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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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: 000-21429
ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3221586
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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200 BOSTON AVENUE, MEDFORD, MASSACHUSETTS 02155
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(781) 395-4100
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
(TITLE OF EACH CLASS) ON WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 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 Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1998 was: $218,276,085.
There were 11,938,236 shares of the registrant's Common Stock outstanding
as of March 5, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant's 1998 Annual
Meeting of Shareholders to be held on May 14, 1998, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year of December 31, 1997, are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
ArQule has created a new technology platform for the discovery and
production of novel chemical compounds with commercial potential. The Company
has developed proprietary technologies for the identification and optimization
of drug development candidates and agrochemicals. Using combinatorial chemistry,
a modular building block approach to the development of compounds,
structure-guided compound design, high speed parallel chemical synthesis and
information technology, the Company rapidly develops large, diverse collections
of compounds that have the potential to be biologically active. To date, the
Company has entered into collaborative arrangements with Abbott Laboratories,
Monsanto Company, Amersham Pharmacia Biotech AB, Roche Bioscience, Solvay Duphar
B.V., American Homes Products Corporation, Inc. and Sankyo Company, Ltd. and has
formed joint discovery programs with many biotechnology companies.
The Company's goal is to penetrate the product development pipelines of
major pharmaceutical, biotechnology and agrochemical companies and to maximize
the likelihood that active compounds are discovered and successfully developed.
In order to achieve this goal, the Company pursues a strategy designed to
maximize the number of biological targets against which its compounds are
screened. ArQule believes that its technologies will allow its collaborative
partners in the pharmaceutical, biotechnology and agrochemical industries to
accelerate the product development process by several years, permitting them to
realize significant cost reductions and the earlier recovery of research and
development expenditures for successful drugs and agrochemicals. In addition,
the Company believes its technologies will allow researchers to seek solutions
to product development challenges previously deemed too costly or otherwise
impractical because of the inherent limitations of traditional medicinal
chemistry.
The potential market for ArQule's proprietary modular building block
technology is comprised of all consumers of novel chemical compounds, including
developers of drugs, separations media, agrochemical products, industrial
catalysts, specialty materials and other industrial products. The Company's
initial business focus has been on the pharmaceutical, biotechnology and
agrochemical industries.
APPLICATION OF THE COMPANY'S TECHNOLOGIES IN THE DRUG DISCOVERY INDUSTRY
Industry Background
Traditional Drug Discovery and Its Limitations. Drugs are chemical
compounds that modulate the activity of biological targets associated with
particular disease states to achieve a desired therapeutic effect. The discovery
and development of drugs has traditionally been a lengthy, expensive and often
unsuccessful process. Typically, it takes 12 to 15 years from the original
concept of modulating the activity of a particular biological target to the
market introduction of a drug that performs such a function. The average cost of
bringing a new drug to market has been estimated to be in excess of $300
million.
The first major step in the drug discovery process is the identification of
one or more compounds that interact with a biological target, such as an enzyme,
receptor or other protein, that is associated with a disease state. To identify
such a compound, collections of compounds are tested or screened for activity
with respect to the biological target. A compound that interacts with a target
is referred to as a hit, and a hit with characteristics making it suitable as a
potential drug is referred to as a lead compound.
Historically, drug developers have obtained collections of chemical
compounds for screening from natural product sources and by synthesis. These
collections are often neither sufficiently diverse to be likely to result in a
hit nor preselected to include compounds with promising structures or desirable
drug characteristics. This random screening approach has yielded a relatively
small percentage of hits and only a relatively small portion of those hits have
resulted in lead compounds.
The second major step in the drug discovery process is the optimization of
a lead compound by the sequential synthesis and testing of variations, or
analogs, of a lead compound to identify promising drug development candidates. A
drug development candidate is a lead compound that in preclinical studies
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demonstrates pharmacological efficacy, lack of toxicity, potency, selectivity
and other desirable characteristics such as oral availability, cell penetration
and stability. Using traditional medicinal chemistry, lead optimization has
required an average of two years of synthesizing hundreds of analogs of a lead
compound and has been the most expensive and time consuming part of the drug
development process prior to clinical testing. The synthesis of a single
compound analog takes approximately 7 to 10 days and costs approximately $7,500.
As a result, a chemist is usually able to synthesize only 100 to 200 analogs per
year. On average, as many as 6,000 chemical compounds may be synthesized per
successful drug at a cost of approximately $45 million in chemistry costs.
Drug Development in Transition. Lower profit margins, shorter product
lives, the proliferation of generic drugs, managed care and cost containment
initiatives, combined with scientific and technological advances, have created
powerful incentives for drug developers to explore new technologies to discover
novel drugs more quickly and cost effectively. The growing biotechnology and
gene discovery (genomics) industries are rapidly identifying numerous new
biological targets and developing highly sensitive assays incorporating these
targets. Advances in robotics have led to automated high throughput screening
systems, allowing biologists to assay large numbers of chemical compounds
against novel targets. These developments have resulted in increased demand for
large and diverse collections of novel compounds.
In addition, in recent years, structure-guided and rational drug design
approaches have allowed scientists, using structure-activity relationship
("SAR") data about biological targets, to design compounds that are likely to
show activity with respect to a biological target. These developments, together
with the developments referred to in the preceding paragraph, have resulted in a
proliferation of hits, generating demand for tools to rapidly create analogs of
hits and optimize lead compounds.
Current Combinatorial Chemistry Technology and Its
Limitations. Combinatorial chemistry is the rapid creation of hundreds of
thousands of chemical compounds, most of which do not exist in nature, for the
purpose of rapidly identifying hits through random screening. Current
combinatorial chemistry has been successful in producing large numbers of
compounds and correspondingly large numbers of hits. However, current
combinatorial chemistry techniques have been less successful in generating lead
compounds and, ultimately, drug development candidates for some or all of the
following reasons:
- Time-Consuming Isolation of Hits. In certain combinatorial chemistry
applications, large numbers of chemical compounds are synthesized and
screened in mixtures. Hits must therefore be isolated from the mixtures,
which is a costly, slow, labor-intensive process.
- Lack of Structural and SAR Information. Once a hit is isolated, many
current combinatorial techniques fail to facilitate the identification of
the structure of the hit or to provide SAR data to guide the lead
optimization process.
- Incompatibility with Drug Developers' Screening Protocols. Many
combinatorial compounds are produced in a format that is incompatible
with standard screening protocols of drug developers. In addition, once a
hit is found and the compound is isolated, significant additional work
must often be performed by the combinatorial chemistry company to
determine the structure of the compound. Drug developers relying on this
format may therefore be required to transfer hits to the combinatorial
chemistry company.
- Limitations of Solid Phase Chemistry. Several combinatorial chemistry
techniques involve the production of compounds using solid phase
chemistry in which compounds are attached to small beads. Because many
compounds with desirable chemistries cannot be synthesized using solid
phase chemistry, collections of compounds based exclusively on solid
phase chemistry may have limited diversity.
- Limited Compound Quantities. Certain current combinatorial chemistry
techniques produce very small quantities of each compound, which limits
further testing once a lead compound is found and precludes archiving of
compounds for future testing against additional targets.
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- Scale-Up Limitations. Many current combinatorial chemistry techniques
involve laboratory methods that cannot be easily translated into large
scale manufacturing processes. This creates the possibility that active
compounds will be identified that are difficult or impractical to produce
in quantities necessary for clinical trials or commercial production.
- Unproductive Screening. Because certain combinatorial chemistry
techniques involve the screening of random compounds without preselection
for desirable drug characteristics, suitable lead compounds often can be
identified only after many unproductive screenings. In addition, testing
of mixtures frequently produces equivocal or false positive screening
results because the observed activity with a biological target is caused
by several compounds within the mixture rather than the interaction of an
individual compound with a target, leading to further unproductive
screening.
Although recent developments in combinatorial chemistry have shortened the
time between identifying a biological target and obtaining a hit in the target
assay, the proliferation of hits has not led to a commensurate increase in lead
compounds. In addition, current combinatorial chemistry techniques have not
significantly improved the lead optimization process and, therefore, have not
significantly shortened the time it takes to produce a drug development
candidate from a lead compound.
The ArQule Revolution
ArQule believes its modular building block technology overcomes many of the
limitations of current combinatorial chemistry approaches by achieving Targeted
Discovery(TM) to accelerate the identification and optimization of lead
compounds. Targeted Discovery is the design of diverse compound arrays that are
biased toward specific biological targets by selecting molecules from a variety
of chemical classes and constructing compound arrays in a manner believed to
increase the probability of discovering one or more active compounds for those
biological targets.
Many organic molecules, including amino acids, peptides, nucleosides,
carbohydrates, steroids and alkaloids, may be viewed as comprised of structural
components, consisting of a scaffold, or core structure, around which a set of
substituent groups and connectors (bonds) is varied. ArQule's scientists have
developed proprietary methods for selecting and combining molecular components,
or building blocks, to produce arrays of compounds that possess properties they
believe will exhibit activity in biological systems.
Using SAR data regarding biologically active compounds and modular
molecular components, ArQule's synthetic and computational chemists work
together to rapidly design compound arrays that include all combinations of a
set of selected building blocks around a common core structure or theme.
ArQule's arrays are created by using structure-guided and rational drug design
tools to systematically select and assemble molecular building blocks with
properties the Company's scientists believe are likely to exhibit biological
activity. Each compound in the array is different from the adjacent compound as
a result of a single structural modification. Each ArQule array omits compounds
that are closely analogous to other compounds in the array, using representative
diversity to create a logical representation of a virtual library of hundreds of
times as many compounds as are in the array. Drug developers are able to realize
significant savings by screening the thousands of compounds in each ArQule array
rather than the millions of compounds they represent. In addition, the SAR data
of compounds within the array provides a navigational tool for lead optimization
by indicating the most promising investigational direction for analoging.
In order to enhance the effectiveness of this modular building block
technology, ArQule integrates the following tools:
- structure-guided design;
- a proprietary "automated molecular assembly plant" (AMAP(TM)) system for
high speed parallel synthesis, purification and structural verification
of chemical compounds; and
- proprietary computer applications that facilitate the integration of all
of the Company's proprietary technologies.
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Structure-Guided Design. ArQule's scientists believe that the likelihood
of generating a drug development candidate can be substantially increased if the
collection of compounds used for screening is created using three-dimensional
structural and SAR data. The Company designs its arrays based on chemical
structures that are believed to be biologically active and also on SAR data
regarding a particular target and a particular lead compound. Using this data,
as well as knowledge of the chemical reactions that are feasible using high
speed parallel synthesis, ArQule's scientists design logically arranged arrays
of diverse compounds that can easily be synthesized. The Company believes that
this approach will accelerate the lead discovery and optimization process by
increasing the probability of identifying a lead compound that will result in a
drug development candidate.
The AMAP High Speed Parallel Synthesis System. Using its AMAP system,
ArQule synthesizes, purifies and verifies structural information for individual
compounds through automated high speed parallel synthesis. The AMAP system is
capable of synthesizing thousands of compounds per day, each in milligram
quantities adequate for multiple screens, analyzing such compounds for
structural integrity and purity, registering the structural data in a relational
database, and delivering the compounds in a 96-well microtiter plate format for
high throughput screening.
Integrated Proprietary Computer Applications ("Informatics"). ArQule has
developed a proprietary information system which incorporates (i) databases of
the molecular structures of building blocks and the compounds in its arrays,
(ii) multi-dimensional matrix geometry which provides guidance for the creation
of the Company's spatially addressable arrays of compounds containing systematic
variations of modular building blocks, (iii) instructions for the robotics
involved in the AMAP parallel synthesis production process, (iv) resulting
databases of structural information regarding the compounds produced in any
particular array which can be supplied in a format compatible with customers'
own data registration systems and (v) databases of SAR data regarding particular
compounds and their molecular components contained in an array generated when
these compounds are screened against biological targets. This integrated
information system enables ArQule to gather and apply data on an ongoing basis
to enhance the efficiency of the production process and to design compounds
based on a growing knowledge of the structure and activity of its molecular
components.
Advantages of ArQule's Combinatorial Drug Discovery and Development Platform
The Company believes the integration of its technological capabilities
offers a unique combinatorial drug discovery and development platform. This
platform offers the following significant advantages over current combinatorial
chemistry approaches:
- Elimination of Isolation Issues. Unlike combinatorial chemistry
processes involving the production of synthesized compounds in mixtures,
ArQule's AMAP system produces one compound per well, with each well
containing a known compound with a high level of purity.
- Enhanced Structural and SAR Data. ArQule produces arrays using
preselected modular building blocks that its scientists believe are
likely to produce lead compounds with desirable characteristics, and, in
the case of Directed Array sets, based upon the SAR data of the target
and/or lead compound. As a result, the Company believes the success rate
for drugs developed using its arrays will be improved and the risk of
downstream clinical failure will be reduced. The wealth of SAR data
available with respect to compounds in its arrays will also facilitate
the development of analogs for the further optimization of active
compounds.
- Compatibility with Drug Developers' Screening Protocols. ArQule's
compounds are delivered to its collaborators in 96-well microtiter plates
containing one known compound per well. This delivery format is
compatible with most existing screening protocols and permits the owner
of the assay to screen compounds in its own laboratories, thereby having
complete control over the screening process.
- Solution and Solid Phase Chemistry. ArQule's compounds may be produced
using either solution or solid phase chemistry, permitting the creation
of a broad range of novel chemical compounds.
- Significant Compound Quantities. ArQule's compounds are delivered to its
collaborators in milligram quantities, permitting the collaborator to
engage in extensive testing of a lead compound or to screen
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compounds against multiple biological targets without having to obtain
additional samples from the Company.
- Ease of Scale-Up. ArQule's compounds are produced using fully
reproducible and scalable manufacturing processes.
- Reduction in Unproductive Screening. By creating logical arrays of
compounds based on known structural and SAR data and eliminating
compounds that are closely analogous to others in the array, ArQule
believes that fewer compounds will need to be screened prior to
identifying compounds with activity. In addition, because ArQule delivers
single compounds for screening, such compounds do not generate the false
positives and false negatives associated with screening mixtures of
compounds.
ArQule believes these significant advantages will allow its collaborative
partners to accelerate the drug discovery process by several years by shortening
the time required to identify a lead compound and to optimize that compound into
a drug development candidate. This acceleration should permit drug developers to
realize significant cost reductions and the earlier recovery of research and
development expenditures for successful drugs.
APPLICATION OF THE COMPANY'S TECHNOLOGIES IN THE AGROCHEMICAL INDUSTRY
Industry Background. Agrochemicals are chemical products used in the
agricultural industry. Examples of agrochemicals are herbicides, pesticides,
fungicides, bactericides and soil treatment agents. Historically, agrochemical
developers have obtained chemical compounds for screening from natural product
sources and by traditional medicinal synthesis, and then screened those
compounds against whole organisms rather than specific molecular targets. Lead
compounds have traditionally been optimized using medicinal chemistry techniques
similar to those used in the drug industry. Agrochemicals are also expensive and
time-consuming to develop. As an example, the American Crop Protection
Association estimates that development, testing, and regulatory approval of a
pesticide product typically requires eight to ten years and may cost up to $50
million.
As in the case of the pharmaceutical industry, the agrochemical industry is
under pressure to identify lead compounds for the development of new products.
As patents expire on existing products and generic equivalents become available,
developers must introduce improved products to stay competitive and maintain
profit margins. To gain market acceptance of a new product at a premium price,
the product must provide some advantage to the customer as compared with
existing products, such as an improvement in environmental profile, user health
and safety, consumer health and safety, user convenience, or effectiveness at
lower concentrations. Alternatively, a producer can maintain profit margins on a
product sold without a premium if that product can be manufactured at a lower
cost. Therefore, products in the agrochemical industry have historically been
subject to a cost-benefit analysis that only recently has affected the
pharmaceutical industry with the advent of managed care.
Combinatorial Chemistry in the Agrochemical Industry. The agrochemical
industry is now adopting new technologies including high throughput screening
and combinatorial chemistry for many of the same reasons as the pharmaceutical
industry. The limitations of certain combinatorial chemistry techniques, as
described in the context of the pharmaceutical industry, are also applicable to
the agrochemical industry. Indeed, compound quantities and scale-up issues are
perhaps more important to the agrochemical industry than the pharmaceutical
industry.
- Compound Quantities. The agrochemical industry has historically used
whole-organism screening methods and has not completed the transition to
screening for specific molecular targets. These whole-organism assays
consume quantities of test compounds in excess of the quantities produced
using certain current combinatorial chemistry techniques.
- Scale-Up. As compared with the pharmaceutical industry, the agrochemical
industry manufactures and sells larger quantities of product at a lower
margin. In addition, these products will not succeed in the marketplace
unless they offer a clear advantage over existing products, with
cost-effectiveness as a
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major factor. Because of these constraints, the ease and cost of manufacture for
a product is a more important consideration in the agrochemical industry than in
the pharmaceutical industry.
- The ArQule Advantage. The advantages of the ArQule approach to
combinatorial chemistry, as described in the context of the
pharmaceutical industry, are also advantages for the agrochemical
industry. Indeed, the ArQule combinatorial compound discovery and
development platform satisfies the important considerations of adequate
compound quantities for initial screening and ease of scale-up for
manufacturing. ArQule's compounds are delivered to its collaborators in
milligram quantities sufficient for whole-organism screening methods,
which are traditionally used in agrochemical development. In addition,
ArQule's compounds are produced using fully reproducible and scalable
manufacturing processes.
ARQULE'S PRODUCTS
ArQule's integrated technologies result in the production of significant
quantities of pure small molecule compounds contained in a logically structured
spatially-addressable array. ArQule provides its collaborative partners with two
types of arrays of synthesized compounds: (i) Mapping Array compound sets, which
are arrays of novel, diverse, small molecule compounds used for screening
against biological targets and (ii) Directed Array compound sets, which are
arrays of analogs of a particular lead compound synthesized for the purpose of
optimizing that lead compound.
Mapping Array(TM) Program. ArQule's Mapping Array Program is a multi-year
subscription to annual Mapping Array compound sets which are designed around
certain core structures or themes selected by ArQule. Through this program, the
Company provides 15 to 20 Mapping Array compound sets, on an annual basis, each
containing between 3,000 and 10,000 individual compounds for a minimum aggregate
of 100,000 compounds. The Mapping Array Program is provided to subscribers
without limitation as to the targets against which the compounds may be
screened. ArQule believes this approach will maximize the number of targets
against which its Mapping Array sets are tested, thereby maximizing the
potential for identifying activity for each compound in the array. Initially,
the Company provides its Mapping Array sets on a non-exclusive, subscription fee
basis for screening purposes only. If a compound shows activity in a
subscriber's assay, the subscriber may license that compound from the Company
for development purposes on an exclusive basis, unless such compound has already
been licensed to another collaborative partner. The Company does not provide any
structural information regarding the compounds in the Mapping Array sets until a
particular compound is licensed.
Directed Array(TM) Programs. Under its Directed Array Programs, the
Company provides Directed Array sets in order to optimize lead compounds. In a
Directed Array set, the Company uses its modular building block technology to
create analogs of a lead compound identified by the collaborator, either
independently or as a result of screening a Mapping Array set. Successive
Directed Array sets are generated in order to identify the analog or analogs
having the greatest biological activity and most desirable development
characteristics. When delivering each Directed Array set, the Company provides
the collaborator with structural information for each compound in the array, and
each compound is owned by the collaborator either individually or jointly with
ArQule, subject to the payment of fixed fees, milestones and royalties to the
Company. Under a typical Directed Array Program, ArQule provides three to seven
Directed Array sets, each averaging about 1,000 analogs of a particular lead
compound chosen by a collaborator in consultation with ArQule.
BUSINESS STRATEGY
ArQule's goal is to become the leading drug and chemical product discovery
company by using its high throughput molecular technologies to design,
synthesize and test high performance molecules for health care and specialty
chemical applications. The Company seeks to penetrate the product development
pipelines of pharmaceutical, agrochemical and biotechnology companies and to
maximize the likelihood of the discovery
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of activity and successful development of commercial compounds. Key elements of
the Company's strategy include:
- Collaborations with Pharmaceutical and Agrochemical Companies. The
Company seeks collaborations with those companies that have established
manufacturing, marketing and sales resources and a strong commitment to
the development of pharmaceutical or agrochemical products. ArQule offers
to each of its collaborative partners access to its Mapping Array Program
for an annual subscription fee and provides, if requested, customized
Directed Array Programs for a fixed fee. In addition, the Company is
entitled to payments upon the achievement of certain milestones and
royalties upon the commercialization of products developed by the
collaborator from ArQule compounds. The Company plans to pursue
additional collaborations aggressively to gain access to additional
targets and development expertise and to generate additional revenue.
- Joint Discovery Programs with Biotechnology Companies. Biotechnology
companies have identified numerous proprietary biological targets and
assays and therefore represent important potential collaborators for
joint discovery and development efforts using ArQule's Mapping Array and
Directed Array sets. ArQule provides Mapping Array and Directed Array
sets to biotechnology companies in exchange for joint ownership of any
lead compounds that exhibit activity in the proprietary assays developed
by the biotechnology company collaborators. ArQule seeks collaborators
with promising drug development programs in a broad range of therapeutic
areas.
- Expansion of Proprietary Drug Discovery Capabilities. The Company
intends to expand its proprietary drug discovery capabilities by
developing or acquiring, either independently or in partnership with
others, proprietary biological targets, proprietary assays and the
capability to screen its compounds against such assays. The Company will
also consider investing in the lead optimization and initial preclinical
and clinical development efforts for selected lead compounds in order to
realize a greater portion of the value created by its technologies.
- Extension of Chemistry Tools to Other Areas. The Company intends to
extend its integrated technologies outside the fields of pharmaceuticals,
agrochemicals and bioseparations to a variety of other applications,
including industrial catalysts and polymeric structures for
non-biological applications.
- Continued Investment in Proprietary Chemistry Technology. ArQule intends
to continue its aggressive investment in proprietary chemistry
technologies through internal development and licensing of third party
technologies. ArQule will also continue to invest in improving the
cost-effectiveness of its products through automation and information
technologies.
ARQULE'S PRODUCT DISCOVERY PROGRAMS
Pharmaceutical and Agrochemical Company Collaborations
To date, the Company has entered into the following major collaborations
with pharmaceutical and agrochemical companies:
Amersham Pharmacia Biotech AB. In March 1995, the Company entered
into a collaborative agreement with Amersham Pharmacia Biotech AB
("Amersham"), to allow Amersham to evaluate the utility of the Company's
technology for the development of products in the fields of bioseparations,
synthesis of biomolecules and cell culture (the "Amersham Agreement"). On
the same date, the Company and Amersham also signed an agreement under
which Amersham has an option to acquire an exclusive, worldwide license to
develop and commercialize specified compounds generated by the Company in
additional fields covered under the Amersham Agreement, subject to the
payment by Amersham of additional fees and the negotiation and execution by
the parties of a license agreement containing commercially reasonable terms
(the "Option Agreement"). In accordance with its terms, the Amersham
Agreement expired on December 31,1997. The parties are actively engaged in
negotiations to extend and expand the contract.
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Abbott Laboratories. In June 1995, the Company entered into a
collaborative agreement with Abbott Laboratories ("Abbott") pursuant to
which Abbott subscribed to the Company's Mapping Array Program and has the
right to request customized Directed Array sets (the "Abbott Agreement").
To date, the Company has provided Abbott with many Mapping Array and
Directed Array sets. In August 1996, the Abbott Agreement was amended to
provide for the Company to supply Abbott with additional Mapping Array sets
and to eliminate restrictions on the period during which Abbott may screen
the Mapping Array sets. In December 1996, the Abbott Agreement was further
amended to extend the term of the Abbott Agreement until March 1999, to
provide for the Company to supply Abbott with additional Mapping Array sets
during such extended period and additional Directed Array sets during part
of such extended period, and to provide for the payment by Abbott of
additional research and development funding during such extended period. In
December 1997, the Abbott Agreement was further amended to provide for the
Company to supply Abbott with additional Mapping Array sets through March
1999 and with additional Directed Array sets through December 1999. Abbott
may not terminate the Abbott Agreement prior to March 1999 without cause.
Absent early termination, Abbott has agreed to pay the Company $7.4 million
through March 1999. Abbott is also obligated under the Abbott Agreement to
make additional payments upon the achievement of certain milestones and to
pay royalties on the sale of drugs that may result from the relationship.
Solvay Duphar B.V. In November 1995, the Company entered into a
collaborative agreement with Solvay Duphar B.V. ("Solvay") pursuant to
which Solvay has subscribed to the Company's Mapping Array Program and has
the right to request customized Directed Array sets (the "Solvay
Agreement"). To date, the Company has provided Solvay with several Mapping
Array and Directed Array sets. Absent early termination, Solvay agreed to
pay the Company a minimum of $17.5 million over five years. Solvay is also
obligated to make additional payments upon the achievement of certain
milestones and to pay royalties on sales of drugs that may result from the
relationship. The Solvay Agreement expires in November 2000. Solvay has the
right to terminate the Mapping Array Program on twelve months' written
notice at any time subject to its payment of a termination fee of
approximately $1.0 million. Solvay may also terminate the delivery of
Directed Array sets on six months' written notice at any time subject to
its payment of a termination fee equal to a certain percentage of the
aggregate research payments made by Solvay in the year in which notice is
given. To date, Solvay has paid the Company an aggregate of $4.3 million
under the Solvay Agreement. In connection with this collaboration, an
affiliate of Solvay, Physica B.V., made a $7.0 million equity investment in
the Company. Under the Solvay Agreement, Solvay has the right to license,
on an exclusive basis, lead compounds identified from a Mapping Array set
that are active against specified biological targets and that have not
previously been committed to another of ArQule's collaborative partners or
to an internal program of the Company. Solvay also has the right to use
certain of ArQule's technologies internally.
Roche Bioscience. In September 1996, the Company entered into a
collaborative agreement with Roche Bioscience ("Roche Bioscience"), a
division of Syntex (U.S.A.) Inc. and indirect subsidiary of Roche Holding
Ltd., pursuant to which the Company will synthesize Directed Array sets
from compounds provided to the Company by Roche Bioscience, developed by
the Company internally and/or developed by the Company as a part of the
collaboration (the "Roche Bioscience Agreement"). Absent early termination,
Roche Bioscience will pay the Company approximately $12.1 million over
three years. The parties may jointly agree to increase the number of
Directed Array sets to be provided by the Company under the Roche
Bioscience Agreement, which may result in increased payments to the
Company. Roche Bioscience is also obligated to make additional payments
upon the achievement of certain milestones and to pay royalties on sales of
drugs that may result from the relationship. The Roche Bioscience Agreement
expires in September 1999 and is terminable by Roche Bioscience on or after
September 1998 on six months' advance notice. If such termination occurs on
September 30, 1998, the Company will have received payments of
approximately $8.4 million from Roche Bioscience through that date and no
further payments, other than milestone payments and royalties, will be due
to the Company.
Monsanto Company. In December 1996, the Company entered into a
collaborative agreement with Monsanto Company ("Monsanto"), pursuant to
which Monsanto subscribed to the Company's
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Mapping Array Program and the Company agreed to synthesize Directed Array
sets from compounds provided to the Company by Monsanto and/or developed by
the Company under the Mapping Array Program (the "Monsanto Agreement").
Assuming Monsanto requests the synthesis of at least one Directed Array per
year over the term of the Monsanto Agreement, the Company will receive a
minimum of $12.0 million over five years. Monsanto is also obligated to
make additional payments upon the achievement of certain milestones and to
pay royalties on sales of products that may result from the relationship.
The Monsanto Agreement expires in December 2001, subject to Monsanto's
right to extend the term of the Monsanto Agreement for two additional
one-year periods. Monsanto has the right to terminate the Mapping Array
Program and/or the Directed Array Program on six months' written notice at
any time subject to its payment of a termination fee equal to the aggregate
minimum amount that would have been paid to the Company by Monsanto under
the program to be terminated over the entire five-year term.
American Home Products. In July 1997, the Company entered into a
collaborative agreement with Wyeth-Ayerst Pharmaceuticals, a division of
American Home Products Corporation ("Wyeth-Ayerst"), pursuant to which
Wyeth-Ayerst subscribed to the Company's Mapping Array Program and has
committed to a minimum number of Directed Array Programs. Wyeth-Ayerst will
pay ArQule approximately $28 million, which includes a $2 million equity
investment in ArQule to be paid in 1998. Wyeth-Ayerst will make further
payments to ArQule throughout the five year collaboration as development
milestones are reached. In addition, ArQule will be entitled to royalties
from sales of any products emanating from this collaboration.
Sankyo Company, Ltd. In November 1997, the Company entered into a
collaborative agreement with Sankyo Company, Ltd. ("Sankyo") to discover
and optimize drug candidates. The agreement calls for use of ArQule's
Mapping Array and Directed Array Programs in identifying and optimizing
lead compounds for a number of therapeutic areas. Under terms of the
agreement, Sankyo will receive a three year subscription to ArQule's
Mapping Array Program to discover new lead compounds. Sankyo is also
committed to a minimum number of Direct Array Programs during the term of
the agreement. Absent early termination, the Company will receive a minimum
of $9.0 million over this three year period. Payments will be made to
ArQule for delivery of the Mapping Array and Directed Array Programs and
for achieved milestones. In addition, ArQule will be entitled to royalties
from sales of any products emanating from this collaboration.
9
<PAGE> 11
Joint Discovery Programs with Biotechnology Companies
ArQule has initiated joint programs for lead generation and optimization
with a number of biotechnology companies. Some of ArQule's biotechnology
collaborators and their areas of focus are listed below:
<TABLE>
<CAPTION>
COMPANY AREA OF FOCUS
------- -------------
<S> <C>
Acacia Biosciences Biosynthesis and metabolism
Aurora Biosciences, Inc. Mammalian Cell-Based Assays
Cubist Pharmaceuticals, Inc. Infectious Diseases
CuraGen Genomics
FibroGen Fibrotic Disorders
GenQuest Cancer
Genzyme Corp. Cancer
ICAgen, Inc. Ion Channel Receptors
Ontogeny Developmental Biology Targets
Ribogene Pathogen specific translation
Scriptgen Pharmaceuticals, Inc. RNA/Protein Interaction
Sepracor, Inc. Resistant HIV and Hepatitis B
Signal Pharmaceuticals, Inc. Gene Transcription/Transcription Factors
SUGEN, Inc. Signal Transduction/Kinases
T Cell Sciences, Inc. T Cell Activation/Inhibition
ViroPharma, Inc. RNA viruses
</TABLE>
In the United States, small biotechnology companies have been highly
successful in the discovery of biological targets associated with disease
states. Many of these companies, however, lack both (i) large libraries of
chemical compounds to screen against identified targets and (ii) the
sophisticated chemistry expertise required to optimize compounds once a lead
compound has been identified. Under the Company's typical arrangement with a
biotechnology company, ArQule provides Mapping Array sets for screening without
collecting upfront fees, and the biotechnology company executes a preliminary
material transfer agreement. If the collaborator detects an active compound
within a Mapping Array set, and that compound has not been previously committed
to a third party or to an internal ArQule program, the Company and the
collaborator establish a joint discovery program and execute a more focused
research collaboration agreement. If the parties are unable to negotiate the
scope of a joint discovery program within a certain period, ArQule has the right
to license such compound to any third party.
Although ArQule's formal research collaboration agreement varies from
transaction to transaction, it typically establishes a joint drug development
program for the lead compound and a particular target, and gives ArQule shared
control over the program.
MARKETING AND SALES
The Company markets its products directly to customers through
participation in trade conferences and seminars and publications in scientific
and trade journals.
To date, the Company has sold its products to its collaborative partners
primarily through the efforts of its senior management. The Company's senior
management has limited experience in marketing products similar to those of the
Company. In order to achieve significant long-term growth in revenues and its
overall strategic goals, the Company intends to hire several dedicated sales and
marketing personnel. There can be no assurance that the Company will be able to
achieve anticipated expansion of its business, attract a significant number of
new collaborative partners as customers or build an efficient and effective
sales and marketing organization. In the event the Company is unable to achieve
any one or more of the foregoing goals, the Company's business, financial
condition and results of operations could be materially adversely affected. In
addition to the risks inherent in the Company's efforts to market its own
products, the Company's revenues
10
<PAGE> 12
from royalties and milestone payments from its collaborative partners are
substantially dependent upon the marketing efforts of such collaborative
partners.
RESEARCH AND DEVELOPMENT
ArQule intends to continue its aggressive investment in its proprietary
technologies through internal development and licensing of third party
technologies in order to increase the diversity and improve other
characteristics of the compounds offered. The Company will also continue to
invest in improving the cost-effectiveness of its products and capabilities
through automation and information technologies. The Company is actively
pursuing research projects aimed at identifying and developing new chemistries
to improve and expand on its Mapping Array and Directed Array Programs. The
Company is also undertaking collaborations with other researchers in order to
pursue the possible acquisition of chemistries and other technologies developed
by academic institutions and other third parties.
PATENTS AND PROPRIETARY RIGHTS
ArQule has three issued U.S. utility patents, one issued U.S. design
patent, one issued Australian patent, and over 70 patent applications in the
U.S. and other countries. There can be no assurance that patent applications
filed by ArQule will result in patents being issued, that the claims of such
patents will offer significant protection of the Company's technology, or that
any patents issued to or licensed by ArQule will not be challenged, narrowed,
invalidated or circumvented. The Company may also be subject to proceedings that
result in the revocation of patent rights previously owned by or licensed to
ArQule, as a result of which the Company may be required to obtain licenses from
others to continue to develop, test or commercialize its products. There can be
no assurance that ArQule will be able to obtain such licenses on acceptable
terms, if at all. In addition, there may be pending or issued patents held by
parties not affiliated with ArQule that relate to the technology utilized by
ArQule. As a result, ArQule may need to acquire licenses, to assert
infringement, or contest the validity, of such patents or other similar patents
which may be issued. ArQule could incur substantial costs in defending itself
against patent infringement claims, interference proceedings, opposition
proceedings or other challenges to its patent rights made by third parties, or
in bringing such proceedings or enforcing any patent rights of its own.
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. In an
effort to maintain the confidentiality and ownership of trade secrets and
proprietary information, the Company requires employees, consultants and certain
collaborators to execute confidentiality and invention assignment agreements
upon commencement of a relationship with the Company. These agreements are
intended to enable the Company to protect its proprietary information by
controlling the disclosure and use of technology to which it has rights and
provide for ownership by the Company of proprietary technology developed at the
Company or with the Company's resources. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's trade
secrets or other confidential information in the event of unauthorized use or
disclosure of such information or that adequate remedies would exist in the
event of such unauthorized use or disclosure. The loss or exposure of trade
secrets possessed by ArQule could have a material adverse effect on its
business.
COMPETITION
Many organizations are actively attempting to identify and optimize
compounds for potential pharmaceutical or agrochemical development. The
Company's services and products face competition based on a number of factors,
including size, diversity and ease of use of libraries of compounds, speed and
costs of identifying and optimizing potential lead compounds and patent
position. ArQule competes with the research departments of pharmaceutical
companies, biotechnology companies, agrochemical companies, combinatorial
chemistry companies and research and academic institutions. Many of these
competitors have greater financial and human resources and more experience in
research and development than the Company. Smaller companies may also prove to
be significant competitors, particularly through arrangements with large
corporate collaborators. In addition to competition for customers, these
companies and institutions also compete with the Company in recruiting and
retaining highly qualified scientific and management personnel.
11
<PAGE> 13
Historically, pharmaceutical and agrochemical companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Many of these companies, which represent
a significant potential market for ArQule's products and services, are
developing in-house combinatorial chemistry and other methodologies to improve
productivity, including major investments in robotics technology to permit the
automated parallel synthesis of compounds. In addition, these companies may
already have large collections of compounds previously synthesized or ordered
from chemical supply catalogs or other sources against which they may screen new
targets. Other sources of compounds include extracts from natural products such
as plants and microorganisms and compounds created using rational design.
Academic institutions, governmental agencies and other research organizations
are also conducting research in areas in which the Company is working either on
their own or through collaborative efforts.
The Company anticipates that it will face increased competition in the
future as new companies enter the market and advanced technologies become
available. The Company's processes may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or more
of the Company's competitors. The existing approaches of the Company's
competitors or new approaches or technology developed by the Company's
competitors may be more effective than those developed by the Company.
There can be no assurance that the Company's competitors will not develop
more effective or more affordable technology or products, or achieve earlier
product development and commercialization than the Company, thus rendering the
Company's technologies and/or products obsolete, uncompetitive or uneconomical.
GOVERNMENT REGULATION
Although the manufacture, transportation and storage of the Company's
products are subject to certain laws and regulations discussed in the last
paragraph of this section, the licensing of the Company's products is not
subject to significant government regulations. However, the Company's future
profitability is dependent on the sales of pharmaceuticals and other products
developed from the Company's compounds by its customers and collaborators.
Regulation by governmental entities in the United States and other countries
will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a customer of the Company, or
in the event the Company decides to develop a drug beyond the preclinical phase.
The nature and the extent to which such regulation may apply to the Company's
customers will vary depending on the nature of any such pharmaceutical products.
Virtually all pharmaceutical products developed by the Company's customers will
require regulatory approval by governmental agencies prior to commercialization.
In particular, human pharmaceutical products are subject to rigorous preclinical
and clinical testing and other approval procedures by the FDA and by foreign
regulatory authorities. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources.
Generally, in order to gain FDA approval, a company first must conduct
preclinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, the Company or its customer will be
required to sponsor and file an IND and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety and efficacy that are
necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and generally take two to five years, but may take
longer, to complete. After completion of clinical trials of a new product, FDA
and foreign regulatory authority marketing approval must be obtained. If the
product is classified as a new drug, the Company or its customer will be
required to file an NDA and receive approval before commercial marketing of the
drug. The testing and approval processes require substantial time and effort and
there can be no assurance that any approval will be granted on a timely basis,
if at all. NDAs submitted to the FDA can take
12
<PAGE> 14
several years to obtain approval. Even if FDA regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. For marketing outside the United States, the Company will
also be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
Fertilizers, pesticides and other agrochemicals are heavily regulated in
the United States. The EPA regulates such products under the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA"). Agrochemicals are also
regulated by various state agencies. Some states, such as California, have their
own extensive registration requirements. To develop and commercialize a
pesticide product, detailed and complex procedures must be followed and Federal
approvals obtained under FIFRA. Small scale field testing usually can be
conducted prior to product registration to evaluate product efficacy. To conduct
large scale tests, a company must obtain an Experimental Use Permit which
generally requires satisfactory completion of certain toxicology and
environmental studies. Synthetic chemical pesticides require extensive
toxicology and environmental testing to substantiate product safety prior to
obtaining a product registration. Commercial sale of agrochemicals requires a
product registration for each pest and crop for which the product is used.
The research and development processes of the Company involve the
controlled use of hazardous materials. The Company is subject to federal state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any liability could
exceed the resources of the Company. In addition, there can be no assurance that
the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future.
EMPLOYEES
As of March 5, 1998, ArQule employed 159 people of whom 51 have Ph.D.
degrees. Of these, 90 were engaged in operations, 52 were engaged in research
and development and 17 were engaged in marketing and general administration.
None of ArQule's employees are covered by collective bargaining agreements.
ArQule believes its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eric B. Gordon........................ 50 President, Chief Executive Officer and
Director
Joseph C. Hogan, Jr., Ph.D............ 56 Chairman of the Board, Senior Vice
President of Research and
Development, Chief Scientific
Officer, and Director
James R. Fitzgerald, Jr............... 53 Vice President, Chief Financial
Officer and Treasurer
</TABLE>
Eric B. Gordon has been the President and Chief Executive Officer of the
Company since January 1996. From 1987 until he joined the Company, Mr. Gordon
served in various capacities in the United States and Europe with Pasteur
Merieux Connaught -- U.S., a pharmaceutical company, most recently as Vice
President and Chief Financial Officer. In addition, since 1993 he held the
additional position of Chief Executive Officer of Virogenetics Corporation, a
partially owned joint venture company and since 1994 Vice President and
Treasurer of Pasteur Merieux. Mr. Gordon received his A.M.P. from the Wharton
School of Business of the University of Pennsylvania and his B.S. in Accounting
and Finance from Syracuse University.
13
<PAGE> 15
Joseph C. Hogan, Jr., Ph.D. is a founder of the Company and has served as
the Chief Scientific Officer and Senior Vice President of Research and
Development since its inception. Dr. Hogan has served as the Chairman of the
Board since January 1996. From 1990 until he founded the Company, Dr. Hogan was
the founder and president of Applied Modular Chemistries, Inc., a chemistry
company. Dr. Hogan received his M.S. and B.S. in Chemistry from Boston College
and his Ph.D. from Boston College and the Max Planck Institut fuer
Kohlenforschung, Muelheim/Ruhr, Germany.
James R. Fitzgerald, Jr. joined the Company in July 1996 as the Vice
President, Chief Financial Officer and Treasurer. From 1988 until he joined the
Company, Mr. Fitzgerald was the Chief Financial Officer of Hoyts Cinemas
Corporation, an owner and operator of cinemas. Mr. Fitzgerald received his
M.B.A. and his B.A. in Economics from Northeastern University.
ITEM 2. PROPERTIES
ArQule's research facilities include approximately 63,000 square feet of
laboratory and office space in Medford, Massachusetts pursuant to three lease
agreements. These leases extend through July 30, 2001, at which time the Company
has an option to renew the leases for an additional five year period. The
company has obtained 12,000 square feet of additional laboratory space in
Waltham, Massachusetts pursuant to a sublease agreement. This lease extends
through November 30, 2000, at which time the Company has an option to extend for
one year. ArQule believes its facilities are adequate for its current
operations. The Company believes that suitable additional space will be
available to it, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On July 21, 1997, a complaint was filed in the United States District Court
of Connecticut (Case No. 397CV01449) against the Company and two of the
Company's stockholders by two individuals alleging that they were entitled to
compensation from the Company and these two stockholders equal to approximately
five percent of the equity interest in the Company for services in connection
with the initial financing of ArQule Partners, L.P. in 1993. In addition, one of
the plaintiffs is alleging that he was denied the opportunity to make a five
percent investment in the Company at the time of its incorporation. Prior to the
Company's initial public offering of its Common Stock, ArQule Partners, L.P. was
a major stockholder of the Company. An answer was filed on September 15, 1997
denying the material allegations in the complaint and Phase I of the discovery
process has been completed. Although the parties to this lawsuit have had
mediation proceedings, the Company intends to continue to contest this lawsuit
vigorously. No assurance can be given regarding the outcome of this lawsuit.
Except as stated above, ArQule is not a party to any other legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock began trading on The Nasdaq Stock MarketSM on
October 16, 1996 under the symbol "ARQL". Prior to October 16, 1996, there was
no public market for the Common Stock or any other securities of the Company.
The following table sets forth, for the periods indicated, the range of the
high and low closing sale prices for the Company's Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Fourth Quarter (from October 16, 1996).................... $15.75 $ 9.00
1997
First Quarter............................................. 24.25 14.25
Second Quarter............................................ 19.50 12.00
Third Quarter............................................. 22.75 14.75
Fourth Quarter............................................ 29.25 17.75
1998
First Quarter (through March 5, 1998)..................... 25.50 15.00
</TABLE>
As of March 5, 1998, there were approximately 89 holders of record and
approximately 2,546 beneficial shareholders of the Company's Common Stock.
During the first quarter of the Company's fiscal year ended December 31,
1997 and prior to the Company filing a registration statement on Form S-8 for
option exercises under its Amended and Restated 1994 Equity Incentive Plan (the
"Plan"), options to purchase 34,375 shares of Common Stock were exercised at
$0.20 per share pursuant to Rule 701 of the Securities Act of 1933, as amended.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
its business.
Use of Proceeds from Registered Securities
A Registration Statement on Form S-1 (File No. 333-11105) registering
2,875,000 shares of the Company's Common Stock, filed in connection with the
Company's IPO was declared effective by the Securities and Exchange Commission
on October 16, 1996. Exercise of the over-allotment option was initiated on
November 13, 1996 and was closed on November 18, 1996.
The Company and its selling shareholders sold, in aggregate, all 2,875,000
shares registered in the IPO, with an aggregate offering price to the public of
$34,500,000. The managing underwriters of the IPO were Hambrecht & Quist LLC,
Oppenheimer & Co., Inc. and Vector Securities International Inc.
In connection with the IPO, the Company incurred total expenses of
$2,979,000, including underwriting discounts and commissions of $2,415,000 and
other expenses of $564,000. After such expenses, the Company's net proceeds from
the IPO were $31,521,000. The amount of net offering proceeds used by the
Company as of December 31, 1997 was as follows: approximately $9,500,000 for
fixed asset additions and approximately $1,500,000 for capital lease
obligations.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the period from inception (May
6, 1993) through December 31, 1993 and for the years 1994, 1995, 1996 and 1997,
have been derived from the Company's audited financial statements, including the
balance sheet as of December 31, 1996 and 1997 and the related statements of
operations and of cash flows for the three years ended December 31, 1997 and
notes thereto appearing elsewhere herein. The data should be read in conjunction
with the Financial Statements and the Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Form 10-K. The historical results are not necessarily
indicative of the results of operations to be expected in the future (in
thousands, except per share data).
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MAY 6, 1993) THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------
1993 1994 1995 1996 1997
--------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ -- $ 85 $ 3,330 $ 7,255 $17,420
------- ------- ------- ------- -------
Cost and expenses:
Cost of revenue............... -- -- 1,644 4,739 10,218
Research and development...... 769 2,806 2,095 3,076 4,704
Marketing, general and
administrative............. 687 1,346 1,557 2,850 4,670
------- ------- ------- ------- -------
Total costs and expenses... 1,456 4,152 5,296 10,665 19,592
------- ------- ------- ------- -------
Loss from operations............ (1,456) (4,067) (1,966) (3,410) (2,172)
Interest income (expense),
net........................... (9) (139) (286) 417 2,463
------- ------- ------- ------- -------
Net income (loss)............... $(1,465) $(4,206) $(2,252) $(2,993) $ 291
======= ======= ======= ======= =======
Basic net income (loss) per
share(1)...................... $ (3.76) $ (1.23) $ .03
======= ======= =======
Weighted average common shares
outstanding -- basic(1)....... 599 2,430 11,337
======= ======= =======
Diluted net income (loss) per
share(1)...................... $ (3.76) $ (1.23) $ .02
======= ======= =======
Weighted average common shares
and equivalents outstanding --
diluted(1).................... 599 2,430 12,394
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities........................... $ 595 $ 425 $ 7,791 $37,086 $49,282
Working capital (deficit)............... 275 (2,108) 5,074 31,440 46,023
Total assets............................ 1,538 2,321 10,190 43,509 66,925
Capital lease obligations, less current
portion.............................. 376 962 911 1,728 1,213
Series B mandatorily redeemable
convertible preferred stock.......... -- -- 6,888 -- --
Total stockholders' equity (deficit).... 771 (1,203) (1,000) 34,621 57,340
</TABLE>
- ---------------
(1) The Company adopted Statement of Financial Accounting Standards No.
128 -- "Earnings Per Share" ("SFAS 128") in the fourth quarter of 1997. SFAS
128 requires retroactive restatement of previously reported income (loss)
per share calculations. As a result of adopting SFAS 128, certain
anti-dilutive pro-forma share amounts included in the computation of the
loss per share in 1995 and 1996 are no
16
<PAGE> 18
longer included in the weighted average common shares and equivalents
outstanding. Prior to the restatement required by SFAS 128, pro forma net
loss per share for the year ended December 31, 1995 was ($0.33), based upon
weighted average common shares outstanding of 6,853 and for the year ended
December 31, 1996 was ($0.39), based upon weighted average common shares
outstanding of 7,705.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ArQule is engaged in the discovery and development of novel chemical
compounds with commercial potential in the pharmaceutical, biotechnology and
agrochemical industries. ArQule manufactures and delivers two types of arrays of
synthesized compounds to its pharmaceutical, biotechnology and agrochemical
partners: (i) Mapping Array compound sets, which are arrays of novel, diverse
small molecule compounds used in screening for lead generation and (ii) Directed
Array compound sets, which are arrays of analogs of a particular lead compound
(identified from a Mapping Array set or otherwise), synthesized for the purpose
of optimizing such lead compounds.
The Company currently generates revenue primarily through compound
development from collaborative agreements, which provide for the development and
delivery of Mapping Array and Directed Array sets. The Company's revenue to date
is primarily attributable to seven major corporate collaborations: Amersham
Pharmacia Biotech AB, entered into in March 1995; Abbott Laboratories, entered
into in June 1995; Solvay Duphar B.V., entered into in November 1995; Roche
Bioscience, entered into in September 1996; Monsanto Company, entered into in
December 1996; American Home Products, entered into July 1997; and Sankyo Ltd,
entered into November 1997. Under these collaborations, the Company has received
payments of $29.1 million through December 31, 1997 and has recognized $28.1
million as revenue. The Company recognizes revenue under its corporate
collaborations as related work is performed and arrays are delivered. Payments
received from corporate partners prior to the completion of the related work are
recorded as deferred revenue. License option fees are recognized as the options
are granted because such fees are nonrefundable and the Company has no further
obligations to fulfill. Technology access fees are recognized over the length of
the research and development agreement. The Company is also entitled to receive
milestone and royalty payments if products generated under the collaborations
are developed. The Company has not received any milestone or royalty payments to
date. The Company has additionally entered into joint discovery agreements with
a number of biotechnology companies to which it has provided Mapping Array and
Directed Array sets in exchange for joint ownership interests of resulting drug
candidates. These agreements have not yet yielded any significant revenue for
the Company.
The Company experienced its first year of profitability in 1997, reflecting
the increase in revenues resulting from ArQule's growing collaborator base and
an increase in interest income. Quarterly variations in future financial
performance may be expected as increases in revenue are dependent on expanding
existing collaborations, additional corporate collaborations, and future
milestone payments, which may be inconsistent and difficult to anticipate. In
addition, the Company will continue to aggressively invest in new technologies
to expand its drug discovery capabilities. The Company also expects that
strategic opportunities will arise to broaden the Company's participation in
drug discovery and to extend the Company's proprietary technology platform to
industry segments beyond pharmaceutical and agrochemical product discovery.
Strategic investments of this nature have the potential for enhancing longer
term equity value but may result in near term earnings fluctuations or impact
profitability.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Revenue. The Company's revenue for the year ended December 31, 1997
increased $10.1 million to $17.4 million from $7.3 million for the same period
in 1996. This increase was primarily due to increased compound development
revenue from work performed on and the delivery of Mapping Array and Directed
Array sets under the Company's collaborative agreements. The Company began
recognizing revenue from Roche BioScience, Monsanto Company, American Home
Products and Sankyo collaborations in October 1996, December 1996, July 1997,
and November 1997, respectively.
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<PAGE> 19
Cost of revenue. The Company's cost of revenue for the year ended December
31, 1997 increased $5.5 million to $10.2 million from $4.7 million for the same
period in 1996. These increases are primarily attributable to the costs of
additional facilities and scientific personnel and the necessary supplies and
overhead expenses related to the performance of the work and the delivery of the
Mapping Array and Directed Array sets pursuant to the Company's collaborative
agreements. The Company anticipates that the aggregate cost of revenue will
increase over the next several years as its business expands.
Research and development expenses. The Company's research and development
expenses for the year ended December 31, 1997 increased $1.6 million to $4.7
million from $3.1 million for the same period in 1996. These increases are the
result of the Company's expansion of its chemical libraries and related
proprietary technologies. The Company expects research and development spending
to increase over the next several years as the Company further expands its
chemistry discovery and development programs.
Marketing, general and administrative expenses. The Company's marketing,
general and administrative expenses for the year ended December 31, 1997
increased $1.8 million to $4.7 million from $2.9 million for the same period in
1996. These increases are primarily associated with increased marketing and
business development activities, expenses of being a public company for a full
year, and higher levels of administrative support in concert with the Company's
growth during 1997. These expenses will likely increase in the aggregate in
future periods to support the projected growth of the Company.
Net interest income (expense). The Company's net interest income for the
year ended December 31, 1997 was $2.5 million, compared to $0.4 million for the
same period in 1996. Higher interest income in 1997 resulted primarily from the
Company holding higher cash and marketable securities balances following its
initial and follow-on offerings of common stock in October 1996 and April 1997,
respectively.
Net income (loss). The Company's net income for the year ended December
31, 1997 was $0.3 million as compared to a net loss of $3.0 million for the same
period in 1996. The net income for 1997 is primarily attributable to increase in
revenues from the Company's growing collaborator base and higher net interest
income recognized during 1997. Quarterly variations in future financial
performance may be expected as increases in revenue are dependent on expanding
existing collaborations, additional corporate collaborations, and future
milestone payments, which may be inconsistent and difficult to anticipate.
Years Ended December 31, 1996 and 1995
Revenue. The Company's revenue for the year ended December 31, 1996
increased $4.0 million to $7.3 million from $3.3 million for the same period in
1995. This was attributable to a $5.0 million increase in compound development
revenue related to the performance of work and the delivery of Mapping Array and
Directed Array sets under the Company's collaborative agreements, offset by a
$1.0 million decrease in license option fees during the same period. The Company
began recognizing revenue from the Amersham Pharmacia Biotech AB, Abbott
Laboratories and Solvay Duphar B.V. collaborations in March, June and November
1995, respectively and for Roche Bioscience and Monsanto Company in October and
December of 1996, respectively.
Cost of revenue. The Company's cost of revenue for the year ended December
31, 1997 increased $3.1 million to $4.7 million from $1.6 million for the same
period in 1995. This increase was primarily attributable to the costs of
additional scientific personnel and the necessary supplies and overhead expenses
related to the performance of the work and the delivery of the Mapping Array and
Directed Array sets pursuant to its collaborative agreements.
Research and development expenses. The Company's research and development
expenses for the year ended December 31, 1997 increased $1.0 million to $3.1
million from $2.1 million from the same period in 1995. This increase was the
result of the Company's expansion of its chemical libraries and related
proprietary technologies.
Marketing, general and administrative expenses. The Company's marketing,
general and administrative expenses for the year ended December 31, 1996
increased $1.3 million to $2.9 million from $1.6 million for the same period in
1995. The increase was primarily associated with increased business development
activities,
18
<PAGE> 20
expenses of being a public company, and higher levels of administrative support
for the Company's growth during 1996.
Net interest income (expense). The Company's net interest income for the
year ended December 31, 1996 was $0.4 million, which compared to a net interest
expense of $0.3 million for the same period in 1995. Higher interest income in
1996 resulted primarily from the Company holding higher cash balances following
its initial public offering of common stock in October 1996.
Net loss. The Company's net loss for the year ended December 31, 1996
increased $0.7 million to $3.0 million from $2.3 million for 1995. The increase
was primarily attributable to operating and development expenses exceeding the
increase in revenue generated from corporate collaborations during 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company held cash and cash equivalents and
marketable securities with a value of $49.3 million. The Company's working
capital at December 31, 1997 was $46.0 million. The Company has funded
operations through December 31, 1997 with sales of common stock, payments from
corporate collaborators and the utilization of capital equipment lease
financing. The Company has maintained a master lease agreement since February
1994. Under the terms of this agreement, the Company has funded certain capital
expenditures through leases with terms of 42 months in duration. As of December
31, 1997, the Company had utilized $4.5 million of the available $8.5 million
financing facility.
Net cash provided by operating activities was $0.6, $0.8 million and $0.7
million for each of the years ended December 31, 1997, 1996 and 1995,
respectively. The positive cash flow from operating activities primarily
reflects payments received from the seven corporate collaborators.
Net cash used by investing activities during the year ended December 31,
1997 was $42.7 million, resulting primarily from the proceeds of the purchase of
marketable securities and from the proceeds of the initial and secondary public
offerings.
Net cash provided by investing activities during the year ended December
31, 1996 was $2.0 million, resulting primarily from the sale of marketable
securities offset by the purchases of property and equipment. Net cash used in
investing activities for the year ended December 31, 1995 was $5.3 million. This
increase primarily reflects purchases of marketable securities.
Net cash provided by financing activities for the year ended December 31,
1997 and 1996 was $20.7 and $30.8 million, respectively, primarily reflecting
proceeds from the Company's April 1997 secondary public offering and October
1996 initial public offering. Net cash provided by financing activities for the
year ended December 31, 1995 was $7.2 million, largely due to a $7.0 million
equity investment by Solvay Duphar B.V.
The Company expects that its available cash and marketable securities,
together with operating revenues, investment income and lease financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. The Company's cash requirements may
vary materially from those now planned depending upon the results of its drug
discovery and development strategies, the ability of the Company to enter into
any corporate collaborations in the future and the terms of such collaborations,
the results of research and development, the need for currently unanticipated
capital expenditures, competitive and technological advances, acquisitions, and
other factors. There can be no assurance that the Company will be able to obtain
additional customers for the Company's products and services, or that such
products and services will produce revenues adequate to fund the Company's
operating expenses. If the Company experiences increased losses, the Company may
have to seek additional financing from the public or private sale of its
securities, including equity securities. There can be no assurance that
additional funding will be available when needed or on acceptable terms.
The Company has evaluated its computer software and database software to
identify modifications, if any, that may be required to address year 2000
compliance. Management does not expect the financial impact of any required
modifications to have a material impact on its results of operations of
financial position.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... 21
Balance Sheet at December 31, 1996 and 1997................................ 22
Statement of Operations for the three years ended December 31, 1997........ 23
Statement of Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the three years ended December 31, 1997............. 24
Statement of Cash Flows for the three years ended December 31, 1997........ 25
Notes to Financial Statements.............................................. 27
Financial Statement Schedules:
Schedules are not included because they are not applicable
or the information is included in the Notes to Financial Statements.
</TABLE>
20
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ArQule, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of redeemable preferred stock and stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of ArQule, 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 reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 9, 1998
21
<PAGE> 23
ARQULE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,586,000 $ 15,137,000
Marketable securities..................................... 500,000 34,145,000
Accounts receivable....................................... 250,000 3,133,000
Inventory................................................. -- 953,000
Prepaid expenses and other current assets................. 338,000 520,000
Notes receivable from related parties..................... 176,000 30,000
------------ ------------
Total current assets.............................. 37,850,000 53,918,000
Property and equipment, net................................. 5,293,000 12,654,000
Other assets................................................ 139,000 156,000
Notes receivable from related parties....................... 227,000 197,000
------------ ------------
$ 43,509,000 $ 66,925,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 1,138,000 $ 1,174,000
Accounts payable and accrued expenses..................... 1,109,000 2,804,000
Deferred revenue.......................................... 4,163,000 3,917,000
------------ ------------
Total current liabilities......................... 6,410,000 7,895,000
------------ ------------
Capital lease obligations................................... 1,728,000 1,213,000
------------ ------------
Deferred revenue............................................ 750,000 477,000
------------ ------------
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding at December
31, 1996 and 1997...................................... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 9,851,487 and 11,877,315 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 99,000 119,000
Additional paid-in capital................................ 46,102,000 68,418,000
Accumulated deficit....................................... (10,934,000) (10,643,000)
------------ ------------
35,267,000 57,894,000
Deferred compensation..................................... (646,000) (554,000)
------------ ------------
Total stockholders' equity............................. 34,621,000 57,340,000
------------ ------------
Commitments and contingency (Note 13)....................... -- --
------------ ------------
$ 43,509,000 $ 66,925,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
ARQULE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue
Compound development revenue...................... $ 1,830,000 $ 4,255,000 $13,840,000
Compound development revenue -- related party..... 500,000 3,000,000 3,580,000
License option fees............................... 1,000,000 -- --
----------- ----------- -----------
3,330,000 7,255,000 17,420,000
----------- ----------- -----------
Costs and expenses:
Cost of revenue................................... 1,367,000 2,683,000 8,039,000
Cost of revenue -- related party.................. 277,000 2,056,000 2,179,000
Research and development.......................... 2,095,000 3,076,000 4,704,000
Marketing, general and administrative............. 1,557,000 2,850,000 4,670,000
----------- ----------- -----------
5,296,000 10,665,000 19,592,000
----------- ----------- -----------
Loss from operations........................... (1,966,000) (3,410,000) (2,172,000)
Interest income..................................... 133,000 607,000 2,686,000
Interest expense.................................... (419,000) (190,000) (223,000)
----------- ----------- -----------
Net (loss) income.............................. $(2,252,000) $(2,993,000) $ 291,000
=========== =========== ===========
Basic net income (loss) per share................... $ (3.76) $ (1.23) $ .03
=========== =========== ===========
Weighted average common shares
outstanding -- basic.............................. 599,000 2,430,000 11,337,000
=========== =========== ===========
Diluted net income (loss) per share................. $ (3.76) $ (1.23) $ .02
=========== =========== ===========
Weighted average common shares and equivalents
outstanding -- diluted............................ 599,000 2,430,000 12,394,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
ARQULE, INC.
STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B MANDATORILY ----------------------------------------------------------------
REDEEMABLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE CAPITAL
---------- ----------- ----------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....... 8,591,000 $ 86,000 554,597 $ 6,000 $4,376,000
Employee restricted stock
purchases......................... 68,200 -- 1,000
Issuance of common stock purchase
warrants under bridge financing... 57,000
Cancellation of unvested portion on
restricted stock upon employee
termination....................... (100,000) (1,000) 1,000
Conversion of bridge notes into
Series A convertible preferred
stock............................. 1,920,000 2,400,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock, net of issuance costs of
$115,000.......................... 1,800,000 $ 6,885,000
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. 3,000
Net loss...........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1995....... 1,800,000 6,888,000 10,511,000 2,486,000 522,797 5,000 4,435,000
Conversion of interest on bridge
notes to Series A convertible
preferred stock................... 113,429 142,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock to maintain ownership
percentage (Note 9)............... 15,468
Cancellation of unvested portion of
restricted stock upon employee
termination....................... (1,875) --
Employee option exercise........... 625 --
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. 15,000
Conversion of Series B mandatorily
redeemable preferred stock to
common stock...................... (1,815,468) (6,903,000) 907,734 9,000 6,894,000
Conversion of Series A convertible
preferred stock to common stock... (10,624,429) (2,628,000) 5,312,214 54,000 2,574,000
Exercise of warrants pursuant to a
cashless exercise provision....... 234,992 2,000 (2,000)
Issuance of common stock in
connection with initial public
offering, net of issuance costs of
$2,979,000........................ 2,875,000 29,000 31,492,000
Compensation related to the grant
of common stock options........... 709,000
Amortization of deferred
compensation......................
Net loss...........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1996....... -- -- -- -- 9,851,487 99,000 46,102,000
Cancellation of unvested portion of
restricted stock upon
employee termination.............. (49,219) --
Employee stock option exercises.... 133,374 1,000 352,000
Employee stock purchase plan....... 9,173 -- 110,000
Issuance of common stock in
connection with secondary public
offering, net of issuance costs of
$1,645,000........................ 1,932,500 19,000 21,526,000
Compensation related to the grant
of common stock options........... 328,000
Amortization of deferred
compensation......................
Net income.........................
---------- ----------- ----------- ----------- ---------- -------- -----------
BALANCE AT DECEMBER 31, 1997....... -- $ -- -- $ -- 11,877,315 $119,000 $68,418,000
========== =========== =========== =========== ========== ======== ===========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
TOTAL
ACCUMULATED DEFERRED STOCKHOLDERS'
DEFICIT COMPENSATION EQUITY (DEFICIT)
------------ ------------ ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994....... $(5,671,000) $(1,203,000)
Employee restricted stock
purchases......................... 1,000
Issuance of common stock purchase
warrants under bridge financing... 57,000
Cancellation of unvested portion on
restricted stock upon employee
termination....................... --
Conversion of bridge notes into
Series A convertible preferred
stock............................. 2,400,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock, net of issuance costs of
$115,000..........................
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. (3,000) (3,000)
Net loss........................... (2,252,000) (2,252,000)
------------ --------- -----------
BALANCE AT DECEMBER 31, 1995....... (7,926,000) -- (1,000,000)
Conversion of interest on bridge
notes to Series A convertible
preferred stock................... 142,000
Issuance of Series B mandatorily
redeemable convertible preferred
stock to maintain ownership
percentage (Note 9)...............
Cancellation of unvested portion of
restricted stock upon employee
termination....................... --
Employee option exercise........... --
Accretion of Series B mandatorily
redeemable preferred stock to
redemption value.................. (15,000) (15,000)
Conversion of Series B mandatorily
redeemable preferred stock to
common stock...................... 6,903,000
Conversion of Series A convertible
preferred stock to common stock... --
Exercise of warrants pursuant to a
cashless exercise provision....... --
Issuance of common stock in
connection with initial public
offering, net of issuance costs of
$2,979,000........................ 31,521,000
Compensation related to the grant
of common stock options........... $(709,000) --
Amortization of deferred
compensation...................... 63,000 63,000
Net loss........................... (2,993,000) (2,993,000)
------------ --------- -----------
BALANCE AT DECEMBER 31, 1996....... (10,934,000) (646,000) 34,621,000
Cancellation of unvested portion of
restricted stock upon
employee termination.............. --
Employee stock option exercises.... 353,000
Employee stock purchase plan....... 110,000
Issuance of common stock in
connection with secondary public
offering, net of issuance costs of
$1,645,000........................ 21,545,000
Compensation related to the grant
of common stock options........... (328,000) --
Amortization of deferred
compensation...................... 420,000 420,000
Net income......................... 291,000 291,000
------------ --------- -----------
BALANCE AT DECEMBER 31, 1997....... $(10,643,000) $(554,000) $57,340,000
============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
ARQULE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net (loss) income................................ $(2,252,000) $(2,993,000) $ 291,000
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization................. 506,000 1,171,000 2,580,000
Amortization of debt discount................. 164,000 -- --
Amortization of deferred compensation......... -- 63,000 420,000
Increase in accounts receivable............... -- (250,000) (2,883,000)
Increase in inventory......................... -- -- (953,000)
Increase in prepaid expenses and other current
assets...................................... (94,000) (215,000) (182,000)
(Increase) decrease in other assets........... 203,000 (40,000) (17,000)
(Increase) decrease in notes receivable from
related parties............................. (120,000) (220,000) 176,000
Increase in accounts payable and accrued
expenses.................................... 141,000 482,000 1,695,000
Increase (decrease) in deferred revenue....... 2,108,000 2,805,000 (519,000)
----------- ----------- ------------
Net cash provided by operating
activities............................. 656,000 803,000 608,000
----------- ----------- ------------
Cash flows from investing activities:
Purchases of marketable securities............... (9,052,000) -- (61,447,000)
Proceeds from sale or maturity of marketable
securities.................................... 4,250,000 4,302,000 27,802,000
Additions to property and equipment.............. (495,000) (2,292,000) (9,085,000)
----------- ----------- ------------
Net cash (used in) provided by investing
activities............................. (5,297,000) 2,010,000 (42,730,000)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from bridge financing -- related
party......................................... 700,000 -- --
Principal payments of capital lease
obligations................................... (381,000) (737,000) (1,335,000)
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net.............. 6,885,000 -- --
Proceeds from issuance of common stock, net...... 1,000 31,521,000 22,008,000
----------- ----------- ------------
Net cash provided by financing
activities............................. 7,205,000 30,784,000 20,673,000
----------- ----------- ------------
Net (decrease) increase in cash and cash
equivalents...................................... 2,564,000 33,597,000 (21,449,000)
Cash and cash equivalents, beginning of period..... 425,000 2,989,000 36,586,000
----------- ----------- ------------
Cash and cash equivalents, end of period........... $ 2,989,000 $36,586,000 $ 15,137,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $503,000, $2,178,000 and $856,000 were
incurred in 1995, 1996 and 1997, respectively, when the Company entered into
leases for various machinery and equipment, furniture and fixtures, and
leasehold improvements.
During 1995, the Company converted $2,400,000 of bridge loans into
1,920,000 shares of Series A convertible preferred stock (Note 8). In addition,
during 1996, the Company converted $142,000 of interest relating to the bridge
loans into 113,429 shares of Series A convertible preferred stock.
During 1996, 12,439,897 shares of Series A and Series B preferred stock
were converted into 6,219,948 shares of common stock, in connection with the
Company's initial public offering of common stock (Note 9). In addition, 234,992
shares of common stock were issued in connection with the cashless exercise of
outstanding warrants.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1995, 1996 and 1997, the Company paid approximately $254,000,
$190,000 and $223,000 respectively, for interest.
26
<PAGE> 28
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
ArQule, Inc. (the "Company") is engaged in the discovery, development and
production of novel chemical compounds primarily for the pharmaceutical,
biotechnology and agrochemical industries. Its operations are focused on the
integration of combinatorial chemistry, structure-guided rational drug design
and other proprietary technologies which automate the process of chemical
synthesis to produce arrays of novel small organic chemical compounds used to
generate and optimize drug development candidates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased within three
months of maturity date to be cash equivalents. The Company invests its
available cash primarily in money market mutual funds and U.S. government and
other investment grade debt securities which have strong credit ratings. These
investments are subject to minimal credit and market risks. At December 31, 1996
and 1997, the Company has classified its investments as available-for-sale.
Fair Value of Financial Instruments
At December 31, 1996 and 1997, the Company's financial instruments consist
of cash, cash equivalents, marketable securities, accounts receivable, notes
receivable from related party, accounts payable and accrued expenses. The
carrying amount of these instruments approximate their fair values.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases by use of the
straight-line method. Maintenance and repair costs are expensed as incurred.
Revenue Recognition
Compound development revenue relates to revenue from significant
collaborative agreements (Note 3) and from licensing of compound arrays. Revenue
from collaborative agreements relates to the delivery of compounds and to
compound development work and is recognized using the percentage of completion
method. The application of this revenue recognition method is dependent on the
contractual arrangement of either compound delivery or development. Accordingly,
revenue is recognized on the proportional achievement of deliveries against a
compound delivery schedule or as development labor is expended against a total
research and development labor plan. Payments received under these arrangements
prior to the completion of the related work are recorded as deferred revenue.
Revenue from licensing of compound arrays with no additional obligations is
recognized upon delivery of the compound array. License option fees represent
payments made to the Company for a right to evaluate and negotiate the terms of
potential licensing arrangements and are recognized as revenue as the options
are granted, as the Company has no further obligations and as payments are
nonrefundable.
Cost of Revenue
Cost of revenue represents the actual costs incurred in connection with
performance pursuant to collaborative agreements and the costs incurred to
produce compound arrays. These costs consist primarily of payroll and
payroll-related costs, chemicals, supplies and overhead expenses.
27
<PAGE> 29
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) per Share
During the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
No. 128 replaces primary and fully diluted earnings per share with basic and
diluted earnings per share. The adoption of this standard resulted in the
Company's retroactive restatement of previously reported loss per share
calculations reflecting the removal of certain anti-dilutive pro forma share
amounts. For the year ended December 31, 1997, the dilutive effect of 1,057,000
weighted average common stock option equivalents were added to the basic
weighted average shares outstanding to arrive at diluted weighted average shares
outstanding.
Stock Compensation
Options granted to employees and directors are accounted for in accordance
with Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Under APB No. 25, no compensation expense is
recognized for options granted at fair market value. The Company has adopted the
disclosure requirements of SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). Options granted to nonemployees are accounted
for using the fair value method and are recognized as compensation expense over
their respective service periods.
Inventories
Inventory consists of costs associated with the Company's Mapping Array
libraries and is stated at the lower of cost, on a first-in, first-out basis, or
market. Such costs are capitalized after achieving technological feasibility.
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 these estimates.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation. These reclassifications had no
effect on the net loss for 1995 and 1996.
3. SIGNIFICANT AGREEMENTS
The Company has entered into a number of license, research and development
agreements (the "Agreements") with seven corporate collaborators who accounted
for substantially all of the Company's 1997 revenue. One Agreement was entered
into with Solvay Duphar B.V. ("Solvay"), a related party (Note 9). Revenue
related to the Solvay Agreement is included in compound development
revenue -- related party. Under the terms of these Agreements, the Company will
provide a certain number of compounds per year and has granted the right to
screen these compounds against targets to identify biological activity (an
"Active Compound") and will provide research and development services. The
collaborators have the right to enter into an exclusive, worldwide license (the
"License") for any Active Compound identified. The initial terms of these
Agreements generally range from two to five years during which period the
collaborators make payments to the Company for technology access, delivery of
compounds and for its research and development services. In exchange for a
License, the Company will receive milestone payments during product development
and royalty payments based on the sales of the product. Solvay exercised its
right to license certain of the Company's technologies on a non-exclusive basis
in December 1997.
28
<PAGE> 30
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company has entered into a number of agreements with
biotechnology companies (the "biotech collaborators"). Under the terms of
material transfer agreements with biotech collaborators, the Company has granted
the biotech collaborator the nonexclusive, royalty-free license to test certain
compound arrays supplied by the Company. Upon identification of an active
compound, the Company will negotiate a joint drug development program with the
biotech collaborator to develop the compound, provided the Company has not
previously licensed the compound. Under the collaboration agreements with these
joint drug development programs, the Company and the biotech collaborator will
each bear the costs and expenses of their respective activities. Proceeds
received on sales or a third party license of the jointly developed compound
will first reimburse development costs incurred by each party on a pro rata
basis. After all such reimbursements have been made, the remaining proceeds will
be split evenly between the parties.
4. CASH EQUIVALENTS AND MARKETABLE SECURITIES
The following is a summary of the fair market value of available-for-sale
marketable securities held by the Company at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
MATURITY 1996 1997
------------- -------- -----------
<S> <C> <C> <C>
U.S. Government obligations................. Within 1 year $500,000 $ 2,200,000
Corporate bonds............................. Within 1 year -- 31,945,000
-------- -----------
$500,000 $34,145,000
======== ===========
</TABLE>
At December 31, 1996 and 1997, marketable securities are carried at
amortized cost, which approximates fair market value. All of the Company's
marketable securities are classified as current at December 31, 1996 and 1997 as
funds are highly liquid and are available to meet working capital needs and to
fund current operations. Gross unrealized gains and losses on sales of
securities for the years ended December 31, 1996 and 1997 were not significant.
5. INVENTORY
Inventories at December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Raw Materials............................................... $361,000
Finished Goods.............................................. 592,000
--------
$953,000
========
</TABLE>
29
<PAGE> 31
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE -------------------------
(YEARS) 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Machinery and equipment........................ 3-7 $3,053,000 $ 5,997,000
Leasehold improvements......................... 5 2,728,000 4,183,000
Furniture and fixtures......................... 7 178,000 178,000
Computer equipment............................. 3 1,197,000 3,253,000
Construction-in-progress....................... -- 5,000 3,491,000
---------- -----------
7,161,000 17,102,000
Less -- accumulated depreciation and
amortization................................. 1,868,000 4,448,000
---------- -----------
$5,293,000 $12,654,000
========== ===========
</TABLE>
Assets held under capital leases at December 31, 1997 and 1996 consisted of
$2,416,000 in 1996 and $3,272,000 in 1997 of machinery and equipment, $832,000
of leasehold improvements, $746,000 in computer equipment and $107,000 of
furniture and fixtures. Accumulated amortization of these assets totaled
$1,305,000 and $2,503,000 at December 31, 1996 and 1997, respectively. For the
years ended December 31, 1995, 1996 and 1997, amortization expense related to
assets held under capital lease obligations was $300,000, $751,000 and
$1,198,000, respectively.
7. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Note receivable due from an officer of the Company, due in
full on November 3, 1997.................................. $ 63,000 $ --
Note receivable due from the same officer of the Company,
payable in four equal annual installments commencing on
November 2, 1996, principal due on each installment date
will be forgiven so long as the officer is employed by the
Company on the installment date, secured by the officer's
beneficial interest in 48,000 shares of common stock of
the Company............................................... 90,000 60,000
Note receivable due from another officer of the Company,
payable in three equal annual installments commencing on
October 16, 1997, secured by shares of common stock of the
Company issuable to the officer upon the exercise of
options................................................... 250,000 167,000
-------- --------
403,000 227,000
Less current portion........................................ 176,000 30,000
-------- --------
$227,000 $197,000
======== ========
</TABLE>
Interest on the notes receivable from related parties accrues on the unpaid
principal and interest at 5.9%. Interest due on the notes at December 31, 1996
and 1997, $6,000 and $13,248, respectively, was included in prepaid expenses and
other current assets.
30
<PAGE> 32
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Accounts payable............................................ $ 485,000 $2,161,000
Accrued professional fees................................... 469,000 379,000
Other accrued expenses...................................... 155,000 264,000
---------- ----------
$1,109,000 $2,804,000
========== ==========
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
On November 5, 1995, as part of a collaborative agreement (Note 3), the
Company sold to Solvay Duphar B.V. ("Solvay") 1,800,000 shares of Series B
preferred stock which resulted in net proceeds to the Company of $6,885,000. In
April 1996, the Company issued to Solvay an additional 15,468 shares of Series B
preferred stock in connection with the conversion of the bridge financing
interest into Series A preferred stock to maintain the original, agreed-upon
ownership percentage.
At December 31, 1995, the Company had 15,000,000 shares of convertible
preferred stock authorized. Upon the closing of the Company's initial public
offering on October 16, 1996 (Note 10), all outstanding shares of Series A and
Series B preferred stock automatically converted into 6,219,948 shares of common
stock, and the number of authorized shares of preferred stock was reduced to
1,000,000 shares.
10. COMMON STOCK
On October 4, 1996, the Company effected a 1-for-2 reverse stock split on
the common stock of the Company. Accordingly, all common share and per share
data have been restated to give retroactive effect to the stock split for all
periods presented.
In October and November 1996, the Company completed its initial public
offering of 2,875,000 shares of common stock. Proceeds to the Company, net of
issuance costs, amounted to $31,521,000. In connection with its initial public
offering, the stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized common shares to 30,000,000.
On April 4, 1997, the Company completed a follow-on offering of 1,932,500
shares of Common Stock, which included the underwriters' exercise of their
over-allotment of 300,000 shares of Common Stock on April 14, 1997. Proceeds to
the Company, net of issuance costs, amounted to $21,545,000.
Stock Restriction Agreements
The Company has common stock issued pursuant to the Equity Incentive Plan
which is subject to stock restriction agreements whereby the stockholder
automatically forfeits to the Company the unvested portion of shares of common
stock in the event of termination of their employment with the Company. All such
forfeited shares shall immediately be retired by the Company. Shares subject to
this agreement vest over a four year period. At December 31, 1996 and 1997, the
approximate number of unvested common shares is 96,500 and 13,500, respectively.
Each stock restriction agreement may be terminated at the election of the
Company.
11. EQUITY INCENTIVE AND STOCK PURCHASE PLANS
During 1996, the stockholders approved an amendment to the 1994 Amended and
Restated Equity Incentive Plan (the "Equity Incentive Plan") increasing the
number of shares of common stock available for awards under the Equity Incentive
Plan to 2,600,000. All shares are awarded at the discretion of a Committee
31
<PAGE> 33
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Board of Directors (the "Committee") in a variety of stock-based forms
including stock options and restricted stock. Pursuant to the Equity Incentive
Plan, incentive stock options may not be granted at less than the fair market
value of the Company's common stock at the date of the grant, and the option
term may not exceed ten years. For holders of 10% or more of the Company's
voting stock, options may not be granted at less than 110% of the fair market
value of the common stock at the date of the grant, and the option term may not
exceed five years. Stock appreciation rights granted in tandem with an option
shall have an exercise price not less than the exercise price of the related
option. As of December 31, 1997, no stock appreciation rights have been issued.
Subject to the restrictions above, the Committee is authorized to designate
the options, awards, and purchases under the Equity Incentive Plan, the number
of shares covered by each option, award and purchase, and the related terms,
exercise dates, prices and methods of payment.
In 1996, the stockholders approved the 1996 Director Stock Option Plan (the
"1996 Director Plan") for nonemployee directors. Under this plan, eligible
directors are automatically granted once a year, at the annual meeting of
stockholders of the Company, options to purchase 3,500 shares of common stock
which are exercisable on the date of grant. Upon initial election of an eligible
director, options to purchase 7,500 shares of common stock will be granted which
will become exercisable in three equal annual installments commencing on the
date of the Company's next annual stockholders' meeting held after the date of
grant. All options granted pursuant to the 1996 Director Plan have a term of ten
years with exercise prices equal to fair market value on the date of grant.
Through December 31, 1997, options to purchase 33,000 shares of common stock
have been granted under this plan. A maximum of 125,000 shares of common stock
of the Company is reserved for issuance in accordance with the terms of this
plan, of which 92,000 are available for future grant.
The Company applies APB No. 25 and related interpretations in accounting
for employee grants under the Equity Incentive Plan and the 1996 Director Plan
(collectively the "Plans"). No compensation expense has been recognized under
the Plans for employee grants. Had compensation cost been determined based on
the estimated value of options at the grant date consistent with the provisions
of SFAS No. 123, the Company's pro forma net loss, pro forma basic net loss per
share and diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro Forma net loss.......................... $(2,254,000) $(3,186,000) $(2,583,000)
Pro Forma basic and diluted net loss per
share..................................... (3.76) (1.31) (0.23)
</TABLE>
During 1996 and 1997, the Company issued 117,500 and 69,000 options to
certain consultants and members of its Scientific Advisory Board (SAB) under the
Equity Incentive Plan. In April 1997, 11,000 shares were cancelled. The
estimated value of these options totaled $709,000 and $328,000 in 1996 and 1997,
respectively, was recorded as deferred compensation and is being amortized as
compensation expense over the vesting period of the options. Compensation
expense in 1996 and 1997 was $63,000 and $420,000, respectively.
For the purposes of pro forma disclosure, the estimated value of each
employee and nonemployee option grant was calculated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: no
dividend yield for both years; 45% volatility for 1996 and 50% volatility for
1997 for nonemployee grants and employee grants subsequent to the initial filing
of the Registration Statement in connection with the Company's initial public
offering; no volatility for employee grants prior to the initial public
offering; risk-free interest rates of 5.2% to 7.1% in 1996 and 6.0% in 1997;
expected lives of 3 to 6 years in 1996 and 4 years in 1997 for options granted.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the corporation's employee stock options have characteristics significantly
different from those of traded options,
32
<PAGE> 34
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and because changes in the subjective assumptions can materially affect the fair
value estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock-based
compensation.
Option activity under the Plans for the three years ended December 31, 1997
was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
STOCK OPTIONS OF SHARES PRICE
- ------------- --------- --------
<S> <C> <C>
Outstanding at December 31, 1994............................ 2,500 $ .02
Granted..................................................... 298,500 .22
---------
Outstanding at December 31, 1995............................ 301,000 .22
Granted..................................................... 1,073,920 4.39
Exercised................................................... (625) .02
Cancelled................................................... (101,625) .49
---------
Outstanding at December 31, 1996............................ 1,272,670 3.72
Granted..................................................... 1,016,912 16.63
Exercised................................................... (133,374) 2.64
Cancelled................................................... (44,456) 9.57
---------
Outstanding at December 31, 1997............................ 2,111,752 $ 9.88
=========
Exercisable at December 31, 1997............................ 373,025
=========
Weighted average estimated value of options granted during
the year ended December 31, 1997.......................... $ 4.17
======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE AS OF AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------------ -------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.0000 - 2.4000........................ 602,820 7.9 $ 0.74 203,617 $ 0.68
4.8001 - 7.2000........................ 359,875 8.5 6.00 71,125 6.00
9.6001 - 12.0000........................ 157,250 8.8 10.86 44,216 10.95
12.0001 - 14.4000........................ 490,807 9.3 14.13 43,567 14.13
14.4001 - 16.8000........................ 35,500 9.1 15.70 -- --
16.8001 - 19.2000........................ 276,000 9.3 17.84 10,500 17.63
19.2001 - 21.6000........................ 133,000 9.7 20.88 -- --
21.6001 - 24.0000........................ 56,500 9.9 24.00 -- --
--------- -------
2,111,752 8.8 $ 9.88 373,025 $ 4.96
========= === ====== ======= ======
</TABLE>
At December 31, 1997, there were 515,546 shares available for future grant
under the Equity Incentive Plan.
Stock Purchase Plan
In 1996, the stockholders adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). This plan enables eligible employees to exercise rights
to purchase the Company's common stock at 85% of the fair
33
<PAGE> 35
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
market value of the stock on the date the right was granted or the date the
right is exercised, whichever is lower. Rights to purchase shares under the
Purchase Plan are granted by the Board of Directors. The rights are exercisable
during a period determined by the Board of Directors; however, in no event will
the period be longer than twenty-seven months. The Purchase Plan is available to
substantially all employees, subject to certain limitations. The Company has
reserved 120,000 shares of common stock for purchases under the Purchase Plan.
At December 31, 1997, 9,173 shares have been purchased pursuant to the Purchase
Plan.
12. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 1995, 1996 and 1997.
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes. The income tax effect of temporary
differences comprising the deferred tax assets and deferred tax liabilities on
the accompanying balance sheets is a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Preoperating costs capitalized for tax purposes......... $ 370,000 $ 288,000
Net operating loss carryforwards........................ 3,906,000 4,506,000
Tax credit carryforwards................................ 311,000 811,000
Non-employee equity based compensation.................. -- 173,000
Other................................................... 30,000 40,000
----------- -----------
$ 4,617,000 $ 5,818,000
Deferred tax liabilities:
Tax depreciation in excess of book...................... -- (135,000)
Valuation allowance....................................... (4,617,000) (5,683,000)
----------- -----------
Net deferred tax assets................................. $ -- $ --
=========== ===========
</TABLE>
The Company has provided a full valuation allowance for the deferred tax
assets as the realization of these future benefits is not sufficiently assured
as of the end of each related year. If the Company achieves profitability, the
deferred tax assets will be available to offset future income tax liabilities
and expense. Of the $5.7 million valuation allowances at December 31, 1997,
$615,000 relates to deductions for disqualifying dispositions and non qualified
stock options which will be credited to paid in capital, if realized.
34
<PAGE> 36
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate (35%) and
the effective rate of income tax expense for each of the three years during the
period ended December 31, 1997 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- ---------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory
rate......................................... $ 788,000 $ 1,048,000 $(102,000)
State tax benefit (expense), net............... 135,000 180,000 (18,000)
Losses without current tax benefit............. (907,000) (1,180,000) --
Utilization of net operating loss
carryforwards................................ -- -- 133,000
Other.......................................... (16,000) (48,000) (13,000)
--------- ----------- ---------
Tax Provision............................. $ -- $ -- $ --
========= =========== =========
</TABLE>
The Company has available net operating loss carryforwards of approximately
$11,000,000 for tax purposes to offset future taxable income. The net operating
loss carryforwards expire principally in 2009 to 2012. General tax credit
carryforwards of approximately $811,000 expire principally in 2009 to 2012.
Under the Internal Revenue Code, certain substantial changes in the Company's
ownership could result in an annual limitation on the amount of net operating
loss and tax credit carryforwards which can be utilized in future years.
13. COMMITMENTS AND CONTINGENCY
Leases
The Company leases facilities and equipment under noncancelable operating
and capital leases. The future minimum lease commitments under these leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ ---------- ----------
<S> <C> <C>
1998........................................................ $ 838,000 $1,174,000
1999........................................................ 780,000 907,000
2000........................................................ 721,000 305,000
2001........................................................ 315,000 1,000
---------- ----------
2,387,000
Interest due on capital leases.............................. 243,000
---------- ----------
Total minimum lease payments................................ $2,654,000 $2,630,000
========== ==========
</TABLE>
The Company has a lease line agreement with a financial institution (the
"Lessor") for $8,500,000 of which approximately $4,000,000 was available for
future leases at December 31, 1997. The term for each lease under the agreement
is forty-two months, commencing on the purchase date of the asset, and the lease
bears interest at a rate determined by the Lessor at the transaction date.
Rent expense under noncancelable operating leases was approximately
$163,000, $283,000 and $582,000 for the years ended December 31, 1995, 1996, and
1997, respectively.
Employment Agreements
The Company has employment agreements with an officer who is also a member
of the board of directors. The agreement provides that if employment is
terminated without cause, the officer is entitled to receive up to six months'
salary.
35
<PAGE> 37
ARQULE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contingency
On July 21, 1997, a complaint was filed in the United States District Court
of Connecticut against the Company and two of the Company's stockholders by two
individuals alleging that they were entitled to compensation from the Company
and these two stockholders equal to approximately five percent of the equity
interests in the Company for services in connection with the initial financing
of ArQule Partners, L.P. in 1993. In addition, one of the plaintiffs is alleging
that he was denied the opportunity to make a five percent investment in the
Company at the time of its incorporation. Prior to the Company's initial public
offering of its Common Stock, ArQule Partners, L.P. was a major stockholder of
the Company. An answer was filed on September 15, 1997 denying the material
allegations in the complaint and Phase I of the discovery process has been
completed. Although the parties to this lawsuit have had mediation proceedings,
the Company intends to continue to contest this lawsuit vigorously. No assurance
can be given regarding the outcome of this lawsuit. The Company is currently
unable to estimate the range of potential loss, if any, that might result as a
consequence of this action.
36
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1 hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the caption "Election of Directors" in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders scheduled for May 14, 1998 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption, "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement and from Notes 7
and 9 to the Financial Statements included herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules listed under Item 8 of this report are
omitted because they are not applicable or required information and are shown in
the financial statements of the footnotes thereto.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
37
<PAGE> 39
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-22945) and incorporated
herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.1* Amended and Restated 1994 Equity Incentive Plan, as amended
through October 17, 1994. Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.3* Amended and Restated 1996 Director Stock Option Plan. Filed
herewith.
10.4 Form of Indemnification Agreement between the Company and
its directors. Such agreements are materially different only
as to the signing directors and the dates of execution.
Filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-11105) and incorporated
herein by reference.
10.5 Investors' Rights Agreement among the Company and certain
stockholders of the Company dated November 2, 1995. Filed as
Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
10.6 Lease Agreement dated September 29, 1993 between the Company
and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.7 Lease Agreement, dated July 27, 1995, between the Company
and Cummings Properties Management, Inc. as amended. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.8* Employment Agreement effective as of January 2, 1996,
between the Company and Eric B. Gordon. Filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.9* Employment Agreement effective as of July 9, 1996, between
the Company and James R. Fitzgerald, Jr. Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph
C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.12* Promissory Note and Pledge Agreement dated July 9, 1996
between Eric B. Gordon and the Company. Filed as Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.14+ Research, Development and License Agreement between the
Company and Solvay Duphar B.V. dated November 2, 1995. Filed
as Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.15+ Research & Development and License Agreement between the
Company and Abbott Laboratories dated June 15, 1995, as
amended. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.16+ Research & Development Agreement between the Company and
Amersham Pharmacia Biotech AB dated March 10, 1995, as
amended. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.17+ Option Agreement between the Company and Amersham Pharmacia
Biotech AB dated March 10, 1995, as amended. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.18* Adoption Agreement for Fidelity Management and Research
Company (the Company's 401(k) plan). Filed as Exhibit 10.18
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.19 Research and License Agreement between the Company and Roche
Bioscience dated September 13, 1996. Filed as Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.20+ Array Delivery and Testing Agreement between the Company and
Monsanto Company dated as of December 23, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-22945) and incorporated herein by
reference.
10.21+ Amendment No. 2 to Research & Development License Agreement
between the Company and Abbott Laboratories dated as of
December 24, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-22945) and
incorporated herein by reference.
10.22 Lease Agreement, dated December 20, 1996 between the Company
and Cummings Property Management, Inc. Filed as Exhibit
10.22 to the Company's Registration Statement on Form S-1
(File No. 333-22945) and incorporated herein by reference.
10.23+ Research and License Agreement between the Company and
American Home Products Corporation acting through its
Wyeth-Ayerst Research Division dated July 3, 1997. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 000-21249) and
incorporated herein by reference.
10.24 Common Stock Purchase Agreement between the Company and
American Home Products Corporation Dated July 3, 1997. Filed
as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.25+ Second Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated September 23, 1996. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.26+ Third Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.27* First Allonge to Promissory Note between the Company and
Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.28 Intentionally omitted.
10.29+ Research and Development Agreement between the Company and
Sankyo Co., Ltd. dated November 1, 1997. Filed herewith.
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed herewith.
11.1 Statement re computation of unaudited pro forma net loss per
share. Filed herewith.
23.1 Consent of Price Waterhouse LLP. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately, with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities
and Exchange Act of 1934, as amended.
40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Medford, Commonwealth of Massachusetts, on March 13, 1998.
ARQULE, INC.
By: /s/ ERIC B. GORDON
------------------------------------
Eric B. Gordon
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ERIC B. GORDON President, Chief Executive Officer and March 13, 1998
- ------------------------------------------ Director (Principal Executive Officer)
Eric B. Gordon
/s/ JAMES R. FITZGERALD, JR. Vice President, Chief Financial Officer March 13, 1998
- ------------------------------------------ and Treasurer (Principal Financial Officer
James R. Fitzgerald, Jr. and Principal Accounting Officer)
/s/ JOSEPH C. HOGAN, JR. Chairman of the Board, Senior Vice March 13, 1998
- ------------------------------------------ President of Research and Development,
Joseph C. Hogan, Jr. Chief Scientific Officer and Director
/s/ ADRIAN DE JONGE Director March 13, 1998
- ------------------------------------------
Adrian de Jonge
/s/ ALLAN R. FERGUSON Director March 13, 1998
- ------------------------------------------
Allan R. Ferguson
/s/ STEPHEN M. DOW Director March 13, 1998
- ------------------------------------------
Stephen M. Dow
/s/ L. PATRICK GAGE Director March 13, 1998
- ------------------------------------------
L. Patrick Gage
</TABLE>
41
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-22945) and incorporated
herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as
Exhibit 3.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
4.1 Specimen Common Stock Certificate. Filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.1* Amended and Restated 1994 Equity Incentive Plan, as amended
through October 17, 1994. Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.2* 1996 Employee Stock Purchase Plan. Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.3* Amended and Restated 1996 Director Stock Option Plan. Filed
herewith.
10.4 Form of Indemnification Agreement between the Company and
its directors. Such agreements are materially different only
as to the signing directors and the dates of execution.
Filed as Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-11105) and incorporated
herein by reference.
10.5 Investors' Rights Agreement among the Company and certain
stockholders of the Company dated November 2, 1995. Filed as
Exhibit 10.5 to the Company's Registration Statement on Form
S-1 (File No. 333-11105) and incorporated herein by
reference.
10.6 Lease Agreement dated September 29, 1993 between the Company
and Beautyrest Property, Inc. and WRB, Inc. Filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.7 Lease Agreement, dated July 27, 1995, between the Company
and Cummings Properties Management, Inc. as amended. Filed
as Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.8* Employment Agreement effective as of January 2, 1996,
between the Company and Eric B. Gordon. Filed as Exhibit
10.8 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.9* Employment Agreement effective as of July 9, 1996, between
the Company and James R. Fitzgerald, Jr. Filed as Exhibit
10.9 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.10* Promissory Note dated November 2, 1995 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.11* Pledge Agreement dated November 2, 1995 between Dr. Joseph
C. Hogan, Jr. and the Company. Filed as Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.12* Promissory Note and Pledge Agreement dated July 9, 1996
between Eric B. Gordon and the Company. Filed as Exhibit
10.12 to the Company's Registration Statement on Form S-1
(File No. 333-11105) and incorporated herein by reference.
10.13* Promissory Note dated November 4, 1993 between Dr. Joseph C.
Hogan, Jr. and the Company. Filed as Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-11105) and incorporated herein by reference.
10.14+ Research, Development and License Agreement between the
Company and Solvay Duphar B.V. dated November 2, 1995. Filed
as Exhibit 10.14 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.15+ Research & Development and License Agreement between the
Company and Abbott Laboratories dated June 15, 1995, as
amended. Filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.16+ Research & Development Agreement between the Company and
Amersham Pharmacia Biotech AB dated March 10, 1995, as
amended. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-11105) and
incorporated herein by reference.
10.17+ Option Agreement between the Company and Amersham Pharmacia
Biotech AB dated March 10, 1995, as amended. Filed as
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-11105) and incorporated herein by
reference.
10.18* Adoption Agreement for Fidelity Management and Research
Company (the Company's 401(k) plan). Filed as Exhibit 10.18
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.19 Research and License Agreement between the Company and Roche
Bioscience dated September 13, 1996. Filed as Exhibit 10.19
to the Company's Registration Statement on Form S-1 (File
No. 333-11105) and incorporated herein by reference.
10.20+ Array Delivery and Testing Agreement between the Company and
Monsanto Company dated as of December 23, 1996. Filed as
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-22945) and incorporated herein by
reference.
10.21+ Amendment No. 2 to Research & Development License Agreement
between the Company and Abbott Laboratories dated as of
December 24, 1996. Filed as Exhibit 10.21 to the Company's
Registration Statement on Form S-1 (File No. 333-22945) and
incorporated herein by reference.
10.22 Lease Agreement, dated December 20, 1996 between the Company
and Cummings Property Management, Inc. Filed as Exhibit
10.22 to the Company's Registration Statement on Form S-1
(File No. 333-22945) and incorporated herein by reference.
10.23+ Research and License Agreement between the Company and
American Home Products Corporation acting through its
Wyeth-Ayerst Research Division dated July 3, 1997. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 (File No. 000-21249) and
incorporated herein by reference.
10.24 Common Stock Purchase Agreement between the Company and
American Home Products Corporation Dated July 3, 1997. Filed
as Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.25+ Second Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated September 23, 1996. Filed as
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 (File No.
000-21429) and incorporated herein by reference.
10.26+ Third Amendment to Option Agreement and Research and
Development Agreement between the Company and Amersham
Pharmacia Biotech AB dated June 24, 1997. Filed as Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.27* First Allonge to Promissory Note between the Company and
Eric B. Gordon dated July 16, 1997. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997 (File No. 000-21429) and
incorporated herein by reference.
10.28 Intentionally omitted.
10.29+ Research and Development Agreement between the Company and
Sankyo Co., Ltd. dated November 1, 1997. Filed herewith.
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed herewith.
11.1 Statement re computation of unaudited pro forma net loss per
share. Filed herewith.
23.1 Consent of Price Waterhouse LLP. Filed herewith.
99.1 Important Factors Regarding Forward-Looking Statements.
Filed herewith.
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan.
+ Certain confidential material contained in the document has been omitted and
filed separately, with the Securities and Exchange Commission pursuant to Rule
406 of the Securities Act of 1933, as amended or Rule 246-2 of the Securities
and Exchange Act of 1934, as amended.
43
<PAGE> 1
EXHIBIT 10.3
ARQULE, INC.
AMENDED AND RESTATED 1996 DIRECTOR STOCK OPTION PLAN
Effective as of May 14, 1997
The purpose of this Amended and Restated 1996 Director Stock Option Plan
(the "Plan") of ArQule, Inc. (the "Company") is to attract and retain highly
qualified non-employee directors of the Company and to encourage ownership of
stock of the Company by such directors so as to provide additional incentives to
promote the success of the Company.
1. ADMINISTRATION OF THE PLAN.
Grants of stock options under the Plan shall be automatic as provided in
Section 6. However, all questions of interpretation with respect to the Plan and
options granted under it shall be determined by the Board of Directors of the
Company (the "Board") or by a committee consisting of one or more directors
appointed by the Board and such determination shall be final and binding upon
all persons having an interest in the Plan.
2. PERSONS ELIGIBLE TO PARTICIPATE IN THE PLAN.
Each director of the Company who is not an employee of the Company or of
any subsidiary of the Company shall be eligible to participate in the Plan
unless such director irrevocably elects not to participate.
3. SHARES SUBJECT TO THE PLAN.
(a) The aggregate number of shares of the Company's Common Stock which
may be optioned under this Plan is 125,000 shares. Shares issued under the Plan
may consist in whole or in part of authorized but unissued shares or treasury
shares.
(b) In the event of a stock dividend, split-up, combination or
reclassification of shares, recapitalization or other similar capital change
relating to the Company's Common Stock, the maximum aggregate number and kind of
shares or securities of the Company as to which options may be granted under
this Plan and as to which options then outstanding shall be exercisable, and the
option price of such options shall be appropriately adjusted so that the
proportionate number of shares or other securities as to which options may be
granted and the proportionate interest of holders of outstanding options shall
be maintained as before the occurrence of such event.
(c) In the event of a consolidation or merger of the Company with another
corporation where the Company's stockholders do not own a majority in interest
of the surviving or resulting corporation, or the sale or exchange of all or
substantially all of the
<PAGE> 2
assets of the Company, or a reorganization or liquidation of the Company, any
deferred exercise period shall be automatically accelerated and each holder of
an outstanding option shall be entitled to receive upon exercise and payment in
accordance with the terms of the option the same shares, securities or property
as he would have been entitled to receive upon the occurrence of such event if
he had been, immediately prior to such event, the holder of the number of shares
of Common Stock purchasable under his or her option; provided, however, that in
lieu of the foregoing the Board may upon written notice to each holder of an
outstanding option or right under the Plan, provide that such option or right
shall terminate on a date not less than 20 days after the date of such notice
unless theretofore exercised.
(d) Whenever options under this Plan lapse or terminate or otherwise
become unexercisable the shares of Common Stock which were subject to such
options may again be subjected to options under this Plan. The Company shall at
all times while this Plan is in force reserve such number of shares of Common
Stock as will be sufficient to satisfy the requirements of this Plan.
4. NON-STATUTORY STOCK OPTIONS.
All options granted under this Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
5. FORM OF OPTIONS.
Options granted hereunder shall be in substantially the form of the
attached EXHIBIT A or in such other form as the Board or any committee appointed
pursuant to Section 1 above may from time to time determine.
6. GRANT OF OPTIONS AND OPTION TERMS.
(a) AUTOMATIC GRANT OF OPTIONS. Upon the initial election of any person
as a member of the Board who is an eligible director (whether or not such
election is at an annual meeting of stockholders or otherwise), such person
shall automatically be granted (i) an option to purchase 7,500 shares of Common
Stock (an "Initial Option"). In addition, at each annual meeting of
stockholders, each eligible director serving as a member of the Board prior to
and immediately after such annual meeting (whether or not such director was
reelected at such meeting) shall automatically be granted an Annual Option to
purchase 3,500 shares of Common Stock ("Annual Option"; the Annual Option
together with the Initial Option are sometimes collectively referred to as
"Options"). No Options shall be granted hereunder after ten years from the date
on which this Plan was initially approved and adopted by the Board.
- 2 -
<PAGE> 3
(b) DATE OF GRANT. The "Date of Grant" for Options granted under this
Plan shall be the date of initial election as a director or the date of the
annual stockholder meeting at which such Option was granted, as the case may be
in accordance with Section 6(a).
(c) OPTION PRICE. The option price for each Option granted under this
Plan shall be the closing price for the Company's Common Stock as reported by
the National Association of Securities Dealers Automated Quotations ("Nasdaq")
National Market on the last trading day prior to Date of Grant.
(d) TERM OF OPTION. The term of each Option granted under this Plan shall
be ten years from the Date of Grant.
(e) EXERCISABILITY OF OPTIONS. (1) The Initial Options granted under this
Plan shall become exercisable with respect to 2,500 shares on the date of the
Company's next annual meeting of stockholders from the Date of Grant and each of
the next two annual meetings of stockholders following such annual meeting of
stockholders, but in all cases if and only if the Option holder is a member of
the Board at the opening of business on that date. (2) The Annual Options
granted under this Plan shall become exercisable with respect to all 3,500
shares on the Date of Grant.
(f) GENERAL EXERCISE TERMS. Directors holding exercisable Options under
this Plan who cease to serve as members of the Board may, during their lifetime,
exercise the rights they had under such Options at the time they ceased being a
director for the full unexpired term of such Option. Any rights that have not
yet become exercisable shall terminate upon cessation of membership on the
Board. Upon the death of a director, those entitled to do so shall have the
right, at any time within twelve months after the date of death, to exercise in
whole or in part any rights which were available to the director at the time of
his or her death. The rights of the Option holder may be exercised by the
holder's guardian or legal representative in the case of disability and by the
beneficiary designated by the holder in writing delivered to the Company or, if
none has been designated, by the holder's estate or his or her transferee on
death in accordance with this Plan, in the case of death. Options granted under
the Plan shall terminate, and no rights thereunder may be exercised, after the
expiration of the applicable exercise period. Notwithstanding the foregoing
provisions of this section, no rights under any Options may be exercised after
the expiration of ten years from their Date of Grant.
(g) METHOD OF EXERCISE AND PAYMENT. Options may be exercised only by
written notice to the Company at its head office accompanied by payment of the
full Option price for the shares of Common Stock as to which they are exercised.
The Option price shall be paid in cash or by check or in shares of Common Stock
of the Company, or in any combination thereof. Shares of Common Stock
surrendered in payment of the Option price shall have been held by the person
exercising the Option for at least six months, unless otherwise permitted by the
Board. The value of shares delivered in payment of the Option price shall be
their fair market value, as determined in accordance with Section 6(c) above, as
of the date of exercise. Upon receipt of such notice and payment, the Company
shall promptly issue and deliver to the optionee (or other person entitled to
exercise the Option) a certificate or certificates for the number of shares as
to which the exercise is made.
- 3 -
<PAGE> 4
(h) NON-TRANSFERABILITY. Options granted under this Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and distribution or as permitted by Rule 16b-3 (or any successor provision)
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3").
7. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an Option or any other action taken pursuant to the Plan, shall
constitute an agreement or understanding, express or implied, that the Company
will retain an Option holder as a director for any period of time or at any
particular rate of compensation.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. A director shall have no rights
as a stockholder with respect to the shares covered by Options until the date
the director exercises such Options and pays the Option price to the Company,
and no adjustment will be made for dividends or other rights for which the
record date is prior to the date such Option is exercised and paid for.
8. AMENDMENT OR TERMINATION.
The Board may amend or terminate this Plan at any time, provided that, to
the extent necessary or desirable to comply with Rule 16b-3, this Plan shall not
be amended more than once every six months, other than to comport with changes
in the Code, ERISA or the rules thereunder.
9. STOCKHOLDER APPROVAL.
The 1996 Director Stock Option Plan was approved by the stockholders of
the Company by an affirmative vote of the holders of a majority of the shares of
Common Stock present, or represented and entitled to vote, at the Company's 1997
annual meeting of stockholders and any further amendments hereto shall be
subject to stockholder approval to the extent (i) required by law, (ii) required
by Nasdaq or stock exchange listing requirements, as determined by the Board of
Directors, or (iii) as desirable, as determined by the Board of Directors, to
comply with Rule 16b-3. In the event any approval is not obtained, all Options
granted under this Plan after such further amendment shall be void and without
effect.
10. GOVERNING LAW.
This Plan shall be governed by and interpreted in accordance with the
laws of the State of Delaware.
- 4 -
<PAGE> 1
EXHIBIT 10.29
RESEARCH AND DEVELOPMENT AGREEMENT
between
SANKYO CO., LTD
and
ARQULE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. DEFINITIONS........................................................... (1)
1.1. "ACTIVE HOMOLOG"............................................... (1)
1.2. "ACTIVE ARQULE COMPOUND"....................................... (1)
1.3. "ACTIVE COMPOUND".............................................. (1)
1.4. "ACTIVE SANKYO COMPOUND"....................................... (1)
1.5. "AFFILIATE".................................................... (1)
1.6. "AGREEMENT".................................................... (2)
1.7. "ARQULE COMPOUND".............................................. (2)
1.8. "ARQULE DERIVATIVE COMPOUND"................................... (2)
1.9. "ARQULE PATENT RIGHTS"......................................... (2)
1.10. "ARQULE TECHNOLOGY"............................................ (2)
1.11. "ARRAY"........................................................ (2)
1.12. "BASE RATE OF INTEREST"........................................ (2)
1.13. "CHEMICAL THEME"............................................... (2)
1.14. "CONFIDENTIAL INFORMATION"..................................... (2)
1.15. "CONTRACT YEAR"................................................ (2)
1.16. "DERIVATIVE COMPOUND".......................................... (2)
1.17. "DIRECTED ARRAY(TM)"........................................... (3)
1.18. "DIRECTED ARRAY(TM)PROGRAM".................................... (3)
1.19. "DISCLOSING PARTY"............................................. (3)
1.20. "EFFECTIVE DATE"............................................... (3)
1.21. "EXTRAORDINARY EXPENSES"....................................... (3)
1.22. "FDA".......................................................... (3)
1.23. "JOINT PATENT RIGHTS".......................................... (3)
1.24. "LICENSED COMPOUND"............................................ (3)
1.25. "LICENSED COMPOUND SET"........................................ (3)
1.26. "MAPPING ARRAY(TM)"............................................ (3)
1.27. "MAPPING ARRAY(TM)PROGRAM"..................................... (3)
1.28. "NET SALES".................................................... (3)
1.29. "NET SALES PRICE".............................................. (4)
1.30. "PARTY"........................................................ (4)
1.31. "PATENT RIGHTS"................................................ (4)
1.32. "PHASE I CLINICAL TRIALS"...................................... (4)
1.33. "PHASE II CLINICAL TRIALS"..................................... (4)
1.34. "PHASE III CLINICAL TRIALS".................................... (4)
1.35. "PRECLINICAL COMPOUND"......................................... (5)
1.36. "PRECLINICAL DEVELOPMENT"...................................... (5)
1.37. "RECEIVING PARTY".............................................. (5)
1.38. "RESEARCH PERIOD".............................................. (5)
1.39. "RESEARCH PROGRAM"............................................. (5)
1.40. "RESEARCH PLAN"................................................ (5)
1.41. "ROYALTY-BEARING PRODUCT"...................................... (5)
</TABLE>
(i)
<PAGE> 3
<TABLE>
<C> <S> <C>
1.42. "ROYALTY PERIOD"............................................... (5)
1.43. "SANKYO COMPOUND".............................................. (5)
1.44. "SANKYO DERIVATIVE COMPOUND"................................... (5)
1.45. "SANKYO PATENT RIGHTS"......................................... (6)
1.46. "STEERING COMMITTEE"........................................... (6)
1.47. "SUBLICENSEE".................................................. (6)
1.48. "TARGET"....................................................... (6)
1.49. "U.S. TERRITORY"............................................... (6)
1.50. "VALID CLAIM".................................................. (6)
1.51. "WORLDWIDE TERRITORY".......................................... (6)
2. MANAGEMENT OF RESEARCH PROGRAM........................................ (6)
2.1. COMPOSITION OF STEERING COMMITTEE.............................. (6)
2.2. DUTIES OF THE STEERING COMMITTEE............................... (6)
2.3. COMPOUNDS EXCLUDED FROM THE DIRECTED ARRAY(TM)PROGRAM.......... (7)
2.4. MEETINGS OF THE STEERING COMMITTEE............................. (7)
2.5. COOPERATION.................................................... (8)
2.6. VISITS TO FACILITIES........................................... (8)
3. MAPPING ARRAY(TM)PROGRAM.............................................. (8)
3.1. CONDUCT OF MAPPING ARRAY(TM)PROGRAM............................ (8)
3.2. MUTUAL DISCLOSURE.............................................. (9)
3.3. RESERVATION OF ACTIVE ARQULE COMPOUNDS......................... (9)
3.4. MAPPING ARRAY(TM)PROGRAM PAYMENTS.............................. (9)
3.5. TERM OF MAPPING ARRAY(TM)PROGRAM............................... (10)
3.6. PERFORMANCE OF MAPPING ARRAY(TM)PROGRAM........................ (10)
4. DIRECTED ARRAY(TM)PROGRAM............................................. (10)
4.1. DESCRIPTION OF DIRECTED ARRAY(TM)PROGRAM....................... (10)
4.2. CONDUCT OF DIRECTED ARRAY(TM)PROGRAM........................... (10)
4.3. DIRECTED ARRAY(TM)PROGRAM PAYMENTS............................. (11)
4.3.1. DELIVERY FEE........................................... (11)
4.3.2. EXPENSES............................................... (11)
4.4. TERM OF DIRECTED ARRAY(TM) PROGRAM............................. (11)
5. LICENSE GRANTS; REVERSION OF RIGHTS................................... (11)
5.1. SCREENING LICENSES............................................. (11)
5.2. PRECLINICAL AND CLINICAL LICENSES.............................. (11)
5.3. COMMERCIALIZATION LICENSE...................................... (12)
5.4. REVERSION OF RIGHTS; RETURN OF MATERIALS....................... (12)
6. OWNERSHIP OF COMPOUNDS................................................ (12)
6.1. SANKYO COMPOUNDS; SANKYO DERIVATIVE COMPOUNDS.................. (12)
6.2. ARQULE COMPOUNDS; ARQULE DERIVATIVE COMPOUNDS.................. (12)
7. INTELLECTUAL PROPERTY RIGHTS.......................................... (12)
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<C> <S> <C>
7.1. OWNERSHIP OF PATENT RIGHTS..................................... (12)
7.2. MANAGEMENT OF JOINT PATENT RIGHTS.............................. (13)
7.3. COOPERATION OF THE PARTIES..................................... (13)
7.4. INFRINGEMENT BY THIRD PARTIES.................................. (13)
8. PAYMENTS, REPORTS, AND RECORDS........................................ (14)
8.1. MILESTONE PAYMENTS............................................. (14)
8.2. ALTERNATIVE TO MILESTONE PAYMENTS.............................. (14)
8.3. ROYALTIES...................................................... (14)
8.4. REPORTS AND PAYMENTS........................................... (15)
8.5. INVOICES; PAYMENTS IN U.S. DOLLARS............................. (15)
8.6. PAYMENTS IN OTHER CURRENCIES................................... (15)
8.7. RECORDS........................................................ (15)
8.8. LATE PAYMENTS.................................................. (16)
8.9. WITHHOLDING TAX PAYMENTS....................................... (16)
8.9.1. PAYMENTS............................................... (16)
8.9.2. ROYALTY PAYMENTS....................................... (16)
9. CONFIDENTIAL INFORMATION.............................................. (16)
9.1. DEFINITION OF CONFIDENTIAL INFORMATION......................... (16)
9.2. DESIGNATION OF CONFIDENTIAL INFORMATION........................ (17)
9.3. OBLIGATIONS.................................................... (17)
9.4. EXCEPTIONS..................................................... (17)
9.5. RETURN OF CONFIDENTIAL INFORMATION............................. (18)
9.6. SURVIVAL OF OBLIGATIONS........................................ (18)
10. REPRESENTATIONS AND WARRANTIES........................................ (18)
10.1. AUTHORIZATION.................................................. (18)
11. INDEMNIFICATION AND INSURANCE......................................... (18)
11.1. SANKYO INDEMNITY OBLIGATIONS................................... (18)
11.2. PROCEDURE...................................................... (19)
11.3. INSURANCE...................................................... (19)
12. TERM AND TERMINATION.................................................. (19)
12.1. TERM........................................................... (19)
12.2. BREACH OF PAYMENT OBLIGATIONS.................................. (19)
12.3. MATERIAL BREACH................................................ (20)
12.4. EFFECT OF TERMINATION.......................................... (20)
13. MISCELLANEOUS......................................................... (20)
13.1. RELATIONSHIP OF PARTIES........................................ (20)
13.2. PUBLICITY...................................................... (20)
13.3. NON-SOLICITATION............................................... (20)
13.4. GOVERNING LAW.................................................. (20)
13.5. DISPUTE RESOLUTION PROCEDURES.................................. (20)
13.6. COUNTERPARTS................................................... (22)
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<C> <S> <C>
13.7. HEADINGS....................................................... (22)
13.8. BINDING EFFECT................................................. (22)
13.9. ASSIGNMENT..................................................... (22)
13.10. NOTICES........................................................ (22)
13.11. AMENDMENT AND WAIVER........................................... (23)
13.12. SEVERABILITY................................................... (23)
13.13. ENTIRE AGREEMENT............................................... (23)
13.14. FORCE MAJEURE.................................................. (23)
EXHIBIT A.................................................................. (25)
</TABLE>
(iv)
<PAGE> 6
RESEARCH AND DEVELOPMENT AGREEMENT
This Agreement, dated as of November 1, 1997, is between Sankyo Co., LTD
("Sankyo"), a Japanese corporation, having a business address at 5-1, Nihonbashi
Honcho 3-chome, Chuo-ku Tokyo 103, Japan, and ArQule, Inc. ("ArQule"), a
Delaware corporation, having a business address at 200 Boston Avenue, Medford,
Massachusetts, U.S.A..
R E C I T A L S
WHEREAS, ArQule has developed certain technology that has applications in
the discovery and development of pharmaceutical compounds;
WHEREAS, Sankyo desires that ArQule apply its technologies to the
research and development of pharmaceutical compounds for Sankyo; and
WHEREAS, in exchange for payment by Sankyo of research funds, milestone
payments and royalties, ArQule is willing to perform certain research and
development activities for Sankyo, subject to the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, the Parties hereby agree as follows:
1. DEFINITIONS.
1.1. "ACTIVE HOMOLOG" shall mean any ArQule Derivative Compound or
Sankyo Derivative Compound that exhibits substantial homology with an Active
Compound as determined by the Steering Committee.
1.2. "ACTIVE ARQULE COMPOUND" shall mean any ArQule Compound or ArQule
Derivative Compound which exhibits confirmed significant functional activity
against a Target. The Steering Committee shall establish the criteria for
"significant functional activity" at the time of selection of each Target.
1.3. "ACTIVE COMPOUND" shall mean any Active ArQule Compound or Active
Sankyo Compound.
1.4. "ACTIVE SANKYO COMPOUND" shall mean any Sankyo Compound or Sankyo
Derivative Compound which exhibits confirmed significant functional activity
against a Target. The Steering Committee shall establish the criteria for
"significant functional activity" at the time of selection of each Target.
1.5. "AFFILIATE" shall mean a corporation or other legal entity that
controls, is controlled by, or is under common control with such Party. For
purposes of this definition, "control" means the ownership, directly or
indirectly, of fifty percent (50%) or more of the
<PAGE> 7
outstanding equity securities of a corporation which are entitled to vote in the
election of directors or a fifty percent (50%) or greater interest in the net
assets or profits of an entity which is not a corporation.
1.6. "AGREEMENT" shall mean this Research and Development Agreement,
together with EXHIBIT A hereto.
1.7. "ARQULE COMPOUND" shall mean any organic chemical molecule that
is synthesized by ArQule using its proprietary technology and provided by ArQule
to Sankyo under the Mapping Array(TM) Program.
1.8. "ARQULE DERIVATIVE COMPOUND" shall mean a Derivative Compound
synthesized by ArQule from an ArQule Compound under the Directed Array(TM)
Program described in Section 4.
1.9. "ARQULE PATENT RIGHTS" shall mean Patent Rights controlled or
owned by ArQule as of the Effective Date or during the Research Period; all to
the extent and only to the extent that ArQule now has or hereafter will have the
right to grant licenses, immunities or other rights thereunder.
1.10. "ARQULE TECHNOLOGY" shall mean all information and data which is
owned by ArQule or licensed by third parties to ArQule prior to or during the
Research Program and is necessary or useful to conduct the screening to discover
Active ArQule Compounds and Active Homologs thereto or to develop, make, use,
sell or seek regulatory approval in any country to market a product containing a
Licensed Compound; all to the extent and only to the extent that ArQule now has
or hereafter will have the right to grant licenses, immunities or other rights
thereunder.
1.11. "ARRAY" shall mean a set of samples of structurally related
chemical compounds arranged in a format such as a microtiter screening plate.
1.12. "BASE RATE OF INTEREST" shall mean the base rate of interest
declared from time to time by the Bank of Boston.
1.13. "CHEMICAL THEME" shall mean the chemical or structural
characteristics shared by a group of compounds as determined by the Steering
Committee pursuant to Section 2.2.
1.14. "CONFIDENTIAL INFORMATION" shall have the meaning set forth in
Section 9.1.
1.15. "CONTRACT YEAR" shall mean each twelve (12) month period of the
Research Period, commencing on the Effective Date.
1.16. "DERIVATIVE COMPOUND" shall mean a chemical compound structurally
derived in one or more steps from another by a process of modification or
partial substitution of at least one component wherein at least one structural
feature is retained at each process step. The number of intermediate steps or
compounds is not relevant to the classification of a
(2)
<PAGE> 8
compound as a Derivative Compound. A compound need not have structural
similarity to another compound in order to be classified as a Derivative
Compound.
1.17. "DIRECTED ARRAY(TM)" shall mean an Array comprised of ArQule
Derivative Compounds synthesized by ArQule under the Directed Array(TM) Program
described in Section 4.
1.18. "DIRECTED ARRAY(TM) PROGRAM" shall mean a Directed Array(TM)
Program conducted by ArQule as set forth in Section 4, with each Directed
Array(TM) Program consisting of multiple Arrays derived from one (1) Sankyo
Compound or one (1) Active ArQule Compound.
1.19. "DISCLOSING PARTY" shall mean that Party disclosing Confidential
Information to the other Party under Section 9.
1.20. "EFFECTIVE DATE" shall mean the first business day of the month
immediately following the date of execution of this Agreement by the Parties
hereto.
1.21. "EXTRAORDINARY EXPENSES" shall mean those expenses incurred from
time to time by ArQule in connection with the Directed Array(TM) Program which
are not (a) direct, out-of-pocket costs provided for in the Research Plan which
are directly attributable to the Directed Array(TM) Program or (b) fixed
overhead costs provided for in the Research Plan which are allocable to the
Directed Array(TM) Program.
1.22. "FDA" shall mean the United States Food and Drug Administration
(or its foreign equivalent in Japan or Europe).
1.23. "JOINT PATENT RIGHTS" shall mean any Patent Rights that are
jointly owned by the Parties, as set forth in Section 7.1(b).
1.24. "LICENSED COMPOUND" shall mean any Active Compound or Active
Homolog thereto with respect to which the Steering Committee has designated in
accordance with Sections 2.2 and 3.2.
1.25. "LICENSED COMPOUND SET" shall mean, with respect to a Licensed
Compound, such Licensed Compound and any Active Homolog thereto.
1.26. "MAPPING ARRAY(TM)" shall mean an Array of ArQule Compounds
synthesized by ArQule under the Mapping Array(TM) Program set forth in Section
3.
1.27. "MAPPING ARRAY(TM) PROGRAM" shall mean the Mapping Array(TM)
component of the Research Program as set forth in Section 3.
1.28. "NET SALES" shall mean the aggregate Net Sales Price of
Royalty-Bearing Products in any Royalty Period.
(3)
<PAGE> 9
1.29. "NET SALES PRICE" shall mean the * received on sales by Sankyo,
its Affiliates and Sublicensees of Royalty-Bearing Products, less the following:
*. In any transfers of Royalty-Bearing Products between Sankyo and an Affiliate,
the Net Sales Price shall be calculated based on the * of the Royalty-Bearing
Product to an independent third party. In the event that Sankyo receives
non-monetary consideration for any Royalty-Bearing Products, the Net Sales Price
shall be calculated based on the * by Sankyo for such Royalty-Bearing Products
during the * Royalty Period.
1.30. "PARTY" means ArQule or Sankyo or their respective Affiliates;
"PARTIES" means ArQule and Sankyo and their respective Affiliates.
1.31. "PATENT RIGHTS" shall mean all rights arising under issued
patents and reissues, reexaminations, extensions and supplementary protection
certificates thereof and all patent applications and any divisions,
continuations, or continuations-in-part thereof or patents issuing thereon.
1.32. "PHASE I CLINICAL TRIALS" shall mean clinical trials in healthy
adults and/or in a small number of patients commencing upon the filing of a
trial protocol with the appropriate regulatory body and designed to determine
the metabolism and pharmacologic actions of a product in humans, the side
effects associated with increasing doses and to gather evidence on effectiveness
and meeting the requirements established by the FDA or by the equivalent
Japanese agency for Phase I clinical trials. The completion of the Phase I
Clinical Trials will be deemed to have occurred upon the first formal internal
issuance of trial results as measured by trial objectives, or in any event no
later than the commencement of the Phase II Clinical Trials.
1.33. "PHASE II CLINICAL TRIALS" shall mean clinical trials in a small
sample of the intended patient population commencing upon the filing of a trial
protocol with the appropriate regulatory body and designed to assess the
efficacy for a specific indication of a compound proposed to be used as a
therapeutic or diagnostic pharmaceutical product, to determine dose tolerance
and the optimal dose range as well as to gather additional information relating
to safety and potential adverse effects, and meeting the requirements
established by the FDA or the equivalent Japanese agency for Phase II clinical
trials. The completion of the Phase II Clinical Trials will be deemed to have
occurred upon the first formal internal issuance of trial results as measured by
trial objectives, or in any event no later than the commencement of the Phase
III Clinical Trials.
1.34. "PHASE III CLINICAL TRIALS" shall mean clinical trials commencing
upon the filing of a trial protocol with the appropriate regulatory body and
designed to demonstrate safety and efficacy of a compound proposed to be used as
a prophylactic, therapeutic or diagnostic pharmaceutical product in an expanded
patient population at geographically dispersed study sites, meeting the
requirements established by the FDA or the equivalent Japanese agency for Phase
III clinical trials. The completion of the Phase III Clinical Trials
- -------------
*Confidential Treatment has been requested for the marked portion.
(4)
<PAGE> 10
will be deemed to have occurred upon the first formal internal issuance of trial
results as measured by trial objectives, or in any event no later than the
filing of an NDA.
1.35. "PRECLINICAL COMPOUND" shall mean any Licensed Compound selected
by Sankyo or an Affiliate of Sankyo to enter into Preclinical Development.
1.36. "PRECLINICAL DEVELOPMENT" shall mean, with respect to any
Preclinical Compound, the commencement of potency and efficacy testing in animal
models.
1.37. "RECEIVING PARTY" shall mean that Party receiving Confidential
Information under Section 9.1.
1.38. "RESEARCH PERIOD" shall mean the period during which the Research
Program remains in effect. The duration of the Research Period shall be a *,
unless extended by the mutual agreement of the Parties.
1.39. "RESEARCH PROGRAM" shall mean, collectively, each of the Directed
Array(TM) Programs and the Mapping Array(TM) Program.
1.40. "RESEARCH PLAN" shall mean a plan of research for the Directed
Array(TM) Program covering a minimum of a * period, which shall be updated
quarterly pursuant to Section 2.2 to reflect developments during the previous
three (3) months and extended for the subsequent three (3) months. The parties
will begin development of the initial Research Plan by *. The parties will
complete the Research Plan for the first Directed Array Program by * and will
complete the Research Plan for the second Directed Array Program by *. The
completed Research Plan will be attached to this Agreement as EXHIBIT A.
1.41. "ROYALTY-BEARING PRODUCT" shall mean a product containing *.
1.42. "ROYALTY PERIOD" shall mean, with respect to each Royalty-Bearing
Product, every calendar quarter, or partial calendar quarter, commencing with
the first commercial sale of such Royalty-Bearing Product in any country and
ending on the later to occur of (i) the end of the quarter during which all
Valid Claims of all Patent Rights covering such Royalty-Bearing Product expire
in the applicable country, or * years after such first commercial sale in the
applicable country.
1.43. "SANKYO COMPOUND" shall mean any chemical compound provided by
Sankyo or its Affiliates to ArQule under the Directed Array(TM) Program
described in Section 4.
1.44. "SANKYO DERIVATIVE COMPOUND" shall mean a Derivative Compound
synthesized by ArQule from a Sankyo Compound under the Directed Array(TM)
Program described in Section 4.
- --------------
*Confidential Treatment has been requested for the marked portion.
(5)
<PAGE> 11
1.45. "SANKYO PATENT RIGHTS" shall mean Patent Rights controlled or
owned by Sankyo as of the Effective Date or during the Research Period; all to
the extent and only to the extent that Sankyo now has or hereafter will have the
right to grant licenses, immunities or other rights thereunder.
1.46. "STEERING COMMITTEE" shall have the meaning set forth in
Section 2.1.
1.47. "SUBLICENSEE" shall mean any non-Affiliate third party licensed
by Sankyo to make, use (except where the right to use accompanies the sale of
any Royalty-Bearing Product by Sankyo or its Affiliates or Sublicensees) or sell
any Royalty-Bearing Product.
1.48. "TARGET" shall mean any biological target selected by Sankyo for
which Sankyo has certain proprietary technology and/or expertise.
1.49. "U.S. TERRITORY" shall mean the fifty states comprising the
United States of America and all American possessions.
1.50. "VALID CLAIM" shall mean either (a) a claim of an issued patent
that has not been held unenforceable or invalid by an agency or a court of
competent jurisdiction in any unappealable or unappealed decision or (b) a claim
of a pending patent application that has not been abandoned or finally rejected
without the possibility of appeal or refiling.
1.51. "WORLDWIDE TERRITORY" shall mean the world excluding the U.S.
Territory.
1.52. The above definitions are intended to encompass the defined terms
in both the singular and plural tenses.
2. MANAGEMENT OF RESEARCH PROGRAM.
2.1. COMPOSITION OF STEERING COMMITTEE. The Parties hereby establish a
Steering Committee comprised of six (6) members, with three (3) representatives
appointed by each Party. The initial members of the Steering Committee shall be
as follows:
ARQULE REPRESENTATIVES SANKYO REPRESENTATIVES
*
A Party may change one or more of its representatives to the Steering Committee
at any time upon notice to the other Party. Each Party will designate one of its
representatives as its team leader.
2.2. DUTIES OF THE STEERING COMMITTEE. The Steering Committee shall
direct and administer the Research Program. With respect to each Directed
Array(TM) Program, the
- -----------------
*Confidential Treatment has been requested for the marked portion.
(6)
<PAGE> 12
Steering Committee shall specifically determine the following: (i) the
appropriate objectives of each Chemical Theme and/or Active Compound to be
submitted to the Directed Array(TM) Program; (ii) the appropriate number and
type of Chemical Themes to be submitted to the Directed Array(TM) Program,
subject to ArQule's right to exclude certain compounds as set forth in Section
2.3 below; (iii) the appropriate number of compounds that ArQule should generate
in a Directed Array(TM) for a particular Chemical Theme; and (iv) the
appropriate amount of each compound in a Directed Array(TM) that ArQule should
deliver to Sankyo for further research and development. The scope of each
Chemical Theme will be determined on the basis of the following criteria: (i)
the specific reaction or reaction sequence used to combine members of two or
more discrete chemical units in which each chemical unit bears the functional
group(s) required for the specific reaction(s) that result in the combination of
the chemical units; and (ii) the extent to which a class of compounds is related
by a recurring structural motif associated with a particular biological
activity. In addition, the Steering Committee shall (i) determine whether any
Active Compound should be designated as a Licensed Compound; (ii) determine and
update the list of Licensed Compounds; (iii) determine the allocation of the
funding and personnel resources to be contributed by ArQule under this
Agreement; (iv) revise and extend the Research Plan each calendar quarter for
the subsequent six (6) months based on prior developments; and (v) resolve
matters involving scientific questions.
2.3. COMPOUNDS EXCLUDED FROM THE DIRECTED ARRAY(TM) PROGRAM. ArQule
shall have the right, at the time Sankyo seeks to include any Active ArQule
Compound or Active Homolog thereto in any Directed Array(TM) Program, to exclude
from such Directed Array(TM) Program any Active ArQule Compound or Active
Homolog thereto that is at that time either (i) included within a Directed
Array(TM) Program for a third party, (ii) being optimized by a third party from
a Mapping Array(TM) Program, (iii) previously licensed or reserved by a third
party, or (iv) is included within an existing ArQule internal development
program.
2.4. MEETINGS OF THE STEERING COMMITTEE. The Steering Committee shall
communicate regularly, but in no event less than monthly, via written project
status reports through written communications means, including, without
limitation, electronic mail. A member of the committee from each Party will
promptly respond to such communications where appropriate within * of its
receipt by such member. In the event that questions or issues arise from such
written communications that cannot be, or are not being effectively addressed by
such written communications, or upon request by any member of the Steering
Committee, the Steering Committee shall promptly conduct one or more telephone
conferences to address such questions or issues and shall prepare and deliver to
each Party a brief written report describing the significant issues and
discussions that take place during such telephone conference(s). A
representative of the Steering Committee jointly appointed by its members shall
provide each member with * notice of the time of any such telephone conferences
and the proposed agenda with respect thereto, unless waived by all members. The
Steering Committee shall meet at least once each quarter at the facilities of
ArQule, or at such other times and locations as the Steering Committee
determines. A representative of the Steering Committee jointly appointed by its
members shall provide each member with*
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*Confidential Treatment has been requested for the marked portion.
(7)
<PAGE> 13
notice of the time and location of meetings, unless such notice is waived by all
members. If a designated representative of a Party cannot attend any meeting of
the Steering Committee, such Party may designate a different representative for
that meeting without notice to the other Party, and the substitute member will
have full power to vote on behalf of the permanent member. Except as otherwise
provided in this Section 2, all actions and decisions of the Steering Committee
will require the unanimous consent of all of its members. If the Steering
Committee fails to reach agreement upon any matter, the dispute will be resolved
in accordance with the procedures set forth in Section 13.5 below. Within *
following each quarterly meeting of the Steering Committee, the Steering
Committee shall prepare and deliver, to both Parties, a written report
describing the decisions made, conclusions and actions agreed upon.
2.5. COOPERATION. Each Party agrees to provide the Steering Committee
with information and documentation as reasonably required for the Steering
Committee to fulfill its duties under this Agreement. In addition, each Party
agrees to make available its employees and consultants as reasonably requested
by the Steering Committee. The Parties anticipate that members of the Steering
Committee will communicate informally with each other and with employees and
consultants of the Parties on matters relating to the Directed Array(TM)
Program.
2.6. VISITS TO FACILITIES. Members of the Steering Committee shall
have reasonable access to the facilities of each Party where activities under
this Agreement are in progress, but only during normal business hours and with
reasonable prior notice. Each Party shall bear its own expenses in connection
with such site visits.
3. MAPPING ARRAY(TM) PROGRAM.
3.1. CONDUCT OF MAPPING ARRAY(TM) PROGRAM. ArQule will supply Sankyo
with Mapping Arrays(TM) containing approximately * each of approximately *
different ArQule Compounds during the first Contract Year selected by ArQule
from the * based on no more than * Chemical Themes selected by Sankyo and
approved by the Steering Committee. Subject to Section 3.6, ArQule will supply
Sankyo with Mapping Arrays(TM) containing approximately * each of approximately
* different ArQule Compounds during each subsequent Contract Year of the term of
the Mapping Array(TM) Program provided for in Section 3.5, selected at the start
of such subsequent Contract Year from the then available Mapping Array(TM)
compounds based on no more than * Chemical Themes selected by Sankyo and
approved by the Steering Committee. ArQule agrees to ship such * Mapping
Array(TM) compounds (i) for the first Contract Year by * (ii) for the second
Contract Year on or after the earlier to occur of (a) * after Sankyo completes
initial screening, as determined by the Steering Committee, of the Mapping
Array(TM) compounds shipped to Sankyo during the first Contract Year, or (ii) *,
or earlier when available if so requested by Sankyo in writing, and (iii) for
the third Contract Year *. Sankyo agrees to accept each such shipment of Mapping
Array(TM) compounds *. Promptly upon its receipt of any such Mapping Arrays(TM),
Sankyo shall commence testing of such Mapping Arrays(TM) for activity against
Targets. Upon the
- -------------------
*Confidential Treatment has been requested for the marked portion.
(8)
<PAGE> 14
completion by Sankyo of its testing of any such Mapping Arrays(TM), Sankyo shall
promptly provide each member of the Steering Committee with notice by telefax
communication detailing the discovery of Active Compounds, together with
relevant information concerning the functional activity identified, which
telefax shall be followed by a confirmatory letter.
3.2. MUTUAL DISCLOSURE. Initially, ArQule will identify the Chemical
Themes of each Mapping Array(TM) but not the structures of the individual ArQule
Compounds in the Mapping Arrays(TM). Sankyo may screen the Mapping Arrays(TM)
against any Targets during the term of this Agreement and thereafter. Initially,
Sankyo will not disclose the Targets screened. If Sankyo detects any Active
ArQule Compound in a Mapping Array(TM), ArQule will disclose (a) the structure
of each Active ArQule Compound and (b) the structures, but not the locations in
the Mapping Array(TM), of all other ArQule Compounds in the Mapping Array(TM)
and Sankyo will disclose (a) the identity of the Target and (b) the level of
activity. All such disclosed information shall be treated as Confidential
Information by both Parties. Sankyo shall submit each such Active ArQule
Compound to the Directed Array(TM) Program pursuant to Section 4. Sankyo, at its
discretion, may request that the Steering Committee designate any such Active
ArQule Compound and Active Homologs thereto as Licensed Compounds comprising a
Licensed Compound Set if such Active ArQule Compound and Active Homologs are
still available as Licensed Compounds. * Subject to the foregoing, (a) ArQule
shall notify the Steering Committee that such Active ArQule Compound and Active
Homologs thereto are properly designated as Licensed Compounds, and (b) provide
Sankyo with the confirmed chemical composition, structure, purity information
and location of all Active ArQule Compounds and Active Homologs thereto so
designated as Licensed Compounds belonging to such Licensed Compound Set.
3.3. RESERVATION OF ACTIVE ARQULE COMPOUNDS. Prior to designating any
Active ArQule Compounds and Active Homologs thereto as Licensed Compounds
pursuant to Section 3.2 hereof, Sankyo, at its discretion, may notify ArQule of
its intent to license such Active ArQule Compounds and Active Homologs, and
request a reservation of such Active ArQule Compounds and Active Homologs
thereto (collectively the "Reserved Compounds"). Upon ArQule receiving from
Sankyo (i) a written request to reserve such Reserved Compounds, and (ii)
disclosure of the Target and activity information pursuant to Section 3.2
hereof, ArQule shall reserve such Reserved Compounds for subsequent designation
by Sankyo as Licensed Compounds for a period ending upon the earlier to occur of
(i) * or (ii) * days.
3.4. MAPPING ARRAY(TM) PROGRAM PAYMENTS. In consideration of the
performance by ArQule of the Mapping Array(TM) Program, during each Contract
Year, Sankyo shall pay ArQule a delivery fee equal to * in the initial Contract
Year, payable *. Thereafter, Sankyo shall make the following annual payment to
ArQule during each Contract Year, in the second Contract Year payable * and in
the third Contract Year payable *:
Annual Payment = *
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*Confidential Treatment has been requested for the marked portion.
(9)
<PAGE> 15
Where CPI is a fraction, the numerator of which is the difference between
the Consumer Price Index (CPI-U; U.S. City Average for all items; 1982-84
= 100) as of the last month of the immediately preceding Contract Year
and the Consumer Price Index as of the month immediately preceding the
Effective Date and the denominator of which is the Consumer Price Index
as of the month immediately preceding the Effective Date.
3.5. TERM OF MAPPING ARRAY(TM) PROGRAM. The Mapping Array(TM) Program
shall commence on the Effective Date, continue for a period of * Contract Years,
unless earlier terminated as provided in Section 3.6 or Article 12 below.
Termination of the Mapping Array(TM) Program shall have no effect on the
continuation of any Directed Array(TM) Program.
3.6. PERFORMANCE OF MAPPING ARRAY(TM) PROGRAM. Sankyo shall have the *
the Mapping Array(TM) Program on or before the earlier to occur of (i) * as
determined by the Steering Committee, of the Mapping Array(TM) compounds shipped
to Sankyo during the first Contract Year, or (ii) *, upon written notice to
ArQule, in the event that *. ArQule shall be under the obligation to deliver
Mapping Arrays(TM) for the successive Contract Years *.
4. DIRECTED ARRAY(TM) PROGRAM.
4.1. DESCRIPTION OF DIRECTED ARRAY(TM) PROGRAM. Under the direction of
the Steering Committee and in accordance with the Research Plan, ArQule will
synthesize multiple Directed Arrays(TM) of compounds derived from (i) each
Sankyo Compound provided to ArQule by Sankyo and/or (ii) each Active ArQule
Compound provided by ArQule to Sankyo under the Mapping Array(TM) Program,
subject to Section 2.3 above. The Parties intend that, during the Research
Period, ArQule will produce such Directed Arrays(TM) in * Directed Array(TM)
Programs, each based on a different Chemical Theme and intended to produce
approximately *, per Contract Year for a minimum of * Contract Years beginning
on the Effective Date. However, the number of closely related Chemical Themes
actually submitted to each Directed Array(TM) Program for the same Target
pursuant to a given Research Plan and the number of ArQule Derivative Compounds
and/or Sankyo Derivative Compounds actually produced per Chemical Theme will be
determined by the Steering Committee. The Parties also intend that ArQule will
produce approximately * of each ArQule Derivative Compound and/or Sankyo
Derivative Compound in the Directed Arrays(TM), subject to the availability of
the original Sankyo Compounds and/or the ArQule Compounds; PROVIDED, HOWEVER,
that the amount of each ArQule Derivative Compound and/or Sankyo Derivative
Compound that ArQule actually produces will ultimately be determined by the
Steering Committee.
4.2. CONDUCT OF DIRECTED ARRAY(TM) PROGRAM. The Directed Array(TM)
Program shall be conducted in a good scientific manner and in compliance with
all applicable legal requirements. The conduct of the Directed Array(TM) Program
shall be the primary responsibility of ArQule with participation by Sankyo.
Sankyo shall propose Chemical Themes to the Steering Committee for inclusion in
the Directed Array(TM) Program. If the Steering Committee approves the inclusion
of the proposed Chemical Theme, Sankyo shall
- ---------------
*Confidential Treatment has been requested for the marked portion.
(10)
<PAGE> 16
provide ArQule with the requisite amount and purity of Sankyo Compounds for that
Chemical Theme, as directed by the Steering Committee. ArQule shall thereupon
diligently synthesize Directed Arrays(TM) of ArQule Derivative Compounds and/or
Sankyo Derivative Compounds, as the case may be, in accordance with the Research
Plan. Sankyo shall, in its discretion, test all compounds in the Directed
Arrays(TM). The Parties shall continue the procedure described in this Section
4.2 for each Active Compound until the earliest to occur of (i) the
determination by the Steering Committee, in accordance with Section 2.2, to
designate any such Active Compound and any Active Homolog thereto as a Licensed
Compound Set, (ii) the determination by the Steering Committee to cease further
testing of such Active Compound, or (iii) the termination of this Agreement in
accordance with Section 12.
4.3. DIRECTED ARRAY(TM) PROGRAM PAYMENTS.
4.3.1. DELIVERY FEE. In consideration of the performance by
ArQule of the Directed Array(TM) Program, Sankyo shall pay ArQule a delivery fee
equal to * per Directed Array(TM) Program during the first Contract Year,
payable *. Thereafter, Sankyo shall make the following annual payment to ArQule
during each Contract Year, payable *:
Annual Payment = *
Notwithstanding the foregoing, if the number of Active Compounds submitted to
all Directed Array(TM) Programs exceeds * for the first * Contract Years, the
Parties *.
4.3.2. EXPENSES. In addition to the amounts payable pursuant to
Section 4.3.1 above, Sankyo shall pay any and all Extraordinary Expenses of
ArQule, as required and approved by the Steering Committee.
4.4. TERM OF DIRECTED ARRAY(TM) PROGRAM. The term of each Directed
Array(TM) Program shall begin upon the commencement of the Research Plan and
terminate no later than the first anniversary of such commencement date unless
extended by the Steering Committee because of extraordinary circumstances. The
period for initiating and completing all Directed Array(TM) Programs commenced
pursuant to Section 4.1 hereof shall terminate at the end of the * Contract
Year, PROVIDED, HOWEVER, that upon * months prior written notice by Sankyo, such
period may be extended for * period at * on terms and conditions to be mutually
agreed upon by the Parties.
5. LICENSE GRANTS; REVERSION OF RIGHTS.
5.1. SCREENING LICENSES. ArQule hereby grants to Sankyo, under ArQule
Patent Rights and ArQule Technology *.
5.2. PRECLINICAL AND CLINICAL LICENSES. Upon the identification by
Sankyo of any Active Compound and the determination by the Steering Committee
that such Active
- -----------------
*Confidential Treatment has been requested for the marked portion.
(11)
<PAGE> 17
Compound and any Active Homolog thereto should properly be designated as a
Licensed Compound Set, ArQule shall grant to Sankyo, under any intellectual
property rights covering the composition, manufacture or use of such Licensed
Compound Set, *.
5.3. COMMERCIALIZATION LICENSE. ArQule hereby grants to Sankyo *.
5.4. REVERSION OF RIGHTS; RETURN OF MATERIALS. In the event that *. In
such event, ArQule shall thereafter be free to grant licenses covering such
Active ArQule Compounds and Active Homologs related to such Active ArQule
Compounds to third parties. Upon termination of such license by ArQule, Sankyo
shall (i) grant to ArQule an exclusive, royalty-free license, with the right to
grant sublicenses, to manufacture, use or sell such Active ArQule Compounds and
Active Homologs related to such Active ArQule Compounds under any patent rights
of Sankyo covering the composition or use of such Active ArQule Compounds and
Active Homologs related to such Active ArQule Compounds and (ii) return to
ArQule all Proprietary Materials and Confidential Information supplied by ArQule
which relate to such Active ArQule Compounds and Active Homologs related to such
Active ArQule Compounds. Notwithstanding the foregoing, the provisions of this
Section 5.4 shall not apply to Sankyo Compounds or Sankyo Derivative Compounds.
6. OWNERSHIP OF COMPOUNDS.
6.1. SANKYO COMPOUNDS; SANKYO DERIVATIVE COMPOUNDS. All Sankyo
Compounds and Sankyo Derivative Compounds shall be owned by Sankyo or its
Affiliates, except, and only to the extent that, with respect to the Directed
Array(TM) Program, ArQule can show that any such compound *.
6.2. ARQULE COMPOUNDS; ARQULE DERIVATIVE COMPOUNDS. All ArQule
Compounds and ArQule Derivative Compounds shall be owned by ArQule except, and
only to the extent that, Sankyo can show that any such compound was in the
possession of Sankyo before it was provided by ArQule to Sankyo or its
Affiliates.
7. INTELLECTUAL PROPERTY RIGHTS.
7.1. OWNERSHIP OF PATENT RIGHTS.
(a) ARQULE PATENT RIGHTS. Any Patent Rights filed by either
Party covering Active ArQule Compounds only will be owned solely by
ArQule except as provided in Section 7.1(b).
(b) JOINT PATENT RIGHTS. Any Patent Rights (i) filed by either
Party covering both Active ArQule Compounds and Active Sankyo Compounds,
(ii) claiming an Active ArQule Compound and uses thereof discovered by
Sankyo; and/or
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*Confidential Treatment has been requested for the marked portion.
(12)
<PAGE> 18
(iii) claiming an Active Sankyo Compound and uses thereof discovered by
ArQule, shall be owned jointly by ArQule and Sankyo.
(c) SANKYO PATENT RIGHTS. Any Patent Rights filed by either
Party covering solely Active Sankyo Compounds will be owned solely by
Sankyo.
(d) PATENT RIGHTS GENERALLY. Any Patent Rights arising out of or
related to this Agreement, the ownership of which cannot be determined
from Subsections (a), (b) or (c) of this Section 7.1, will be owned by
the Party(ies) having inventorship under the patent laws of the United
States.
7.2. MANAGEMENT OF JOINT PATENT RIGHTS. In the case of Joint Patent
Rights, the Parties shall agree on the allocation of responsibility for, and the
expense of, the preparation, filing, prosecution, and maintenance of any Joint
Patent Rights claiming such inventions. In the event of any disagreement
concerning any Joint Patent Rights, the matter shall be resolved by the Steering
Committee or, in the absence thereof, by the President of ArQule and the
Director of the Patent Department of Sankyo. The Party controlling a Joint
Patent Right shall consult with the other Party as to the preparation, filing,
prosecution, and maintenance of such Joint Patent Right reasonably prior to any
deadline or action with the U.S. Patent & Trademark Office or its foreign
equivalent in Japan or Europe, and shall furnish to the other Party copies of
all relevant documents reasonably in advance of such consultation. In the event
that the Party controlling a Joint Patent Right desires to abandon such Joint
Patent Right, or if the Party assuming control of a Joint Patent Right later
declines responsibility for such Joint Patent Right, the controlling Party shall
provide reasonable prior written notice to the other Party of such intention to
abandon or decline responsibility, and such other Party shall have the right, at
its expense, to prepare, file, prosecute, and maintain such Joint Patent Rights.
7.3. COOPERATION OF THE PARTIES. Each Party agrees to cooperate fully
in the preparation, filing, and prosecution of any Patent Rights under this
Agreement. Such cooperation includes, but is not limited to:
(a) executing all papers and instruments, or requiring its
employees or agents, to execute such papers and instruments, so as to
effectuate the ownership of Patent Rights set forth in Section 7.1 above
and to enable the other Party to apply for and to prosecute patent
applications in any country;
(b) promptly informing the other Party of any matters coming to
such Party's attention that may affect the preparation, filing, or
prosecution of any such patent applications; and
(c) undertaking no actions that are potentially deleterious to
the preparation, filing, or prosecution of such patent applications.
7.4. INFRINGEMENT BY THIRD PARTIES. ArQule and Sankyo shall each
promptly notify the other in writing of any alleged or threatened infringement
by a third party of any ArQule
(13)
<PAGE> 19
Patent Right, Sankyo Patent Right or Joint Patent Right of which they become
aware. The parties shall consult concerning the action(s) to be taken.
8. PAYMENTS, REPORTS, AND RECORDS.
8.1. MILESTONE PAYMENTS. In partial consideration of the rights granted
Sankyo under this Agreement, Sankyo shall pay ArQule the following amounts
within * days after each occurrence of the following milestones:
Payment for Royalty-
Bearing Products Milestone
- -------------------- ---------
* *
Such milestone payments shall be non-refundable and shall not be credited
against royalties payable to ArQule under this Agreement, PROVIDED, HOWEVER,
that * of any such milestone payments made with respect to any Royalty-Bearing
Product consisting of an ArQule Compound provided to Sankyo pursuant to the
Mapping Array(TM) Program, and not submitted to a Directed Array(TM) Program,
shall be creditable up to * per year against royalties due ArQule for such
Royalty-Bearing Product pursuant to Section 8.3. Sankyo shall promptly notify
ArQule of each occurrence of any of the foregoing milestones.
8.2. ALTERNATIVE TO MILESTONE PAYMENTS. If any time on or before * days
prior to the * with respect to any Royalty-Bearing Product, Sankyo elects, *, it
shall so notify ArQule in writing. Promptly upon its receipt of such written
notice, ArQule shall enter into good faith negotiations with Sankyo for an
appropriate amendment to this Agreement under which either *. If the Parties are
unable to reach agreement with respect to the foregoing by the expiration of *
days from the commencement of such negotiations, Sankyo shall remain obligated
to pay the full amount of milestone payments set forth in Section 8.1 above for
such Royalty-Bearing Product.
8.3. ROYALTIES. In consideration of the licenses granted to Sankyo
hereunder, for each Royalty Period, Sankyo shall pay to ArQule a royalty for
each Royalty-Bearing Product as follows:
<TABLE>
<CAPTION>
Source of Royalty-bearing Product Royalty Rate (Percentage of Net Sales)
--------------------------------- --------------------------------------
Worldwide Territory U.s. Territory
------------------- --------------
<S> <C> <C>
Sankyo Derivative Compound * *
ArQule Compound or ArQule * *
Derivative Compound
</TABLE>
- -------------
*Confidential Treatment has been requested for the marked portion.
(14)
<PAGE> 20
8.4. REPORTS AND PAYMENTS. Within * days after the conclusion of each
Royalty Period, Sankyo shall deliver to ArQule a report containing the following
information:
*
All such reports shall be maintained in confidence by ArQule. If no royalties
are due to ArQule for any reporting period, the report shall so state.
Concurrent with this report, Sankyo shall remit to ArQule any payment due for
the applicable Royalty Period. The method of payment shall be mutually agreed
to. All amounts payable to ArQule under this Section will first be calculated in
the currency of sale and then converted into U.S. dollars in accordance with
Section 8.6, and such amounts shall be paid without deduction of any withholding
taxes, value-added taxes, or other charges applicable to such payments, except
as provided for in Section 8.9.
8.5. INVOICES; PAYMENTS IN U.S. DOLLARS. With the exception of royalty
payments due under Section 8.3, ArQule shall submit invoices to Sankyo for each
payment due ArQule hereunder (including without limitation all payments due
pursuant to Section 3.3), and Sankyo shall pay such invoices within * days of
receipt thereof. All payments due under this Agreement shall, except as provided
in Section 8.6 below, be payable in United States dollars. Conversion of foreign
currency to U.S. dollars shall be made at the conversion rate existing in the
United States (as reported in the WALL STREET JOURNAL) on the last working day
of the calendar quarter preceding the applicable calendar quarter. Such payments
shall be without deduction of exchange, collection, or other charges, except as
provided for in Section 8.9.
8.6. PAYMENTS IN OTHER CURRENCIES. If by law, regulation, or fiscal
policy of a particular country, conversion into United States dollars or
transfer of funds of a convertible currency to the United States is restricted
or forbidden, Sankyo shall give ArQule prompt written notice of such
restriction, which notice shall satisfy the *day payment deadline described in
Section 8.4. Sankyo shall pay any amounts due ArQule through whatever lawful
methods ArQule reasonably designates; provided, however, that if ArQule fails to
designate such payment method within * days after ArQule is notified of the
restriction, then Sankyo may deposit such payment in local currency to the
credit of ArQule in a recognized banking institution selected by Sankyo and
identified by written notice to ArQule, and such deposit shall fulfill all
obligations of Sankyo to ArQule with respect to such payment.
8.7. RECORDS. Sankyo and its Affiliates shall maintain complete and
accurate records of Royalty-Bearing Products made, used or sold by them or their
Sublicensees under this Agreement, and any amounts payable to ArQule in relation
to such Royalty-Bearing Products, which records shall contain sufficient
information to permit ArQule to confirm the accuracy of any reports delivered to
ArQule in accordance with Section 8.4. The relevant Party shall retain such
records relating to a given Royalty Period for at least * years after the
conclusion of that Royalty Period. Each Party (acting as the "Auditing Party")
shall have the right, at its own expense, to cause an independent certified
public accountant to inspect such records of the other Party (the "Audited
Party") during normal business hours for the
- ----------------
*Confidential Treatment has been requested for the marked portion.
(15)
<PAGE> 21
sole purpose of verifying any reports and payments delivered under this
Agreement. Such accountant shall not disclose to the Auditing Party any
information other than information relating to accuracy of reports and payments
delivered under this Agreement and shall provide the Audited Party with a copy
of any report given to the Auditing Party. The Parties shall reconcile any
underpayment or overpayment within * days after the accountant delivers the
results of the audit. In the event that any audit performed under this Section
reveals an underpayment in excess of * in any Royalty Period, the Audited Party
shall bear the full cost of such audit. Each party may exercise its rights under
this Section only once every year and only with reasonable prior notice to the
other Party.
8.8. LATE PAYMENTS. Any payments by Sankyo that are not paid on or
before the date such payments are due under this Agreement shall bear interest,
to the extent permitted by law, at * calculated based on the number of days that
payment is delinquent.
8.9. WITHHOLDING TAX PAYMENTS.
8.9.1. PAYMENTS. All amounts payable under Section 3.4, 4.3 and
8.1 shall represent the actual proceeds to be received by ArQule after
any applicable deductions have been made, including without limitation
any withholding taxes. ArQule agrees to reasonably cooperate with Sankyo
in obtaining a refund of any withholding taxes paid by Sankyo with
respect to any payments to ArQule hereunder. In the event that ArQule is
successful in obtaining any refund of tax withholding amounts paid by
Sankyo under Sections 3.4, 4.3 and 8.1 of this Agreement, ArQule agrees
to promptly remit such refund amount received by ArQule to Sankyo.
8.9.2. ROYALTY PAYMENTS. Sankyo may only withhold from royalties
due to ArQule under Section 8.3 amounts for payment of Japanese
withholding tax that is required by law to be paid to the Japanese taxing
authority with respect to such royalty amounts due to ArQule; PROVIDED,
HOWEVER, that such amount withheld shall not exceed the lesser of * and
FURTHER PROVIDED, HOWEVER, that in regard to any such tax withholding
Sankyo shall give ArQule such documents, and provide any other
cooperation or assistance on a reasonable basis, as may be necessary to
enable ArQule to claim exemption therefrom, to receive a full allowance
of such withholding tax or claim a foreign tax credit, and Sankyo shall
upon ArQule's request give proper evidence as to the payment of such tax.
In the event that Sankyo is successful in obtaining any refund of tax
withholding amounts paid by Sankyo under Sections 8.3 of this Agreement,
Sankyo agrees to promptly remit such refund amount received by Sankyo to
ArQule.
9. CONFIDENTIAL INFORMATION.
9.1. DEFINITION OF CONFIDENTIAL INFORMATION. Confidential Information
shall mean any technical or business information furnished by the Disclosing
Party to the Receiving Party in connection with this Agreement and specifically
designated as confidential. Such
- ---------------
*Confidential Treatment has been requested for the marked portion.
(16)
<PAGE> 22
Confidential Information may include, without limitation, the identity of a
chemical compound, the use of a chemical compound, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, research and development activities, product and
marketing plans, and customer and supplier information.
9.2. DESIGNATION OF CONFIDENTIAL INFORMATION. Confidential Information
that is disclosed in writing shall be marked with a legend indicating its
confidential status. Confidential Information that is disclosed orally or
visually shall be documented in a written notice prepared by the Disclosing
Party and delivered to the Receiving Party within thirty (30) days of the date
of disclosure; such notice shall summarize the Confidential Information
disclosed to the Receiving Party and reference the time and place of disclosure.
9.3. OBLIGATIONS. The Receiving Party agrees that it shall:
(a) maintain all Confidential Information in strict confidence,
except that the Receiving Party may disclose or permit the disclosure of
any Confidential Information to its, and its Affiliates, directors,
officers, employees, consultants, and advisors who are obligated to
maintain the confidential nature of such Confidential Information and who
need to know such Confidential Information for the purposes set forth in
this Agreement;
(b) use all Confidential Information solely for the purposes set
forth in, or as permitted by, this Agreement; and
(c) allow its directors, officers, employees, consultants, and
advisors to reproduce the Confidential Information only to the extent
necessary to effect the purposes set forth in this Agreement, with all
such reproductions being considered Confidential Information.
9.4. EXCEPTIONS. The obligations of the Receiving Party under
Section 9.3 above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:
(a) was in the public domain prior to the time of its disclosure
under this Agreement;
(b) entered the public domain after the time of its disclosure
under this Agreement through means other than an unauthorized disclosure
resulting from an act or omission by the Receiving Party;
(c) was independently developed or discovered by the Receiving
Party without use of the Confidential Information;
(d) is or was disclosed to the Receiving Party at any time,
whether prior to or after the time of its disclosure under this
Agreement, by a third party having no fiduciary relationship with the
Disclosing Party and having no obligation of
(17)
<PAGE> 23
confidentiality to the Disclosing Party with respect to such Confidential
Information; or
(e) is required to be disclosed to comply with applicable laws or
regulations (such as disclosure to the FDA or the United States Patent
and Trademark Office or to their foreign equivalents), or to comply with
a court or administrative order, provided that the Disclosing Party
receives prior written notice of such disclosure and that the Receiving
Party takes all reasonable and lawful actions to obtain confidential
treatment for such disclosure and, if possible, to minimize the extent of
such disclosure.
9.5. RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this
Agreement, at the request of the Disclosing Party, the Receiving Party shall
destroy or return to the Disclosing Party all originals, copies, and summaries
of documents, materials, and other tangible manifestations of Confidential
Information in the possession or control of the Receiving Party, except that the
Receiving Party may retain one copy of the Confidential Information in the
possession of its legal counsel (for ArQule) and its Legal Department (for
Sankyo) solely for the purpose of monitoring its obligations under this
Agreement.
9.6. SURVIVAL OF OBLIGATIONS. The obligations set forth in this Article
shall remain in effect for a period of * years after termination of this
Agreement, except that the obligations of the Receiving Party to destroy or
return Confidential Information to the Disclosing Party shall survive until
fulfilled.
10. REPRESENTATIONS AND WARRANTIES.
10.1. AUTHORIZATION. Each Party represents and warrants to the other
that it has the legal right and power to enter into this Agreement, to extend
the rights and licenses granted to the other in this Agreement, and to fully
perform its obligations hereunder, and that the performance of such obligations
will not conflict with its charter documents or any agreements, contracts, or
other arrangements to which it is a Party.
11. INDEMNIFICATION AND INSURANCE.
11.1. SANKYO INDEMNITY OBLIGATIONS. Sankyo agrees to defend, indemnify
and hold ArQule, its Affiliates and their respective directors, officers,
employees and agents harmless from all costs, judgments, liabilities and damages
assessed by a court of competent jurisdiction arising from claims asserted by a
third party against ArQule, its Affiliates or their respective directors,
employees or agents as a result of: (a) actual or asserted violations of any
applicable law or regulation by Sankyo, its Affiliates, sublicensees or third
party manufacturers by virtue of which the Royalty-Bearing Products
manufactured, distributed or sold shall be alleged or determined to be
adulterated, misbranded, mislabeled or otherwise
- ---------------
*Confidential Treatment has been requested for the marked portion.
(18)
<PAGE> 24
not in compliance with such applicable law or regulation; (b) claims for bodily
injury, death or property damage attributable to the manufacture, distribution,
sale or use of the Royalty-Bearing Products by Sankyo, its Affiliates,
sublicensees or third party manufacturers; or (c) a recall ordered by a
governmental agency, or required by a confirmed failure, of Royalty-Bearing
Products manufactured, distributed, or sold by Sankyo, its Affiliates,
sublicensees or third party manufacturers as reasonably determined by the
Parties hereto.
11.2. PROCEDURE. In the event that ArQule or any of its Affiliates or
their respective employees or agents (the "Indemnitee") intends to claim
indemnification under this Article 11, such Party shall promptly notify Sankyo
of any loss, claim, damage, liability or action in respect of which the
Indemnitee intends to claim such indemnification, and Sankyo shall assume the
defense thereof with counsel mutually satisfactory to the Parties; provided,
however, that an Indemnitee shall have the right to retain its own counsel, with
the fees and expenses to be paid by Sankyo, if representation of such Indemnitee
by the counsel retained by Sankyo would be inappropriate due to actual or
potential differing interests between such Indemnitee and any other Party
represented by such counsel in such proceedings. The indemnity agreement in this
Article 11 shall not apply to amounts paid in settlement of any loss, claim,
damage, liability or action if such settlement is effected without the consent
of Sankyo, which consent shall not be withheld unreasonably. The failure to
deliver notice to Sankyo within a reasonable time after the commencement of any
such action, if prejudicial to its ability to defend such action, shall relieve
Sankyo of any liability to the Indemnitee under this Article 11, but the
omission so to deliver notice to Sankyo will not relieve it of any liability
that it may have to any Indemnitee otherwise than under this Article 11. The
Indemnitee under this Article 11, its employees and agents, shall cooperate
fully with Sankyo and its legal representatives in the investigation of any
action, claim or liability covered by this indemnification.
11.3. INSURANCE. Sankyo shall maintain appropriate product liability
insurance with respect to development, manufacture and sales of the
Royalty-Bearing Products by Sankyo in such amount as Sankyo customarily
maintains with respect to sales of its other products. Sankyo shall each
maintain such insurance for so long as it continues to manufacture or sell the
Royalty-Bearing Products, and thereafter for so long as Sankyo maintains
insurance for itself covering such manufacture or sales.
12. TERM AND TERMINATION.
12.1. TERM. This Agreement shall commence on the Effective Date and
shall remain in effect until the expiration of the last Royalty Period covering
any Royalty-Bearing Product, unless earlier terminated as provided in this
Article 12.
12.2. BREACH OF PAYMENT OBLIGATIONS. In the event that Sankyo fails to
make timely payment of any amounts due to ArQule under this Agreement, ArQule
may terminate this
(19)
<PAGE> 25
Agreement upon * days written notice to Sankyo, unless Sankyo pays all past-due
amounts within such *day notice period.
12.3. MATERIAL BREACH. In the event that either Party commits a material
breach of any of its obligations under this Agreement (other than as provided in
Section 12.2) and such Party fails (i) to remedy that breach within * days after
receiving written notice thereof from the other Party or (ii) to commence
dispute resolution pursuant to Section 13.5, within * days after receiving
written notice of that breach from the other Party, the other Party may
immediately terminate this Agreement upon written notice to the breaching Party.
12.4. EFFECT OF TERMINATION. Termination of this Agreement shall not
relieve the Parties of any obligation accruing prior to such termination. The
provisions of Article 5, Article 6, Article 7 and Article 8 (with respect only
to milestone payments and royalties accrued at the time of termination but not
yet paid), Article 9, Article 11 and Article 13 shall survive the expiration or
termination of this Agreement.
13. MISCELLANEOUS.
13.1. RELATIONSHIP OF PARTIES. Nothing in this Agreement is intended or
shall be deemed to constitute a partnership, agency, employer-employee or joint
venture relationship between the Parties. No Party shall incur any debts or make
any commitments for the other, except to the extent, if at all, specifically
provided therein.
13.2. PUBLICITY. Neither Party shall use the name of the other Party or
reveal the terms of this Agreement in any publicity or advertising without the
prior written approval of the other Party, except that (i) either Party may use
the text of a written statement approved in advance by both Parties without
further approval, (ii) either Party shall have the right to identify the other
Party and to disclose the terms of this Agreement as required by applicable
securities laws or other applicable law or regulation, and (iii) either Party
may use the name of the other Party and reveal the existence of this Agreement.
13.3. NON-SOLICITATION. During the term of this Agreement and thereafter
for a period of * years, each Party agrees not to seek to persuade or induce any
employee of the other Party to discontinue his or her employment with that Party
in order to become employed by or associated with any business, enterprise, or
effort that is associated with its own business.
13.4. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
13.5. DISPUTE RESOLUTION PROCEDURES.
(a) The Parties hereby agree that they will attempt in good
faith to resolve any controversy, claim or dispute ("Dispute") arising
out of or relating to this
- ------------
*Confidential Treatment has been requested for the marked portion.
(20)
<PAGE> 26
Agreement promptly by negotiations. Any such Dispute which is not settled
by the Parties within fifteen (15) days after notice of such Dispute is
given by one Party to the other in writing shall be referred to a senior
executive of ArQule and the Director of the Research Institute of Sankyo
who are authorized to settle such Disputes on behalf of their respective
companies ("Senior Executives"). The Senior Executives will meet for
negotiations within fifteen (15) days of the end of the 15 day
negotiation period referred to above, at a time and place mutually
acceptable to both Senior Executives. If the Dispute has not been
resolved within thirty (30) days after the end of the 15 day negotiation
period referred to above (which period may be extended by mutual
agreement), subject to any rights to injunctive relief and unless
otherwise specifically provided for herein, any Dispute will be settled
first by non-binding mediation and thereafter by arbitration as described
in subsections (b) and (c) below.
(b) Any Dispute which is not resolved by the Parties within
the time period described in subsection (a) shall be submitted to an
alternative dispute resolution process ("ADR"). Within five (5) business
days after the expiration of the thirty (30) day period set forth in
subsection (a), each Party shall select for itself a representative with
the authority to bind such Party and shall notify the other Party in
writing of the name and title of such representative. Within ten (10)
business days after the date of delivery of such notice, the
representatives shall schedule a date for engaging in non-binding ADR
with a neutral mediator or dispute resolution firm mutually acceptable to
both representatives. Any such mediation shall be held in Boston,
Massachusetts. Thereafter, the representatives of the Parties shall
engage in good faith in an ADR process under the auspices of such
individual or firm. If the representatives of the Parties have not been
able to resolve the Dispute within thirty (30) business days after the
conclusion of the ADR process, or if the representatives of the Parties
fail to schedule a date for engaging in non-binding ADR within the ten
(10) day period set forth above, the Dispute shall be settled by binding
arbitration as set forth in subsection (c) below. If the representatives
of the Parties resolve the dispute within the thirty (30) day period set
forth above, then such resolution shall be binding upon the Parties. If
either Party fails to abide by such resolution, the other Party can
immediately refer the matter to arbitration under Section 13.5(c).
(c) If the Parties have not been able to resolve the
Dispute as provided in subsections (a) and (b) above, the Dispute shall
be finally settled by binding arbitration. Any arbitration hereunder
shall be conducted under rules of the American Arbitration Association.
The arbitration shall be conducted before three arbitrators chosen
according to the following procedure: each of the Parties shall appoint
one arbitrator and the two so nominated shall choose the third. If the
arbitrators chosen by the Parties cannot agree on the choice of the third
arbitrator within a period of thirty (30) days after their appointment,
then the third arbitrator shall be appointed by the Court of Arbitration
of the American Arbitration Association. Any such arbitration shall be
held in Boston, Massachusetts. The arbitrators shall have the authority
to grant specific performance, and to allocate between the Parties the
costs of arbitration in such equitable manner as they determine. The
arbitral award (i) shall be final and binding upon the Parties; and (ii)
may be entered in any court of competent jurisdiction.
(21)
<PAGE> 27
(d) Nothing contained in this Section or any other
provisions of this Agreement shall be construed to limit or preclude a
Party from bringing any action in any court of competent jurisdiction for
injunctive or other provisional relief to compel the other Party to
comply with its obligations hereunder before or during the pendency of
mediation or arbitration proceedings. The Parties hereby irrevocably
consent to submit to the jurisdiction of the courts of the Commonwealth
of Massachusetts and/or any other court having jurisdiction for this
purpose.
13.6. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
13.7. HEADINGS. All headings in this Agreement are for convenience only
and shall not affect the meaning of any provision hereof.
13.8. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the Parties, their Affiliates, and their respective lawful
successors and assigns.
13.9. ASSIGNMENT. This Agreement may not be assigned by either Party
without the prior written consent of the other Party, except that either Party
may assign this Agreement to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement.
13.10. NOTICES. All notices, requests, demands and other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized international overnight courier, confirmed
facsimile transmission, or registered or certified mail, return receipt
requested, postage prepaid to the following addresses or facsimile numbers:
If to Sankyo: If to ArQule:
Sankyo Co., LTD ArQule, Inc.
2-58, Hiromachi 1-Chome 200 Boston Avenue, Suite 3600
Shinagawa-ku Medford, MA 02155
Tokyo 140 Japan Attention: Eric B. Gordon
Attention: Hiroshi Fukumi
Tel: 03 3492 3131 Tel: (617) 395-4100
Fax: 03 5436 8561 Fax: (617) 395-1225
with a copy to:
Palmer & Dodge
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton, Esquire
Tel: (617) 573-0327
Fax: (617) 227-4420
(22)
<PAGE> 28
Either Party may change its designated address and facsimile number by notice to
the other Party in the manner provided in this Section.
13.11. AMENDMENT AND WAIVER. This Agreement may be amended,
supplemented, or otherwise modified only by means of a written instrument signed
by both Parties. Any waiver of any rights or failure to act in a specific
instance shall relate only to such instance and shall not be construed as an
agreement to waive any rights or fail to act in any other instance, whether or
not similar.
13.12. SEVERABILITY. In the event that any provision of this Agreement
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and the Parties shall negotiate in good faith to modify the Agreement to
preserve (to the extent possible) their original intent.
13.13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Parties with respect to the subject matter hereof and supersedes all
prior agreements or understandings between the Parties relating to the subject
matter hereof.
13.14. FORCE MAJEURE. Neither Party shall be held liable or responsible
to the other Party, nor be deemed to be in breach of this Agreement, for failure
or delay in fulfilling or performing any provisions of this Agreement when such
failure or delay is caused by or results from any cause whatsoever outside the
reasonable control of the Party concerned including, but not limited to, fire,
explosion, breakdown of plant, strike, lock-out, labor disputes, casualty or
accident, lack or failure of transportation facilities, flood, lack or failure
of sources of supply or of labor, raw materials or energy, civil commotion,
embargo, any law, regulation, decision, demand or requirement of any national or
local government or authority. The Party claiming relief shall, without delay,
notify the other Party by registered airmail or by telefax of the interruption
and cessation thereof and shall use its best efforts to remedy the effects of
such hindrance with all reasonable dispatch. The onus of proving that any such
Force Majeure event exists shall rest upon the Party so asserting. During the
period that one Party is prevented from performing its obligations under this
Agreement due to a Force Majeure event, the other Party may, in its sole
discretion, suspend any obligations that relate thereto. Upon cessation of such
Force Majeure event the Parties hereto shall use their best efforts to make up
for any suspended obligations. If such Force Majeure event is anticipated to
continue, or has existed for nine (9) consecutive months or more, this Agreement
may be forthwith terminated by either Party by registered airmail or by telefax.
In case of such termination the terminating Party will not be required to pay to
the other Party any indemnity whatsoever.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
(23)
<PAGE> 29
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement as a sealed instrument effective as of the date first above written.
SANKYO CO., LTD ARQULE, INC.
By: /s/ Tetsuo Hiraoka By: /s/ Eric B. Gordon
-------------------------- --------------------------------
Name: Tetsuo Hiraoka, Ph.D. Name: Eric B. Gordon
Title: Member of the Board and Title: President and Chief Executive
Director of Research
(24)
<PAGE> 30
EXHIBIT A
RESEARCH PLAN
[THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
<PAGE> 1
EXHIBIT 10.30
AMENDMENT NO. 3 TO RESEARCH & DEVELOPMENT AND
LICENSE AGREEMENT
This Amendment No. 3 to Research & Development and License Agreement,
dated as of December 23, 1997, is between Abbott Laboratories, an Illinois
corporation having a principal place of business at 100 Abbott Park Road, Abbott
Park, Illinois ("Abbott") and ArQule, Inc., a Delaware corporation having a
principal place of business at 200 Boston Avenue, Suite 1000, Medford,
Massachusetts ("ArQule").
RECITALS
WHEREAS, Abbot and ArQule have entered into that certain Research &
Development and License Agreement, dated as of June 16, 1995, as amended by
Amendment No. 1 dated August 13, 1996 and Amendment No. 2 dated December 24,
1996 (as so amended, the "License Agreement"), pursuant to which ArQule agreed,
among other things, to perform certain contract research activities and to
provide Abbott with certain ArQule Core Compounds and Abbott Derivative
Compounds (these and other capitalized terms used herein without definition
shall have the respective meanings provided in the License Agreement) for
screening in consideration of the payment by Abbott to ArQule of certain
technology access fees, license fees, milestone and royalty payments, and
research funding payments on the terms and subject to the conditions set forth
in the License Agreement; and
WHEREAS, ArQule and Abbott desire to further amend the License Agreement
to amend the Research Term thereof and to provide for additional financial terms
in connection therewith, and to further provide for delivery of additional
ArQule Core Compounds to Abbott.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
conditions contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. R & D PROGRAM. Abbott has previously extended the R & D Program set forth
in Article 2 beyond the initial Research Term, which ended June 15, 1997. The
parties hereby agree to amend the R & D Program, with certain modifications, as
follows:
(i) The research and development services provided by ArQule to Abbott
pursuant to Section 2.1 of the License Agreement shall continue
until *, unless extended pursuant to paragraph (iii) below.
(ii) Abbott shall by December 31, 1997 pay ArQule additional research
and development funding of *, which funding will support the
research and development services provided by ArQule to Abbott
pursuant to Section 2.1 of the License Agreement through *.
*Confidential Treatment has been requested for the marked portion.
<PAGE> 2
(iii) Abbott may, at its option, extend the R & D Program for the *
period commencing on * and concluding on *, upon written notice to
ArQule which is received by ArQule not later than *. The research
and development funding for such * period shall be *, payable in
two equal installments of * with the first installment due on or
before * and the second installment due on or before *.
(iv) The parties acknowledge and agreement that the research and
development funding set forth in this Article is calculated based
on a rate of * per ArQule FTE per calendar year (the "FTE Rate").
ArQule shall have no obligation to perform services in the R & D
Program without payment by Abbott at the FTE Rate.
(v) This Article shall supersede Sections 2.3, 2.4(c), and 2.4(d) of
the License Agreement.
2. INCREASE IN DELIVERY OF ARQULE ARRAYS. ArQule hereby agrees to increase
the number of ArQule Core Compounds that ArQule will deliver to Abbott during
the Initial Contract Extension Period (through March 16, 1999) by * ArQule Core
Compounds, without additional charge, such that Abbott will receive a total of *
ArQule Core Compounds within ArQule Arrays having not less than * different
Chemical Themes (with a minimum of * ArQule Core Compounds and a maximum of *
ArQule Core Compounds for each Chemical Theme).
3. PAYMENT OF TECHNOLOGY ACCESS FEE. Abbott agrees to pay ArQule the amount
of * on or before December 31, 1997, which amount represents the * installment
of the technology access fee for the Initial Contract Extension Period which is
payable under Section 2.4(b) of the License Agreement. This Article shall
supersede Section 2.4(b) of the License Agreement.
4. MISCELLANEOUS.
4.1 GOVERNING LAW. This Amendment shall be governed in all respects by
the laws of the State of Illinois without giving effect to principles of
conflicts of law thereunder.
4.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, permitted assigns, heirs, executors, and administrators of
the parties hereto.
4.3 LICENSE AGREEMENT. Except as specifically provided herein, the
License Agreement as previously executed and amended by Amendments No. 1 and 2
shall remain in full force and effect.
*Confidential Treatment has been requested for the marked portion.
<PAGE> 3
4.4 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one in the same instrument.
IN WITNESS WHEREOF, the parties have duly executed this Amendment No. 3
as of the date first written above.
ABBOTT LABORATORIES ARQULE, INC.
By: /s/ Andre G. Pernet By: /s/ Eric B. Gordon
----------------------------------- -------------------------
Name: Andre G. Pernet, Ph.D. Eric B. Gordon
Title: Vice President, President and Chief Executive
Pharmaceutical Research and Development Officer
<PAGE> 1
EXHIBIT 11.1
ARQULE, INC.
STATEMENT RE COMPUTATION OF PER SHARE NET INCOME (LOSS) PER SHARE
Basic Net Income (Loss) Per Share
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------------ ------------- -----------
<S> <C> <C> <C>
Net income (loss) $(2,252,000) $(2,993,000) $ 291,000
----------- ----------- -----------
Weighted average shares outstanding:
Common Stock 599,000 2,430,000 11,337,000
Weighted average common shares outstanding 599,000 2,430,000 11,337,000
----------- ----------- -----------
Basic net income (loss) per share $ (3.76) $ (1.23) $ 0.03
----------- ----------- -----------
</TABLE>
Diluted Net Income (Loss) Per Share
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $(2,252,000) $(2,993,000) $ 291,000
Weighted average shares outstanding:
Common Stock 599,000 2,430,000 11,337,000
Stock option common stock equivalents -- -- 1,057,000
----------- ----------- -----------
Weighted average common shares and equivalents
outstanding 599,000 2,430,000 12,394,000
----------- ----------- -----------
Diluted net income (loss) per share $ (3.76) $ (1.23) $ 0.02
----------- ----------- -----------
</TABLE>
39
<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 (File No. 333-19469) pertaining to the 1996 Employee Stock
Purchase Plan, the Registration Statement on Form S-8 (File No. 333-25369)
pertaining to the 1996 Director Stock Option Plan and the Registration Statement
on Form S-8 (File No. 333-25371) pertaining to the Amended and Restated 1994
Equity Incentive Plan of ArQule, Inc., of our report dated February 9, 1998,
appearing on page 21 on this Form 10-K.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 13, 1998
40
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 15,137
<SECURITIES> 34,145
<RECEIVABLES> 3,133
<ALLOWANCES> 0
<INVENTORY> 953
<CURRENT-ASSETS> 53,918
<PP&E> 17,102
<DEPRECIATION> 4,448
<TOTAL-ASSETS> 66,925
<CURRENT-LIABILITIES> 7,895
<BONDS> 0
0
0
<COMMON> 119
<OTHER-SE> 57,221
<TOTAL-LIABILITY-AND-EQUITY> 66,925
<SALES> 17,420
<TOTAL-REVENUES> 17,420
<CGS> 10,218
<TOTAL-COSTS> 19,592
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223
<INCOME-PRETAX> 291
<INCOME-TAX> 0
<INCOME-CONTINUING> 291
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 291
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ARQULE, INC.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
MARCH 1998
From time to time, ArQule through its management may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning anticipated collaborative agreements, projected plans,
performance, product development and commercialization as well as other
estimates relating to future operations. Forward-looking statements may be in
reports filed under the Securities Exchange Act of 1934, as amended, in press
releases or in oral statements made with the approval of an authorized executive
officer. The words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, as enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events which may cause management to re-evaluate such forward-looking
statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.
Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability. The Company has had a limited operating history. For the
years ended December 31, 1995 and 1996, the Company had net losses of
approximately $2.3 million and $3.0 million, respectively. As of December 31,
1997, the Company had net income of approximately $291,000. The Company's
expansion of its operations and enhancements to its technology will result in
significant expenses over the next several years that may not be offset by
significant revenues. The Company expects that revenue for the foreseeable
future and the Company's ability to achieve profitability will be dependent upon
the ability of the Company to enter into additional collaborative arrangements
with customers. To date, all revenue received by the Company has been derived
from up-front fees, payments for compound deliveries, and research and
development funding paid pursuant to collaborative agreements with the Company's
collaborative partners. The Company has not realized any revenue from the
achievement of milestones or royalties from the discovery, development or sale
of a commercial product by one of the Company's collaborative partners, and
there can be no assurance that any such revenue will be realized. The Company is
unable to determine whether, and for how long, it will continue to be
profitable.
Unproven Business Strategy. The Company's modular building block approach to
chemistry has not yet resulted in the commercialization of a product. The
Company uses chemical building blocks for the purpose of rapidly identifying,
optimizing and obtaining proprietary rights to as many compounds with commercial
potential as possible. The pricing and nature of the Company's programs are such
that there may only be a limited number of companies that are potential
customers for such programs. The Company's ability to succeed is dependent upon
the acceptance by potential customers of the Company's approach to chemistry and
compound analysis as an effective tool in the discovery and development of
compounds with commercial potential. Due to the highly proprietary nature of the
activities being conducted, the central importance of these activities to their
product discovery and development efforts, and the desire to obtain maximum
patent and other proprietary protection on the results of their internal
programs, pharmaceutical, biotechnology and agrochemical companies have
historically conducted lead compound identification and optimization within
their own research departments. There can be no assurance that the Company's
present or future collaborators will not pursue existing or alternative
technology, either independently or in collaboration with others, in preference
to that of the
42
<PAGE> 2
Company or that the Company will be able to attract future collaborators on
acceptable terms or develop a sustainable, profitable business.
Competition and the Risk of Obsolescence of Technology. Competition among
the many organizations actively attempting to identify and optimize compounds
for development in the pharmaceutical industry and in other areas is intense.
ArQule competes with the research departments of pharmaceutical companies,
biotechnology companies, agrochemical companies, combinatorial chemistry
companies and research and academic institutions. Many of these competitors have
greater financial and human resources, and more experience in research and
development, than the Company. Historically, pharmaceutical and agrochemical
companies have maintained close control over their research activities,
including the synthesis, screening and optimization of chemical compounds. Many
of these companies, which represent the greatest potential market for ArQule's
products and services, have developed or are developing internal combinatorial
chemistry and other methodologies to improve productivity, including major
investments in robotics technology to permit the automated parallel synthesis of
compounds. In addition, ArQule competes with biotechnology and combinatorial
chemistry companies that offer a range of products and services. Academic
institutions, governmental agencies and other research organizations are also
conducting research in areas in which the Company is working, either on their
own or in collaboration with others. The Company anticipates that it will face
increased competition in the future as new companies enter the market and
advanced technologies, including more sophisticated information technologies,
become available. The Company's technological approaches may be rendered
obsolete or uneconomical by advances in existing technological approaches or the
development of different approaches by one or more of the Company's competitors.
Limited Sales and Marketing Experience; Expansion of Sales Activities. To
date, the Company has sold its products to its collaborative partners primarily
through the efforts of its senior management. The Company's senior management
has limited experience in marketing products similar to those of the Company. In
order to achieve significant long-term growth in revenue and its overall
strategic goals, the Company intends to hire several dedicated sales and
marketing personnel. There can be no assurance that the Company will be able to
achieve anticipated expansion of its business, attract a significant number of
new collaborative partners as customers or build an efficient and effective
sales and marketing organization. In the event the Company is unable to achieve
any one or more of the foregoing goals, the Company's business, financial
condition and results of operations could be materially adversely affected. In
addition to the risks inherent in the Company's efforts to market its own
products, the Company's revenue from royalties and milestone payments from its
collaborative partners is substantially dependent upon the marketing efforts of
such collaborative partners as discussed below under "Dependence on Third
Parties."
Dependence on Third Parties. The Company's strategy for the development and
commercialization of its products and services involves the formation of
collaborative arrangements with third parties, initially pharmaceutical,
biotechnology and agrochemical companies. To date, the Company has entered into
numerous such arrangements. There can be no assurance that the Company's
existing collaborations will not be terminated under certain circumstances by
its collaborators and any such terminations could have a material adverse effect
on the Company. There can be no assurance that the Company will be able to
establish additional collaborative arrangements, that any such arrangements will
be on terms favorable to the Company, or that current or future collaborative
arrangements will ultimately be successful. Further, ArQule's receipt of revenue
from collaborative arrangements is affected by the timing of efforts expended by
third parties. The Company's products and services will result in commercialized
pharmaceutical and agrochemical products generating milestone payments and
royalties only after significant preclinical and clinical development efforts or
the completion of preliminary field trials, the receipt of the requisite
regulatory approvals, and the integration of manufacturing capabilities and
successful marketing efforts. With the exception of certain aspects of
preclinical drug development, the Company does not currently intend to perform
any of these activities. Therefore, the Company will be dependent upon the
expertise of, and dedication of sufficient resources by, third parties to
develop and commercialize products. Should a collaborative partner fail to
develop or commercialize a compound or product to which it has obtained rights
from the Company, the Company may not receive any future milestone payments or
royalties associated with such compound or product. Furthermore, there can be no
assurance that any such development or commercialization would be successful or
that disputes will not arise over the application of payment provisions to such
products. There can be no assurance that current or future collaborative
partners will not pursue alternative technologies or develop alternative
products, either on their own or in collaboration with others, including the
Company's competitors, as a means for developing alternative solutions in the
areas targeted by collaborative arrangements with the Company.
Dependence on Key Employees. The Company is highly dependent on the
principal members of its scientific and management staff, in particular, Dr.
Joseph C. Hogan, Jr. and Dr. David L. Coffen. The loss of one or more members of
its staff could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
person life insurance on the life of any employee. The Company's future success
will also depend, in part, on its ability to identify, hire and retain
additional qualified personnel, including individuals with doctorates in basic
sciences. There is intense competition for such personnel in the areas of the
Company's activities, and there can be no assurance that the Company will be
able to continue to
43
<PAGE> 3
attract and retain personnel with the advanced technical qualifications
necessary for the development of the Company's business. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
Future Capital Needs; Uncertainty of Additional Funding. The Company may be
required to raise additional capital over a period of several years in order to
conduct its operations. Such capital may be raised through additional public or
private equity financings, as well as collaborative arrangements, borrowings and
other available sources. The Company's capital requirements depend on numerous
factors, including entering into additional collaborative arrangements,
competing technological and market developments, changes in the Company's
existing collaborative relationships, the cost of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights, the purchase
of additional capital equipment, the progress of the Company's drug discovery
programs and the progress of the Company's collaborators' milestone and
royalty-producing activities. The Company does not currently plan to
independently develop, manufacture or market any products it discovers. Should
the Company choose to develop any such products, however, the Company will
require substantial funds to conduct research and development, preclinical
studies, clinical trials and field trials and to market any products that may be
developed. There can be no assurance that additional funding, if necessary, will
be available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds by entering into arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies,
product candidates, products or potential markets. To the extent that additional
capital is raised through the sale of equity or securities convertible into
equity, the issuance of such securities could result in dilution to the
Company's existing stockholders.
Dependence on Scale Up and Management of Growth. The Company's success will
depend on the expansion of its operations and the management of these expanded
operations. To be cost-effective in its delivery of services and products, the
Company must enhance productivity through further automation of its processes
and improvements to its technology. The Company also must successfully structure
and manage multiple additional collaborative relationships. There can be no
assurance that the Company will be successful in its engineering efforts to
further automate its processes or that the Company will be successful in
managing and meeting the staffing requirements of additional collaborative
relationships. Failure to achieve any of these goals could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Dependence on Patents and Proprietary Rights. ArQule has three issued
utility patents, one issued design patent in the United States and has filed a
number of patent applications. There can be no assurance that patent
applications filed by ArQule will result in patents being issued, that the
claims of such patents will offer significant protection of the Company's
technology, or that any patents issued to or licensed by ArQule will not be
challenged, narrowed, invalidated or circumvented. The Company believes its
success will depend in large part on its ability, and the ability of its
licensees and its licensors, to obtain patents for its technologies and the
compounds and other products, if any, resulting from the application of such
technologies, to defend such patents once obtained and to maintain trade
secrets, both in the United States and in foreign countries. In the absence of
such patents, the Company may be unable to prevent others from utilizing the
Company's technology and may need to rely upon expertise developed during
pre-commercial implementation of the technology, which may not provide the same
level of competitive advantages. The commercial success of the Company will also
depend upon avoiding the infringement of patents issued to others and
maintaining the technology licenses upon which certain of the Company's current
products are, or any future products under development might be, based.
Some of the Company's competitors have, or are affiliated with companies
having, substantially greater resources than the Company, and such competitors
may be able to sustain the costs of complex patent litigation to a greater
degree and for longer periods of time than the Company. Uncertainties resulting
from the initiation and continuation of any patent or related litigation could
have a material adverse effect on the Company's ability to compete in the
marketplace pending resolution of the disputed matters. To date, three utility
patents and one design patent have been issued to the Company. There can be no
assurance that other patents will issue to the Company or its licensors as a
result of their pending applications or that, if issued, such patents will
contain claims sufficiently broad to afford protection against competitors with
similar technology. Moreover, there can be no assurance that the Company or its
customers will be able to obtain significant patent protection for compounds or
products based upon the Company's technology. There can be no assurance that any
patents issued to the Company or its collaborative partners, or for which the
Company has license rights, will not be challenged, narrowed, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. Litigation, which could result in substantial cost to
the Company, may be necessary to enforce the Company's patent and license
rights, to enforce or defend an infringement claim, or to determine the scope
and validity of others' proprietary rights. If competitors of the Company
prepare and file patent applications in the United States or abroad that claim
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of invention, or opposition proceedings in a foreign
patent office, both of which could result in substantial cost to the Company,
even if the outcome is favorable. An adverse outcome could subject the Company
to
44
<PAGE> 4
significant liabilities to third parties, and require the Company to cease
using the technology or to license disputed rights from third parties, which
licenses may not be available at reasonable cost.
A number of pharmaceutical, biotechnology and agrochemical companies, as
well as research and academic institutions, have developed technologies, filed
patent applications or received patents on various technologies that may be
related to the Company's business. Some of these technologies, applications or
patents may conflict with the Company's technologies or patent applications.
Such conflicts could also limit the scope of the claim of any patents that the
Company may be able to obtain, or result in the rejection of the Company's
patent applications. The Company currently has certain licenses to patents and
patent applications from third parties, and in the future may require additional
licenses from other parties. There can be no assurance that: (i) such licenses
will be obtainable on commercially reasonable terms, if at all; (ii) the patents
underlying such licenses will be valid and enforceable; (iii) patents having
commercially valuable claims will issue from any licensed patent applications;
or (iv) the proprietary nature of any other technology underlying such licenses
will remain proprietary.
The Company relies substantially on certain technologies that are not
patentable or proprietary and are therefore available to the Company's
competitors. The Company also relies on certain proprietary trade secrets and
know-how that are not patentable. Although the Company has taken steps to
protect its unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
collaborators, there can be no assurance that (i) the agreements will not be
breached; (ii) the Company would have adequate remedies for any breach; or (iii)
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.
Potential Liability Regarding Hazardous Materials. The research and
development processes of the Company involve the controlled use of hazardous
materials. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. 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 damages that result
and any such liability could exceed the resources of the Company. In addition,
there can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
Government Regulation. Although the manufacture, transportation and storage
of the Company's products are subject to the laws and regulations regarding
hazardous materials discussed in the preceding risk factor, the sale of the
Company's products is not subject to significant government regulations.
However, the Company's future profitability is dependent on the sales of
pharmaceuticals and other products developed from the Company's compounds by its
customers and collaborators. Regulation by governmental entities in the United
States and other countries may be a significant factor in the production and
marketing of products that may be developed by a customer or collaborative
partner of the Company. The nature and the extent to which such regulation may
apply to the Company's customers or its collaborative partners will vary
depending on the nature of any such products.
Virtually all pharmaceutical products developed by the Company's customers
or its collaborative partner will require regulatory approval by governmental
agencies prior to commercialization. In particular, human pharmaceutical
products are subject to rigorous preclinical and clinical testing and other
approval procedures by the U.S. Food and Drug Administration (the "FDA") and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such pharmaceutical products.
The process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources. Generally, in order to gain
FDA approval, a company first must conduct preclinical studies in the laboratory
and in animal models to gain preliminary information on a compound's efficacy
and to identify any safety problems. The results of these studies are submitted
as a part of an Investigational New Drug application ("IND") that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, the Company or its customers or its
collaborative partners will be required to sponsor and file an IND and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA approval of any such
products. Clinical trials are normally done in three phases and generally take
two to five years, but may take longer, to complete. After completion of
clinical trials of a new product, FDA and foreign regulatory authority marketing
approval must be obtained. If the product is classified as a new drug, a New
Drug Application ("NDA") must be filed and approved before commercial marketing
of the drug. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. NDAs submitted to the FDA can take several years to
obtain approval. Even if FDA regulatory clearances are obtained, a marketed
product is subject to continual review, and later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions. For marketing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The
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requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
Fertilizers, pesticides and other agrochemical products sold by the
Company's collaborators will be subject to rigorous testing and approval
processes by the U.S. Environmental Protection Agency and similar regulatory
authorities in certain states and in other countries. The process of obtaining
these approvals can be time consuming and costly. There can be no assurance that
such approvals will be granted on a timely basis.
During the first quarter of the Company's fiscal year ended December 31,
1997 and prior to the Company filing a registration statement on Form S-8 for
option exercises under its Amended and Restated 1994 Equity Incentive Plan (the
"Plan"), options to purchase 34,375 shares of Common Stock were exercised at
$0.20 per share pursuant to Rule 701 of the Securities Act of 1933, as amended.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development of
the business.
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