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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-28310
SIBIA NEUROSCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3616229
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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505 COAST BOULEVARD SOUTH, SUITE 300, LA JOLLA, CA 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(619) 452-5892
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
On January 31, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant totaled approximately $27,239,856 based on the
closing stock price as reported by The Nasdaq Stock Market. For purposes of
determining this number, shares of Common Stock held by officers, directors and
stockholders whose ownership exceeded ten percent (10%) of the total shares of
Common Stock outstanding at January 31, 1998 were excluded. Exclusion of such
shares should not be construed to indicate that any such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled or under control
with the Registrant.
The number of shares of Common Stock of the Registrant outstanding as of
January 31, 1998 was 9,368,294.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A
in connection with the 1998 Annual Meeting of Stockholders scheduled to be held
May 20, 1998 are incorporated herein by reference into Part III of this Report.
Such proxy statement will be filed with the Commission not later than 120 days
after Registrant's year end. Certain Exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-2586) are incorporated
by reference into Part IV of this Report.
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SIBIA NEUROSCIENCES, INC.
FORM 10-K
INDEX
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PART I
ITEM 1 Business.................................................... 1
ITEM 2 Properties.................................................. 27
ITEM 3 Legal Proceedings........................................... 27
ITEM 4 Submission of Matters to a Vote of Security Holders......... 27
PART II
ITEM 5 Market for the Company's Common Stock and Related Security
Holder Matters.............................................. 28
ITEM 6 Selected Consolidated Financial Data........................ 28
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
ITEM 8 Financial Statements and Supplementary Data................. 32
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32
PART III
ITEM 10 Directors and Executive Officers of the Company............. 32
ITEM 11 Executive Compensation...................................... 32
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
ITEM 13 Certain Relationships and Related Transactions.............. 32
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 32
Signatures.................................................. 36
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PART I
ITEM 1. BUSINESS
Except for historical information contained herein, the discussion in this
Form 10-K contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 as amended ("Exchange Act") involving
risk and uncertainties. Actual results could differ materially from those
projected in this Form 10-K. Factors that could cause or contribute to such
differences include, but are not limited to, the ability to discover and develop
safe and efficacious drugs, variability of royalty, license and other revenue,
failure to satisfy performance obligations, ability to maintain current or enter
into future collaboration agreements, uncertainty regarding the Company's
patents and proprietary rights (including the risk that the Company may be
forced to engage in costly litigation to protect such patent rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), as well as other risks and uncertainties discussed in
the description of the Company's business below and the sections entitled "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as those discussed in any document incorporated
herein by reference.
OVERVIEW
SIBIA Neurosciences, Inc. ("SIBIA" or the "Company") is engaged in the
discovery and development of novel small molecule therapeutics for the treatment
of neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs. SIBIA
is a leader in the development of proprietary drug discovery platforms that
combine key tools necessary for modern drug discovery, including genomics, high
throughput screening, advanced combinatorial chemistry techniques and
pharmacology. These platforms are based on two primary technologies in which the
Company has established a leading scientific and proprietary position: human
receptor/ion channel subtype technology and human protease technology. The
Company's proprietary molecular targets and drug candidates, together with its
drug discovery technologies and research expertise, have enabled the Company to
establish several corporate collaborations, which include Novartis AG
("Novartis"), Bristol-Myers Squibb Company ("Bristol-Myers Squibb") and Meiji
Seika Kaisha, Ltd. ("Meiji"). The Company also has multiple technology licensing
arrangements including The Salk Institute for Biological Studies ("The Salk
Institute"), Eli Lilly and Company ("Lilly"), Neurocrine Biosciences, Inc.
("Neurocrine") and Aurora Biosciences Corporation ("Aurora") and sublicensing
arrangements, through Aurora, with Merck & Company, Inc. ("Merck") and Lilly.
SIBIA believes its proprietary drug discovery technology platform and drug
candidates will lead to additional corporate collaborations and licensing
opportunities with pharmaceutical, biotechnology and drug discovery service
companies.
The first compound to enter clinical trials from the Company's drug
discovery program was SIB-1508Y, currently in development for Parkinson's
disease. This compound was selected as a potential drug candidate on the basis
of its nicotinic acetylcholine receptor ("nAChR") subtype selectivity and
behavioral profile. In contrast to current therapies, which treat only motor
dysfunction, SIB-1508Y is being developed for the treatment of motor, affective
and cognitive dysfunctions of Parkinson's disease. In September 1997, SIBIA
completed Phase I clinical trials of SIB-1508Y and commenced Phase II clinical
trials in early 1998. The Company has a collaboration with Meiji for the
development and commercialization of SIB-1508Y in Japan and certain other Asian
countries and plans to establish additional corporate collaborations for
advanced clinical trials and commercialization of SIB-1508Y in other areas of
the world. In addition, the Company has selected another nAChR subtype-selective
compound, SIB-1553A, as a development candidate for the treatment of Alzheimer's
disease.
The Company is applying its drug discovery technologies to discover and
develop potential drug candidates independently and in collaboration with
established pharmaceutical companies. The Company currently expects that late
stage clinical development and commercialization of independently discovered
compounds will be accomplished in conjunction with corporate partners. The
Company believes, assuming successful pre-clinical studies, that compounds
discovered with its technologies by the Company and its corporate partners will
enter clinical trials within the next 12 to 18 months. There can be no
assurance,
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however, that pre-clinical studies relating to any of the Company's compounds
will be successful. Since 1992, the Company has received over $57 million in
equity, license fees, research support and milestone payments from corporate
partners.
SIBIA'S DRUG DISCOVERY PLATFORMS
SIBIA is pursuing a molecular target-based approach to drug discovery. The
Company believes that its proprietary drug discovery platform technologies will
enable the early identification of compounds that are selective for specific
receptor/ion channel subtypes and proteases, facilitating the discovery and
development of new classes of drugs that may be more effective and have fewer
side effects than existing drugs for the treatment of nervous system disorders.
SIBIA's drug discovery platforms are based on two primary technologies that
define the molecular targets on which the Company has focused, and in which the
Company has established a leading scientific and proprietary position: human
receptor/ion channel subtype technology and human protease technology.
THE ROLE OF CALCIUM IN NERVOUS SYSTEM FUNCTION AND DISEASE
The human nervous system is a complex network of interconnected neurons
that are responsible for coordination of virtually all bodily functions,
including movement, sensory perception, learning and memory. Neurons receive,
conduct and transmit signals; this communication between neurons and with other
cells is essential to the function of the nervous system. Neuronal cell death or
dysfunction that impairs the ability of neurons to communicate can result in
neurodegenerative disorders (e.g., Alzheimer's and Parkinson's diseases),
neurological disorders (e.g., epilepsy and chronic pain), and psychiatric
disorders (e.g., schizophrenia and depression).
Communication between neurons occurs through complex electrical and
chemical processes. Neurons communicate with each other and with target cells
through the transmission and reception of molecules known as neurotransmitters.
Nerve impulses, in the form of voltage changes, cause the release of
neurotransmitters, activating specific receptors on the surface of an adjacent
neuron or target cell and cause a response in the receiving cell. This
interaction takes place at a synapse, which is the point at which a nerve
impulse is transmitted from one neuron to another. Each different
neurotransmitter interacts with a specific corresponding receptor or family of
receptors and transmits primary messages that control important processes within
those neurons and target cells. These processes include the regulation of
secondary messenger systems that, in turn, modulate a wide array of signal
transduction pathways involved in neuronal communication and survival.
One of the most important messengers in the nervous system is calcium ions,
which facilitate the communication between neurons. Calcium ions regulate many
essential functions in neurons, such as the release of neurotransmitters,
electrical activity, activation of enzymes and transcription of genes. Calcium
ions perform this function by entering neurons through ion channels
("receptor/ion channels") which open and close (i.e., are gated) either through
neurotransmitter reception (more generally, ligand/receptor interactions) or
voltage changes such as nerve impulses.
Because calcium is central to so many critical neuronal functions, the
Company believes that controlling calcium levels within neurons is a key
strategy for potential therapeutic intervention in a number of nervous system
disorders, including Parkinson's disease, Alzheimer's disease and other
dementias, stroke, epilepsy, chronic pain and migraine. Over the past 20 years,
drugs blocking calcium influx through certain receptor/ion channels (e.g.,
voltage-gated calcium channels ("VGCCs")) have been successfully developed and
commercialized for the treatment of cardiovascular diseases such as angina and
hypertension. However, these existing calcium channel blockers are either
generally ineffective or have significant side effects when evaluated for
nervous system disorders. The Company believes this is due to their lack of
selectivity or activity on specific neuronal VGCC subtypes and that the
Company's drug discovery technologies will enable it to identify lead compounds
that are highly selective for receptor/ion channel subtypes.
Calcium ions enter neurons primarily through: (i) two receptor classes that
function as ligand-gated ion channels -- nAChRs and excitatory amino acid
receptors ("EAARs"); and (ii) VGCCs. These three classes are the major
receptor/ion channel classes involved in regulating neuronal calcium. Each class
is comprised of
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numerous structurally and pharmacologically distinct subtypes. In addition,
subtypes within these receptor/ion channel classes are anatomically distinct,
located not only in different organs of the body (such as the heart and brain),
but also localized within specific substructures of organs (such as the
hippocampus and cerebellum of the brain). The large number and diversity of
nAChR, EAAR and VGCC subtypes have only recently been identified through modern
gene cloning techniques.
SIBIA was a pioneer in the discovery and functional expression of cloned
genes encoding important human subtypes in these three receptor/ion channel
classes. This has enabled SIBIA to characterize a large number of previously
unrecognized receptor/ion channel subtypes and establish them as targets for
drug discovery. SIBIA has further incorporated these molecular targets into
functional cell-based assays for drug screening.
SIBIA'S HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
SIBIA's human receptor/ion channel subtype technology is based on (i) the
identification and cloning of the genes encoding for nAChRs, EAARs and VGCCs
from human brain tissue, (ii) the expression of these genes in mammalian cells
to afford fully functional receptor/ion channels of defined subtype and (iii)
the use of these cells in in vitro high throughput functional drug screening
assays. Each cell line or assay contains only a single human receptor/ion
channel subtype representing a pure molecular target for drug screening. In
contrast to traditional binding assays, these proprietary assays can quantify
the functional effect of test compounds and characterize them as agonists,
antagonists or modulators, at any functional site, known or unknown, on a
specific receptor/ion channel subtype, all in a primary screen.
SIBIA has established a leading proprietary position in drug discovery
based on human receptor/ion channel subtypes. Each of the following scientific
and technological developments by SIBIA was critical in building this position
and has represented a significant advance:
- The Company has discovered, isolated and developed an extensive library
of more than 60 complete genes cloned from human brain tissue which code
for multiple, distinct subtypes of nAChRs, EAARs and VGCCs.
- SIBIA has expressed more than 30 functional receptor/ion channel subtypes
in the nAChR, EAAR and VGCC classes in stable cell lines. Each subtype
potentially represents a novel molecular target for developing
therapeutic compounds for nervous system disorders. This was a difficult
and significant technical challenge, since most receptor/ion channel
subtypes are multimeric (i.e., molecular complexes of two or more
proteins) and require the expression of multiple complex genes to form a
functional subtype.
- SIBIA has developed proprietary functional cell-based assays encompassing
these molecular targets and uses these assays with its proprietary high
throughput screening technology, which includes novel assay methods and
instrumentation, to rapidly identify and select compounds for further
development.
HUMAN PROTEASE TECHNOLOGY
Proteases are a class of enzymes which play an important role in the
processing of proteins. The body uses this mechanism to control several critical
pathways or biochemical cascades, such as blood clot formation. In neurons,
specific proteases control pathways critical to neuronal communication and
survival. Abnormal neuronal protease activity can lead to degenerative
processes, as occurs during progressive disorders such as Alzheimer's disease
and in phases of acute neuronal cell death resulting from head trauma and
ischemia due to stroke. For example, these proteases can generate products that
are neurotoxic, such as the amyloid beta protein ("A(BETA)") which forms the
senile plaques seen in Alzheimer's disease patients, or initiate degradative
cascades that are involved in breaking down the neuronal cytoskeleton, leading
to nerve cell death. The Company believes that modulating the activity of
selected proteases may control these degenerative processes and have therapeutic
benefit leading to neuroprotection and reduced neuronal cell loss.
SIBIA believes there are significant new opportunities for protease-based
therapeutics for nervous system disorders, particularly neurodegenerative
conditions. To pursue this class of molecular targets the Company
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has established its human protease technology platform, which includes the
identification and characterization of specific proteases and their functional
activity, the development of proprietary assays to measure specific protease
activity and the use of novel combinatorial chemistry techniques to design
proprietary and selective protease inhibitors. The Company has established a
panel of more than 15 protease targets to be able to evaluate the selectivity of
its compounds. These targets have been incorporated into assays that include
isolated enzymes and cell-based approaches. This has facilitated the discovery
of specific small molecule inhibitors that have demonstrated effectiveness in
animal models of human neurodegenerative diseases.
DRUG DISCOVERY TECHNOLOGIES
SIBIA is a leader in the development of proprietary drug discovery
platforms which combine key tools necessary for modern drug discovery, including
genomics, high throughput screening, advanced combinatorial chemistry techniques
and pharmacology.
The Company's proprietary molecular targets and drug candidates, together
with its drug discovery technologies and research expertise, have enabled the
Company to establish several corporate collaborations and resulted in a number
of compounds being evaluated for, or developed in, clinical trials. The Company
believes its technology platform, including its human receptor/ion channel
subtype and human protease technologies, and product candidates will lead to
additional corporate collaborations and licensing opportunities with
pharmaceutical, biotechnology and drug discovery service companies.
MOLECULAR TARGETS
Genomics. For nearly ten years, SIBIA has been involved in the cloning of
complete genes encoding selected receptor/ion channel subtypes from human brain
tissue. This has been critical for the Company's target based approach to drug
discovery. Receptor/ion channel subunit genes have been cloned through molecular
biological, biochemical, immunological and functional approaches and using
molecular hybridization techniques and homology screening, related subunits and
splice variants of those genes have been identified. SIBIA is now incorporating
more sophisticated bioinformatics-based approaches to its target identification
efforts and has developed a collection of more than 60 complete receptor/ion
channel genes encompassing all known subtypes of the targeted nAChR, EAAR and
VGCC classes. This has provided SIBIA with a strong proprietary position with
respect to those particular drug targets. These techniques are now being applied
in the protease area.
Functional Genomics. In an effort to establish functions for specific
isolated receptor/ion channel subtypes and proteases, SIBIA has pursued various
functional genomic approaches either internally or in conjunction with leading
academic collaborators. These include anatomical (mapping studies in normal and
diseased tissue using clones and antibodies to expressed proteins),
pharmacological (utilizing molecular target-specific compounds in cell, tissue
or animal models) and genetic (chromosomal mapping, linkage studies, knockouts
and transgenic animals) approaches.
FUNCTIONAL ASSAY TECHNOLOGY AND HIGH THROUGHPUT SCREENING
High throughput screening utilizing functional assays is a key component of
SIBIA's target-based approach to drug discovery. SIBIA utilizes its human
receptor/ion channel subtype technology and human protease technology with high
throughput screening in two modes: first, for the testing of large random
compound libraries to discover novel structures that are selective and potent
substrates for more in-depth research and evaluation; and second, for the rapid
identification, characterization, profiling and optimization of selected
compounds through an interactive process with chemistry and pharmacology for
further in vitro and in vivo study of lead candidates.
SIBIA's proprietary high throughput functional cell-based assays are
applicable to all of SIBIA's drug discovery programs -- nAChRs, EAARs, VGCCs and
proteases. SIBIA's proprietary assays are based on the receptor/ion
channel-induced changes in cellular calcium levels, or protease-mediated changes
in fluorescent substrates. In contrast to traditional binding assays, these
assays also allow for simultaneous analysis of the
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selectivity, potency, efficacy and pharmacological nature (e.g., agonist,
antagonist or modulator) of test compounds with respect to specific molecular
targets.
Fluorescence-Based Ion Assay. SIBIA's proprietary fluorescence-based ion
assay technology measures changes in intracellular events (e.g., calcium
concentrations) through the use of ion-sensitive fluorescent dyes. SIBIA, in
collaboration with a third party, has developed a microtiter plate-imaging
fluorimeter to perform functional high throughput screening. The equipment is
fully automated with robotics and analyzes the fluorescent signals of all 96
wells in a standard microtiter plate simultaneously, rather than sequentially in
a time-delayed manner. This system is being adapted to a 384 well plate format.
This equipment incorporates a sophisticated computer control and data capture
system which allows SIBIA to perform more than 12,000 functional receptor/ion
channel assays per day. SIBIA is in the process of expanding its capacity in
this area and expects to significantly increase high throughput screening.
Transcription-Based Assay. SIBIA's proprietary transcription-based assay
technology measures the functional activity of test compounds on cell-surface
proteins using a wide array of specifically responsive promoter-reporter gene
constructs and products. SIBIA believes its proprietary transcription-based
assay technology is broadly applicable to virtually any cell-surface protein,
such as receptors and ion channels, that control signal transduction processes
affecting gene transcription. In addition, the Company believes that
transcription-based assays have applications beyond SIBIA's current receptor/ion
channel subtype targets and could support the expansion of SIBIA's drug
discovery efforts to other human molecular targets involved in nervous system
disorders or to other therapeutic categories.
CHEMISTRY
Medicinal Chemistry. SIBIA has established in-house a state-of-the-art
medicinal chemistry capability which incorporates structure-based drug design,
computer assisted molecular modeling, pharmacophore development based on
structure-activity relationships and organic synthesis. These activities are
closely integrated with combinatorial chemistry.
Combinatorial Chemistry. SIBIA has developed a combinatorial chemistry
capability referred to as high throughput organic synthesis ("HTOS"). HTOS is
currently focused on the rapid generation of analogues of "hits" from high
throughput screening. The Company's HTOS laboratory is automated and is able to
produce up to 1,000 individual compounds per week at several milligram yields
with identity confirmed and at purity levels greater than 90%. Novel synthetic
approaches and strategies have also been developed and are being utilized in
SIBIA's drug discovery programs. SIBIA has integrated its high throughput
screening capabilities with its proprietary HTOS technologies to rapidly convert
hits identified through screening to potential lead compounds.
PHARMACOLOGY
Neuropharmacology. SIBIA has established in-house a number of in vitro and
in vivo assays for evaluating properties of specific test compounds such as
second messenger modulation, neurotransmitter release from tissue slices, by in
vivo microdialysis, as well as systems to measure, neuroprotective and
neurodegenerative potential.
Behavioral Pharmacology. SIBIA has developed in-house a panel of more than
20 different animal models that permit the evaluation and optimization in vivo
of compound activity in a range of potential therapeutic indications.
Developmental Pharmacology. SIBIA has established an in-house group capable
of performing safety and ADME (absorption, distribution, metabolism and
excretion) studies in rodents, which are a precursor to the development of drug
candidate compounds.
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DISCOVERY AND DEVELOPMENT PROGRAMS
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DEVELOPMENT COMMERCIAL
PROGRAM THERAPEUTIC TARGET STATUS(1) RIGHTS(2)
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HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
naChR Agonists
SIB-1508Y Parkinson's Disease Phase II Meiji/SIBIA
clinical trials
commenced
SIB-1553A Alzheimer's Pre-clinical SIBIA
Disease, Attention
Deficit and
Hyperactivity
Other Series Pain, Discovery SIBIA
Schizophrenia,
Depression, Eating
Disorders
EAAR Antagonists
Lead Compound Epilepsy Lead identified Novartis/SIBIA
Compound Series Epilepsy Pre-clinical Novartis/SIBIA
Other Compounds Pain, Traumatic Leads identified Novartis/SIBIA
Brain Injury,
Stroke, Epilepsy
VGCC Antagonists
Compound Series Stroke Leads identified Lilly/SIBIA
Several Series Pain Leads identified SIBIA
Other Series Migraine, Stroke, Discovery SIBIA
Epilepsy
HUMAN PROTEASE TECHNOLOGY
A(BETA) Inhibitors Alzheimer's Disease Pre-clinical/ Bristol-Myers
Discovery Squibb/SIBIA
Caspase-3 Inhibitors Apoptosis Discovery SIBIA
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DRUG DISCOVERY TECHNOLOGY LICENSEES(2)
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Transcription-Based Assay Novartis; Aurora; Neurocrine; Lilly(3)
Fluorescence-Based Ion Assay Novartis; Aurora; Lilly; Merck(3)
Phage Display Technology Affymax/Glaxo Wellcome
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(1) "Discovery" activities include initial research related to specific
molecular targets and assay development for the identification of new lead
compounds.
"Leads identified" indicates that lead compounds have been discovered that
meet certain criteria of the Company. Lead compounds may undergo structural
modification and more extensive evaluation prior to selection of candidates
for preclinical development.
"Pre-clinical" indicates that SIBIA is conducting pharmacology testing,
toxicology testing, formulation, process development and/or manufacturing
scale-up prior to possible submission of an IND.
"Phase II clinical trials" are those in which the drug is administered to
patients to evaluate safety, tolerability and efficacy. This indicates that
SIBIA has completed the initial introduction of the drug into healthy human
subjects (Phase I), where it has successfully been tested for safety, dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics.
(2) See " -- Strategic Alliances" and " -- Drug Discovery Technology Licenses."
(3) Sublicensed through Aurora.
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HUMAN RECEPTOR/ION CHANNEL SUBTYPE TECHNOLOGY
nAChR Program
In the late 1980s, SIBIA began exploring nAChR subtypes as targets for drug
discovery because of the growing awareness of the diversity and importance of
the nAChR system and its endogenous neurotransmitter, acetylcholine, in
excitatory processes, particularly cognition; the discovery of a number of
distinct nAChR subtypes located in the brain; and the complex pharmacology of
the exogenous ligand nicotine. The complexity of nicotine's activity was
believed to be due to its non-selective nature (acting at all nAChRs), and SIBIA
sought to separate the potential therapeutic benefits of nicotinic compounds
from less desirable effects with receptor subtype-selective compounds. Until
recently, the pharmaceutical industry has not focused on nAChRs as important
drug targets. Mapping and pharmacological studies have revealed that nAChR
subtypes are widely but discretely distributed in the brain and appear to be
associated with specific neuronal structures and functions. The Company's nAChR
drug discovery program is focused on the identification, optimization and
early-stage development of nAChR subtype-selective compounds as novel drug
candidates.
There is strong evidence that nAChRs are important in a number of nervous
system disorders. In particular, deficits of nAChRs have been demonstrated in
Parkinson's and Alzheimer's patients. Studies by the Company indicate that
nAChRs are involved in modulating the release of dopamine, acetylcholine and
other important neurotransmitters in different brain regions. The Company
believes that it may be able to develop subtype-selective nAChR drugs, such as
SIB-1508Y and SIB-1553A, to ameliorate the disease symptoms that result from
reduced concentrations of dopamine and acetylcholine in Parkinson's and
Alzheimer's patients, respectively. In addition, SIBIA believes that nAChR
compounds with different subtype selectivities may be useful for the treatment
of other nervous system disorders such as schizophrenia, ADHD, depression and
chronic pain as well as nervous system-related addictive behaviors, such as
eating disorders and smoking addiction.
SIB-1508Y. The first compound discovered by SIBIA to enter clinical trials
was SIB-1508Y, currently in development for Parkinson's disease. In contrast to
current Parkinson's disease therapies which treat only motor dysfunction,
SIB-1508Y is being developed for the treatment of motor, affective and cognitive
dysfunctions of this disease. SIB-1508Y exhibits subtype-selective nAChR agonist
activity and releases dopamine, acetylcholine and norepinephrine from selected
brain regions. SIB-1508Y has been tested in a number of animal models, and
demonstrated activity in rodent and primate models of Parkinson's disease, in
rodent models of depression and in primate models of cognitive function.
Pre-clinical data suggests that SIB-1508Y may be useful both as a stand-alone
therapeutic agent and as an adjunctive therapy with L-dopa. In September 1997,
the Company completed Phase I clinical trials of SIB-1508Y and commenced Phase
II clinical trials of SIB-1508Y in Parkinson's disease patients in early 1998.
The first Phase II trial is a multi-site, placebo-controlled study with motor
and cognitive endpoints, and should be completed in the second half of 1998,
assuming satisfactory patient recruitment rates. There can be no assurance that
these Phase II clinical trials will be successful.
In March 1997, the Company announced a collaboration with Meiji Seika
Kaisha, Ltd. for the development and commercialization of SIB-1508Y in Japan and
certain other Asian countries. SIBIA has retained worldwide rights to
manufacture the clinical supplies and bulk drug material required for the
commercial production of SIB-1508Y. The Company plans to establish additional
corporate collaborations for advanced clinical trials and commercialization of
SIB-1508Y in other areas of the world.
SIB-1553A. Another compound discovered by SIBIA's proprietary drug
discovery platforms is SIB-1553A, currently in development for Alzheimer's
disease. The Company's studies indicate that this compound strongly stimulates
acetylcholine release in specific brain regions associated with memory and
learning, the same regions which exhibit deficits of this neurotransmitter in
Alzheimer's disease. In the first half of 1997, the Company reported
pre-clinical data demonstrating that in animals, SIB-1553A significantly
stimulates the release of acetylcholine. In addition, SIB-1553A was demonstrated
to improve working (short-term) and reference (long-term) memory deficits due to
injury, drugs or aging in studies in rodents and monkeys. See "-- Strategic
Alliances."
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EAAR Program
The excitatory amino acid system is a major excitatory system in the brain.
EAARs are divided into three categories: NMDA-type receptor/ion channels,
non-NMDA-type receptor/ion channels and metabotropic receptors, a category of G
protein-coupled receptors which do not directly flux calcium but rather function
via other cellular second messenger molecules. Each category is comprised of
multiple subtypes that are activated by excitatory amino acid neurotransmitters
such as glutamate and each subtype has unique anatomical distributions.
The NMDA- and non-NMDA-type receptor/ion channel categories are
ligand-gated ion channels, and a significant number of these subtypes directly
flux calcium into neurons. These receptor/ion channel subtypes are important for
diverse brain functions, including memory and learning, and are also implicated
in neurodegenerative processes. For example, when nerve cells are subjected to
ischemic conditions, as occurs during and after a stroke, large amounts of
glutamate are released. Normally, excess glutamate is removed by nearby cells,
but in ischemic conditions these cells do not function properly and are unable
to dispose of this excess glutamate. The glutamate then binds to EAARs on nerve
cells and activates them, leading to a large influx of calcium which triggers a
biochemical cascade that damages cells and can ultimately lead to cell death.
The newly injured nerve cells release more glutamate, and the process repeats
itself, spreading neuronal damage from cell to cell. For this reason, there is
significant interest in developing subtype-selective EAAR antagonists as a
potential treatment for stroke. The Company believes compounds that modulate
NMDA- and non-NMDA-type EAARs may be able to selectively control calcium entry
into nerve cells, under ischemic conditions.
Metabotropic receptors also appear to be involved in certain nervous system
disorders. Clones for genes encoding a number of different and novel
metabotropic EAARs have been isolated by SIBIA from human brain tissue and have
been demonstrated to be functional in several types of assays. Stable cell lines
expressing metabotropic EAARs have been established and are being used in
SIBIA's functional high throughput screening assays. Potent and selective
compounds have been identified and are being evaluated in various animal models.
The Company believes drugs acting at different and specific EAAR subtypes
may have application to certain neurodegenerative diseases such as Alzheimer's,
Parkinson's and Huntington's diseases and various nervous system disorders,
including stroke, epilepsy, chronic pain and head trauma. To date, developing
therapeutically useful EAAR drugs has been difficult. Traditional drug discovery
approaches have produced non-specific EAAR antagonists which generally have
intolerable side effects. SIBIA has discovered a number of novel and distinct
human EAAR subtypes, each with different pharmacological properties. By
identifying receptor subtype-specific EAAR antagonists, the Company believes it
may be possible to effectively treat certain nervous system disorders without
the side effects caused by non-selectively blocking multiple EAAR subtypes.
The first EAAR gene was cloned at The Salk Institute, and SIBIA has an
exclusive license to broad patents relating to this research. The Company has
subsequently filed its own patents on additional EAAR subtypes. SIBIA is engaged
in a corporate collaboration with Novartis in the area of drug discovery for
EAAR subtypes. SIBIA and Novartis are screening compounds from a Novartis
library in functional EAAR subtype assays. In addition, SIBIA has identified a
series of subtype-specific human metabotropic receptor antagonists. Under the
terms of their collaborative agreement, SIBIA and Novartis are working together
to design and optimize potential lead compounds which are selective for EAARs.
Such compounds will be further developed by Novartis. Based on preliminary
studies, SIBIA believes that subtype-specific metabotropic receptor antagonists
may provide a novel approach to the treatment of epilepsy. See "-- Strategic
Alliances" and "-- Patents and Proprietary Rights."
VGCC Program
VGCCs are a major receptor/ion channel family involved in regulating
neuronal calcium flux and cell excitability. VGCCs have traditionally been
classified as L-, T-, N- and P-type calcium channels based on their biophysical
and pharmacological properties. SIBIA's pioneering research in the
characterization of
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VGCCs by molecular structure has led to the identification of other classes of
calcium channels as well as channel subtypes within these classes, resulting in
a new structure-based understanding of VGCCs. The critical role of VGCC subtypes
in the function and potential dysfunction of nerve cells indicates that they may
be important targets for therapeutic intervention in a number of nervous system
disorders.
Calcium flux through distinct VGCC subtypes at presynaptic nerve terminals
controls the release of different neurotransmitters, including glutamate,
serotonin, dopamine and acetylcholine. The Company believes that the ability to
selectively control neurotransmitter release with subtype-selective VGCC drugs
could impact many nervous system disorders. For example, control of glutamate
release may have application in the treatment of stroke, epilepsy and pain, and
control of serotonin release may have application in the treatment of depression
and migraine. Further, a synthetic version of the VGCC subtype-selective peptide
(OMEGA)-conotoxin MVIIA is currently in late stage clinical development by a
third party for chronic pain. This molecule has demonstrated efficacy in early
trials, but its widespread use may be limited by its peptidic nature.
Nonetheless, it validates particular VGCC subtypes as molecular targets for
pain. SIBIA believes that small molecule drugs of the type SIBIA is identifying
will offer significant advantages over peptides or their derivatives. In
addition, recent studies have identified specific mutations in one of the
Company's proprietary human VGCC genes associated with an inherited form of
migraine. The Company believes this provides insight as to a novel therapeutic
approach for the treatment of migraine. The Company further believes modulation
of synaptic activity by controlling neurotransmitter release, neuronal calcium
levels and neuronal excitability with VGCC subtype-selective drugs may prove to
be a more effective approach with broader applicability than current drug
therapy for many nervous system disorders.
The Company believes it was the first to clone and functionally express a
human neuronal N-type VGCC, has generated a number of stable mammalian cell
lines which functionally express additional distinct VGCC subtypes and has
developed these cell lines into assays that currently are being employed by
SIBIA in efforts to discover selective drugs using high throughput screening
technology. SIBIA has an extensive patent portfolio in this area. Potent and
selective compounds have been identified by the Company and are being evaluated
in various animal models. Under the terms of the agreement between SIBIA and
Lilly, which was completed in October of 1997, the parties will independently
pursue discovery and development of drug leads that act on VGCC drug targets
identified under the collaboration with SIBIA. Lilly is obligated to make
milestone and royalty payments to SIBIA on compounds it identifies within a
certain period of time and commercializes. See "-- Strategic Alliances" and
"-- Patents and Proprietary Rights."
HUMAN PROTEASE TECHNOLOGY
APP Modulators
SIBIA's Amyloid Precursor Protein (APP) Modulator program is currently
focused on controlling degradative proteases that generate A(BETA), the
neurotoxic fragment of APP. A(BETA), which is derived from APP, is generally
understood to be a key molecule in the development of Alzheimer's disease.
A(BETA) is found at autopsy in senile plaques and in deposits surrounding the
small blood vessels in brain tissue, both of which are diagnostic for
Alzheimer's disease. A number of studies indicate that mutations in the APP gene
are associated with early-onset familial Alzheimer's disease. The clinical
presentation and histopathology of early-onset Alzheimer's disease are
indistinguishable from that seen in the more prevalent late-onset Alzheimer's
disease. The Company therefore believes the inhibition of A(BETA) formation may
be broadly applicable to early-and late-onset Alzheimer's disease.
SIBIA has conducted extensive research concerning the role of APP in
Alzheimer's disease. It has developed technology related to the metabolism of
APP in Alzheimer's disease and methods for controlling the formation of A(BETA).
The other important APP metabolic product, secreted APP(s(ALPHA)), has been
shown in in vitro and in vivo studies to have neuroprotective properties and has
been shown by SIBIA to be significantly decreased in the cerebrospinal fluid of
Alzheimer's disease patients. SIBIA is seeking to develop compounds which
selectively modulate the enzymatic processing of APP, such that the formation of
A(BETA) is inhibited and that of APP(s(ALPHA)) is maintained or enhanced. SIBIA
believes such compounds could slow disease progression or possibly modify the
underlying disease process. In the A(BETA) inhibitor program, SIBIA has
developed
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neuronal-type cell lines able to process human APP and produce APP(s(ALPHA)),
A(BETA) and other processing fragments which can be detected with the use of
various antibodies, and which have been established as functional assays for
compound screening and drug development. SIBIA's biochemical assays allow
quantification of A(BETA) and APP(s(ALPHA)) in cultured cells, tissues and
biological fluids (for example, cerebrospinal fluid) from animals (normal and
transgenic mice) and sporadic and familial Alzheimer's patients. The Company
believes its assays, and the ability to biochemically evaluate the effect of
test compounds on APP processing in biological systems, and potentially in
patients in clinical trials, provide it a significant competitive advantage.
SIBIA, in collaboration with its partner in the A(BETA) inhibitor program,
Bristol-Myers Squibb, has identified several series of small molecules which
inhibit A(BETA) production in vitro and in vivo. The most advanced compounds
from this collaboration are in pre-clinical development. See "-- Strategic
Alliances" and "-- Patents and Proprietary Rights."
Other Protease Targets
SIBIA has built an integrated drug discovery platform able to address a
broad range of human proteases as molecular targets. The Company is developing a
novel neuronal protease cell-based assay format for high throughput screening
utilizing proprietary technology licensed from Aurora for monitoring the
inhibitory effects of test compounds. SIBIA is currently pursuing the enzyme
caspase-3, a protease involved in apoptosis. See "-- Research Collaborations."
STRATEGIC ALLIANCES
Strategic alliances with major pharmaceutical and biotechnology companies
are an integral part of SIBIA's business strategy. Currently, SIBIA has
collaborative agreements with Novartis, Bristol-Myers Squibb and Meiji.
Novartis AG
In October 1992, SIBIA entered into a three-year collaborative agreement
(which included research funding and a $5,000,000 equity investment) with
Novartis to develop and utilize SIBIA's receptor/ion channel technology in the
area of EAARs for the discovery of drugs that interact with these molecular
targets. In March 1996, the initial term of the Novartis agreement was extended
through September 1998, unless extended by mutual consent or terminated by
either party upon six months' notice. Under the agreement, Novartis has been
granted exclusive worldwide rights to manufacture and market products it or
SIBIA discovers using the EAAR technology during the collaboration, and SIBIA is
entitled to receive milestone payments at certain stages of the development of
product candidates, if any are identified, and royalties on sales of products
that are developed, if any are developed. During the term of the collaboration
agreement, SIBIA will work exclusively with Novartis in the area of EAARs, and
Novartis has an exclusive license during the term of the collaboration agreement
to use the Company's EAAR technology. Upon expiration of the collaboration
agreement, SIBIA retains the rights to use the program technology for its own
drug discovery efforts and may screen molecules from other sources against EAARs
and pursue development of these molecules, subject to Novartis' right of first
negotiation with respect to such molecules discovered during the three years
following expiration of the collaboration agreement. Novartis also received a
non-exclusive license to the Company's transcription-based assay technology and
fluorescence-based ion assay technology.
Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to fund
certain capital expenditures and agreed to purchase $7,500,000 of the Company's
Common Stock, $5,000,000 of which was purchased in conjunction with the initial
public offering of the Company's Common Stock and the remaining $2,500,000 of
which will be purchased upon the achievement of certain research milestones.
Bristol-Myers Squibb Company
In August 1995, SIBIA entered into a collaborative agreement with
Bristol-Myers Squibb under which Bristol-Myers Squibb agreed to fund research
for a minimum of four years to discover and develop compounds able to
selectively modulate the processing of APP for the treatment of Alzheimer's
disease and related
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neurodegenerative disorders. During the joint research effort, neither SIBIA nor
Bristol-Myers Squibb may enter into any other third-party agreements directed
toward the discovery and development of products for use in the area of APP
metabolism. In addition, Bristol-Myers Squibb has the sole discretion to
determine which compounds, if any, it will pursue to develop. Under the terms of
the agreement, all pre-clinical and clinical development of lead compounds will
be undertaken by Bristol-Myers Squibb. SIBIA has a right of first negotiation to
obtain a license to certain compounds discovered during the collaboration in the
event Bristol-Myers Squibb elects not to pursue the development of such
compounds. Pursuant to the collaborative agreement, except with regard to
SIBIA's assay technology, SIBIA has granted to Bristol-Myers Squibb an
exclusive, worldwide, royalty-bearing license to commercialize products arising
out of the collaboration. Furthermore, upon the termination of the
collaboration, SIBIA and Bristol-Myers Squibb have granted to one another
non-exclusive licenses to the other's assay technology for the discovery and
development of new compounds. The agreement may not be terminated prior to
August 1999 without the parties' mutual consent.
Coincident with the collaborative agreement, Bristol-Myers Squibb made an
equity investment in the amount of $7,000,000 and paid a non-refundable license
fee of $3,000,000. Bristol-Myers Squibb is also obligated to make a further
equity investment of $6,000,000 upon the initiation of clinical trials relating
to any product developed from the collaboration. In addition to research
funding, SIBIA is entitled to receive certain milestone payments at certain
stages during the development of product candidates, if any are identified. The
agreement also provides that Bristol-Myers Squibb will pay SIBIA royalties on
net sales of products resulting from the joint research, if any are developed.
Meiji Seika Kaisha, Ltd.
In February 1997, the Company entered into a development and license
agreement with Meiji for the development and commercialization of the Company's
proprietary nAChR agonist, SIB-1508Y, as a treatment for Parkinson's disease and
other nervous system disorders in Japan and other Asian countries. Under the
agreement, the Company received a one-time license fee of $3,000,000 for the
license of certain technology to Meiji. In addition, the Company may receive
development milestone payments and royalties on future product sales, if the
product is successfully commercialized in such countries. SIBIA has retained
rights to develop and commercialize SIB-1508Y outside of Japan and certain other
Asian countries, and has retained rights to manufacture clinical supplies and
commercial material worldwide.
Other Collaborations
In October 1997, the Company and Lilly completed their collaborative
research in the area of VGCCs. The Company and Lilly will independently pursue
discovery and development of drug leads that act on VGCC drug targets identified
under this collaboration. The Company is entitled to receive milestone payments
and royalties on sales of products identified by Lilly within a certain period
of time and commercialized, and is free to develop compounds it discovers in
this area on its own or with other partners. Lilly has exercised its option to
license the Company's fluorescence-based ion assay technology.
DRUG DISCOVERY TECHNOLOGY LICENSES
Consistent with the Company's strategy of enhancing and leveraging its
proprietary drug discovery platform technologies, from time to time the Company
enters into technology licensing arrangements with third parties.
The Salk Institute for Biological Studies
In 1988, SIBIA entered into a license agreement with The Salk Institute on
a number of nAChR subunit clones on which five U.S. patents have issued. This
agreement was amended in March 1996 such that the license to the issued U.S.
patents and related patent applications became an exclusive worldwide license.
Pursuant to the agreement, as amended, SIBIA is obligated to pay royalties to
The Salk Institute on sales of products resulting from The Salk Institute's
nAChR technology. In addition, the Company is required to
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make minimum annual royalty payments to The Salk Institute beginning in 2002.
Failure to pay such royalties will result in the related license becoming
non-exclusive.
In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of research at The
Salk Institute by SIBIA and the transfer of research materials and research
results in the EAAR area from The Salk Institute to SIBIA. SIBIA also received
an exclusive worldwide license to certain EAAR-related patents and patent
applications held by The Salk Institute. The agreement was amended in March
1996. Pursuant to the agreement, as amended, the Company is required to make
certain annual minimum royalty payments to The Salk Institute beginning in 2002.
Failure to pay such royalties will result in the related license becoming
non-exclusive.
Aurora Biosciences Corporation
In January 1997, the Company entered into an agreement with Aurora. Under
the agreement, the Company licensed to Aurora non-exclusive rights to practice
its patented transcription-based assay technology, and certain aspects of its
fluorescence-based ion assay technology related to automated drug screening. In
return, in addition to other consideration, the Company received from Aurora
non-exclusive rights to several assay technologies, including novel reporter
molecules, that will facilitate the Company's high throughput screening and drug
discovery efforts directed to certain receptor, ion channel and enzyme targets
associated with nervous system disorders. Both parties have limited sublicensing
rights to each other's patents. In December 1997, Aurora entered into agreements
with Lilly and Merck to sublicense certain of SIBIA's patents when used in
conjunction with Aurora technologies.
Cognetix, Inc.
In July 1996, SIBIA entered into an agreement with Cognetix, Inc.
("Cognetix") to conduct research on conopeptides (peptides derived from
different Conus species of marine snails) with the objective of identifying and
characterizing highly selective compounds for different receptors and ion
channels found on nerve cells. Such compounds could have potential as
therapeutics for nervous system disorders. In addition, the agreement provides
SIBIA with a nonexclusive license to use certain materials for research purposes
and with an option for an exclusive, worldwide license to intellectual property
and specific molecules resulting from the collaborative work. Under the
collaborative agreement, SIBIA will apply its proprietary functional drug
screening assays to specific conopeptides and Conus venoms supplied by Cognetix.
Neurocrine Biosciences, Inc.
In October 1997, SIBIA entered into an agreement with Neurocrine. Under the
agreement, the Company licensed to Neurocrine non-exclusive rights to practice
its patented transcription-based assay technology for use with a specified
molecular target. In exchange, SIBIA has been granted access to a compound
library developed by Neurocrine's combinatorial chemistry group. SIBIA intends
to use the Neurocrine compound library in its drug discovery and high throughput
screening programs directed to certain receptor/ion channel and enzyme targets
associated with nervous system disorders.
Affymax/Glaxo Wellcome
In 1993, SIBIA entered into a semi-exclusive license with Affymax, which
was subsequently acquired by Glaxo Wellcome, regarding SIBIA patents covering
phage display technology for drug discovery. This technology covers the display
of random peptide epitopes on the surface of viral coat proteins, which can then
be screened for activity in various types of assays. SIBIA retains exclusive
rights to this technology for vaccine and other applications.
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SELECTED ACADEMIC RESEARCH COLLABORATIONS
The Parkinson's Institute
SIBIA is collaborating with Dr. Maryka Quik of the Parkinson's Institute
for the distribution and function of nAChR subtypes in non-human primates.
The Mayo Clinic, Jacksonville
SIBIA is collaborating with and providing research support to Dr. Steven G.
Younkin, Director of Research at the Mayo Clinic, Jacksonville. Research is
focused on measuring the effects of lead compounds on A(BETA) levels in
biological samples from in vitro and in vivo models of APP processing and
Alzheimer's disease.
The Rockefeller University
SIBIA is collaborating with Dr. Rong Wang, a researcher in the Mass
Spectrometry Laboratory at Rockefeller, on the detection and quantitation of
A(BETA) and related APP fragments in tissue culture, cerebrospinal fluid and
plasma samples.
University of California, Los Angeles, School of Medicine
SIBIA is collaborating with Robert Baloh, M.D., Professor, Department of
Neurology and Joanna Jen, M.D., Ph.D., Clinical Instructor, Department of
Neurology, in the area of genetic disorders involved with calcium channels.
Thomas Jefferson University
SIBIA is collaborating with Jay S. Schneider, Ph.D. in the evaluation of
various compounds on cognitive deficits in motor asymptomatic macaques treated
with MPTP.
Medical College of Georgia
SIBIA is collaborating with Jerry J. Buccafusco, Ph.D., Professor,
Director, ARC Animal Behavior Center, in the evaluation of various compounds in
aged rhesus monkeys.
University of Chicago
SIBIA is collaborating with Dr. Richard J. Miller, Professor, Department of
Pharmacology and Physiological Sciences, University of Chicago, on the
biophysical and pharmacological characterization of certain VGCC subtypes.
PATENTS AND PROPRIETARY RIGHTS
SIBIA files patent applications to protect molecular targets, technologies,
compounds, processes and assay methods that are important to the development of
its business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
SIBIA has established an extensive patent portfolio which it intends to
protect on behalf of its shareholders. On July 9, 1996, the Company filed an
action for patent infringement against Cadus Pharmaceutical Corporation
("Cadus") in the United States District Court for the Southern District of
California. The complaint asserts that Cadus infringes the Company's U.S. Patent
No. 5,401,629 (the " '629 patent"), entitled "Assay Methods and Compositions
Useful for Measuring the Intracellular Transduction of an Intracellular Signal."
Through the complaint, the Company seeks damages in an unspecified amount and
injunctive relief. On August 1, 1996, Cadus filed its answer and a counterclaim
to the Company's complaint. The counterclaim asserts claims that the '629 patent
and the Company's U.S. Patent No. 5,436,128, entitled "Assay Methods and
Composition for Detecting and Evaluating the Intracellular Transduction of an
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Extracellular Signal," are invalid, unenforceable and not infringed, and further
asserts claims for intentional interference with prospective economic advantage
and unfair competition. The counterclaim seeks declaratory relief and
compensatory and punitive damages in an unspecified amount. See "Item 3. Legal
Proceedings."
SIBIA directly holds, or has exclusive licenses to, 27 issued U.S. and ten
foreign patents relating to molecular targets, technologies, compounds and assay
methods integral to its drug discovery effort for various nervous system
diseases and disorders. In addition, SIBIA has 50 pending U.S. applications
relating to these enabling technologies, eleven of which have been allowed.
SIBIA has five issued patents which include claims to DNAs encoding key
structural components of VGCCs, one of which, the (ALPHA)(2)(DELTA) component,
is thought to be essential for all VGCC subtypes. Two additional patents cover
VGCCs which can be utilized in assays to identify compounds that modulate VGCC
function. SIBIA has been granted a European patent covering DNA encoding VGCC
(ALPHA)(2)(DELTA) subunits, cells expressing the same and a method to identify
compounds that modulate VGCC function and patents in Australian and Great
Britain covering a number of subtypes and assay methods. Twelve of the pending
U.S. patent applications cover the composition or use of VGCC genes and the
encoded subtypes and assay methods; five of these have been allowed.
SIBIA has been issued one U.S. patent which claims DNAs encoding key
structural components of nAChRs and has an exclusive license from the Salk
Institute to five issued U.S. patents which claim DNAs encoding various nAChR
subunits and assay methods. SIBIA also has been granted three patents in Great
Britain covering nAChR subtypes and assay methods. Eight of SIBIA's pending U.S.
applications cover the composition or use of human nAChR genes and encoded
subtypes and assay methods; one of these has been allowed.
SIBIA has one issued U.S. patent with claims to DNAs encoding human
metabotropic receptors and cells containing the same and a corresponding patent
has been granted in Great Britain. SIBIA also has an exclusive license from the
Salk Institute to an issued U.S. patent with broad claims to DNAs encoding
various NMDA- and non-NMDA-type ligand gated EAA receptor/ion channel subtypes
and a corresponding Australian patent. SIBIA has six pending U.S. applications
covering human NMDA receptor genes and encoded subtypes, one of which has been
allowed, and a granted patent in Great Britain. Furthermore, SIBIA has three
pending U.S. applications covering human metabotropic glutamate receptor
("mGluR") genes and assay methods, one of which has been allowed. In addition,
SIBIA has received notification that another application exclusively licensed
from The Salk Institute has been allowed.
Several of SIBIA's pending U.S. patent applications relate to functional
screening techniques that can be utilized in conjunction with receptor/ion
channel compositions for identifying drugs which have the potential for
treatment of disorders associated with the particular receptor or ion channel.
Two issued U.S. patents cover methods and compositions for identifying
receptor-modulating compounds based on detection of reporter gene transcription.
In addition, one issued U.S. patent, one granted foreign patent and five pending
U.S. patent applications cover fluorescence-based automated systems and methods
for high throughput functional screening of receptor-modulating compounds.
SIBIA has also filed a patent application disclosing proprietary methods
for solid phase synthesis of chemical series, termed resin activation/capture or
REACAP, to produce libraries of compounds that would be difficult, or
impossible, to obtain using solution phase syntheses. An additional advantage of
the methods is the production of compounds of increased purity. The libraries
produced by the methods will be useful for screening against SIBIA's molecular
targets.
SIBIA has eight issued U.S. patents covering the composition, use, or
methods or preparation of compounds which modulate the activity of nAChRs for
the treatment of diseases and disorders involving these receptors, including an
issued U.S. patent covering, inter alia, SIB-1508Y. Additionally, SIBIA has six
pending U.S. applications, two of which have been allowed, covering new series
of nAChR (including, inter alia, SIB-1553) and EAA compounds. Two of the
applications covering EAA compounds are jointly assigned to SIBIA and Novartis.
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SIBIA has nine U.S. patent applications pending covering the composition or
use of compounds that modulate the processing of proteins implicated in
Alzheimer's disease and an issued U.S. patent covering assay methods for the
detection of Alzheimer's disease. One of these applications has been allowed.
Applications for foreign patents corresponding to the majority of the above
described U.S. patents and applications have also been filed.
SIBIA has a non-exclusive worldwide license to various patents and patent
applications held by Aurora. The technology covered by these patents and patent
applications include several assay technologies. See "-- Research Collaborations
and Licenses."
The Company intends to file additional applications as appropriate for
patents covering its technologies, compounds and processes. There can be no
assurance that the Company will develop additional technologies, compounds or
processes that are patentable, that patents will issue from any patent
application or that claims allowed will be sufficient to protect the Company's
technologies, compounds or processes. Competitors may have filed applications,
may have been issued patents or may obtain additional patents and proprietary
rights relating to technologies, compounds or processes competitive with those
of the Company. The failure by the Company to adequately protect its
technologies, compounds or processes covered by issued patents or to obtain
patents based on the applications referred to herein or any future applications
could have a material adverse effect on the Company's business.
The patent positions of pharmaceutical and biotechnology firms, including
SIBIA, are uncertain and involve complex legal and factual questions. In
addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, the Company does not know
whether any more of its applications will result in the issuance of patents or,
if any patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until a patent issues, and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it was the first
creator of inventions covered by its pending patent applications or that it was
the first to file patent applications for such inventions.
The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are based. It is uncertain whether any
third-party patents will require the Company to alter its technologies,
compounds or processes, obtain licenses or cease certain activities. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents in the field in
which the Company is involved. Some of these applications or patents may be
competitive with the Company's applications or conflict in certain respects with
claims made under the Company's applications. Such conflict could result in a
significant reduction of the coverage of the Company's patents, if issued. In
addition, if patents issued to other companies contain competitive or
conflicting claims and such claims are ultimately determined to be valid, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. If any licenses are required, there can be no
assurance that the Company will be able to obtain any such license on
commercially favorable or acceptable terms, if at all. The Company's breach of
an existing license or failure to obtain a license to any technology that it may
require to develop and commercialize its compounds would have a material adverse
effect on the Company's business.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. See "Item 3. Legal
Proceedings." Moreover, if competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office ("PTO") to determine
priority of invention, which could result in substantial cost to the Company,
even if the eventual outcome is favorable to the Company. Similarly, the Company
may have to participate in opposition proceedings with respect to granted
foreign patents. The Company is aware of third-party patent applications that
may elicit an interference proceeding with two of the Company's patent
applications in the PTO. There
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can be no assurance that the Company will prevail in these proceedings. Also,
there can be no assurance that the validity of the Company's patents, if issued,
would be upheld by a court of competent jurisdiction. An adverse outcome in
patent prosecution or in litigation with respect to the validity of any of the
Company's patents could subject the Company to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require
the Company to cease using such technology, any of which could have a material
adverse effect on the Company's business.
In addition, the recombinant Pichia pastoris yeast expression system
developed at SIBIA is protected by several patents that have issued to Phillips
Petroleum. These patents include claims to key Pichia gene regulatory elements,
marker genes and transformation methods that form the basis of the recombinant
expression system. SIBIA retains full rights to the general expression system
protected by these patents but does not have the right to sublicense this
technology. SIBIA has filed numerous applications and has been granted eight
U.S. patents and two foreign patents pertaining to Pichia-based recombinant
systems for the production of certain proteins including human epidermal growth
factor, human IGF-1 and aprotinin. SIBIA also has patents in vaccine-related
technology. See "Risk Factors -- Uncertainty Regarding Patents and Proprietary
Rights."
In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors.
COMPETITION
Competition to develop drugs to treat nervous system disorders is intense
and expected to increase as knowledge and interest in the disorders addressed by
the products the Company is seeking to develop increases. The Company's most
significant competitors are pharmaceutical companies and established
biotechnology and drug discovery service companies. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical companies. In addition, the Company faces
competition from academic institutions, governmental agencies and other public
and private research organizations which conduct research, seek patent
protection, and establish collaborative arrangements for product and clinical
development and marketing. Furthermore, these companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel.
Many of the Company's competitors have substantially greater financial,
technical and human resources than the Company and have significant products
approved or in development. In addition, many of these competitors have
significantly greater experience than the Company in undertaking preclinical
testing and clinical trials of new pharmaceutical products and in obtaining FDA
approval for products more rapidly than the Company. The Company has not sought
the approval of the FDA for any product based on any of its compounds under
development. Furthermore, if the Company is permitted to commence commercial
sales of products that it may develop, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has no
experience. See "Risk Factors -- No Assurance of Regulatory Approval; Government
Regulation," and "-- Reliance on Third-Party Manufacturers."
Any product that the Company may succeed in developing, and for which it
gains regulatory approval, must then compete for market acceptance and market
share. For certain of the Company's potential products, an important competitive
factor will be the timing of market introduction. Accordingly, the Company
expects that the relative speed with which companies can develop products,
complete the clinical testing and approval processes and supply commercial
quantities of the product to the market will be important competitive factors.
With respect to clinical testing, competition may delay progress by limiting the
number of clinical investigators and patients available to test the Company's
potential products.
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In addition to the above factors, competition is based on product efficacy
and safety, the timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, price, patent position and reimbursement
coverage. See "Risk Factors -- Intense Competition; Rapid Technological Change."
MANUFACTURING
The Company currently has no manufacturing facilities for clinical or
commercial production of any compounds currently under development or the
manufacture and distribution of products that may be developed. The Company is
currently relying on third-party manufacturers to produce its compounds for
preclinical and clinical purposes. Furthermore, the compounds under development
by the Company have never been manufactured on a commercial scale and may not be
able to be manufactured at a cost or in quantities to make commercially viable
products.
The Company intends to establish arrangements with third-party
manufacturers to supply compounds for preclinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's preclinical and clinical testing schedule would be delayed, resulting
in the delay of submission of products for regulatory approval and initiation of
new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
products that it may develop, market introduction or penetration of such
products would be adversely affected. See "Risk Factors -- Reliance on
Third-Party Manufacturers."
SALES AND MARKETING
The commercialization of products, such as those that may be developed by
the Company, is an expensive and time-consuming process. The Company has no
experience in sales, marketing or distribution. In order to market directly any
products that the Company may develop, the Company must develop a marketing and
sales force with technical expertise and supporting distribution capability.
Alternatively, the Company may seek to obtain the assistance of a pharmaceutical
or biotechnology company with a large distribution system and a large direct
sales force. See "Risk Factors -- Absence of Sales and Marketing Organization."
GOVERNMENT REGULATION
The manufacturing and marketing of pharmaceutical products in the United
States requires the approval of the FDA under the federal Food, Drug and
Cosmetic Act. Similar approvals by the comparable agencies are required in most
foreign countries. The FDA has established mandatory procedures and safety
standards that apply to the preclinical and clinical testing, manufacture and
marketing of pharmaceutical products. Obtaining FDA approval for a new
therapeutic takes several years and involves substantial expenditures.
Pharmaceutical manufacturing facilities are also regulated by state, local and
other authorities.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animal models to assess a drug's efficacy and
to identify potential safety problems. The results of these studies are
submitted to the FDA as part of an IND, which is filed to comply with FDA
regulations prior to beginning clinical trials.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
assess the potential of the drug for specific, targeted indications; (ii)
evaluate dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to further evaluate clinical efficacy and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. Data from clinical trials are submitted to the FDA in a
New Drug Application ("NDA") or Product License Application ("PLA"). Preparing
an NDA or PLA involves considerable data collection, verification, analysis and
expense.
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The testing and approval process requires substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. The time period required for NDA review and approval may be affected
by a number of factors, including the severity of the disease, the availability
of alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review period. The FDA may ask one of its advisory committees to aid in its
assessment of the drug. All of these factors may delay marketing approval. The
FDA may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense. FDA approval is limited to specified
indications. Moreover, the product label and promotional labeling and
prescription drug advertising are highly regulated by the FDA under the federal
Food, Drug and Cosmetic Act. In order to permit promotion of the approved
product for indications not included in the scope of the original approval,
further clinical trials and FDA approval may be necessary. See "Risk
Factors -- No Assurance of Regulatory Approval; Government Regulation."
NDA approval requires, among other things, that the prospective
manufacturer's quality control and manufacturing procedures conform to Good
Manufacturing Practices ("GMP") regulations. All manufacturing facilities,
whether foreign or domestic, may be subjected to a pre-NDA approval inspection.
Additionally, domestic manufacturing facilities are subject to biennial FDA
inspections and foreign manufacturing facilities are subject to periodic
inspection by foreign regulatory authorities as well as by the FDA where the FDA
has a reciprocal inspection agreement with the foreign regulatory authorities.
For clinical investigation and marketing outside the United States, the
Company also is subject to foreign regulatory requirements governing clinical
trials and marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. The Company's approach to the European regulatory
process involves the identification of respected clinical investigators in the
member states of the European Union ("EU") to conduct clinical studies. The
Company intends to design these studies to meet both FDA and EU standards.
Provided regulatory harmonization is finalized in the EU, these studies are
designed to develop a regulatory package sufficient for multi-country approval
in the Company's European target markets without the need to duplicate studies
for individual country approvals. This approach also takes advantage of
regulatory requirements in some countries, such as in the United Kingdom, which
allow Phase I studies to commence after appropriate toxicology and preclinical
pharmacology studies but prior to formal regulatory approval.
In December 1996, the Company filed an IND with respect to SIB-1508Y for
the treatment of Parkinson's disease, completed Phase I clinical trials in
September 1997 and commenced Phase II clinical trials in January 1998. See "Risk
Factors -- Absence of Developed Products; Early Stage of Development."
HUMAN RESOURCES
As of December 31, 1997, the Company had 111 employees, 33 of whom hold
Ph.D. degrees. 101 employees are engaged in, or directly support, research and
development. The Company's employees are not covered by a collective bargaining
agreement and the Company considers its relations with its employees to be
excellent.
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RISK FACTORS
Except for historical information contained herein, the discussion in this
Form 10-K contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 as amended ("Exchange Act") involving
risk and uncertainties. Actual results could differ materially from those
projected in this Form 10-K. Factors that could cause or contribute to such
differences include, but are not limited to, the ability to discover and develop
safe and efficacious drugs, variability of royalty, license and other revenue,
failure to satisfy performance obligations, ability to maintain current or enter
into future collaboration agreements, uncertainty regarding the Company's
patents and proprietary rights (including the risk that the Company may be
forced to engage in costly litigation to protect such patent rights and the
material adverse consequences to the Company if there were unfavorable outcome
of any such litigation), as well as other risks and uncertainties discussed in
the following risk factors and in the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those discussed in any document incorporated herein by
reference.
Absence of Developed Products; Early Stage of Development. SIBIA is an
early stage biotechnology company. The Company has no products available for
sale and does not expect to have any products resulting from its research
efforts, including its collaborations with others, commercially available for at
least several years, if at all. SIBIA has only filed an Investigational New Drug
("IND") application with the United States Food and Drug Administration ("FDA")
for one of its compounds (SIB-1508Y) currently under research and development,
and no INDs have been filed by the Company's collaborative partners for any
compound in connection with their collaborations with the Company. Even though
clinical trials with respect to SIB-1508Y have commenced, SIB-1508Y may prove to
be ineffective in the treatment of neural disorders, or have undesirable or
unintended side effects or other characteristics that prevent or limit its
commercial use, either of which could have a material adverse effect on the
Company's business. Furthermore, there can be no assurance that any products
will be successfully discovered or developed by the Company or its collaborative
partners, be approved for clinical trials, prove to be safe and efficacious in
clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at acceptable costs or be marketed
successfully. The failure of the Company or its collaborative partners to
discover or develop commercially viable products or successfully market such
products would have a material adverse effect on the Company's business. See
"Business -- Discovery and Development Programs."
The Company's area of therapeutic focus, disorders of the nervous system,
is not thoroughly understood and there can be no assurance that the compounds
the Company is seeking to develop will prove to be safe and effective in
treating nervous system disorders. The development of such compounds will
require the commitment of substantial resources to continue research and to
conduct the pre-clinical development and clinical trials necessary to bring such
compounds to market and to establish production and marketing capabilities. Drug
research, discovery and development by nature are uncertain. There is a risk of
delay or failure at any stage, and the time required and cost involved in
successfully accomplishing the Company's objectives cannot be predicted. Actual
drug research, discovery and development costs could exceed budgeted amounts,
which could have a material adverse effect on the Company's business.
Dependence on Collaborative Relationships. The Company's strategy for the
development, clinical testing, manufacturing and commercialization of certain of
its compounds includes entering into various collaborations with corporate
partners, licensors, licensees and others. The Company has entered into
collaborative arrangements with Novartis, Bristol-Myers Squibb and Meiji and
intends to enter into additional collaborations. The Company's current
collaborators have received from SIBIA certain exclusive rights to commercialize
any products developed under their respective agreements. These collaborators
have generally agreed to fund the research and development of compounds
discovered under their respective agreements, conduct clinical testing of lead
compounds, prepare and file submissions for regulatory approval, make milestone
payments to SIBIA upon the achievement of certain goals and pay royalties on any
resulting products. Under its agreements with these collaborators, the Company
is restricted in its ability to conduct research with third parties with respect
to the technology subject to the respective agreement. Pursuant to the terms of
the Company's agreement with Novartis, Novartis has exclusive rights to
compounds discovered by the Company during the term thereof and rights of first
negotiation to compounds discovered by the Company
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during the three-year period following the term of such agreement. Under the
Company's agreement with Bristol-Myers Squibb, Bristol-Myers Squibb has
exclusive rights to compounds discovered by the Company during the term of such
agreement. There can be no assurance that these collaborations will continue or
be successful or that any products will be developed. Moreover, Novartis and
Bristol-Myers Squibb, under their respective agreements, have the sole and
exclusive right to select compounds for further development and halt or delay
the testing of any compounds selected for development. Under the Company's
agreement with Meiji, all clinical development, product finishing, marketing and
sales for Japan and certain other Asian countries with respect to products
produced from SIB-1508Y, if any, will be controlled by Meiji. The amount and
timing of resources dedicated by these collaborators under their respective
agreements also is not within the control of the Company. There can be no
assurance that the Company will ever receive any milestone or royalty payments
under these agreements. In addition, if products that may be developed under
such agreements are approved for marketing, any revenues to the Company from
such products will be dependent on the marketing and sales efforts of these
collaborators.
Each of the collaborative parties has the right to terminate its respective
collaboration under certain circumstances, including upon the occurrence of a
material breach and, in certain cases, upon a change in control. Novartis can
terminate its collaboration with the Company, with or without cause, upon six
months' prior written notice. There can be no assurance that one or more of the
Company's relationships with its collaborative partners will not be terminated
or that the Company will be able to enter into additional collaborations in the
future. In addition, there can be no assurance that collaborators will not
pursue alternative technologies to develop treatments for the diseases targeted
by the respective collaborative programs. If any of the Company's collaborative
partners terminates or breaches its agreement with the Company or fails to
devote adequate resources to or to conduct in a timely manner its collaborative
activities, the research program under the applicable collaborative agreement or
the development and commercialization of drug candidates subject to such
collaboration would be materially adversely affected, which would have a
material adverse effect on the Company's business. In addition, because the
Company's collaborative agreements have accounted for 81%, 97% and 95% of total
revenues for the years ended December 31, 1995, 1996 and 1997, respectively,
such a termination or breach could materially adversely affect the Company's
results of operations and financial condition. Also, there can be no assurance
that a research program covered by a particular collaborative agreement does not
or will not conflict with any research programs covered by the Company's other
collaborations. The occurrence of any such conflict could have a material
adverse effect on the Company's business.
The Company and Lilly completed their collaborative research in the area of
VGCCs in October 1997. The Company and Lilly will independently pursue discovery
and development of drug leads that act on VGCC drug targets identified under
this collaboration. The Company will no longer receive research support payments
in connection with this collaboration. The Company is entitled to receive
milestone payments and royalties on sales of products commercialized by Lilly
and is free to develop compounds it discovers in this area on its own or with
other partners. The amount and timing of resources dedicated by Lilly to
development and commercialization of such products is not within the control of
the Company. There can be no assurance that the Company will ever receive any
milestone or royalty payments from Lilly. In addition, if any products are
developed and approved for marketing, any revenues to the Company from such
products will be dependent on the marketing and sales efforts of Lilly.
A key element of the Company's strategy is to enter into additional
collaborative arrangements with pharmaceutical and biotechnology companies to
develop and commercialize its drug candidates. There can be no assurance that
the Company will be able to negotiate collaborative arrangements in the future
on acceptable terms, if at all, or that such collaborative arrangements will be
successful. Most of the Company's competitors similarly are seeking to develop
or expand their collaborative relationships with pharmaceutical and
biotechnology companies, which could adversely impact the Company's ability to
enter into additional collaborative arrangements. To the extent that the Company
is not able to establish such arrangements or any of its existing arrangements
are terminated, it would require significant capital to undertake development,
regulatory, manufacturing and marketing activities at its own expense and may be
required to curtail significantly or eliminate one or more of its research,
discovery or development programs, either of which could have a material adverse
effect on the Company's business. In addition, the Company may encounter
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significant delays in introducing products that it may develop into certain
markets or may find that the development, manufacture or sale of such products
in such markets is adversely affected by the absence of such collaborative
arrangements.
New and Uncertain Technology. The Company's proprietary nervous system
discovery technologies, which comprise the human receptor/ion channel subtype
technology and human protease technology, are unproven and relatively new
compared to traditional methods of drug discovery. The Company uses its
technologies to isolate and identify molecular targets that it believes play an
important role in nervous system function and nervous system disorders. The
ability of the Company to screen potential compounds, select product candidates
and develop products is dependent in large part upon the number of such targets
available for screening and whether the expected functionality of such targets
plays an important role in nervous system function and nervous system disorders.
There can be no assurance that the use of such technologies will lead to the
discovery or development of commercial pharmaceutical products that are safe and
efficacious in treating any nervous system disorder. Failure to develop any such
product would have a material adverse effect on the Company's business.
History of Operating Losses. The Company is at an early stage of
development with respect to its nervous system technologies and its compounds.
Except for 1995, the Company has incurred net losses every year since it shifted
its area of therapeutic focus to the central nervous system in 1991. As of
December 31, 1997, the Company had an accumulated deficit of approximately $29.3
million. The Company is continuing to incur losses and expects to incur
increasing operating losses over the next several years as the Company's
research and development expenditures increase. The Company's revenue for the
short term will be limited to payments under its existing or future strategic
alliance agreements. There can be no assurance that the Company will ever
achieve or sustain significant revenues or profitable operations. To achieve
significant revenues or profitable operations, the Company, alone or with its
collaborators, must successfully develop, manufacture and market safe and
efficacious products and obtain the regulatory approvals required for their
testing, manufacture and sale. Failure to achieve significant revenues or
profitable operations could impair the Company's ability to sustain operations.
There can be no assurance that the Company will be successful in entering into
additional collaborative arrangements or that any such arrangements will result
in revenues or that the Company will receive additional revenues under existing
collaborative arrangements. The Company has not yet received any revenues from
the achievement of milestones from the discovery or development of, or royalties
from the sale of, commercial drugs by Lilly, Novartis, Bristol-Myers Squibb or
Meiji, and such revenues, if any, are not expected to represent a material
amount of the Company's total revenues for several years, if at all.
Future Capital Needs; Uncertainty of Additional Funding. The Company will
require substantial additional funds to conduct the research and development and
pre-clinical and clinical testing of its compounds and to manufacture and market
any products that may be developed. Although the Company plans to contract with
third parties to manufacture and market any products that may be developed, to
the extent the Company is unsuccessful and is required to establish its own
manufacturing capacity or marketing program, it will require substantial
additional capital. The Company's future capital needs will be dependent upon
many factors, including progress in its research and development activities, the
magnitude and scope of these activities, progress with pre-clinical and clinical
trials, the cost of preparing, filing, prosecuting, maintaining, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in or terminations of existing
collaborative arrangements, the establishment of additional collaborative
arrangements and the cost of manufacturing scale-up and development of marketing
activities, if undertaken by the Company. The Company expects to expend
substantial funds in connection with research and development and in the
prosecution and enforcement of its intellectual property rights. Payments under
existing collaborative agreements and the Company's current cash reserves will
be insufficient to fund the Company's operations through the completion of any
clinical trials and commercialization of its first product, if developed.
Although the Company will seek to obtain additional funds through public or
private equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be
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required to curtail significantly or eliminate one or more of its research,
discovery or development programs or obtain funds through additional
arrangements with corporate partners or others which may require the Company to
relinquish rights to certain of its technologies or product candidates that the
Company would not otherwise relinquish, any of which could have a material
adverse effect on the Company's business.
Intense Competition; Rapid Technological Change. The field in which the
Company is involved is characterized by extensive research efforts, rapid
technological change and intense competition from numerous organizations
including pharmaceutical companies, biotechnology companies, drug discovery
service companies, universities and other research organizations. Technologies,
products and therapies currently exist on the market that would compete directly
with those that the Company is seeking to develop and market. In addition, new
developments occur and are expected to continue to occur at a rapid pace.
Competition from pharmaceutical, biotechnology and drug discovery service
companies is intense and is expected to increase. Many of these companies have
significantly greater financial resources and expertise in research and
development, manufacturing, pre-clinical and clinical testing, obtaining
regulatory approvals and marketing than the Company. Smaller companies may also
prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical companies. Many of these competitors have
significant nervous system products approved or in development and operate
large, well-funded nervous system research and development programs. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, and establish collaborative arrangements
for the clinical development of compounds and marketing of products aimed at
treating nervous system disorders. The Company's competitors may succeed in
discovering and developing products more rapidly or products that are more
effective or more affordable than any that may be developed by the Company and
its collaborative partners, and such competitors may also prove to be more
successful than the Company and its collaborative partners in production and
marketing of such products. There can be no assurance that research, discoveries
or commercial developments by others will not render any of the Company's or its
collaborative partners' programs or potential products obsolete or
noncompetitive, any of which would have a material adverse effect on the
Company's business. Moreover, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's or its collaborative partners' ability to
use the Company's technology or commercialize products that may be developed.
Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to obtain patents, maintain trade secrets and
operate without infringing on the proprietary rights of others, both in the
United States and other countries. The patent positions of biotechnology and
pharmaceutical companies can be highly uncertain and involve complex legal and
factual questions, and therefore, the breadth of claims allowed in biotechnology
and pharmaceutical patents cannot be predicted. There can be no assurance that
patents issued to or licensed by the Company will not be infringed or will not
be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company's technology, to
products that the Company may develop, or to other competitive advantages that
the Company may possess.
SIBIA has 50 pending applications for U.S. patents on its technology
relating to drug discovery for various nervous system disorders. To date, the
Company has exclusively licensed six U.S. patents from The Salk Institute
related to SIBIA's human receptor/ion channel subtype technology, as well as
continuations-in-part and foreign counterparts of these patents. The Company
intends to file additional applications as appropriate for patents covering its
technologies, compounds and processes. There can be no assurance that the
Company will develop additional technologies, compounds or processes that are
patentable, that patents will issue from any patent application or that claims
allowed will be sufficient to protect the Company's technologies, compounds or
processes. Competitors may have filed applications, may have been issued patents
or may obtain additional patents and proprietary rights relating to
technologies, compounds or processes competitive with those of the Company. The
failure by the Company to adequately protect its technologies, compounds or
processes covered by issued patents or to obtain patents based on the
applications referred to herein or any future applications could have a material
adverse effect on the Company's business.
The success of the Company will also depend in part on SIBIA not infringing
patents issued to competitors and not breaching the technology licenses upon
which any Company compounds or processes are
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based. It is uncertain whether any third-party patents will require the Company
to alter its technologies, compounds or processes, obtain licenses or cease
certain activities. A number of pharmaceutical companies, biotechnology
companies, universities and research institutions have filed patent applications
or received patents in the field in which the Company is involved. Some of these
applications or patents may be competitive with the Company's applications or
conflict in certain respects with claims made under the Company's applications.
Such conflict could result in a significant reduction of the coverage of the
Company's patents, if issued. In addition, if patents issued to other companies
contain competitive or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable or acceptable terms, if at all. The
Company's breach of an existing license or failure to obtain a license to any
technology that it may require to develop and commercialize its compounds would
have a material adverse effect on the Company's business.
Litigation, which could result in substantial economic costs to the Company
and diversion of management and other resources, may also be necessary to
enforce any patents issued to the Company or to determine the scope and validity
of third-party proprietary rights. Moreover, if competitors of the Company
prepare and file patent applications in the United States that claim technology
also claimed by the Company, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office ("PTO") to
determine priority of invention, which could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. Similarly,
the Company may have to participate in opposition proceedings with respect to
granted foreign patents. The Company is aware of third-party patent applications
that may elicit an interference proceeding with two of the Company's patent
applications in the PTO. There can be no assurance that the Company will prevail
in these proceedings. Also, there can be no assurance that the validity of the
Company's patents, if issued, would be upheld by a court of competent
jurisdiction. An adverse outcome in patent prosecution or in litigation with
respect to the validity of any of the Company's patents could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease using such
technology, any of which could have a material adverse effect on the Company's
business. See "Business -- Patents and Proprietary Rights" and "-- Legal
Proceedings."
On July 9, 1996, the Company filed an action for patent infringement
against Cadus in the United States District Court for the Southern District of
California. The complaint asserts that Cadus' assay technology infringes the
Company's U.S. Patent No. 5,401,629 (the " '629 patent"), entitled "Assay
Methods and Compositions Useful for Measuring the Transduction of an
Intracellular Signal." Through the complaint, the Company seeks damages in an
unspecified amount and injunctive relief. On August 1, 1996, Cadus filed its
answer and a counterclaim to the Company's complaint. The counterclaim asserts
claims that the '629 patent and the Company's U.S. Patent No. 5,436,128,
entitled "Assay Methods and Composition for Detecting and Evaluating the
Intracellular Transduction of an Extracellular Signal," are invalid,
unenforceable and not infringed, and further asserts claims for intentional
interference with prospective economic advantage and unfair competition. The
counterclaim seeks declaratory relief and compensatory and punitive damages in
an unspecified amount. Although the Company believes that its complaint against
Cadus is well-founded, there can be no assurance that the Company will prevail
on its claim, or be able to successfully defend against Cadus' counterclaim.
In addition to patents, the Company relies on trade secret laws to protect
its technology, especially where patent protection is not believed to be
appropriate or obtainable. Thus, SIBIA relies on protecting its proprietary
technology and processes in part by confidentiality agreements with its
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently discovered by competitors. If the Company is
unable to sufficiently protect its trade secrets, such inability could have a
material adverse effect on the Company's business.
No Assurance of Regulatory Approval; Government Regulation. The production
and marketing of products that the Company may develop and its ongoing research
and development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. Prior to
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marketing in the United States, any drug developed by the Company must undergo
rigorous pre-clinical and clinical testing and an extensive regulatory approval
process implemented by the FDA under the federal Food, Drug and Cosmetic Act. To
market products abroad, the Company also would be subject to foreign regulatory
requirements, implemented by foreign health authorities, governing clinical
trials and marketing approval for drugs. Satisfaction of such regulatory
requirements, which includes demonstrating to the satisfaction of the FDA that
the product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Pre-clinical studies must be conducted, as
appropriate, in conformance with the FDA's good laboratory practice regulations.
Clinical trials will be vigorously regulated and must meet requirements for
institutional review board oversight and informed consent as well as FDA review
and oversight and under good clinical practice regulations. The Company has no
experience in developing a product through the clinical trial process, which is
necessary to obtain regulatory approval. The Company intends to establish
collaborative relationships to conduct clinical trials and seek regulatory
approvals to market products that it may develop, although there can be no
assurance that such approvals will be received on a timely basis, if at all.
Clinical trials require the recruitment of large numbers of test subjects,
particularly for products that are intended to treat nervous system disorders.
There can be no assurance that those conducting clinical trials for the Company
will be able to initiate such trials at preferred clinical test sites or recruit
sufficient test subjects, or that such trials will be started or completed
successfully within any specified time period, if at all, with respect to any of
the products that the Company may develop. Furthermore, the Company or the FDA
may suspend clinical trials at any time if it is determined that the subjects
participating in such trials are being exposed to unacceptable health risks.
There can be no assurance that the Company will not encounter problems in
clinical trials which would cause the Company or the FDA to delay or suspend
clinical trials. Any such delay or suspension could have a material adverse
effect on the Company's business. There can be no assurance that any compound
that may be developed by the Company alone or in conjunction with others will
prove to be safe and efficacious in clinical trials and meet all of the
applicable regulatory requirements needed to receive marketing approval. If
regulatory approval of a product is granted, such approval will be limited to
those disease states and conditions for which the product is useful, as
demonstrated through clinical studies. The failure to obtain marketing approval
for any drug candidate could have a material adverse effect on the Company's
business.
There can be no assurance that delays or rejections will not be encountered
based upon additional government regulation from future legislation or
administrative action or that changes will not be made in FDA policy during the
period of product development and FDA regulatory review of each submitted new
drug application. Similar delays may also be encountered in foreign countries.
Furthermore, product approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and the regulatory standards for manufacturing are
currently being applied stringently by the FDA. Later discovery of previously
unknown problems with a product, a manufacturer or its facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market, which would have a material adverse effect on the
Company's business.
Reliance on Third-Party Manufacturers. The Company currently has no
manufacturing facilities for clinical or commercial production of any compounds
currently under development or marketing capability for the distribution of any
products that may be developed. The Company is currently relying on third-party
manufacturers to produce its compounds for pre-clinical and clinical purposes.
The Company's only compound in human clinical trials, SIB-1508Y, has never been
manufactured on a commercial scale and there can be no assurance that such
compound, or any other compound the Company or its collaborators may develop,
can be manufactured at a cost or in quantities to make commercially viable
products.
The Company intends to establish additional arrangements with third-party
manufacturers to supply compounds for pre-clinical and clinical trials and
commercial sales of products that may be developed, as well as for the
packaging, labeling and distribution of such products. If the Company is unable
to contract for a sufficient supply of its compounds on acceptable terms, the
Company's pre-clinical and clinical testing schedule would be delayed, resulting
in the delay of submission of compounds for regulatory approval and initiation
of new development programs, which would have a material adverse effect on the
Company's business. If the Company should encounter delays or difficulties in
establishing relationships with manufactur-
24
<PAGE> 27
ers to produce, package and distribute products that the Company may develop,
market introduction or penetration of such products would be adversely affected.
Moreover, third-party manufacturers that the Company may use must adhere to good
manufacturing practice regulations enforced by the FDA through its facilities
inspection program. If facilities of third-party manufacturers cannot pass a
pre-approval plant inspection, the FDA approval of products that may be
developed by the Company will be adversely affected.
Absence of Sales and Marketing Organization. The Company has no experience
in sales, marketing or distribution. In order to market directly any products
that it may develop, the Company must develop or obtain access to a substantial
marketing staff and sales force with technical expertise and supporting
distribution capability. Alternatively, the Company may seek to obtain the
assistance of a pharmaceutical or biotechnology company with a large
distribution system and a large direct sales force. There can be no assurance
that the Company will be able to establish such a marketing staff or sales
force, that the Company's sales and marketing efforts will be successful, or
that the Company will be able to obtain the assistance of another pharmaceutical
or biotechnology company in these efforts. To the extent the Company enters into
arrangements with third parties for the marketing and sale of products it may
develop, any revenues received by the Company will be dependent on the efforts
of such third parties, and there can be no assurance that such efforts will be
successful. Failure to establish adequate sales, marketing and distribution
capabilities independently or with others would have a material adverse effect
on the Company's business.
Management of Growth; Dependence on Key Personnel; Need to Attract and
Retain Key Employees and Consultants. To expand its research and development
programs and pursue its product development plans, the Company will be required
to hire additional qualified scientific personnel to perform research and
development, as well as personnel with expertise in clinical testing and
government regulation. These requirements are also expected to necessitate the
addition of management personnel and the development of additional expertise by
existing management personnel. The failure to attract such personnel or to
develop or acquire such expertise would have a material adverse effect on the
Company's business. As part of this growth, the Company will be required to
enter into additional collaborative arrangements and successfully manage these,
along with its current, collaborative arrangements. To the extent the Company
does not enter into collaborative agreements with third parties, it will also be
required to hire manufacturing and marketing personnel. If the Company is unable
to manage its growth effectively, the Company's business would be materially
adversely affected.
The Company is highly dependent on the principal members of its scientific
and management staff, and the loss of any of these members might significantly
delay the achievement of the Company's development objectives. The Company does
not maintain "key man" insurance on any of its employees, nor does the Company
intend to secure such insurance. In addition, the Company relies on consultants
and advisors, including its scientific advisors, to assist the Company in
formulating its research and development strategy. Retaining and attracting
qualified personnel, consultants and advisors will be critical to the Company's
success. The Company faces competition for qualified individuals from numerous
pharmaceutical and biotechnology companies, universities and other research
institutions. There can be no assurance that the Company will be able to attract
and retain such individuals on acceptable terms or at all. The failure to
attract or retain such personnel would have a material adverse effect on the
Company's business.
Control by Principal Stockholders; Anti-Takeover Provisions. The Salk
Institute and its affiliates beneficially owned approximately 21.2% of the
outstanding shares of Common Stock of SIBIA as of December 31, 1997. In
addition, as of December 31, 1997, the present directors and executive officers
of the Company beneficially owned approximately 8.9% of the outstanding shares
of Common Stock. Accordingly, together with The Salk Institute, the present
directors and executive officers of the Company have the ability to exercise
substantial influence over the outcome of most stockholders' actions. Moreover,
the Company's Certificate of Incorporation does not provide for cumulative
voting with respect to the election of directors. Consequently, the present
directors and executive officers, together with The Salk Institute, are able to
exercise substantial influence over the election of the members of the Board of
Directors. Such concentration of ownership could have an adverse effect on the
price of SIBIA's Common Stock. In addition, the Company's Certificate of
Incorporation provides that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing.
Special meetings of the stockholders of the Company may be called only by the
25
<PAGE> 28
Chairman of the Board of Directors, the President of the Company, by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors, or by the holders of 10% of the outstanding voting
stock of the Company. Moreover, the Company's Certificate of Incorporation and
Bylaws provide for a classified Board of Directors and eliminate the ability of
stockholders to remove a director without cause. The Company's Certificate of
Incorporation and Bylaws also require that the holders of at least 66 2/3% of
the voting stock of the Company must approve any amendment to either the
Certificate of Incorporation or Bylaws affecting certain provisions, including
the provisions described above. These provisions may have the effect of making
hostile takeovers of the Company more difficult, but may also render more
difficult the accomplishment of mergers or the assumption of control by a
principal stockholder because they make it more difficult to remove the
Company's management. In addition, the Board of Directors has the authority,
without action by stockholders, to issue additional shares of Common Stock and
to fix the rights and preferences of and issue shares of Preferred Stock, either
of which may have the effect of delaying or preventing a change in control of
the Company.
Further, the Company has issued rights (the "Rights") to the holders of its
Common Stock to purchase a specified class of Preferred Stock of the Company
pursuant to a Preferred Share Purchase Rights Plan (the "Rights Plan"). Although
the Rights Plan will not prevent a takeover of the Company, it may discourage
abusive and coercive takeover tactics that result in a rapid, forced sale of the
Company at a lower price than might otherwise be obtainable. The existence of a
Rights Plan may confront the Board of Directors with difficult decisions with
respect to redemption or amendment of the outstanding Rights. In addition, once
a hostile bidder crosses a certain threshold, the Rights become non-redeemable
and the Board of Directors' ability to enter into a negotiated acquisition would
be impaired. There can be no assurance that the Rights Plan will maximize
shareholder value. Furthermore, there can be no assurance that the Rights Plan
will not discourage potential bidders from attempting to gain control of the
Company. The foregoing charter provisions as well as other charter provisions,
the rights of first refusal in favor of the Company, the Rights Plan and certain
provisions of Delaware law may discourage certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests.
In addition, certain of the Company's collaborative partners have the right
to terminate their respective agreements with the Company upon certain changes
in control of the Company, which may discourage acquisitions or other changes in
control (including those in which stockholders of the Company might otherwise
receive a premium for their shares over then current market prices).
Product Liability Exposure and Uninsured Risks. The testing of compounds
and the marketing and sale of commercial pharmaceutical products involves
unavoidable risks. The use of any of the Company's compounds or its
collaborative partners' compounds in clinical trials and the sale of any
products that may be developed may expose the Company to potential liability
resulting from the use of such compounds or products. Such liability might
result from claims made directly by consumers or by regulatory agencies,
pharmaceutical companies or others using or selling such compounds or products.
The Company has obtained insurance coverage for its current clinical trials. The
Company intends to seek additional insurance coverage if and when it develops
products that are ready to be commercialized. There can be no assurance that the
Company will be able to obtain or maintain product liability insurance in the
future on acceptable terms or that, if obtained, the insurance coverage will be
sufficient to cover any potential claims or liabilities. The inability of the
Company to obtain product liability coverage in amounts sufficient to cover any
damages resulting from a product liability claim could have a material adverse
effect on the Company's business.
Hazardous Materials. The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for storing,
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any resulting damages, which
could have a material adverse effect on the Company's business.
26
<PAGE> 29
Possible Volatility of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies, including that of SIBIA,
historically have been highly volatile, and the market from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Factors that may have a significant
impact on the market price and marketability of the Company's Common Stock
include: announcements of technological innovations or new commercial
therapeutic products by the Company, its collaborative partners or the Company's
present or potential competitors; announcements by the Company or others of
results of preclinical testing and clinical trials; developments or disputes
concerning patent or other proprietary rights; developments in the Company's
relationships with its existing or future collaborative partners; acquisitions;
litigation; adverse legislation; changes in governmental regulation, third party
reimbursement policies, or the status of the Company's regulatory approvals or
applications; changes in earnings; changes in securities analysts'
recommendations; changes in health care policies and practices; economic and
other external factors; and period-to-period fluctuations in financial results
of the Company and general market conditions. Fluctuations in the trading price
or liquidity of the Company's Common Stock may adversely affect the Company's
ability to raise capital through future equity financing, which could have a
material adverse effect on the Company's business.
ITEM 2. PROPERTIES
The Company's facilities are located in La Jolla, California. The Company
leases approximately 52,088 square feet of space used for laboratory and
administrative purposes of which approximately 10,792 square feet is sublet.
SIBIA believes that its present facility will be adequate to conduct its
research activities through December 2001, when its current lease expires. The
Company has an option to extend its lease for an additional five years.
Management believes that it will be able to secure additional space at
commercially reasonable rates during the terms of such lease, if necessary.
ITEM 3. LEGAL PROCEEDINGS
On July 9, 1996, the Company filed an action for patent infringement
against Cadus in the United States District Court for the Southern District of
California. The complaint asserts that Cadus' assay technology infringes the
Company's U.S. Patent No. 5,401,629 (the " '629 patent"), entitled "Assay
Methods and Compositions Useful for Measuring the Transduction of an
Intracellular Signal." Through the complaint, the Company seeks damages in an
unspecified amount and injunctive relief.
On August 1, 1996, Cadus filed its answer and a counterclaim to the
Company's complaint. The counterclaim asserts claims that the '629 patent and
the Company's U.S. Patent No. 5,436,128, entitled "Assay Methods and Composition
for Detecting and Evaluating the Intracellular Transduction of an Extracellular
Signal," are invalid, unenforceable and not infringed, and further asserts
claims for intentional interference with prospective economic advantage and
unfair competition. The counterclaim seeks declaratory relief and compensatory
and punitive damages in an unspecified amount.
Company management believes that its complaint against Cadus is
well-founded and necessary to protect the value of its intellectual property
portfolio. Management believes that Cadus' counterclaim is without merit and
intends to vigorously prosecute its claim of infringement and defend against
Cadus' counterclaim.
Management believes that the ultimate resolution of the above matter will
not have a material adverse impact on the Company's financial position, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's Security holders
during the fourth quarter of the year ended December 31, 1997.
27
<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol "SIBI" on May 9, 1996. The following table sets forth, for the
periods indicated, the high and low sales prices per share of the Common Stock
as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
Fourth Quarter.............................................. $ 9 $ 5 5/8
Third Quarter............................................... 9 1/8 6
Second Quarter.............................................. 9 5 1/4
First Quarter............................................... 9 1/2 7 1/2
1996
Fourth Quarter.............................................. $ 8 1/4 $ 6 1/4
Third Quarter............................................... 8 1/4 5 1/2
Second Quarter (from May 9, 1996)........................... 11 1/2 6 7/8
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq National
Market on January 31, 1998 was $5 5/8 per share. As of January 31, 1998, there
were approximately 1,200 stockholders of record of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and does not
intend to do so in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for each of
the five years in the period ended December 31, 1997. The information should be
read in conjunction with the financial statements included elsewhere in this
report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................... $ 11,197 $ 8,481 $ 10,448 $ 4,852 $ 5,077
Research and development expenses....... 15,819 12,268 8,949 8,663 7,713
Net income (loss)....................... (7,593) (5,564) 2,926 (27) (4,550)
Basic net income (loss) per common
share................................ (0.82) (0.73) 0.60
Diluted net income (loss) per common
share................................ (0.82) (0.73) 0.47
Shares used in computing basic net
income (loss) per common share....... 9,248 7,596 4,893
Shares used in computing diluted net
income (loss) per common share....... 9,248 7,596 6,164
BALANCE SHEET DATA:
Cash, cash equivalents and investment
securities........................... 33,347 37,464 16,488 5,944 4,584
Working capital......................... 31,214 35,324 14,338 4,523 2,016
Total assets............................ 36,180 39,983 18,251 8,005 6,451
Long-term capital lease obligations..... 695 519 721 860 761
Accumulated deficit..................... (29,286) (21,693) (16,129) (19,055) (19,028)
Total stockholders' equity.............. 32,214 36,572 15,107 5,166 2,588
</TABLE>
28
<PAGE> 31
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SIBIA, incorporated in Delaware in 1981, was established by The Salk
Institute. Through 1990, SIBIA successfully developed several proprietary
life-sciences technologies in collaboration with corporate partners. In 1987,
SIBIA initiated research in the neuroscience field and in 1991 shifted its focus
completely to the development of novel therapeutics to treat nervous system
disorders.
The Company receives contract revenue and license and royalty revenue.
Contract revenue includes payments for research to support a specified number of
the Company's scientists and payments upon the achievement of specified research
and drug development milestones. Research contracts are generally conducted on a
best efforts basis. Contract revenue is recognized as the research is performed
using the percentage-of-completion method of accounting, primarily based on
contract costs incurred to date compared with total estimated costs at
completion. Revenue related to milestones is recognized upon the achievement of
the related milestone and when collection is probable. License revenue is
recognized when earned as generally evidenced by certain factors including:
receipt of such fees, satisfaction of any performance obligations and the
non-refundable nature of such fees. Royalty revenue is recognized when earned
and collection is probable.
Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect costs related to specific projects as well as fees paid to other
entities which conduct certain research activities on behalf of the Company.
The Company has no products available for sale and does not expect to have
any products resulting from its research efforts, including its collaborations
with others, commercially available for at least several years, if at all.
Except for 1995, the Company has incurred net losses every year since shifting
its area of therapeutic focus to the central nervous system in 1991. The Company
is continuing to incur losses and expects to incur increasing operating losses
over the next several years as the Company's research and development
expenditures increase. The Company expects that its revenue and other income for
the next several years will fluctuate significantly from quarter to quarter and
will be limited to payments under its collaborative relationships, license fees,
interest income and other miscellaneous income.
During the years ended December 31, 1995, 1996 and 1997, the Company had
three, three, and four collaborative research agreements that accounted for 81%,
97% and 95%, respectively, of total revenue.
To date, the majority of the Company's expenditures have been for research
and development activities. SIBIA expects to receive royalties on sales of
Myotrophin, a product based on the insulin-like growth factor-1 ("IGF-1")
molecule being developed by Cephalon, Inc. ("Cephalon"), if it receives FDA
approval, although there can be no assurances that Myotrophin will receive such
approval. With the exception of Myotrophin, the Company does not expect to
receive royalties based upon net sales of drugs that may be developed for a
significant number of years, if at all. SIBIA expects research and development
expenses to increase significantly over the next several years as its discovery
and development programs progress. In addition, general and administrative
expenses necessary to support such expanded programs are also expected to
increase over the next several years.
As of December 31, 1997, the Company had an accumulated deficit of
approximately $29,286,000. The Company expects to continue to incur significant
additional net losses over the next several years as its research, development
and clinical trial efforts expand. Operating losses may fluctuate from quarter
to quarter as a result of differences in the timing of expenses incurred and
revenues recognized. To date, the Company's operations have been funded
primarily through equity financings, research contracts, option and license and
royalty revenues. In addition, SIBIA received funds from the sale of its
interest in a corporate joint venture in 1994 and from the settlement of certain
litigation in 1995, with which it has purchased investment securities and which
it has used to finance its operations.
29
<PAGE> 32
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Total revenue increased by 32%, from $8,481,000 in 1996 to $11,197,000 in
1997. The increase was due primarily to one-time license fees of $3,000,000
recognized in 1997 related to the Company's agreement with Meiji for the
development of SIB-1508Y, SIBIA's lead compound for Parkinson's disease.
Total operating expenses increased by 32%, from $15,829,000 in 1996 to
$20,965,000 in 1997. The increase in total operating expenses was primarily
attributable to an increase in research and development expenses of 29%, from
$12,268,000 in 1996 to $15,819,000 in 1997. This was primarily the result of
expanded programs in drug discovery and for expenses associated with clinical
trials of SIB-1508Y. General and administrative expenses increased 45%, from
$3,561,000 in 1996 to $5,146,000 in 1997. The increase in general and
administrative expenses was primarily due to increased legal fees related to
various patent and litigation matters, the payment of foreign taxes related to
payments received under the Meiji agreement and costs associated with a proposed
secondary offering of the Company's common stock, which offering was withdrawn
by the Company in February 1998 due to market conditions.
Other income increased by 22%, from $1,784,000 in 1996 to $2,175,000 in
1997. The increase in other income was due primarily to an increase in interest
income earned on proceeds from the Company's initial public offering of Common
Stock in May 1996.
Years Ended December 31, 1996 and 1995
Total revenue decreased by 19%, from $10,448,000 in 1995 to $8,481,000 in
1996. The decrease was due primarily to the recognition, in 1995, of a one-time
license fee of $3,000,000 received from Bristol-Myers Squibb for an exclusive
commercialization license to use certain proprietary technologies related to
APP, a one-time payment of $1,750,000 related to Cephalon's buy-down of its
royalty percentage due on sales of Myotrophin, and revenue related to Novartis'
purchase of certain equipment. Such decrease was partially offset by a net
increase in 1996 contract revenue that was primarily attributable to the
Company's collaborative agreement with Bristol-Myers Squibb and reimbursement of
additional costs and fees from Novartis, pursuant to the terms of the extension
of a collaborative agreement.
Total operating expenses increased by 42%, from $11,127,000 in 1995 to
$15,829,000 in 1996. The increase in total operating expenses was primarily
attributable to an increase in research and development expenses of 37%, from
$8,949,000 in 1995 to $12,268,000 in 1996. This was a result of an increase in
research and development personnel and other costs related to the collaborative
agreement with Bristol-Myers Squibb, expanded programs in drug discovery,
increased outside pre-clinical expenses, occupancy costs and compensation
expense relating to stock option grants. Partially offsetting the above
increases was a decrease in costs related to Novartis' purchase of certain
equipment. General and administrative expenses increased 63%, from $2,178,000 in
1995 to $3,561,000 in 1996. The increase in general and administrative expenses
was primarily due to increased 1996 legal fees related to various general and
litigation matters, increased 1996 compensation expense relating to stock option
grants, increases in salaries and fringe benefit expenses in 1996 due to an
increased number of employees and other expenses related to being a publicly
traded company.
Other income decreased by 52%, from $3,680,000 in 1995 to $1,784,000 in
1996. The decrease in other income was due primarily to the net effect of
$3,146,000 of litigation settlements in 1995 and $1,834,000 of interest income
in 1996 related to investing of the proceeds of the Company's initial public
offering of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
SIBIA has financed its operations primarily through equity financings,
research contracts (generally conducted on a best efforts basis) and option,
license and royalty revenues. The Company has also received funds from the sale
of its interest in the SISKA Diagnostics, Inc. joint venture and the settlement
of certain litigation, with which it has invested in investment securities and
which it expects to use to finance its operations. Since 1991, the Company has
received approximately $41,775,000 in net proceeds from the sale of
30
<PAGE> 33
Convertible Preferred Stock and Common Stock to investors and collaborative
partners and approximately $47,936,000 in contract, license and royalty revenue.
The Company is entitled to receive additional payments under the collaborative
agreements in the form of contract revenue, milestone payments, if milestones
are achieved, and royalties, if products are commercialized. As of December 31,
1997, the Company had an accumulated deficit of $29,286,000.
The Company believes its proprietary drug discovery platform will lead to
corporate collaboration and licensing opportunities which may generate future
revenues in the form of license fees, milestone payments and/or royalties.
The Company anticipates that the cash, cash equivalents and investment
securities balance of $33,347,000 as of December 31, 1997 will be used to
support continued research and development of its technologies and fund other
general and administrative expenditures. The Company leases laboratory and
office facilities under an agreement expiring on December 31, 2001. The average
minimum annual payment under the lease is approximately $1,497,000, before
consideration of sublease income. The Company believes that its present facility
will be adequate to conduct its research activities through December 2001.
Management believes that it should be able to secure additional space at
commercially reasonable rates, if necessary. The Company has an option to extend
its lease for an additional five years. Since 1991, the Company has invested
$3,837,000 in property and equipment. Included within this amount is $3,085,000
of equipment under capital leases. The net present value of obligations under
such capital leases as of December 31, 1997 was $1,223,000.
The Company expects to incur substantial research and development expenses
including continued increases in personnel costs and costs related to the
continued expansion of its drug discovery platform and pre-clinical testing and
early stage clinical trials. The Company's future capital needs will be
dependent upon many factors, including progress in its research and development
activities, the magnitude and scope of these activities, progress with
pre-clinical and clinical trials, the cost of preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in or
terminations of existing collaborative arrangements, the establishment of
additional licensing and/or collaborative arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
the Company. The Company intends to seek additional funding through research and
development relationships with suitable corporate collaborators or through
public or private financing. There can be no assurance that the Company will be
successful in its efforts to collaborate with additional partners or that
additional financing from other sources will be available on favorable terms, if
at all.
Payments under existing collaborative agreements and the Company's current
cash reserves will be insufficient to fund the Company's operations through the
completion of any clinical trials and commercialization of its first product, if
developed. Although the Company will seek to obtain additional funds through
public or private equity or debt financings, collaborative or other arrangements
with corporate partners or from other sources, there can be no assurance that
additional financing will be available or, if available, that it will be
available on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to then existing stockholders would result. If
adequate funds are not available, the Company may be required to curtail
significantly or eliminate one or more of its research, discovery or development
programs or to obtain funds through additional arrangements with corporate
partners or others which may require the Company to relinquish rights to certain
of its technologies or product candidates that the Company would not otherwise
relinquish, which could have a material adverse effect on the Company's
business.
NET OPERATING LOSSES
As of December 31, 1997, the Company had available net operating loss
carryforwards for federal and state income tax purposes of approximately
$28,640,000 and $8,407,000, respectively, which expire beginning in 2006 and
2002, respectively. As of December 31, 1997, the Company had federal and state
tax credits for research activities totaling approximately $1,393,000 and
$381,000, respectively, which are available to offset future income taxes. The
federal tax credits expire during the years 2004 to 2013. The Company's ability
to
31
<PAGE> 34
utilize net operating loss carryforwards and tax credits is subject to
limitations as set forth in applicable federal and state tax laws. As specified
in the Internal Revenue Code, an ownership change of more than 50% by a
combination of the Company's significant stockholders during any three-year
period would result in certain limitations on the Company's ability to utilize
its net operating loss and tax credit carryforwards.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14, and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information under the caption "Election of Directors" contained in the Company's
definitive Proxy Statement to be filed with the Commission pursuant to
Regulation 14A in connection with the Company's 1997 Annual Meeting of
Stockholders to be held on May 20, 1998 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Compensation of Executive Officers" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Index to financial statements appears on page F-1.
(2) FINANCIAL STATEMENT SCHEDULES
None required.
(b) (1) REPORTS ON FORM 8-K
Not applicable
32
<PAGE> 35
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(4)
3.2 Amended and Restated Bylaws of the Registrant.(4)
3.3 Registrant's Certificate of Designation of Series A Junior
Participating Preferred Stock.(2)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Specimen stock certificate.(1)
10.1 Form of Indemnification Agreement entered into between
Registrant and its directors and officers.(1)
10.2 Registrants 1981 Employee Stock Option Plan.(1)
10.3 Form of Employee Incentive Stock Option Agreement under the
1981 Employee Stock Option Plan.(1)
10.4 Registrant's 1981 Consultant Stock Option Plan.(1)
10.5 Form of Consultant Nonstatutory Stock Option Agreement.(1)
10.6 Registrant's 1992 Stock Option and Restricted Stock Plan, as
amended (the "1992 Option Plan").(4)
10.7 Form of Incentive Stock Option Agreement under the 1992
Option Plan.(1)
10.8 Form of Nonstatutory Stock Option Agreement under the 1992
Option Plan.(1)
10.9 Registrant's 1996 Equity Incentive Plan, as amended (the
"1996 Equity Plan").(4)
10.10 Form of Incentive Stock Option Agreement under the 1996
Equity Plan.(1)
10.11 Form of Nonstatutory Stock Option Agreement under the 1996
Equity Plan.(1)
10.12 Registrant's 1996 Non-Employee Directors' Stock Option Plan,
as amended (the "Non-Employee Directors' Option Plan").(4)
10.13 Form of Nonstatutory Stock Option Agreement under the
Non-Employee Directors' Option Plan.(1)
10.14 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
10.15 Registrant's Management Change of Control Plan, as amended
(the "Change of Control Plan").(4)
10.16 Form of Nonqualified Stock Option Agreement under the Change
of Control Plan.(1)
10.17 Lease Agreement dated April 7, 1989 between Registrant and
Regency Associates Limited, as subsequently amended on March
1, 1993, and July 1, 1995.(1)
10.18 Equipment Lease Line Agreement dated June 30, 1992 between
Registrant and GE Capital, as amended.(1)
10.19 Investment Agreement dated August 10, 1995 between
Registrant and Bristol-Myers Squibb Company.(1)
10.20 Collaborative Research and License Agreement dated August
10, 1995 between Registrant and Bristol-Myers Squibb
Company.(1)
10.21 Stockholders Agreement dated as of October 1, 1991, by and
among Registrant, Phillips Petroleum Company, The Salk
Institute for Biological Studies, Skandigen AB and the
Stockholders of Protease Corporation.(1)
10.22 License Agreement dated March 8, 1988 between Registrant and
The Salk Institute for Biological Studies, as amended by
that certain First Amendment to License Agreement dated
March 10, 1996.(1)
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.23 License Agreement dated December 15, 1990 between Registrant
and The Salk Institute for Biological Studies, as amended by
that certain First Amendment to License Agreement dated
March 10, 1996.(1)
10.24 Stock Purchase and Stockholders Agreement dated April 11,
1988 among Registrant, Phillips Petroleum Company, The Salk
Institute for Biological Studies and Skandigen AB, as
amended by that certain Amendment to Stock Purchase and
Shareholders Agreement dated April 12, 1990.(1)
10.25 Agreement dated December 20, 1991 between Registrant,
Phillips Petroleum Company, The Salk Institute for
Biological Studies and Skandigen AB.(1)
10.26 License Agreement dated December 20, 1991 between Registrant
and Phillips Petroleum Company.(1)
10.27 Amended and Restated Research and Development and License
Agreement dated March 20, 1996 between Registrant and
CIBA-GEIGY Limited.(1)
10.28 Stock Purchase Agreement dated September 15, 1992 between
Registrant and CIBA-GEIGY Limited.(1)
10.29 Subscription Agreement dated April 11, 1994 between
Registrant and CIBA-GEIGY Limited.(1)
10.30 Stock Purchase Agreement dated March 20, 1996 between
Registrant and CIBA-GEIGY Limited.(1)
10.31 Agreement dated May 1, 1992 between Registrant and Eli Lilly
and Company, as amended and extended by that certain
Extension Agreement dated May 1, 1995.(1)
10.32 Stock Purchase Agreement dated May 7, 1992 between
Registrant and Eli Lilly and Company.(1)
10.33 Option and License Agreement dated April 30, 1995 between
Registrant and Eli Lilly and Company.(1)
10.34 License Agreement dated March 5, 1992 between Registrant and
Cephalon, Inc., as amended by that certain Letter dated
March 22, 1995.(1)
10.35 Patent License Agreement dated June 21, 1993 between
Registrant and Affymax Technologies, N.V., as amended by
that certain Letter dated July 15, 1993.(1)
10.36 Agreement dated October 1, 1993 between Registrant and
Hafslund Nycomed Pharma AG.(1)
10.37 Development and License Agreement dated February 28, 1997
between Registrant and Meiji Seika Kaisha, Ltd.(3)
10.38 Further Extension Agreement dated November 1, 1996 between
Registrant and Eli Lilly and Company.(3)
10.39 Third Amendment to Lease dated December 31, 1996 between
Registrant and Regency Properties, L.P.(3)
10.40 Equipment Lease Line Agreement dated March 4, 1997 between
Registrant and G.E. Capital.(3)
10.41 Rights Agreement dated as of March 17, 1997 among Registrant
and ChaseMellon Shareholder Services, L.L.C.(2)
10.42 Specimen Rights Certificate.(2)
11.1 Computation of net income per share. Reference is made to
page F-9
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney. Reference is made to page 36.
27.1 Financial Data Schedule.
</TABLE>
34
<PAGE> 37
- ---------------
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-2586) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's report on Form 8-K filed with the
Commission on March 31, 1997 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's annual report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's quarterly report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
35
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998 SIBIA NEUROSCIENCES, INC.
By: /s/ THOMAS A. REED
-------------------------------------
Thomas A. Reed, Vice President,
Finance/Administration, & CFO
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William T. Comer and Thomas A. Reed, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
resubstitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ WILLIAM T. COMER President, Chief Executive March 27, 1998
- -------------------------------------------------------- Officer and Director
William T. Comer, Ph.D (Principal Executive Officer)
/s/ THOMAS A. REED Vice President, Finance/ March 27, 1998
- -------------------------------------------------------- Administration and Chief
Thomas A. Reed Financial Officer (Principal
Financial and Accounting
Officer)
/s/ WILLIAM R. MILLER Chairman of the Board March 27, 1998
- --------------------------------------------------------
William R. Miller
/s/ STANLEY T. CROOKE Director March 27, 1998
- --------------------------------------------------------
Stanley T. Crooke, M.D., Ph.D
/s/ GUNNAR EKDAHL Director March 27, 1998
- --------------------------------------------------------
Gunnar Ekdahl
/s/ FREDERICK B. RENTSCHLER Director March 27, 1998
- --------------------------------------------------------
Frederick B. Rentschler
/s/ JAMES D. WATSON Director March 27, 1998
- --------------------------------------------------------
James D. Watson, Ph.D
</TABLE>
36
<PAGE> 39
SIBIA NEUROSCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet as of December 31, 1996 and 1997.............. F-3
Statement of Operations for the years ended December 31,
1995, 1996 and 1997....................................... F-4
Statement of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997.......................... F-5
Statement of Cash Flows for the years ended December 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of SIBIA Neurosciences, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of SIBIA Neurosciences, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- --------------------------
PRICE WATERHOUSE LLP
San Diego, California
February 25, 1998
F-2
<PAGE> 41
SIBIA NEUROSCIENCES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,412,000 $ 4,972,000
Investment securities..................................... 36,052,000 28,375,000
Contracts and accounts receivable......................... 68,000 588,000
Prepaid expenses and other current assets................. 684,000 550,000
------------ ------------
Total current assets.............................. 38,216,000 34,485,000
Property and equipment, net............................... 1,307,000 1,599,000
Other assets.............................................. 460,000 96,000
------------ ------------
$ 39,983,000 $ 36,180,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,212,000 $ 1,611,000
Accrued liabilities....................................... 1,249,000 1,660,000
Deferred revenue.......................................... 431,000
------------ ------------
Total current liabilities......................... 2,892,000 3,271,000
Long-term capital lease obligations......................... 519,000 695,000
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares
authorized (Note 8):
Common Stock, $.001 par value; 25,000,000 shares
authorized; 9,154,157 and 9,338,744 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 9,000 9,000
Additional paid-in capital................................ 59,746,000 59,946,000
Deferred compensation..................................... (1,039,000) (580,000)
Notes receivable from stockholders........................ (640,000) (87,000)
Net unrealized gain on investment securities
available-for-sale..................................... 189,000 2,212,000
Accumulated deficit....................................... (21,693,000) (29,286,000)
------------ ------------
Total stockholders' equity........................ 36,572,000 32,214,000
------------ ------------
$ 39,983,000 $ 36,180,000
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 42
SIBIA NEUROSCIENCES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Contract.......................................... $ 5,563,000 $ 8,215,000 $ 7,537,000
License and royalty............................... 4,885,000 266,000 3,660,000
----------- ------------ ------------
Total revenue (Note 1).................... 10,448,000 8,481,000 11,197,000
----------- ------------ ------------
Operating expenses:
Research and development.......................... 8,949,000 12,268,000 15,819,000
General and administrative........................ 2,178,000 3,561,000 5,146,000
----------- ------------ ------------
Total operating expenses.................. 11,127,000 15,829,000 20,965,000
----------- ------------ ------------
(679,000) (7,348,000) (9,768,000)
----------- ------------ ------------
Other income (expense):
Settlement of litigation (Note 6)................. 3,146,000
Interest income................................... 567,000 1,834,000 2,231,000
Interest expense.................................. (71,000) (68,000) (59,000)
Other............................................. 38,000 18,000 3,000
----------- ------------ ------------
3,680,000 1,784,000 2,175,000
----------- ------------ ------------
Income (loss) before provision for income taxes..... 3,001,000 (5,564,000) (7,593,000)
Provision for income taxes........................ 75,000
----------- ------------ ------------
Net income (loss)................................... $ 2,926,000 $ (5,564,000) $ (7,593,000)
=========== ============ ============
Basic net income (loss) per common share............ $ 0.60 $ (0.73) $ (0.82)
=========== ============ ============
Diluted net income (loss) per common share.......... $ 0.47 $ (0.73) $ (0.82)
=========== ============ ============
Shares used in computing basic net income (loss) per
common share...................................... 4,893,092 7,596,380 9,247,521
=========== ============ ============
Shares used in computing diluted net income (loss)
per common share.................................. 6,163,535 7,596,380 9,247,521
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 43
SIBIA NEUROSCIENCES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A, B AND C
CONVERTIBLE
PREFERRED STOCK COMMON STOCK NOTES
-------------------- -------------------- ADDITIONAL RECEIVABLE
SHARES SHARES PAID-IN DEFERRED FROM
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
----------- ------ ----------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31,
1994......................... 196,511 4,876,384 $5,000 $24,461,000 $ (223,000) $(84,000)
Issuance of Series C
Convertible Preferred
Stock........................ 280,000 6,930,000
Stock option compensation
expense...................... 461,000 (412,000)
Stock cancellations -- Series B
Convertible Preferred
Stock........................ (300) (2,000) 2,000
Exercise of stock options...... 23,500 19,000
Net increase in unrealized gain
on investment securities
available-for-sale...........
Net income.....................
-------- ------ --------- ------ ----------- ---------- --------
BALANCE AS OF DECEMBER 31,
1995......................... 476,211 4,899,884 5,000 31,869,000 (635,000) (82,000)
Issuance of Common Stock....... 2,554,545 3,000 25,842,000
Stock option compensation
expense...................... 1,167,000 (404,000)
Exercise of stock options...... 120,200 288,765 815,000 (593,000)
Stock purchase plan............ 9,408 54,000
Payments on notes receivable... 35,000
Conversion of Preferred
Stock........................ (596,411) 1,401,566 1,000 (1,000)
Net increase in unrealized gain
on investment securities
available-for-sale...........
Cancellation of partial
shares....................... (11)
Net loss.......................
-------- ------ --------- ------ ----------- ---------- --------
BALANCE AS OF DECEMBER 31,
1996......................... 9,154,157 9,000 59,746,000 (1,039,000) (640,000)
Stock option compensation
expense...................... (109,000) 459,000
Exercise of stock options...... 162,766 174,000
Stock purchase plan............ 21,821 135,000
Payments on notes receivable... 553,000
Net increase in unrealized gain
on investment securities
available-for-sale...........
Net loss.......................
-------- ------ --------- ------ ----------- ---------- --------
BALANCE AS OF DECEMBER 31,
1997......................... 9,338,744 $9,000 $59,946,000 $ (580,000) $(87,000)
======== ====== ========= ====== =========== ========== ========
<CAPTION>
NET
UNREALIZED
GAIN ON
INVESTMENT
SECURITIES TOTAL
AVAILABLE- ACCUMULATED STOCKHOLDERS'
FOR-SALE DEFICIT EQUITY
---------- ----------- -------------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31,
1994......................... $ 62,000 $(19,055,000) $ 5,166,000
Issuance of Series C
Convertible Preferred
Stock........................ 6,930,000
Stock option compensation
expense...................... 49,000
Stock cancellations -- Series B
Convertible Preferred
Stock........................
Exercise of stock options...... 19,000
Net increase in unrealized gain
on investment securities
available-for-sale........... 17,000 17,000
Net income..................... 2,926,000 2,926,000
---------- ------------ -----------
BALANCE AS OF DECEMBER 31,
1995......................... 79,000 (16,129,000) 15,107,000
Issuance of Common Stock....... 25,845,000
Stock option compensation
expense...................... 763,000
Exercise of stock options...... 222,000
Stock purchase plan............ 54,000
Payments on notes receivable... 35,000
Conversion of Preferred
Stock........................
Net increase in unrealized gain
on investment securities
available-for-sale........... 110,000 110,000
Cancellation of partial
shares.......................
Net loss....................... (5,564,000) (5,564,000)
---------- ------------ -----------
BALANCE AS OF DECEMBER 31,
1996......................... 189,000 (21,693,000) 36,572,000
Stock option compensation
expense...................... 350,000
Exercise of stock options...... 174,000
Stock purchase plan............ 135,000
Payments on notes receivable... 553,000
Net increase in unrealized gain
on investment securities
available-for-sale........... 2,023,000 2,023,000
Net loss....................... (7,593,000) (7,593,000)
---------- ------------ -----------
BALANCE AS OF DECEMBER 31,
1997......................... $2,212,000 $(29,286,000) $32,214,000
========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 44
SIBIA NEUROSCIENCES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 2,926,000 $ (5,564,000) $ (7,593,000)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization................. 497,000 598,000 667,000
Compensation from issuance of common stock
options..................................... 49,000 763,000 350,000
Gain on disposal of property.................. (37,000) (1,000) (3,000)
Net amortization of premium and discount on
investment securities....................... (271,000) (447,000) (127,000)
Increase (decrease) in cash resulting from
changes in:
Contract and accounts receivable.............. 201,000 (33,000) (520,000)
Prepaid expenses and other assets............. 47,000 (813,000) 488,000
Accounts payable and accrued liabilities...... 271,000 237,000 764,000
Deferred revenue.............................. 76,000 181,000 (431,000)
------------ ------------ ------------
Net cash provided (used) by operating
activities............................. 3,759,000 (5,079,000) (6,405,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities
held-to-maturity.............................. (17,312,000)
Maturities of investment securities
held-to-maturity.............................. 7,295,000 13,992,000
Purchase of investment securities
available-for-sale............................ (42,624,000) (13,383,000)
Maturities of investment securities
available-for-sale............................ 7,300,000 23,181,000
Principal payments received on investment
securities available-for-sale................. 88,000 51,000 29,000
Proceeds from disposal of property and
equipment..................................... 44,000 5,000 4,000
Acquisition of property and equipment............ (120,000) (182,000) (172,000)
------------ ------------ ------------
Net cash provided (used) by investing
activities............................. (10,005,000) (21,458,000) 9,659,000
------------ ------------ ------------
Cash flows from financing activities:
Payments on notes receivable from stockholders... 35,000 553,000
Proceeds from issuance of stock.................. 6,949,000 26,121,000 309,000
Principal payments on capital lease obligations.. (377,000) (481,000) (556,000)
------------ ------------ ------------
Net cash provided by financing
activities............................. 6,572,000 25,675,000 306,000
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 326,000 (862,000) 3,560,000
Cash and cash equivalents at beginning of year..... 1,948,000 2,274,000 1,412,000
------------ ------------ ------------
Cash and cash equivalents at end of year........... $ 2,274,000 $ 1,412,000 $ 4,972,000
============ ============ ============
Supplemental Information:
Income taxes paid -- Note 7
Interest paid -- Note 10
Equipment under capital leases -- Note 10
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 45
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SIBIA Neurosciences, Inc. (the "Company" or "SIBIA") was founded by The
Salk Institute for Biological Studies ("The Salk Institute") and incorporated in
Delaware in 1981. SIBIA is engaged in the discovery and development of novel
small molecule therapeutics for the treatment of nervous system disorders. The
Company is pursuing a molecular target-based approach to drug discovery, and its
targets have been selected based on their known or postulated roles in molecular
processes critical to normal and pathologic neuronal function. The Company's
focus is on the development of therapeutics for the treatment of
neurodegenerative, neuropsychiatric and neurological disorders, many of which
have large patient populations and represent critical unmet medical needs.
The Company has been funded to date principally through equity financings,
research contracts (generally conducted on a best efforts basis), option,
license and royalty revenues. The Company has also received income from the
settlement of certain litigation (Note 6).
Significant Ownership
The Salk Institute owned 33%, 22% and 21% of the Company's outstanding
Common Stock as of December 31, 1995, 1996, and 1997, respectively. Skandigen AB
owned 16%, 11% and 11% of the Company's outstanding Common Stock as of December
31, 1995, 1996, and 1997, respectively. Novartis AG, formerly CIBA-GEIGY
Limited, owned 11% of the Company's outstanding Common Stock as of December 31,
1996 and 1997.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
It is management's belief that the carrying amounts shown for the Company's
financial instruments, including cash, investment securities, contracts and
accounts receivable, and accounts payable and accrued liabilities, are
reasonable estimates of their fair value (Notes 2 and 3).
Concentration of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
investment securities. No significant losses have been incurred related to these
investments.
During the years ended December 31, 1995, 1996, and 1997, the Company had
three, three and four collaborative research agreements that accounted for 81%,
97% and 95%, respectively, of total revenue (Note 4).
Collaborative Agreements
The Company enters into collaborative agreements from time to time with
third parties. Such agreements may call for an equity investment by the
collaborative partner as well as a commitment for current and future
F-7
<PAGE> 46
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
research funding in exchange for best efforts research to be provided by the
Company. The collaborative agreements may also provide for license fees,
milestone payments and royalties. Such agreements define the rights of each
party related to the results of such research. Amounts related to research
funding and license and royalty rights are recognized in accordance with the
specific terms of each collaborative agreement to the extent the Company
determines that such recognition is consistent with the substance of the
agreement (Note 4).
Revenue Recognition
Contract revenue is recognized as the research is performed using the
percentage-of-completion method of accounting, primarily based on contract costs
incurred to date compared with total estimated costs at completion. Contract
revenue related to milestones is recognized upon the achievement of the related
milestone and when collection is probable. License revenue is recognized when
earned as generally evidenced by certain factors including: receipt of such
fees, satisfaction of any performance obligations and the non-refundable nature
of such fees. Royalty revenue is recognized when earned and collection is
probable.
Total revenue for the years ended December 31, 1995, 1996, and 1997,
includes related party revenue of $4,139,000, $6,606,000 and $3,496,000,
respectively.
Research and Development Costs
Research and development costs are expensed as incurred and include costs
associated with collaborative agreements. These costs consist of direct and
indirect internal costs related to specific projects as well as fees paid to
other entities which conduct certain research activities on behalf of the
Company.
Cash Equivalents
Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less. As of December 31, 1996, $932,000 of the
$1,412,000 total cash and cash equivalents was invested in money market funds.
As of December 31, 1997, the cash and cash equivalents balance of $4,972,000 was
primarily made up of $2,317,000 in money market funds and $2,474,000 in
commercial paper.
Investment Securities
Management determines the appropriate classification of its investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company has classified its investment securities as
"available-for-sale" or "held-to-maturity". Available-for-sale securities are
recorded at fair value with the corresponding unrealized gain or loss reflected
as a component of stockholders' equity. Held-to-maturity securities are recorded
at amortized cost. Actual gains or losses, if any, on investment securities are
reflected in the statement of operations when the underlying securities are
sold.
Property and Equipment
Property and equipment is recorded at cost and depreciated over estimated
useful lives of 4 to 8 years using the straight-line method. Property and
equipment acquired under capital leases is amortized over the shorter of the
useful life or the related lease terms using the straight-line method.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets, on an
exception basis, when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. An impairment loss
would be recognized when the sum of the expected future net cash flows is less
than the carrying amount of the asset. No such impairment losses have been
recorded by the Company.
F-8
<PAGE> 47
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. The Company
establishes a valuation allowance, if necessary, to reflect the likelihood of
realization of net deferred tax assets. Deferred income tax expense is the
change during the year in the deferred income tax asset or liability.
Net Income (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share" ("EPS"), for fiscal 1997 and retroactively
restated all prior periods as required. Basic net income per common share is
computed by dividing income available to holders of Common Stock by the weighted
average number of shares of Common Stock outstanding. Diluted EPS is computed
similarly to basic EPS, except that the weighted average number of shares of
Common Stock outstanding are increased to include the number of additional
shares of Common Stock that would have been outstanding if dilutive potential
common shares had been issued. The details of the net income (loss) per share
calculations for the years 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) used in basic and diluted
net income per common share................ $2,926,000 $(5,564,000) $(7,593,000)
Shares used:
Weighted average common shares used in
computing basic net income (loss) per
common share............................ 4,893,092 7,596,380 9,247,521
Weighted average options to purchase common
stock as determined by application of
the treasury stock method............... 480,359
Incremental shares for assumed conversion
of convertible preferred stock.......... 790,084
---------- ----------- -----------
Shares used in computing diluted net income
per common share........................ 6,163,535 7,596,380 9,247,521
========== =========== ===========
</TABLE>
All outstanding shares of the Company's preferred stock automatically
converted into shares of common stock upon the closing of the Company's initial
public offering on May 9, 1996. Shares used in computing diluted net loss per
common share for 1995 assume conversion of all outstanding shares of convertible
preferred stock at the beginning of that year or upon issuance, whichever is
later.
F-9
<PAGE> 48
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENT SECURITIES
The following is a summary of all of the Company's investment securities.
All of the Company's securities are classified as available-for-sale.
Determination of estimated fair value is based on quoted market prices:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS
ESTIMATED UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S government
agencies......................... $31,506,000 $31,626,000 $120,000 $
=========== =========== ======== ======
U.S. corporate debt securities..... $ 4,062,000 $ 4,059,000 $ $3,000
=========== =========== ======== ======
Mortgage-backed securities......... $ 295,000 $ 367,000 $ 78,000 $6,000
=========== =========== ======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
ESTIMATED UNREALIZED UNREALIZED
COST FAIR VALUE GAINS LOSSES
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury obligations and
obligations of U.S government
agencies....................... $21,859,000 $21,923,000 $ 67,000 $ 2,000
=========== =========== ========== =======
U.S. corporate debt securities... $ 4,033,000 $ 4,013,000 $ $20,000
=========== =========== ========== =======
U.S. corporate equity
securities..................... $ 1,000 $ 2,100,000 $2,099,000 $
=========== =========== ========== =======
Mortgage-backed securities....... $ 271,000 $ 339,000 $ 73,000 $ 5,000
=========== =========== ========== =======
</TABLE>
The amortized cost and estimated fair value of the debt securities as of
December 31, 1997 by contractual maturity are shown below. Actual maturities may
differ from the contractual maturities as the issuers of the securities may have
the right to call the obligation.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less................................... $18,835,000 $18,853,000
=========== ===========
Due in one to five years.................................. $ 7,057,000 $ 7,083,000
=========== ===========
Due after ten years....................................... $ 271,000 $ 339,000
=========== ===========
</TABLE>
F-10
<PAGE> 49
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Lab equipment........................................... $ 3,708,000 $ 4,463,000
Computer equipment...................................... 284,000 354,000
Other................................................... 108,000 171,000
----------- -----------
4,100,000 4,988,000
Accumulated depreciation and Amortization............... (2,793,000) (3,389,000)
----------- -----------
$ 1,307,000 $ 1,599,000
=========== ===========
ACCRUED LIABILITIES
Capital leases obligations, current portion............. $ 482,000 $ 528,000
Accrued vacation........................................ 288,000 335,000
Accrued bonuses......................................... 183,000 531,000
Other................................................... 296,000 266,000
----------- -----------
$ 1,249,000 $ 1,660,000
=========== ===========
</TABLE>
NOTE 4. SIGNIFICANT COLLABORATIVE AGREEMENTS
Novartis AG (Formerly CIBA-GEIGY Limited)
In October 1992, the Company entered into a three-year collaborative
agreement (which included research funding and a $5,000,000 equity investment)
with Novartis AG ("Novartis") to develop and utilize SIBIA's receptor/ion
channel technology in the area of excitatory amino acid receptors ("EAARs") for
the discovery of drugs that interact with these molecular targets. During March
1994, pursuant to the agreement, Novartis purchased 173,611 shares of Series A
Convertible Preferred Stock (Note 8). In March 1996, the Company executed an
agreement with Novartis to extend the term of its collaborative agreement to
September 1998, unless extended by mutual consent or terminated by either party
upon six months' notice. In exchange for providing a certain level of scientific
research under the agreement, the Company will receive payments from Novartis;
additional payments may be received by the Company upon the achievement of
certain development milestones and the Company may receive royalties in the
event there are sales of products containing a compound developed under the
agreement. Pursuant to the extended agreement, Novartis paid SIBIA $500,000 to
fund certain capital expenditures and agreed to purchase $7,500,000 of the
Company's Common Stock, $5,000,000 of which was purchased in conjunction with
the initial public offering of the Company's Common Stock and the remaining
$2,500,000 of which will be purchased upon the achievement of certain research
milestones. Upon expiration of the collaboration agreement, SIBIA retains the
rights to use the program technology for its own drug discovery efforts and may
screen molecules from other sources against EAARs and pursue development of
these molecules, subject to Novartis' right of first negotiation with respect to
such molecules discovered during the three years following expiration of the
collaboration agreement. The Company recognized contract revenue related to this
agreement of $2,281,000, $3,383,000 and $3,496,000 for the years ended December
31, 1995, 1996 and 1997, respectively.
Bristol-Myers Squibb Company
In August 1995, the Company entered into a four-year collaborative
agreement with Bristol-Myers Squibb Company ("Bristol-Myers Squibb") relating to
the discovery and development of compounds relating to amyloid precusor protein.
The collaborative effort includes identifying compounds that are suitable for
development into products for commercialization and to conduct preclinical
development and clinical trials for
F-11
<PAGE> 50
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
such compounds. In exchange for providing a certain level of scientific research
under the agreement, the Company will receive payments from Bristol-Myers
Squibb; additional payments may be received by the Company upon the achievement
of certain development milestones. Bristol-Myers Squibb will also pay royalties
based on the level of its net sales of products, if any, developed under the
agreement. The Company recognized contract revenue related to this agreement of
$1,169,000, $3,223,000 and $3,262,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Concurrent with the execution of the agreement, Bristol-Myers Squibb paid a
non-refundable $3,000,000 license fee for an exclusive commercialization license
to use certain related existing proprietary technologies and purchased 280,000
shares of the Company's Series C Convertible Preferred Stock (Note 9). Bristol-
Myers Squibb also agreed to make an additional equity investment of $6,000,000
in shares of Common Stock upon the initiation of clinical trials relating to any
product developed from the collaboration.
Meiji Seika Kaisha, Ltd
In February 1997, the Company entered into a development and license
agreement with Meiji Seika Kaisha, Ltd for the development and commercialization
of the Company's proprietary nicotinic acetylcholine receptor agonist,
SIB-1508Y, as a treatment for Parkinson's disease and other nervous system
disorders in Japan and other Asian countries. Under the agreement, the Company
received a one-time license fee of $3,000,000 for the license of certain
technology to Meiji. In addition, the Company recognizes contract revenue and
related development costs related to certain cost sharing provisions of the
agreement and may receive development milestone payments and royalties on future
product sales, if the product is successfully commercialized in such countries.
SIBIA has retained rights to develop and commercialize SIB-1508Y outside of
Japan and certain other Asian countries, and has retained rights to manufacture
clinical supplies and commercial material worldwide. The Company recognized
contract revenue related to this agreement of $114,000 for the year ended
December 31, 1997.
Eli Lilly & Company
In May 1992, the Company entered into a three-year agreement with Eli Lilly
& Company ("Lilly") providing for the discovery and development of drugs which
specifically interact with human neuronal calcium channels. As part of the
agreement, Lilly purchased 276,470 shares of Common Stock. The agreement was
revised, extended and ultimately completed in October 1997. The Company is
entitled to receive milestone payments and royalties on sales of products
identified by Lilly within a certain period of time and commercialized, and is
free to develop compounds and other technology it discovers in this area on its
own or with other partners. The Company recognized contract revenue related to
this agreement of $1,663,000, $1,609,000 and $665,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Total costs incurred under the Company's various collaborative agreements
for the years ended December 31, 1995, 1996 and 1997, including certain
administrative costs, aggregated $4,381,000, $5,671,000 and $7,313,000,
respectively.
NOTE 5. SIGNIFICANT OPTION AND LICENSE AGREEMENTS
The Salk Institute
In 1988, SIBIA entered into a license agreement with The Salk Institute
covering a number of nAChR subunit clones. This agreement was amended in March
1996 such that the license to the issued U.S. patents and related patent
applications became an exclusive worldwide license. Pursuant to the agreement,
as amended, SIBIA is obligated to pay royalties to The Salk Institute on sales
of products resulting from The Salk Institute's nAChR technology. In addition,
the Company is required to make certain minimum annual
F-12
<PAGE> 51
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
royalty payments to The Salk Institute beginning in 2002. Failure to pay such
royalties will result in the related license becoming non-exclusive.
In 1990, SIBIA entered into a three-year agreement with The Salk Institute
in the area of EAARs. This agreement provided for the support of certain
research in 1992 and 1993 at The Salk Institute by SIBIA and the transfer of
research materials and research results in the EAAR area from The Salk Institute
to SIBIA. SIBIA also received an exclusive worldwide license to certain
EAAR-related patents and patent applications held by The Salk Institute. The
agreement was amended in March 1996. Pursuant to the agreement, as amended,
SIBIA is required to make certain annual minimum royalty payments to The Salk
Institute beginning in 2002. Failure to pay such royalties will result in the
related license agreement becoming non-exclusive.
Cephalon, Inc.
In October 1991, the Company entered into a development and
option-to-license agreement with Cephalon, Inc. ("Cephalon") for certain
proprietary technology related to the development and production of recombinant
insulin-like growth factor ("IGF-1"), known as Myotrophin, on a commercial basis
for certain applications. The option-to-license was subsequently expanded to
include additional applications. All options-to-license the IGF-1 technology
were exercised and the license agreements, as executed, include a provision for
the payment of licensing fees upon the occurrence of certain development
milestones and royalties on the sales of products using licensed technology. In
1995, the Company received a non-refundable payment of $1,750,000 from Cephalon
to reduce the royalty percentage on sales of an IGF-1 product within the
neurology field.
Aurora Biosciences Corporation
In January 1997, the Company entered into an agreement with Aurora
Biosciences Corporation ("Aurora"). Under the agreement, the Company gave Aurora
non-exclusive rights to practice under its patents for transcription-based
assays and certain other patents related to automated drug screening. In return,
the Company received 160,000 shares of Aurora's Common Stock and non-exclusive
rights to several assay technologies, including novel reporter molecules, that
will facilitate the Company's high throughput screening and drug discovery
efforts directed to certain receptor, ion channel and enzyme targets associated
with nervous system disorders. Both parties received limited sublicensing rights
to each other's patents. In December 1997 Aurora entered into agreements with
Lilly and Merck to sublicense certain of SIBIA's patents when used in
conjunction with Aurora technologies.
NOTE 6. SETTLEMENT OF LITIGATION
In October 1995, the Company entered into settlements with two law firms
for failure to properly file a foreign patent application. The Company accepted
$4,633,000 in total damages and received $3,146,000 in net proceeds after
payment of $1,487,000 in legal expenses.
NOTE 7. INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $28,640,000 and
$8,407,000, respectively, which expire beginning in 2006 and 2002, respectively.
As of December 31, 1997, the Company had federal and state tax credits for
research activities totaling approximately $1,393,000 and $381,000,
respectively, which are available to offset future income taxes. The federal
credits expire during the years 2004 to 2013.
The Company's ability to utilize net operating loss carryforwards and tax
credits is subject to limitations as set forth in applicable federal and state
tax laws. As specified in the Internal Revenue Code, an ownership
F-13
<PAGE> 52
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
change of more than 50% by a combination of the Company's significant
stockholders during any three-year period would result in certain limitations on
the Company's ability to utilize its net operating loss and credit
carryforwards.
Deferred tax liabilities and assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.................................. $ (431,000) $ (517,000)
------------ ------------
Deferred tax assets:
Net operating loss carryforwards.............. 6,581,000 10,228,000
Research and development credits.............. 1,486,000 1,774,000
Research and development capitalized for state
tax purposes............................... 1,855,000 708,000
Capital lease obligations..................... 408,000 487,000
Other......................................... 377,000 449,000
------------ ------------
Total deferred tax assets............. 10,707,000 13,646,000
------------ ------------
Net deferred tax assets......................... 10,276,000 13,129,000
Valuation allowance............................. (10,276,000) (13,129,000)
------------ ------------
Deferred taxes.................................. $ -- $ --
============ ============
</TABLE>
As of December 31, 1997, the Company has provided a deferred tax asset
valuation allowance for net deferred tax assets which "more likely than not"
will not be realized based on recent and expected trends in operating results.
The Company paid state franchise taxes of $13,000, $31,000 and $25,000
during 1995, 1996 and 1997, respectively.
NOTE 8. STOCKHOLDERS' EQUITY
Amendments to Certificate of Incorporation
In March 1996, the Company amended and restated its Certificate of
Incorporation to: (i) change the name of the Company to "SIBIA Neurosciences,
Inc.", (ii) split each outstanding share of Common Stock into 2.35 shares of
Common Stock, (iii) increase the authorized number of shares of Common Stock to
25,000,000, (iv) adjust the conversion rate of Convertible Preferred Stock to
2.35-for-1 and (v) provide for the automatic conversion of the Series B
Preferred Stock into Common Stock upon the closing of an initial public
offering. The 1995 stockholders' equity accounts have been restated to give
effect to the Common Stock split and increased share authorization. All earnings
per share, option and other data presented have also been restated to give
effect to the stock split.
Convertible Preferred Stock
In July 1995, the Company amended and restated its Certificate of
Incorporation to issue up to 280,000 shares of the Company's Series C
Convertible Preferred Stock in conjunction with the Bristol-Myers Squibb stock
purchase agreement (Note 4). In August 1995, Bristol-Myers Squibb purchased
280,000 shares of Series C Convertible Preferred Stock (658,000 shares of Common
Stock on an as-if-converted basis) for an aggregate amount of $7,000,000 that
was recorded net of $70,000 in issuance costs.
In March 1994, the Company amended and restated its Certificate of
Incorporation to issue up to 173,611 shares of the Company's Series A
Convertible Preferred Stock in conjunction with the Novartis stock
F-14
<PAGE> 53
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
purchase agreement (Note 4). In March 1994, Novartis purchased 173,611 shares of
Series A Convertible Preferred Stock (407,986 shares of Common Stock on an
as-if-converted basis) for an aggregate amount of $2,500,000.
In March 1996, certain officers of the Company exercised options to
purchase 120,200 shares of Series B Convertible Preferred Stock at $5.00 per
share in exchange for cash and $589,000 of notes receivable that bear interest
at 7% per annum.
In May 1996, the Series A, B and C Convertible Preferred Stock were
automatically converted into Common Stock upon the Company's initial public
offering of Common Stock.
Share Purchase Rights Plan
In March 1997, the Board of Directors of the Company designated 150,000
shares of $.001 par value Preferred Stock as Series A Junior Participating
Preferred Stock and adopted a Share Purchase Rights Plan pursuant to which
preferred share purchase rights (the "Rights") were distributed for each share
of Common Stock of the Company held as of the close of business on April 2,
1997. Each Right, under certain circumstances, entitles the holder thereof to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock (each a "Preferred Share") at an exercise price of
$60.00 per one one-hundredth of a Preferred Share. Each one one-hundredth of a
share of Preferred Share has rights, preferences and privileges equal to the
value of a share of Common Stock. The Rights will expire on March 17, 2007,
unless the Rights are earlier redeemed or exchanged by the Company. The Rights
will cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors.
Warrants
As of December 31, 1996 and 1997, warrants to purchase 258,359 shares of
Common Stock (the "warrants") were outstanding. The warrants were issued in
September 1991 as part of an acquisition. The warrants are exercisable through
October 31, 2001 upon the Company's achieving $50,000,000 from net sales of, or
royalties from, products utilizing the related acquired technology. The license
agreement to which the technology relates was cancelled in 1994 and the Company
is no longer utilizing the related technology. The warrants are not presently
exercisable and management believes that the warrants will never be exercisable.
No separate value was assigned to the warrants in 1991 as the Company determined
their value to be de minimis.
NOTE 9. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation. Compensation
expense, as appropriate, has been recorded related to option grants and is being
amortized to operations over the related vesting period. No compensation expense
has been recognized for its stock purchase plan. Had compensation cost for the
Company's stock-based compensation awards issued during 1996 and 1997 been
determined based on the fair value at the grant dates of awards consistent with
the method of Statement of Financial Accounting Standards No. 123, the
F-15
<PAGE> 54
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's actual net income (loss) and pro forma net income (loss) per share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported........................ $2,926,000 $(5,564,000) $(7,593,000)
Pro forma.......................... 2,698,000 (5,856,000) (8,215,000)
Basic net income (loss) per share:
As reported........................ $ .60 $ (0.73) $ (0.82)
Pro forma.......................... .55 (0.77) (0.89)
Diluted net income (loss) per share:
As reported........................ $ .47 $ (0.73) $ (0.82)
Pro forma.......................... .44 (0.77) (0.89)
</TABLE>
For purposes of determining the pro forma amounts, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
during the years ended December 31, 1995, 1996 and 1997, respectively: dividend
yield of 0.0% for all years, risk-free interest rates of 6.01%, 6.16% and 5.70%,
expected volatility of 0.0%, 34.2% and 66.0%, and expected lives of 4.0, 5.81
and 7.5 years. The weighted average fair value of options granted during 1995,
1996 and 1997 for which the exercise price equals the market price on the grant
date was $0.30, $5.29 and $4.79, respectively. The weighted average fair value
of options granted during 1995 and 1996 for which the exercise price was less
than the market price on the grant date was $4.58 and $6.21, respectively. The
fair value of the employees' purchase rights is estimated using the
Black-Scholes model with the following weighted average assumptions used for
purchase rights granted during the years ended December 31, 1996 and 1997,
respectively: dividend yield of 0.0% for both years, risk-free interest rate of
5.41% and 5.43%, expected volatility of 66.8% and 66.6% and an expected life of
1.26 and 1.47 years. The weighted average fair value of those purchase rights
granted in 1996 and 1997 was $4.91 and $5.22, respectively.
Stock Option and Equity Incentive Plans
The Company has various stock option plans and an equity incentive plan
whereby 2,694,306 shares of the Company's Common Stock have been reserved for
issuance to its officers, directors, employees and consultants. The plans are
administered by the Board of Directors or its designees and provide generally
that, for incentive stock options, the exercise price shall not be less than the
fair market value of the shares on the date of grant and, for non-qualified
stock options, the price shall not be less than 85% of the fair market value of
the shares on the date of grant as determined by the Board of Directors. The
options expire not later than ten years from the date of grant and are generally
subject to vesting over four years, as determined by the
F-16
<PAGE> 55
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Board of Directors. A summary of the changes in options outstanding under the
plans for the three years ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance, December 31, 1994............................ 1,209,809 $1.30
Options granted:
Price equal to the market price of stock
on grant date.................................. 128,310 1.45
Price less than the market price of stock on
grant date..................................... 110,919 1.18
Options exercised................................... (23,500) 0.80
Options forfeited................................... (56,559) 1.29
---------
Balance, December 31, 1995............................ 1,368,979 1.31
Options granted:
Price equal to the market price of stock on grant
date........................................... 173,975 7.32
Price less than the market price of stock on
grant date..................................... 186,282 2.01
Options exercised................................... (570,706) 1.43
Options forfeited................................... (36,910) 3.06
---------
Balance, December 31, 1996............................ 1,121,620 2.24
Options granted:
Price equal to the market price of stock on grant
date........................................... 257,892 6.82
Options exercised................................... (151,545) 1.02
Options forfeited................................... (40,400) 5.20
---------
Balance, December 31, 1997............................ 1,187,567 3.29
=========
Exercisable, December 31, 1997........................ 506,833 2.68
=========
Available for future grant, December 31, 1997......... 1,328,479
=========
</TABLE>
Included as options outstanding as of December 31, 1997 in the above table
are options to purchase 355,374 shares of Common Stock under the Management
Change of Control Plan which, in the event of a change of control, may have
accelerated vesting of unvested options as determined by the value of the
Company on the date of such a change of control. Also included as options
outstanding as of December 31, 1997 in the above table are options to purchase
385,186 shares of Common Stock under the 1996 Equity Incentive Plan. Shares of
Common Stock issued under the 1996 Equity Incentive Plan may be subject to a
repurchase feature in favor of the Company in accordance with a vesting schedule
to be determined by the Board of Directors; however; the right to repurchase at
the original purchase price will lapse at a minimum rate of 20% per year over
the five-year period following the date that the award was granted. The
repurchase feature can be exercised by the Company within the 90-day period
following the stockholder's termination of employment or the relationship as a
director or consultant.
F-17
<PAGE> 56
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.85 355,374 6.91 $0.85 161,504 $0.85
1.23 - 1.70 253,949 1.91 1.45 174,564 1.43
1.91 - 2.13 159,058 3.15 1.91 48,938 1.92
6.50 - 8.38 393,591 9.25 6.82 102,676 6.70
9.75 - 9.88 25,595 8.41 9.78 19,151 9.76
--------- -------
1,187,567 506,833
========= =======
</TABLE>
Employee Stock Purchase Plan
In February 1996, the Company adopted the Employee Stock Purchase Plan
under Section 423 of the Internal Revenue Code in which eligible employees may
use funds from accumulated payroll deductions to purchase shares of Common Stock
at the end of each designated purchase period. Employees may contribute up to
15% of base salary toward such purchases, not to exceed $25,000 per calendar
year. The purchase price is 85% of the fair market value of Common Stock
determined at the beginning or end of each purchase period, whichever is lower.
The Company has reserved 500,000 shares of Common Stock for issuance under the
plan. In 1997, the Company issued 21,821 shares of Common Stock under the plan.
Retirement Savings Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue
Code which covers all employees who meet minimum age requirements. Employees can
contribute up to 9% of their salaries, but not in excess of the amount
deductible for income tax purposes. The Company currently matches 50% of
employee contributions up to 6% of an employee's salary, limited to the maximum
contribution allowable for income tax purposes. Employer contributions are
vested proportionately over five years of service. The plan may be amended or
discontinued at anytime by the Company. During 1995, 1996 and 1997, the Company
contributed $104,000, $121,000, and $161,000, respectively, to the plan.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Capital Leases
Certain scientific instrumentation, computer equipment and other equipment
acquired under available lease-line credit facilities are subject to leases
which are classified as capital leases. These capital leases mature at various
dates through 2001 and have interest rates between 4.9% and 8.1%. As of December
31, 1997, $2,715,000 ($1,182,000 net of accumulated amortization) of such leased
equipment is included in property and equipment. For the years ended December
31, 1995, 1996 and 1997, $392,000, $483,000 and $542,000 in amortization
expense, respectively, was recorded related to property acquired under capital
leases.
During 1995, 1996 and 1997, $71,000, $66,000 and $57,736, respectively, was
paid in imputed interest on capital leases.
For the years ended December 31, 1995, 1996 and 1997 the Company had
non-cash financing activities in the form of capital leases for $264,000,
$330,000 and $778,000, respectively.
F-18
<PAGE> 57
SIBIA NEUROSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Operating Leases
The Company leases its principal facilities under a long-term operating
lease which expires December 31, 2001. The Company has the option to extend the
lease for a period of five years. Rent expense was $563,000, $705,000, and
$967,000 net of sub-lease income of $571,000, $586,000 and $400,000 for 1995,
1996 and 1997, respectively.
Future minimum lease payments for capital and operating leases as of
December 31, 1997 are as follows (operating lease payments are net of
noncancellable sub-lease income of $718,000 over the term of the agreements).
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
1998................................................ $ 586,000 $1,011,000
1999................................................ 362,000 1,176,000
2000................................................ 246,000 1,518,000
2001................................................ 132,000 1,563,000
---------- ----------
Total minimum lease payments.............. 1,326,000 $5,268,000
==========
Amount representing interest........................ 103,000
----------
Obligations under capital leases.................... 1,223,000
Less portion due within one year.................... 528,000
----------
Long-term capital lease obligations................. $ 695,000
==========
</TABLE>
Legal Proceedings
On July 9, 1996, the Company filed an action for patent infringement
against Cadus Pharmaceutical Corporation ("Cadus") in the United States District
Court for the Southern District of California. Through the complaint, the
Company seeks damages in an unspecified amount and injunctive relief. On August
1, 1996, Cadus filed its answer and counterclaim to the Company's complaint. The
counterclaim asserts claims that the '629 patent and the Company's U.S. Patent
No. 5,436,128, entitled "Assay Methods and Composition for Detecting and
Evaluating the Intracellular Transduction of an Extracellular Signal," are
invalid, unenforceable and not infringed, and further asserts claims for
intentional interference with prospective economic advantage and unfair
competition. The counterclaim seeks declaratory relief and compensatory and
punitive damages in an unspecified amount. Company management believes that its
complaint against Cadus is well-founded and necessary to protect the value of
its intellectual property portfolio. Management believes that Cadus'
counterclaim is without merit and intends to vigorously prosecute its claim of
infringement and defend against Cadus' counterclaim. Management believes that
the ultimate resolution of the above matter will not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
In addition to the above, the Company is involved in certain legal or
administrative proceedings generally incidental to its normal business
activities. While the outcome of any such proceeding cannot be accurately
predicted, the Company does not believe the ultimate resolution of any such
existing matters will have a material adverse effect on its financial position,
results of operations or cash flows.
F-19
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-03519) of SIBIA Neurosciences, Inc. of our
report dated February 25, 1998 appearing on page F-2 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
- ---------------------------------
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,972,000
<SECURITIES> 28,375,000
<RECEIVABLES> 588,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,485,000
<PP&E> 1,599,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,180,000
<CURRENT-LIABILITIES> 3,271,000
<BONDS> 0
0
0
<COMMON> 9,000
<OTHER-SE> 32,205,000
<TOTAL-LIABILITY-AND-EQUITY> 36,180,000
<SALES> 0
<TOTAL-REVENUES> 11,197,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,965,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,000
<INCOME-PRETAX> (7,593,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,593,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,593,000)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
