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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, 1998 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 OF (I.R.S. EMPLOYER
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 8, 1999 was: $53,649,327.
There were 12,505,052 shares of the registrant's Common Stock outstanding
as of March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the Registrant's 1999 Annual
Meeting of Shareholders to be held on May 27, 1999, 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, 1998, 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 eight companies in the
pharmaceutical, agrochemical, and bioseparations industries, 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,
bioseparations 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
demonstrates pharmacological efficacy, lack of toxicity, potency, selectivity
and other desirable characteristics
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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.
- 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
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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.
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
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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 compounds
against multiple biological targets without having to obtain additional
samples from the Company.
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- 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 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.
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- 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 40 to 50 Mapping Array compound sets, on an annual basis, each
containing between 2,000 and 10,000 individual compounds for a minimum aggregate
of 200,000 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. Typically, 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 life sciences, 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 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
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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. In August, 1998, the Company
expanded its collaboration agreement with Amersham. Under the expanded
collaboration, the parties will jointly develop and commercialize
bioseparations products for industrial, life science and research
applications.
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
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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 1998. Abbott has paid 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"). The Roche Bioscience
Agreement was amended in September 1998 and will continue through March
1999. Under the revised collaboration, ArQule will provide Roche Bioscience
with proprietary screening libraries while continuing lead optimization on
a number of Roche compounds. 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.
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 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
8
<PAGE> 10
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 paid in June 1998. Wyeth-Ayerst will make further
payments to ArQule 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 Sets and for
achieved milestones. In addition, ArQule will be entitled to royalties from
sales of any products emanating from this collaboration.
Johnson and Johnson. In December, 1998, the Company entered into a
collaborative agreement with R.W. Johnson Pharmaceutical Research
Institute, a division of Johnson & Johnson, Inc. ("R.W. Johnson"), pursuant
to which R.W. Johnson subscribed to the Company's Mapping Array Program.
Absent early termination, the Company will receive a minimum of $8.1
million over this four year period. Payments will be made to ArQule for
delivery of the Mapping Array Program and for achieved milestones. In
addition, ArQule will be entitled to royalties from sales of any products
emanating from this collaboration.
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>
ACADIA Pharmaceuticals........................ Cell-Based Assays for reception
Aurora Biosciences, Inc. ..................... Mammalian Cell-Based Assays
Cubist Pharmaceuticals, Inc. ................. Infectious Diseases
DGI Biotechnologies........................... Chemokine/cytokine receptors
FibroGen...................................... Fibrotic Disorders
Genome Therapeutics........................... Antimicrobials
GenQuest...................................... Cancer
Genzyme Corp. ................................ Cancer
ICAgen, Inc. ................................. Ion Channel Receptors
Immunex Corp. ................................ Inflammatory Disorders
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
ViroPharma, Inc. ............................. RNA viruses
</TABLE>
9
<PAGE> 11
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 licensed 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 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 seven issued U.S. utility patents, one issued U.S. design
patent, four issued Australian patents, and 59 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
10
<PAGE> 12
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.
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.
11
<PAGE> 13
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 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
12
<PAGE> 14
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 8, 1999, ArQule employed 190 people of whom 71 have Ph.D.
degrees. Of these, 95 were engaged in operations, 78 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......................... 51 President, Chief Executive Officer and
Director*
Dr. Stephen A. Hill.................... 40 President, Chief Executive Officer and
Director*
Joseph C. Hogan, Jr., Ph.D. ........... 57 Chairman of the Board, Senior Vice President
of Research and Development, Chief
Scientific Officer, and Director
James R. Fitzgerald, Jr................ 54 Vice President, Chief Financial Officer and
Treasurer
Michael D. Rivard...................... 33 Vice President, General Counsel and
Assistant Secretary
John M. Sorvillo, Ph.D. ............... 44 Vice President, Business Development
Robert F. Tilton, Ph.D. ............... 42 Vice President, Information, Design and
Discovery
</TABLE>
- ---------------
* Mr. Gordon has resigned as President and Chief Executive Officer, effective
March 31, 1999. Dr. Hill has been appointed President and Chief Executive
Officer, effective April 1, 1999.
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.
Dr. Stephen A. Hill, B.M. B.Ch. M.A., F.R.C.S., has been appointed
President and Chief Executive Officer and elected as director of ArQule
effective April 1, 1999. From September 1989 to March 1999, Dr. Hill served in
various capacities in the United Kingdom and Switzerland for Roche Ltd., most
recently as the Head of Global Drug Development at F. Hoffmann -- La Roche, Ltd.
Dr. Hill graduated from Oxford University.
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.
13
<PAGE> 15
Michael D. Rivard joined the Company in February 1997 as Vice President,
Legal, General Counsel and Assistant Secretary. Prior to his position at the
Company, Mr. Rivard was Associate Counsel at the University of Massachusetts.
Mr. Rivard received his B.A. in Biochemistry from Bowdoin College and his J.D.
from the UCLA School of Law.
John M. Sorvillo, Ph.D., joined the Company in December 1995 as Vice
President of Business Development. Prior to joining the Company, Dr. Sorvillo
was Vice President and General Manager at Oncogene Science, Inc. Dr. Sorvillo
received his B.A. in Biology from the City University of New York, Hunter
College and his Ph.D. in Immunology from the New York University Medical Center.
Robert F. Tilton, Ph.D., joined the Company in August 1997 as Vice
President of Informatics, Design and Discovery. Prior to joining the Company,
Dr. Tilton was responsible for Structural Biology, Computational Design, and
Analytical Chemistry for the Pharmaceutical Division of Bayer Corp. -- the
United States branch of Bayer AG. Dr. Tilton received his B.A. in Biophysics
from UC Berkeley and his Ph.D. in Pharmaceutical Chemistry from UC San
Francisco.
ITEM 2. PROPERTIES
ArQule's research facilities include approximately 68,000 square feet of
laboratory and office space in Medford, Massachusetts pursuant to three lease
agreements, two of which expire on July 30, 2000 and one of which expires on
July 30, 2001, at which time the Company has an option to renew each of the
leases for an additional five year period. The Company also occupies
approximately 12,000 square feet of additional laboratory space in Waltham,
Massachusetts pursuant to a sublease agreement. This lease expires on November
30, 2000, at which time the Company has an option to extend for one additional
year. ArQule believes its facilities are adequate for its current operations. On
May 29, 1998, the Company reached agreement with Metro North Corporate Center
LLC to lease approximately 130,000 square feet of laboratory and office space
currently under construction in Woburn, Massachusetts pursuant to a fifteen-year
lease agreement, under which the Company has the option to extend the original
lease term by two additional five-year periods, the option to expand its
operations into approximately 130,000 square feet of additional laboratory and
office space to be constructed on a lot adjacent to the lot housing the
aforementioned facility, the option to purchase the entire project, the right of
first opportunity to purchase the entire project and the right of first refusal
with regard to purchase of the entire project.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market(R) under
the symbol "ARQL".
14
<PAGE> 16
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>
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............................................... 24.75 16.38
Second Quarter.............................................. 20.63 10.81
Third Quarter............................................... 13.25 4.22
Fourth Quarter.............................................. 7.38 4.50
1999
First Quarter (through March 8, 1999)....................... 7.50 5.13
</TABLE>
As of March 8, 1999, there were approximately 97 holders of record and
approximately 2,936 beneficial shareholders of the Company's Common Stock.
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 initial public offering (the "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
$34.5 million. 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 $3.0
million, including underwriting discounts and commissions of $2.4 million and
other expenses of $0.6 million. After such expenses, the Company's net proceeds
from the IPO were $31.5 million. The amount of net offering proceeds used by the
Company as of December 31, 1998 was as follows: approximately $19.3 million for
fixed asset additions and approximately $2.7 million for capital lease
obligations.
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to the years 1994, 1995, 1996,
1997 and 1998, have been derived from the Company's audited financial
statements, including the balance sheet as of December 31, 1997 and 1998 and the
related statements of operations and of cash flows for the three years ended
December 31, 1998 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 Annual Report on Form 10-K. The
historical results are
15
<PAGE> 17
not necessarily indicative of the results of operations to be expected in the
future (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ 85 $ 3,330 $ 7,255 $17,420 $22,193
Cost and expenses:
Cost of revenue........................ -- 1,644 4,739 10,218 14,036
Research and development............... 2,806 2,095 3,076 4,704 10,427
Marketing, general and
administrative...................... 1,346 1,557 2,850 4,670 6,387
------- ------- ------- ------- -------
Total costs and expenses....... 4,152 5,296 10,665 19,592 30,850
------- ------- ------- ------- -------
Loss from operations................... (4,067) (1,966) (3,410) (2,172) (8,657)
Interest income (expense), net......... (139) (286) 417 2,463 2,195
------- ------- ------- ------- -------
Net income (loss)...................... $(4,206) $(2,252) $(2,993) $ 291 $(6,462)
======= ======= ======= ======= =======
Basic net income (loss) per share(1)... $ (7.93) $ (1.32) $ .03 $ (0.54)
======= ======= ======= =======
Weighted average common shares
outstanding -- basic(1)............. 284 2,272 11,282 12,031
======= ======= ======= =======
Diluted net income (loss) per
share(1)............................ $ (7.93) $ (1.32) $ .02 $ (0.54)
======= ======= ======= =======
Weighted average common shares
outstanding -- diluted(1), (2)...... 284 2,272 12,394 12,031
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable...
securities.............................. $ 425 $ 7,791 $37,086 $49,282 $33,870
Working capital (deficit)............... (2,108) 5,074 31,440 46,023 35,546
Total assets............................ 2,321 10,190 43,509 66,925 60,480
Capital lease obligations, less
current portion....................... 962 911 1,728 1,213 306
Series B mandatorily redeemable
convertible preferred stock........... -- 6,888 -- -- --
Total stockholders' equity (deficit).... (1,203) (1,000) 34,621 57,340 54,267
</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 required retroactive restatement of previously reported income (loss)
per share calculations. As a result of adopting SFAS 128, certain
anti-dilutive pro-forma share amounts and unvested shares of common stock
subject to restriction agreements previously included in the computation of
the loss per share in 1995 and 1996 are no 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.
(2) 1997 includes common shares and common share equivalents.
16
<PAGE> 18
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 for generating leads 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 revenues to
date are primarily attributable to eight major corporate collaborations. Under
these collaborations, the Company has received payments of $47.4 million through
December 31, 1998 and has recognized $50.3 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 received one milestone and no 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 and screening services in exchange for joint ownership interests of
resulting drug candidates. These agreements have not yet yielded any significant
revenue for the Company.
Quarterly variations in financial performance may be expected as levels of
revenue are dependent on expanding or continuing existing collaborations,
additional corporate collaborations, and future milestone payments, which are
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, 1998 and 1997
Revenue. The Company's revenue for the year ended December 31, 1998
increased $4.8 million to $22.2 million from $17.4 million for the same period
in 1997. 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.
Cost of revenue. The Company's cost of revenue for the year ended December
31, 1998 increased $3.8 million to $14.0 million from $10.2 million for the same
period in 1997. 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, 1998 increased $5.7 million to $10.4
million from $4.7 million for the same period in 1997. These increases are the
result of the Company's expansion of its chemistry capabilities and related
proprietary technologies. The Company expects research and development spending
to increase over the next
17
<PAGE> 19
several years as the Company further expands its chemistry related technologies,
drug discovery and development programs.
Marketing, general and administrative expenses. The Company's marketing,
general and administrative expenses for the year ended December 31, 1998
increased $1.7 million to $6.4 million from $4.7 million for the same period in
1997. These increases are primarily associated with increased marketing and
business development activities, and higher levels of administrative support in
concert with the Company's growth during 1998. These expenses will likely
increase in the aggregate in future periods to support the projected growth of
the Company.
Net interest income. The Company's net interest income for the year ended
December 31, 1998 was $2.2 million, compared to $2.5 million for the same period
in 1997. Lower interest income in 1998 resulted primarily from the Company
utilizing cash and marketable securities balances to finance operations and
capital additions.
Net income (loss). The Company's net loss for the year ended December 31,
1998 was $6.5 million as compared to net income of $0.3 million for the same
period in 1997. The net loss for 1998 is primarily attributable to increased
expenditures as the Company invested in new technologies to expand its drug
discovery capabilities. 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 and
royalty payments, which may be inconsistent and difficult to anticipate.
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.
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 chemistry capabilities 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. 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 an increase
in revenues from the Company's growing collaborator base and higher net interest
18
<PAGE> 20
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 and royalty payments, which may be inconsistent and difficult to
anticipate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company held cash and cash equivalents and
marketable securities with a value of $33.9 million. The Company's working
capital at December 31, 1998 was $35.5 million. The Company has funded
operations through December 31, 1998 with sales of common stock, revenues 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, 1998, the Company had utilized $4.5 million of the available $8.5 million
financing facility. Subsequent to year end the Company consummated a term loan
facility under which up to $15.0 million will be available to support capital
expenditures.
Net cash used by operating activities was $7.6 million in 1998. Net cash
provided by operating activities was $0.6 million and $0.8 million for the years
ended December 31, 1997 and 1996, respectively. The negative cash flow from
operating activities primarily reflects the net operating loss in 1998. The
positive cash flow from operating activities in 1997 and 1996 primarily reflects
payments received from corporate collaborators.
Net cash used by investing activities during the year ended December 31,
1998 was $3.7 million, resulting primarily from fixed asset additions. Net cash
used by investing activities during the year ended December 31, 1997 was $42.7
million, resulting primarily from the purchase of marketable securities from the
proceeds of the initial and secondary public offerings. Net cash provided by
investing activities for the year ended December 31, 1996 was $2.0 million. This
increase primarily reflects the sale of marketable securities offset by the
purchases of property and equipment.
Net cash provided by financing activities for the year ended December 31,
1998 and 1997 was $2.0 million and $20.7 million, respectively, primarily
reflecting the equity investment of $2.0 million by Wyeth-Ayerst, Inc., in June
1998 and proceeds from the Company's April 1997 secondary public offering. Net
cash provided by financing activities for the year ended December 31, 1996 was
$30.8 million, largely due to the Company's October 1996 initial public
offering.
The Company expects that its available cash and marketable securities,
together with operating revenues, investment income and 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.
YEAR 2000 COMPLIANCE
Many currently installed systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies in a very wide variety
of applications may experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Significant uncertainty exists concerning the scope and
magnitude of problems associated with the century change.
The Company has established a project team to address Year 2000 risks. The
Company has also initiated various Information Technology enhancement projects
intended to improve the access and dissemination of scientific and business
information throughout the enterprise to enhance development and operational
19
<PAGE> 21
efficiencies. The Company expects to be in full Y2K compliance with its internal
financial systems by the second quarter of 1999. As the costs associated with
these initiatives are part of the Company's continuing improvement process they
have been recognized as incurred.
The Company is in the data gathering phase with regard to non-financial
software and imbedded chip technology and is currently gathering data to assess
the impact of the Year 2000 on its non-financial systems such as automated
production equipment, security equipment, etc. In addition to data gathered to
date by the project team, the Company has acquired compliance certificates and
commitments from IT vendors that Y2K upgrades will be available with Year 2000
compliance scheduled for the second quarter of 1999. The Company does not, at
this time, have any indications that the cost of achieving Year 2000 compliance
for its non-financial systems will be material. If the Company is unable to
achieve Year 2000 compliance for its major non-financial system, the Year 2000
could have a material impact on the operations of the Company. Since the Company
is in the information-gathering phase, the Company does not currently have a
contingency plan in place for its internal non-financial software and imbedded
chip technology.
The Company is in the process of contacting its critical suppliers, service
providers and contractors to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issues. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company intends to change suppliers, service providers or
contractors to those who have demonstrated Year 2000 readiness but the Company
cannot be assured that it will be successful in finding such alternative
suppliers, service providers and contractors. The Company does not currently
have any formal information concerning the year 2000 compliance status of its
customers but has received indications that most of its customers are working on
Year 2000 compliance. In the event that any of the Company's significant
customers and suppliers do not successfully and timely achieve Year 2000
compliance, and the Company is unable to replace them with new customers or
alternate suppliers, the Company's business or operations could be adversely
affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for certain
derivatives and other financial instruments. The Company does not utilize
derivative financial instruments.
See Notes 1 and 2 to the Consolidated Financial Statements for a
description of the Company's use of other financial instruments. The carrying
amounts reflected in the consolidated balance sheet of cash and cash
equivalents, trade receivables, and trade payables approximates fair value at
December 31, 1998 due to the short maturities of these instruments.
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, 1997 and 1998................. 22
Statement of Operations for the three years ended December
31, 1998.................................................. 23
Statement of Redeemable Preferred Stock and Stockholders'
Equity (Deficit) for the three years ended December 31,
1998...................................................... 24
Statement of Cash Flows for the three years ended December
31, 1998.................................................. 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 consolidated balance sheet and the related
consolidated 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. and its subsidiary at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 28, 1999
21
<PAGE> 23
ARQULE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,137 $ 5,780
Marketable securities..................................... 34,145 28,090
Accounts receivable....................................... 3,133 5,708
Inventory................................................. 953 526
Prepaid expenses and other current assets................. 520 869
Notes receivable from related parties..................... 30 30
-------- --------
Total current assets.............................. 53,918 41,003
Property and equipment, net................................. 12,654 17,821
Other assets................................................ 156 1,656
Notes receivable from related parties....................... 197 --
-------- --------
$ 66,925 $ 60,480
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 1,174 $ 907
Accounts payable and accrued expenses..................... 2,804 2,094
Deferred revenue.......................................... 3,917 2,456
-------- --------
Total current liabilities......................... 7,895 5,457
-------- --------
Capital lease obligations................................... 1,213 306
-------- --------
Deferred revenue............................................ 477 450
-------- --------
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 11,878,090 and 12,171,335 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 119 122
Additional paid-in capital................................ 68,418 71,432
Accumulated deficit....................................... (10,643) (17,105)
-------- --------
57,894 54,449
Deferred compensation..................................... (554) (182)
-------- --------
Total stockholders' equity........................ 57,340 54,267
-------- --------
Commitments (Note 12)....................................... -- --
-------- --------
$ 66,925 $ 60,480
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
ARQULE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue
Compound development revenue.............................. $ 4,255 $13,840 $11,868
Compound development revenue -- related party............. 3,000 3,580 10,325
------- ------- -------
7,255 17,420 22,193
------- ------- -------
Costs and expenses:
Cost of revenue........................................... 2,683 8,039 7,506
Cost of revenue -- related party.......................... 2,056 2,179 6,530
Research and development.................................. 3,076 4,704 10,427
Marketing, general and administrative..................... 2,850 4,670 6,387
------- ------- -------
10,665 19,592 30,850
------- ------- -------
Loss from operations................................... (3,410) (2,172) (8,657)
Interest income............................................. 607 2,686 2,364
Interest expense............................................ (190) (223) (169)
------- ------- -------
Net (loss) income...................................... $(2,993) $ 291 $(6,462)
======= ======= =======
Basic net income (loss) per share........................... $ (1.32) $ .03 $ (0.54)
======= ======= =======
Weighted average common shares outstanding -- basic......... 2,272 11,282 12,031
======= ======= =======
Diluted net income (loss) per share......................... $ (1.32) $ .02 $ (0.54)
======= ======= =======
Weighted average common shares outstanding -- diluted(1).... 2,272 12,394 12,031
======= ======= =======
</TABLE>
- ---------------
(1) 1997 includes common shares and common share equivalents
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 25
ARQULE, INC.
CONSOLIDATED 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
----------- -------- ----------- ------- ------------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 1,800,000 $ 6,888 10,511,000 $ 2,486 522,797 $ 5 $ 4,435
Conversion of interest on bridge
notes to Series A convertible
preferred stock................. 113,429 142
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
Conversion of Series B mandatorily
redeemable preferred stock to
common stock.................... (1,815,468) (6,903) 907,734 9 6,894
Conversion of Series A convertible
preferred stock to common
stock........................... (10,624,429) (2,628) 5,312,214 54 2,574
Exercise of warrants pursuant to a
cashless exercise provision..... 234,992 2 (2)
Issuance of common stock in
connection with initial public
offering, net of issuance costs
of $2,979....................... 2,875,000 29 31,492
Compensation related to the grant
of common stock options......... 709
Amortization of deferred
compensation....................
Net loss..........................
---------- ------- ----------- ------- ---------- ---- -------
Balance at December 31, 1996...... -- -- -- -- 9,851,487 99 46,102
Cancellation of unvested portion
of restricted stock stock upon
employee termination............ (48,444) --
Employee stock option exercises... 133,374 1 352
Employee stock purchase plan...... 9,173 -- 110
Issuance of common stock in
connection with secondary public
offering, net of issuance costs
of $1,645....................... 1,932,500 19 21,526
Compensation related to the grant
of common stock options......... 328
Amortization of deferred
compensation....................
Net income........................
---------- ------- ----------- ------- ---------- ---- -------
Balance at December 31, 1997...... -- -- -- -- 11,878,090 119 68,418
Employee stock option exercises... 134,639 1 793
Employee stock purchase plan...... 53,619 1 381
Issuance of common stock in
connection with American Home
Products investment in ArQule,
Inc............................. 104,987 1 1,999
Compensation related to the grant
of common stock options......... (159)
Amortization of deferred
compensation....................
Net loss..........................
---------- ------- ----------- ------- ---------- ---- -------
Balance at December 31, 1998...... -- $ -- -- $ -- 12,171,335 $122 $71,432
========== ======= =========== ======= ========== ==== =======
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
TOTAL
ACCUMULATED DEFERRED STOCKHOLDERS'
DEFICIT COMPENSATION EQUITY (DEFICIT)
----------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995...... $ (7,926) -- $(1,000)
Conversion of interest on bridge
notes to Series A convertible
preferred stock................. 142
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) (15)
Conversion of Series B mandatorily
redeemable preferred stock to
common stock.................... 6,903
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....................... 31,521
Compensation related to the grant
of common stock options......... (709) --
Amortization of deferred
compensation.................... 63 63
Net loss.......................... (2,993) (2,993)
-------- ----- -------
Balance at December 31, 1996...... (10,934) (646) 34,621
Cancellation of unvested portion
of restricted stock stock upon
employee termination............ --
Employee stock option exercises... 353
Employee stock purchase plan...... 110
Issuance of common stock in
connection with secondary public
offering, net of issuance costs
of $1,645....................... 21,545
Compensation related to the grant
of common stock options......... (328) --
Amortization of deferred
compensation.................... 420 420
Net income........................ 291 291
-------- ----- -------
Balance at December 31, 1997...... (10,643) (554) 57,340
Employee stock option exercises... 794
Employee stock purchase plan...... 382
Issuance of common stock in
connection with American Home
Products investment in ArQule,
Inc............................. 2,000
Compensation related to the grant
of common stock options......... 159 --
Amortization of deferred
compensation.................... 213 213
Net loss.......................... (6,462) (6,462)
-------- ----- -------
Balance at December 31, 1998...... $(17,105) $(182) $54,267
======== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
ARQULE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
Net (loss) income......................................... $(2,993) $ 291 $ (6,462)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,171 2,580 4,620
Amortization of deferred compensation.................. 63 420 213
Increase in accounts receivable........................ (250) (2,883) (2,575)
(Increase) decrease in inventory....................... -- (953) 427
Increase in prepaid expenses and other current
assets............................................... (215) (182) (349)
Increase in other assets............................... (40) (17) (1,500)
(Increase) decrease in notes receivable from related
parties.............................................. (220) 176 197
Increase (decrease) in accounts payable and accrued
expenses............................................. 482 1,695 (710)
Increase (decrease) in deferred revenue................ 2,805 (519) (1,488)
------- -------- --------
Net cash provided by (used in) operating
activities........................................ 803 608 (7,627)
------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities........................ -- (61,447) (44,109)
Proceeds from sale or maturity of marketable securities... 4,302 27,802 50,164
Additions to property and equipment....................... (2,292) (9,085) (9,787)
------- -------- --------
Net cash provided by (used in) investing
activities........................................ 2,010 (42,730) (3,732)
------- -------- --------
Cash flows from financing activities:
Principal payments of capital lease obligations........... (737) (1,335) (1,174)
Proceeds from issuance of common stock, net............... 31,521 22,008 3,176
------- -------- --------
Net cash provided by financing activities............ 30,784 20,673 2,002
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 33,597 (21,449) (9,357)
Cash and cash equivalents, beginning of period.............. 2,989 36,586 15,137
------- -------- --------
Cash and cash equivalents, end of period.................... $36,586 $ 15,137 $ 5,780
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $2,178 and $856 were incurred in 1996 and
1997, respectively, when the Company entered into leases for various machinery
and equipment, furniture and fixtures, and leasehold improvements.
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 1996, 1997 and 1998, the Company paid approximately $190, $223 and
$169, respectively, for interest expense.
26
<PAGE> 28
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF OPERATIONS
ArQule, Inc. 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 and product development candidates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Basis of Consolidation
The consolidated financial statements include the accounts of ArQule, Inc.
and its majority-owned subsidiary ArQule Catalytics, Inc., which was
incorporated in February 1998 (collectively, the "Company"). All intercompany
transactions and balances have been eliminated.
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, 1997
and 1998, the Company has classified its investments as available-for-sale.
Fair Value of Financial Instruments
At December 31, 1997 and 1998, 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 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
27
<PAGE> 29
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
develop and produce compound arrays. These costs consist primarily of payroll
and payroll-related costs, chemicals, supplies and overhead expenses.
Stock Compensation
Options granted to employees 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.
Segment Data
The Company is engaged principally in one industry segment. The Company
also operates principally in one geographic location. See Note 3 with respect to
significant customers.
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 1996 and 1997 financial
statements to conform to the 1998 presentation. These reclassifications had no
effect on the net loss for 1996 or net income for 1997.
3. SIGNIFICANT AGREEMENTS
The Company has entered into a number of license, research and development
agreements (the "Agreements") with eight corporate collaborators who accounted
for substantially all of the Company's 1998 revenue. Two Agreements were entered
into with Solvay Duphar B.V. ("Solvay") and Wyeth-Ayerst Pharmaceuticals, a
division of American Home Products Corporation ("Wyeth-Ayerst"). Revenue related
to the Solvay Agreement is included in compound development revenue -- related
party from 1996 through 1998. In 1998, Wyeth-Ayerst became a 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
28
<PAGE> 30
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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 be allotted between the parties
in accordance with the individual agreements, after, in some instances, the
reimbursement of direct research costs incurred by the respective 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, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
MATURITY 1997 1998
------------- ------- -------
<S> <C> <C> <C>
U.S. Government obligations.............. Within 1 year $ 2,200 $ 2,002
Corporate bonds.......................... Within 1 year 31,945 26,088
------- -------
$34,145 $28,090
======= =======
</TABLE>
At December 31, 1997 and 1998, 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, 1997 and 1998 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, 1997 and 1998 were not significant.
5. INVENTORY
Inventories at December 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Raw materials............................................... $361 $526
Finished goods.............................................. 592 0
---- ----
$953 $526
==== ====
</TABLE>
29
<PAGE> 31
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
USEFUL LIFE DECEMBER 31,
ESTIMATED ------------------
(YEARS) 1997 1998
----------- ------- -------
<S> <C> <C> <C>
Machinery and equipment.................... 5 $ 5,936 $ 9,083
Leasehold improvements..................... 3-7 6,125 9,548
Furniture and fixtures..................... 7 451 606
Computer equipment......................... 3 3,372 4,527
Construction-in-progress................... -- 1,218 3,125
------- -------
17,102 26,889
Less -- accumulated depreciation and
amortization............................. 4,448 9,068
------- -------
$12,654 $17,821
======= =======
</TABLE>
Assets held under capital leases at December 31, 1997 and 1998 consisted of
$1,900 of machinery and equipment, $1,785 of leasehold improvements, $703 in
computer equipment and $107 of furniture and fixtures. Accumulated amortization
of these assets totaled $2,207 and $3,290 at December 31, 1997 and 1998,
respectively. For the years ended December 31, 1996, 1997 and 1998, amortization
expense related to assets held under capital lease obligations was $751, $1,198
and $1,083, respectively.
7. NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
Note receivable due from the an 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............................................... 60 30
Note receivable due from another officer of the Company,
payable in three equal annual installments commencing on
February 16, 1998, secured by shares of common stock of
the Company issuable to the officer upon the exercise of
options................................................... 167 --
---- ---
227 30
Less current portion........................................ 30 30
---- ---
$197 $--
==== ===
</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, 1997
and 1998, $13 and $16, respectively, was included in prepaid expenses and other
current assets.
30
<PAGE> 32
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Accounts payable........................................... $2,161 $ 818
Accrued professional fees.................................. 379 360
Other accrued expenses..................................... 264 916
------ ------
$2,804 $2,094
====== ======
</TABLE>
9. 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. 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.
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 two to four year periods. At December 31, 1997 and
1998, the approximate number of unvested common shares is 9,800 and 0,
respectively. Each stock restriction agreement may be terminated at the election
of the Company.
Collaborator Investment.
On June 4, 1998, American Home Products invested $2.0 million in the
Company in accordance with the Common Stock Purchase Agreement and the Research
and License Agreement, both dated July 3, 1997.
10. EQUITY INCENTIVE AND STOCK PURCHASE PLANS
During 1998, 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 4,700,000. All shares are awarded at the discretion of a Committee 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
31
<PAGE> 33
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not less than the exercise price of the related option. As of December 31, 1998,
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, 1998, options to purchase 65,500 shares of common stock
have been granted under this plan of which 48,000 shares are currently
exercisable. 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 59,500
shares are available for future grant.
The Company applies APB No. 25 and related interpretations in accounting
for employee grants under the Equity Incentive Plan (the "Plan"). No
compensation expense has been recognized under the Plan 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,
------------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss........................... $(3,186) $(2,583) $(13,217)
Pro forma basic and diluted net loss per
share...................................... $ (1.40) $ (0.23) $ (1.10)
</TABLE>
During 1997 and 1998, the Company issued 69,000 and 45,500 options to
certain members of its Scientific Advisory Board (SAB) under the Equity
Incentive Plan. In April 1997, 11,000 shares were cancelled. A total of $554 and
$183 at December 31, 1997 and 1998, respectively, was recorded as deferred
compensation and is being amortized as compensation expense over the vesting
period of the options. Compensation expense in 1997 and 1998 was $420 and $213,
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. 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, 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. The model was calculated using the following assumptions: no
dividend yield for both years; 45% volatility for 1996, 50% volatility for 1997,
and 75% volatility for 1998 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 and 1998; expected lives of 3 to 6 years in 1996 and 4
years in 1997 and 1998 for options granted.
32
<PAGE> 34
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Plans for the three years ended December 31, 1998
was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
STOCK OPTIONS OF SHARES PRICE
- ------------- ---------- --------
<S> <C> <C>
Outstanding at December 31, 1995...................... 298,500 $ .22
Granted............................................... 1,073,920 4.39
Exercised............................................. 0 .00
Cancelled............................................. (99,750) .50
----------
Outstanding at December 31, 1996...................... 1,272,670 3.71
Granted............................................... 1,016,412 16.62
Exercised............................................. (133,374) 2.64
Cancelled............................................. (44,456) 9.57
----------
Outstanding at December 31, 1997...................... 2,111,252 9.88
----------
Granted............................................... 1,606,265 9.06
Exercised............................................. (134,639) 5.90
Cancelled............................................. (1,244,292) 15.25
----------
Outstanding as of December 31, 1998................... 2,338,586 $ 6.68
==========
Exercisable at December 31, 1998...................... 736,337 7.13
==========
Weighted average estimated value of options granted
during the year ended December 31, 1998............. $ 5.58
======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS 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 1998 LIFE PRICE 1998 PRICE
- ------------------------ --------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.0000 - 2.4000............... 486,508 7.0 $ 0.83 297,058 $ 0.81
4.8001 - 7.2000............... 1,331,611 9.0 5.19 158,737 5.86
9.6001 - 12.0000............... 125,334 7.8 10.90 81,189 10.90
12.0001 - 14.4000............... 112,929 5.2 14.13 88,375 14.13
14.4001 - 16.8000............... 46,000 8.6 16.04 41,000 16.11
16.8001 - 19.2000............... 133,204 8.3 17.70 54,978 17.64
19.2001 - 21.6000............... 57,500 8.7 21.00 15,000 21.00
21.6001 - 24.0000............... 45,500 9.0 22.94 -- --
--------- -------
2,338,586 8.3 $ 6.68 736,337 $ 7.13
========= === ====== ======= ======
</TABLE>
At December 31, 1998, there were 1,685,480 shares available for future
grant under the Equity Incentive Plan.
On September 8, 1998 the Company determined that certain stock options
issued to employees of the Company had an exercise price significantly higher
than the fair market value of the Company's common stock. In light of the
Company's conclusions that such options were not providing the desired
incentive, the Company provided employees with the opportunity to exchange
options previously granted to them under the Plan on or after June 25, 1996 for
new options ("the Replacement Options") to purchase the same number of
33
<PAGE> 35
ARQULE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock at an exercise price of $4.875 per share, the then fair
market value of the Company's common stock. A total of 985,059 options were
exchanged. Employees (other than those individuals designated as "officers" by
the Company, including those officers subject to Section 16 of the Securities
Exchange Act of 1934) were given the choice of retaining their existing options,
with the original vesting schedule, or accepting the Replacement Options, with a
vesting schedule extended by one year.
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 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,
1998, 62,792 shares have been purchased pursuant to the Purchase Plan.
11. INCOME TAXES
There is no current or deferred tax expense for the years ended December
31, 1996, 1997 and 1998.
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 1998
------- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Preoperating costs capitalized for tax
purposes................................ $ 370 $ 288 $ 210
Net operating loss carryforwards........... 3,906 4,506 7,068
Tax credit carryforwards................... 311 811 2,324
Non-employee equity based compensation..... -- 173 286
Book depreciation in excess of tax......... -- -- 411
Other...................................... 30 40 39
------- ------- --------
$ 4,617 $ 5,818 $ 10,338
Deferred tax liabilities:
Tax depreciation in excess of book......... -- (135) --
Valuation allowance.......................... (4,617) (5,683) (10,338)
------- ------- --------
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 $10.3 million valuation allowances at December 31, 1998,
$1.0 million 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 CONSOLIDATED 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, 1998 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory
rate.......................................... $ 1,048 $(102) $ 2,262
State tax benefit (expense), net................ 180 (18) 399
Losses and credits without current tax
benefit....................................... (1,180) -- (2,650)
Utilization of net operating loss
carryforwards................................. -- 133 --
Other........................................... (48) (13) (11)
------- ----- -------
Tax Provision.............................. $ -- $ -- $ --
======= ===== =======
</TABLE>
The Company has available net operating loss carryforwards of approximately
$17.3 million for tax purposes to offset future taxable income. The net
operating loss carryforwards expire principally in 2009 to 2018. Federal and
state tax credit carryforwards of approximately $2.3 million expire principally
in 2009 to 2018. 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.
12. COMMITMENTS
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>
1999..................................................... $ 871 $ 907
2000..................................................... 738 305
2001..................................................... 322 1
------ ------
1,213
Interest due on capital leases........................... 81
------ ------
Total minimum lease payments............................. $1,931 $1,294
====== ======
</TABLE>
The Company has a lease line agreement with a financial institution (the
"Lessor") for $8,500 of which approximately $4,000 was available for future
leases at December 31, 1998. 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 $283,
$582 and $1,105 for the years ended December 31, 1996, 1997, and 1998,
respectively.
35
<PAGE> 37
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 27, 1999 (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 1998.
36
<PAGE> 38
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 ended
through April 8, 1998. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
amended June 30, 1998 (File No. 000-21429) 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
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
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.
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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.
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.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed with the Commission on March 17,
1997 (File No. 000-21249) and incorporated herein by
reference.
10.31+ Research Collaboration and License Agreement between the
Company and Amersham Pharmacia Biotech AB dated August 13,
1998. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-3 (File No. 333-62203) and incorporated
herein by reference.
10.32+ Commercialization Agreement between the Company and Amersham
Pharmacia Biotech AB dated August 13, 1998. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-62203) and incorporated herein by reference.
10.33+ Amendment No. 1 to Research and License Agreement between
the Company and Roche Bioscience, a division of Syntex,
Inc., dated as of September 30, 1998. Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.34* Resignation Agreement between Eric Gordon and the Company
dated as of September 11, 1998. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.35 Lease by and between MetroNorth Corporate Center LLC and the
Company dated as of May 29, 1998. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.36+ Compound Supply and License Agreement between the Company
and R.W. Johnson Pharmaceutical Research Institute, a
division of Ortho-McNeil Pharmaceutical, Inc., dated as of
December 15, 1998. Filed herewith.
11.1 Statement re computation of per share net income (loss).
Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27.1 Financial Data Schedule. 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 24b-2 of the Securities
and Exchange Act of 1934, as amended.
39
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Medford, Commonwealth of Massachusetts, on March 29, 1999.
ARQULE, INC.
By: /s/ ERIC B. GORDON
------------------------------------
Eric B. Gordon
President and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ ERIC B. GORDON President, Chief Executive Officer March 29, 1999
- --------------------------------------------------- and Director (Principal Executive
Eric B. Gordon Officer)
/s/ JAMES R. FITZGERALD, JR. Vice President, Chief Financial March 29, 1999
- --------------------------------------------------- Officer and Treasurer (Principal
James R. Fitzgerald, Jr. Financial Officer and Principal
Accounting Officer)
/s/ JOSEPH C. HOGAN, JR. Chairman of the Board, Senior Vice March 29, 1999
- --------------------------------------------------- President of Research and
Joseph C. Hogan, Jr. Development, Chief Scientific
Officer and Director
/s/ ADRIAN DE JONGE Director March 29, 1999
- ---------------------------------------------------
Adrian De Jonge
/s/ ALLAN R. FERGUSON Director March 29, 1999
- ---------------------------------------------------
Allan R. Ferguson
/s/ STEPHEN M. DOW Director March 29, 1999
- ---------------------------------------------------
Stephen M. Dow
/s/ L. PATRICK GAGE Director March 29, 1999
- ---------------------------------------------------
L. Patrick Gage
/s/ MICHAEL ROSENBLATT Director March 29, 1999
- ---------------------------------------------------
Michael Rosenblatt
</TABLE>
40
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 April 8, 1998. Filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for this quarter
amended June 30, 1998 (File No. 000-21429) and incorporated
herein by refernce.
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
as Exhibit 10.3 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
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.
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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.
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.
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.29+ Research and Development Agreement between the Company and
Sankyo Co., Ltd. dated November 1, 1997. Filed as Exhibit
10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, filed with the
Commission on March 17, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.30+ Amendment No. 3 to Research & Development and License
Agreement between the Company and Abbott Laboratories dated
December 23, 1997. Filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed with the Commission on March 17,
1998 (File No. 000-21249) and incorporated herein by
reference.
10.31+ Research Collaboration and License Agreement between the
Company and Amersham Pharmacia Biotech AB dated August 13,
1998. Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-3 (File No. 333-62203) and incorporated
herein by reference.
10.32+ Commercialization Agreement between the Company and Amersham
Pharmacia Biotech AB dated August 13, 1998. Filed as Exhibit
10.2 to the Company's Registration Statement on Form S-3
(File No. 333-62203) and incorporated herein by reference.
10.33+ Amendment No. 1 to Research and License Agreement between
the Company and Roche Bioscience, a division of Syntex,
Inc., dated as of September 30, 1998. Filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.34* Resignation Agreement between Eric Gordon and the Company
dated as of September 11, 1998. Filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.35 Lease by and between MetroNorth Corporate Center LLC and the
Company dated as of May 29, 1998. Filed as Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 000-21429) and
incorporated herein by reference.
10.36+ Compound Supply and License Agreement between the Company
and R.W. Johnson Pharmaceutical Research Institute, a
division of Ortho-McNeil Pharmaceutical, Inc., dated as of
December 15, 1998. Filed herewith.
11.1 Statement re computation of per share net income (loss).
Filed herewith.
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27.1 Financial Data Schedule. 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 24b-2 of the Securities
and Exchange Act of 1934, as amended.
43
<PAGE> 1
COMPOUND SUPPLY AND LICENSE AGREEMENT
This Compound Supply and License Agreement dated as of December 15,
1998 (the "Effective Date") is between the R.W. Johnson Pharmaceutical Research
Institute ("PRI"), a division of Ortho-McNeil Pharmaceutical, Inc, a Delaware
corporation, having a business address of U.S.Route 202, Raritan, NJ 08869, and
ArQule, Inc. ("ArQule"), a Delaware corporation, having a business address of
200 Boston Avenue, Medford, MA 02155.
R E C I T A L S
---------------
WHEREAS, ArQule has expertise relating to the design and synthesis of
libraries of chemical compounds in Mapping Array Sets using rapid parallel
synthesis methods, including its AMAP(TM) chemical synthesis system;
WHEREAS, PRI desires to access compound libraries produced by ArQule to
identify lead molecules by subscribing to the ArQule Mapping Array Program
pursuant to which ArQule will synthesize and deliver to PRI at least *
small organic molecules each year in a collection of Mapping Array Sets
representing at least * Chemical Themes; and
WHEREAS, ArQule is willing to provide its compound libraries comprising
ArQule Compounds in Mapping Array Sets delivered as individual compounds in a
spatially addressable array format in a microtiter plate wherein the ArQule
Compounds within each Mapping Array Set are, on average, at least * pure; and
WHEREAS, ArQule and PRI desire that the implementation of the Mapping
Array Program be managed by a joint Research Committee; and
WHEREAS, PRI desires to screen the ArQule Compounds against biological
targets in the Screening Field in order that PRI may obtain an exclusive license
to Available Compounds in the Development Field whereby PRI will pay ArQule
success fees and royalties on Royalty-Bearing Products; and
WHEREAS, PRI also desires to receive a non-exclusive license to
practice certain ArQule Patent Rights outside of the Mapping Array Program.
NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, PRI and ArQule hereby agree as follows:
<PAGE> 2
1. DEFINITIONS.
1.1. "ACTIVE COMPOUND" means an ArQule Compound that exhibits activity
against a Target, as determined by PRI according to a predetermined threshold
set by PRI for each Target consistent with the manner it treats other compounds
resulting from its drug discovery program.
1.2. "AFFILIATE" means any legal entity (such as a corporation,
partnership, or limited liability company) that is controlled by, controls or is
under common control with a party. For the purposes of this definition, the term
"control" means (i) beneficial ownership of at least fifty percent (50%) of the
voting securities of a corporation or other business organization with voting
securities or (ii) a fifty percent (50%) or greater interest in the net assets
or profits of a partnership or other business organization without voting
securities.
1.3. "ANALOG" means a chemical compound (i) that exhibits significant
structural similarity to an ArQule Compound, (ii) was discovered or developed
using information obtained by screening ArQule Compounds, or (iii) was
structurally derived in one or more steps from a parent ArQule Compound 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.
1.4. "ARQULE COMPOUND" means a chemical compound provided by ArQule to
PRI pursuant to this Agreement, and specifically includes all compounds in the
Mapping Array Sets provided to PRI under the Mapping Array Program.
1.5. "AVAILABLE COMPOUND" means an Active Compound that, as of the date
PRI reports activity to ArQule, (i) ArQule has the right to grant to PRI the
licenses set forth under Section 4.1. and (ii) is not committed to an internal
ArQule program, as evidenced by written or electronic records, in the
Development Field.
1.6. "CHEMICAL THEME" means the chemical or structural characteristics
that define the compounds in a Mapping Array Set.
1.7. "CONFIDENTIAL INFORMATION" means any technical or business
information furnished by one party (the "Disclosing Party") to the other party
(the "Receiving Party") in connection with this Agreement or generated pursuant
to this Agreement as more fully defined in Article 9. Such Confidential
Information may include, without limitation, the identity or use of a chemical
compound, the identity or use of a biological target, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, research and development activities, Research Committee
reports, royalty reports, product and marketing plans, clinical development
plans, and customer and supplier information.
1.8. "DEVELOPMENT FIELD" means applications in * .
1.9. "EMEA" means the European Medicine Evaluation Agency.
- ------------
*Confidential treatment has been requested for the marked portion.
2
<PAGE> 3
1.10. "FDA" means the United States Food and Drug Administration or any
successor agency.
1.11. "IND" means an investigational new drug application filed with
the FDA prior to beginning clinical trials in humans as more fully defined in 21
C.F.R. 312.3 or any comparable application filed with the regulatory authorities
of a country other than the United States, prior to beginning clinical trials in
humans in that country.
1.12. "LICENSED COMPOUND" means an Available Compound for which PRI has
elected to obtain an exclusive license, as further described in Section 3.3.
below.
1.13. "LICENSED COMPOUND GROUP" means a group of from two to four
Licensed Compound Sets that contain Licensed Compounds and Analogs which exhibit
activity for the same Target, as further described in Section 7.2.
1.14. "LICENSED COMPOUND SET" means a set of Licensed Compounds that
are from the same Mapping Array Set and which are Active Compounds with respect
to the same Target, as well as Analogs of those Licensed Compounds that
demonstrate biological activity with respect to the same Target, as further
described in Section 7.1.
1.15. "MAJOR MARKET COUNTRY" means any of the United States, United
Kingdom, France, Germany, Italy, or Japan.
1.16. "MAPPING ARRAY(TM) PROGram" means an annual program under which
ArQule provides its collaborators with a certain number of ArQule Compounds
organized in Mapping Array Sets and grants its collaborators a non-exclusive
right to screen the ArQule Compounds against any Target in the Screening Field,
as further described in Article 3 below.
1.17. "MAPPING ARRAY(TM) Set" means a set of ArQule Compounds
consisting of diverse, structurally related small organic chemical compounds
arranged in a spatially addressable format such as a microtiter screening plate
and having the same Chemical Theme, which are provided to PRI under the Mapping
Array Program.
1.18. "NDA" means a New Drug Application and all supplements thereto
filed with the FDA, including all documents, data, and other information
concerning a Royalty-Bearing Product, which are necessary for, or included in,
FDA approval to market such Royalty-Bearing Product, as more fully defined in 21
C.F.R. 314.5 et seq.
1.19. "NET SALES" means * .
1.20. "PATENT RIGHTS" means any United States and foreign patent
application and any divisional, continuation, or continuation-in-part of such
patent application (to the extent the
- ------------
*Confidential treatment has been requested for the marked portion.
3
<PAGE> 4
claims are directed to subject matter specifically described therein), as well
as any patent issued thereon and any reissue or reexamination of such patent,
and any foreign counterparts to such patents and patent applications, including
those arising out of this Agreement. "ARQULE PATENT RIGHTS" means Patent Rights
that are either (i) invented solely by ArQule employees or assigned solely to
ArQule, (ii) invented jointly by ArQule employees and employees of a party other
than PRI or assigned jointly to ArQule and a party other than PRI, or (iii)
licensed to or otherwise controlled by ArQule, in each case to the extent that
ArQule has the ability to license or sublicense the rights required under this
Agreement. "PRI PATENT RIGHTS" means Patent Rights developed or discovered
solely in connection with this Agreement that are either (i) invented solely by
employees of PRI or assigned solely to PRI, (ii) invented jointly by PRI
employees and employees of a party other than ArQule or assigned jointly to PRI
and a party other than ArQule, or (iii) licensed to or otherwise controlled by
PRI, in each case to the extent that PRI has the ability to license or
sublicense the rights required under this Agreement. "JOINT PATENT RIGHTS" means
Patent Rights developed or discovered solely in connection with this Agreement
assigned to both ArQule and PRI as joint owners.
1.21. "PHASE I CLINICAL TRIAL" shall mean that portion of the FDA
submission and approval process which provides for the first introduction into
humans of a product with the purpose of determining human toxicity, metabolism,
absorption, elimination and other pharmacological action as more fully defined
in 21 C.F.R. ss. 312.21(a).
1.22. "PHASE II CLINICAL TRIAL" shall mean that portion of the FDA
submission and approval process which provides for the initial trials of product
on a limited number of patients for the purposes of determining dose and
evaluating safety and efficacy in the proposed therapeutic indication as more
fully defined in 21 C.F.R. ss. 312.21(b).
1.23. "PHASE III CLINICAL TRIAL" shall mean that portion of the
clinical development program which provides for continued trials of a product on
sufficient numbers of patients to establish the safety and efficacy of a product
and generate, if required, pharmacoeconomics data to support regulatory approval
in the proposed therapeutic indication as more fully defined in 21 C.F.R. ss.
312.2(c).
1.24. "PROPRIETARY MATERIALS" means any tangible research materials,
whether biological, chemical, physical, or otherwise, that one party (the
"Provider") furnishes to the other party (the "Recipient") under this Agreement
and designates as proprietary or confidential, including without limitation all
ArQule Compounds.
1.25. "POP" means the internal PRI proof of principal program in which
a clinical candidate is selected, produced in quantity under GMP conditions,
pre-clinical toxicology studies are performed, and first administration to human
subjects is performed. PRI formally selects a compound as a clinical candidate
for POP according to its internal procedures. * .
1.26. "RESEARCH COMMITTEE" means the joint Research Committee described
in
- ------------
*Confidential treatment has been requested for the marked portion.
4
<PAGE> 5
Section 2.1.
1.27. "ROYALTY PERIOD" means the partial calendar quarter commencing on
the date on which the first Royalty-Bearing Product is sold and every complete
or partial calendar quarter thereafter during which PRI has the obligation to
pay a royalty pursuant to Section 5.3.1.
1.28. "ROYALTY-BEARING PRODUCT" means* .
1.29. "SCREENING FIELD" means *.
1.30. "TARGET" means any biological target in the Screening Field that
PRI selects for screening against ArQule Compounds.
1.31. "TECHNOLOGY" means any proprietary development, idea, design,
concept, technique, process, invention, compound, discovery, or improvement,
whether or not patentable or copyrightable, including those arising out of this
Agreement. "ARQULE TECHNOLOGY" means Technology that is either (i) assigned
solely to ArQule, (ii) assigned jointly to ArQule and a party other than PRI, or
(iii) licensed to or otherwise controlled by ArQule, in each case to the extent
that ArQule has the ability to license or sublicense the rights required under
this Agreement. "PRI TECHNOLOGY" means Technology developed or discovered solely
in connection with this Agreement that is either (i) assigned solely to PRI,
(ii) assigned jointly to PRI and a party other than ArQule, or (iii) licensed to
or otherwise controlled by PRI, in each case to the extent that PRI has the
ability to license or sublicense the rights required under this Agreement.
"JOINT TECHNOLOGY" means Technology that is developed or discovered jointly by
one or more employees or consultants of PRI and one or more employees or
consultants of ArQule solely in connection with this Agreement.
1.32. "UNBLINDED ARQULE COMPOUND" means (i) an Available Compound for
which PRI has received the structure under Subsection 3.3.1, (ii) all ArQule
Compounds within a Mapping Array Set containing a Licensed Compound for which
PRI has received structures under Subsection 3.3.3, or (iii) any other ArQule
Compounds for which PRI has received structures from ArQule under this
Agreement.
1.33 "VALID CLAIM" means either (i) 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 (ii) a claim of
patent application that has been pending for less than five (5) years from the
earliest filing date of a non-provisional application and that has not been
abandoned or finally rejected without the possibility of appeal or refiling.
2. MANAGEMENT OF MAPPING ARRAY PROGRAM.
- --------------------------------------
2.1. ESTABLISHMENT OF RESEARCH COMMITTEE. The parties hereby establish
a Research Committee comprised of four (4) members or such other number as the
parties may agree, with
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an equal number of representatives appointed by each party. The parties shall
designate the initial members of the Research Committee within thirty (30) days
after the Effective Date. A party may change any of its representatives to the
Research Committee at any time upon written notice to the other party.
2.2. DUTIES OF RESEARCH COMMITTEE. The Research Committee shall
monitor, manage, and administer the Mapping Array Program under this Agreement.
In general, the Research Committee will have responsibility for all issues of a
scientific or technical nature (e.g., scheduling, quality, and delivery
formats). Specifically, the Research Committee will discuss which Chemical
Themes to include in the Mapping Array Program for each calendar year, verify
that Active Compounds exhibit the required activity against a specific Target,
and resolve all matters involving scientific questions. The Research Committee
may have other responsibilities as expressly set forth in this Agreement.
2.3. MEETINGS OF RESEARCH COMMITTEE. Unless otherwise determined by the
Research Committee, the Research Committee shall meet at least once each
calendar quarter alternately at the location of each party, or at other times,
locations, or manner (e.g., telephone conferences) determined by the Research
Committee. A representative of the Research Committee jointly appointed by its
members shall provide each member with five (5) business days notice of the time
and location of each quarterly meeting, unless such notice is waived by all
members. If a designated representative of a party cannot attend a meeting of
the Research Committee, such party may designate a different representative for
that meeting without notice to the other party, and the substitute member will
have all the powers of the permanent member. Except as otherwise provided in
this Agreement, all actions and decisions of the Research Committee will require
the unanimous consent of all of its members. If the Research Committee fails to
reach agreement upon any matter, the dispute will be resolved in accordance with
the procedures set forth in Article 12 below. Within ten (10) business days
following each quarterly meeting of the Research Committee, a representative of
the Research Committee jointly appointed by its members shall prepare and
deliver, to both parties, a written report describing the program status and the
issues, decisions, conclusions, and other actions taken by the Research
Committee.
2.4. COOPERATION. Each party agrees to provide the Research Committee
with information and documentation as reasonably required for the Research
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 Research Committee. The parties anticipate and intend that members of the
Research Committee will communicate informally with each other and with
employees and consultants of the parties on matters relating to the Mapping
Array Program.
3. CONDUCT OF MAPPING ARRAY PROGRAM.
- -----------------------------------
3.1. DELIVERY OF MAPPING ARRAY SETS. During calendar year 1998, ArQule
will supply PRI with approximately * ArQule Compounds, representing at
least * Chemical Themes, produced in its 1996, 1997, and 1998 Mapping
Array Programs. ArQule shall deliver a duplicate of these Mapping Array Sets on
a date requested by PRI between * . Thereafter,
in each calendar year during the term of this Agreement, ArQule
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will supply PRI with at * different Mapping Array Sets (in
duplicate) containing in the aggregate approximately * ArQule Compounds
produced in the Mapping Array Program for that calendar year. In general, each
Mapping Array Set will contain a minimum of * and a maximum of * ArQule
Compounds. In this regard, beginning in 1999, ArQule shall deliver the ArQule
Compounds to PRI spread out throughout the calendar year, it being the intention
of the parties that ArQule will deliver approximately * ArQule Compounds in
duplicate per quarter. The ArQule Compounds within each Mapping Array Set
delivered under the 1998 Mapping Array Program and thereafter shall have an
average purity level of at least * as measured by
standard analytical chemistry methods used at ArQule. Unless otherwise
determined by the Research Committee, ArQule shall deliver *
solution of each ArQule Compound in duplicate in DMSO solution in 96 well
microtiter plates (representing approximately * of each ArQule Compound
per well). The ArQule Compounds are organized and shipped in Mapping Array Sets.
ArQule will identify the Chemical Theme for each Mapping Array Set upon
shipment. Except as provided in Section 3.3 below, ArQule shall have no
obligation to identify the individual ArQule Compounds in the Mapping Array Sets
and PRI shall have no obligation to identify its Targets. During the planning
process to select Chemical Themes for each annual Mapping Array Program, PRI
shall have an opportunity to suggest Chemical Themes which ArQule will consider
for inclusion in the Mapping Array Program, and PRI shall have the opportunity
to comment on Chemical Themes proposed by ArQule for inclusion in the Mapping
Array Program.
3.2. SCREENING OF MAPPING ARRAY SETS. Subject to the terms and
conditions of this Agreement, ArQule hereby grants PRI and its Affiliates a
nonexclusive, worldwide license (without the right to sublicense) under the
ArQule Patent Rights and other rights in ArQule Technology to screen the ArQule
Compounds in the Mapping Array Sets against any Targets within the Screening
Field. PRI agrees to use efforts consistent with its normal scientific practices
to screen the ArQule Compounds in the Mapping Array Sets against its Targets in
the Screening Field.
3.3. DESIGNATION OF LICENSED COMPOUNDS.
--------------------------------------
3.3.1. DETERMINATION OF AVAILABILITY. PRI shall disclose to
ArQule the array plate number and well number of any Active Compounds by
facsimile transmission followed by a confirmatory letter. ArQule will promptly
determine whether the Active Compounds are Available Compounds and notify PRI of
such determination within ten (10) business days. ArQule will also inform PRI if
an Available Compound is licensed outside the Development Field or is a reverted
Licensed Compound under any other agreement with another ArQule collaborator. If
an Active Compound is not an Available Compound, PRI shall have no rights with
respect to that Active Compound. If an Active Compound is an Available Compound,
ArQule shall disclose to PRI the chemical composition and theoretical structure
of the Active Compound within * . At the request of PRI, ArQule shall (i)
internally designate that Active Compound as a Licensed Compound (subject to the
annual maintenance fee in accordance with Section 5.5) and (ii) no longer
identify that Active Compound as an Available Compound in the
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<PAGE> 8
Development Field to any other third party or ArQule collaborator. The Research
Committee may verify that ArQule Compounds meet the criteria of Active
Compounds.
3.3.2. CONFIRMATION SAMPLES AND RESYNTHESIZED COMPOUNDS. If
PRI requests confirmation samples of a Licensed Compound, ArQule shall resupply
PRI with * of the Licensed Compound for confirmation of activity within * from
the date requested, subject to a maximum of * confirmation requests per month
and a maximum number of * per ArQule Compound during the term of this Agreement.
Within * after receiving the resupplied Licensed Compound from ArQule, subject
to extension by the Research Committee, PRI shall notify ArQule whether the
activity is confirmed. If PRI confirms activity, then PRI shall disclose to
ArQule the Target and the level of activity. If PRI requests resynthesized
samples of a Licensed Compound, ArQule will supply PRI with a sufficient
quantity (determined by the Research Committee) of the resynthesized Licensed
Compound to confirm activity and perform secondary assays within * from the date
requested, unless synthesis starting materials are unavailable for such
resynthesized Active Compound, subject to a maximum of * such resynthesis
requests per quarter (i.e., *) and no more than * such requests in any one
month. Within * after receiving the resynthesized Active Compound from ArQule to
confirm activity, subject to extension by the Research Committee, PRI shall
notify ArQule whether activity is confirmed. If PRI confirms activity and has
not previously confirmed activity with a confirmation sample, then PRI shall
disclose to ArQule the Target and level of activity. In the event that PRI (i)
requests resupply of more than * per month, (ii) exceeds the * total resupply
quantity, or (iii) requests resynthesis of more than * in a given calendar
quarter, ArQule shall have no obligation to supply the excess compounds unless
PRI and ArQule establish a mutually acceptable fee for such excess services.
3.3.3. ACTIVATION OF DEVELOPMENT LICENSES. If PRI does not
confirm activity within the applicable confirmation period for a resupplied or
resynthesized Licensed Compound, or if PRI has no further interest in that
Licensed Compound for any other reason, the Licensed Compound shall revert to
ArQule as provided in Section 7.5. If PRI confirms activity of a resynthesized
Licensed Compound within the applicable confirmation period and desires to
retain that Licensed Compound, then (i) ArQule shall remove the Licensed
Compound from future shipments of its Mapping Array Set in the Development
Field, (ii) ArQule shall provide to PRI the chemical composition and theoretical
structures (but not the locations) for all of the ArQule Compounds within the
Mapping Array Set containing the Licensed Compound, and (iii) subject to
disclosure to ArQule by PRI of the Target and level of activity, the licenses
set forth in Section 4.1. shall immediately become effective with respect to
that Licensed Compound. The Research Committee shall verify that ArQule
Compounds have been confirmed by PRI as Active Compounds under Subsection 3.3.2.
Any disagreements regarding whether ArQule Compounds are Active Compounds or
confirmed Active Compounds shall be submitted to the scientific dispute
resolution procedures set forth in Article 12. All information disclosed by
ArQule and PRI under this Section shall be deemed Confidential Information and,
as such, is subject to the restrictions set forth in Article 9.
4. LICENSE GRANT.
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<PAGE> 9
4.1. DEVELOPMENT AND COMMERCIALIZATION LICENSE. Subject to disclosure
to ArQule by PRI of the Target and the level of activity of a Licensed Compound
and confirmation of activity in accordance with Subsection 3.3.2. above, and
subject to the other terms and conditions of this Agreement, ArQule hereby
grants to PRI and its Affiliates the following licenses:
(i) an exclusive, worldwide license (with the right to sublicense)
under the ArQule Patent Rights, Joint Patent Rights, and other
rights in ArQule Technology and Joint Technology to conduct
development of Licensed Compounds in the Development Field,
including the right to make and have made Analogs of Licensed
Compounds;
(ii) an exclusive, worldwide license (with the right to sublicense)
under the ArQule Patent Rights, Joint Patent Rights, and other
rights in ArQule Technology and Joint Technology to make, have
made, use, sell, have sold, and import Licensed Compounds in
the Development Field; and
(iii) a non-exclusive, worldwide license (with the right to
sublicense) under the ArQule Patent Rights and other rights in
ArQule Technology to use chemical synthesis methods within the
ArQule Patent Rights and ArQule Technology to make
Royalty-Bearing Products.
ArQule shall not grant to any third party any rights under Joint Patent Rights
to make, have made, use, sell, have sold, or import Analogs. The parties
understand and agree that this limitation applies only to the Joint Patent
Rights; accordingly, ArQule has no obligation to grant to PRI any other legal
rights that ArQule may obtain in Analogs, and ArQule may license such other
legal rights to any third party.
PRI and ArQule acknowledge that the exclusive license granted under this Section
prohibits ArQule from granting any third party any right or license to use
Licensed Compounds to develop Analogs in the Development Field. Since PRI has a
non-exclusive screening license under Section 3.2. and since ArQule has granted
other such non-exclusive licenses, it is possible that other ArQule partners may
make analogs of their licensed compounds which overlap in scope with Analogs
made by PRI. Accordingly, ArQule makes no representation that PRI will have the
exclusive right to Analogs of Licensed Compounds. PRI acknowledges and agrees
that the license grant in clause (iii) above is subject to the terms,
conditions, and limitations of any agreement under which ArQule has acquired
rights in a chemical synthesis method from a third party and, in such event, PRI
may need to enter into a separate license agreement with the third party or
sublicensee agreement with ArQule before such license grant shall take effect.
As of the Effective Date, ArQule has entered into such third-party agreements
with * . After the licenses set forth above take effect for a Licensed Compound,
and at the written request of PRI, ArQule will notify PRI if any such
third-party agreements apply to the synthesis of that Licensed Compound as a
Royalty-Bearing Product. In the event that PRI decides to sublicense its rights
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<PAGE> 10
under this Section to a third party, PRI shall furnish ArQule with written
notice of the sublicense grant and shall ensure that all sublicense agreements
conform to this Agreement.
4.2. RIGHTS OUTSIDE THE DEVELOPMENT FIELD. PRI acknowledges that its
rights in Licensed Compounds under this Agreement are limited to the Development
Field. PRI further acknowledges that, as a direct result of its rights to screen
ArQule Compounds and develop Licensed Compounds pursuant to this Article 4, PRI
may obtain PRI Patent Rights, Joint Patent Rights, or other rights in PRI
Technology and Joint Technology that may have effect outside the Development
Field and thereby limit the rights of ArQule collaborators who may have
exclusive rights to develop and commercialize ArQule Compounds outside the
Development Field. PRI hereby grants to ArQule and its Affiliates an exclusive,
worldwide, royalty-free license (with the right to sublicense) under the PRI
Patent Rights, Joint Patent Rights, and other rights in PRI Technology and Joint
Technology to develop, manufacture, use, sell, and import Licensed Compounds
outside of the Development Field.
4.3. NON-EXCLUSIVE PATENT LICENSE. In connection with this Agreement,
ArQule has granted to PRI a non-exclusive license to practice certain of its
United States patents. The terms and conditions of this patent license are set
forth on EXHIBIT A.
5. PAYMENTS.
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5.1. TECHNOLOGY ACCESS FEE. In consideration of the licenses granted
PRI as set forth on EXHIBIT A and in partial consideration of PRI obtaining
access to the Mapping Array Program as set forth in this Agreement, PRI shall
pay to ArQule a technology access fee in the amount of * , payable within thirty
(30) days of the Effective Date, but not later than December 31, 1998.
5.2. DELIVERY FEES. In partial consideration of the delivery by ArQule
of the duplicate Mapping Array Sets under the Mapping Array Program and certain
compound resupply and resynthesis services as set forth in Section 3.3. of this
Agreement, PRI shall pay to ArQule (i) an initial delivery fee in the amount of
*, payable within thirty (30) days of the Effective Date, but no later than
December 31, 1998, for the first copy of Mapping Array Sets containing 300,000
ArQule Compounds from the 1996, 1997, and 1998 Mapping Array Programs, (ii) a
delivery fee in the amount of *, payable not later than March 31, 1999, for the
second copy of the ArQule Compounds delivered in 1998, and (iii) the annual
delivery fee set forth below during each subsequent calendar year in which this
Agreement remains in effect, payable in four equal quarterly installments which
shall be invoiced by ArQule on or about January 1, April 1, July 1, and October
1 of each such calendar year and payable by PRI thirty (30) days thereafter. The
annual delivery fee payable to ArQule in 1999 shall be * and the annual delivery
fee payable in each year after calendar year 1999 shall be determined as
follows:
Annual Delivery Fee = * x (1 + CPI)
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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
calendar 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.
The parties acknowledge that the base annual delivery fee of * represents an
aggregate of three component payments: *. It is the intention of the parties
that ArQule will deliver to PRI approximately * ArQule Compounds per
quarter. *.
5.3. PRODUCT ROYALTIES.
-----------------
5.3.1. EARNED ROYALTIES; ROYALTY TERM. In partial
consideration of the performance by ArQule of the Mapping Array Program, PRI
shall pay to ArQule the following royalties on Net Sales of Royalty-Bearing
Products in accordance with the procedures set forth in Article 6.
*
*
This royalty obligation shall commence with the first commercial sale of a
Royalty-Bearing Product in any country and shall continue on a
country-by-country basis for a period of * after the first commercial sale of
the Royalty-Bearing Product in such country. Upon expiration of the * royalty
payment obligations in a country, PRI shall thereafter have, in perpetuity, a
fully paid up license under Section 4.1. of this Agreement.
5.3.2. THIRD PARTY ROYALTIES. PRI shall be responsible for
procuring such licenses as it deems, in its sole discretion, appropriate for the
manufacture, use, marketing, sale or distribution of Royalty-Bearing Products by
PRI and its Affiliates and sublicensees, and for the payment of any amounts due
third parties under such licenses; *.
5.4. MILESTONE PAYMENTS. In partial consideration of the performance by
ArQule of the Mapping Array Program, PRI shall pay ArQule the following
milestone payments within thirty (30) days after each occurrence of each event
for each Royalty-Bearing Product:
*
*
5.5. ANNUAL MAINTENANCE FEE. PRI shall pay ArQule an annual license
maintenance fee in the amount of * for each Licensed Compound Set on each
anniversary of the first date upon which ArQule provided PRI with the structure
of a Licensed Compound within that Licensed
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Compound Set, as described in Section 3.3. For the convenience of the parties,
PRI may pay this fee for all affected Licensed Compound Sets on the last day of
the calendar quarter in which said anniversary occurs. *.
5.6. PAYMENT FOR USE OF SYNTHETIC METHODS. Under Section 4.1 of this
Agreement, ArQule granted to PRI a non-exclusive, worldwide license under the
ArQule Patent Rights and ArQule Technology to use chemical synthesis methods
within the ArQule Patent Rights and ArQule Technology to make Royalty-Bearing
Products. PRI acknowledges that ArQule may have acquired or may, in the future,
acquire such methods from a third party and that, in such event, PRI may need to
execute a separate license agreement with the third party or sublicense
agreement with ArQule before the license grant may take effect. ArQule has
notified PRI of all such third-party agreements as of the Effective Date. After
the licenses set forth in Section 4.1. above take effect for a Licensed
Compound, and at the written request of PRI, ArQule will notify PRI if any such
third-party agreements apply to the synthesis of that Licensed Compound as a
Royalty-Bearing Product. To the extent that use of a chemical synthesis method
requires payment to a third party, PRI agrees to make such payments under the
terms of the separate license or sublicense agreement. ArQule represents that
there are no such agreements which, under the terms of this Agreement, would
require payment to a third party as of the Effective Date hereof.
5.7. * .
6. REPORTS, RECORDS, AND PAYMENT PROCEDURES.
----------------------------------------
6.1. ROYALTY REPORTS AND PAYMENTS. Within sixty (60) days after the
conclusion of each Royalty Period, PRI shall deliver to ArQule a written report
setting forth the Net Sales of Royalty Bearing Products sold and the royalty due
and payable on a product-by-product and country-by-country basis (including all
deductions taken from the gross sales price in determining Net Sales). If no
payment is due to the other party for any reporting period, the report shall so
state. All such reports shall be considered Confidential Information under this
Agreement. Concurrent with this report, PRI shall remit to ArQule any payment
due for the applicable Royalty Period.
6.2. METHOD AND CURRENCY OF PAYMENT. The remittance of royalties
payable on Net Sales will be payable in U.S. dollars to ArQule at a bank and to
an account designated by ArQule using a rate of exchange of the currency of the
country from which the royalties are payable in accordance with the rate of
exchange published in THE WALL STREET JOURNAL as of the last business day of the
month immediately preceding the month during which payment of such royalties is
required to be made to ArQule hereunder. All references to dollars hereunder are
references to U.S. dollars.
6.3. BLOCKED CURRENCY. Where royalties are due for Net Sales in a
country where by reason of currency regulations of any kind or taxes of any kind
it is impossible to make royalty
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payments for that country's Net Sales in accordance with Section 5.3., said
royalties shall be deposited in whatever currency is allowable for the benefit
or credit of ArQule in any accredited bank in that country as shall be
acceptable to ArQule. Moreover, in order to facilitate payments from countries
other than the United States, when requested by PRI, ArQule shall enter into
direct license agreements with PRI Affiliates or sublicensees designated by PRI,
whereby such Affiliate or sublicensee will be obligated to remit royalty
payments due for Net Sales in such country directly to ArQule. If such Affiliate
or sublicensee fails to deposit or remit royalty payments as provided herein,
PRI will make such deposits or remittances. Each such license agreement shall
recite specifically the applicable terms of this Agreement insofar as such terms
are lawful under applicable laws and regulations of the particular country.
6.4. LATE PAYMENTS. Any payments by PRI 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 two percentage points above the Prime Rate of
interest as reported in the WALL STREET JOURNAL on the date payment is due, with
interest calculated based on the number of days that payment is delinquent.
6.5. TAXES. Any tax required to be withheld by PRI or any Affiliate or
sublicensee under the laws of any foreign country for the account of ArQule
under this Article 6 shall be promptly paid by PRI or said Affiliate or
sublicensee for and on behalf of ArQule to the appropriate governmental
authority, and PRI or the Affiliate or sublicensee shall furnish ArQule with
proof of payment of such tax together with official or other appropriate
evidence issued by the appropriate governmental authority sufficient to enable
ArQule to support a claim for income tax credit in respect of any sum so
withheld.
6.6. RECORDS. PRI shall maintain, and shall require its Affiliates and
other authorized sellers of Royalty-Bearing Products to maintain, complete and
accurate records of the sales of Royalty-Bearing Products with respect to which
a royalty is payable according to this Agreement. PRI shall retain such records
relating to a given Royalty Period for at least * after the conclusion of that
Royalty Period (and access to such records shall not be denied thereafter, if
such records are reasonably available). ArQule shall have the right, at its own
expense, to cause an independent certified public accountant reasonably
acceptable to PRI to inspect such records during normal business hours for the
sole purpose of verifying any reports and payments delivered under this
Agreement. The accountant shall conduct the audit at a date and time reasonably
acceptable to PRI but not later than fifteen (15) business days after ArQule
notifies PRI of the audit. Such accountant shall not disclose to ArQule any
information other than information relating to accuracy of reports and payments
delivered under this Agreement and shall provide PRI with a copy of any report
given to ArQule. The parties shall reconcile any underpayment or overpayment
within sixty (60) 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 five percent (5%) in any Royalty Period, PRI shall bear the full
cost of such audit.
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7. DILIGENCE AND REVERSION.
-----------------------
7.1. ESTABLISHMENT OF LICENSED COMPOUND SET. Licensed Compound Sets
shall be established automatically to include (i) each Licensed Compound and
(ii) all Analogs of the Licensed Compound that are synthesized by PRI and
exhibit biological activity for the same Target. In the event that two or more
Licensed Compounds from the same Mapping Array Set exhibit activity for the same
Target, the Research Committee will establish one Licensed Compound Set for
those related Licensed Compounds and all Analogs of the Licensed Compounds that
are synthesized by PRI and exhibit biological activity for the same Target.
7.2. DILIGENCE. PRI shall use efforts consistent with its normal
business practices to develop, manufacture, market, and sell a Royalty-Bearing
Product based on at least one Licensed Compound or Analog within a Licensed
Compound Group, the Licensed Compound Sets of which are selected by PRI and
reported to the Research Committee. PRI shall satisfy its diligence obligations
under this Article 7 so long as one Licensed Compound or Analog within a
Licensed Compound Group is being developed as a Royalty-Bearing Product. At any
time, PRI may add a Licensed Compound Set to a Licensed Compound Group or
substitute a new Licensed Compound Set for a Licensed Compound Set within a
Licensed Compound Group, effective immediately upon notice to the Research
Committee. In the event of a substitution, the Licensed Compounds in the
replaced Licensed Compound Set shall revert to ArQule as set forth in Section
7.5. below.
7.3. STATUS REPORTS. PRI will furnish ArQule with a brief semi-annual
statement, within sixty (60) days after the conclusion of each calendar six (6)
month period, that describes the status of each Licensed Compound or Analog
which remains under development by PRI as a Royalty-Bearing Product. A status
report will meet the requirements of this Section 7.3. if it states the
development phase of the Licensed Compound or Analog and outlines the future
development plans for the upcoming six (6) months. After PRI completes
development of a Royalty-Bearing Product, PRI will promptly notify ArQule of the
first commercial sale of that Royalty-Bearing Product in each country.
7.4. REVERSION. In certain limited circumstances, as described in
Sections 7.5 and 7.6, Licensed Compound(s) may revert to ArQule, whereupon (i)
PRI shall exclusively license to ArQule, without payment, any PRI Patent Rights,
Joint Patent Rights, and other rights to PRI Technology and Joint Technology
that claim the composition or use of the Licensed Compound(s) but only insofar
as said PRI Patent Rights, Joint Patent Rights, and other rights in PRI
Technology and Joint Technology claim the Licensed Compound(s) (i.e., PRI does
not grant ArQule a license with respect to Analogs), and (ii) PRI shall return
to ArQule all ArQule Confidential Information and ArQule Proprietary Materials
relating to the Licensed Compound(s). Thereafter, PRI shall have no further
right or interest in the reverted Licensed Compound(s) under Section 4.1. of
this Agreement, but shall retain rights to screen such ArQule Compounds pursuant
to Section 3.2. PRI Technology and Joint Technology licensed to ArQule hereunder
shall not include any PRI data or NDAs or foreign equivalents relating to such
reverted Licensed Compound(s). Under no circumstances will PRI be required to
grant to
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ArQule any rights to the composition or use of Analogs of Licensed Compound(s).
PRI shall retain the right, with regard to any Analogs of reverted Licensed
Compounds, to screen, develop, and commercialize such Analogs for activity
against Targets; however, PRI may screen but shall not develop or commercialize
such Analogs for activity against the Target for which the reverted Licensed
Compound exhibited activity without the consent of ArQule, which consent shall
not be unreasonably withheld.
7.5. VOLUNTARY REVERSION. PRI agrees that Licensed Compounds will
revert to ArQule in accordance with Section 7.4. in the event that (i) PRI does
not confirm the biological activity of a Licensed Compound within the *
confirmation period(s), as may be extended by the Research Committee, or if PRI
has no further interest in that Licensed Compound for any other reason, as
described in Section 3.3. above, (ii) PRI substitutes a Licensed Compound Set in
accordance with Section 7.2. or if PRI notifies the Research Committee that PRI
has no further interest in a Licensed Compound Set for any reason, or (iii) PRI
notifies the Research Committee that PRI will cease the development of all
Licensed Compounds and Analogs within an individual Licensed Compound Set or, if
applicable, within all Licensed Compound Sets of a Licensed Compound Group.
7.6. INVOLUNTARY REVERSION. In the event that ArQule reasonably
believes that PRI has not met its diligence obligations under Section 7.2. or
reporting obligations under Section 7.3 with regard to an individual Licensed
Compound Set or the Licensed Compound Sets within a Licensed Compound Group,
ArQule shall furnish PRI with written notice to that effect and PRI shall have a
period of ninety (90) days to furnish ArQule with a written response. ArQule may
exercise this right only once in each calendar year for all such affected
Licensed Compound Sets. If PRI fails to answer within the ninety-day response
period, ArQule may institute the dispute resolution procedure according to
Article 12. If PRI furnishes ArQule with an answer within the ninety-day
response period, but ArQule reasonably determines that PRI has not met its
obligations under Section 7.2 or 7.3, ArQule shall furnish PRI with a written
request to meet, whereupon the parties shall meet to discuss the matter and
shall establish measurable diligence objectives that are reasonably acceptable
to both parties. If PRI does not meet with ArQule within sixty (60) days after
PRI receives the meeting request, or if the parties fail to establish diligence
objectives within six (6) months after PRI receives the meeting request, then
ArQule may institute the dispute resolution procedure under Article 12. If the
dispute resolution procedure under Article 12 finds that PRI did not meet its
diligence or reporting obligations under Sections 7.2 or 7.3, respectively, then
such Licensed Compound(s) shall revert to ArQule in accordance with Section 7.4.
7.7. NON-REVERSION. In the event that ArQule is entitled to reversion
of Licensed Compound(s) under Section 7.4 either by Voluntary Reversion under
Section 7.5 or Involuntary Reversion under Section 7.6, PRI shall, at its sole
discretion, be entitled to cease development of such Licensed Compound(s) but
maintain all rights under Section 4.1. to all such Licensed Compound(s) within a
Licensed Compound Set by payment of a license fee in the following amounts:
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*Confidential treatment has been requested for the marked portion.
15
<PAGE> 16
*
PRI may cease payment of this annual license fee with respect to a given
Licensed Compound Set at any time by effecting a voluntary reversion of the
Licensed Compounds in that Licensed Compound Set as set forth in Section 7.5.
above. Upon expiration of the * license fee payment obligations for a Licensed
Compound Set hereunder, PRI shall thereafter have, in perpetuity, a fully paid
up license to the applicable Licensed Compounds under Section 4.1. of this
Agreement. If PRI desires to resume development of the applicable Licensed
Compounds at any time, the payment provisions of Article 5 shall resume.
8. INTELLECTUAL PROPERTY.
---------------------
8.1. OWNERSHIP OF INTELLECTUAL PROPERTY. Other than as specifically
provided for herein, neither party shall have any rights in Patent Rights and
Technology that is invented, developed or discovered by the other party prior to
the Effective Date or outside the research performed under this Agreement.
Ownership of Patent Rights and Technology arising from the research performed
under this Agreement shall be allocated in the following manner:
(i) ArQule shall have sole ownership of all right, title, and
interest in ArQule Patent Rights and ArQule Technology;
(ii) PRI shall have sole ownership of all right, title, and
interest in PRI Patent Rights and PRI Technology; and
(iii) ArQule and PRI shall have joint ownership of all right, title,
and interest in Joint Patent Rights and Joint Technology.
8.2. MANAGEMENT OF PATENT RIGHTS.
---------------------------
8.2.1. PATENT RIGHTS IN LICENSED COMPOUNDS. PRI shall have the
primary right and responsibility, at its own expense, for the preparation,
filing, prosecution, and maintenance of Patent Rights claiming the composition
or use of a Licensed Compound. PRI shall use outside patent counsel reasonably
acceptable to ArQule. The outside counsel will keep both parties informed of all
actions in the course of its work and provide adequate opportunity for both
parties to comment on any decisions or actions undertaken. The parties will
cooperate reasonably in filing and prosecuting Patent Rights claiming the
composition or use of a Licensed Compound with such outside counsel and with
each other and will share all material information relating thereto promptly
after receipt. In the event the parties, working with the outside counsel, are
unable to agree as to any action or decision in regard to the preparation,
filing, prosecution, or maintenance of any such United States Patent Rights,
then ArQule will have final say on the matter with the basis for such decision
being effective and broad coverage of discoveries and inventions. PRI shall have
the final say with respect to the preparation, filing,
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*Confidential treatment has been requested for the marked portion.
16
<PAGE> 17
prosecution, and maintenance of such Patent Rights outside the United States. In
the event that PRI screens Analogs in the PRI compound collection but not the
Unblinded ArQule Compounds, and PRI prepares a patent application claiming such
Analogs, PRI shall not exclude the Unblinded ArQule Compounds from such Patent
Rights in order to circumvent the provisions of this Section 8.2.1. or to
circumvent the payment provisions under Sections 5.3. and 5.4. by eliminating a
compound or product from the definition of Royalty-Bearing Product.
8.2.2. OTHER PATENT RIGHTS. Except as otherwise provided in
Subsection 8.2.1., PRI shall have sole responsibility for and control over the
management of PRI Patent Rights, and ArQule shall have sole responsibility for
and control over the management of ArQule Patent Rights. Each party will bear
its own expenses in connection with such Patent Rights. In the case of Joint
Technology not subject to Subsection 8.2.1., the Research Committee will decide
whether to seek Joint Patent Rights claiming that Technology. If the Research
Committee decides to seek any Joint Patent Rights under this Subsection, the
parties shall jointly prepare, file, prosecute, and maintain such Patent Rights,
and all related expenses shall be borne equally by the parties. If the Research
Committee decides not to seek such Joint Patent Rights and has not decided to
maintain the relevant Joint Technology as a trade secret, and if one of the
parties desires to seek such Joint Patent Rights, then that party may prepare,
file, prosecute, and maintain such Joint Patent Rights, and all related expenses
shall be borne by such party. In the event that a party declines to pay or
desires to cease further payment of patent-related expenses for such a Joint
Patent Right in any country and the other party desires to maintain the Joint
Patent Right, the withdrawing party may assign or exclusively license to the
continuing party all rights in that Joint Patent Right in such country and
thereafter have no further obligation to pay such expenses.
8.3. COOPERATION. Each party agrees to cooperate fully in the
preparation, filing, and prosecution of any Joint Patent Rights and other Patent
Rights claiming the composition or use of a Licensed Compound. Such cooperation
includes, but is not limited to:
(i) 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 as
established under this Agreement and to enable the other party
to apply for and to prosecute patent applications in any
country;
(ii) 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
(iii) undertaking no actions that are potentially deleterious to the
preparation, filing, or prosecution of such patent
applications.
8.4. INFRINGEMENT
8.4.l. OFFENSIVE ACTIONS. With respect to infringement of any
Patent Right claiming the composition or use of a Licensed Compound, Analog, or
Royalty-Bearing Product,
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<PAGE> 18
PRI shall have the primary right, but not the obligation, to enforce such Patent
Right under its sole control and at its sole expense. In such event, PRI shall
be exclusively entitled to all proceeds or recoveries resulting therefrom, but
from such proceeds or recoveries PRI shall pay ArQule a royalty in accordance
with Subsection 5.3.1. on sales lost to the infringer. In the event that PRI
declines to enforce such Patent Right with respect to a Royalty-Bearing Product
where the sales of the alleged infringer are at least twenty percent (20%) of
the market for said product, then ArQule shall have the secondary right to
enforce such Patent Right under its sole control and at its sole expense. In
such event, ArQule shall be exclusively entitled to all proceeds or recoveries
resulting therefrom.
8.4.2. DEFENSIVE ACTIONS. PRI will indemnify, defend, and hold
harmless ArQule, its Affiliates, and their respective officers, directors,
employees, and agents from any and all loss, damage, cost, and expense
(including reasonable attorneys fees) and amounts paid in settlement arising
from any actual or alleged infringement claim brought by a third party, in law
or in equity, based on activities undertaken pursuant to this Agreement (except
for claims based solely on the practice of an ArQule Patent Right or the use of
an ArQule Technology) or based on the manufacture or sale of a Royalty-Bearing
Product. In the event that ArQule intends to claim indemnification under this
Subsection, ArQule shall promptly notify PRI of the infringement action and PRI
shall assume the defense of the action under its sole control, including the
right to effect a settlement. A failure to deliver notice to PRI within a
reasonable time shall relieve PRI of its indemnity obligation under this
Subsection to the extent such failure prejudices the ability of PRI to defend
such action. ArQule shall cooperate fully with PRI and its legal representatives
in the investigation and defense of the action. In the event of a settlement,
PRI shall obtain the prior consent of ArQule before agreeing to any settlement
that imposes restrictions which are inconsistent with the rights and obligations
of the parties under this Agreement.
9. CONFIDENTIAL INFORMATION.
------------------------
9.1. 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.
9.2. OBLIGATIONS. The Receiving Party agrees that it shall:
-----------
(i) 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; ArQule will not allow any
directors who are employees of pharmaceutical companies to
have access to Confidential Information of PRI except for
Confidential Information they reasonably need to
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<PAGE> 19
perform their function as directors (e.g., general status of
collaboration but not specific targets, compounds, or disease
indications);
(ii) use all Confidential Information solely for the purposes set
forth in, or as permitted by, this Agreement; and
(iii) 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.
9.3. EXCEPTIONS. The obligations of the Receiving Party under
Section 9.2. above shall not apply to the extent that the Receiving
Party can demonstrate that certain Confidential Information:
(i) was in the public domain prior to the time of its
disclosure under this Agreement;
(ii) 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;
(iii) was independently developed or discovered by the Receiving
Party without use of the Confidential Information as evidenced
by written records of the Receiving Party;
(iv) 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 confidentiality to the Disclosing Party with
respect to such Confidential Information; or
(v) 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 in order that the Disclosing
Party shall have an opportunity to intervene to limit or
prevent such disclosure; in any event, Receiving Party shall
disclose only the minimum Confidential Information required to
be disclosed in order to comply with its disclosure
obligations.
9.4. 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
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<PAGE> 20
possession of its Legal Department solely for the purpose of monitoring its
obligations under this Agreement.
9.5. SURVIVAL OF OBLIGATIONS. The obligations set forth in this Article
shall remain in effect for a period of five (5) 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. PROPRIETARY MATERIALS.
---------------------
10.1. OWNERSHIP. PRI acknowledges and agrees that the ArQule Compounds
and any other ArQule Proprietary Materials provided to PRI and its Affiliates
under this Agreement are and shall remain the property of ArQule. ArQule
acknowledges and agrees that any PRI Analogs of an ArQule Compound that are
synthesized by PRI and its Affiliates and any other Proprietary Materials
provided to ArQule under this Agreement are and shall remain the property of
PRI. The foregoing notwithstanding, the parties agree that ownership of any
intellectual property rights in ArQule Compounds, and Analogs of ArQule
Compounds, and other Proprietary Materials shall be determined in accordance
with Article 8.
10.2. RESTRICTIONS ON USE AND TRANSFER. PRI shall use the ArQule
Compounds only for the purposes contemplated by this Agreement, and shall not
transfer the ArQule Compounds to any third party other than PRI Affiliates
without the prior written consent of ArQule. PRI may, however, transfer Licensed
Compounds to third parties for any purpose and may transfer Active Compounds to
third parties for the purpose of conducting research on behalf of PRI. PRI shall
not attempt to identify the chemical structure of the ArQule Compounds in the
Mapping Array Sets. In the case of Proprietary Materials other than ArQule
Compounds, each Recipient agrees to use such Proprietary Materials only for the
purposes indicated by the Provider, and shall not transfer the Proprietary
Materials to any third party without the prior written consent of the Provider.
Each Recipient further agrees to inform its employees and consultants about the
proprietary nature of the Proprietary Materials and to take reasonable
precautions, at least as stringent as those observed by Recipient to protect its
own Proprietary Materials, to ensure that such employees and consultants observe
the obligations of Recipient under this Section.
10.3. DISPOSITION OF UNUSED MATERIALS. At the request of Provider,
Recipient will return or destroy any unused Proprietary Materials furnished by
Provider other than ArQule Compounds.
10.4. DISPOSITION OF ARQULE COMPOUNDS. Except in the case of a material
breach of this Agreement by PRI, PRI shall be entitled to retain and continue to
screen all ArQule Compounds in PRI's possession.
10.6. COMPLIANCE WITH LAW. Recipient agrees to comply with all federal,
state, and local laws and regulations applicable to the use, storage, disposal,
and transfer of Proprietary Materials furnished by Provider, including without
limitation the Toxic Substances Control Act (15 USC 2601 ET SEQ.) and
implementing regulations (in particular, 40 CFR 720.36 [Research and
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<PAGE> 21
Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 ET SEQ.)
and implementing regulations, and all Export Administration Regulations of the
Department of Commerce. Recipient assumes sole responsibility for any violation
of such laws or regulations by Recipient or any of its Affiliates.
10.7. LIMITATION OF LIABILITY. Any Proprietary Materials delivered
pursuant to this Agreement are understood to be experimental in nature and may
have hazardous properties. Recipient should assume that the materials are
dangerous and should use appropriate precautions. PROVIDER MAKES NO
REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE PROPRIETARY MATERIALS FURNISHED TO RECIPIENT. THERE
ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. PROVIDER DISCLAIMS ANY WARRANTY, EXPRESS OR IMPLIED, THAT
THE USE OF ANY PROPRIETARY MATERIALS WILL NOT INFRINGE ANY PATENT OR OTHER
INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY, AND PROVIDER SHALL HAVE NO
LIABILITY RELATING THERETO.
11. TERM AND TERMINATION.
--------------------
11.1. TERM. This Agreement shall commence on the Effective Date and
shall remain in effect until the expiration of PRI's obligation to pay royalties
for all Royalty-Bearing Products, unless earlier terminated as provided in this
Article 11.
11.2. TERM OF ARQULE COMPOUND SUPPLY. ArQule's obligation to supply
ArQule Compounds to PRI pursuant to this Agreement shall commence on the
Effective Date and shall remain in effect until December 31, 2001, unless
earlier terminated as provided in this Article 11; provided, however, that if
ArQule continues to offer the Mapping Array Program during the year 2002, PRI
may extend on the same terms the supply of ArQule Compounds through December 31,
2002 upon written notice to ArQule which is received by ArQule not later than
July 1, 2001. Upon expiration of the term of the ArQule Compound supply, PRI
shall be entitled to retain and continue to screen all ArQule Compounds in PRI's
possession (except as otherwise provided in Section 11.5.).
11.3. MATERIAL BREACH. In the event that either party commits a
material breach of any of its obligations under this Agreement and such
breaching party fails (i) to remedy that breach within sixty (60) days after
receiving written notice thereof from the non-breaching party or (ii) to
commence dispute resolution pursuant to Article 12, within sixty (60) days after
receiving written notice of that breach from the non-breaching party, the
non-breaching party may immediately terminate this Agreement upon written notice
to the breaching party.
11.4. FORCE MAJEURE. Neither party will be responsible for delays
resulting from acts beyond the control of such party, provided that the
nonperforming party uses commercially reasonable efforts to avoid or remove such
causes of nonperformance and continues performance hereunder with reasonable
dispatch whenever such causes are removed.
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11.5. EFFECT OF TERMINATION. Termination of this Agreement shall not
relieve the parties of any obligation accruing prior to such termination. The
following provisions shall survive the expiration or termination of this
Agreement: Articles 6, 7, 8, 9, 10, 12 and 13; Sections 3.2., 3.3., 4.1., 4.2.,
5.3., 5.4., 5.5., 5.6., 11.5., 14.8., 14.10., and 14.13. * .
12. DISPUTE RESOLUTION.
------------------
12.1. PROCEDURES MANDATORY. The parties agree that any dispute arising
out of or relating to this Agreement shall be resolved solely by means of the
procedures set forth in this Article, and that such procedures constitute
legally binding obligations that are an essential provision of this Agreement;
provided, however, that all procedures and deadlines specified in this Article
may be modified by written agreement of the parties. If either party fails to
observe the procedures of this Article, as modified by their written agreement,
the other party may bring an action for specific performance in any court of
competent jurisdiction.
12.2. DISPUTE RESOLUTION PROCEDURES.
-----------------------------
12.2.1. NEGOTIATION. In the event of any dispute arising out
of or relating to this Agreement, the affected party shall notify the other
party, and the Research Committee shall attempt to resolve the matter, subject
to the approval of the senior management of both parties, within ten (10) days
after the date such notice is received by the other party (the "Notice Date").
Any disputes not resolved by discussions by the Research Committee shall be
referred to the Chief Executive Officer of ArQule and the President of PRI
(collectively, the "Senior Executives"), who shall meet at a mutually acceptable
time and location within thirty (30) days after the Notice Date and attempt to
negotiate a settlement. If the Senior Executives fail to meet within the
thirty-day period, or if the matter remains unresolved for a period of sixty
(60) days after the Notice Date, then either party may submit the dispute to
arbitration as provided in this Section 12.2.
12.2.2. ARBITRATION. Any dispute, controversy, or claim
arising out of or relating to this Agreement or the breach, termination, or
invalidity thereof, shall be finally settled by binding arbitration in New York,
New York in accordance with the then-existing rules (the "Rules") of the
American Arbitration Association ("AAA"), except as otherwise provided in this
Subsection. Any award or decision by the arbitrators shall be final and binding
upon the parties, and judgment thereon may be entered in any court having
jurisdiction thereof. All disputes involving issues of a scientific or technical
nature, such as whether an ArQule Compound is an Active Compound or confirmed
Active Compound or whether the Mapping Array Sets have the requisite average
purity levels, and disputes involving intellectual property issues, such as the
legitimate scope of a claim in a Patent Right, shall be decided by a sole
arbitrator who is an experienced medicinal chemist (in the case of scientific or
technical issues) or an experienced patent attorney with reasonable expertise in
the technological subject matter at issue (in the case of intellectual property
issues). The arbitrator shall be appointed by the parties. If the parties fail
to agree on an arbitrator within thirty (30) days after the date upon which a
party first demanded
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*Confidential treatment has been requested for the marked portion.
22
<PAGE> 23
arbitration, then each party shall designate a neutral representative who
together shall appoint an arbitrator within thirty (30) days, failing which the
arbitrator shall be appointed by the AAA in accordance with the Rules. All other
disputes shall be decided by a majority of the members of the Board of
Arbitration consisting of three (3) members, one (1) of whom shall be appointed
by each party and the third of whom shall be the chairman of the panel and be
appointed by mutual agreement of the two (2) party appointed arbitrators. In the
event of failure of the two (2) arbitrators to agree within sixty (60) days
after the commencement of the arbitration proceeding upon the appointment of the
third arbitrator, the third arbitrator shall be appointed by the AAA in
accordance with the Rules. An arbitration proceeding under this Section shall be
deemed to commence upon request or demand for arbitration filed with the AAA.
The arbitrator(s) shall apply the law as set forth in Section 14.10. below. The
arbitrator(s) shall provide for discovery by the parties not to exceed six (6)
months from the filing date of the arbitration demand. The arbitrator(s) shall
be required to render a brief written decision, which shall set forth the
rationale underlying the decision, within thirty (30) days after the hearings
are completed. The arbitrator(s) may award the prevailing party its costs and
reasonable attorneys fees, in addition to any other award granted to such party.
12.3. PRESERVATION OF RIGHTS PENDING RESOLUTION.
-----------------------------------------
12.3.1. PERFORMANCE TO CONTINUE. Each party shall continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out or relating to this Agreement; provided, however, that a
party may suspend performance of its obligations during any period in which the
other party fails or refuses to perform its obligations.
12.3.2. PROVISIONAL REMEDIES. Although the procedures
specified in this Article are the sole and exclusive procedures for the
resolution of disputes arising out of relating to this Agreement, either party
may seek a preliminary injunction or other provisional equitable relief if, in
its reasonable judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.
12.3.3. STATUTE OF LIMITATIONS. The parties agree that all
applicable statutes of limitation and time-based defenses (such as estoppel and
laches) shall be tolled while the procedures set forth in Subsections 12.2.1.
and 12.2.2. are pending. The parties shall take any actions necessary to
effectuate this result.
13. INDEMNIFICATION AND INSURANCE.
-----------------------------
13.1. INDEMNIFICATION. PRI agrees to defend, indemnify and hold ArQule,
its Affiliates and their respective directors, officers, employees, and agents
(the "Indemnitees") 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,
officers, employees, or agents as a result of: (i) actual or asserted violations
by PRI or its Affiliates, sublicensees, or third party manufacturers of any
applicable law or regulation that relates to the manufacture, distribution, or
sale of any product containing an ArQule Compound, Analog, or Royalty-Bearing
Product, including without any alleged or actual claim that such
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<PAGE> 24
product was adulterated, misbranded, or mislabeled; (ii) claims for bodily
injury, death, or property damage attributable to the manufacture, distribution,
sale, or use by PRI or its Affiliates, sublicensees, or third party
manufacturers of any product containing an ArQule Compound, Analog, or
Royalty-Bearing Product; or (iii) a recall ordered by a governmental agency, or
required by a confirmed failure, of any product containing an ArQule Compound,
Analog, or Royalty-Bearing Product that is manufactured, distributed, or sold by
PRI, its Affiliates, sublicensees, or third party manufacturers; provided,
however, that such indemnification shall not apply to any liability, damage,
loss or expense to the extent directly attributable to (i) the negligent
activities or intentional misconduct of the Indemnitees or (ii) the settlement
of a claim, suit, action, or demand by the Indemnitees without the prior written
approval of PRI.
13.2. PROCEDURE. The Indemnitees agree to provide PRI with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. PRI agrees, at its own expense,
to provide attorneys reasonably acceptable to ArQule to defend against any such
claim. The Indemnitees shall cooperate fully with PRI in such defense and will
permit PRI to conduct and control such defense and the disposition of such
claim, suit, or action (including all decisions relative to litigation, appeal,
and settlement); provided, however, that any Indemnitee shall have the right to
retain its own counsel, at the expense of PRI, if representation of such
Indemnitee by the counsel retained by PRI would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. PRI agrees to keep ArQule informed of
the progress in the defense and disposition of such claim and to consult with
ArQule with regard to any proposed settlement.
13.3. INSURANCE. During any period in which PRI makes any ArQule
Compound, Analog, or Royalty-Bearing Product available for administration to a
human subject, PRI shall maintain policies of commercial general liability
insurance and product liability insurance in an amount not less than $5 million
per occurrence.
14. MISCELLANEOUS.
-------------
14.1. PUBLICITY. Neither party shall reveal the terms of this Agreement
or use the name of the other party in connection with any promotional statements
to the public about the work performed under this Agreement or the relationship
between the parties, whether in a press release, advertisement, promotional
sales literature, or other promotional oral or written statements, without the
prior written approval of the other party, except for restatements of
previously-approved statements and disclosures required by applicable law or
regulation.
14.2. RELATIONSHIP OF PARTIES. For the purposes of this Agreement, each
party is an independent contractor and not an agent or employee of the other
party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or authorized in writing.
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14.3. REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants to the other party (i) that it has the legal right, power, and
authority to enter into this Agreement, to extend the rights and licenses
granted to the other party in this Agreement, and to fully perform its
obligations under this Agreement, and (ii) 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. In the event that a
party becomes aware that any of its representations and warranties under this
Section become untrue during the term of this Agreement, such party shall
immediately furnish the other party with written notice which describes the
facts in reasonable detail.
14.4. 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.
14.5. HEADINGS. All headings in this Agreement are for convenience only
and shall not affect the meaning of any provision hereof.
14.6. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective lawful successors and assigns.
14.7. ASSIGNMENT. Neither party may assign this Agreement without the
prior written consent of the other party, except that a party may assign this
Agreement to an Affiliate or 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.
14.8. 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 national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:
If to PRI:
The R.W. Johnson Pharmaceutical Research Institute
920 U.S. Route 202 South
P.O. Box 300
Raritan, New Jersey 08869-0602
Attention: President
Facsimile: 908-707-1895
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With a copy to: Office of General Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Facsimile: 732-524-2788
If to ArQule:
ArQule, Inc.
200 Boston Avenue
Medford, MA 02155
Attn: President
Tel: (781) 395-4100
Fax: (781) 393-8321
With a copy to:
ArQule, Inc.
200 Boston Avenue
Medford, MA 02155
Attn: Legal Department
Tel: (781) 395-4100
Fax: (781) 393-8321
Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section.
14.9. AMENDMENT AND WAIVER. This Agreement may be amended,
supplemented, or otherwise modified at any time, but 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.
14.10. GOVERNING LAW. This Agreement and the legal relations among the
parties shall be governed by and construed in accordance with the laws of the
State of Delaware irrespective of any conflict of laws principles.
14.11. HART-SCOTT-RODINO ACT. If required by law, the parties shall, at
their own expense, prepare and make appropriate filings under Title II of the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules
and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as
soon as reasonably practicable. The parties shall co-operate in the antitrust
clearance process and agree to furnish promptly to the FTC and the Antitrust
Division of the Department of Justice any additional information reasonably
requested by them in connection with such filings.
26
<PAGE> 27
14.12. 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 this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.
14.13. NON-SOLICITATION. During the term of the ArQule compound supply
as set forth in Section 11.2. and thereafter for a period of two (2) years, PRI
shall not persuade or induce, or attempt to persuade or induce, any ArQule
employee to discontinue his or her employment with ArQule in order to become
employed by or associated with PRI; its Affiliates; or any other business,
enterprise, or effort that is associated with PRI.
14.14. RIGHTS UPON INSOLVENCY. All rights and licenses to Patent Rights
granted under or pursuant to this Agreement by ArQule to PRI are, for all
purposes of Section 365(n) of Title 11 of the U.S. Code ("Title 11"), licenses
of rights to "intellectual property" as defined under Section 101(60) of Title
11. The parties agree that PRI shall retain and may fully exercise all of its
rights and elections under Title 11. ArQule agrees during the term of this
Agreement to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, of all such Patent
Rights. If a case is commenced by or against ArQule under Title 11, then ArQule
(in any capacity, including debtor-in-possession) and its successors and assigns
(including, without limitation, a Title 11 trustee) shall either (i) provide PRI
access to, or if appropriate provide PRI with a duplicate copy of, all such
intellectual property (including all embodiments thereof) held by ArQule and
such successors and assigns, as PRI may elect in a written request, immediately
upon such request, or (ii) perform all of the obligations provided in this
Agreement to be performed by ArQule; provided, however, that ArQule shall
fulfill the obligations set forth in clause (i) above in the event that this
Agreement is rejected as provided in Title 11 and PRI elects to retain its
rights hereunder as provided in Title 11. All rights, powers and remedies of
PRI, as a licensee hereunder, provided herein are in addition to and not in
substitution for any and all other rights, powers and remedies now or hereafter
existing at law or in equity (including, without limitation, Title 11) in the
event of the commencement of a Title 11 case by or against ArQule. PRI, in
addition to the rights, powers and remedies expressly provided herein, shall be
entitled to exercise all other such rights and powers and resort to all other
such remedies as may now or hereafter exist at law or in equity (including Title
11) in such event.
14.15. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all prior or contemporaneous oral and prior written
agreements and understandings.
14.16. ADVICE OF COUNSEL. PRI and ArQule have each consulted counsel of
their choice regarding this Agreement, and each acknowledges and agrees that
this Agreement shall not be deemed to have been drafted by one party or another
and will be construed accordingly.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as a sealed instrument effective as of the date first above
written.
27
<PAGE> 28
R.W. JOHNSON PHARMACEUTICAL
RESEARCH INSTITUTE
By: /s/ Per A. Peterson
------------------------------------------------
Per A. Peterson
President
ARQULE, INC.
By: /s/ Eric B. Gordon
------------------------
Eric B. Gordon
President and Chief Executive Officer
28
<PAGE> 29
EXHIBIT A
---------
TERMS AND CONDITIONS OF PATENT LICENSE
The following terms and conditions supplement the provisions of the Agreement.
1. DEFINITIONS.
-----------
1.1. "COMPOUND ARRAY" means a plurality of chemical compounds arranged
in a spatially addressable format.
1.2. "LICENSED ARRAY" means any Compound Array that cannot be
developed, manufactured, used, or sold without infringing one or more claims
under the Licensed Patents, excluding (i) the specific Compound Array and
individual chemical compounds disclosed in the example in the Licensed Patents
and (ii) Compound Arrays and individual chemical compounds that incorporate the
specific chemistries disclosed in the Licensed Patents (e.g., aminimide- and
oxazolone-based chemistries).
1.3. "LICENSED PATENTS" means U.S. Patent Nos. 5,712,171 and 5,736,412
entitled "Method of Generating a Plurality of Chemical Compounds in a Spatially
Arranged Array" and any divisional, continuation, reissue, or reexamination of
such patents, and any foreign counterparts to such patents.
1.4. "LICENSED PROCESS" means a process used to produce a Compound
Array if the process cannot be developed or performed without infringing one or
more claims under the Licensed Patents.
2. GRANT OF RIGHTS.
---------------
During the term of this Agreement, ArQule hereby grants to PRI and its
Affiliates a non-exclusive, worldwide license (without the right to sublicense)
under the Licensed Patents to develop, make, and use Licensed Arrays and to
develop and perform Licensed Processes for its own internal research and
development efforts. This license grant is expressly limited to the Licensed
Patents and does not extend to any other current or future issued patents within
ArQule Patent Rights.
3. INDEMNIFICATION.
---------------
3.1. INDEMNIFICATION. PRI agrees to defend, indemnify and hold ArQule,
its Affiliates and their respective directors, officers, employees, and agents
(the "Indemnitees") 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,
officers, employees, or agents as a result of: (i) actual or asserted violations
by PRI or its Affiliates, sublicensees, or third party manufacturers of any
applicable law or regulation that relates to the manufacture, distribution, or
sale of any Licensed Array or other product developed
29
<PAGE> 30
or discovered using the Licensed Process, including without any alleged or
actual claim that such product was adulterated, misbranded, or mislabeled; (ii)
claims for bodily injury, death, or property damage attributable to the
manufacture, distribution, sale, or use by PRI or its Affiliates, sublicensees,
or third party manufacturers of any Licensed Array or other product developed or
discovered using the Licensed Process; or (iii) a recall ordered by a
governmental agency, or required by a confirmed failure, of any Licensed Array
or other product developed or discovered using the Licensed Process that is
manufactured, distributed, or sold by PRI, its Affiliates, sublicensees, or
third party manufacturers; provided, however, that such indemnification shall
not apply to any liability, damage, loss or expense to the extent directly
attributable to (i) the negligent activities or intentional misconduct of the
Indemnitees or (ii) the settlement of a claim, suit, action, or demand by the
Indemnitees without the prior written approval of PRI.
3.2. PROCEDURE. The Indemnitees agree to provide PRI with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. PRI agrees, at its own expense,
to provide attorneys reasonably acceptable to ArQule to defend against any such
claim. The Indemnitees shall cooperate fully with PRI in such defense and will
permit PRI to conduct and control such defense and the disposition of such
claim, suit, or action (including all decisions relative to litigation, appeal,
and settlement); provided, however, that any Indemnitee shall have the right to
retain its own counsel, at the expense of PRI, if representation of such
Indemnitee by the counsel retained by PRI would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. PRI agrees to keep ArQule informed of
the progress in the defense and disposition of such claim and to consult with
ArQule with regard to any proposed settlement.
4. MISCELLANEOUS.
-------------
4.1. MARKING OF LICENSED ARRAYS. To the extent commercially feasible
and consistent with prevailing business and legal practices, PRI shall mark, and
shall cause its Affiliates to mark, all Licensed Arrays that are produced under
this Agreement with the number of each issued patent under the Licensed Patents
that applies to such Licensed Array.
4.2. COMPLIANCE WITH LAW. PRI shall comply with, and shall ensure that
its Affiliates comply with, all local, state, federal, and international laws
and regulations relating to the development, manufacture, use, and sale of
Licensed Arrays. PRI expressly agrees that PRI and its Affiliates shall comply
with all United States laws and regulations controlling the export of certain
commodities and technical data, including without limitation all Export
Administration Regulations of the United States Department of Commerce.
30
<PAGE> 1
EXHIBIT 11.1
ARQULE, INC.
STATEMENT RE COMPUTATION OF UNAUDITED PRO FORMA NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (2,993) $ 291 $ (6,462)
======== ======== ========
Weighted average shares outstanding:
Common Stock 2,272 11,282 12,031
Weighted average common shares outstanding 2,272 11,282 12,031
======== ======== ========
Basic net income (loss) per share $ (1.32) $ 0.03 $ (0.54)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $(2,993) $ 291 $(6,462)
Weighted average shares outstanding:
Common Stock 2,272 11,282 12,031
Common Stock equivalents -- 1,112 --
------- ------- -------
Weighted average common shares and equivalents 2,272 12,394 12,031
outstanding
======= ======= =======
Diluted net income (loss) per share $ (1.32) $ 0.02 $ (0.54)
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
ARQULE, INC.
SUBSIDIARIES OF THE COMPANY
ArQule Catalytics, Inc., a majority-owned subsidiary of ArQule, is incorporated
in Delaware.
<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 January 28, 1999 with
respect to the financial statements of ArQule, Inc., included in the Annual
Report on Form 10-K for the year ended December 31, 1998.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,780
<SECURITIES> 28,090
<RECEIVABLES> 5,708
<ALLOWANCES> 0
<INVENTORY> 526
<CURRENT-ASSETS> 41,003
<PP&E> 26,889
<DEPRECIATION> (9,068)
<TOTAL-ASSETS> 60,480
<CURRENT-LIABILITIES> 5,457
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 54,145
<TOTAL-LIABILITY-AND-EQUITY> 60,480
<SALES> 0
<TOTAL-REVENUES> 22,193
<CGS> 14,036
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169
<INCOME-PRETAX> (6,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,462)
<EPS-PRIMARY> ($0.54)
<EPS-DILUTED> ($0.54)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ARQULE, INC.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
MARCH 1999
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
year ended December 31, 1998, the Company had a net loss of $6.5 million. For
the year ended December 31, 1997, the Company had net income of $0.3 million. In
1996, the Company had a net loss of $3.0 million. 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, substantially 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 realized one milestone payment to date.
The Company has not realized any other 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 become 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
<PAGE> 2
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 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.
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
<PAGE> 3
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 seven issued
utility patents and one issued design patent in the United States, four issued
Australian patents, 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, the Company has
received seven utility patents and one design patent in the United States, and
four patents in Australia. There can be no assurance that other patents will
issue to the Company 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 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
<PAGE> 4
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 partners 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 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.
