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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-22383
TRANSCEND THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 04-3174575
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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640 MEMORIAL DRIVE, CAMBRIDGE, MA 02139
(Address of principal executive offices)
(617) 374-1200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check [X] whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 [X] 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 the 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 the voting common equity held by
non-affiliates of the Registrant based upon the closing sales price of Common
Stock on March 25, 1998 as reported on the Nasdaq National Market, was
approximately $4.2 million. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 25, 1998, 5,762,763 shares of the Registrant's Common Stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Stockholders to be held on May 20, 1998 are incorporated by reference in Items
10, 11, 12, 13 of Part III of this Report on Form 10-K.
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TRANSCEND THERAPEUTICS, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 15
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
PART III.
Item Directors and Executive Officers of the Registrant..........
10. 40
Item Executive Compensation......................................
11. 40
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 40
Item Certain Relationships and Related Transactions..............
13. 40
PART IV.
Item Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 40
Signatures.................................................. 41
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THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING THOSE
REGARDING THE COMPANY'S EFFORTS IN THE DEVELOPMENT AND COMMERCIALIZATION OF ITS
POTENTIAL PRODUCT CANDIDATES. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN
THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES", "ANTICIPATES",
"PLANS", "EXPECTS", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THE IMPORTANT FACTORS DISCUSSED BELOW UNDER THE
CAPTION "CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS," AMONG
OTHERS, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY
FORWARD-LOOKING STATEMENTS MADE HEREIN AND PRESENTED ELSEWHERE BY MANAGEMENT
FROM TIME TO TIME.
Procysteine(R) is a registered trademark and Transcend Therapeutics(TM) is
a trademark of Transcend Therapeutics, Inc. All other trademarks or trade names
referred to in this report on Form 10-K are the property of their respective
owners.
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PART I.
ITEM 1. BUSINESS
Transcend Therapeutics, Inc. ("Transcend" or the "Company") is developing
novel pharmaceuticals, with its initial compounds focusing on the treatment of
diseases associated with oxidative stress and resultant tissue damage. The
Company's primary focus has been development of Procysteine(R), an intracellular
glutathione repleting agent, for the treatment of Acute Respiratory Distress
Syndrome ("ARDS"). In the second quarter of 1997, the Company began a Phase III
clinical trial (the "Phase III Clinical Trial") to determine the safety and
efficacy of Procysteine in intravenous formulations ("Procysteine i.v.") for the
treatment of ARDS. In March 1998, the Company suspended the Phase III Clinical
Trial following a recommendation of an independent Safety Monitoring Board. The
Safety Monitoring Board had determined following a review of preliminary
mortality data on a total of 213 patients enrolled through March 18, 1998 that
the incidence of all-cause mortality in patients receiving Procysteine i.v. was
higher than the incidence in patients receiving a placebo. The Company intends
to conduct a full review of the data to determine whether to resume its work
with Procysteine i.v. for the treatment of ARDS. If the Company does not resume,
or significantly delays, its work with Procysteine i.v. for the treatment of
ARDS, the Company's business, financial condition and results of operations will
be adversely affected.
In February 1997, the Company and Boehringer Ingelheim International GmbH
("BI") entered into a Development and License Agreement ("BI Agreement")
relating to the worldwide development and marketing of Procysteine i.v. for the
treatment and prevention of ARDS and the related condition, multiple organ
dysfunction ("MOD"). Under the BI Agreement, the Company granted to BI an
exclusive worldwide license to use and sell Procysteine i.v. for all
pharmaceutical applications. The Company has agreed with BI to use an aggregate
of $10 million in proceeds from BI only for the clinical development of
Procysteine i.v. for use in the treatment of ARDS. The Company had incurred $7.3
million of ARDS development expenses under the BI Agreement through February 28,
1998.
OXIDATIVE TISSUE DAMAGE
While oxygen is vital to life, it can also be extremely toxic. As a
by-product of normal metabolism, the body produces small amounts of highly
reactive, toxic molecules called reactive oxygen species ("ROS"). In addition,
larger quantities of ROS are produced by activation of neutrophils, a type of
white blood cell, as part of the body's immune response against infection.
Although ROS help kill infectious organisms, the excessive production of ROS, as
part of the inflammatory response to infection, can also cause oxidative tissue
damage. In some conditions associated with massive acute inflammation, such as
severe infection, multiple trauma and extensive burns, activation of neutrophils
may produce such large quantities of ROS that severe tissue damage in organs
occurs, leading to organ dysfunction and in many cases death.
Transcend is developing small molecule, intracellular glutathione-repleting
agents designed to limit or prevent oxidative tissue damage. One of the body's
principal means for protecting cells from oxidative tissue damage is the
molecule glutathione, a small peptide found in high concentrations throughout
the body. Glutathione is produced inside cells from three amino acids,
L-cysteine, L-glutamic acid and glycine. Procysteine, the Company's first
product candidate, is a delivery system for the introduction of the amino acid
cysteine into cells. Procysteine readily enters cells, where it is converted
into cysteine that is then available for glutathione synthesis.
PRODUCT DEVELOPMENT PROGRAMS
During 1997, the primary focus of the Company's product development program
was to initiate and implement the Phase III Clinical Trial of Procysteine i.v.
for the treatment of ARDS. The Company has suspended the Phase III Clinical
Trial following the recommendation of an independent Safety Monitoring Board.
The Company intends to conduct a full review of the data to determine whether to
resume its work with Procysteine i.v. for the treatment of ARDS. Subject to the
review of data from the Phase III Clinical Trial, the Company currently plans to
conduct further Phase I/Phase II clinical trials of oral Procysteine for the
treatment of amyotrophic lateral sclerosis ("ALS") and atherosclerotic
cardiovascular disease ("ASCVD") as well as to conduct additional early stage
preclinical research for the TR-500 compounds in its portfolio.
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ACUTE RESPIRATORY DISTRESS SYNDROME ("ARDS")
ARDS, a disorder characterized by severe lung dysfunction, is a devastating
complication of conditions associated with massive acute inflammation, such as
severe infection, multiple traumatic injury, cardiac surgery, and extensive
burns. The disorder affects an estimated 150,000 patients in the United States
annually, with a mortality rate of approximately 40 percent. ARDS is often
associated with dysfunction of other organs such as the kidneys, liver and
heart.
The Company believes that there are currently no commercially available
drug treatments for ARDS. Treatment for patients suffering from ARDS is
administered in a hospital intensive care unit and is generally limited to
supportive care, consisting of highly invasive mechanical ventilation.
Mechanical ventilation involves forcing air containing high concentrations of
oxygen into the lungs through an endotracheal tube inserted through a patient's
nose or mouth. Patients must be sedated because this process usually causes
extreme discomfort. Patients requiring mechanical ventilation for more than two
weeks generally require surgical insertion of a tracheostomy tube to avoid
complications of prolonged nasotracheal or orotracheal intubation. As long as
the patient is on mechanical ventilation, there is an increased risk of serious
complications, including hospital-acquired infection with drug resistant
organisms.
ROS play a central role in ARDS. In connection with the onset of ARDS,
neutrophils activate and adhere to the surface of pulmonary capillaries. These
neutrophils then release ROS and protease enzymes which cause the damage to lung
tissue. Glutathione, which is normally present in lung cells and in lung fluid
in high concentrations, neutralizes or inactivates these ROS and limits
oxidative damage. Anti-protease enzymes are present in the lung under normal
conditions and protect the lung against damage. The protective effect of
anti-proteases is lost in the presence of excessive ROS. Preclinical studies
indicate that glutathione may prevent further lung damage indirectly, by
blocking ROS inhibition. The clinical result of excess ROS in the lungs is a
swelling of the normally thin walls lining the air spaces that impedes the
movement of oxygen from the air spaces into the bloodstream. Patients with ARDS
require supplemental oxygen and mechanical ventilation in order to maintain
sufficient oxygen for the body's tissues, but the oxygen rich air provided by
the ventilator has the potential to exacerbate oxidative tissue damage.
The Company believes that increasing glutathione levels by administering
Procysteine may prevent additional ROS damage and speed recovery of lung
function, thereby reducing the need for mechanical ventilation. Because of
multiple complications associated with prolonged mechanical ventilation, the
Company also believes that reduced time on the ventilator is a clinically
important goal in the treatment of ARDS patients and will also likely reduce the
cost of treating these patients.
PROCYSTEINE - INTRAVENOUS FORMULATION
Treatment of Acute Respiratory Distress Syndrome
Phase II Trials. Transcend has sponsored two randomized, double-blind
placebo-controlled Phase II trials of Procysteine which have indicated potential
efficacy in the treatment of patients with ARDS. An objective of the first Phase
II trial was to assess the effect of Procysteine on patients with ARDS. Of the
ARDS patients studied, 17 received 189 mg/kg/day (milligrams of drug/kilogram of
body weight/day) of Procysteine for up to ten days, and 15 received a placebo.
The study results provided evidence that Procysteine-treated patients gained
independence from mechanical ventilation a median of five days earlier than did
placebo-treated patients, which was a statistically significant difference.
The objective of the second Phase II trial was to assess the effect of
Procysteine on blood glutathione levels. This study was conducted in 25 patients
with sepsis syndrome and organ dysfunction, 23 of whom suffered from pulmonary
dysfunction (either acute lung injury or ARDS). Of the 25 patients, 19 received
200 mg/kg/day of Procysteine for up to 21 days and six patients received a
placebo. Prior to administration of Procysteine or the placebo, the patients in
the study had lower blood glutathione concentrations than a healthy control
population. Following administration, average glutathione concentration
increased to a greater degree in the patients receiving Procysteine than in
placebo-treated patients.
As in the first Phase II trial, the results of the second Phase II trial
indicated a reduction in median days on mechanical ventilation among
Procysteine-treated patients compared with placebo patients. However, the
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study was not designed to provide statistical evidence of efficacy and this
trend did not reach statistical significance. The results of the study also
indicated that, as measured by PaO(2)/FiO(2) (an established measure of lung
function), Procysteine-treated patients regained efficiency of the lungs in
transporting oxygen to the bloodstream to a greater degree than placebo-treated
patients.
Phase III Trials. Based on the results of the Phase II trials and on
discussions with the FDA, Transcend began its Phase III Clinical Trial in May
1997. The Phase III Clinical Trial is designed as a randomized, double-blind,
placebo-controlled trial of approximately 350 newly-diagnosed ARDS patients. The
protocol for the double-blind, placebo-controlled clinical trial required an
Interim Safety Evaluation after 150 patients were enrolled. The evaluation was
conducted by an independent Safety Monitoring Board on patients enrolled through
January 26, 1998. The Safety Monitoring Board recommended that the study be
continued. However, following an updated review of preliminary mortality data on
a total of 213 patients enrolled through March 18, 1998, the Safety Monitoring
Board concluded that the incidence of all-cause mortality in patients receiving
Procysteine i.v. was higher than the incidence in patients receiving a placebo.
On March 20, 1998, the Company suspended the Phase III Clinical Trial following
recommendation of the Safety Monitoring Board. The Company intends to conduct a
full review of the data to determine whether to resume its work with Procysteine
i.v. for the treatment of ARDS. If the Company does not resume, or significantly
delays, its work with Procysteine i.v. for the treatment of ARDS, the Company's
business, financial condition and results of operations will be adversely
affected.
The protocol for the Phase III Clinical Trial provides that patients
enrolled in the Trial receive either 210 mg/kg/day of Procysteine or a placebo
for up to 14 days. The Company expected the trial to involve a total of
approximately 75 centers and expected to complete enrollment in the trial by the
end of 1998. The protocol provides that the primary endpoint for the trial is
the number of days patients are alive and off-ventilator over a 30-day trial
period. This endpoint is designed to provide an accurate and quantifiable
measure of the clinical benefit as measured by reduction in ventilator days,
while accounting for the high mortality rate in these patients. Secondary
endpoints in the trial include the effect of Procysteine treatment on mortality,
lung function and other organ function. The Company believes that the use of
non-mortality endpoints has become generally accepted as a measure of clinical
benefit in ARDS treatment studies. In anticipation of its Phase III Clinical
Trial, the Company analyzed its initial Phase II trial results using the
proposed Phase III Clinical Trial primary endpoint and confirmed a trend,
although not statistically significant, in favor of Procysteine-treated
patients. The Company intends to rely on third parties to assist it in
monitoring the Phase III Clinical Trial, if resumed, and managing data generated
in the trial.
Whereas two studies are a customary basis for approval for new drugs, in
life-threatening conditions such as ARDS which lack effective therapy,
regulatory agencies have become willing to consider approval based upon just a
single trial. Based on discussions with the FDA prior to the suspension of the
Phase III Clinical Trial, if the results of a Phase III clinical trial are
conclusive, the Company expects to be able to submit an NDA upon completion of
one trial.
As of March 20, 1998, when the Phase III Clinical Trial was suspended, the
Company has initiated 73 clinical sites, including 10 sites in Europe, and
enrolled 214 patients in the study.
The Company has been granted orphan-drug designation by the FDA for
Procysteine for the treatment of ARDS. See "Business -- Government Regulation."
Prevention of ARDS and MOD
Patients at risk of developing ARDS are also at risk of developing
dysfunction of other organs. The failure of one organ, such as the lungs, places
other organs at risk of failure. The failure of two or more organs, known as
multiple organ dysfunction or MOD, generally has catastrophic consequences for
the patient. Organ systems that are frequently affected in MOD include the lungs
(ARDS), kidneys (acute renal failure), the liver (acute hepatic failure) and the
heart (cardiovascular collapse). While the mortality rate of patients with a
single organ failure is 30 to 40 percent, the mortality rate rises to more than
60 percent when two organs fail and exceeds 90 percent when a third organ fails.
In addition, MOD exacts a significant cost on the healthcare system. MOD
patients are treated in intensive care units, with costs averaging $100,000 per
patient. The Company estimates that there are over 750,000 patients annually in
the United States at risk of MOD. These
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patients include those patients with ARDS as well as those who suffer from acute
conditions such as severe infection, multiple trauma, cardiac surgery, and
extensive burns. Because of the difficulty of determining which patients will
develop MOD and due to the higher rate of mortality that occurs when a single
organ dysfunction progresses to MOD, the Company believes it would be more
effective to administer treatment prophylactically.
The Company believes there are currently no commercially available drugs to
prevent ARDS or MOD. As in ARDS, mechanical support for other failed organs
(e.g., dialysis to support kidney function), and pharmacological treatments for
complications arising from MOD, are the sole available therapies. Because most
methods of mechanical intervention, such as dialysis, are invasive, they also
carry additional risks to patients.
Published clinical studies have indicated that the same process of
oxidative tissue damage that results in ARDS also contributes to the development
of MOD. The Company believes, based on published and Company-sponsored
preclinical studies, that Procysteine may be effective in the prevention of ARDS
and/or MOD in patients with acute conditions such as severe infection, multiple
trauma and extensive burns. In the Company's first ARDS Phase II trial, there
was a statistically significantly lower percentage of patients with new organ
dysfunction (other than lung) in the group receiving Procysteine compared to the
placebo group. In the second trial sponsored by the Company including patients
with ARDS (and who are at risk of MOD), a reduced level of glutathione was
shown. Additional Phase II work will be required to complete a Phase II program
for the use of Procysteine for the prevention of ARDS and/or MOD. The Company's
Phase III Clinical Trial for ARDS, if completed, is also expected to provide
data on the potential of Procysteine to prevent progression to MOD.
Under the BI Agreement, BI has the right to participate in the development
of and to commercialize Procysteine i.v. worldwide for the treatment and
prevention of MOD. If BI exercises this right, it will be required to share in
clinical development funding or reimburse the Company for clinical development
costs. See "Business -- Boehringer Ingelheim." The Company believes that, unlike
in ARDS trials, non-mortality endpoints have not become generally accepted as
measures of clinical benefit in trials for the treatment or prevention of other
organ dysfunction and as a result, additional research will be necessary to
define an appropriate endpoint. Further, since not all patients in a prevention
trial develop ARDS and/or MOD, a trial for the prevention of ARDS and/or MOD
would require a considerably larger number of patients than a trial for the
treatment of ARDS. If BI does not elect to participate in the development of
Procysteine i.v. for the prevention of ARDS and/or MOD, the Company will be
required to raise substantial additional funds to pursue further research and
development. If the Company undertakes such an ARDS/MOD prevention program,
there can be no assurance that the results of earlier studies on the use of
Procysteine for the prevention of ARDS and/or MOD will be predictive of results
that will be obtained from more extensive clinical testing.
PROCYSTEINE -- ORAL FORMULATION
Transcend has conducted Phase I/II trials with oral Procysteine to
determine its potential application for the treatment of ALS and ASCVD. Subject
to the review of data from the Phase III Clinical Trial and the availability of
adequate financing, the Company plans to conduct expanded Phase II clinical
trials for either or both of these indications. If such studies are conducted
and yield positive results, the Company would seek to outlicense its rights to
oral Procysteine for ALS and/or ASCVD.
Amyotrophic Lateral Sclerosis
The inherited form of ALS, a fatal degenerative disorder, is widely
believed to be the result of a malfunctioning enzyme that results in increased
ROS. The Company believes, based on published preclinical studies, that
increasing glutathione levels in nerve cells in such patients may reduce or
prevent further oxidative tissue damage. The Company sponsored a Phase I/II
clinical trial which demonstrated that Procysteine entered the cerebrospinal
fluid in ALS patients, indicating that Procysteine is able to gain access to
nerve cells. Based on this result, the Company may conduct a Phase II trial to
evaluate the efficacy of
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Procysteine in limiting neuromuscular degeneration in patients with ALS. There
can be no assurance, however, that the study will be conducted or completed or
that the results of this study will be positive.
The Company has been granted orphan drug designation by the FDA for
Procysteine for the treatment of ALS. See "Business -- Government Regulation."
Atherosclerotic Cardiovascular Disease
Atherosclerotic cardiovascular disease ("ASCVD"), a major risk factor for
heart attack and stroke, is characterized by a narrowing of the arteries by
lipid deposits and the loss of blood vessel elasticity. There is growing
evidence in the medical literature that increased vascular oxidative stress is a
primary mechanism of impaired blood vessel elasticity in patients with
atherosclerosis. The Company believes, based on preclinical studies, that
Procysteine administration may improve blood vessel elasticity. As a result, it
may enhance blood flow, and reduce the risk and severity of heart attack in
patients with coronary artery disease. The Company has completed a Phase I/II
clinical trial in which a single, oral dose of Procysteine rapidly restored
blood vessel elasticity in patients with ASCVD. Based on this result, the
Company may conduct a similar Phase I/II trial using multiple doses of
Procysteine. There can be no assurance, however, that the study will be
conducted or completed or that the results of this study will be positive. See
"Certaing Factors Which May Affect Operating Results"
TR-500 COMPOUNDS (GLUTATHIONE-REPLETING AGENTS)
The TR-500 Compounds are a group of glutathione derivatives that enable the
direct delivery of glutathione into cells. The Company believes that in clinical
conditions, where glutathione cannot be repleted efficiently through the use of
Procysteine, the TR-500 Compounds may serve as second generation
glutathione-repleting agents. The Company believes, based on preclinical
studies, that TR-571 may have potential therapeutic application in hemolytic
anemias where ROS may play a role in blood cell damage. These anemias include
inherited disorders such as sickle cell disease and thalassemia, and acquired
anemias such as the hemolytic anemia associated with dialysis. In addition, the
Company believes, based on preclinical studies, that TR-520 may have potential
therapeutic application in the treatment of acute renal failure, where low
glutathione levels play a role in kidney tissue damage.
BOEHRINGER INGELHEIM
In February 1997, the Company entered into an agreement with Boehringer
Ingelheim International GmbH for the worldwide development and commercialization
of Procysteine i.v. Under the BI Agreement, the Company granted BI an exclusive
worldwide license to use and sell Procysteine i.v. for all pharmaceutical
applications.
The Company has principal responsibility for, and will bear all expenses
related to, the clinical development of Procysteine i.v. for use in the
treatment of ARDS in all countries other than Japan. In December 1997, BI
exercised its rights under the BI Agreement to develop and commercialize
Procysteine i.v. for the treatment of ARDS in Japan. The Company is also
responsible for obtaining at its expense any necessary regulatory approvals
relating to the use of Procysteine i.v. for the treatment of ARDS (other than in
Japan, for which BI is responsible). BI is responsible for the worldwide
marketing, sale and distribution of Procysteine i.v. for the treatment of ARDS.
The Company has retained the right to co-promote Procysteine i.v. in the United
States.
The Company has also granted BI the right to participate in the development
of and to commercialize Procysteine i.v. worldwide for the treatment and
prevention of MOD. If BI exercises its rights with respect to the MOD
indication, it will be required to share in clinical development funding or
reimburse the Company for clinical development costs. However, BI is not
required to exercise its rights until late in the product development process,
if at all, and there can be no assurance that the Company will be able to gain
access to the resources (financial and other) necessary to conduct required MOD
clinical trials if BI declines to exercise its rights or defers such exercise
until later in the product development process. If BI elects not to exercise its
participation rights with respect to the MOD indication, all rights relating
thereto will revert to the Company.
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The Company has also granted BI the right to participate in the development
of and to commercialize Procysteine i.v. for use in indications other than ARDS
and MOD. The Company has retained the right, subject to a right of first
negotiation with BI, to develop and commercialize oral formulations of
Procysteine, including for ALS and ASCVD. The Company has agreed not to
commercialize oral formulations of Procysteine for any indication for which BI
is participating in the development and commercialization of Procysteine i.v.
The Company has agreed to manufacture, either directly or through contract
manufacturers, and supply BI with Procysteine i.v. for clinical trials and
commercial purposes.
BI has paid the Company an upfront license fee of $5.0 million and has made
a $5.0 million equity investment in the Company through the purchase of 500,000
shares of Common Stock at $10.00 per share in the Company's initial public
offering in July 1997. The Company has agreed with BI to use the aggregate $10.0
million in proceeds from BI only for the clinical development of Procysteine
i.v. for use in the treatment of ARDS. BI has also agreed to make additional
payments to the Company, which could total up to $36.0 million, upon the
achievement of clinical development and regulatory milestones relating to ARDS
and, if BI exercises its participation rights, to MOD. More than half of these
milestone payments are payable only with respect to MOD-related development.
Because BI is not required to participate in the development and
commercialization of Procysteine i.v. for MOD, there can be no assurance that BI
will be obligated to make any of the milestone payments relating to the
development of Procysteine i.v. for MOD. BI has also agreed to pay royalties
(and, if applicable, co-promotion payments in the United States) on any sales of
Procysteine i.v.
The Company will be dependent upon the efforts of BI with respect to the
commercialization of Procysteine i.v. There can be no assurance that BI will
commit sufficient marketing resources to the commercialization of the Company's
products. Any failure by BI to commit sufficient marketing resources to the
commercialization of Procysteine i.v. would have a material adverse effect on
the Company's business, financial condition and results of operations.
MANUFACTURING
The Company is responsible for manufacturing and supplying BI with
Procysteine i.v. for clinical trials and commercial purposes. The Company
currently contracts with third-party manufacturers to produce its compounds for
preclinical research and for clinical trials. If the Company commercializes
Procysteine i.v., the Company expects to utilize third-party manufacturers for
commercial production. The Company has established relationships with a third
party to produce bulk quantities of Procysteine and with other parties to
formulate the compound into intravenous and oral forms of Procysteine for
clinical trials. Through third-party manufacturers and formulators, the Company
believes it has produced sufficient Procysteine for use in its Phase III
Clinical Trial. In addition, the Company believes that it will be able to reach
arrangements with third-party manufacturers and formulators on commercially
reasonable terms, and that it will not be necessary for it to develop internal
manufacturing capability in order to successfully commercialize Procysteine.
However, in the event that the Company is unable to obtain contract
manufacturing or formulation services on reasonable terms, it may need to
acquire manufacturing capability or it may be unable to commercialize its
products as planned or satisfy its obligations under the BI Agreement. In
February 1997, the Company's sole supplier of bulk drug substance for
Procysteine was issued a warning letter by the FDA for failure to be in
compliance with cGMP. During 1997, the Company conducted multiple site visits to
the supplier and held detailed discussions with the supplier on resolving the
noncompliance issues. In December 1997, the Company was informed by counsel for
the supplier that the FDA, after reviewing the supplier's responses to FDA's
concerns, now finds the supplier's manufacturing of drug substances to be
acceptable. In any event, the Company believes that alternate suppliers of its
bulk drug substance for Procysteine are available.
SALES AND MARKETING
Under the BI Agreement, BI will be responsible for marketing Procysteine
i.v., subject to certain co-promotion rights in the United States retained by
Transcend. The Company plans to form additional strategic alliances with
established pharmaceutical or biotechnology companies in order to finance the
development of certain of its other product candidates. The Company may elect to
establish a sales force to market and distribute those products for which it
retains marketing rights or shares rights with corporate partners,
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including its copromotion rights under the BI Agreement. There can be no
assurance that the Company will be able to establish in-house sales, marketing
or distribution capabilities or enter into or maintain strategic relationships
for sales, marketing and distribution on a timely basis, or at all.
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success will depend to a significant extent on
obtaining and enforcing patent protection for its products and methods,
including methods for treating or preventing human disease, or for such products
and methods licensed from third parties, maintaining trade secret protection and
operating without infringing the proprietary rights of third parties. As of
December 31, 1997, the Company owns or has exclusively licensed 16 United States
patents and ten United States applications as well as counterparts of these
patents and applications in various foreign jurisdictions. Of these, nine United
States patents and three United States applications relate to the Company's
business as described herein. Specifically, the Company owns a United States
patent application for the use of Procysteine in treating and preventing the
development of ARDS and MOD. During 1997, the Company received a final Office
Action, from the USPTO, rejecting the claims of this patent application as being
obvious over a combination of prior art references. Final Office Actions
commonly are issued by the USPTO. While receipt of a final Office Action may
impose certain procedural limitations on an applicant's subsequent submissions
in a particular case, it does not signal the end of the prosecution process. The
Company has responded to the final Office Action, by the presentation of
additional arguments and facts in support of its position that the patent
application contains patentable subject matter. There can be no assurance,
however, that this patent application ultimately will issue as a patent in the
United States, or, if it issues, as to the breadth of the claims. A
corresponding European patent has issued and has been validated as national
patents in Austria, Belgium, Denmark, France, Germany, Greece, Italy,
Luxembourg, Monaco, the Netherlands, Portugal, Spain, Sweden, Switzerland, and
the United Kingdom, all of which expire in 2011. Corresponding patent
applications are pending in Canada, Australia and Japan.
On July 24, 1997, the Company was informed that Zambon Group S.p.A. of
Italy ("Zambon") had filed a Notice of Opposition in the European Patent Office
against the Company's issued European patent for the use of Procysteine in
treating pulmonary disease, including ARDS. On August 15, 1997, the Company was
informed that Zambon had also filed a Notice of Opposition in the European
Patent Office against the Company's issued European patent for the use of esters
of Procysteine to stimulate the synthesis of glutathione in cells. The Company
has examined the assertions made by Zambon in its Notices of Opposition and
intends to present additional arguments and facts in support of its position
that the patent contains patentable subject matter. An adverse decision by the
European Patent Office in either opposition may result in revocation of the
Company's respective European patent, and patents in individual European
countries issued therefrom, or a narrowing of the claims of such patents, which
could have a material adverse effect on the Company's business. No final
decision would be expected from the European Patent Office for several years.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to methods for treating or preventing human disease, and most particularly for
diseases such as ARDS and MOD, for which the Company believes there is currently
no commercially available drug for treatment or prevention. Substantial periods
of time pass before the USPTO responds on the merits to patent applications and
submissions on behalf of the inventors. In addition, the coverage claimed in a
patent application can be significantly reduced or modified before and after a
patent is issued. Consequently, there can be no assurance that any of the
Company's or any licensor's pending or future patent applications will result in
the issuance of patents or, if any patents are issued, whether the patents will
be subjected to further proceedings limiting their scope, and whether they will
provide significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Because patent applications in the United States
are maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of inventions in scientific or patent
literature often lags behind actual dates of invention, the Company cannot be
certain that it or any licensor was the first inventor of inventions covered by
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
7
<PAGE> 10
There can be no assurance that the Company's or any licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's or any licensor's patents
issue, there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
The Company may be required to obtain licenses to patents or other
proprietary rights of third parties. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or it may be unable to
develop, manufacture or sell products.
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such as ARDS and MOD. If
such data is required, the Company's ability to obtain patent protection could
be delayed or otherwise adversely affected. Although the USPTO issued new
utility guidelines in July 1995 that address the requirements for demonstrating
utility for biotechnology inventions, including for inventions relating to
methods for treating or preventing human disease, there can be no assurance that
USPTO patent examiners will follow such guidelines or that the USPTO's position
will not change with respect to what is required to establish utility for
methods of using Procysteine or future potential products of the Company in the
treatment of human diseases. In addition, there can be no assurance that
compliance with such guidelines will result in valid and enforceable patents.
Furthermore, the enactment of legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to United States Patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of 17 years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened term of patent protection, which may adversely impact the Company's
patent position. In addition, if this change results in a shorter period of
patent coverage, and if the Company negotiates royalties based on the existence
of a valid patent, the Company's business could be adversely affected.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business.
TECHNOLOGY AND LICENSE AGREEMENTS
The Company was formed to develop and commercialize certain rights to
patents and related technology covering methods of using Procysteine and the
TR-500 Compounds ("Covered Technology") which were originally developed at
Cornell Medical College and licensed to Baxter Healthcare Corporation
("Baxter"). In 1989, Baxter and Nestle, Clinical Nutrition, Inc. ("Nestle")
established Clintec Nutrition Company ("Clintec"), and Baxter assigned its
rights in the Covered Technology to Clintec. From 1988 to 1994, Baxter and
Clintec completed various studies of Procysteine, including preclinical studies,
assay development,
8
<PAGE> 11
toxicology, formulation and several clinical studies. In April 1994, the Company
acquired rights to the Covered Technology from Cornell and Clintec.
Cornell Research Foundation
In connection with a Contribution Agreement dated April 5, 1994 (the
"Contribution Agreement") between the Company and Clintec, the Company obtained
an exclusive worldwide license from Cornell (the "Cornell Agreement") to certain
patent as covering methods of using Procysteine to increase intracellular levels
of glutathione and/or cysteine. The Company's rights under the Cornell Agreement
include an exclusive license under a composition of matter patent for the TR-500
series of glutathione-repleting agents.
In consideration for the licenses granted to Transcend under the Cornell
Agreement, Cornell received 28,000 shares of Common Stock. In addition,
Transcend agreed to (i) provide certain funding to Cornell Medical College
(which was fully paid by the Company during 1997); (ii) pay royalties on sales
of products covered by the licensed patents, if any; and (iii) pay annual
minimum royalties which would be credited in any year against earned royalties
due for such year. Under the Cornell Agreement, Transcend agreed to exercise due
diligence in development and commercialization of products covered by the
licensed patents. Any failure to exercise such diligence with respect to a
particular technology licensed under the Agreement would permit Cornell to cause
the license to become non-exclusive.
Clintec Nutrition Company
Pursuant to the Contribution Agreement, the Company acquired from Clintec
various clinical supplies, data, records, contractual and intellectual property
rights related to pharmaceutical applications of the Covered Technology. In
connection with the Contribution Agreement, the Company had granted to Clintec
an exclusive, royalty-free sub-license to the use of the Covered Technology for
certain clinical nutrition and nutritional applications, while retaining
exclusive rights to all pharmaceutical applications of the Covered Technology.
In October 1997, Baxter and Nestle dissolved Clintec and the Company entered
agreements effective in December 1997 with each of them, as the several
successors of Clintec, under which the rights and obligations of the Company
were substantially unchanged. Although no disputes have arisen to date regarding
the exclusive rights of the Company, Clintec or its successors in their
respective fields, such a dispute could have a material adverse effect on the
Company's ability to enter into corporate alliances and license arrangements,
and if resolved in a manner adverse to the Company would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, if the Company decides not to maintain a patent or decides to
abandon an application covered by the agreements with Nestle and Baxter, either
or both may assume the Company's obligations and receive an assignment of the
patent or application.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and other research organizations are actively
engaged in the discovery and development of products in the therapeutic areas
pursued by the Company. Many of these entities have greater financial,
technical, manufacturing and marketing resources than the Company. In addition,
many of these competitors have become more active in seeking patent protection
and licensing arrangements in anticipation of collecting royalties for use of
technology that they have developed.
The Company's ability to compete effectively will depend on its ability to
advance its core technology, maintain a proprietary position in its technology
and products, obtain required governmental approvals on a timely basis, attract
and retain key personnel and develop effective products that can be manufactured
cost-effectively and marketed successfully. The Company expects that competition
among products approved for sales will be based, among other things, on
efficacy, reliability, product safety, price and patent position.
The Company believes there are currently no commercially available drugs to
prevent or treat ARDS. There can be no assurance that research and development
by others will not render any of the Company's planned products obsolete or
uneconomical or result in therapies superior to any developed by the Company,
9
<PAGE> 12
or that any products developed by the Company will be preferred to any existing
or newly developed technologies.
GOVERNMENT REGULATION
The production, marketing, sales and distribution of the Company's products
and its research and development activities are subject to extensive regulation
for safety, efficacy and quality by numerous governmental authorities in the
United States and other countries. In the United States, drugs and certain
biological products are subject to rigorous FDA regulation under the Federal
Food, Drug and Cosmetic Act (the "FDCA"), and the regulations promulgated
thereunder, as well as other federal and state statutes and regulations that
govern, among others, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Product development and approval within this regulatory framework can
take a number of years and requires the expenditure of substantial resources.
Any failure by the Company or its collaborators or licensees to obtain
regulatory approval, or any delay in obtaining such approvals, could adversely
affect the marketing of products being developed by the Company, its ability to
receive product or royalty revenues and its liquidity and capital resources.
Human therapeutics are normally subject to rigorous preclinical and
clinical testing. The standard process required by the FDA before a drug may be
marketed in the United States includes (i) preclinical laboratory tests; (ii)
submission to the FDA of an investigational new drug application ("IND"), which
must be approved before human clinical trials may commence; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug in its intended indication; (iv) submission to the FDA of an NDA; and
(v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Preclinical animal testing is generally conducted in the laboratory to
evaluate the potential safety and efficacy of a drug. Although the results of
preclinical testing may show the efficacy of a product tested in animals, and
may support an application to begin clinical testing, subsequent clinical
testing may not demonstrate comparable effectiveness in humans. The results of
these animal studies are submitted to the FDA as part of the IND and NDA.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with
good clinical practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and, if applicable, the efficacy
criteria to be evaluated. Each protocol must be submitted to the FDA as part of
the IND. Further, each clinical trial must be conducted under the auspices of an
Institutional Review Board ("IRB") at the institution at which the trial will be
conducted. IRBs will consider, among other things, ethical factors, the safety
of human subjects and the possible liability of the institution. Typically,
clinical evaluation involves a three-phase process. In Phase I, trials are
conducted with a small number of human subjects to determine the safety profile,
the pattern of drug distribution and metabolism. In Phase II, trials are
conducted with a larger group of patients afflicted with a specific condition in
order to determine preliminary efficacy, optimal dosages and expanded evidence
with respect to safety. In Phase III, large-scale, often multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data for the statistical proof of safety and efficacy
required by the FDA and other regulatory authorities. There can be no assurance
however, that the data derived from the Phase III Clinical Trial for Procysteine
i.v., if resumed, would prove conclusive or sufficient for regulatory approval
without further Phase III clinical trials. The pertinent Safety Monitoring Board
or the FDA may suspend clinical trials at any time if they believe that the
subjects or patients are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of an NDA. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny an NDA if applicable regulatory criteria are not satisfied,
require additional testing or information, or approve an NDA subject to
postmarketing testing and surveillance or limitations on the indicated uses for
which the
10
<PAGE> 13
subject drug may be marketed. Finally, product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Domestic manufacturing establishments are subject to inspection by the FDA
and must comply with the FDA's current Good Maufacturing Practices ("cGMP"). To
supply products for use in the United States, foreign manufacturing
establishments must comply with cGMP and are subject to periodic inspection by
the FDA or by regulatory authorities in such countries under reciprocal
agreements with the FDA.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that both receives orphan drug
designation by the FDA and is the first product of a chemical moiety to receive
FDA marketing approval for its indication is entitled to receive up to a
seven-year exclusive marketing period in the United States for that indication.
A drug that is considered by the FDA to be different from a particular orphan
drug is not barred from sale in the United States during such exclusive
marketing period. Legislation has previously been introduced in Congress to
limit the marketing exclusivity provided for certain orphan drugs. Although the
outcome of that legislation, if reintroduced, is uncertain, there remains a
possibility that future legislation will limit the incentives currently afforded
to the developers of orphan drugs.
The Company has been granted orphan drug designation for Procysteine for
the treatment of ARDS and ALS. There can be no assurance, however, that a
product considered by the FDA to be different from Procysteine will not be
successfully introduced by a competitor of the Company. Any such product would
not be barred from sale in the United States by the designation of Procysteine
as an orphan drug. If such a drug proved to be safer, more effective or less
costly than Procysteine, the Company's business could be materially adversely
affected.
If and when the Company markets its products outside the United States,
whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign
jurisdictions must be obtained prior to the commencement of human clinical
trials or marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. In addition, the Company's products may be subject to
export control.
EMPLOYEES
As of February 28, 1997 the Company employed 23 persons, five of whom hold
Ph.D. and/or M.D. degrees. The Company's employees are not members of a union,
and the Company believes that it has good employee relations. All of the
Company's employees have signed agreements obligating them to protect the
proprietary nature of the Company's confidential information.
ITEM 2. FACILITIES.
The Company currently holds an operating lease on and occupies
approximately 8,100 square feet of leased office and administrative space at 640
Memorial Drive, Cambridge, Massachusetts. The Company pays approximately
$200,000 annually under its facilities lease. The lease on these facilities
expires in December 1999. The Company believes that suitable additional space
will be available to it, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Registrant's security holders
during the fourth quarter of fiscal 1997.
11
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive officers of the Registrant are as follows:
Hector J. Gomez, M.D., Ph.D., age 59, has served as President, Chief
Executive Officer and a director of the Registrant since November 1994. He
previously served as Vice President of Medical Affairs at Vertex Pharmaceuticals
Incorporated, a rational drug design company, from May 1992 to November 1994.
From December 1991 to May 1992, Dr. Gomez served as Associate Vice President at
Immunomedics, Inc., a biotechnology company. From December 1988 to December
1991, he served as Executive Director of Cardiovascular Clinical Research at
CibaGeigy Corporation ("Ciba-Geigy"), a pharmaceutical company. Previously, Dr.
Gomez served as Director of Clinical Research from 1985 to 1988, at Merck & Co.,
Inc. ("Merck"), a pharmaceutical company.
John J. Whalen, M.D., age 51, has served as Executive Vice President and
Chief Scientific Officer of the Registrant since October 1997. He previously
served as Senior Vice President and Chief Scientific Officer of the Registrant
from October 1995 to October 1997. In addition, he has served as Chairman of the
Registrant's Scientific Advisory Board since October 1995. From 1990 to 1995, he
served as Senior Vice President and General Manager of the Pharmaceutical
Division at Alpha Therapeutic Corporation, a phamaceutical company. He has also
held senior management positions as Vice President of Clinical Research at G.H.
Besselaar Associates and as Director of Clinical Research for
Cardiovascular/Rental Products at Merck, Sharp & Dohme Research Laboratories.
B. Nicholas Harvey, age 37, has served as Senior Vice President, Finance,
Chief Financial Officer and Secretary of the Registrant since October 1997. He
previously served as Vice President, Finance, Chief Financial Officer and
Secretary of the Registrant from December 1992 to October 1997. From February
1992 to December 1992, he was Treasurer at the Computer Power Group, a computer
services and software company. From May 1986 to February 1989, he was Executive
Director at Brunckhorst & Co., an Australian investment firm that he helped to
found. Mr. Harvey received his B.Econ. and LL.B. from the Australian National
University and his M.B.A. from the Harvard Business School in 1991.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Shares of the Company's Common Stock have been traded on the Nasdaq
National Market under the symbol "TSND" since July 2, 1997, when the Company's
registration statement on Form 8-A under the Exchange Act was declared
effective. The following table sets forth, for the periods indicated, the high
and low sale prices of the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
Third Quarter (July 2, 1997 through September 30, 1997).... $10.12 $7.625
Fourth Quarter............................................. $ 9.00 $6.00
</TABLE>
During the fiscal year ended December 31, 1997, the Company made the sales
of unregistered equity securities described below. Other than the stock options
described in paragraph three below, all such sales were consumated prior to the
closing of the initial public offering of the Company's Common Stock in July
1997. No underwriters were engaged in connection with any such sales. The
issuances of equity securities in the transactions described in paragraphs one
and two below were made in reliance upon exemptions from registration
requirements provided by Section 4(2) of the Securities Act and/or Regulation D
under the Securities Act. The issuances of stock options described in paragraph
three below were made in reliance upon the exemption from registration
requirements provided by Rule 701 under the Securities Act.
(1) In March 1997, the Company sold an aggregate of 1,039,000 shares of
Nonconvertible Preferred Stock and warrants to purchase 34,630
shares of Common Stock, to a group of investors, resulting proceeds
to the Company of approximately $1.0 million, Such warrants are
exercisable upon issuance and expire five years from the date of
issuance.
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<PAGE> 15
(2) In May 1997, the Company agreed to issue additional warrants to the
holders of its Nonconvertible Preferred Stock to purchase an
aggregate of 17,320 shares of Common Stock.
(3) During 1997, the Company granted options to purchase 353,568 shares
of Common Stock at exercise prices ranging from $0.50 to $11.00 per
share.
(b) The Company is furnishing the following information with respect to the
use of proceeds from its initial public offering of common stock, $.01 par value
share, which closed in July 1997.
(1) The effective date of the Registration Statement on Form S-1 for the
offering was July 9, 1997, and the commission file number of the
Registration Statement is 333-22817.
(2) The offering commenced on July 9, 1997.
(3) Not applicable. (The offering did not terminate prior to the sale of
any securities.)
(4) (i) The offering terminated on or about July 27, 1997. All of the
shares of Common Stock registered were sold prior to the
termination of the offering.
(ii) The managing underwriters for the offering were EVEREN
Securities, Inc. and Principal Financial Securities, Inc.
(iii) The Company registered shares of its common stock, $.01 par
value per share, in the offering.
(iv) All of the 1,800,000 shares of common stock registered in the
offering were registered and sold for the account the Company.
The aggregate offering price of the shares registered and sold
was $18,000,000.
(v) From July 2, 1997 to December 31, 1997, the actual expenses
incurred for the account of the Company in connection with the
offering were as follows:
<TABLE>
<S> <C>
Underwriting discount.................... $1,260,000
SEC registration fee..................... 9,758
NASD filing fee.......................... 7,440
Nasdaq National Market listing fee....... 35,260
Travel-related expenses.................. 115,000
Transfer agent and Registrar fees........ 5,000
Accounting fees and expenses............. 232,000
Legal fees and expenses.................. 285,000
Printing and mailing expenses............ 235,000
Miscellaneous............................ 75,542
Total.......................... $2,260,000
</TABLE>
Payments of expenses were to persons other than directors,
officers, general partners of the Company or their associates,
persons owning 10% or more of the equity securities of the
Company or affiliates of the Company.
(vi) The net offering proceeds to the Company after expenses were
approximately $15.7 million.
(vii) From July 2, 1997, the effective date of the Registration
Statement, to December 31, 1997, the Company has used the net
offering proceeds to the Company as follows:
<TABLE>
<S> <C>
Accrued contract research payment......... $130,000
Payment of operating expenses............. $370,000
Total........................... $500,000
</TABLE>
Payments of expenses were to persons other than directors,
officers, general partners of the Company or their associates,
persons owning 10% or more of the equity securities of the
Company or affiliates of the Company.
(viii) Not applicable. (The above described use of proceeds does not
materially differ from the use of proceeds described in the
Prospectus for the offering.)
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<PAGE> 16
On March 25, 1998, there were approximately 750 holders of the Company's
Common Stock. On March 25, 1998, the closing price of the Company's Stock on the
Nasdaq National Market was $4.00 per share.
DIVIDENDS
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for use in the operation and growth of its business and therefore, does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------ ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................ $6,095(1) $ -- $ -- $ -- $ 5,000(2)
Operating expenses:
Research and development............ 4,498 2,627 2,739 1,968 4,510
General administration.............. 1,626 1,115 1,645 1,834 3,339
------ ------- -------- -------- --------
Total operating expenses....... 6,124 3,742 4,384 3,802 7,849
------ ------- -------- -------- --------
Loss from operations................... (29) (3,742) (4,384) (3,802) (2,849)
Other income (expense)................. -- 139 (66) (325) 588
------ ------- -------- -------- --------
Net loss............................... (29) (3,603) (4,450) (4,127) (2,261)
Accretion of Nonconvertible Redeemable
Preferred Stock..................... -- (1,111) (1,481) (5,080)(3) (178)
------ ------- -------- -------- --------
Net loss to common stockholders........ $ (29) $(4,714) $ (5,931) $ (9,207) $ (2,439)
====== ======= ======== ======== ========
Net loss per common share(4)........... $ (7.77) $(11.94) $ (0.75)
======== ======== ========
Weighted average common shares
outstanding(4)...................... 763 771 3,267
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------ ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Restricted cash........................ -- -- -- -- $ 5,805
Unrestricted cash and cash
equivalents......................... $ 66 $ 3,461 $ 1,276 $ 640 10,988
Working capital (deficit).............. (63) 3,136 733 96 15,320
Total assets........................... 107 4,257 1,866 1,566 17,426
Senior secured convertible notes....... -- -- 2,000 -- --
Redeemable preferred stock............. -- 8,100 9,581 20,176 --
Deficit accumulated during the
development stage................... (28) (3,631) (8,081) (19,719) (21,980)
Total stockholders' equity (deficit)... (28) (4,368) (10,297) (19,235) 15,766
</TABLE>
- ---------------
(1) Reflects a one-time contract research fee of $6,095,000 for various research
and development services. See Note 2 of Notes to Financial Statements.
(2) Reflects a one-time license fee of $5.0 million received in connection with
the signing of the BI Agreement. See "Business -- Boehringer Ingelheim."
(3) Includes approximately $4.0 million of additional accretion relating to the
exchange of the Series C Convertible Preferred Stock in September 1996.
(4) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per common share.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company develops novel pharmaceuticals, with its initial compounds
focusing on the treatment of diseases associated with oxidative stress and
resulting tissue damage. Since inception, the Company has devoted substantially
all of its resources to the development of Procysteine and related compounds.
The Company has generated no revenue from product sales and has been dependent
upon funding from external financing, contract research and interest income.
In May 1997, the Company began a Phase III clinical trial for the use of
Procysteine i.v. for the treatment of ARDS. Following a review of preliminary
mortality data on a total of 213 patients enrolled in the Phase III clinical
trial through March 18, 1998, an independent Safety Monitoring Board concluded
that the incidence of all cause mortality in patients receiving Procysteine i.v.
was higher than the incidence in patients receiving a placebo. On March 20,
1998, the Company suspended the Phase III clinical trial following the
recommendation of the Safety Monitoring Board. The Company intends to conduct a
full review of the data to determine whether to resume its work with Procysteine
i.v. for the treatment of ARDS.
In February 1997, the Company entered into an agreement with Boehringer
Ingelheim International GmbH for the worldwide development and commercialization
of Procysteine i.v. Under the BI Agreement, the Company granted BI an exclusive
worldwide license to use and sell Procysteine i.v. for all pharmaceutical
applications. The Company has agreed with BI to use an aggregate of $10.0
million in proceeds from BI only for the clinical development of Procysteine
i.v. for use in the treatment of ARDS. The Company incurred $7.3 million of ARDS
development expenses under the BI Agreement through February 28, 1998 of which
$5.8 million has been paid through February 28, 1998.
The Company has accumulated net losses of $22.0 million through December
31, 1997. Losses have resulted principally from costs incurred for clinical and
product development and from general and administrative expenses. The Company
expects to incur additional operating losses over at least the next several
years, and expects such losses to increase as the Company advances its clinical
development programs. The Company's ability to achieve profitability is
dependent on its ability to successfully complete development of, and obtain
regulatory approval for, its planned products, enter into agreements for
commercialization of such products and successfully market such products, as to
which there can be no assurance.
INITIAL PUBLIC OFFERING
In July 1997, the Company completed its initial public offering of 1.8
million shares of Common Stock. The Company received approximately $15.7 million
in proceeds from the sale (net of approximately $2.3 million in underwriting
discounts, commissions and offering costs), including an equity investment of
$5.0 million by BI.
YEAR 2000 INFORMATION
The Company utilizes computer technologies throughout its business to
effectively carry out its day to day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the Year 2000 approaches. The
Company believes that its current systems are adequate with regard to the date
recognition issues inherent with the Year 2000 and does not believe that there
will be a significant impact on its results of operations or financial condition
as a result of any necessary upgrades or systems changes.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
The Company earned revenues of $5.0 million consisting of a non-refundable,
non-creditable licensing fee received under the BI Agreement in the year ended
December 31, 1997 and no revenues in the year ended December 31, 1996.
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The Company's total operating expenses for the years ended December 31,
1997 and 1996 were $7.9 million and $3.8 million, respectively. Research and
development expenses for the years ended December 31, 1997 and 1996 were $4.5
million and $2.0 million, respectively. Research and development expenses
increased in 1997 from 1996 due to expenditures associated with the Company's
ongoing Phase III ARDS clinical trial which commenced in the second quarter of
1997. General and administrative expenses for the years ended December 31, 1997
and 1996 were $3.3 million and $1.8 million, respectively. General and
administrative expenses increased in 1997 from 1996 due primarily to higher
compensation expenses and recruiting costs, costs associated with the transition
of the Company's operations from a private entity to a publicly traded company,
and professional fees related to the BI Agreement.
Other income (expense) for the years ended December 31, 1997 and 1996
consists of interest income and interest expense. Interest income for the years
ended December 31, 1997 and 1996 were $588,000 and $30,000, respectively.
Interest income increased in 1997 as compared to 1996 primarily due to higher
cash balances available for investment following receipt of the $5.0 million BI
License fee and $15.7 million of net proceeds from the Company's initial public
offering in July 1997 . The Company incurred interest expense of $355,000 in the
year ended December 31, 1996 on outstanding senior secured convertible term
notes, payable in shares of Series A and Series B Convertible Preferred Stock.
There were no senior secured convertible notes outstanding in 1997.
Net loss for the years ended December 31, 1997 and 1996 were $2.3 million
and $4.1 million, respectively.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company earned no revenue in 1996 and 1995.
The Company's total operating expenses for the years ended December 31,
1996 and 1995 were $3.8 million and $4.4 million, respectively. Research and
development expenses for the years ended December 31, 1996 and 1995 were $2.0
million and $2.7 million, respectively. Research and development expenses
decreased in 1996 from 1995 due to completion of the Phase II clinical trial for
ARDS in June 1996, reduced clinical costs for oral Procysteine and reduced
assay, formulation, development and clinical material costs. General and
administrative expenses for the years ended December 31, 1996 and 1995 were $1.8
million and $1.6 million, respectively. General and administrative expenses
increased in 1996 from 1995 due primarily to increased business development
expenses.
Other income (expense) for the years ended December 31, 1996 and 1995
consists of interest income and interest expense. Interest income for the years
ended December 31, 1996 and 1995 were $30,000 and $111,000, respectively.
Interest income decreased in 1996 as compared to 1995 primarily due to reduced
cash balances available for investment. The Company incurred interest expense,
payable in shares of Series A and Series B Convertible Preferred Stock, for the
years ended December 31, 1996 and 1995, of $355,000 and $178,000, respectively,
related to the Company's senior secured convertible notes.
Net loss for the years ended December 31, 1996 and 1995 were $4.1 million
and $4.5 million, respectively.
Inflation and Income Taxes
Inflation did not have a significant effect on the Company's results of
operations in the two-year period ended December 31, 1997.
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
1997, the Company had deferred tax assets of $7.2 million. Because of
uncertainties surrounding the realization of those favorable tax attributes in
future tax periods, all of the net deferred tax assets have been fully offset by
a valuation allowance. As of December 31, 1997, the Company had total net
operating loss carryforwards of $11.3 million and federal and state tax credits
of approximately $2.6 million, both of which expire on dates through 2012. The
Company's ability to utilize the net operating loss carryforwards in future
years may be limited in some circumstances, including significant changes in
ownership interests, due to certain provisions of the Internal Revenue Code of
1986, as amended.
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LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily with
$30.3 million from the sale of equity securities and convertible notes, $11.1
million in contract research and license fee payments, and $868,000 in interest
income. In July 1997, the Company received $16.7 million in gross proceeds from
its initial public offering (net of $1.3 million in underwriting fees and
commissions). Of the $16.7 million in gross proceeds, $1.0 million of offering
costs were deducted for net proceeds of $15.7 million from the offering.
The Company had restricted cash and unrestricted cash and cash equivalents
of approximately $16.8 million at December 31, 1997, compared to $640,000 at
December 31, 1996. Such amount at December 31, 1997 includes approximately $5.8
million which is restricted for use in ARDS development. Pursuant to the BI
Agreement, the Company must use the BI license fee of $5.0 million and an equity
investment by BI of $5.0 million exclusively for ARDS development expenses.
Since March 1997, the Company had incurred $5.6 million of ARDS development
expenses under the BI Agreement, of which $4.2 million had been paid as of
December 31, 1997. The Company incurred additional ARDS development expenses of
$1.7 million through February 28, 1998. As of February 28, 1998, the Company has
incurred a total of $7.3 million of ARDS development expenses of which $5.8 has
been paid.
The Company expects negative cash flows from operations to continue and to
increase for the foreseeable future.
The Company anticipates that its existing cash and cash equivalents
available at December 31, 1997 will be sufficient to fund its operating expenses
to May 1999. However, there can be no assurance that the Company's estimates of
future operating losses and operating expenses are accurate. The Company's
actual working capital needs and funding requirements will depend upon numerous
factors, including the progress of the external research and development
programs being supported by the Company, the magnitude and scope of these
activities, the timing, costs and results of preclinical and clinical testing,
the timing and costs of obtaining regulatory approvals, the level of resources
that the Company commits to the development of manufacturing, marketing and
sales capabilities, if any, whether BI elects to participate in and co-fund the
development of the Company's MOD program, the ability of the Company to
establish new and maintain existing collaborative arrangements with BI and other
companies to provide funding to the Company, the costs of any acquisitions
and/or licensing of technology rights, products or businesses, the technological
advances and activities of competitors, the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims and other
intellectual property rights, developments related to regulatory and
reimbursement matters and other factors. The Company intends to seek additional
funding through corporate collaborations. There can be no assurance that the
Company will be able to negotiate such agreements on acceptable terms, or at
all. The Company will also seek additional funding through public or private
financings. If additional funds are raised by issuing equity securities, further
dilution to stockholders will result. Debt financing, if available, may involve
restrictive covenants. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate certain of its product development
programs, to license to others rights to commercialize products or technologies
that the Company would otherwise seek to develop and commercialize itself or
cease operations.
REVENUE RECOGNITION AND FUNDED RESEARCH
Revenues from the nonrefundable $5.0 million BI license fee payment were
recognized as license revenues upon execution of the BI Agreement.
Non-refundable fees, collection of which is subject to the achievement of
clinical development and regulatory milestones, will be recorded when such
milestones are attained.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS,
INCLUDING THOSE REGARDING THE COMPANY'S EFFORTS IN THE DEVELOPMENT AND
COMMERCIALIZATION OF ITS POTENTIAL PRODUCT CANDIDATES. FOR THIS PURPOSE, ANY
STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
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FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS," "INTENDS,"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND
ELSEWHERE IN THIS ANNUAL REPORT.
SUSPENSION OF PHASE III CLINICAL TRIAL. On March 20, 1998, following the
recommendation of an independent Safety Monitoring Board, the Company announced
that it had suspended its Phase III Clinical Trial of Procysteine i.v., the
Company's lead product candidate, for the treatment of ARDS. The Company intends
to conduct a full review of the data to determine whether to resume its work
with Procysteine i.v. for the treatment of ARDS. If the Company resumes its work
with respect to the use of Procysteine i.v. for the treatment of ARDS, the
Company could elect to either resume the Phase III Clinical Trial or to commence
a new Phase III Clinical Trial. There can be no assurance that any Phase III
clinical trial will demonstrate the safety and efficacy of Procysteine i.v. to
the extent necessary to obtain regulatory approvals or that the FDA would not
require additional studies to support regulatory approval. If the Company does
not resume its work with Procysteine i.v. for the treatment of ARDS, the
Company's business, financial condition and results of operations would be
adversely affected. In addition, in the event that Procysteine does not prove to
be safe and effective, it is unlikely that the Company would continue to pursue
development of the use of intracellular glutathione repleting agents for the
treatment of oxidative stress, including MOD, and the Company's business,
financial condition and results of operations would be materially and adversely
affected. Even if the Phase III Clinical Trial is resumed or the Company
commences a new Phase III clinical trial, the suspension will result in a
substantial increase in costs which will have a material adverse effect on the
business, financial condition and results of operations of the Company. Under
its agreement with BI, the Company has agreed to use $10 million in proceeds
from BI for the clinical development of Procysteine i.v. for use in the
treatment of ARDS.
EARLY STAGE OF PRODUCT DEVELOPMENT. Development of new pharmaceuticals,
including Procysteine and the Company's other glutathione-repleting agents (the
TR-500 compounds), is highly uncertain, and unanticipated developments, clinical
or regulatory delays, unexpected adverse side effects or inadequate therapeutic
efficacy could slow or prevent the product development efforts of the Company
and have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's current potential products or any future potential products will
advance to clinical trials, prove safe and effective in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed. In addition, there
can be no assurance that the Company's Phase III Clinical Trial will be resumed
in the near future or at all, be completed on a timely basis or at all, that the
trial will demonstrate the safety and efficacy of Procysteine to the extent
necessary to obtain regulatory approvals, or that the FDA will not require
additional studies to support regulatory approval.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS. The rate of completion of
clinical trials is dependent upon, among other factors, the enrollment of
patients. Patient accrual is a function of many factors, including the size of
the patient population, the proximity of patients to clinical sites, the
eligibility criteria for the trial to be performed, the existence of competitive
clinical trials and the availability of other approved therapies. The protocol
for the Company's Phase III Clinical Trial of Procysteine for ARDS calls for an
interim analysis to confirm the appropriateness of the sample size. The results
of the analysis could lead the Company to increase the number of patients in the
trial. Delays in planned patient enrollment or increases in the number of
required patients in the Company's Phase III Clinical Trial, if resumed, or
future clinical trials of Procysteine or other potential products may result in
increased costs, program delays or both, which would have a material adverse
effect on the Company. In addition, the Company has a limited clinical staff
and, as a result, will rely on third parties to assist it in monitoring and
analyzing the Company's clinical trial results, including any Phase III clinical
trial of Procysteine i.v. for ARDS, if resumed, which may result in delays in
completing, or failure to complete, clinical trials if such third parties fail
to perform under their agreements with the Company or fail to meet regulatory
standards in the performance of their obligations under such agreements. There
can be no
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assurance that, if the Phase III Clinical Trial is resumed and completed, the
Company will be able to submit a new drug application ("NDA") or its equivalent
in countries outside the United States as scheduled or that any such application
will be reviewed and approved by the FDA or comparable agencies in foreign
countries in a timely manner, or at all. See "Business -- Government
Regulation." Even if cleared by the FDA or the regulatory authorities of other
countries, Procysteine may later be shown to be unsafe or to not have its
purported effect, thereby preventing its widespread use or requiring its
withdrawal from the market.
DEPENDENCE ON BOEHRINGER INGELHEIM. Under the BI Agreement, the Company
granted BI an exclusive worldwide license to use and sell Procysteine i.v. for
all pharmaceutical applications. The Company has retained certain rights with
respect to the marketing and sales of Procysteine i.v. in the United States. See
"Business -- Boehringer Ingelheim." There can be no assurance that BI will
commit sufficient marketing resources to the commercialization of Procysteine
i.v. or otherwise perform its obligations under the BI Agreement. The failure of
BI to commit sufficient marketing resources to the commercialization of
Procysteine i.v. or otherwise perform its obligations under the BI Agreement
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Under the BI Agreement, the Company has principal responsibility for, and
will bear all expenses related to, the clinical development of Procysteine i.v.
for use in the treatment of ARDS in all countries other than Japan, including
expenses relating to regulatory approval. In addition, the Company is
responsible for manufacturing and supplying BI with Procysteine i.v. for
clinical trials and commercial purposes, including responsibility for
manufacturing-related regulatory compliance. The Company's right to receive
milestone payments and, ultimately, royalties is based upon successful
performance of such obligations. There can be no assurance that the Company will
have the financial or logistical resources to meet these obligations or that the
Company will achieve the development and regulatory milestones necessary to earn
such payments. Failure to perform these obligations or achieve such milestones
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Pursuant to the BI Agreement, BI agreed to make certain milestone payments
to the Company, which could total up to $36.0 million, more than half of which
is payable only with respect to development relating to MOD. BI has no
obligation to participate in such development. There can be no assurance that
the Company will be able to gain access to the resources (financial and other)
necessary to conduct required MOD clinical trials or complete the development of
Procysteine i.v. for MOD if BI declines to exercise its rights or defers such
exercise until later in the product development process or that the Company will
ever receive milestone payments in connection with its MOD program.
The BI Agreement is subject to termination by either party for a material
breach by the other party which is not cured within 90 days. In addition, BI has
the right to terminate the agreement at any time (i) within six months after
completion of the Phase III Clinical Trial, or (ii) within 30 days after notice
that the Company intends, without the consent of BI, to file an NDA for
Procysteine i.v. for the treatment of ARDS. Any such termination would have a
material adverse effect on the Company's business, financial condition and
results of operations.
NO ASSURANCE OF FDA APPROVAL; COMPREHENSIVE GOVERNMENT REGULATION. The
research, development, clinical testing, manufacturing and marketing of
therapeutic products are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. All of the
Company's potential products will require governmental approvals for
commercialization, which approvals have not yet been obtained and are not
expected to be obtained for several years, if at all. Preclinical and clinical
trials and manufacturing of all of the Company's potential products, including
its lead product candidate, Procysteine, will be subject to the rigorous testing
and approval processes of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes preclinical studies and
clinical testing of potential products to establish their safety and efficacy,
requires many years to complete and the expenditure of substantial resources.
Delays in obtaining such approvals could adversely affect the marketing of
products developed by the Company and the Company's ability to generate
commercial product revenues. There can be no assurance that requisite regulatory
approvals will be obtained within a reasonable period of time, if at all.
Moreover, if regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses for
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which such product may be marketed. Further, even if such regulatory approval is
obtained, a marketed product, its manufacturer and its manufacturing facilities
are subject to continual review and periodic inspections. Failure to pass such
inspections could result in suspension of manufacturing, withdrawal of approval,
recall of product from the market or other regulatory sanctions, any of which
could have a material adverse effect on the business, financial condition and
results of operations of the Company.
The Company is also subject to numerous environmental, health and workplace
safety laws and regulations, including those governing laboratory procedures and
the handling of biohazardous materials. Any violation of, and the cost of
compliance with, such laws and regulations could adversely affect the Company's
operations.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success, growth and
profitability will depend primarily on market acceptance of Procysteine, if
cleared for marketing by the FDA, for the treatment of ARDS and other
indications targeted by the Company. Even if the benefits of Procysteine are
established as clinically significant, physicians, pharmacists and other health
care providers may elect not to purchase, prescribe or administer Procysteine
for any number of reasons. As a result, there can be no assurance that demand
for Procysteine will be sufficient to allow for profitable operations. Because
Procysteine represents the Company's primary product focus, if Procysteine does
not achieve a significant level of market acceptance, the Company's business,
financial condition and results of operation would be materially and adversely
affected.
DEPENDENCE ON RESEARCH AND CLINICAL COLLABORATORS AND SCIENTIFIC
ADVISORS. The Company does not have any research facilities and does not intend
to conduct internal discovery activities. Substantially all of the Company's
research and clinical testing activities are performed by third parties. The
Company depends upon academic and other institutions for research, development
and clinical testing and for access to technology. Such collaborators are not
employees of the Company and the Company has limited control over their
activities. The failure of these third parties to perform their obligations
under agreements with the Company or to devote adequate time to the Company's
projects could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also seeks to protect
its proprietary technology, including technology which may not be patented or
patentable, in part by confidentiality agreements and, if applicable, inventor's
rights agreements with its collaborators, advisors, employees and consultants.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not be otherwise disclosed to or discovered by competitors. Any
unauthorized dissemination of the Company's confidential information could have
an adverse effect on the Company's business. The Company's completion of any
Phase III clinical trial of Procysteine i.v. for ARDS, and the research and
development of and access to other potential products or technologies will
depend on continued collaborations with researchers at academic and other
institutions. There can be no assurance that the Company will be able to
negotiate additional acceptable collaborations with collaborators at academic
and other institutions or that its existing collaborations will be successful.
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. The biotechnology and
pharmaceutical industries are subject to rapid and significant technological
change, and competition in these industries is intense and is expected to
increase. Many of the Company's competitors are actively engaged in the research
and development of products in the Company's targeted areas. Competitors of the
Company in the United States and abroad are numerous and include, among others,
pharmaceutical and biotechnology companies, universities and other research
institutions. Many of these competitors have substantially greater financial and
technical resources and product and marketing capabilities than the Company, as
well as considerable experience in preclinical testing, human clinical trials
and other regulatory approval procedures, and certain of these competitors may
compete with the Company in establishing development and marketing agreements
with pharmaceutical companies. There can be no assurance that research and
development by others will not receive regulatory approval before that of the
Company or render any of the Company's planned products obsolete or
uneconomical, or that any products developed by the Company will be preferred to
any existing or newly developed technologies or therapies.
LIMITED SOURCE OF SUPPLY; DEPENDENCE ON THIRD-PARTY MANUFACTURERS. To be
successful, the Company's products, including Procysteine, if successfully
developed, must be manufactured in commercial
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quantities in accordance with regulations prescribed by the FDA, at acceptable
costs and on a timely basis and in accordance with the Company's obligations to
any collaborators, including BI. The Company is responsible for manufacturing
and supplying BI with Procysteine i.v. for clinical and commercial purposes. The
Company does not have the capability to manufacture products under cGMP
regulations prescribed by the FDA and does not intend to develop such a
capability in the near future. Accordingly, the Company anticipates that, for
the foreseeable future, it will pursue a strategy of seeking production
capability from outside vendors or corporate collaborators. The Company does not
have a long term, fixed price supply agreement for Procysteine, but rather
obtains Procysteine by issuing purchase orders to its supplier on an as needed
basis. In February 1997, the Company's sole supplier of bulk drug substance for
Procysteine was issued a warning letter by the FDA for failure to be in
compliance with cGMP. During 1997, the Company conducted multiple site visits to
the supplier and held detailed discussions with the supplier on resolving the
noncompliance issues. In December 1997, the Company was informed by counsel for
the supplier that the FDA, after reviewing the supplier's responses to FDA's
concerns, now finds the supplier's manufacturing of drug substances to be
acceptable. There can be no assurance however that the Company's existing or
future outside vendors or prospective corporate collaborators will be able to
manufacture Procysteine or any other product which is successfully developed by
the Company on a commercial scale in compliance with cGMP or other regulatory
guidelines or that any collaborator or vendor will be able to manufacture such
products on a timely basis or in quantities of a quality or at prices which will
be commercially viable or beneficial for the Company or will satisfy the
Company's obligations to any collaborators, including BI. A failure to obtain
third party manufacturing on commercially acceptable terms and on a timely
basis, would delay or foreclose the Company's ability to commercialize products,
in which case its business, financial condition and results of operations would
be materially and adversely affected.
LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE; DEPENDENCE ON STRATEGIC
ALLIANCES. The Company does not have experience in marketing, sales,
distribution or support of commercial products. To succeed in marketing any of
its products, the Company must develop and maintain a sales force with
sufficient marketing and technical expertise to commercialize and provide
support for its products. Alternatively, the Company must obtain such
capabilities through third parties. To date, the Company has entered into one
strategic alliance for the development and marketing of intravenous formulations
of the Company's lead product candidate, Procysteine. There can be no assurance
however that the Company will be able to establish in-house sales and
distribution capabilities or gain market acceptance for its products or enter
into other strategic relationships without undue delays or expenditures. Any
such delay or expenditure could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that current or future collaborators, if any, will commit sufficient
marketing and other resources towards developing, promoting and commercializing
its products. Further, competitive conflicts may arise among these third parties
that could prevent them from working cooperatively with the Company. The amount
and timing of resources devoted to these activities by such parties generally
would be controlled by such partners. In addition, strategic relationships
generally provide the collaborator with the right to terminate an agreement in
part or in full under certain circumstances. Any termination of a strategic
relationship for any reason could substantially reduce the likelihood that the
collaborative product candidate would be developed, would obtain regulatory
approvals and be successfully commercialized on a timely basis, if at all, and
any such termination could, therefore, have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
royalties from sales of products licensed to collaborators, if any, may be less
than the revenues the Company could have generated had it commercialized and
marketed products itself. There can be no assurance that the Company would be
successful in establishing or maintaining future collaborative arrangements,
that any collaborative partners would be successful in developing and
commercializing products or that the Company would generate revenues from
royalties sufficient to offset the Company's significant investment in research
and development and other costs.
PATENT AND PROPRIETARY RIGHTS; THIRD-PARTY RIGHTS. The Company's
commercial success will depend, to a significant extent, on the Company's and
any licensor's ability to obtain patent protection for its products and methods,
including methods for treating or preventing human disease. The Company is
conducting research and expects to seek additional patents in the future. The
Company's success will depend to a significant extent
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on its ability to obtain and enforce patents, maintain trade secret protection
and operate without infringing the patents and proprietary rights of third
parties.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to methods for treating or preventing human diseases, and most particularly for
diseases such as ARDS and MOD for which the Company believes there is currently
no commercially available drug for prevention or treatment. Substantial periods
of time pass before the USPTO responds on the merits to patent applications and
submissions on behalf of the inventors. In addition, the coverage originally
claimed in a patent application can be significantly reduced or modified before
and after a patent is issued. Consequently, there can be no assurance that any
of the Company's or any licensor's pending or future patent applications will
result in the issuance of patents or, if any patents are issued, whether the
patents will be subjected to further proceedings limiting their scope, and
whether they will provide significant proprietary protection or competitive
advantage, or will be circumvented or invalidated. Because patent applications
in the United States are maintained in secrecy until patents issue and patent
applications in certain other countries generally are not published until more
than 18 months after they are filed, and since publication of inventions in
scientific or patent literature often lags behind actual dates of invention, the
Company cannot be certain that it or any licensor was the first inventor of
inventions covered by pending patent applications or that it or such licensor
was the first to file patent applications on such inventions.
There can be no assurance that the Company's or any licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's or any licensor's patents
issue, there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such as ARDS and MOD, for
which the Company believes there is currently no commercially available drug for
prevention or treatment. If such data is required, the Company's ability to
obtain patent protection could be delayed or otherwise adversely affected.
Although the USPTO issued new utility guidelines in July 1995 that address the
requirements for demonstrating utility for biotechnology inventions, including
for inventions relating to methods for treating or preventing human diseases,
there can be no assurance that USPTO patent examiners will follow such
guidelines or that the USPTO's position will not change with respect to what is
required to establish utility for methods of using Procysteine or future
potential products of the Company in the treatment of human diseases. Nor can it
be assured that compliance with such guidelines will result in patents that are
valid and enforceable. Furthermore, the enactment of legislation implementing
the General Agreement on Trade and Tariffs has resulted in certain changes to
United States patent laws that became effective on June 8, 1995. Most notably,
the term of patents that issue from patent applications filed on or after June
8, 1995 is no longer a period of 17 years from the date of grant. The new term
of United States patents will commence on the date of issuance and terminate 20
years from the earliest claimed filing date of the application. Because the time
from filing to issuance of biotechnology patent applications is often more than
three years, a 20 year term from the claimed date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position. In addition, if this change results in a shorter
period of patent coverage, and if the Company negotiates royalties based on the
existence of a valid patent, the Company's business could be adversely affected.
The Company was independently approached by an individual, employed by the
University of Wisconsin, claiming to be the first and sole inventor of the use
of Procysteine in the treatment of patients with amyotrophic lateral sclerosis
("ALS"). A United States patent application, naming the individual as sole
inventor, has been filed at the Company's expense. There can be no assurance
that the subject matter of the
22
<PAGE> 25
patent application is patentable over prior art. Further, there can be no
assurance that the Company will be able to obtain a license to any patent that
issues or that any such license, if obtained, would be on terms acceptable to
the Company. If the Company cannot obtain such a license, the Company will not
be able to develop, market and sell Procysteine for use in the treatment of ALS.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business.
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES. One of the
Company's strategies is to build a product pipeline by acquiring and/or
licensing technology rights, products or businesses. The Company's strategy
could involve the retention of additional personnel, the establishment of new or
expanded facilities and the acquisition of technology rights, products,
equipment, businesses or assets of other companies. There can be no assurance
that the Company will be able to manage successfully the growth and expansion of
its operations. Failure of the Company to manage its growth, or any specific
acquisition of additional capabilities, could have a material adverse effect on
the Company's business, operating results and financial condition.
PRODUCT LIABILITY. The testing, marketing and sale of human therapeutic
products entail an inherent risk of exposure to product liability claims by
consumers, health care providers, pharmaceutical and biotechnology companies or
other sellers of the Company's products. There can be no assurance that
substantial product liability claims will not be asserted against the Company.
While the Company has liability insurance with respect to clinical trials, there
can be no assurance that the Company will be able to maintain clinical trial
liability insurance on acceptable terms or that such insurance will provide
adequate coverage against potential liabilities. The Company does not have
product liability insurance coverage for the commercial sale of Procysteine, the
Company's lead product candidate. The Company will seek to obtain product
liability insurance coverage for commercial sales if and when its products are
commercialized. However, there can be no assurance that adequate insurance
coverage will be available in sufficient amounts and at acceptable costs, if at
all. In addition, pursuant to the terms of the licensing agreements entered into
by the Company, including the agreement licensing methods of using Procysteine
in the treatment of human diseases, the Company has agreed to indemnify certain
third parties with respect to losses incurred as a result of the manufacture,
supply or sale of potential product candidates. The Company has also agreed to
indemnify BI with respect to any claims relating primarily to the manufacture of
Procysteine i.v. Any indemnification or product liability claim or product
recall could inhibit or prevent commercialization of products being developed by
the Company and otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED
MATTERS. The Company's business, financial condition and results of operations
may be materially adversely affected by the continuing efforts of government and
third-party payors to contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, the Company expects that there will continue to be a number of federal
and state proposals to implement similar government control. While the Company
cannot predict whether any such regulatory proposals will be adopted or the
effect such proposals may have on its business, the pendency of such proposals
could have a material adverse effect on the Company's ability to raise capital,
and the adoption of such proposals could have a material adverse effect on the
Company in general. In addition, increasing emphasis on managed care in the
United States will continue to put pressure on the pricing of pharmaceutical
products. Cost control initiatives could decrease the price that the Company or
its strategic partners, if any, receive for any products in the future and could
have a material adverse effect on the
23
<PAGE> 26
Company's business, financial condition and results of operations. In addition,
if adequate coverage and reimbursement levels are not provided by government and
other third-party payors for the Company's products, the market acceptance of
these products may be reduced, which may have a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
24
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. 26
Balance Sheets.............................................. 27
Statements of Operations.................................... 28
Statements of Redeemable Preferred Stock and Stockholder's
Equity (Deficit).......................................... 29
Statements of Cash Flows.................................... 30
Notes to Financial Statements............................... 31
</TABLE>
25
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Transcend Therapeutics, Inc.
We have audited the accompanying balance sheets of Transcend Therapeutics,
Inc. (a company in the developmental stage)(the Company) as of December 31, 1997
and 1996, and the related statements of operations, redeemable preferred stock
and stockholders equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997 and the period January 1, 1993 (commencement
of operations) to December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Therapeutics, Inc.
(a company in the development stage) at December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 and the period January 1, 1993 (commencement of
operations) to December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 9, 1998
26
<PAGE> 29
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Restricted cash........................................... $ 5,805,188
Unrestricted cash and cash equivalents.................... 10,988,461 $ 639,626
Prepaid expenses and other current assets................. 161,105 39,579
Other assets.............................................. 25,000 41,328
------------ ------------
Total current assets........................................ 16,979,754 720,533
Property and equipment, net................................. 110,608 46,108
Other assets:
Deferred offering costs................................... 409,548
Patents and licenses, net................................. 335,357 389,576
------------ ------------
$ 17,425,719 $ 1,565,765
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,659,989 $ 624,535
------------ ------------
Total current liabilities................................... 1,659,989 624,535
Redeemable Preferred Stock:
Series A Redeemable Convertible Preferred Stock,
12,991,000 shares authorized, 9,916,330 outstanding in
1996, par value $.01 (liquidation preference of
$9,140,187)............................................ 9,140,187
Series B Redeemable Convertible Preferred Stock, 3,000,000
shares authorized, 690,775 shares issued and
outstanding, par value $.01 (liquidation preference of
$1,036,163)............................................ 1,036,163
Series C Redeemable Convertible Preferred Stock, 4,255,319
shares authorized, issued and outstanding, par value
$.01 (liquidation preference of $10,000,000)........... 10,000,000
Stockholders' equity (deficit:)
Common Stock, par value $0.01, 25,000,000 shares
authorized, 5,758,649 and 779,381 shares issued and
outstanding at December 31, 1997 and 1996,
respectively........................................... 57,586 7,793
Additional paid-in capital................................ 38,395,031 1,453,848
Deferred compensation..................................... (707,251) (977,802)
Deficit accumulated during the development stage....... (21,979,636) (19,718,959)
------------ ------------
Total stockholders' equity (deficit).............. 15,765,730 (19,235,120)
------------ ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 17,425,719 $ 1,565,765
============ ============
</TABLE>
See accompanying notes.
27
<PAGE> 30
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
YEARS ENDED DECEMBER 31 (COMMENCEMENT
--------------------------------------- OF OPERATIONS) TO
1997 1996 1995 DECEMBER 31, 1997
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Research and development
contract revenues and license
fees.............................. $ 5,000,000 $ 11,095,000
Operating expenses:
Research and development....... 4,509,582 $ 1,967,794 $ 2,738,880 16,341,289
General administration......... 3,338,977 1,834,179 1,645,038 9,558,477
----------- ----------- ----------- ------------
Total operating expenses............ 7,848,559 3,801,973 4,383,918 25,899,766
Other income (expense):
Interest income................ 587,880 30,109 111,465 868,204
Interest expense............... -- (355,066) (177,534) (532,200)
----------- ----------- ----------- ------------
587,880 (324,957) (66,069) 336,004
----------- ----------- ----------- ------------
Net loss............................ $(2,260,679) $(4,126,930) $(4,449,987) $(14,468,762)
----------- ----------- ----------- ============
Accretion of redeemable
nonconvertible preferred stock.... (178,000) (5,080,496) (1,481,088)
----------- ----------- -----------
Net loss to common stockholders..... $(2,438,679) $(9,207,426) $(5,931,075)
=========== =========== ===========
Net loss per share.................. $ (0.75) $ (11.94) $ (7.77)
=========== =========== ===========
Weighted average shares
outstanding....................... 3,266,841 771,149 763,247
=========== =========== ===========
</TABLE>
See accompanying notes.
28
<PAGE> 31
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------------- ----------------------- --------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/share).........................................
Purchase of Treasury Stock............................
Net loss..............................................
---------- ---------- -------- ----------- ----------
Balance at December 31, 1993..........................
April 1994:
Issuance of Common Stock from treasury for
services............................................
Issuance of Series A Redeemable Convertible Preferred
Stock ($1.00/share).................................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology ($1,000/share)....................... 6,500,000 $6,500,000
Issuance of Common Stock for technology and payment
of expenses ($.50/share)............................
Issuance of Series A Preferred Stock Warrants
($.01/share)........................................
Accretion of Redeemable Nonconvertible Preferred
Stock...............................................
Net loss.............................................
---------- ---------- -------- ----------- ----------
Balance at December 31, 1994.......................... 6,500,000 6,500,000
Cancellation of Cornell's common shares...............
Extinguishment of Series A Preferred Warrants.........
Conversion of options to common shares................
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Net loss..............................................
---------- ---------- -------- ----------- ----------
Balance at December 31, 1995.......................... 6,500,000 6,500,000
Issuance of Series A Redeemable Convertible Preferred
Stock in January 1996................................ 130,000 130,000
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest in January, May and
September 1996 ($1.00/share)........................ 496,437 496,437
Issuance of Series B Redeemable Convertible Preferred
Stock in lieu of interest in September 1996
($1.50/share)........................................ 24,109 $ 36,164
Conversion of Senior Secured Convertible Note to
Series B Redeemable Convertible Preferred Stock in
September 1996 ($1.50/share)......................... 666,666 999,999
Conversion of Redeemable Convertible Senior Secured
Convertible Note to Series A Redeemable Convertible
Preferred Stock in September 1996 ($1.00/share)...... 2,000,000 2,000,000
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Issuance of Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)............... 851,064
Conversion of Redeemable Nonconvertible Preferred
Stock to Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)................ 3,404,255
Conversion of Series A Redeemable Convertible Warrants
to Series A Preferred Stock in September 1996
($.02/share)......................................... 789,893 13,750
Exercise of stock options.............................
Grant of stock options................................
Amortization of deferred compensation expense.........
Net loss..............................................
---------- ---------- -------- ----------- ----------
Balance at December 31, 1996.......................... 9,916,330 9,140,187 690,775 1,036,163 4,255,319
---------- ---------- -------- ----------- ----------
Exercise of stock options.............................
Issuance of Redeemable Nonconvertible Preferred Stock
and Common Stock warrants............................
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Sale of Registered Common Stock in IPO................
Conversion of Series Redeemable Convertible Preferred
Stock and Redeemable Nonconvertible Preferred Stock
into Common Stock at IPO............................. (9,916,330) (9,140,187) (690,775) (1,036,163) (4,255,319)
Amortization of deferred compensation.................
Net loss..............................................
---------- ---------- -------- ----------- ----------
Balance at December 31, 1997.......................... -- $ -- -- $ -- --
========== ========== ======== =========== ==========
<CAPTION>
SERIES C REDEEMABLE
CONVERTIBLE PREFERRED NONCONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ----------------------- -------------------
NUMBER OF NUMBER OF
AMOUNT SHARES AMOUNT SHARES AMOUNT
------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/share)......................................... 44,109 $ 441
Purchase of Treasury Stock............................
Net loss..............................................
------------ -------- ----------- --------- -------
Balance at December 31, 1993.......................... 44,109 $ 441
April 1994:
Issuance of Common Stock from treasury for
services............................................
Issuance of Series A Redeemable Convertible Preferred
Stock ($1.00/share).................................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology ($1,000/share)....................... 9,000 $ 489,124
Issuance of Common Stock for technology and payment
of expenses ($.50/share)............................ 715,025 7,150
Issuance of Series A Preferred Stock Warrants
($.01/share)........................................
Accretion of Redeemable Nonconvertible Preferred
Stock............................................... 1,110,816
Net loss.............................................
------------ -------- ----------- --------- -------
Balance at December 31, 1994.......................... 9,000 1,599,940 759,134 7,591
Cancellation of Cornell's common shares............... (7,025) (70)
Extinguishment of Series A Preferred Warrants.........
Conversion of options to common shares................ 11,197 112
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ 1,481,088
Net loss..............................................
------------ -------- ----------- --------- -------
Balance at December 31, 1995.......................... 9,000 3,081,028 763,306 7,633
Issuance of Series A Redeemable Convertible Preferred
Stock in January 1996................................
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest in January, May and
September 1996 ($1.00/share)........................
Issuance of Series B Redeemable Convertible Preferred
Stock in lieu of interest in September 1996
($1.50/share)........................................
Conversion of Senior Secured Convertible Note to
Series B Redeemable Convertible Preferred Stock in
September 1996 ($1.50/share).........................
Conversion of Redeemable Convertible Senior Secured
Convertible Note to Series A Redeemable Convertible
Preferred Stock in September 1996 ($1.00/share)......
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ 999,734
Issuance of Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)............... $ 2,000,000
Conversion of Redeemable Nonconvertible Preferred
Stock to Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)................ 8,000,000 (9,000) (4,080,762)
Conversion of Series A Redeemable Convertible Warrants
to Series A Preferred Stock in September 1996
($.02/share).........................................
Exercise of stock options............................. 16,075 160
Grant of stock options................................
Amortization of deferred compensation expense.........
Net loss..............................................
------------ -------- ----------- --------- -------
Balance at December 31, 1996.......................... 10,000,000 -- -- 779,381 7,793
------------ -------- ----------- --------- -------
Exercise of stock options............................. 57,099 571
Issuance of Redeemable Nonconvertible Preferred Stock
and Common Stock warrants............................ 103,900 861,000
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ 178,000
Sale of Registered Common Stock in IPO................ 1,800,000 18,000
Conversion of Series Redeemable Convertible Preferred
Stock and Redeemable Nonconvertible Preferred Stock
into Common Stock at IPO............................. (10,000,000) (103,900) (1,039,000) 3,122,167 31,222
Amortization of deferred compensation.................
Net loss..............................................
------------ -------- ----------- --------- -------
Balance at December 31, 1997.......................... $ -- -- $ -- 5,758,647 $57,586
============ ======== =========== ========= =======
<CAPTION>
SERIES A PREFERRED
STOCK WARRANTS CUMULATIVE
--------------------- ACCRETION ON
ADDITIONAL REDEEMABLE
NUMBER OF PAID-IN NONCONVERTIBLE DEFERRED
WARRANTS AMOUNT CAPITAL PREFERRED STOCK COMPENSATION
--------- ------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/share)......................................... $ (436)
Purchase of Treasury Stock............................
Net loss..............................................
---------- -------- ----------- ----------- -----------
Balance at December 31, 1993.......................... (436)
April 1994:
Issuance of Common Stock from treasury for
services............................................
Issuance of Series A Redeemable Convertible Preferred
Stock ($1.00/share).................................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology ($1,000/share).......................
Issuance of Common Stock for technology and payment
of expenses ($.50/share)............................ 350,363
Issuance of Series A Preferred Stock Warrants
($.01/share)........................................ 1,625,000 $ 16,250
Accretion of Redeemable Nonconvertible Preferred
Stock............................................... $(1,110,816)
Net loss.............................................
---------- -------- ----------- ----------- -----------
Balance at December 31, 1994.......................... 1,625,000 16,250 349,927 (1,110,816)
Cancellation of Cornell's common shares............... (3,442)
Extinguishment of Series A Preferred Warrants......... (250,000) (2,500) 2,500
Conversion of options to common shares................ 5,486
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ (1,481,088)
Net loss..............................................
---------- -------- ----------- ----------- -----------
Balance at December 31, 1995.......................... 1,375,000 13,750 354,471 (2,591,904)
Issuance of Series A Redeemable Convertible Preferred
Stock in January 1996................................
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest in January, May and
September 1996 ($1.00/share)........................
Issuance of Series B Redeemable Convertible Preferred
Stock in lieu of interest in September 1996
($1.50/share)........................................
Conversion of Senior Secured Convertible Note to
Series B Redeemable Convertible Preferred Stock in
September 1996 ($1.50/share).........................
Conversion of Redeemable Convertible Senior Secured
Convertible Note to Series A Redeemable Convertible
Preferred Stock in September 1996 ($1.00/share)......
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ (999,734)
Issuance of Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)...............
Conversion of Redeemable Nonconvertible Preferred
Stock to Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)................ (3,591,638)
Conversion of Series A Redeemable Convertible Warrants
to Series A Preferred Stock in September 1996
($.02/share)......................................... (1,375,000) (13,750) 7,877
Exercise of stock options............................. ($1,091,500)
Grant of stock options................................ 1,091,500 113,689
Amortization of deferred compensation expense.........
Net loss..............................................
---------- -------- ----------- ----------- -----------
Balance at December 31, 1996.......................... -- -- 1,453,848 -- (977,802)
---------- -------- ----------- ----------- -----------
Exercise of stock options............................. 31,710
Issuance of Redeemable Nonconvertible Preferred Stock
and Common Stock warrants............................ 3,346 (3,346)
Accretion of Redeemable Nonconvertible Preferred
Stock................................................ (178,000)
Sale of Registered Common Stock in IPO................ 15,722,000
Conversion of Series Redeemable Convertible Preferred
Stock and Redeemable Nonconvertible Preferred Stock
into Common Stock at IPO............................. 21,184,127 178,000
Amortization of deferred compensation................. 273,897
Net loss..............................................
---------- -------- ----------- ----------- -----------
Balance at December 31, 1997.......................... -- $ -- $38,395,031 -- $ (707,251)
========== ======== =========== =========== ===========
<CAPTION>
DEFICIT
ACCUMULATED TREASURY
DURING STOCK
DEVELOPMENT NUMBER OF ---------
STAGE SHARES AMOUNT
----------- --------- ------
<S> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/share).........................................
Purchase of Treasury Stock............................ 4,959 $(2)
Net loss.............................................. $ (28,274)
------------ ------- ---
Balance at December 31, 1993.......................... (28,274) 4,959 (2)
April 1994:
Issuance of Common Stock from treasury for
services............................................ 4,959 2
Issuance of Series A Redeemable Convertible Preferred
Stock ($1.00/share).................................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology ($1,000/share).......................
Issuance of Common Stock for technology and payment
of expenses ($.50/share)............................
Issuance of Series A Preferred Stock Warrants
($.01/share)........................................
Accretion of Redeemable Nonconvertible Preferred
Stock...............................................
Net loss............................................. (3,602,892)
------------ ------- ---
Balance at December 31, 1994.......................... (3,631,166)
Cancellation of Cornell's common shares...............
Extinguishment of Series A Preferred Warrants.........
Conversion of options to common shares................
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Net loss..............................................
------------ ------- ---
Balance at December 31, 1995.......................... (4,449,987) -- --
Issuance of Series A Redeemable Convertible Preferred
Stock in January 1996................................ (8,081,153)
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest in January, May and
September 1996 ($1.00/share)........................
Issuance of Series B Redeemable Convertible Preferred
Stock in lieu of interest in September 1996
($1.50/share)........................................
Conversion of Senior Secured Convertible Note to
Series B Redeemable Convertible Preferred Stock in
September 1996 ($1.50/share).........................
Conversion of Redeemable Convertible Senior Secured
Convertible Note to Series A Redeemable Convertible
Preferred Stock in September 1996 ($1.00/share)......
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Issuance of Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)...............
Conversion of Redeemable Nonconvertible Preferred
Stock to Series C Redeemable Convertible Preferred
Stock in September 1996 ($2.35/share)................ (7,510,876)
Conversion of Series A Redeemable Convertible Warrants
to Series A Preferred Stock in September 1996
($.02/share).........................................
Exercise of stock options.............................
Grant of stock options................................
Amortization of deferred compensation expense.........
Net loss.............................................. (4,126,930)
------------ ------- ---
Balance at December 31, 1996.......................... (19,718,959) -- --
------------ ------- ---
Exercise of stock options.............................
Issuance of Redeemable Nonconvertible Preferred Stock
and Common Stock warrants............................
Accretion of Redeemable Nonconvertible Preferred
Stock................................................
Sale of Registered Common Stock in IPO................
Conversion of Series Redeemable Convertible Preferred
Stock and Redeemable Nonconvertible Preferred Stock
into Common Stock at IPO.............................
Amortization of deferred compensation.................
Net loss.............................................. (2,260,679)
------------ ------- ---
Balance at December 31, 1997.......................... $(21,979,636) -- $--
============ ======= ===
</TABLE>
29
<PAGE> 32
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
DECEMBER 31, (COMMENCEMENT OF
--------------------------------------- OPERATIONS) TO
1997 1996 1995 DECEMBER 31, 1997
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................ $(2,260,679) $(4,126,930) $(4,449,987) $(14,468,761)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 25,449 13,230 10,107 59,263
Amortization.......................................... 54,219 54,219 54,219 203,321
Issuance of Preferred Stock in lieu of interest
payments............................................ 532,601 532,601
Amortization of deferred compensation expense......... 273,897 113,698 387,595
Loss on sale of property and equipment................ 5,408 5,408
Expenses incurred with related party that were settled
with the issuance of Common Stock................... 304,446
Change in operating assets and liabilities:
Restricted cash....................................... (5,805,188) (5,805,188)
Prepaid expenses and other current assets............. (121,526) (1,297) 161,689 (161,105)
Other assets.......................................... 16,328 13,272 3,513 (21,487)
Accounts payable, deferred offering costs and accrued
expenses............................................ 1,035,454 145,664 83,811 1,585,447
Interest payable to related party..................... (177,534) 142,578
----------- ----------- ----------- ------------
Net cash used in operating activities................. (6,782,045) (3,433,077) (3,988,662) (17,378,460)
INVESTING ACTIVITIES:
Purchase of property and equipment...................... (89,949) (7,417) (29,013) (176,826)
Proceeds from sale of equipment......................... 784 764 1,548
----------- ----------- ----------- ------------
Net cash used in investing activities................... (89,949) (6,633) (28,249) (175,278)
FINANCING ACTIVITIES:
Proceeds from issuance of debt.......................... 1,000,000 2,000,000 3,170,000
Payment on note payable to related party................ (170,000) (170,000)
Offering costs.......................................... (590,452) (335,006) (925,458)
Issuance of Series A Preferred Stock Warrants........... 16,250
Issuance of Series A Redeemable Convertible Preferred
Stock................................................. 130,000 6,630,000
Issuance of Series C Redeemable Convertible Preferred
Stock................................................. 2,000,000 2,000,000
Issuance of Redeemable Non-Convertible Preferred
Stock................................................. 1,039,000 1,039,000
Issuance of Common Stock................................ 16,740,000 16,740,000
Proceeds from exercise of stock options................. 32,281 8,037 2,086 42,409
Purchase of treasury stock.............................. (2)
----------- ----------- ----------- ------------
Net cash provided by financing activities............... 17,220,829 2,803,031 1,832,086 28,542,199
----------- ----------- ----------- ------------
Increase (decrease) in cash and cash equivalents.......... 10,348,835 (636,679) (2,184,825) 10,988,461
Cash and cash-equivalents at beginning of period.......... 639,626 1,276,305 3,461,130
----------- ----------- ----------- ------------
Cash and cash-equivalents at end of period................ $10,988,461 $ 639,626 $ 1,276,305 $ 10,988,461
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES FOR NON-CASH ACTIVITIES:
Non-Cash Financing Transactions.........................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology........................................ $ 489,000
Issuance of Common Stock for technology................. $ 53,000
Conversion of Senior Secured Convertible Notes to Series
B Redeemable Convertible Preferred Stock.............. $ 1,000,000
Conversion of Senior Secured Convertible Notes to Series
A Redeemable Convertible Preferred Stock.............. $ 2,000,000
Conversion of Series A Redeemable Convertible Stock
Warrants to Series A Preferred Stock.................. $ 14,000
</TABLE>
See accompanying notes.
30
<PAGE> 33
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
COMPANY
Transcend Therapeutics, Inc. (the "Company") was incorporated on December
23, 1992, and began operations in January 1993. The Company is a
development-stage enterprise, as defined in Statement of Financial Accounting
Standards No. 7, and is devoting its efforts to develop novel pharmaceuticals
for the treatment of diseases caused by oxidative stress and resultant tissue
damage, with a particular therapeutic focus on critical care. In May 1997, the
Company began a pivotal Phase III clinical trial of its lead product candidate,
Procysteine(R), to determine its safety and efficacy in the treatment of acute
respiratory distress syndrome ("ARDS").
RECAPITALIZATION
In August 1996, the Company's Board of Directors approved a one-for-five
reverse stock split of its Common Stock. There was a delay in filing the
necessary amendments to the Company's charter and the split was not effective
until February 1997. All common share and per share amounts have been adjusted
retroactively to reflect the stock split.
2. SIGNIFICANT ACCOUNTING POLICIES
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 reported
period. Actual results could differ from those estimates.
RESTRICTED CASH
Pursuant to the Development and License Agreement with Boehringer
Ingelheim, GmbH(BI), the Company is restricted as to the manner in which it can
use proceeds from BI. According to the Agreement, the Company must use the BI
license fee of $5.0 million and an equity investment by BI of $5.0 million
(received in the Company's initial public offering) exclusively for ARDS
Development Expenses. Since March 1997, the Company has incurred $5,616,570 of
ARDS Development Expenses under the BI Agreement (of which $4,194,812 has been
paid as of December 31, 1997). The Company anticipates utilizing the full amount
of restricted cash during 1998 and therefore has classified the full amount as a
current asset.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
31
<PAGE> 34
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets (the
Company uses an estimate of 5 years of useful life for the purposes of
depreciation). The cost and accumulated depreciation of property and equipment
at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Property and equipment............................... $165,600 $ 75,651
Less accumulated depreciation........................ 54,992 29,543
-------- --------
Property and equipment, net.......................... $110,608 $ 46,108
======== ========
</TABLE>
INTANGIBLE ASSETS
Acquired patents and licenses are recorded at cost and amortized using the
straight-line method over the estimated useful lives of the related assets,
subject to the maximum legal life of the patents and/or licenses. The costs of
internally generated patents or patent applications are expensed in the period
incurred as research and development expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997, the Company's financial instruments consist of cash
and cash equivalents, accounts payable and accrued expenses. Fair value of
issued equity instruments is based upon negotiated prices and includes cash and
the fair value of other consideration received.
REVENUE RECOGNITION
Research and development contract revenues and license revenues are
recognized as earned and represent, in 1993, reimbursement of the Company's
expenditures pursuant to the terms of an agreement with Clintec Nutrition
Company whereby the Company was reimbursed $6,095,000 for expenditures it
incurred. In 1997, the Company recognized as revenue a $5,000,000 license fee
received from BI in exchange for which the Company granted BI exclusive rights
to various patents related to intravenous Procysteine(R) and which the Company
has no obligation to repay.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under APB 25, when
the exercise price of options granted to employees and outside directors under
these plans equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is incurred.
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which is based on the fair-value method of measuring
stock-based compensation.
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," (SFAS 128) which the Company adopted on December
31, 1997. SFAS 128 replaced the calculation
32
<PAGE> 35
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Pursuant to the previous requirements of the Securities and
Exchange Commission (SEC), common shares and common share equivalents issued by
the Company during the twelve-month period prior to the initial public offering
of the Company's common stock had been included in the calculations as if they
were outstanding for all periods prior to the offering whether or not they were
anti-dilutive. In February 1998, the SEC issued Staff Accounting Bulletin 98
which, among other things, conformed prior SEC requirements to SFAS 128 and
eliminated inclusion of such shares in the computation of earnings per share.
All earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 and SEC requirements.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net loss:............................................... $(2,260,679) $(4,126,930) $(4,449,987)
Accretion of redeemable nonconvertible prefered stock... (178,000) (5,080,496) (1,481,088)
----------- ----------- -----------
Numerator for loss per share - loss to common
stockholders.......................................... $(2,438,679) $(9,207,426) $(5,931,075)
Denominator:
Denominator for loss per share - weighted-average
shares................................................ 3,266,841 771,149 763,247
=========== =========== ===========
Loss per share.......................................... $ (0.75) $ (11.94) $ (7.77)
=========== =========== ===========
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" (FAS 130), which is effective for fiscal
years beginning after December 15, 1997. FAS 130 requires that comprehensive
income and its components, as defined in the Statement, be reported in the
financial statements. The Company believes that the adoption of FAS 130 will not
have a material impact on its financial statements.
3. COLLABORATIVE AGREEMENTS
In February 1997, the Company entered into a Development and License
Agreement ("BI Agreement") with Boehringer Ingelheim International GmbH ("BI")
relating to the worldwide development and marketing of intravenous formulations
of Procysteine. The Company has received an aggregate of $10.0 million in
proceeds from BI (consisting of a $5.0 million license fee paid in March 1997
and a $5.0 million equity investment purchased in the Company's initial public
offering in July 1997) which is restricted as to its use solely for the clinical
development of Procysteine i.v. for use in the treatment of ARDS. BI has also
agreed to make additional payments to the Company, which could total up to $36.0
million, upon the achievement of clinical development and regulatory milestones
relating to ARDS and, if BI exercises its participation rights, to MOD. The
Company had restricted cash and unrestricted cash and cash equivalents of
approximately $16.8 million at December 31, 1997. Such amount includes
approximately $5.8 million which is restricted for use in ARDS development.
33
<PAGE> 36
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
4. ACCRUED LIABILITIES
Included in accounts payable and accrued expenses were the following
accrued expenses at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued clinical costs............................ $1,172,000 $ 58,000
Accrued vacation.................................. 82,000 53,000
Accrued other..................................... 113,000 84,000
Accrued offering costs............................ 105,000
---------- ----------
Total accrued expenses............................ $1,367,000 $ 300,000
========== ==========
</TABLE>
5. SENIOR SECURED CONVERTIBLE NOTES
On September 13, 1995, the Company sold Series A Notes in the aggregate
principal amount of $2,000,000 to certain institutional investors. Subsequently,
on May 29, 1996, the Company issued Series B Convertible Notes in the aggregate
principal amount of $1,000,000 to certain institutional investors. The Series A
Notes were convertible into shares of Series A Convertible Preferred Stock at
one share per $5.00 of principal outstanding. The Series B Notes were
convertible into shares of Series B Preferred stock at one share per $7.50 of
principal outstanding.
Prior to conversion, each note was to mature on January 15, 1997, bearing
interest of 30% per annum, payable every four months beginning January 13, 1996.
Interest payments were made in the form of Series A and B Convertible Preferred
Stock. All principal and accrued interest were converted into shares of Series A
and B Convertible Preferred Stock upon the closing of the issuance of the Series
C Convertible Preferred Stock as described in Note 6.
6. INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
tax rates are applied to cumulative temporary differences based on when and how
they are expected to affect the tax return. Deferred tax assets and liabilities
are adjusted for tax rate changes.
At December 31, 1997, the Company has available net operating tax loss
carry-forwards of approximately $11.3 million and federal and state tax credits
of approximately $2.6 million. These losses and tax credits are available to
offset future income of the Company and will expire for both federal and
Massachusetts tax purposes through the year 2012. The utilization of these tax
losses and tax credit carry-forwards may be subject to limitation as a result of
any ownership changes as defined by Sections 382 and 383 of the Internal Revenue
Code.
34
<PAGE> 37
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Due to the Company's net
loss position, a valuation allowance of 100% of its deferred tax assets has been
established. The Company has the following deferred tax assets as of December
31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 4,500,000 $ 4,435,000
Deferred compensation............................. 155,000 45,000
Other accruals.................................... 41,000 24,000
R&D tax credit.................................... 2,550,000 852,000
------------ ------------
Total deferred tax assets.............................. 7,246,000 5,356,000
Valuation allowance.................................... (7,246,000) (5,356,000)
------------ ------------
Deferred income taxes, net.................................. $ -0- $ -0-
------------ ------------
</TABLE>
7. STOCKHOLDERS' EQUITY
COMMON STOCK
On April 5, 1994, the Company acquired a direct license from Cornell
Research Foundation ("Cornell") to the Procysteine(R) and related technologies
for the issue of 35,025 shares of Common Stock. In accordance with the same
agreement, the Company issued 680,000 shares of Common Stock to Clintec as part
consideration for the acquisition of the Procysteine(R) and related
technologies. The technology has been recorded at the Common Stock's fair value
of $.50 per share at the time of the transaction.
In relation to the acquisition of Covered Technology from Clintec on April
5, 1994, Clintec agreed to forgive and forever discharge the Company from any
obligation to repay an outstanding amount due for expenses incurred of $304,446
due to Clintec. The Company recorded this amount as a contribution to capital
during 1994.
In July 1997, the Company completed its initial public offering of
1,800,000 shares of Common Stock. In connection with the completion of the
offering, the Company converted all of its outstanding shares of Series A, B and
C Convertible Preferred Stock and Redeemable Non-Convertible Preferred Stock to
an aggregate of 3,122,167 shares of Common Stock.
The Company has reserved 56,950 shares of Common Stock for issuance upon
exercise of Common Stock Warrants, and 639,424 shares of Common Stock for
issuance upon exercise of stock options granted under the 1994 Equity Incentive
Plan.
COMMON STOCK WARRANTS
On October 28, 1994, as additional consideration for the execution of the
lease on the office space, the Company issued Common Stock Warrants to purchase
5,000 shares of Common Stock, exercisable through October 28, 1999, at $5.00 per
share to the lessor. Additionally, in connection with the a financing in
February 1997, the Company issued Common Stock Warrants to purchase 51,950
shares of Common Stock, exercisable through March 3, 2002, at $10.00 per share
to certain affiliated parties.
35
<PAGE> 38
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
PREFERRED STOCK
The Company's Board of Directors are authorized to issue up to 5,000,000
additional shares of Preferred Stock in one or more series, without further
stockholder approval. Each such series of Preferred Stock would have such number
of shares, designations, preferences, voting powers, qualifications and special
and relative rights or privileges that the Board of Directors may from time to
time determine, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences and conversion
rights. Mandatorily redeemable preferred stock is recorded upon issuance at fair
value, net of issuance costs, and periodically accreted to redemption value
using the interest method.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1994, the Company sold 6,500,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Stock") for $6,500,000. The Series A
Stock was converted into 1,983,255 shares of Common Stock upon the closing of
the Company's Initial Public Offering in July, 1997.
SERIES B AND C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 3, 1996, the Company sold an aggregate of 851,064 shares of
its Series C Convertible Preferred Stock to a group of investors for $2.0
million. As part of the same transaction, the sole holder (Clintec) of 9,000
shares of the Company's Redeemable Nonconvertible Preferred Stock exchanged such
shares for 3,404,255 shares of Series C Convertible Preferred Stock. In
addition, $3.1 million in aggregate principal amount of, and interest on, the
Series A Notes and Series B Notes were converted into an aggregate of 2,098,631
shares of Series A Convertible Preferred Stock and 690,775 shares of Series B
Convertible Preferred Stock. The notes were scheduled to mature on January 15,
1997, bearing interest of 30% per annum.
The Series B and C Preferred Stock were converted into 138,155 and 896,861
shares of Common Stock, respectively, of the Company upon the closing of the
initial public offering in July 1997.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED WARRANT SHARES
In conjunction with the issuance of the Series A Redeemable Convertible
Preferred Stock, the Company sold 1,625,000 warrants to purchase Series A
Redeemable Convertible Preferred Stock at a price per share equal to the lesser
of (i) the per share purchase price of the securities issued in the next
financing round or (ii) $5.00. During 1995, 250,000 warrant shares were canceled
by the Company in accordance with the terms and conditions stipulated in the
April 4, 1994 Series A Preferred Stock Purchase Warrants agreement, as a result
of not participating in the private placement offering in September 1995.
In connection with the issuance of the Series C Convertible Preferred
Stock, the holders of the Series A Preferred Stock Warrants (Series A Warrants)
elected to surrender the Series A Warrants and receive Series A Convertible
Preferred Stock equivalent to the difference between the deemed fair market
value of the Series C Preferred Stock ($2.35/share) and the exercise price of
the Series A Warrants ($1.00/share) multiplied by the outstanding Series A
Warrants (1,375,000). The resulting aggregate fair market value of the Series A
Preferred Stock Warrants received converted into 789,983 shares of Series A
Convertible Preferred Stock and were issued upon the net exercise of such
warrants.
All of the outstanding shares of Series A, B and C Convertible Preferred
Stock were converted into Common Stock upon the closing of the Company's initial
public offering in July 1997.
36
<PAGE> 39
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
REDEEMABLE NONCONVERTIBLE PREFERRED STOCK
The Company had issued 9,000 shares of Redeemable Nonconvertible Preferred
Stock to Clintec as part consideration for the acquisition of the Procysteine(R)
and related technologies at its fair value of approximately $500,000 on April 5,
1994. The Redeemable Nonconvertible Preferred Stock was redeemable, upon certain
conditions at the option of the holder, at a price of $1,000 per share plus any
unpaid dividends which accrued at a rate of $70 per share per annum. The
Redeemable Nonconvertible Preferred Stock had a liquidation preference over
Common Stock of $1,000 per share, plus any accrued, but unpaid, dividends. As
part of the September 3, 1996 financing transaction, the holders exchanged the
nonconvertible preferred stock for 3,404,255 of Series C Preferred Stock valued
at $8 million by the Company. The Company recorded the difference of
approximately $4 million between the carrying value of the Redeemable
Nonconvertible Preferred Stock and the value of the Series C Preferred Stock
issued in exchange thereof as a charge to accumulated deficit and an adjustment
to net loss to common stockholders in 1996.
In February 1997, the Company issued 1,039,000 shares of Redeemable
Nonconvertible Preferred Stock and Warrants to purchase 51,950 shares of Common
Stock. The shares of Redeemable Nonconvertible Preferred Stock were exchanged
for 103,896 shares of Common Stock upon the closing of the initial public
offering in July 1997.
8. STOCK OPTION PLAN
The Company has a 1994 Equity Incentive Plan (the Plan), which authorizes
the Board of Directors to grant stock options to purchase up to an aggregate of
1,075,891 shares of Common Stock (as amended by the Board of Directors in
January 1998, and subject to stockholder approval at the 1998 Annual Meeting).
Stock options granted under the Plan may qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code. The price at which shares may be
purchased with an option shall be specified by the Board at the date the option
is granted, but in the case of an incentive stock option, shall not be less than
fair market value on the date of grant. The duration of any option shall be
specified by the Board, but no option designated as an "incentive stock option"
may be exercised beyond ten years from the date of grant. Options granted under
the Plan vest ratably over two to four years beginning after one year of
service.
During 1996, the Company had recorded an increase to additional
paid-in-capital and a corresponding charge to deferred compensation to recognize
the aggregate difference between the deemed fair market value for accounting
purposes of the stock options at the date of grant and the option exercise
price. The deferred compensation is being amortized over the option vesting
period.
37
<PAGE> 40
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
The following table presents the activity of the Plan for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year.............. 370,324 $1.19 262,455 $0.50
Granted............................................... 353,568 8.45 131,000 2.46
Exercised............................................. (57,099) 0.54 (16,075) 0.50
Terminated............................................ (27,369) 0.99 (7,056) 0.50
------- ----- -------- -----
Options outstanding at end of year.................... 639,424 $5.25 370,324 $1.19
======= ===== ======== =====
Exercisable at end of year............................ 221,519 158,029
------- --------
Available for grant at end of year.................... 52,098 405,567
======= ========
Weighted average fair value per share of options
granted during the year............................. $ 2.93 $ 1.84
======= ========
</TABLE>
The following table represents weighted average price and life information
about significant option groups outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
DATED AS OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
DECEMBER 31, OUTSTANDING (YRS) PRICE EXERCISABLE PRICE
------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
1995........................ 262,455 7.1 0.50 86,399 0.50
1996........................ 370,324 7.6 1.19 158,029 0.68
1997........................ 639,424 8.8 5.25 221,519 1.06
</TABLE>
Proforma information is required by SFAS 123, and has been determined as if
the Company has accounted for employee stock options under the fair value
method. The proforma net loss to common stockholders for 1997, 1996 and 1995 was
approximately $(2,600,000), $(9,300,000) and $(5,900,000), respectively. The
proforma net loss per common share to Common stockholders for 1997, 1996 and
1995 was $(0.80), $(12.06) and $(7.73), respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the option vesting period, and is net of the amount recorded for deferred
compensation expense by the Company.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with an estimated weighted-average life of
three to six years from the date of grant, assuming a risk free interest rate of
5% to 7%; and a volatility factor of .23 on the expected market price of the
Company's common stock. At this time management does not expect to pay any
dividends to shareholders during the vesting period of the options, and
therefore, has excluded such assumption from determining fair value of the
options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
effect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
38
<PAGE> 41
TRANSCEND THERAPEUTICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
The effects on 1997, 1996 and 1995 pro forma net loss of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only one, two and three years of option grants under the Plan.
9. LEASE OBLIGATIONS
The Company leases office space under a five-year operating lease, with the
option to extend for an additional five years, subject to certain rights of
first refusal held by other parties, which commenced in December 1994. The
Company also leases certain office equipment. Future minimum lease payments
under noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------
<S> <C>
1998............................................... $213,528
1999............................................... 184,537
2000............................................... 6,348
2001............................................... 778
--------
$405,191
========
</TABLE>
Rent expense amounted to $203,256, $199,381 and $185,532 for the years
ended December 31, 1997, 1996 and 1995, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company is committed to pay minimum royalties to Cornell Research
Foundation (Cornell) under patent licenses of $60,000 per annum through 2000,
net of certain patent costs.
11. DEFINED CONTRIBUTION PLAN
During 1995, the Company began a defined contribution 401(k) plan which
covers substantially all employees. The plan permits participants to make
contributions from 1% to 15% of their compensation (as defined). In addition,
the Company may contribute to the plan at its discretion. The Company made no
contributions in 1997, 1996 or 1995.
12. RELATED-PARTY TRANSACTIONS
During 1995, the Company repaid a note payable due to Clintec in the amount
of $170,000 for fees paid by Clintec on behalf of the Company for delivery of a
clinical data base.
39
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report, and certain information included herein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Registrant's officers required by the Item
is included in the section in Part I hereby entitled "Executive Officers of the
Registrant." The information concerning the Registrant's directors required by
this Item is included in the Registrant's Proxy Statement under the heading
"Election of Directors." Information concerning compliance by the Registrant's
officers, directors and 10% stockholders with reporting requirements of Section
16(a) of the Securities Act of 1934 is included in the Registrant's Proxy
Statement under the heading "Executive Compensation--Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is included in the Registrant's Proxy
Statement under the heading "Directors' Compensation" and "Executive
Compensation," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is included in the Registrant's Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is included in the Registrant's Proxy
Statement under the heading "Certain Transactions" and is incorporated herein by
reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The Financial Statements listed in the Index
to Financial Statements immediately preceeding such Statements are
filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules. None
3. Exhibits. The Exhibits listed in the Exhibit Index immediately
preceeding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by the Registrant during
the fourth quarter of the fiscal year covered by this Annual Report
on Form 10-K.
40
<PAGE> 43
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.
TRANSCEND THERAPEUTICS, INC.
By: /s/ HECTOR J. GOMEZ
------------------------------------
HECTOR J. GOMEZ, M.D., PH.D.
Chief Executive Officer and
President
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HECTOR J. GOMEZ President and Chief Executive March 26, 1998
- ----------------------------------------------------- Officer (Principal Executive
HECTOR J. GOMEZ Officer)
/s/ B. NICHOLAS HARVEY Senior Vice President, Finance March 26, 1998
- ----------------------------------------------------- and Chief Financial Officer
B. NICHOLAS HARVEY (Principal Financial and
Accounting Officer)
/s/ JERRY T. JACKSON Director March 26, 1998
- -----------------------------------------------------
JERRY T. JACKSON
/s/ PHILIPPE CHAMBON Director March 26, 1998
- -----------------------------------------------------
PHILIPPE CHAMBON
Director March , 1998
- -----------------------------------------------------
FRANK L. DOUGLAS
/s/ RICHARD W. HUNT Director March 26, 1998
- -----------------------------------------------------
RICHARD W. HUNT
/s/ WILLIAM C. MILLS III Director March 26, 1998
- -----------------------------------------------------
WILLIAM C. MILLS III
/s/ GERARD M. MOUFFLET Director March 30, 1998
- -----------------------------------------------------
GERARD M. MOUFFLET
</TABLE>
41
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant is incorporated herein by reference to
Exhibit 3.2 to the Registrant's registration statement on
Form S-1 (File No. 333-22817) under the Securities Act of
1933, as amended, as declared effective on July 2, 1997 (the
"S-1").
3.2 Amended and Restated By-Laws of the Registrant are
incorporated herein by reference to Exhibit 3.3 to the S-1.
4.1 Specimen certificate for shares of Common Stock, $.01 par
value per share, of the Registrant is incorporated herein by
reference to Exhibit 4.1 to the S-1.
4.2 Third Amended and Restated Registration Rights Agreement
dated June 13, 1997 among the Company and the Holders (as
defined therein) is incorporated herein by reference to
Exhibit 4.4 to the S-1.
10.1 Amended and Restated 1994 Equity Incentive Plan, as amended
10.2 Contribution Agreement dated April 5, 1994 by and between
the Registrant and Clintec Nutrition Company is incorporated
herein by reference to Exhibit 10.2 to the S-1.
10.3 Non-solictitation Agreement dated April 5, 1994 between the
Registrant and Baxter Healthcare Corporation is incorporated
herein by reference to Exhibit 10.3 to the S-1.
10.4 License Agreement dated December 31, 1997 between the
Registrant and Baxter International, Inc.
10.5 License Agreement dated December 31, 1997 between the
Registrant and Nestle, S.A.
10.6 Amended and Restated Exclusive License Agreement CRF D-416
and D-052, D-913, D-1069, D-1239, D-1258, D-1403, D-1426,
dated August 12, 1996 between the Registrant and Cornell
Research Foundation, Inc. is incorporated herein by
reference to Exhibit 10.5 to the S-1.
10.7 Common Stock Purchase Warrant dated October 28, 1994 between
the Registrant and the Massachusetts Institute of Technology
is incorporated herein by reference to Exhibit 10.6 to the
S-1.
10.8 Lease dated October 28, 1994 between the Registrant and the
Massachusetts Institute of Technology is incorporated herein
by reference to Exhibit 10.7 to the S-1.
10.9 Employment Agreement dated November 28, 1994 between the
Registrant and Hector J. Gomez is incorporated herein by
reference to Exhibit 10.8 to the S-1.
10.10 Letter Agreement dated October 4, 1995 between the
Registrant and Cornell Research Foundation, Inc. is
incorporated herein by reference to Exhibit 10.9 to the S-1.
10.11 Development and License Agreement dated February 28, 1997
between the Registrant and Boehringer Ingelheim
International GmbH ("BI") is incorporated herein by
reference to Exhibit 10.10 to the S-1.
10.12 Form of Warrant Agreement between the Company and each of
the Purchasers, as defined in the Non-Convertible Preferred
Stock and Warrant Purchase Agreement dated as of March 3,
1997, as amended June 4, 1997.
10.13 Letter Agreement dated June 2, 1997 between the Registrant
and BI (as defined therein) is incorporated by reference to
Exhibit 10.13 to the S-1.
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule for fiscal year ended December 31,
1997.
27.2 Restated Financial Data Schedule for fiscal year ended
December 31, 1996.
</TABLE>
42
<PAGE> 1
EXHIBIT 10.1
TRANSCEND THERAPEUTICS, INC.
Amended and Restated 1994 Equity Incentive Plan
As amended, January 15, 1998
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for Transcend
Therapeutics, Inc. (the "Company") and its shareholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants or advisors to, the Company and its parent and subsidiary
corporations who are expected to contribute to the Company's future growth and
success. Except where the context otherwise requires, the term "Company" shall
include the parent and all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended or replaced from time to time (the "Code").
2. TYPE OF OPTIONS AND AWARDS; ADMINISTRATION.
(a) TYPES OF OPTIONS AND AWARDS. Options granted pursuant to the Plan shall
be authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-statutory options which are not intended to meet the requirements of
Section 422 of the Code. Awards granted pursuant to the Plan shall be authorized
by action of the Board of Directors of the Company (or a Committee designated by
the Board of Directors) and shall meet the requirements of Section 13 of the
Plan.
(b) ADMINISTRATION. The Plan will be administered by the Board of Directors
of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion (i) grant options to purchase shares of the Company's
Common Stock (as defined in Section 4 of the Plan), and issue shares upon
exercise of such options as provided in the Plan and (ii) make awards for the
purchase of shares of Common Stock pursuant to Section 13 of the Plan. The Board
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements, awards and the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements and awards, which need not be
identical, and to make all other determinations in the judgment of the Board of
Directors necessary or desirable for the administration of the Plan. The Board
of Directors may correct any
<PAGE> 2
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement or award in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and final judge
of such expediency. No director or person acting pursuant to authority delegated
by the Board of Directors shall be liable for any action or determination made
in good faith. The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3 promulgated under the Securities Exchange
Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")),
delegate any or all of its powers under the Plan to a committee (the
"Committee") appointed by the Board of Directors, and if the Committee is so
appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee to the extent authority is so delegated to such
Committee.
(c) APPLICABILITY OF RULE 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply only to such persons as are required
to file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) GENERAL. Options and awards may be granted or made to persons who are,
at the time of grant, employees, officers or directors of, or consultants or
advisors to, the Company; PROVIDED, that the class of individuals to whom
Incentive Stock Options may be granted shall be limited to all employees of the
Company. A person who has been granted an option or award may, if he or she is
otherwise eligible, be granted additional options or awards if the Board of
Directors shall so determine. Subject to adjustment as provided in Section 16
below, the maximum number of shares with respect to which options or restricted
stock awards may be granted to any person under the Plan shall not exceed
100,000 shares of Common Stock during any calendar year during the term of the
Plan. For the purpose of calculating such maximum number, (a) an option or award
shall continue to be treated as outstanding notwithstanding its repricing,
cancellation or expiration and (b) the repricing of an outstanding option or
award or the issuance of a new option or award in substitution for a cancelled
option or award shall be deemed to constitute the grant of a new additional
option or award, as the case may be, separate from the original grant that is
repriced or cancelled.
(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. The selection of a director
or an officer (as the terms "director" and "officer" are defined for purposes of
Rule 16b-3) as a participant, the timing of the option grant or award, the
exercise price of the option or the sale price of the award and the number of
shares for which an option or award may be granted to such director or officer
shall be determined either (i) by the Board of Directors, of which all members
shall be "disinterested persons" (as hereinafter defined), or (ii) by a
committee of two or more directors having full authority to act in the matter,
of which all members shall be "disinterested persons." For the purposes of the
Plan, a director shall be deemed to be "disinterested" only if
2
<PAGE> 3
such person qualifies as a "disinterested person" within the meaning of Rule
16b-3, as such term is interpreted from time to time.
4. STOCK SUBJECT TO PLAN.
Subject to adjustment as provided in Section 16 below, the total number of
shares which may be issued and sold under the Plan is 1,075,891 shares of Common
Stock, $.01 par value per share ("Common Stock") (reflecting the 300,000-share
increase in the number of shares covered by the Plan pursuant to an amendment
adopted by the Board of Directors on January 15, 1998, subject to stockholder
approval). If an option granted under the Plan shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares subject to
such option shall again be available for subsequent option grants or awards
under the Plan.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. PURCHASE PRICE UPON EXERCISE OF OPTIONS.
(a) GENERAL. The purchase price per share of Common Stock deliverable upon
the exercise of an option shall be determined by the Board of Directors,
PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the exercise
price shall not be less than 100% of the fair market value of such stock, as
determined by the Board of Directors, at the time of grant of such option, or
less than 110% of such fair market value in the case of options described in
Section 11(b).
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised, (ii) by any other means (including without limitation
by delivery of a promissory note of the optionee payable on such terms as are
specified by the Board of Directors) which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board) or (iii) by any combination of such
methods of payment. The fair market value of any shares of the Company's Common
Stock or other non-cash consideration which may be delivered upon exercise of an
option shall be determined in such manner as may be prescribed by the Board of
Directors.
3
<PAGE> 4
7. OPTION PERIOD.
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that such date, in the case
of an Incentive Stock Option, shall in no case be later than ten years after the
date on which the option is granted.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. NONTRANSFERABILITY OF OPTIONS.
Incentive Stock Options, and all options granted to Reporting Persons,
shall not be assignable or transferable by the person to whom it is granted,
either voluntarily or by operation of law, except by will or the laws of descent
and distribution, and, during the life of the optionee, shall be exercisable
only by the optionee; provided, however, that non-statutory options granted to
Reporting Persons may be transferred pursuant to a qualified domestic relations
order (as defined in Rule 16b-3).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
The Board of Directors shall determine the period of time during which an
optionee may exercise an option following (i) the termination of the optionee's
employment or other relationship with the Company or (ii) the death or
disability of the optionee. Such periods shall be set forth in the agreement
evidencing such option.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options.
(b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
4
<PAGE> 5
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value
of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five years from the
date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), PROVIDED, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised, by the person to whom it is
transferred by will or the laws of descent and distribution, within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option or award granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7(h) of the Income Tax Regulations (or any successor regulations).
Notwithstanding the foregoing provisions, no stock option may be exercised after
its expiration date.
5
<PAGE> 6
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its sole
discretion, include additional provisions in any option granted under the Plan,
including without limitation restrictions on transfer, repurchase rights,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; PROVIDED THAT such
additional provisions shall not be inconsistent with any other term or condition
of the Plan.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all or any particular option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. AWARDS.
A restricted stock award (an "award") shall consist of the sale and
issuance by the Company of shares of Common Stock, and the purchase by the
recipient of such shares, subject to the terms, conditions and restrictions
described in the document evidencing the award and in this Section 13 and
elsewhere in the Plan.
(a) EXECUTION OF RESTRICTED STOCK AWARD AGREEMENT. As a condition to an
award under the Plan, each recipient of an award shall execute an agreement in
such form, which may differ among recipients, as shall be specified by the Board
of Directors at the time of such award.
(b) PRICE. The Board of Directors shall determine the price at which shares
of Common Stock shall be sold to recipients of awards under the Plan. The Board
of Directors may, in its discretion, issue shares pursuant to awards without the
payment of any cash purchase price by the recipients or issue shares pursuant to
awards at a purchase price below the then fair market value of the Common Stock.
If a purchase price is required to be paid, it shall be paid in cash or by check
payable to the order of the Company at the time that the award is accepted by
the recipient, or by such other means as may be approved by the Board of
Directors.
(c) NUMBER OF SHARES. The award shall specify the number of shares of
Common Stock granted thereunder.
(d) RESTRICTIONS ON TRANSFER. In addition to such other terms, conditions
and restrictions upon awards as shall be imposed by the Board of Directors, all
shares issued pursuant to an award shall be subject to the following
restrictions:
6
<PAGE> 7
(1) All shares of Common Stock subject to an award (including any
shares issued pursuant to paragraph (e) of this Section) shall be subject
to certain restrictions on disposition and obligations of resale to the
Company as provided in subparagraph (2) below for the period specified in
the document evidencing the award, and shall not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of until such
restrictions lapse. The period during which such restrictions are
applicable is referred to as the "Restricted Period."
(2) In the event that a recipient's employment with the Company (or
consultancy or advisory relationship, as the case may be) is terminated
within the Restricted Period, whether such termination is voluntary or
involuntary, with or without cause, or because of the death or disability
of the recipient, the Company shall have the right and option for a period
of three months following such termination to buy for cash that number of
the shares of Common Stock purchased under the award as to which the
restrictions on transfer and the forfeiture provisions contained in the
award have not then lapsed, at a price equal to the price per share
originally paid by the recipient. If such termination occurs within the
last three months of the applicable restrictions, the restrictions and
repurchase rights of the Company shall continue to apply until the
expiration of the Company's three month option period.
(3) Notwithstanding subparagraphs (1) and (2) above, the Board of
Directors may, in its discretion, either at the time that an award is made
or at any time thereafter, waive its right to repurchase shares of Common
Stock upon the occurrence of any of the events described in this paragraph
(d) or remove or modify any part or all of the restrictions. In addition,
the Board of Directors may, in its discretion, impose upon the recipient of
an award at the time of such award such other restrictions on any shares of
Common Stock issued pursuant to such award as the Board of Directors may
deem advisable.
(e) ADDITIONAL SHARES. Any shares received by a recipient of an award as a
stock dividend on, or as a result of stock splits, combinations, exchanges of
shares, reorganizations, mergers, consolidations or otherwise with respect to,
shares of Common Stock received pursuant to such award shall have the same
status and shall bear the same restrictions, all on a proportionate basis, as
the shares initially purchased pursuant to such award.
(f) TRANSFERS IN BREACH OF AWARD. If any transfer of shares purchased
pursuant to an award is made or attempted contrary to the terms of the Plan and
of such award, the Board of Directors shall have the right to purchase for the
account of the Company those shares from the owner thereof or his or her
transferee at any time before or after the transfer at the price paid for such
shares by the person to whom they were awarded under the Plan. In addition to
any other legal or equitable remedies which it may have, the Company may enforce
its rights by specific
7
<PAGE> 8
performance to the extent permitted by law. The Company may refuse for any
purpose to recognize as a shareholder of the Company any transferee who receives
any shares contrary to the provisions of the Plan and the applicable award or
any recipient of an award who breaches his or her obligation to resell shares as
required by the provisions of the Plan and the applicable award, and the Company
may retain and/or recover all dividends on such shares which were paid or
payable subsequent to the date on which the prohibited transfer or breach was
made or attempted.
(g) ADDITIONAL AWARD PROVISIONS. The Board of Directors may, in its sole
discretion, include additional provisions in any award granted under the Plan,
including without limitation commitments to pay cash bonuses, make, arrange for
or guarantee loans or transfer other property to recipients upon the grant of
awards, or such other provisions as shall be determined by the Board of
Directors.
14. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom
an option or award is granted, as a condition of exercising such option or
purchasing the shares subject to the award, to give written assurances in
substance and form satisfactory to the Company to the effect that such person is
acquiring the Common Stock subject to the option or award for his or her own
account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
(b) COMPLIANCE WITH SECURITIES LAWS. Each option and award shall be subject
to the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option or award upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition
is necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option or award may not be exercised, in whole or in
part, unless such listing, registration, qualification, consent or approval, or
satisfaction of such condition shall have been effected or obtained on
conditions acceptable to the Board of Directors. Nothing herein shall be deemed
to require the Company to apply for or to obtain such listing, registration or
qualification, or to satisfy such condition.
15. RIGHTS AS A SHAREHOLDER.
The holder of an option or recipient of an award shall have no rights as a
shareholder with respect to any shares covered by the option or award
(including, without limitation, any rights to receive dividends or non-cash
distributions with respect to such shares) until the date of issue of a stock
certificate to him or her for such shares. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
8
<PAGE> 9
16. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS.
(a) GENERAL. If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment shall be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan or repurchase rights of the Company, without changing the
aggregate purchase price as to which such options remain exercisable, provided
that no adjustment shall be made pursuant to this Section 16 if such adjustment
would cause the Plan to fail to comply with Section 422 of the Code or with Rule
16b-3.
(b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section
16 will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account of
any such adjustments.
17. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of a consolidation or merger in which outstanding
shares of Common Stock are exchanged for securities, cash or other property of
any other corporation or business entity or in the event of a liquidation of the
Company or sale of all or substantially all of the assets of the Company, the
Board of Directors of the Company, or the board of directors of any corporation
assuming the obligations of the Company, may, in its discretion, take any one or
more of the following actions, as to outstanding options and awards: (i) provide
that such options shall be assumed, or equivalent options shall be substituted,
by the acquiring or succeeding corporation (or an affiliate thereof), PROVIDED
that any such options substituted for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, (ii) upon written notice to the
optionees, provide that all unexercised options will terminate immediately prior
to the consummation of such transaction unless exercised by the optionee within
a specified period following the date of such notice, (iii) in the event of a
merger under the terms of which holders of the Common Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the merger (the "Merger Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such outstanding options (to the extent
then exercisable at prices not in excess of the Merger Price) and (B) the
9
<PAGE> 10
aggregate exercise price of all such outstanding options in exchange for the
termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full, any restrictions on exercising
outstanding options issued pursuant to the Plan prior to any given date shall
terminate and any restrictions on and rights of the Company to repurchase shares
covered by outstanding awards issued pursuant to the Plan shall terminate.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
18. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option or award shall confer upon
any recipient of an award or optionee any right with respect to the continuation
of his or her employment by the Company or interfere in any way with the right
of the Company at any time to terminate such employment or to increase or
decrease the compensation of the optionee.
19. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, neither the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise nor the value of an award granted to an employee will
constitute compensation with respect to which any other employee benefits of
such employee are determined, including, without limitation, benefits under any
bonus, pension, profit-sharing, life insurance or salary continuation plan,
except as otherwise specifically determined by the Board of Directors.
20. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required as to such modification or amendment
under Section 422 of the Code or any successor provision with respect to
Incentive Stock Options or under Rule 16b-3 with respect to options held by or
awards made to Reporting Persons, the Board of Directors may not effect such
modification or amendment without such approval.
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<PAGE> 11
(b) The termination or any modification or amendment of the Plan shall not,
without the consent of an optionee or recipient of an award, affect his or her
rights under an option or award previously granted to him or her. With the
consent of the optionee or recipient of the award affected, the Board of
Directors may amend outstanding option agreements or awards in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option or award to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3 or any successor rule.
21. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee or recipient of an award any federal, state or
local taxes of any kind required by law to be withheld with respect to any
shares issued upon exercise of options under the Plan or the purchase of shares
subject to the award. Subject to the prior approval of the Company, which may be
withheld by the Company in its sole discretion, the optionee or recipient of an
award may elect to satisfy such obligations, in whole or in part, (i) by causing
the Company to withhold shares of Common Stock otherwise issuable pursuant to
the exercise of an option or the purchase of shares subject to an award or (ii)
by delivering to the Company shares of Common Stock already owned by the
optionee or award recipient. The shares so delivered or withheld shall have a
fair market value equal to such withholding obligation. The fair market value of
the shares used to satisfy such withholding obligation shall be determined by
the Company as of the date that the amount of tax to be withheld is to be
determined. An optionee or award recipient who has made an election pursuant to
this Section 21(a) may only satisfy his or her withholding obligation with
shares of Common Stock which are not subject to any repurchase, forfeiture,
unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3.
(c) If the recipient of an award under the Plan elects, in accordance with
Section 83(b) of the Code, to recognize ordinary income in the year of
acquisition of any shares awarded under the Plan, the Company will require at
the time of such election an additional payment for withholding tax purposes
based on the difference, if any, between the purchase price of such shares and
the fair market value of such shares as of the date immediately preceding the
date of the award.
11
<PAGE> 12
22. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
23. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring shareholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 20) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option issued after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
and awards may be granted under the Plan at any time after the effective date
and before the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section 17,
the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options or the final vesting
of awards granted under the Plan. Unless sooner terminated in accordance with
Section 17, the Plan shall terminate with respect to options which are not
Incentive Stock Options and awards on the date specified in (ii) above. If the
date of termination is determined under (i) above, then options outstanding on
such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such options.
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<PAGE> 13
24. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
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<PAGE> 1
EXHIBIT 10.4
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, effective this 31st day of December, 1997 (the
"Effective Date") is entered into by and between Baxter International Inc., a
Delaware corporation having offices at One Baxter Parkway, Deerfield, Illinois
60015 ("BAXTER") and Transcend Therapeutics Inc., a Delaware corporation
("TTI").
WHEREAS, Clintec Nutrition Company, an Illinois general partnership
("CLINTEC") was formed by Nestle Clinical Nutrition Inc. (formerly Clinical
Nutrition Holdings, Inc.), a Delaware Corporation ("Nestle Nutrition") and
Clintec International, Inc., a Delaware Corporation, a subsidiary of BAXTER for
the purpose of combining the clinical nutrition businesses of NESTLE and BAXTER
and their respective Affiliates;
WHEREAS, on April 5, 1994 (the "Original Effective Date"), CLINTEC and TTI
(then known as Free Radical Sciences, Inc.) entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which, among other things,
CLINTEC contributed to TTI various patents, patent applications and other
technology;
WHEREAS, concurrently with the execution of the Contribution Agreement, TTI
and CLINTEC entered into a License Agreement, effective as of April 5, 1994,
(the "Original License Agreement") pursuant to which, among other things, TTI
granted to CLINTEC a license to use the patents, patent applications and other
technology transferred to TTI pursuant to the Contribution Agreement in the
fields of Clinical Nutrition and Nutrition (as herein defined);
WHEREAS, Nestle Nutrition and Clintec International, Inc. have agreed to
dissolve CLINTEC and wind down its affairs in an orderly manner; and
WHEREAS, in connection with the dissolution of CLINTEC, the parties desire
(i) to terminate the Contribution Agreement and the Original License Agreement,
(ii) to establish separate licensing arrangements with TTI with respect to the
patents, patent applications and other technology covered by the Original
License Agreement and (iii) to make certain of the obligations of the parties
under the Original License Agreement and Contribution Agreement direct
obligations of NESTLE or BAXTER to TTI, on the one hand, or of TTI to NESTLE or
BAXTER, on the other hand in each case, on the terms set forth herein and in a
license agreement (the "NESTLE License Agreement") to be executed concurrently
herewith between TTI and NESTLE Nutrition or an Affiliate of NESTLE Nutrition
(such entity being referred to herein as NESTLE).
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth below, the parties hereby agree as follows:
<PAGE> 2
1. DEFINITIONS. As used herein, the following terms shall have the meanings
set forth below:
"Affiliate" shall mean, when used with reference to a specified party, any
party that directly or indirectly through one or more intermediaries controls or
is controlled by or is under common control with the specified party. For
purpose of this definition, "controls" "is controlled by" and "under common
control with" means the ability to direct the vote of in excess of 50% of the
voting securities of such party.
"AIDS Drugs" shall have the meaning provided in SECTION 3.2.
"Clinical Nutrition" shall mean the feeding under professional supervision
of patients requiring special food administration techniques and devices or
nutrients in relation to their medical condition and (for purposes of this
Agreement) shall be deemed to exclude the administration of any product in which
the Compounds (as defined below) (i) exceed 10% by dry weight of the total
content of the amino acids, amino acid precursors and amino acid substrates, or
(ii) exceed 1% by weight volume of the product administered in liquid form to
patients, unless TTI otherwise consents (which consent shall not be unreasonably
withheld). Clinical Nutrition comprises parenteral (defined as administration
intravenously or intraperitoneally) and enteral (defined as administration
orally, through the nasogastric passage or through the jejunum) nutrition for
patient needs in hospitals, nursing homes, extended care facilities and, if
taken under professional supervision, private residences.
"Clinical Nutrition Products" shall mean products used or that can be used
in the field of Clinical Nutrition. Clinical Nutrition Products include those
products that replete nutritional deficits, return naturally occurring cellular
constituents or cellular products toward or to accepted normal clinical ranges,
ameliorate malnutrition, maintain, or improve nutrition status, offset negative
nitrogen balance or replete energy deficit. In biological systems Clinical
Nutrition Products are handled by known metabolic pathways which may or may not
be altered by disease state or clinical condition.
"Code" shall have the meaning provided in SECTION 3.2(c).
"Compound(s)" shall mean any of the molecular entities
L-2-oxothiazolidine-4-carboxylate (Procysteine), its isomers, its esters
(including diesters) and its neutral salts, the cysteine derivative
N-acetyl-cysteine, and glutathione esters (including diesters) including the
alkyl monoesters.
"Contribution Agreement" shall have the meaning provided in the recitals.
"Cornell License Agreement" shall mean the "Exclusive License Agreement CRF
D-416 and D-520, D-913, D-169, D-1239, D-1258, D-1403, D-1426" by and between
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Cornell Research Foundation Inc. ("Cornell") and TTI (formerly Free Radical
Sciences, Inc.) having an effective date of April 5, 1994.
"Cornell Licensed Patents" shall mean the United States (U.S.) and non-U.S.
patents and patent applications licensed to TTI (formerly Free Radical Sciences,
Inc.) under the Cornell License Agreement.
"Data" shall mean all data and information resulting from any studies,
including stability, toxicology, preclinical and clinicals, relating to
Compounds that was generated prior to the Original Effective Date.
"Effective Date" shall have the meaning provided in the recitals.
"FDA" shall mean the United States Food and Drug Administration.
"Final Determination" shall have the meaning provided in SECTION 3.2(c).
"Gross Margin" shall mean Net Sales less the direct cost of goods sold,
which will include royalties paid to Cornell and any other third party for
technology involved in the manufacture, use or sale of the drug.
"INRA" shall have the meaning provided in SECTION 4.1.
"INRA Contract" shall have the meaning provided in SECTION 4.1.
"Interim Determination" shall have the meaning provided in SECTION 3.2(c).
"IRS" shall have the meaning provided in SECTION 3.2(c).
"Joint Firm" shall have the meaning provided in SECTION 3.2(h).
"Licensed Know-How" shall mean any proprietary right in existence as of the
Original Effective Date, other than a patent or patent application, owned by,
controlled by, or licensed to TTI with the right to sublicense relating to
Clinical Nutrition or Clinical Nutrition Products.
"NESTLE License Agreement" shall have the meaning provided in the recitals.
"Net Sales" shall mean the gross amount of money billed by TTI to its
customers on sale or use of drugs for FDA approved applications for patients
with AIDS subsequent to April 5, 1994, less (1) trade and/or quantity discounts;
(2) returns and allowances; (3) retroactive price reductions; and (4) five
percent (5%) of the amount billed (less deductions (1) through (3)), to cover
cash discounts, sales and other taxes, transportation, insurance charges,
special packaging and duties.
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"Nutrition" shall mean the feeding of individuals and shall include all
products not having therapeutic claims and not included in the definition of
Clinical Nutrition that have as their principal purpose providing nutrients to
an individual.
"Original Effective Date" shall have the meaning provided in the recitals.
"Original License Agreement" shall have the meaning provided in the
recitals.
"Other Compounds" shall mean any other free-radical scavengers which had
been developed or were being developed, as of the Original Effective Date, by or
on behalf of CLINTEC for a primary purpose or use as a pharmaceutical, if any
and which were contributed to TTI pursuant to the Contribution Agreement.
"Pharmaceutical Applications" shall mean the provision of a medicinal
substance or a drug other than a nutrient with the intent to bypass or to alter
or restore normal in vivo synthesis, metabolic or physiologic state, including
redox status. Generally, medicinal substances or drugs will be synthetic,
specifically isolated or specifically produced and will require an approved drug
license to allow sale and promotion of the claimed indication regardless of the
route of administration. Such medicinal substances or drugs can be administered
alone or with other entities such as nutrients.
"Tax Authority" shall have the meaning provided in SECTION 3.2(c).
"Tax Reduction" shall have the meaning provided in SECTION 3.2(c).
"TTI Firm" shall have the meaning provided in SECTION 3.2(h).
"TTI Patents" shall mean the U.S. and non-U.S. patents identified on
SCHEDULE A attached hereto including any reissues or reexaminations thereof, as
well as any U.S. or non-U.S. patents that may issue from TTI Patent Applications
(defined below).
"TTI Patent Applications" shall mean the patent applications identified on
SCHEDULE B attached hereto, as well as any patent application that has been
filed since the Original Effective Date or that is filed after the date of this
Agreement that: is based in whole, or in part, on the invention records
identified on SCHEDULE C: claims priority, at least in part, from a patent
application identified on SCHEDULE B; is based in whole, or in part, on Licensed
Know-How; or is filed as a divisional, continuation, or continuation-in-part of
a patent application identified on SCHEDULE B.
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2. GRANTS
a. GRANT TO BAXTER. For good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, TTI grants to BAXTER a
non-exclusive, paid-up, royalty-free license to the Compounds, Other Compounds,
TTI Patents, TTI Patent Applications, and Cornell Patents limited to the field
of Clinical Nutrition and a paid-up, royalty-free non-exclusive license with
respect thereto limited to the field of Nutrition.
b. LIMITATIONS ON FURTHER LICENSES AND USES BY TTI. Except pursuant to this
License Agreement and the NESTLE License Agreement, TTI agrees not to license to
any other person or entity or to make, use or sell the Compounds, Other
Compounds, TTI Patents, TTI Patent Applications, and Cornell Patents, in the
field of Clinical Nutrition.
c. DATA AND KNOW-HOW. TTI grants to BAXTER a royalty-free non- exclusive
license to the Licensed Know-How. Additionally, TTI will make available to
BAXTER at no cost to BAXTER, at BAXTER's request all Data for use by BAXTER in
the development and regulatory approvals of Clinical Nutrition Products.
3. ROYALTY PAYMENTS
a. ROYALTY FOR CORNELL PATENTS. To the extent any royalty is due and owing
under the Cornell License Agreement in view of BAXTER's sale of Clinical
Nutrition Products under this Agreement, BAXTER agrees to pay the applicable
royalty to Cornell.
b. ROYALTY FOR AIDS DRUGS.
i. From and after the date of this Agreement, TTI shall pay to BAXTER
in U.S. dollars, within 30 days after the end of each calendar quarter after the
date of this Agreement, a royalty equal to 5% of TTI's Gross Margin on Net Sales
of drugs sold by TTI or any subsidiary, affiliate, or sublicensee of TTI during
such calendar quarter for applications for patients with AIDS approved by the
FDA (in the case of sales in the United States) or approved by any foreign
regulatory agency, if applicable (in the case of sales outside the United
States) (the "AIDS Drugs"); provided however, that no such royalty will be
payable by TTI until TTI's cumulative Gross Margin on Net Sales of AIDS Drugs
exceeds the total amount of costs incurred for clinical inventory used in the
AIDS clinical studies (up to a maximum of $1.5 million of such costs), which
royalty shall be payable only on such excess; and provided further, that the sum
of all royalty obligations with respect to technology involved in the
manufacture, use or sale of such AIDS Drugs will in no case, in the aggregate,
exceed 8.5% of Net Sales, which percentage will include payments to
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<PAGE> 6
FCornell and any other third party for technology involved in the manufacture,
use or sale of such AIDS Drugs.
ii. TTI will deliver to BAXTER within 30 days after the end of each
calendar year ending after the date of this Agreement a report in writing
setting forth sales of the AIDS Drugs and will accompany such report with an
appropriate payment of royalty due for such period. TTI will keep an accurate
record for at least three years, certified by it, showing the information by
which TTI arrived at a royalty determination and will permit an auditor
appointed and paid for by BAXTER and acceptable to TTI to make such inspection
of said records as may be necessary to verify royalty reports made by TTI.
However, if such inspection demonstrates that the royalties paid were less than
90% of the royalties due, and TTI's Net Sales of the AIDS Drugs for the
applicable year was $500,000 or more, then TTI shall reimburse BAXTER the
reasonable charges charged by the auditor for such inspection.
iii. In the event it is ultimately determined, by a court of competent
jurisdiction or pursuant to any agreement between TTI and the Internal Revenue
Service ("IRS") and/or any applicable state tax authority (collectively "Tax
Authority"), that any payment made pursuant to SECTION 3.2(a) is not currently
deductible by TTI for federal or state income tax purposes (a "Final
Determination"), then the amounts payable by TTI under SECTION 3.2(B) after such
Final Determination becomes final shall be reduced to the extent necessary so
that the present value, as of the first day of the first year for which any
payment is determined not to be currently deductible, of (i) all payments made
by TTI under SECTION 3.2(b) (taking into account the reduction under this
SECTION 3.2(c) minus (ii) all Tax Reductions attributable to such payments, is
equivalent to the present value, as of the first day of the first year for which
any payment is determined not to be currently deductible, of (iii) all payments
that would be provided for under SECTION 3.2(b) but for this SECTION 3.2(c) and
SECTION 3.2(d) if all such payments had been currently deductible for federal
and state income tax purposes, minus (iv) all Tax Reductions attributable to
such payments, it being the intention of the parties that TTI be put in the same
economic position it would have been in had the amounts payable pursuant to
SECTION 3.2(b) been currently deductible for federal and state income tax
purposes. For this purpose, (i) present value of a payment of Tax Reduction
shall be determined by using, for each calendar year of the computation, the
federal mid-term rate determined using an annual compounding convention under
Section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"),
announced for January of such calendar year, and (ii) the "Tax Reduction"
attributable to a payment is the amount of the actual reduction in federal and
state income tax liability resulting from the payment.
iv. In the event the IRS asserts that any payment made pursuant to
SECTION 3.2(b) is not currently deductible by TTI for federal income tax
purposes and the matter has not been settled or resolved upon the completion of
the audit
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<PAGE> 7
examination (including an appeal to the IRS appeals office) (an "Interim
Determination") then, notwithstanding the provisions of SECTION 3.2(c), the
amounts payable by TTI under SECTION 3.2(b) after the Interim Determination may
be reduced to the extent they could have been reduced under SECTION 3.2(c) if
such deficiency had been upheld or agreed to in a Final Determination, provided,
however, that if there is a Final Determination in which such deficiency is not
upheld or agreed to in its entirety, then TTI shall pay to BAXTER, within 90
days of such Final Determination, the amount necessary to put BAXTER in the same
economic position it would have been in if this SECTION 3.2(d) had not applied.
v. In the event that the amounts payable under SECTION 3.2(b) without
regard to SECTIONS 3.2(c) and 3.2(d) are insufficient to permit any reduction in
the amounts payable under SECTION 3.2(b) that is required pursuant to SECTION
3.2(c) or 3.2(d) as a result of a Final Determination or Interim Determination
to be effected within the four next succeeding calendar quarters after such
Final Determination or Initial Determination, then BAXTER shall pay to TTI,
within 90 days after the end of the last of such calendar quarters, the amount
necessary to put TTI in the economic position it would have been in if the
amounts payable under SECTION 3.2(b) had been sufficient to permit the full
amount of any such required reduction to be effected.
vi. TTI shall give BAXTER a reasonable period of time (i) to review
any federal or state income tax returns of TTI in which TTI claims a deduction
for payments made pursuant to SECTION 3.2(b) prior to filing of any such returns
and (ii) to control the manner in which any such deductions are claimed on such
return.
vii. TTI shall promptly notify BAXTER of any claim by a Tax Authority
that any payment made by TTI under SECTION 3.2(b) is not currently deductible,
and in such event BAXTER shall have the exclusive right to assume the defense of
any such claim and to control any controversy resulting therefrom, at BAXTER's
expense. TTI agrees to cooperate with BAXTER in the defense of any such claim
and to cooperate with BAXTER and the TTI Firm or the Joint Firm (as hereinafter
defined) in the determination of the amount of any reduction in payments
required hereunder. Such cooperation shall include, but not be limited to, (i)
the execution and delivery of any power of attorney required to allow BAXTER and
its representatives to represent TTI in any controversy which BAXTER has the
right to control hereunder, (ii) the prompt and timely filing of appropriate
claims for any refund, and (iii) making available to BAXTER and its
representatives all books, records (including working papers and schedules),
information and employees necessary or useful in connection with any tax
inquiry, audit, investigation, dispute or litigation relating to the matters
described in this SECTION 3.2(q).
viii. The determination of the amount of any reduction pursuant to
SECTIONS 3.2(c) or 3.2(d) hereof shall initially be made by the independent
certified public accountants then serving as auditor for TTI (the "TTI Firm"),
and such
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<PAGE> 8
determination shall be furnished to BAXTER in writing, which shall include a
computation of the amount of any reduction and a detailed written explanation of
the manner in which such computation was made. If BAXTER objects in writing to
such determination within 60 days after it is received by BAXTER, then the
amount of any reduction shall be determined by a "Big Six" firm of independent
certified public accountants jointly selected by BAXTER and TTI (or, if they are
unable to agree, then such a firm jointly selected by the TTI Firm and a firm of
independent public accountants designated by BAXTER) (the "Joint Firm"), and the
decision of the Joint Firm shall be final and binding upon the parties. If
BAXTER does not object in writing to the determination of the TTI Firm within
such time period, then the decision of the TTI Firm shall be final and binding
upon the parties. No reduction in the payments provided for in SECTION 3.2(a)
shall be made until a decision of the TTI Firm of the Joint Firm has become
final. The fees and expenses of the TTI Firm shall be borne by TTI, and the fees
and expenses of the Joint Firm shall be shared equally by BAXTER and TTI, except
that if the Joint Firm decides that the amount of any reduction in payments
required hereunder is less that 90% of the amount of the reduction decided by
the TTI Firm, then TTI shall bear all of the fees and expenses of the Joint
Firm.
4. INRA
a. COOPERATION WITH TTI IN OBTAINING RIGHTS FROM INRA. Clintec
Technologies, S.A. and L'Institut National de la Recherche Agronomique ("INRA")
entered into a Research Contract on December 24, 1992 (the "INRA Contract").
Clintec Technologies, S.A. has subsequently notified INRA of its assignment of
the INRA Contract to Nestec Ltd. effective as of September 30, 1996. BAXTER,
however may have some continuing rights to commercially exploit certain research
results, inventions or discoveries related to the INRA Contract. To the extent
that BAXTER or its Affiliates has such rights (including the right to license
TTI) under the INRA Contract as such rights relate to Pharmaceutical
Applications without the payment by BAXTER of additional consideration therefor,
BAXTER will execute an exclusive, fully paid, royalty-free license granting to
TTI all such rights.
5. NON-SOLICITATION UNDERTAKING
a. NON-SOLICITATION OF TTI EMPLOYEES. BAXTER agrees that until April 5,
1999 it will not (i) directly or indirectly recruit, solicit or otherwise induce
or influence any technical, professional or managerial employee of TTI to
discontinue such employment with TTI, or (ii) willfully induce any person or
firm that performed consulting services for both CLINTEC and TTI at the Original
Effective Date to discontinue the provision of such services to TTI. BAXTER also
agrees that for a period from the date of this Agreement to April 5, 1999, it
will not hire any employee of TTI. Nothing herein shall prevent either party
from (a) hiring any employee of the
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other who was discharged by the other, or (b) hiring any employee of the other
who terminated their employment without inducement by the hiring party.
b. NO DISCLOSURE OF PROPRIETARY INFORMATION.
i. BAXTER hereby agrees that, except as expressly permitted hereby, it
will not directly or indirectly disclose to anyone, or use or otherwise exploit
for its own benefit or for the benefit of anyone else, any trade secrets
contributed to TTI as Contributed Assets under the Contribution Agreement for as
long as they remain trade secrets.
ii. BAXTER hereby agrees that, except as expressly permitted hereby,
until April 5, 1999, it will not directly or indirectly disclose to anyone, or
use or otherwise exploit for its own benefit or for the benefit or anyone else,
any confidential information contributed to TTI as Contributed Assets under the
Contribution Agreement.
iii. BAXTER shall use reasonable efforts to require its employees to
abide by the obligations of this Section 5.2.
c. REMEDIES. BAXTER agrees that if (i) if it breaches the provision in
SECTION 5.1 or 5.2 the damage to TTI will be substantial, although difficult to
ascertain, and money damages will not afford TTI an adequate remedy, and (ii) if
it is in breach of SECTION 5.1 or 5.2, or threatens a breach of this SECTION 5.1
or 5.2, TTI shall be entitled, in addition to all other rights and remedies as
may be provided by law and this Agreement, to specific performance, injunctive
and other equitable relief to prevent or restrain a breach of this SECTION 5.1
or 5.2.
6. PATENT COST.
a. TTI PATENTS AND PATENT APPLICATIONS. TTI shall have the responsibility
to pay all attorney's fees, maintenance fees, and any and all other costs
associated with any TTI Patent or TTI Patent Applications. Should TTI decide not
to pay any cost or expense for any TTI Patent or TTI Patent Application or
decide to allow any such TTI Patent or TTI Patent Application to go abandoned,
prior to abandoning such TTI Patent Application or TTI Patent, TTI shall advise
BAXTER in writing. BAXTER shall then have the right to pay such expense and
maintain the TTI Patent or TTI Patent Application jointly with NESTLE. Should
BAXTER or NESTLE pay the expense or fee, TTI agrees to assign to BAXTER or
NESTLE such TTI Patent or TTI Patent Application upon receipt of a joint written
direction of BAXTER and NESTLE delivered within 30 days after notice from TTI of
such abandonment.
b. CORNELL LICENSED PATENTS. To the extent any fees are due and owing under
the Cornell License Agreement for a Cornell Licensed Patent, TTI will be
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<PAGE> 10
responsible to pay all costs and expenses. However, prior to allowing any
Cornell Licensed Patent to go abandoned for failure to pay any cost or expense,
TTI shall advise BAXTER and BAXTER shall have the right, but not the obligation,
to pay the applicable expense or fee jointly with NESTLE. Should BAXTER and/or
NESTLE pay the expense or fee, TTI will then transfer to BAXTER and/or NESTLE,
to the extent permitted by the Cornell License Agreement, the rights to the
applicable Cornell Licensed Patent upon receipt of a joint written direction of
BAXTER and Nestle delivered within 30 days after notice from TTI of such
abandonment.
7. TERM.
The term of this Agreement shall last for the effective life of the last to
expire of the TTI Patents or Cornell Licensed Patents. Upon expiration of this
License Agreement, BAXTER shall have a royalty-free license to Licensed Know-How
for the purpose of making, using, and selling Clinical Nutrition Products or
products used in the field of Nutrition.
8. ENFORCEMENT.
Upon learning of an infringement of an TTI Patent or Cornell Patent, BAXTER
will advise TTI of such infringement in writing. TTI will then be free, at its
expense, to file a law suit in its name and at its expense against the
infringer. TTI shall be entitled to all damages it recovers. If TTI does not
file a law suit within ninety (90) days of BAXTER's notice, BAXTER, either
individually or jointly with Nestle, shall at its cost and expense, be entitled
to bring suit against the infringer for infringement of the rights granted to
BAXTER in the field of Nutrition and Clinical Nutrition hereunder. TTI will not
be entitled to any damages that may be recovered by BAXTER or Nestle from any
such law suit. TTI agrees, to the extent requested by BAXTER, to join BAXTER and
assist BAXTER, at BAXTER's expense, in maintaining such law suit.
9. ASSIGNMENT.
The rights and obligations of BAXTER under this Agreement can be assigned
to any party by BAXTER upon thirty (30) days notice from BAXTER.
10. TERMINATION.
Either TTI or BAXTER may terminate this Agreement if there is a material
breach of this Agreement by the other party by providing the other party with
written notice of such breach. The breaching party will then have a six (6)
month period in which to cure such breach. If such breach remains uncured at the
end of the six (6) month period, this Agreement will then terminate.
-10-
<PAGE> 11
11. SUBLICENSING.
BAXTER may sublicense its rights under this Agreement to any third party.
12. MISCELLANEOUS.
a. NOTICES. Any notices to be given under any provision of this Agreement
may be given by sending by registered or certified mail to the address of the
party concerned as follows:
If to BAXTER:
c/o Clintec Nutrition Division,
Baxter Healthcare Corporation
Attention: President
One Baxter Parkway
Deerfield, Illinois 60015
Fax. No.: (847) 948-4989
with copy to:
Baxter Health Care Corporation
Attention: General Counsel
One Baxter Parkway
Deerfield, Illinois 60015
Fax No.: (847) 948-3948
If to TTI:
Transcend Therapeutics Inc.
Attn: President
640 Memorial Drive
Cambridge, Massachusetts 02139
Tel. No.: (617) 374-1200
Fax No.: (617) 374-1201
or to such other person as may be designated in a notice delivered to the other
party in accordance with this SECTION 12.1.
b. APPLICABLE LAW. This Agreement shall be deemed to be made under and to
be governed by the laws of the State of Illinois.
-11-
<PAGE> 12
c. SEPARABILITY. Should any part or provision of this Agreement be held
unenforceable or in conflict with the law of any jurisdiction, the
enforceability of the remaining parts or provisions shall not be affected by
such holding.
d. HEADINGS. The headings and subheadings of the various articles and
sections of this Agreement are inserted merely for the purpose of convenience
and do not express or imply any limitation, definition, or extension of the
specific terms and sections so designated.
e. SUCCESSORS AND ASSIGNS. This Agreement is binding on any successors of
BAXTER or assigns of any TTI Patents, TTI Patent Applications, the Licensed
Know-How, or any rights under the Cornell License Agreement.
f. TERMINATION OF APRIL 5, 1994 AGREEMENTS. Upon execution of this
Agreement and the NESTLE License Agreement, the Original License Agreement and
the Contribution Agreement shall terminate and be of no further force and
effect, except that Section 6 of the Contribution Agreement shall remain in full
force and effect and be enforceable against BAXTER as and to the extent that
such section would be enforceable against CLINTEC in the absence of this
Agreement.
g. SECURITIES ACT REPORTS. Transcend agrees to furnish to BAXTER promptly
following the filing thereof with the Securities Exchange Commission, a copy of
all periodic reports on Form 10-K or Form 10-Q filed by TTI under the Securities
Exchange Act of 1934.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties have caused this instrument to be executed in
duplicate as of the day and year first above written.
ATTEST: TRANSCEND THERAPEUTICS INC.
/s/ B. Nicholas Harvey By: /s/ Hector J. Gomez
- ----------------------------- ---------------------
Title:
------------------
Date:
------------------
ATTEST: BAXTER INTERNATIONAL INC.
/s/ Michelle Kern By: /s/ John F. Gaither
- ----------------------------- ---------------------
Title: Vice President
------------------
Date: 2/18/98
--------------------
-13-
<PAGE> 14
SCHEDULE A TO LICENSE AGREEMENT
U.S. Patents
U.S. Patent No. 5,095,027 "Method for Treating Reperfusion Injury
Employing L-2-oxothiazolidine-4-carboxylic
Acid"
Date Issued: March 10, 1992
U.S. Patent No. 5,208,249 "Method for Stimulating Intracellular
Synthesis of Glutathione Using Esters of
L-2-Oxothiazolidine-4-carboxylate"
Date Issued: May 4, 1993
U.S. Patent No. 5,214,062 "Method and Composition for Treating
Immune Disorders, Inflammation and
Chronic Infections"
Date Issued: May 25, 1993
<PAGE> 15
SCHEDULE B TO LICENSE AGREEMENT
Pending Patent Applications
- --------------------------------------------------------------------------------
* Asterisk (and italics) denotes patent applications which were abandoned
by TTI between the Original Effective Date and the Effective Date of this
License Agreement.
- --------------------------------------------------------------------------------
Title: "A Method to Enhance Cellular Defense Against Infection"
U.S. Serial No.: 07/682,636
Date Filed: April 8, 1991
Title: "Method of Treatment for Latent Virus Infection"
U.S. Serial No.: 07/769,194
Date Filed: September 30, 1991
Corresponding Non-U.S. Applications:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 22,115/92 September 4, 1992
Canada 2077966-7 September 10, 1992
Europe 92115046.2 September 3, 1992
Japan 4-26183 September 30, 1992
</TABLE>
Title: "Method for Reducing or Preventing Toxicity Associated With
Antiretroviral Therapy"
U.S. Serial No.: 07/872,549
Date Filed: April 23, 1992
Corresponding Non-U.S. Applications:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 35,357/93 March 23, 1993
Canada 2,094,311 April 19, 1993
Europe 93302218.8 March 22, 1993
Japan 5-94678 April 21, 1993
</TABLE>
B-1
<PAGE> 16
Title: "Method for Preventing and Treating Atherosclerosis"
U.S. Serial No.: 07/930,183
Date Filed: August 17, 1992
Corresponding Non-U.S. Applications:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 38,387/93 May 5, 1993
Canada 2103644 August 9, 1993
Europe 93303526.3 May 6, 1993
Japan 5-203491 August 17, 1993
</TABLE>
- --------------------------------------------------------------------------------
Title: "Method for Optimizing Defensin Synthesis in Vivo and in Vitro"
U.S. Serial No.: 07/969,412 *
Date Filed: October 30, 1992
Title: "Method for Treating Systemic Inflammatory Response Syndrome"
U.S. Serial No.: 07/983,415 *
Date Filed: November 30, 1992
Corresponding Non-U.S. Applications:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 50,404/93 * November 3, 1993
Canada 2110147 * November 26, 1993
Europe 93118259.6 * November 11, 1993
Japan 5-298826 * November 30, 1993
</TABLE>
- --------------------------------------------------------------------------------
Title: "Method for Treating Infertility"
U.S. Serial No.: 08/012,006
Date Filed: February 1, 1993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Corresponding Non-U.S. Applications:
PCT/US94/01118 *
filed January 31, 1994
Title: "Method for Treatment of Pulmonary Disease"
U.S. Serial No.: 08/057,122 *
Date Filed: May 31, 1993
- --------------------------------------------------------------------------------
B-2
<PAGE> 17
Corresponding Non-U.S. Applications:
<TABLE>
<CAPTION>
Country Application No. Filing Date
- ------- --------------- -----------
- ---------------------------------------------------------------------------------
<S> <C> <C>
Australia 10,064/92 * January 6, 1992
- --------------------------------------------------------------------------------
Canada 2058793-8 January 6, 1992
Europe 91121524.2 December 16, 1991
Japan 19504/1992 January 7, 1992
</TABLE>
Title: "Method for Treating Acquired Immune Deficiency Syndrome"
U.S. Serial No.: 08/059,775
Date Filed: May 10, 1993
Title: "Method for Reducing or Preventing Bone Marrow Hypoplasia"
U.S. Serial No.: 08/068,385
Date Filed: May 28, 1993
- -------------------------------------------------------------------------------
Title: "Method and Compositions for Retarding the Aging Process"
U.S. Serial No.: 08/146,305 *
Date Filed: November 1, 1993
Title: "Method and Composition for Stimulating Intracellular
Glutathione"
U.S. Serial No.: 08/147,165 *
Date Filed: November 3, 1993
Title: "Methods of Preventing Hair Loss and of Stimulating
New Hair Growth"
U.S. Serial No.: 08/149,614 *
Date Filed: November 9, 1993
- -------------------------------------------------------------------------------
Title: "Methods of Reducing or Preventing Side Effects of
Chemotherapeutic Agents"
U.S. Serial No.: 08/164,069
Date Filed: December 9, 1993
B-3
<PAGE> 18
Non-U.S. Applications Corresponding to U.S. Patent No. 5,095,027, "Method
for Treating Reperfusion Injury Employing L-2-oxothiazolidine-4 carboxylic
Acid"; Date Issued: March 10, 1992:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 11,101/92 February 20, 1992
Canada 2061270-3 February 14, 1992
Europe 92301226.4 February 14, 1992
Japan 4-43042 February 28, 1992
</TABLE>
Non-U.S. Applications Corresponding to U.S. Patent No. 5,208,249, "Method
for Stimulating Intracellular Synthesis of Glutathione Using Esters of L-2-
Oxothiazolidine-4-Carboxylate"; Date Issued: May 4, 1993:
<TABLE>
<CAPTION>
Country Application No. Filing Date
------- --------------- -----------
<S> <C> <C>
Australia 37,181/93 April 22, 1993
Canada 2096036 May 12, 1993
Europe 93303213.8 April 23, 1993
Japan 5-205958 August 20, 1993
</TABLE>
Non-U.S. Applications Corresponding to U.S. Patent No. 5,214,062, "Method
and Composition for Treating Immune Disorders, Inflammation and Chronic
Infections"; Date Issued: May 25, 1993:
<TABLE>
<CAPTION>
COUNTRY APPLICATION NO. FILING DATE
------- --------------- -----------
<S> <C> <C>
Australia 34,092/93 March 9, 1993
Canada 2093163 April 1, 1993
Europe 93301861.6 March 11, 1993
Japan 5-81957 April 8, 1993
</TABLE>
B-4
<PAGE> 19
SCHEDULE C TO LICENSE AGREEMENT
Invention Records
Goldberg, "Stimulation of Intracellular Glutathione Synthesis for Prevention of
Diabetic Complications" dated August 8, 1990
Pace et al., "Topical Elevation of Intracellular Glutathione as Treatment for
Psoriasis" dated October 19, 1990
Kamarei, "Diets Containing Glutathione for Hepatic Diseases" dated December 4,
1990
Mark et al., "Novel Methods for the Reduction of Difluromethylornithine
Associated Toxicity" dated March 29, 1991
Goldberg, "Topical Applications of Glutathione Esters for Treatment of Local
Herpes, Bursus and Inflammations" dated April 8, 1991
Mark et al., "Method of Treatment of Autoimmune Diseases" dated April 11, 1991
Mark et al., "Method of Modifying in Vitro Cell Culture Media to Enhance
Cellular Functions Including Replication" dated July 23, 1991
Rowe et al., "A Solid Oral Dosage Form for Procysteine" dated July 29, 1991
Madsen, "Amelioration of Valproate Toxicity of Co-administration of Procysteine"
dated October 30, 1991
Mark, "Methods of Enhancing the Use of Nitric Oxide to Treat Severe Adult
Respiratory Distress Syndrome" dated November 8, 1991
Goldberg et al., "Method to Reduce Muscle Injury and Damage and Enhance
Recovery from High Intensity Exercise" dated March 31, 1992
Goldberg, "Method for Enhancing Glutathione Synthesis by Concomitant
Administration of Glutamine and Cysteine" dated April 1, 1992
Mark, "Methods of Modifying in Vitro Tissue Culture Media to Enhance Cellular
Functions, Including Replication" dated October 30, 1992
<PAGE> 1
EXHIBIT 10.5
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, effective this 31st day of December, 1997 (the
"Effective Date") is entered into by and between Nestec Ltd., a Swiss
corporation having offices at Avenue Nestle 55, 1800 Vevey, Switzerland
("NESTLE") and Transcend Therapeutics Inc., a Delaware corporation ("TTI").
WHEREAS, Clintec Nutrition Company, an Illinois general partnership
("CLINTEC") was formed by Nestle Clinical Nutrition Inc. (formerly Clinical
Nutrition Holdings, Inc.), a Delaware Corporation ("Nestle Nutrition") and
Clintec International, Inc., a Delaware Corporation ("BAXTER") for the purpose
of combining the clinical nutrition business of NESTLE and BAXTER and their
respective Affiliates;
WHEREAS, on April 5, 1994 (the "Original Effective Date"), CLINTEC and
TTI (then known as Free Radical Sciences, Inc.) entered into a Contribution
Agreement (the "Contribution Agreement") pursuant to which, among other things,
CLINTEC contributed to TTI various patents, patent applications and other
technology;
WHEREAS, concurrently with the execution of the Contribution Agreement,
TTI and CLINTEC entered into a License Agreement, effective as of April 5, 1994,
(the "Original License Agreement") pursuant to which, among other things, TTI
granted to CLINTEC a license to use the patents, patent applications and other
technology transferred to TTI pursuant to the Contribution Agreement in the
fields of Clinical Nutrition and Nutrition (as herein defined);
WHEREAS, Nestle Nutrition and BAXTER have agreed to dissolve CLINTEC
and wind down its affairs in an orderly manner; and
WHEREAS, in connection with the dissolution of CLINTEC, the parties
desire (i) to terminate the Contribution Agreement and the Original License
Agreement, (ii) to establish separate licensing arrangements with TTI with
respect to the patents, patent applications and other technology covered by the
Original License Agreement and (iii) to make certain other obligations of the
parties under the Original License Agreement and Contribution Agreement direct
obligations of NESTLE or BAXTER to TTI, on the one hand, or of TTI to NESTLE or
BAXTER, on the other hand, in each case, on the terms set forth herein and in a
license agreement to be executed concurrently herewith between TTI and BAXTER or
an Affiliate of BAXTER (the "BAXTER License Agreement").
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth below, the parties hereby agree as follows:
<PAGE> 2
1. DEFINITIONS. As used herein, the following terms shall have the
meanings set forth below:
"Affiliate" shall mean, when used with reference to a specified party,
any party that directly or indirectly through one or more intermediaries
controls or is controlled or is under common control with the specified party.
For purpose of this definition, controls" "is controlled by" and "under common
control with" means the ability to direct the vote of in excess of 50% of the
voting securities of such party.
"AIDS Drugs" shall have the meaning provided in SECTION 3.2.
"BAXTER License Agreement" shall have the meaning provided in the
recitals.
"Clinical Nutrition" shall mean the feeding under professional
supervision of patients requiring special food administration techniques and
devices or nutrients in relation to their medical condition and (for purposes of
this Agreement) shall be deemed to exclude the administration of any product in
which the Compounds (as defined below) (i) exceed 10% by dry weight of the total
content of the amino acids, amino acid precursors and amino acid substrates, or
(ii) exceed 1% by weight volume of the product administered in liquid form to
patients, unless TTI otherwise consents (which consent shall not be unreasonably
withheld). Clinical Nutrition comprises parenteral (defined as administration
intravenously or intraperitoneally) and enteral (defined as administration
orally, through the nasogastric passage or through the jejunum) nutrition for
patient needs in hospitals, nursing homes, extended care facilities and, if
taken under professional supervision, private residences.
"Clinical Nutrition Products" shall mean products used or that can be
used in the field of Clinical Nutrition. Clinical Nutrition Products include
those products that replete nutritional deficits, return naturally occurring
cellular constituents or cellular products toward or to accepted normal clinical
ranges, ameliorate malnutrition, maintain, or improve nutrition status, offset
negative nitrogen balance or replete energy deficit. In biological systems
Clinical Nutrition Products are handled by known metabolic pathways which may or
may not be altered by disease state or clinical condition.
"Code" shall have the meaning provided in SECTION 3.2(c).
"Compound(s)" shall mean any of the molecular entities
L-2-oxothiazolidine-4- carboxylate (Procysteine), its isomers, its esters
(including diesters) and its neutral salts, the cysteine derivative
N-acetyl-cysteine, and glutathione esters (including diesters) including the
alkyl monoesters.
"Contribution Agreement" shall have the meaning provided in the
recitals.
-2-
<PAGE> 3
"Cornell License Agreement" shall mean the "Exclusive License Agreement
CRF D-416 and D-520, D-913, D-169, D-1239, D-1258, D-1403, D-1426" by and
between Cornell Research Foundation Inc. ("Cornell") and TTI (formerly Free
Radical Sciences, Inc.) having an effective date of April 5, 1994.
"Cornell Licensed Patents" shall mean the United States (U.S.) and
non-U.S. patents and patent applications licensed to TTI (formerly Free Radical
Sciences, Inc.) under the Cornell License Agreement.
"Data" shall mean all data and information resulting from any studies,
including stability, toxicology, preclinical and clinicals, relating to
Compounds that was generated prior to the Original Effective Date.
"Effective Date" shall have the meaning provided in the recitals.
"FDA" shall mean the United States Food and Drug Administration.
"Final Determination" shall have the meaning provided in SECTION 3.2(c).
"Gross Margin" shall mean Net Sales less the direct cost of goods sold,
which will include royalties paid to Cornell and any other third party for
technology involved in the manufacture, use or sale of the drug.
"INRA" shall have the meaning provided in SECTION 4.1.
"INRA Contract" shall have the meaning provided in SECTION 4.1.
"Interim Determination" shall have the meaning provided in
SECTION 3.2(c).
"IRS" shall have the meaning provided in SECTION 3.2(c).
"Joint Firm" shall have the meaning provided in SECTION 3.2(h).
"Licensed Know-How" shall mean any proprietary right of TTI in existence
as of the Original Effective Date, other than a patent or patent application,
owned by, controlled by, or licensed to TTI with the right to sublicense
relating to Clinical Nutrition or Clinical Nutrition Products.
"Net Sales" shall mean the gross amount of money billed by TTI to its
customers on sale or use of drugs for FDA approved applications for patients
with AIDS subsequent to April 5, 1994, less (1) trade and/or quantity discounts;
(2) returns and allowances; (3) retroactive price reductions; and (4) five
percent (5%) of the amount billed (less deductions (1) through (3)), to cover
cash discounts, sales and other taxes, transportation, insurance charges,
special packaging and duties.
-3-
<PAGE> 4
"Nutrition" shall mean the feeding of individuals and shall include all
products not having therapeutic claims and not included in the definition of
Clinical Nutrition that have as their principal purpose providing nutrients to
an individual.
"Original Effective Date" shall have the meaning provided in the
recitals.
"Original License Agreement" shall have the meaning provided in the
recitals.
"Other Compounds" shall mean any other free-radical scavengers which had
been developed or were being developed, as of the Original Effective Date, by or
on behalf of CLINTEC for a primary purpose or use as a pharmaceutical, if any
and which were contributed to TTI pursuant to the Contribution Agreement.
"Pharmaceutical Applications" shall mean the provision of a medicinal
substance or a drug other than a nutrient with the intent to bypass or to alter
or restore normal in vivo synthesis, metabolic or physiologic state, including
redox status. Generally, medicinal substances or drugs will be synthetic,
specifically isolated or specifically produced and will require an approved drug
license to allow sale and promotion of the claimed indication regardless of the
route of administration. Such medicinal substances or drugs can be administered
alone or with other entities such as nutrients.
"Tax Authority" shall have the meaning provided in SECTION 3.2(c).
"Tax Reduction" shall have the meaning provided in SECTION 3.2(c).
"TTI Firm" shall have the meaning provided in SECTION 3.2(h).
"TTI Patents" shall mean the U.S. and non-U.S. patents identified on
SCHEDULE A attached hereto including any reissues or reexaminations thereof, as
well as any U.S. or non-U.S. patents that may issue from TTI Patent Applications
(defined below).
"TTI Patent Applications" shall mean the patent applications identified
on SCHEDULE B attached hereto, as well as any patent application that has been
filed since the Original Effective Date or that is filed after the date of this
Agreement that: is based in whole, or in part, on the invention records
identified on SCHEDULE C; claims priority, at least in part, from a patent
application identified on SCHEDULE B; is based in whole, or in part, on Licensed
Know-How; or is filed as a divisional, continuation, or continuation-in-part of
a patent application identified on SCHEDULE B.
-4-
<PAGE> 5
2. GRANTS.
2.1 GRANT TO NESTLE. For good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, TTI grants to NESTLE a
non-exclusive, paid-up, royalty-free license to the Compounds, Other Compounds,
TTI Patents, TTI Patent Applications, and Cornell Patents limited to the field
of Clinical Nutrition and a paid-up, royalty-free non-exclusive license with
respect thereto limited to the field of Nutrition.
2.2 LIMITATIONS ON FURTHER LICENSES AND USES BY TTI. Except pursuant to
this License Agreement and the Baxter License Agreement, TTI agrees not to
license to any other person or entity or to make, use or sell the Compounds,
Other Compounds, TTI Patents, TTI Patent Applications, and Cornell Patents, in
the field of Clinical Nutrition.
2.3 DATA AND KNOW-HOW. TTI grants to NESTLE a royalty-free non-exclusive
license to the Licensed Know-How. Additionally, TTI will make available to
NESTLE at no cost to NESTLE, at NESTLE's request all Data for use by NESTLE in
the development and regulatory approvals of Clinical Nutrition Products.
3. ROYALTY PAYMENTS.
3.1 ROYALTY FOR CORNELL PATENTS. To the extent any royalty is due and
owing under the Cornell License Agreement in view of NESTLE's sale of Clinical
Nutrition Products under this Agreement, NESTLE agrees to pay the applicable
royalty to Cornell.
3.2 ROYALTY FOR AIDS DRUGS.
(a) From and after the date of this Agreement, TTI shall pay to
NESTLE in U.S. dollars, within 30 days after the end of each calendar
quarter after the date of this Agreement, a royalty equal to 5% of TTI's
Gross Margin on Net Sales of drugs sold by TTI or any subsidiary,
affiliate, or sublicensee of TTI during such calendar quarter for
applications for patients with AIDS approved by the FDA (in the case of
sales in the United States) or approved by any foreign regulatory
agency, if applicable (in the case of sales outside the United States)
(the "AIDS Drugs"); provided however, that no such royalty will be
payable by TTI until TTI's cumulative Gross Margin on Net Sales of AIDS
Drugs exceeds the total amount of costs incurred for clinical inventory
used in the AIDS clinical studies (up to a maximum of $1.5 million of
such costs), which royalty shall be payable only on such excess; and
provided further, that the sum of all royalty obligations with respect
to technology involved in the manufacture, use or sale of such AIDS
Drugs will in no case, in the aggregate, exceed 8.5% of Net Sales, which
percentage will include payments to Cornell
-5-
<PAGE> 6
and any other third party for technology involved in the manufacture,
use or sale of such AIDS Drugs.
(b) TTI will deliver to NESTLE within 30 days after the end of each
calendar year ending after the date of this Agreement a report in
writing setting forth sales of the AIDS Drugs and will accompany such
report with an appropriate payment of royalty due for such period. TTI
will keep an accurate record for at least three years, certified by it,
showing the information by which TTI arrived at a royalty determination
and will permit an auditor appointed and paid for by NESTLE and
acceptable to TTI to make such inspection of said records as may be
necessary to verify royalty reports made by TTI. However, if such
inspection demonstrates that the royalties paid were less than 90% of
the royalties due, and TTI's Net Sales of the AIDS Drugs for the
applicable year was $500,000 or more, then TTI shall reimburse NESTLE
the reasonable charges charged by the auditor for such inspection.
(c) In the event it is ultimately determined, by a court of
competent jurisdiction or pursuant to any agreement between TTI and the
Internal Revenue Service ("IRS") and/or any applicable state tax
authority (collectively "Tax Authority"), that any payment made pursuant
to SECTION 3.2(a) is not currently deductible by TTI for federal or
state income tax purposes (a "Final Determination"), then the amounts
payable by TTI under SECTION 3.2(b) after such Final Determination
becomes final shall be reduced to the extent necessary so that the
present value, as of the first day of the first year for which any
payment is determined not to be currently deductible, of (i) all
payments made by TTI under SECTION 3.2(b) (taking into account the
reduction under this SECTION 3.2(c)) minus (ii) all Tax Reductions
attributable to such payments, is equivalent to the present value, as of
the first day of the first year for which any payment is determined not
to be currently deductible, of (iii) all payments that would be provided
for under SECTION 3.2(b) but for this SECTION 3.2(c) and SECTION 3.2(d)
if all such payments had been currently deductible for federal and state
income tax purposes, minus (iv) all Tax Reductions attributable to such
payments, it being the intention of the parties that TTI be put in the
same economic position it would have been in had the amounts payable
pursuant to SECTION 3.2(b) been currently deductible for federal and
state income tax purposes. For this purpose, (i) present value of a
payment of Tax Reduction shall be determined by using, for each calendar
year of the computation, the federal mid-term rate determined using an
annual compounding convention under Section 1274(d) of the Internal
Revenue Code of 1986, as amended (the "Code"), announced for January of
such calendar year, and (ii) the "Tax Reduction" attributable to a
payment is the amount of the actual reduction in federal and state
income tax liability resulting from the payment.
-6-
<PAGE> 7
(d) In the event the IRS asserts that any payment made pursuant to
SECTION 3.2(b) is not currently deductible by TTI for federal income tax
purposes and the matter has not been settled or resolved upon the
completion of the audit examination (including an appeal to the IRS
appeals office) (an "Interim Determination") then, notwithstanding the
provisions of SECTION 3.2(c), the amounts payable by TTI under SECTION
3.2(b) after the Interim Determination may be reduced to the extent they
could have been reduced under SECTION 3.2(c) if such deficiency had been
upheld or agreed to in a Final Determination, provided, however, that if
there is a Final Determination in which such deficiency is not upheld or
agreed to in its entirety, then TTI shall pay to NESTLE, within 90 days
of such Final Determination, the amount necessary to put NESTLE in the
same economic position it would have been in if this SECTION 3.2(d) had
not applied.
(e) In the event that the amounts payable under SECTION 3.2(b)
without regard to SECTIONS 3.2(c) and 3.2(d) are insufficient to permit
any reduction in the amounts payable under SECTION 3.2(b) that is
required pursuant to SECTION 3.2(c) or 3.2(d) as a result of a Final
Determination or Interim Determination to be effected within the four
next succeeding calendar quarters after such Final Determination or
Initial Determination, then NESTLE shall pay to TTI, within 90 days
after the end of the last of such calendar quarters, the amount
necessary to put TTI in the economic position it would have been in if
the amounts payable under SECTION 3.2(b) had been sufficient to permit
the full amount of any such required reduction to be effected.
(f) TTI shall give NESTLE a reasonable period of time (i) to review
any federal or state income tax returns of TTI in which TTI claims a
deduction for payments made pursuant to SECTION 3.2(b) prior to filing
of any such returns and (ii) to control the manner in which any such
deductions are claimed on such return.
(g) TTI shall promptly notify NESTLE of any claim by a Tax Authority
that any payment made by TTI under SECTION 3.2(b) is not currently
deductible, and in such event NESTLE shall have the exclusive right to
assume the defense of any such claim and to control any controversy
resulting therefrom, at NESTLE's expense. TTI agrees to cooperate with
NESTLE in the defense of any such claim and to cooperate with NESTLE and
the TTI Firm or the Joint Firm (as hereinafter defined) in the
determination of the amount of any reduction in payments required
hereunder. Such cooperation shall include, but not be limited to, (i)
the execution and delivery of any power of attorney required to allow
NESTLE and its representatives to represent TTI in any controversy which
NESTLE has the right to control hereunder, (ii) the prompt and timely
filing of appropriate claims for any refund, and (iii) making available
to NESTLE and its representatives all books, records (including
-7-
<PAGE> 8
working papers and schedules), information and employees necessary or
useful in connection with any tax inquiry, audit, investigation, dispute
or litigation relating to the matters described in this SECTION 3.2(g).
(h) The determination of the amount of any reduction pursuant to
SECTIONS 3.2(c) or 3.2(d) hereof shall initially be made by the
independent certified public accountants then serving as auditor for TTI
(the "TTI Firm"), and such determination shall be furnished to NESTLE in
writing, which shall include a computation of the amount of any
reduction and a detailed written explanation of the manner in which such
computation was made. If NESTLE objects in writing to such determination
within 60 days after it is received by NESTLE, then the amount of any
reduction shall be determined by a "Big Six" firm of independent
certified public accountants jointly selected by NESTLE and TTI (or, if
they are unable to agree, then such a firm jointly selected by the TTI
Firm and a firm of independent public accountants designated by NESTLE)
(the "Joint Firm"), and the decision of the Joint Firm shall be final
and binding upon the parties. If NESTLE does not object in writing to
the determination of the TTI Firm within such time period, then the
decision of the TTI Firm shall be final and binding upon the parties. No
reduction in the payments provided for in SECTION 3.2(a) shall be made
until a decision of the TTI Firm of the Joint Firm has become final. The
fees and expenses of the TTI Firm shall be borne by TTI, and the fees
and expenses of the Joint Firm shall be shared equally by NESTLE and
TTI, except that if the Joint Firm decides that the amount of any
reduction in payments required hereunder is less that 90% of the amount
of the reduction decided by the TTI Firm, then TTI shall bear all of the
fees and expenses of the Joint Firm.
4. INRA.
4.1 COOPERATION WITH TTI IN OBTAINING RIGHTS FROM INRA. Clintec
Technologies, S.A. and L'Institut National de la Recherche Agronomique ("INRA")
entered into a Research Contract on December 24, 1992 (the "INRA Contract").
Clintec Technologies, S.A. has subsequently notified INRA of its assignment of
the INRA Contract to NESTLE effective as of September 30, 1996. Under the INRA
Contract NESTLE may have rights to commercially exploit any research results,
inventions or discoveries. To the extent that NESTLE or its Affiliates has such
rights (including the right to license TTI) under the INRA Contract as such
rights relate to Pharmaceutical Applications without the payment by NESTLE of
additional consideration therefor, NESTLE will execute an exclusive, fully paid,
royalty-free license granting to TTI all such rights. To the extent NESTLE is
unable to license such rights, NESTLE will use its best efforts to cause INRA to
offer to TTI an exclusive license, granting TTI all such rights, provided
however, that NESTLE shall not be required to make any payment to INRA or to
incur any out-of-pocket expenses in connection therewith.
-8-
<PAGE> 9
5. NON-SOLICITATION UNDERTAKING.
5.1 NON-SOLICITATION OF TTI EMPLOYEES. NESTLE agrees that until April 5,
1999 it will not (i) directly or indirectly recruit, solicit or otherwise induce
or influence any technical, professional or managerial employee of TTI to
discontinue such employment with TTI, or (ii) willfully induce any person or
firm that performed consulting services for both CLINTEC and TTI at the Original
Effective Date to discontinue the provision of such services to TTI. NESTLE also
agrees that for a period from the date of this Agreement to April 5, 1999, it
will not hire any employee of TTI. Nothing herein shall prevent either party
from (a) hiring any employee of the other who was discharged by the other, or
(b) hiring any employee of the other who terminated their employment without
inducement by the hiring party.
5.2 NO DISCLOSURE OF PROPRIETARY INFORMATION.
(a) NESTLE hereby agrees that, except as expressly permitted hereby,
it will not directly or indirectly disclose to anyone, or use or
otherwise exploit for its own benefit or for the benefit of anyone else,
any trade secrets contributed to TTI as Contributed Assets under the
Contribution Agreement for as long as they remain trade secrets.
(b) NESTLE hereby agrees that, except as expressly permitted hereby,
until April 5, 1999, it will not directly or indirectly disclose to
anyone, or use or otherwise exploit for its own benefit or for the
benefit or anyone else, any confidential information contributed to TTI
as Contributed Assets under the Contribution Agreement.
(c) NESTLE shall use reasonable efforts to require its employees to
abide by the obligations of this Section 5.2.
5.3 REMEDIES. NESTLE agrees that if (i) if it breaches the provision in
SECTION 5.1 or, the damage to TTI will be substantial, although difficult to
ascertain, and money damages will not afford TTI an adequate remedy, and (ii) if
it is in breach of SECTION 5.1 or 5.2, or threatens a breach of this SECTION 5.1
or 5.2, TTI shall be entitled, in addition to all other rights and remedies as
may be provided by law and this Agreement, to specific performance, injunctive
and other equitable relief to prevent or restrain a breach of SECTION 5.1 OR
5.2.
6. PATENT COST.
6.1 TTI PATENTS AND PATENT APPLICATIONS. TTI shall have the
responsibility to pay all attorney's fees, maintenance fees, and any and all
other costs associated with any TTI Patent or TTI Patent Applications. Should
TTI decide not to pay any cost or expense for any TTI Patent or TTI Patent
Application or decide to allow any such TTI
-9-
<PAGE> 10
Patent or TTI Patent Application to go abandoned, prior to abandoning such TTI
Patent Application or TTI Patent, TTI shall advise NESTLE in writing. NESTLE
shall then have the right to pay such expense and maintain the TTI Patent or TTI
Patent Application jointly with BAXTER. Should NESTLE or BAXTER pay the expense
or fee, TTI agrees to assign to BAXTER or NESTLE such TTI Patent or TTI Patent
Application upon receipt of a joint written direction of NESTLE and BAXTER
delivered within 30 days after notice from TTI of such abandonment.
6.2 CORNELL LICENSED PATENTS. To the extent any fees are due and owing
under the Cornell License Agreement for a Cornell Licensed Patent, TTI will be
responsible to pay all costs and expenses. However, prior to allowing any
Cornell Licensed Patent to go abandoned for failure to pay any cost or expense,
TTI shall advise NESTLE and NESTLE shall have the right, but not the obligation,
to pay the applicable expense or fee jointly with BAXTER. Should NESTLE and/or
BAXTER pay the expense or fee, TTI will then transfer to NESTLE and/or BAXTER,
to the extent permitted by the Cornell License Agreement, the rights to the
applicable Cornell Licensed Patent upon receipt of a joint written direction of
NESTLE and BAXTER delivered within 30 days after notice from TTI of such
abandonment.
7. TERM.
The term of this Agreement shall last for the effective life of the last
to expire of the TTI Patents or Cornell Licensed Patents. Upon expiration of
this License Agreement, NESTLE shall have a royalty-free license to Licensed
Know-How for the purpose of making, using, and selling Clinical Nutrition
Products or products used in the field of Nutrition.
8. ENFORCEMENT.
Upon learning of an infringement of a TTI Patent or Cornell Patent,
NESTLE will advise TTI of such infringement in writing. TTI will then be free,
at its expense, to file a law suit in its name and at its expense against the
infringer. TTI shall be entitled to all damages it recovers. If TTI does not
file a law suit within ninety (90) days of NESTLE's notice, NESTLE, either
individually or jointly with BAXTER, shall at its cost and expense, be entitled
to bring suit against the infringer for infringement of the rights granted to
NESTLE in the field of Nutrition and Clinical Nutrition hereunder. TTI will not
be entitled to any damages that may be recovered by NESTLE or BAXTER from any
such law suit. TTI agrees, to the extent requested by NESTLE, to join NESTLE and
assist NESTLE, at NESTLE's expense, in maintaining such law suit.
-10-
<PAGE> 11
9. ASSIGNMENT.
The rights and obligations of NESTLE under this Agreement can be
assigned to any party by NESTLE upon thirty (30) days notice from NESTLE.
10. TERMINATION.
Either TTI or NESTLE may terminate this Agreement if there is a material
breach of this Agreement by the other party by providing the other party with
written notice of such breach. The breaching party will then have a six (6)
month period in which to cure such breach. If such breach remains uncured at the
end of the six (6) month period, this Agreement will then terminate.
11. SUBLICENSING.
NESTLE may sublicense its rights under this Agreement to any third
party.
12. MISCELLANEOUS.
12.1 NOTICES. Any notices to be given under any provision of this
Agreement may be given by sending by registered or certified mail to the address
of the party concerned as follows:
If to NESTLE:
Nestec, Ltd.
Attn: Legal Department
Avenue Nestle 55
1800 Vevey
Switzerland
Tel. No.: 011-41-21-921-1111
Fax No.: 011-41-21-921-1885
If to TTI:
Transcend Therapeutics Inc.
Attn: President
640 Memorial Drive
Cambridge, Massachusetts 02139
Tel. No.: (617) 374-1200
Fax No.: (617) 374-1201
or to such other person as may be designated in a notice delivered to the other
party in accordance with this SECTION 12.1.
-11-
<PAGE> 12
12.2 APPLICABLE LAW. This Agreement shall be deemed to be made under and
to be governed by the laws of the State of Illinois.
12.3 SEPARABILITY. Should any part or provision of this Agreement be
held unenforceable or in conflict with the law of any jurisdiction, the
enforceability of the remaining parts or provisions shall not be affected by
such holding.
12.4 HEADINGS. The headings and subheadings of the various articles and
sections of this Agreement are inserted merely for the purpose of convenience
and do not express or imply any limitation, definition, or extension of the
specific terms and sections 50 designated.
12.5 SUCCESSORS AND ASSIGNS. This Agreement is binding on any successors
of NESTLE or assigns of any TTI Patents, TTI Patent Applications, the Licensed
Know-How, or any rights under the Cornell License Agreement.
12.6 TERMINATION OF APRIL 5, 1994 AGREEMENTS. Upon execution of this
Agreement and the BAXTER License Agreement, the Original License Agreement and
the Contribution Agreement shall terminate and be of no further force and
effect, except that Section 6 of the Contribution Agreement shall remain in full
force and effect and be enforceable against NESTLE as and to the extent that
such section would be enforceable against CLINTEC in the absence of this
Agreement.
12.7 SECURITIES ACT REPORTS. Transcend agrees to furnish to NESTLE
promptly following the filing thereof with the Securities Exchange Commission, a
copy of all periodic reports on Form 10-K or Form 10-Q filed by the TTI under
the Securities Exchange Act of 1934.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties have caused this instrument to be
executed in duplicate as of the day and year first above written.
ATTEST: TRANSCEND THERAPEUTICS INC.
/s/ B. Nicholas Harvey By: /s/ Hector J. Gomez
- ------------------------------- ----------------------------
Title:______________________
Date:_______________________
ATTEST: NESTEC LTD.
/s/ [illegible] By: /s/ [illegible]
- ------------------------------- ---------------------------
Title: Sons-directeur
Date: February 20, 1998
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<PAGE> 14
SCHEDULE A TO LICENSE AGREEMENT
U.S. Patents
U.S. Patent No. 5,095,027 "Method for Treating Reperfusion Injury Employing
L-2- oxothiazolidine-4-carboxylic Acid"
Date Issued: March 10, 1992
U.S. Patent No. 5,208,249 "Method for Stimulating Intracellular Synthesis of
Glutathione Using Esters of
L-2-Oxothiazolidine-4-carboxylate"
Date Issued: May 4, 1993
U.S. Patent No. 5,214,062 "Method and Composition for Treating Immune
Disorders, Inflammation and Chronic Infections"
Date Issued: May 25, 1993
<PAGE> 15
SCHEDULE B TO LICENSE AGREEMENT
Pending Patent Applications
- --------------------------------------------------------------------------------
* Asterisk (and italics) denotes patent applications which were abandoned
by TTI between the Original Effective Date and the Effective Date of this
License Agreement.
- --------------------------------------------------------------------------------
Title: "A Method to Enhance Cellular Defense Against Infection"
U.S. Serial No.: 07/682,636
Date Filed: April 8, 1991
Title: "Method of Treatment for Latent Virus Infection"
U.S. Serial No.: 07/769,194
Date Filed: September 30, 1991
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
Australia 22,115/92 September 4, 1992
Canada 2077966-7 September 10, 1992
Europe 92115046.2 September 3, 1992
Japan 4-26183 September 30, 1992
Title: "Method for Reducing or Preventing Toxicity Associated With
Antiretroviral Therapy"
U.S. Serial No.: 07/872,549
Date Filed: April 23, 1992
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
Australia 35,357/93 March 23, 1993
Canada 2,094,311 April 19, 1993
Europe 93302218.8 March 22, 1993
Japan 5-94678 April 21, 1993
B-1
<PAGE> 16
Title: "Method for Preventing and Treating Atherosclerosis"
U.S. Serial No.: 07/930,183
Date Filed: August 17, 1992
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
Australia 38,387/93 May 5, 1993
Canada 2103644 August 9, 1993
Europe 93303526.3 May 6, 1993
Japan 5-203491 August 17, 1993
- --------------------------------------------------------------------------------
Title: "Method for Optimizing Defensin Synthesis in Vivo and in
Vitro"
U.S. Serial No.: 07/969,412 *
Date Filed: October 30, 1992
Title: "Method for Treating Systemic Inflammatory Response Syndrome"
U.S. Serial No.: 07/983,415 *
Date Filed: November 30, 1992
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
Australia 50,404/93 * November 3, 1993
Canada 2110147 * November 26, 1993
Europe 93118259.6 * November 11, 1993
Japan 5-298826 * November 30, 1993
- --------------------------------------------------------------------------------
Title: "Method for Treating Infertility"
U.S. Serial No.: 08/012,006
Date Filed: February 1, 1993
- --------------------------------------------------------------------------------
Corresponding Non-U.S. Applications:
PCT/US94/01118 *
filed January 31, 1994
Title: "Method for Treatment of Pulmonary Disease"
U.S. Serial No.: 08/057,122 *
Date Filed: May 3, 1993
- --------------------------------------------------------------------------------
B-2
<PAGE> 17
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
-------------------------------------------------------------------
Australia 10,064/92 * January 6, 1992
-------------------------------------------------------------------
Canada 2058793-8 January 6, 1992
Europe 91121524.2 December 16, 1991
Japan 19504/1992 January 7, 1992
Title: "Method for Treating Acquired Immune Deficiency Syndrome"
U.S. Serial No.: 08/059,775
Date Filed: May 10, 1993
Title: "Method for Reducing or Preventing Bone Marrow Hypoplasia"
U.S. Serial No.: 08/068,385
Date Filed: May 28, 1993
- --------------------------------------------------------------------------------
Title: "Method and Compositions for Retarding the Aging Process"
U.S. Serial No.: 08/146,305 *
Date Filed: November 1, 1993
Title: "Method and Composition for Stimulating Intracellular
Glutathione"
U.S. Serial No.: 08/147,165 *
Date Filed: November 3, 1993
Title: "Methods of Preventing Hair Loss and of Stimulating
New Hair Growth"
U.S. Serial No.: 08/149,614 *
Date Filed: November 9, 1993
- --------------------------------------------------------------------------------
Title: "Methods of Reducing or Preventing Side Effects of
Chemotherapeutic Agents"
U.S. Serial No.: 08/164,069
Date Filed: December 9, 1993
B-3
<PAGE> 18
Non-U.S. Applications Corresponding to U.S. Patent No. 5,095,027,
"Method for Treating Reperfusion Injury Employing L-2-oxothiazolidine-4
carboxylic Acid"; Date Issued: March 10, 1992:
Country Application No. Filing Date
------- --------------- -----------
Australia 11,101/92 February 20, 1992
Canada 2061270-3 February 14, 1992
Europe 92301226.4 February 14, 1992
Japan 4-43042 February 28, 1992
Non-U.S. Applications Corresponding to U.S. Patent No. 5,208,249,
"Method for Stimulating Intracellular Synthesis of Glutathione Using Esters of
L-2- Oxothiazolidine-4-Carboxylate"; Date Issued: May 4, 1993:
Country Application No. Filing Date
------- --------------- -----------
Australia 37,181/93 April 22, 1993
Canada 2096036 May 12, 1993
Europe 93303213.8 April 23, 1993
Japan 5-205958 August 20, 1993
Non-U.S. Applications Corresponding to U.S. Patent No. 5,214,062,
"Method and Composition for Treating Immune Disorders, Inflammation and Chronic
Infections"; Date Issued: May 25, 1993:
Country Application No. Filing Date
------- --------------- -----------
Australia 34,092/93 March 9, 1993
Canada 2093163 April 1, 1993
Europe 93301861.6 March 11, 1993
Japan 5-81957 April 8, 1993
B-4
<PAGE> 19
SCHEDULE C TO LICENSE AGREEMENT
Invention Records
Goldberg, "Stimulation of Intracellular Glutathione Synthesis for Prevention of
Diabetic Complications" dated August 8, 1990
Pace et al., "Topical Elevation of Intracellular Glutathione as Treatment for
Psoriasis" dated October 19, 1990
Kamarei, "Diets Containing Glutathione for Hepatic Diseases" dated December 4,
1990
Mark et al., "Novel Methods for the Reduction of Difluromethylornithine
Associated Toxicity" dated March 29, 1991
Goldberg, "Topical Applications of Glutathione Esters for Treatment of Local
Herpes, Bursus and Inflammations" dated April 8, 1991
Mark et al., "Method of Treatment of Autoimmune Diseases" dated April 11, 1991
Mark et al., "Method of Modifying in Vitro Cell Culture Media to Enhance
Cellular Functions Including Replication" dated July 23, 1991
Rowe et al., "A Solid Oral Dosage Form for Procysteine" dated July 29, 1991
Madsen, "Amelioration of Valproate Toxicity of Co-administration of Procysteine"
dated October 30, 1991
Mark, "Methods of Enhancing the Use of Nitric Oxide to Treat Severe Adult
Respiratory Distress Syndrome" dated November 8, 1991
Goldberg et al., "Method to Reduce Muscle Injury and Damage and Enhance Recovery
from High Intensity Exercise" dated March 31, 1992
Goldberg, "Method for Enhancing Glutathione Synthesis by Concomitant
Administration of Glutamine and Cysteine" dated April 1, 1992
Mark, "Methods of Modifying in Vitro Tissue Culture Media to Enhance Cellular
Functions, Including Replication" dated October 30, 1992
<PAGE> 1
EXHIBIT 10.12
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED
UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS
ON TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT
--------------------------------------------------
Warrant No. ____ Number of Shares: ____
(subject to adjustment)
Date of Issuance: August 1, 1997
TRANSCEND THERAPEUTICS, INC.
Common Stock Purchase Warrant
-----------------------------
(Void after March 3, 2002)
Transcend Therapeutics, Inc., a Delaware corporation (the "Company"),
for value received, hereby certifies that __________________________________
(the "Investor"), or its registered assigns (the "Registered Holder"), is
entitled, subject to the terms set forth below, to purchase from the Company, at
any time or from time to time on or after the date of issuance and on or before
March 3, 2002 at not later than 5:00 p.m. (Boston, Massachusetts time),
sixty-two (62) shares of Common Stock, $.01 par value per share, of the Company
at a purchase price of $10.00 per share. The shares purchasable upon exercise of
this Warrant, and the purchase price per share, each as adjusted from time to
time pursuant to the provisions of this Warrant, are hereinafter referred to as
the "Warrant Shares" and the "Purchase Price," respectively.
1. EXERCISE.
(a) This Warrant may be exercised by the Registered Holder,
in whole or in part, by surrendering this Warrant, with the purchase form
appended hereto as EXHIBIT I duly executed by such Registered Holder or by such
Registered Holder's duly authorized attorney, at the principal office of the
Company, or at such other office or agency as the Company may designate,
accompanied by payment in full, in lawful money of the United States, of the
Purchase Price payable in respect of the number of Warrant Shares purchased upon
such exercise.
(b) The Registered Holder may, at its option, elect to pay
some or all of the Purchase Price payable upon an exercise of this Warrant by
cancelling a portion of this Warrant exercisable for such number of Warrant
Shares as is determined by dividing (i) the total Purchase Price payable in
respect of the number
<PAGE> 2
of Warrant Shares being purchased upon such exercise by (ii) the excess of the
Fair Market Value per share of Common Stock as of the effective date of
exercise, as determined pursuant to subsection 1(c) below (the "Exercise Date")
over the Purchase Price per share. If the Registered Holder wishes to exercise
this Warrant pursuant to this method of payment with respect to the maximum
number of Warrant Shares purchasable pursuant to this method, then the number of
Warrant Shares so purchasable shall be equal to the total number of Warrant
Shares, minus the product obtained by multiplying (x) the total number of
Warrant Shares by (y) a fraction, the numerator of which shall be the Purchase
Price per share and the denominator of which shall be the Fair Market Value per
share of Common Stock as of the Exercise Date. The Fair Market Value per share
of Common Stock shall be determined as follows:
(i) If the Common Stock is listed on a national
securities exchange, the Nasdaq National Market System, the Nasdaq system, or
another nationally recognized exchange or trading system as of the Exercise
Date, the Fair Market Value per share of Common Stock shall be deemed to be the
last reported sale price per share of Common Stock thereon on the Exercise Date;
or, if no such price is reported on such date, such price on the next preceding
business day provided that if no such price is reported on the next preceding
business day, the Fair Market Value per share of Common Stock shall be
determined pursuant to clause (ii)).
(ii) If the Common Stock is not listed on a national
securities exchange, the Nasdaq National Market System, the Nasdaq system or
another nationally recognized exchange or trading system as of the Exercise
Date, the Fair Market Value per share of Common Stock shall be deemed to be the
amount most recently determined by the Board of Directors to represent the fair
market value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or issuing Common
Stock under an employee benefit plan of the Company); and, upon request of the
Registered Holder, the Board of Directors (or a representative thereof) shall
promptly notify the Registered Holder of the Fair Market Value per share of
Common Stock. Notwithstanding the foregoing, if the Board of Directors has not
made such a determination within the three-month period prior to the Exercise
Date, then (A) the Fair Market Value per share of Common Stock shall be the
amount next determined by the Board of Directors to represent the fair market
value per share of the Common Stock (including without limitation a
determination for purposes of granting Common Stock options or issuing Common
Stock under an employee benefit plan of the Company), (B) the Board of Directors
shall make such a determination within 15 days of a request by the Registered
Holder that it do so, and (C) the exercise of this Warrant pursuant to this
subsection 1(b) shall be delayed until such determination is made.
2
<PAGE> 3
(c) Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on which
this Warrant shall have been surrendered to the Company as provided in
subsection 1(a) above. At such time, the person or persons in whose name or
names any certificates for Warrant Shares shall be issuable upon such exercise
as provided in subsection 1(d) below shall be deemed to have become the holder
or holders of record of the Warrant Shares represented by such certificates.
(d) As soon as practicable after the exercise of this
Warrant in full or in part, and in any event within 10 days thereafter, the
Company, at its expense, will cause to be issued in the name of, and delivered
to, the Registered Holder, or as such Holder (upon payment by such Holder of any
applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of
full Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to Section 3
hereof; and
(ii) in case such exercise is in part only, a new
warrant or warrants (dated the date hereof) of like tenor, calling in the
aggregate on the face or faces thereof for the number of Warrant Shares equal
(without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the sum of (a) the number of such
shares purchased by the Registered Holder upon such exercise plus (b) the number
of Warrant Shares (if any) covered by the portion of this Warrant cancelled in
payment of the Purchase Price payable upon such exercise pursuant to subsection
1(b) above.
2. ADJUSTMENTS.
(a) If outstanding shares of the Company's Common Stock shall
be subdivided into a greater number of shares or a dividend in Common Stock
shall be paid in respect of Common Stock, the Purchase Price in effect
immediately prior to such division or at the record date of such dividend shall
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend be proportionately reduced. If outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Purchase Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be proportionately
increased. When any adjustment is required to be made in the Purchase Price, the
number of Warrant Shares purchasable upon the exercise of this Warrant shall be
changed to the number determined by dividing (i) an amount equal to the number
of shares issuable upon the exercise of this Warrant immediately prior to such
adjustment, multiplied by the Purchase Price in effect immediately prior to such
adjustment, by (ii) the Purchase Price in effect immediately after such
adjustment.
3
<PAGE> 4
(b) If there shall occur any capital reorganization or
reclassification of the Company's Common Stock (other than a change in par value
or a subdivision or combination as provided for in subsection 2(a) above), or
any consolidation or merger of the Company with or into another corporation, or
a transfer of all or substantially all of the assets of the Company, then, as
part of any such reorganization, reclassification, consolidation, merger or
sale, as the case may be, lawful provision shall be made so that the Registered
Holder of this Warrant shall have the right thereafter to receive upon the
exercise hereof the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to receive if,
immediately prior to any such reorganization, reclassification, consolidation,
merger or sale, as the case may be, such Registered Holder had held the number
of shares of Common Stock which were the purchasable upon the exercise of this
Warrant. In any such case, appropriate adjustment (as reasonably determined in
good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the Registered Holder of this Warrant, such that the
provisions set forth in this Section 2 (including provisions with respect to
adjustment of the Purchase Price) shall thereafter be applicable, as nearly as
is reasonably practicable, in relation to any shares of stock or other
securities or property thereafter deliverable upon the exercise of this Warrant.
(c) When any adjustment is required to be made in the
Purchase Price, the Company shall promptly mail to the Registered Holder a
certificate setting forth the Purchase Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment. Such certificate
shall also set forth the kind and amount of stock or other securities or
property into which this Warrant shall be exercisable following the occurrence
of any of the events specified in subsection 2(a) or (b) above.
3. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of this Warrant to issue any fractional shares, but shall make an
adjustment therefor in cash on the basis of the Fair Market Value per share of
Common Stock, as determined pursuant to subsection 1(b) above.
4. REQUIREMENTS FOR TRANSFER.
(a) This Warrant and the Warrant Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Act, or (ii) the Company first shall have been furnished with an opinion of
legal counsel, reasonably satisfactory to the Company, to the effect that such
sale or transfer is exempt from the registration requirements of the Act.
(b) Notwithstanding the foregoing, no registration or
opinion of counsel shall be required for (i) a transfer by a Registered Holder
which is a
4
<PAGE> 5
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner, if the transferee agrees in writing to be subject to
the terms of this Section 4, or (ii) a transfer made in accordance with the Rule
144 under the Act.
(c) Each certificate representing Warrant Shares shall bear
a legend substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may
not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such securities are registered
under such Act or an opinion of counsel satisfactory to the
Company is obtained to the effect that such registration is not
required."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act.
5. NO IMPAIRMENT. The Company will not, by amendment of its charter
or through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will at all times in good faith assist
in the carrying out of all such terms and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
6. LIQUIDATING DIVIDENDS. If the Company pays a dividend or makes a
distribution on the Common Stock payable otherwise than in cash out of earnings
or earned surplus (determined in accordance with generally accepted accounting
principles) except for a stock dividend payable in shares of Common Stock (a
"Liquidating Dividend"), then the Company will pay or distribute to the
Registered Holder of this Warrant, upon the exercise hereof, in addition to the
Warrant Shares purchased upon such exercise, the Liquidating Dividend which
would have been paid to such Registered Holder if he had been the owner of
record of such Warrant Shares immediately prior to the date on which a record is
taken for such Liquidating Dividend or, if no record is taken, the date as of
which the record holders of Common Stock entitled to such dividends or
distribution are to be determined.
7. NOTICES OF RECORD DATE, ETC. In case:
(a) the Company shall take a record of the holders of its
Common Stock (or other stock or securities at the time deliverable upon the
exercise of this Warrant) for the purpose of entitling or enabling them to
receive any dividend or
5
<PAGE> 6
other distribution, or to receive any right to subscribe for or purchase any
shares of stock of any class or any other securities, or to receive any other
right; or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving entity), or any
transfer of all or substantially all of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon the exercise of this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up. Such notice shall be mailed at least ten (10) day prior to the
record date or effective date for the event specified in such notice.
8. RESERVATION OF STOCK. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the exercise of this
Warrant, such number of Warrant Shares and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
9. EXCHANGE OF WARRANTS. Upon the surrender by the Registered
Holder of any Warrant or Warrants, properly endorsed, to the Company at the
principal office of the Company, the Company will, subject to the provisions of
Section 4 hereof, issue and deliver to or upon the order of such Holder, at the
Company's expense, a new Warrant or Warrants of like tenor, in the name of such
Registered Holder or as such Registered Holder (upon payment by such Registered
Holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
10. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity
6
<PAGE> 7
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
11. TRANSFER, ETC.
(a) The Company will maintain a registered containing the
names and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its or his address as shown on the warrant register by written
notice to the Company requesting such change.
(b) Subject to the provisions of Section 4 hereof, this
Warrant and all rights hereunder are transferable, in whole or in part, upon
surrender of this Warrant with a properly executed assignment (in the form of
EXHIBIT II hereto) at the principal office of the Company.
(c) Until any transfer of this Warrant is made in the
warrant register, the Company may treat the Registered Holder of this Warrant as
the absolute owner hereof for all purposes; PROVIDED, HOWEVER, that if and when
this Warrant is properly assigned in blank, the Company may (but shall not be
obligated to) treat the bearer hereof as the absolute owner hereof for all
purposes, notwithstanding any notice to the contrary.
12. REGISTRATION RIGHTS. The shares of Common Stock issuable upon
exercise of this Warrant shall have the registration rights set forth in the
Third Amended and Restated Registration Rights Agreement dated June 13, 1997
between the Company and certain investors listed on the signatures pages
thereof.
13. MAILING OF NOTICES, ETC. All notices and other communications
from the Company to the Registered Holder of this Warrant shall be mailed by
first-class certified or registered mail, postage prepaid, to the address
furnished to the Company in writing by the last Registered Holder of this
Warrant who shall have furnished an address to the Company in writing. All
notices and other communications from the Registered Holder of this Warrant or
in connection herewith to the Company shall be mailed by first-class certified
or registered mail, postage prepaid, to the Company at its principal office set
forth below. If the Company should at any time change the location of its
principal office to a place other than as set forth below, it shall give prompt
written notice to the Registered Holder of this Warrant and thereafter all
references in this Warrant to the location of its principal office at the
particular time shall be as so specified in such notice.
14. NO RIGHTS AS STOCKHOLDER. Until the exercise of this Warrant,
the Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
7
<PAGE> 8
15. CHANGE OR WAIVER. This Warrant is one of a series of Warrants
issued by the Company, all dated the date hereof and of like tenor, except as to
the number of shares of Common Stock subject thereto (collectively, the "Company
Warrants"). Any term of this Warrant may be amended or waived upon the written
consent of the Company and the holders of Company Warrants representing at least
66 2/3 % of the number of shares of Common Stock then subject to outstanding
Company Warrants; PROVIDED that any such amendment or waiver must apply to all
Company Warrants then outstanding; and PROVIDED FURTHER that the number of
Warrant Shares subject to this Warrant and the Purchase Price of this Warrant
may not be amended, and the right to exercise this Warrant may not be waived,
without the written consent of the holder of this Warrant (it being agreed that
an amendment to or waiver under any of the provisions of Section 2 of this
Warrant shall not be considered an amendment of the number of Warrant Shares or
the Purchase Price).
16. HEADINGS. The headings in this Warrant are for purposes of
reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
17. GOVERNING LAW. This Warrant will be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
TRANSCEND THERAPEUTICS, INC.
640 Memorial Drive
Cambridge, MA 02139
By:
---------------------------------------------
Name: Hector J. Gomez, M.D., Ph.D
Title: President and Chief Executive Officer
[Corporate Seal]
ATTEST:
- -----------------------
8
<PAGE> 9
Exhibit I
---------
PURCHASE FORM
-------------
TO: Transcend Therapeutics, Inc. Dated: ________________
The undersigned, pursuant to the provisions set forth in the attached
Warrant No. __ hereby irrevocably elects to purchase _____ shares of the Common
Stock covered by such Warrant. The undersigned herewith makes payment of
$_______, representing the full purchase price for such shares at the price per
share provided for in such Warrant. Such payment takes the form of (check
applicable box or boxes):
[ ] $__________ in lawful money of the United States, and/or
[ ] the cancellation of such portion of the attached Warrant
is as exercisable for a total of ________ Warrant Shares
(using a Fair Market Value of $__________ per share for
purposes of this calculation).
Signature:__________________________________
Address:____________________________________
____________________________________
<PAGE> 10
Exhibit II
----------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and
transfers all of the rights of the undersigned under the attached Warrant No. __
with respect to the number of shares of Common Stock covered thereby set forth
below, unto:
Name of Assignee Address No. of Shares
Dated:______________________________ Signature:___________________________
Dated:______________________________ Witness:_____________________________
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-36867) pertaining to the Amended and Restated 1994 Equity Incentive
Plan of Transcend Therapeutics, Inc. of our report dated January 9, 1998, with
respect to the financial statements of Transcend Therapeutics, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND THERAPEUTICS, INC. FOR THE YEAR ENDED DECEMBER
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,988,461
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,979,754
<PP&E> 110,608
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,425,719
<CURRENT-LIABILITIES> 1,659,989
<BONDS> 0
0
0
<COMMON> 57,586
<OTHER-SE> 15,708,144
<TOTAL-LIABILITY-AND-EQUITY> 17,425,719
<SALES> 5,000,000
<TOTAL-REVENUES> 5,000,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,848,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,260,679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,260,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,260,679)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TRANSCEND THERAPEUTICS, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 639,626
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 720,533
<PP&E> 46,108
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,565,765
<CURRENT-LIABILITIES> 624,535
<BONDS> 0
0
20,176,350
<COMMON> 7,793
<OTHER-SE> 19,242,913
<TOTAL-LIABILITY-AND-EQUITY> 1,565,765
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,801,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,126,930)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,126,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,126,930)
<EPS-PRIMARY> (11.94)
<EPS-DILUTED> (11.94)
</TABLE>
