<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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: 000-21589
TRIANGLE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 56-1930728
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
4 University Place
4611 University Drive
Durham, North Carolina 27707
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (919) 493-5980
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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
--- ---
As of April 30, 1997, there were 17,585,108 shares of Triangle
Pharmaceuticals, Inc. Common Stock outstanding.
<PAGE>
Triangle Pharmaceuticals, Inc.
Table of Contents
Part I. Financial Information PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet -
December 31, 1996 and March 31, 1997............................. 3-4
Condensed Statement of Operations -
Three Months Ended March 31, 1996 and March 31, 1997 and
Period From Inception (July 12, 1995) Through March 31, 1997..... 5
Condensed Statement of Cash Flows -
Three Months Ended March 31, 1996 and March 31, 1997 and
Period From Inception (July 12, 1995) Through March 31, 1997..... 6
Condensed Statement of Stockholders' Equity -
Period From Inception (July 12, 1995) Through
December 31, 1995 and Through December 31, 1996 and
the Three Months Ended March 31, 1997............................ 7
Notes to Condensed Financial Statements........................... 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10-23
Part II. Other Information
Item 6. Exhibits and Reports of Form 8-K.......................... 24
Signatures.......................................................... 25
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
DECEMBER 31, MARCH 31,
ASSETS 1996 1997
- ------ ------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents...................... $25,255,006 $20,167,512
Restricted deposits............................ 56,067 39,648
Investments.................................... 17,226,221 21,686,705
Interest receivable............................ 272,716 343,926
Other receivables.............................. 455,910 333,740
Prepaid expenses............................... 558,423 353,679
----------- ------------
Total current assets...................... 43,824,343 42,925,210
----------- ------------
Property, plant and equipment, net............... 832,049 935,739
Investments...................................... 10,719,917 7,944,433
Restricted deposits.............................. 118,933 108,573
----------- ------------
Total assets.............................. $55,495,242 $51,913,955
----------- ------------
----------- ------------
The accompanying notes are an integral part of
these condensed financial statements.
3
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
DECEMBER 31, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------ ------------ ------------
(unaudited)
Current liabilities:
Accounts payable................................ $ 1,584,348 $ 730,914
Accrued license fees............................ 150,000 --
Capital lease obligation-current................ 102,006 103,927
Other accrued expenses.......................... 639,255 1,507,420
------------ ------------
Total current liabilities..................... 2,475,609 2,342,261
Capital lease obligation-noncurrent............... 364,385 359,939
------------ ------------
Total liabilities............................. 2,839,994 2,702,200
------------ ------------
Commitments and contingencies (See note 3)........ -- --
Stockholders' equity:
Common Stock, $0.001 par value; authorized
75,000,000 shares; issued and
outstanding 17,567,890 and 17,585,108 shares... 17,568 17,585
Warrants........................................ 151,873 183,914
Additional paid-in capital...................... 64,548,647 64,604,323
Accumulated deficit during development stage.... (11,884,166) (15,428,218)
Deferred compensation........................... (178,674) (165,849)
------------ ------------
Total stockholders' equity.................... 52,655,248 49,211,755
------------ ------------
Total liabilities and stockholders' equity.... $ 55,495,242 $ 51,913,955
------------ ------------
------------ ------------
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS THREE MONTHS (JULY 12, 1995)
ENDED ENDED THROUGH
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Operating expenses:
License fees......................... -- -- $ 3,267,147
Development.......................... $ 210,344 $ 2,749,416 7,716,148
General and administrative........... 616,816 1,520,500 6,083,356
-------------- -------------- --------------
827,160 4,269,916 17,066,651
-------------- -------------- --------------
Interest income........................ 31,538 725,864 1,638,433
-------------- -------------- --------------
Net loss............................... $(795,622) $(3,544,052) $(15,428,218)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per share..................... -- $ (0.20)
--------------
--------------
Pro forma net loss per share........... $ (0.06) --
--------------
--------------
Shares used in computing pro forma
net loss per share and net loss per
share, respectively................... 14,277,498 17,580,032
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
5
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS THREE MONTHS (JULY 12, 1995)
ENDED ENDED THROUGH
MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (795,622) $(3,544,052) $(15,428,218)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization................. 3,358 51,367 152,059
Stock-based compensation: license fees........ -- -- 636,000
Stock-based compensation: development......... -- 11,301 357,870
Stock-based compensation: general and
administrative............................. 7,613 41,009 272,531
Change in assets and liabilities:
Receivables................................ (48,075) 50,960 (677,666)
Prepaid expenses........................... -- 204,744 (353,679)
Accounts payable........................... (47,424) (853,434) 730,914
Accrued license fees and other expenses.... (59,719) 712,086 1,431,550
-------------- -------------- ---------------
Net cash used by operating activities........... (939,869) (3,326,019) (12,878,639)
-------------- -------------- ---------------
Cash flows from investing activities:
(Purchase) sale of restricted deposits........ (175,000) 26,779 (148,221)
Purchase of investments....................... -- (7,592,712) (40,860,637)
Proceeds from sale and maturity of investments -- 5,907,712 11,229,499
Purchase of property, plant and equipment..... (43,088) (125,818) (942,095)
-------------- -------------- ---------------
Net cash used by investing activities........... (218,088) (1,784,039) (30,721,454)
-------------- -------------- ---------------
Cash flows from financing activities:
Sale of stock, net of related issuance costs.. 1,200 35,853 63,405,749
Sale of options............................... -- 17,500 17,500
Sale of warrants.............................. -- -- 130
Proceeds from stock options exercised......... -- 975 26,063
Equipment financing........................... -- -- 354,416
Principal payments on capital lease obligation -- (31,764) (36,253)
-------------- -------------- ---------------
Net cash provided by financing activities....... 1,200 22,564 63,767,605
-------------- -------------- ---------------
Net (decrease) increase in cash and cash
equivalents................................... (1,156,757) (5,087,494) 20,167,512
Cash and cash equivalents at beginning of
period........................................ 3,081,586 25,255,006 --
-------------- -------------- ---------------
Cash and cash equivalents at end of period...... $ 1,924,829 $20,167,512 $ 20,167,512
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
6
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- PAID-IN ACCUMULATED DEFERRED
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
---------- ------- --------- ---------- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial sale
of stock........... 933,334 $ 933 -- 1,175,000 $ 1,175 $ 709,642 -- -- $ 711,750
Additional sale
of stock........... 4,248,337 4,249 -- 1,495,000 1,495 3,137,355 -- -- 3,143,099
Stock-based
compensation....... -- -- -- -- -- 12,000 -- $ (11,750) 250
Net loss,
July 12 through
December 31, 1995.. -- -- -- -- -- -- $ (967,583) -- (967,583)
-------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995.. 5,181,671 5,182 -- 2,670,000 2,670 3,858,997 (967,583) (11,750) 2,887,516
Sale of stock....... 3,756,234 3,756 -- 4,942,652 4,943 59,506,348 -- -- 59,515,047
Sale of warrants.... -- -- $ 130 -- -- -- -- -- 130
Stock-based
compensation....... -- -- 151,743 700,000 700 1,126,500 -- (141,181) 1,137,762
Stock options
exercised.......... -- -- -- 317,333 317 56,802 -- (25,743) 31,376
Conversion of
Preferred to
Common Stock....... (8,937,905) (8,938) -- 8,937,905 8,938 -- -- -- --
Net loss............ -- -- -- -- -- -- (10,916,583) -- (10,916,583)
-------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996.. -- -- 151,873 17,567,890 17,568 64,548,647 (11,884,166) (178,674) 52,655,248
(UNAUDITED)
Sale of stock....... 4,218 4 35,849 35,853
Sale of options..... 17,500 17,500
Sale of warrants.... --
Stock-based
compensation....... 32,041 12,041 44,082
Stock options
exercised.......... 13,000 13 2,327 784 3,124
Net loss............ -- -- -- (3,544,052) -- (3,544,052)
-------------------------------------------------------------------------------------------------------------
Balance,
March 31, 1997..... -- $ -- $183,914 17,585,108 $17,585 $64,604,323 $(15,428,218) $(165,849) $ 49,211,755
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
7
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and applicable
Securities and Exchange Commission regulations for interim financial
information. These financial statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. It is presumed that users of
this interim financial information have read or have access to the audited
financial statements for the preceding fiscal year contained in Triangle
Pharmaceuticals, Inc. (the "Company") Annual Report on Form 10-K. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have been included.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the full year.
2. Pro Forma Net Loss Per Share
For the three month period ended March 31, 1996, the weighted average
shares outstanding used in the calculation of net loss per share includes the
effect of the conversion of all of the Company's Preferred Stock as if such
conversion occurred as of July 12, 1995. Additionally, Common Stock or
equivalent shares from stock options and awards sold or issued at prices
below the Initial Public Offering ("IPO") price per share in the twelve
months preceding the initial filing of the Company's Registration Statement
on Form S-1 on September 11, 1996, have been included in the calculations as
if outstanding from July 12, 1995 through June 30, 1996 pursuant to the
requirements of the Securities and Exchange Commission.
For the three month period ended March 31, 1997, the weighted average
shares outstanding used in the calculation of net loss per share do not
include Common Stock equivalents because they have the effect of reducing net
loss per share. Fully diluted earnings per share were not materially
different from primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS 128 changes the computation of net income per share from the
method currently prescribed by Accounting Principles Board Opinion No. 15.
The Company will adopt SFAS 128 for periods ending after December 15, 1997
and will restate previously reported historical information at that time.
Adoption of SFAS 128 is not expected to materially affect the Company's
financial statements.
3. Licensing and Option Agreements
The Company's existing license agreements require future payments of up
to $17,750,000 contingent upon the achievement of certain development
milestones. Additionally, the Company will pay royalties based on a
percentage of net sales of each licensed product incorporating these drug
candidates. Most of the Company's license agreements require minimum royalty
payments after regulatory approval. Depending on the Company's success and
timing in obtaining regulatory approval, aggregate annual minimum royalties
could range from $2,000,000 (if only a single drug candidate is approved for
one indication) to $46,000,000 (if all drug candidates are approved for all
indications) under the Company's existing license agreements.
8
<PAGE>
The Company recently exercised its option to obtain a license to the drug
candidate MKC-442 from Mitsubishi Chemical Corporation ("Mitsubishi") for the
treatment of HIV, and is currently negotiating the license agreement, which
upon execution will require the Company to pay a license initiation fee and
make certain milestone and royalty payments, including minimum annual
payments, to Mitsubishi. At Mitsubishi's option, certain of these payments
may be made in the form of the Company's capital stock. The Company will
also be required to meet certain milestone obligations and conduct certain
development work with respect to this anti-HIV drug candidate. Upon the
Company's request, Mitsubishi will supply the Company with drug substance for
formulation into final dosage form under the terms of a separate supply and
purchase agreement to be separately negotiated, and any purchases of drug
substance by the Company will be credited to the Company's minimum annual
payment obligation. Mitsubishi would have the right to terminate the license
agreement if the Company does not satisfy certain milestones obligations or
does not cure any material breach of the license agreement. The failure of
the Company to enter into the license agreement or the termination of the
license agreement could have a material adverse effect on the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q may contain certain projections,
estimates and other forward-looking statements that involve a number of risks
and uncertainties, including those discussed below at "--Risks and
Uncertainties." While this outlook represents management's current judgment
on the future direction of the business, such risks and uncertainties could
cause actual results to differ materially from any future performance
suggested below. The Company undertakes no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date hereof.
The following should be read in conjunction with the Company's condensed
financial statements.
OVERVIEW
Triangle is a pharmaceutical company engaged in the development of new
drug candidates primarily in the antiviral area. Since its inception on July
12, 1995, the Company's operating activities have related primarily to
recruiting personnel, negotiating license and option arrangements for its
drug candidates, raising capital and developing the Company's drug
candidates. The Company has not received any revenues from the sale of
products, and does not expect any of its drug candidates to be commercially
available for at least the next several years. As of March 31, 1997, the
Company's accumulated deficit was approximately $15.4 million.
The Company's drug development programs will require substantial capital
expenditures, including expenditures for preclinical testing, chemical
synthetic scale up, clinical trials of drug candidates and payments to the
Company's licensors. The Company has been unprofitable since its inception
and expects to incur substantial and increasing losses for at least the next
several years, due primarily to the expansion of its drug development
programs. The Company expects that losses will fluctuate from period to
period and that such fluctuations may be substantial. See "--Risks and
Uncertainties--History of Operating Losses; Accumulated Deficit; Uncertainty
of Future Profitability."
The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. The risks, expenses and
difficulties encountered by companies at an early stage of development must
be considered when evaluating the Company's prospects. To address these
risks, the Company must, among other things, successfully develop and
commercialize its drug candidates, secure all necessary proprietary rights,
respond to competitive developments and continue to attract, retain and
motivate qualified persons. There can be no assurance that the Company will
be successful in addressing these risks. See "--Risks and
Uncertainties--Development Stage Company; Uncertainty of Product Development."
The operating expenses of the Company will depend on several factors,
including the level of development expenses. Development expenses will depend
on the progress and results of the Company's drug development efforts, which
the Company cannot predict. Management may in some cases be able to control
the timing of development expenses in part by accelerating or decelerating
preclinical testing and clinical trial activities. As a result of these
factors, the Company believes that period to period comparisons in the future
are not necessarily meaningful and should not be relied upon as an indication
of future performance. Due to all of the foregoing factors, it is possible
that the Company's operating results will be below the expectations of market
analysts and investors. In such event, the prevailing market price of the
Common Stock would likely be materially adversely affected. See "--Risks and
Uncertainties--Volatility of Stock Price."
RESULTS OF OPERATIONS
The Company had total interest income of $725,864 for the three months
ended March 31, 1997, compared to $31,538 for the same period in 1996. The
increase in interest income is primarily due to an increase in investments
associated with financing activities. See "--Liquidity and Capital Resources."
The Company reported no license fees for the first quarter of 1997, or
for the first quarter of 1996.
10
<PAGE>
Development expenses totaled $2,749,416 for the three months ended March
31, 1997, compared to $210,344 for the same period in 1996. Development
expenses consisted primarily of expenses for compensation, drug synthesis,
toxicology studies and preclinical testing of the Company's drug candidates.
The Company also recognized non-cash charges of $11,301 relating to the
amortization of deferred consulting expenses. Development expenses were
reduced by approximately $353,000 relating to the reimbursable development
expenses under an option agreement for one of the Company's drug candidates.
Development expenses for the three months ended March 31, 1996 consisted
primarily of expenses for compensation. The Company expects its development
expenses to increase substantially in the future due to continued expansion of
drug development activities, including preclinical testing and clinical
trials. In addition, if the Company in-licenses or otherwise acquires rights
to additional drug candidates, development expenses would increase as a result.
General and administrative expenses totaled $1,520,500 for the three
months ended March 31, 1997, compared to $616,816 for the same period in
1996. General and administrative expenses for the three months ended March
31, 1997, consisted primarily of compensation expenses, rent expense and
amounts paid for outside professional services and included non-cash charges
of $41,009 related to the amortization of deferred compensation expenses. The
increase in general and administrative expenses compared to the three months
ended March 31, 1996, is comprised primarily of increases in compensation
expense, rent expenses associated with office and laboratory facilities and
increases in professional fees. The increase is due primarily to the growth
of the Company's operations. The Company expects that its general and
administrative expenses will increase in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception (July 12, 1995)
through March 31, 1997 primarily with the net proceeds received from private
placements of equity securities, which provided aggregate proceeds of
approximately $22,300,000, and the Company's initial public offering, which
provided aggregate net proceeds to the Company totaling $42,153,664 before
deducting expenses of the offering of approximately $1,100,000. Through March
31, 1997, the Company received approximately $851,000 of $1,185,000 as
reimbursement of certain development expenses under an option agreement for
one of its drug candidates.
At March 31, 1997, the Company's principal source of liquidity was
$20,167,512 in cash and cash equivalents, $21,686,705 in short term
investments and $7,944,433 in long-term investments which are "available for
sale." At March 31, 1997, the Company had utilized $500,119 of a secured
equipment lease-line facility.
The Company expects that its capital requirements will increase
substantially in future periods as the Company funds its drug development
programs. The Company's future capital requirements will depend on many
factors, including the progress of the Company's drug development programs,
the magnitude of these programs, the scope and results of preclinical testing
and clinical trials, the cost, timing and outcome of regulatory reviews, the
costs under the license and/or option agreements relating to the Company's
drug candidates, administrative and legal expenses, the establishment of
capacity for sales and marketing functions, the establishment of
relationships with third parties for manufacturing and sales and marketing
functions, and other factors. Amounts payable by the Company in the future
under its existing license agreements are uncertain due to a number of
factors, including the progress of the Company's drug development programs,
the Company's ability to obtain approval to commercialize any drug candidate
and the commercial success of any approved drug. The Company's existing
license agreements require future payments of up to $17,750,000 contingent
upon the achievement of certain development milestones. Additionally, the
Company will pay royalties based on a percentage of net sales of each
licensed product incorporating these drug candidates. Most of the Company's
license agreements require minimum royalty payments after regulatory
approval. Depending on the Company's success and timing in obtaining
regulatory approval, aggregate annual minimum royalties could range from
$2,000,000 (if only a single drug candidate is approved for one indication)
to $46,000,000 (if all drug candidates are approved for all indications)
under the Company's existing license agreements.
The Company recently exercised its option to obtain a license to the drug
candidate MKC-442 from Mitsubishi Chemical Corporation ("Mitsubishi") for the
treatment of HIV, and is currently negotiating the license
11
<PAGE>
agreement, which upon execution will require the Company to pay a license
initiation fee and make certain milestone and royalty payments, including
minimum annual payments, to Mitsubishi. At Mitsubishi's option, certain of
these payments may be made in the form of the Company's capital stock. The
Company will also be required to meet certain milestone obligations and
conduct certain development work with respect to this anti-HIV drug
candidate. Upon the Company's request, Mitsubishi will supply the Company
with drug substance for formulation into final dosage form under the terms of
a separate supply and purchase agreement to be separately negotiated, and any
purchases of drug substance by the Company will be credited to the Company's
minimum annual payment obligation. Mitsubishi would have the right to
terminate the license agreement if the Company does not satisfy certain
milestones obligations or does not cure any material breach of the license
agreement. The failure of the Company to enter into the license agreement or
the termination of the license agreement could have a material adverse effect
on the Company.
The Company believes that its existing cash and investments will be
adequate to satisfy its anticipated capital requirements through 1997. The
Company expects that it will be required to raise substantial additional
funds through equity or debt financings, collaborative arrangements with
corporate partners or from other sources. There can be no assurance that
additional funding will be available on favorable terms from any of these
sources or at all. See "--Risks and Uncertainties--Future Capital Needs;
Uncertainty of Additional Funding."
RISKS AND UNCERTAINTIES
DEVELOPMENT STAGE COMPANY; UNCERTAINTY OF PRODUCT DEVELOPMENT
The Company was incorporated in July 1995 and accordingly has only a
limited operating history upon which an evaluation of the Company's business
and prospects can be based. In addition, the Company's drug candidates are
all in the early developmental stage and require significant, time consuming
and costly development, testing and regulatory clearances. The Company does
not expect any of its drug candidates to be commercially available for at
least the next several years. The successful development of any new drug,
including any of the Company's drug candidates, is highly uncertain and is
subject to a number of significant risks. These risks include, among others,
the possibility that any or all of the Company's drug candidates will be
found to be ineffective, toxic or otherwise fail to receive necessary
regulatory clearances; that the drug candidates will be uneconomical to
manufacture, market or will not achieve broad market acceptance; that third
parties will hold proprietary rights that will preclude the Company from
marketing the drug candidates; or that third parties will market equivalent
or superior products. The failure of the Company's drug development programs
to result in commercially viable products would have a material adverse
effect on the Company.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company has incurred losses since its inception. As of March 31,
1997, the Company's accumulated deficit was approximately $15.4 million.
Losses have resulted principally from costs incurred in the acquisition and
development of the Company's drug candidates and general and administrative
costs. These costs have exceeded the Company's revenues, which to date have
been generated primarily from interest income. The Company has not generated
any revenue to date from the sale of drugs and does not expect to do so for
at least the next several years. The Company expects to incur significant
additional operating losses over the next several years and expects losses to
increase as the Company's drug development efforts expand. The Company's
ability to achieve profitability will depend upon its ability to develop and
obtain regulatory approval for its drug candidates and to develop the
capacity (or establish relationships with third parties) to manufacture,
market and sell any drug candidates it successfully develops. There can be no
assurance that the Company will ever generate significant revenues or achieve
profitable operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's drug development programs currently require and will in the
future require substantial capital expenditures, including expenditures for
preclinical testing, chemical synthetic scale up, clinical trials of drug
candidates and payments to the Company's licensors. The Company's future
capital requirements will depend
12
<PAGE>
on many factors, including the progress of the Company's drug development
programs, the magnitude of these programs, the scope and results of
preclinical testing and clinical trials, the cost, timing and outcome of
regulatory reviews, the costs under the license and/or option agreements
relating to the Company's drug candidates, administrative and legal expenses,
the establishment of capacity for sales and marketing functions, the
establishment of relationships with third parties for manufacturing and sales
and marketing functions, and other factors. The Company expects that its
capital requirements will increase significantly in the future.
The Company has incurred negative cash flow from operations since
inception and does not expect to generate positive cash flow to fund its
operations for at least the next several years. As a result, the Company
believes that substantial additional equity or debt financings will be
required to fund its operations. There can be no assurance that the Company
will be able to consummate any such financings at all or on favorable terms,
or that such financings will be adequate to meet the Company's capital
requirements. Any additional equity or convertible debt financings could
result in substantial dilution to the Company's stockholders. If adequate
funds are not available, the Company may be required to delay, reduce the
scope of or eliminate one or more of its drug development programs or attempt
to continue development by entering into arrangements with collaborative
partners or others that may require the Company to relinquish some or all of
its rights to certain technologies or drug candidates that the Company would
not otherwise desire to relinquish. In addition, from time to time, the
Company considers the acquisition of technologies and drug candidates that,
if completed, could increase the Company's capital requirements. The
Company's inability to fund its capital requirements would have a material
adverse effect on the Company.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining required regulatory approvals for the commercial sale of
any of its drug candidates under development, the Company must demonstrate
through preclinical testing and clinical trials that each product is safe and
effective for use in each target indication. The results from preclinical
testing and early clinical trials may not be predictive of results that will
be obtained in pivotal clinical trials, and there can be no assurance that
the Company's clinical trials will demonstrate sufficient safety and
effectiveness to obtain required regulatory approvals or will result in
marketable products. A number of companies in the pharmaceutical industry
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. The administration of any drug candidate
developed by the Company may produce undesirable side effects in humans. The
occurrence of side effects could interrupt, delay or halt clinical trials of
such drug candidate and could ultimately prevent its approval by the United
States Food and Drug Administration ("FDA") or foreign regulatory authorities
for any and all targeted indications. The Company or the FDA may suspend or
terminate clinical trials at any time if it is believed that the trial
participants are being exposed to unacceptable health risks. There can be no
assurance that clinical trials will demonstrate that any drug candidate under
development by the Company is safe or effective.
The rate of completion of the Company's clinical trials will depend upon,
among other factors, obtaining adequate clinical supplies and the rate of
patient enrollment. Patient enrollment is a function of many factors,
including the size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites and the eligibility criteria for the
study. Delays in planned patient enrollment can result in increased costs or
delays or both, which could have a material adverse effect on the Company.
There can be no assurance that if clinical trials are successfully completed,
the Company will be able to submit a New Drug Application ("NDA") in a timely
manner or that any such application will be approved by the FDA. Any failure
of the Company to complete successfully its clinical trials and obtain
approvals of corresponding NDAs would have a material adverse effect on the
Company.
UNCERTAINTY OF PATENTS; DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY
RIGHTS
The Company's success will depend in large part on the ability of the
Company and its licensors to obtain patent protection with respect to its
drug candidates, defend patents once obtained, maintain trade secrets and
operate without infringing upon the patents and proprietary rights of others
and to obtain appropriate licenses to patents or proprietary rights held by
third parties, both in the United States and in foreign countries. The
Company
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has no patents in its own name or patent applications of its own pending, but
has obtained licenses to patents and other proprietary rights from third
parties with respect to each of the Company's seven drug candidates.
The patent positions of pharmaceutical companies, including those of the
Company, are uncertain and involve complex legal and factual questions for
which important legal principles are unresolved. There can be no assurance
that the Company or its licensors have or will develop or obtain the rights
to products or processes that are patentable, that patents will issue from
any of the pending applications or that claims allowed will be sufficient to
protect the technology licensed to the Company. In addition, no assurance can
be given that any patents issued to or licensed by the Company will not be
challenged, invalidated, infringed or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. The
Company's success will also depend in large part on the Company not breaching
the licenses pursuant to which the Company obtained its technology and drug
candidates.
A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents to technologies that cover or are similar to the
technologies licensed by the Company. The Company is aware of certain patent
applications previously filed by and patents already issued to others that
conflict with patents or patent applications licensed to the Company either
by claiming the same methods or compounds or by claiming methods or compounds
that could dominate those licensed to the Company. In addition, there can be
no assurance that the Company is aware of all patents or patent applications
that may materially affect the Company's ability to make, use or sell any
products. United States patent applications are confidential while pending in
the United States Patent and Trademark Office ("PTO"), and patent
applications filed in foreign countries are often first published six months
or more after filing. Any conflicts resulting from third party patent
applications and patents could significantly reduce the coverage of the
patents licensed to the Company and limit the ability of the Company or its
licensors to obtain meaningful patent protection. If patents are issued to
other companies that contain competitive or conflicting claims, the Company
may be required to obtain licenses to these patents or to develop or obtain
alternative technology. There can be no assurance that the Company will be
able to obtain any such license on acceptable terms or at all. If such
licenses are not obtained, the Company could be delayed in or prevented from
pursuing the development or commercialization of its drug candidates, which
would have a material adverse effect on the Company.
The Company is aware of significant risks regarding the patent rights
licensed by the Company relating to three of the seven compounds comprising
the Company's existing drug candidate portfolio. The Company may not be able
to commercialize FTC, DAPD or CS-92 for human immunodeficiency virus ("HIV")
and/or hepatitis B virus ("HBV") due to patent rights held by third parties
other than the Company's licensors. The Company is aware of numerous patent
applications and issued patents in the United States and numerous foreign
countries held by third parties other than the Company's licensors that
relate to these compounds and their use alone or with other compounds to
treat HIV and HBV. As a result, the positions of the Company and its
licensors with respect to the use of FTC, DAPD and CS-92 to treat HIV and/or
HBV are highly uncertain and involve numerous complex legal and factual
questions that are unknown or unresolved. If any of these questions is
resolved in a manner that is not favorable to the Company's licensors or the
Company, the Company would not have the right to commercialize FTC, DAPD
and/or CS-92 in the absence of a license from one or more third parties,
which may not be available on acceptable terms or at all. In addition, even
in the absence of an unfavorable resolution of any of these questions, the
Company may attempt to obtain licenses from one or more third parties in
order to reduce or eliminate the risks relating to some or all of these
matters. There can be no assurance that the Company will elect to obtain any
such licenses or that such licenses will be available on acceptable terms or
at all. The Company's inability to commercialize any of these compounds would
have a material adverse effect on the Company.
FTC
The Company obtained its rights to purified forms of FTC under a license
from Emory University ("Emory"). In 1990 and 1991, Emory filed in the United
States and thereafter in numerous foreign countries patent applications with
claims to composition of matter and methods to treat HIV and HBV with FTC.
Yale University ("Yale") filed patent applications on FTC and its use to
treat HBV in 1991 in the United States, and subsequently licensed its rights
under those patent applications to Emory. The Company's license arrangement
with Emory
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includes all rights under the Yale patent applications. FTC belongs to the
same general class of nucleosides as 3TC, which has been approved in the
United States by the FDA for use in combination with AZT for the treatment of
HIV. 3TC is currently being sold by Glaxo Wellcome plc ("Glaxo") for the
treatment of HIV under a license agreement with BioChem Pharma Inc. ("BioChem
Pharma").
HIV. Emory received a United States patent in 1993 covering a method to
treat HIV infection with FTC. BioChem Pharma filed a patent application in
the United States in 1989 and was issued a patent in 1991 covering a group of
nucleosides in the same general class as FTC, but which did not include FTC.
BioChem Pharma filed foreign patent applications in 1990 based upon its 1989
United States patent application, and in those foreign applications included
FTC among a large class of nucleosides. The foreign patent applications are
pending in a large number of countries, and have issued in a number of
countries with claims directed to FTC and its use to treat HIV. In addition,
BioChem Pharma filed a United States patent application in 1991 specifically
directed to a purified form of FTC that exhibits advantageous properties for
the treatment of HIV on which two patents have issued. BioChem Pharma filed
patent applications in a large number of foreign countries based upon its
1991 United States patent application, and patents have issued in certain
countries. BioChem Pharma may have additional patent applications pending in
the United States.
In the United States, the first to invent a subject matter is entitled to
patent protection on that invention. With respect to patent applications
filed prior to January 1, 1996, United States patent law provides that if a
party invented a technology outside the United States, then for purposes of
determining the first to invent the technology, that party is deemed to have
invented the technology on the earlier of the date it introduced the
invention in the United States or the date it filed its patent application.
In a registration statement filed with the United States Securities and
Exchange Commission, BioChem Pharma stated that since it conducts
substantially all of its research activities outside the United States, it is
at a disadvantage as to inventions made prior to January 1, 1996 with respect
to obtaining United States patents as compared to companies that maintain
research facilities in the United States. The Company does not know whether
Emory or BioChem Pharma was the first to invent the subject matter claimed in
their respective United States patent applications or patents, or whether
BioChem Pharma invented the technology disclosed in its patent applications
in the United States or introduced that technology in the United States
before the date of its patent applications. In foreign countries, the first
party to file a patent application on an invention, not the first to invent
the subject matter, is entitled to patent protection on that invention. While
the Company believes that Emory's patent applications that disclosed FTC as a
useful anti-HIV agent were filed in foreign countries before BioChem Pharma
filed its foreign patent applications on that subject matter, BioChem Pharma
has been issued patents in several foreign countries. There can be no
assurance that Emory will initiate or be successful in any foreign proceeding
attempting to revoke patents issued to BioChem Pharma or addressing the
relative rights of BioChem Pharma and Emory. BioChem Pharma has opposed
patent claims on FTC granted to Emory in Japan and Australia. There can be no
assurance that BioChem Pharma will not make additional challenges to any
Emory patents or patent applications, or that Emory will succeed in defending
any such challenges. There can be no assurance that the sale of FTC by the
Company for the treatment of HIV would not be held to infringe United States
and foreign patent rights of BioChem Pharma. Under the patent laws of most
countries, a product can be found to infringe a third party patent either if
the third party patent expressly covers the product or method of treatment
using the product, or in certain circumstances, if the third party patent,
while not expressly covering the product or method, covers subject matter
that is substantially equivalent in nature to the product or method. If it is
determined that the sale of FTC for the treatment of HIV infringes a BioChem
Pharma patent, the Company would not have the right to make, use or sell FTC
for the treatment of HIV in one or more countries in the absence of a license
from BioChem Pharma. There can be no assurance that the Company could obtain
a license from BioChem Pharma on acceptable terms or at all.
HBV. Burroughs Wellcome Co. ("Burroughs Wellcome") filed patent
applications in March and May 1991 in Great Britain on a method to treat HBV
with FTC. Burroughs Wellcome filed similar patent applications in other
countries, which the Company believes includes the United States. Glaxo
subsequently acquired Burroughs Wellcome's rights under those patent
applications. Those applications were filed in foreign countries prior to the
date Emory filed its patent application on the use of FTC to treat HBV, and
therefore, the foreign patent applications filed by Burroughs Wellcome have
priority over those filed by Emory. In July 1996, Emory instituted litigation
against Glaxo in the United States District Court to obtain ownership of the
patent applications filed by Burroughs
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Wellcome, alleging that Burroughs Wellcome converted and misappropriated
Emory's invention and property, and that an Emory employee is the inventor or
a co-inventor of the subject matter covered by the Burroughs Wellcome patent
applications. There can be no assurance that Emory will succeed in its
efforts to establish ownership rights. If Emory fails to establish ownership
rights, the Company could not make, use or sell FTC for the treatment of HBV
in countries in which patents are issued to Glaxo without a license from
Glaxo. If Emory establishes only co-ownership rights (and not sole ownership)
to these patents and patent applications, laws in Europe, Korea and perhaps
other countries could prohibit Emory from licensing any co-owned patent
rights without Glaxo's consent. If the Company is required to obtain a
license from Glaxo to sell FTC for the treatment of HBV, there can be no
assurance that the Company would be able to obtain such a license on
acceptable terms or at all.
BioChem Pharma filed a patent application in May 1991 in Great Britain
also directed to a method to treat HBV with FTC. BioChem Pharma filed similar
patent applications in other countries, and in January 1996 was issued a
patent in the United States. Emory has informed the Company that Emory
intends to challenge BioChem Pharma's issued United States patent. There can
be no assurance that Emory will pursue or succeed in any such proceeding. The
Company cannot sell FTC for the treatment of HBV in the United States unless
the BioChem Pharma patent is held invalid by a United States court or
administrative body or unless the Company obtains a license from Biochem
Pharma. There can be no assurance that the Company would be able to obtain
such a license on acceptable terms or at all. In July 1991, BioChem Pharma
was issued a United States patent on the use of 3TC to treat HBV and has
corresponding applications pending or issued in foreign countries. If it is
determined that the use of FTC to treat HBV is not substantially different
from the use of 3TC to treat HBV, a court could hold that the use of FTC to
treat HBV infringes these BioChem Pharma 3TC patents.
In addition, BioChem Pharma has filed in the United States and foreign
countries several patent applications on manufacturing methods relating to a
class of nucleosides that includes FTC. If the Company uses a manufacturing
method that is covered by patents issuing on any of these applications, the
Company would not be able to manufacture FTC without a license from BioChem
Pharma. There can be no assurance that the Company would be able to obtain
such a license on acceptable terms or at all.
DAPD
The Company obtained its rights to DAPD under a license from Emory and
University of Georgia Research Foundation, Inc. ("UGARF"). The DAPD
portfolio licensed to the Company consists of two issued United States
patents and several United States and foreign patent applications that cover
a method for the synthesis of DAPD and its use to treat HIV and HBV. Emory
and UGARF filed patent applications claiming these inventions in the United
States in 1990, 1992 and 1993, respectively. BioChem Pharma filed a patent
application in the United States in 1988 on a group of nucleosides in the
same general class as DAPD and their use to treat HIV, and has filed
corresponding patent applications in foreign countries. The PTO issued a
patent to BioChem Pharma in 1993 covering a class of nucleosides that
includes DAPD and its use to treat HIV. Corresponding patents have been
issued to BioChem Pharma in many foreign countries. Emory has filed an
opposition to BioChem Pharma's granted patent application in the European
Patent Office based, in part, upon Emory's assertion that BioChem Pharma's
patent does not disclose how to make DAPD, and Emory has informed the Company
that Emory intends to challenge BioChem Pharma's patents and patent
applications in other countries. Patent claims granted to Emory on a portion
of the DAPD technology by the Australian Patent Office have been opposed by
BioChem Pharma. There can be no assurance that a court or administrative body
would invalidate BioChem Pharma's patent claims or that a sale of DAPD by the
Company would not infringe BioChem Pharma's patents. If Emory, UGARF and the
Company do not challenge, or are not successful in any challenge to, BioChem
Pharma's issued patents or pending patent applications (or patents that may
issue as a result of such applications), the Company will not be able to
manufacture, use or sell DAPD in the United States and any foreign countries
in which BioChem Pharma receives a patent without a license from BioChem
Pharma. There can be no assurance that the Company would be able to obtain a
license from BioChem Pharma on acceptable terms or at all.
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CS-92
The Company obtained its rights to CS-92 under a license from Emory and
UGARF. Emory and UGARF have obtained two United States patents that cover
CS-92 and its use to treat HIV, and have filed a European patent application
and a Japanese patent application with claims limited to the use of CS-92 as
a method for administering AZT, which includes the administration of CS-92 as
a precursor form of AZT, to treat HIV infection. Burroughs Wellcome filed an
application with the European Patent Office in September 1986 directed to a
broad group of nucleosides that includes CS-92, and their use to treat HIV
infection. Burroughs Wellcome subsequently filed similar applications in
other countries, and the Company believes Burroughs Wellcome filed a similar
patent application in the United States. Patents have been issued to
Burroughs Wellcome in certain countries based upon these patent applications.
Glaxo now has the rights to these patents and patent applications. There can
be no assurance that, if challenged, a court would uphold the Emory/UGARF
patents in light of the disclosures contained in the earlier filed Burroughs
Wellcome patent applications. In addition, CS-92 is metabolized to AZT in
cell lines IN VITRO, and based on that, the Company believes that it may
likewise be converted to AZT IN VIVO. A court could hold that United States
and foreign patents owned by Glaxo covering the use of AZT to treat HIV
infection would be infringed by the sale of CS-92 to treat HIV infection. If
the use of CS-92 is found to infringe the patents owned by Glaxo, then the
Company would not have the right to sell CS-92 in one or more countries
without a license from Glaxo. There can be no assurance that the Company
would be able to obtain a license from Glaxo on acceptable terms or at all.
Litigation, which could result in substantial cost to the Company, may
also be necessary to enforce any patents to which the Company has rights or
to determine the scope, validity and enforceability of other parties'
proprietary rights, which may affect the Company's drug candidates and
technology. United States patents carry a presumption of validity and
generally can be invalidated only through clear and convincing evidence. The
Company's licensors may also have to participate in interference proceedings
declared by the PTO to determine the priority of an invention, which could
result in substantial cost to the Company. There can be no assurance that the
Company's licensed patents would be held valid by a court or administrative
body or that an alleged infringer would be found to be infringing. Further,
with respect to the drug candidates licensed or optioned by the Company from
Emory, UGARF and the Regents of the University of California ("Regents"),
Emory, UGARF and the Regents are primarily responsible for any litigation,
interference, opposition or other action pertaining to patents or patent
applications related to the licensed technology and the Company is required
to reimburse them for the costs they incur in performing these activities. As
a result, the Company generally does not have the ability to institute or
determine the conduct of any such patent proceedings unless Emory, UGARF
and/or the Regents do not elect to institute or elect to abandon such
proceedings. In cases where Emory, UGARF and/or the Regents elect to
institute and prosecute patent proceedings, the Company's rights will be
dependent in part upon the manner in which Emory, UGARF and/or the Regents
conduct the proceedings. Emory, UGARF and/or the Regents could, in any of
these proceedings they elect to initiate and maintain, elect not to
vigorously pursue or defend or to settle such proceedings on terms that are
not favorable to the Company. An adverse outcome in any patent litigation or
interference proceeding could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties
or require the Company to cease using such technology, any of which could
have a material adverse effect on the Company. Moreover, the mere uncertainty
resulting from the institution and continuation of any technology related
litigation or interference proceeding could have a material adverse effect on
the Company pending resolution of the disputed matters.
The Company also relies on unpatented trade secrets and know how to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can
be no assurance that these agreements will not be breached or terminated,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. The Company relies on certain technologies to
which it does not have exclusive rights or which may not be patentable or
proprietary and thus may be available to competitors. The Company has filed
an application for but has not obtained a trademark registration with respect
to its corporate name and its logo. Another company has filed an application
to obtain a trademark registration for the name "Triangle Coordinated Care,"
and the Company is aware that several other companies use trade names that
are similar to the Company's for their businesses. If the Company is not able
to obtain any licenses that may be necessary for the Company to use its
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corporate name, it may be required to change its corporate name. The
Company's management personnel were previously employed by other
pharmaceutical companies. In many cases, these individuals are conducting
drug development activities for the Company in areas similar to those in
which they were involved prior to joining the Company. As a result, the
Company, as well as these individuals, could be subject to allegations of
violation of trade secrets and other similar claims.
EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Human pharmaceutical products are subject to rigorous preclinical testing
and clinical trials and other approval procedures mandated by the FDA and
foreign regulatory authorities. Various federal and foreign statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of pharmaceutical products. The process
of obtaining these approvals and the subsequent compliance with appropriate
United States and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources. In addition, these
requirements and processes vary widely from country to country. The time
required for completing preclinical testing and clinical trials and obtaining
regulatory approvals is uncertain. The Company may decide to replace a drug
candidate in preclinical testing and/or clinical trials with a modified drug
candidate, thus extending the development period. In addition, the FDA or
similar foreign regulatory authorities may require additional clinical
trials, which could result in increased costs and significant development
delays. Delays or rejections may also be encountered based upon changes in
FDA policy during the period of product development and FDA review. Similar
delays or rejections may be encountered in other countries. The Company's
drug candidates may not qualify for accelerated development and/or approval
under FDA regulations and, even if some of the Company's drug candidates
qualify for accelerated development and/or approval, they may not be approved
for marketing sooner than would be historically expected or at all. There can
be no assurance that even after substantial time and expenditures, any of the
Company's drug candidates under development will receive marketing approval
in any country on a timely basis or at all. If the Company is unable to
demonstrate the safety and effectiveness of its drug candidates to the
satisfaction of the FDA or foreign regulatory authorities, the Company will
be unable to commercialize its drug candidates and would be materially and
adversely affected. Further, even if regulatory approval of a drug candidate
is obtained, the approval may entail limitations on the indicated uses for
which the drug candidate may be marketed. A marketed product, its
manufacturer and the manufacturer's facilities are subject to continual
review and periodic inspections, and subsequent discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. The failure to comply with applicable regulatory
requirements can, among other things, result in fines, suspension of
regulatory approvals, refusal to approve pending applications, refusal to
permit exports from the United States, product recalls, seizure of products,
injunctions, operating restrictions and criminal prosecutions. Further, FDA
policy may change and additional government regulations may be established
that could prevent or delay regulatory approval of the Company's drug
candidates.
The effect of governmental regulation may be to delay the marketing of
new products for a considerable period of time or to prevent such marketing
altogether, to impose costly requirements on the Company's activities or to
provide a competitive advantage to other companies that compete with the
Company. Adverse clinical results by others could have a negative impact on
the regulatory process and timing with respect to the development and
approval of the Company's drug candidates. A delay in obtaining or failure to
obtain regulatory approvals could have a material adverse effect on the
Company. The extent and character of potentially adverse governmental
regulation that may arise from future legislation or administrative action
cannot be predicted.
The Company is also subject to various federal, state and local laws and
regulations relating to safe working conditions, laboratory and manufacturing
practices, the experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its
development work.
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INTENSE COMPETITION; RISK OF TECHNOLOGICAL CHANGE
The Company is engaged in segments of the pharmaceutical industry that
are highly competitive and rapidly changing. If successfully developed and
approved, the drug candidates that the Company is currently developing will
compete with numerous existing therapies. In addition, a number of companies
are pursuing the development of novel pharmaceuticals that target the same
diseases the Company is targeting. The Company believes that a significant
number of drugs are currently under development and will become available in
the future for the treatment of HIV. The Company anticipates that it will
face intense and increasing competition in the future as new products enter
the market and advanced technologies become available. There can be no
assurance that existing products or new products developed by the Company's
competitors will not be more effective, or more effectively marketed and
sold, than any that may be developed by the Company. Competitive products may
render the Company's licensed technology and products obsolete or
noncompetitive prior to the Company's recovery of development or
commercialization expenses incurred with respect to any such products. The
development by others of a cure or new treatment methods for the indications
for which the Company is developing drug candidates could render the
Company's drug candidates noncompetitive, obsolete or uneconomical. Many of
the Company's competitors have significantly greater financial, technical and
human resources than the Company and may be better equipped to develop,
manufacture and market products. In addition, many of these companies have
extensive experience in preclinical testing and clinical trials, obtaining
FDA and other regulatory approvals and manufacturing and marketing
pharmaceutical products. Many of these competitors also have products that
have been approved or are in late stage development and operate large, well
funded research and development programs. Smaller companies may also prove to
be significant competitors, particularly through collaborative arrangements
with large pharmaceutical and biotechnology companies. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are becoming increasingly aware of the commercial value of
their inventions and are more actively seeking to commercialize the
technology they have developed.
If the Company's drug candidates are successfully developed and approved,
the Company will face competition based on the safety and effectiveness of
its products, the timing and scope of regulatory approvals, availability of
supply, marketing and sales capability, reimbursement coverage, price and
patent position. There can be no assurance that the Company's competitors
will not develop more effective or more affordable technology or products, or
achieve earlier patent protection, product development or product
commercialization than the Company. Accordingly, the Company's competitors
may succeed in commercializing products more rapidly or effectively than the
Company, which could have a material adverse effect on the Company.
RISKS RELATED TO LICENSE AND OPTION AGREEMENTS
The agreements pursuant to which the Company has in-licensed or obtained
an option to in-license its drug candidates permit the Company's licensors to
terminate the agreements under certain circumstances, such as the failure by
the Company to achieve certain development milestones or the occurrence of an
uncured material breach by the Company. The termination of any of these
agreements could have a material adverse effect on the Company. Upon
termination of the license agreements with Emory and UGARF, the Company is
required to grant to Emory and UGARF a non-exclusive, royalty free license to
all of the Company's interest in the licensed technology (including any
improvements to the technology developed by the Company). In addition, the
license agreements with Emory, UGARF and the Regents provide that Emory,
UGARF and the Regents are primarily responsible for any litigation,
interference, opposition or other action pertaining to the patents related to
the technology licensed to the Company, and the Company is required to
reimburse them for the costs they incur in performing these activities. The
Company believes that these costs as well as other costs under the license
and option agreements relating to the Company's drug candidates will be
substantial, and any inability or failure of the Company to pay these costs
with respect to any drug candidate could result in the termination of the
license or option agreement for such drug candidate.
LACK OF MANUFACTURING CAPABILITIES
The Company does not have any manufacturing capacity and currently plans
to seek to establish relationships with third party manufacturers for the
manufacture of clinical trial material and the commercial
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production of any products it may develop. There can be no assurance that the
Company will be able to establish relationships with third party
manufacturers on commercially acceptable terms or that third party
manufacturers will be able to manufacture products in commercial quantities
under good manufacturing practices mandated by the FDA on a cost effective
basis. The Company's dependence upon third parties for the manufacture of its
products may adversely affect the Company's profit margins and its ability to
develop and commercialize products on a timely and competitive basis.
Further, there can be no assurance that manufacturing or quality control
problems will not arise in connection with the manufacture of the Company's
products or that third party manufacturers will be able to maintain the
necessary governmental licenses and approvals to continue manufacturing the
Company's products. Any failure to establish relationships with third parties
for its manufacturing requirements on commercially acceptable terms would
have a material adverse effect on the Company.
LACK OF SALES AND MARKETING CAPABILITIES
The Company currently has only one marketing employee and no sales
personnel. The Company will have to develop a sales force or rely on
marketing partners or other arrangements with third parties for the
marketing, distribution and sale of any products it develops. The Company
currently intends to market in the United States most of the drug candidates
that it successfully develops primarily through a direct sales force and
outside the United States through a combination of a direct sales force and
arrangements with third parties. There can be no assurance that the Company
will be able to establish marketing, distribution or sales capabilities or
make arrangements with third parties to perform those activities on terms
satisfactory to the Company or that any internal capabilities or third party
arrangements will be cost effective.
In addition, any third parties with which the Company establishes
marketing, distribution or sales arrangements may have significant control
over important aspects of the commercialization of the Company's products,
including market identification, marketing methods, pricing, composition of
sales force and promotional activities. There can be no assurance that the
Company will be able to control the amount and timing of resources that any
third party may devote to the Company's products or prevent any third party
from pursuing alternative technologies or products that could result in the
development of products that compete with the Company's products and the
withdrawal of support for the Company's programs.
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT, MANUFACTURING AND IN-LICENSING
The Company intends to engage third party contract research organizations
("CROs") to perform certain functions in connection with the development of
the Company's drug candidates and third parties to perform many aspects of
the manufacture of drug substance. The Company intends to design clinical
trials, but have CROs conduct the clinical trials. The Company will rely on
the CROs to perform many important aspects of clinical trials. As a result,
these aspects of the Company's drug development programs will be outside the
direct control of the Company. In addition, there can be no assurance that
the CROs or third parties will perform all of their obligations under
arrangements with the Company. In the event that the CROs or third parties do
not perform clinical trials or manufacture drug substance in a satisfactory
manner or breach their obligations to the Company, the commercialization of
any drug candidate may be delayed or precluded, which would have a material
adverse effect on the Company. The Company does not intend to engage in drug
discovery. The Company's strategy for obtaining additional drug candidates is
to utilize the relationships of its management team and Scientific Advisory
Board to identify compounds for in-licensing from companies, universities,
research institutions and other organizations. There can be no assurance that
the Company will succeed in in-licensing additional drug candidates on
acceptable terms or at all.
NO ASSURANCE OF MARKET ACCEPTANCE
The Company's success will depend in substantial part on the extent to
which any product it develops achieves market acceptance. The degree of
market acceptance will depend upon a number of factors, including the receipt
and scope of regulatory approvals, the establishment and demonstration in the
medical community of the safety and effectiveness of the Company's products
and their potential advantages over existing treatment methods, and
reimbursement policies of government and third party payors. There can be no
assurance that physicians,
20
<PAGE>
patients, payors or the medical community in general will accept or utilize
any product that the Company may develop.
RISKS RELATING TO COMBINATION THERAPY
The Company's success will also depend in large part on the extent to
which combination therapy for the treatment of HIV in the United States and
Europe and for the treatment of HBV in developing areas of the world,
particularly Asia, achieves market acceptance. Present combination treatment
regimens for the treatment of HIV are expensive (published reports indicate
the cost per patient per year can exceed $13,000), and may increase as new
combinations are developed. These costs have resulted in a limitation of
reimbursement available from third party payors for the treatment of HIV
infection, and the Company expects that reimbursement pressures will continue
in the future. If combination therapy is accepted as a method to treat HBV,
treatment regimens are also likely to be expensive. The Company expects that
even the cost of monotherapy for HBV will be considered expensive in
developing countries. Any failure of combination therapy to achieve
significant market acceptance for the treatment of HIV or potentially HBV
could have a material adverse effect on the Company.
DEPENDENCE ON KEY EMPLOYEES
The Company is highly dependent on its senior management and scientific
staff, including Dr. David Barry, the Company's Chairman and Chief Executive
Officer. Except for Dr. Barry, the Company has not entered into employment
agreements with any of its personnel. The loss of the services of any member
of its senior management or scientific staff may significantly delay or
prevent the achievement of product development and other business objectives.
Retaining and attracting qualified personnel, consultants and advisors is
critical to the Company's success. In order to pursue its drug development
programs and marketing plans, the Company will be required to hire additional
qualified scientific and management personnel. Competition for qualified
individuals is intense and the Company faces competition from numerous
pharmaceutical and biotechnology companies, universities and other research
institutions. There can be no assurance that the Company will be able to
attract and retain such individuals on acceptable terms or at all, and the
failure to do so would have a material adverse effect on the Company. In
addition, the Company relies on members of its Scientific Advisory Board to
assist the Company in formulating its drug development strategy. All of the
members of the Scientific Advisory Board are employed by other employers and
each such member may have commitments to or consulting or advisory contracts
with other entities that may limit his availability to the Company.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD PARTY REIMBURSEMENT
The business and financial condition of pharmaceutical companies will
continue to be affected by the efforts of governments and third party payors
to contain or reduce the cost of health care through various means. A number
of legislative and regulatory proposals aimed at changing the health care
system have been proposed in recent years. In addition, an increasing
emphasis on managed care in the United States has and will continue to
increase the pressure on pharmaceutical pricing. While the Company cannot
predict whether legislative or regulatory proposals will be adopted or the
effect those proposals or managed care efforts may have on its business, the
announcement and/or adoption of such proposals or efforts could have a
material adverse effect on the Company. In the United States and elsewhere,
sales of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third party payors, such
as government and private insurance plans that mandate predetermined
discounts from list prices. Third party payors are increasingly challenging
the prices charged for medical products and services. If the Company succeeds
in bringing one or more products to the market, there can be no assurance
that these products will be considered cost effective or that reimbursement
to the consumer will be available or will be sufficient to allow the Company
to sell its products on a competitive basis.
ABSENCE OF PRODUCT LIABILITY INSURANCE; INSURANCE RISKS
The Company's business will expose it to potential product liability
risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical products. There can be no assurance that product liability
claims will not be asserted against the Company. The Company currently has
only limited product liability insurance
21
<PAGE>
relating to potential claims arising from its clinical trials. The Company
intends to expand its insurance coverage if and when the Company begins
marketing commercial products. There can be no assurance, however, that the
Company will be able to obtain any additional product liability insurance on
commercially acceptable terms or that the Company will be able to maintain
its existing insurance and/or any additional insurance it may obtain in the
future at a reasonable cost or in sufficient amounts to protect the Company
against potential losses. A successful product liability claim or series of
claims brought against the Company could have a material adverse effect on
the Company.
HAZARDOUS MATERIALS
The Company's drug development programs involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages or fines that result and any
such liability could exceed the resources of the Company.
CONCENTRATION OF STOCK OWNERSHIP; CONTROL BY MANAGEMENT AND EXISTING
STOCKHOLDERS
As of April 30, 1997 the Company's directors, executive officers and
their respective affiliates beneficially owned approximately 54% of the
Company's outstanding Common Stock. As a result, these stockholders are able
to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also have the
effect of delaying or preventing a change in control of the Company that may
be favored by other stockholders.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as
announcements of the results of clinical trials, developments with respect to
patents or proprietary rights, announcements of technological innovations,
new products or new contracts by the Company or its competitors, actual or
anticipated variations in the Company's operating results due to a number of
factors including, among others, the level of development expenses, changes
in financial estimates by securities analysts, conditions and trends in the
pharmaceutical and other industries, adoption of new accounting standards
affecting the industry, general market conditions and other factors. As a
result, it is possible that the Company's operating results will be below the
expectations of market analysts and investors, which would likely have a
material adverse effect on the prevailing market price of the Common Stock.
Sales of a substantial number of shares of Common Stock in the public
market could also adversely affect the market price of the Common Stock. In
addition, holders of approximately 9,800,000 shares of Common Stock
(including shares issuable upon the exercise of outstanding warrants) are
entitled to certain rights with respect to registration of such shares of
Common Stock for offer or sale to the public. Any such sales may have an
adverse effect on the Company's ability to raise needed capital through an
offering of its equity or convertible debt securities and may adversely
affect the prevailing market price of the Common Stock.
Further, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many pharmaceutical and biotechnology companies and that often
have been unrelated or disproportionate to the operating performance of such
companies. These market fluctuations, as well as general economic, political
and market conditions such as recessions or international currency
fluctuations, may adversely affect the market price of the Common Stock. In
the past, following periods of volatility in the market price of the
securities of companies in the pharmaceutical and biotechnology industries,
securities class action litigation has often been instituted against those
companies. Such litigation, if instituted against the Company, could result
in substantial costs and a diversion of management attention and resources,
which would have a material adverse effect on the Company. The realization of
any of the risks described in these "Risks and Uncertainties" could have a
dramatic and adverse impact on the market price of the Common Stock.
22
<PAGE>
ANTITAKEOVER EFFECTS OF CHARTER, BYLAWS AND DELAWARE LAW
The Company's Second Restated Certificate of Incorporation (the
"Certificate") authorizes the Company's Board of Directors (the "Board") to
issue shares of undesignated preferred stock without stockholder approval on
such terms as the Board may determine. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any such preferred stock that may be issued in the future.
Moreover, the issuance of preferred stock may make it more difficult for a
third party to acquire, or may discourage a third party from acquiring, a
majority of the voting stock of the Company. The Company's Restated Bylaws
(the "Bylaws") provide that the Board will be classified into three classes
of directors beginning at the 1997 annual meeting of stockholders. With a
classified Board, one class of directors is elected each year with each class
serving a three year term. These and other provisions of the Certificate and
the Bylaws, as well as certain provisions of Delaware law, could delay or
impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such
events could be beneficial to the interest of the stockholders. Such
provisions could limit the price that certain investors might be willing to
pay in the future for the Common Stock.
NO DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently does not intend to pay any cash dividends in the
foreseeable future and intends to retain its earnings, if any, for the
operation of its business
23
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Computation of Net Loss Per Share and Pro Forma Net Loss Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K. None
24
<PAGE>
TRIANGLE PHARMACEUTICALS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRIANGLE PHARMACEUTICALS, INC.
Date: May 13, 1997 By: /s/ David W. Barry
------------------------------------
David W. Barry
Chairman and Chief Executive Officer
TRIANGLE PHARMACEUTICALS, INC.
Date: May 13, 1997 By: /s/ James A. Klein, Jr.
------------------------------------
James A. Klein, Jr.
Chief Financial Officer and Treasurer
25
<PAGE>
EXHIBIT 11.1
Computation of Proforma Net Loss Per Share
26
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Computation of Net Loss Per Share and Pro Forma Net Loss Per Share
(Unaudited)
Three Months Three Months
Ended Ended
March 31, 1996(1) March 31, 1997(2)
----------------- -----------------
Historical weighted average shares
outstanding............................ -- 17,580,032
Pro forma historical weighted average
shares outstanding..................... 4,097,333 --
Series A preferred stock, convertible
to Common Stock at consummation of
the initial public offering............ 5,231,671 --
Series B preferred stock, convertible
to Common Stock at consummation of
the initial public offering............ 3,706,234 --
Common stock equivalents for preferred
stock warrants outstanding............. 146,000 --
Common stock equivalents for options
outstanding............................ 1,096,260 --
---------- -----------
Shares used in computing pro forma
net loss per share..................... 14,277,498 17,580,032
---------- -----------
---------- -----------
Net Loss................................ ($795,622) ($3,544,052)
---------- -----------
---------- -----------
Pro forma loss per share................ ($0.06) ($0.20)
---------- -----------
---------- -----------
(1) Weighted average common stock outstanding during the period including
all common stock issued at prices below the public offering price during
the twelve month period preceding the offering as if it was outstanding
at inception (July 12, 1995). Issuance of convertible preferred stock,
preferred stock warrants and common stock options at prices below the
public offering price during the twelve month period preceding the
offering have been included as common stock equivalent as if they had
been issued as common stock as of July 12, 1995.
(2) The weighted average shares outstanding used in the calculation of net
loss per share do not include common stock equivalents because they have
the effect of reducing net loss per share.
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 20,167,512
<SECURITIES> 21,686,705
<RECEIVABLES> 343,926
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,925,210
<PP&E> 1,087,798
<DEPRECIATION> (152,059)
<TOTAL-ASSETS> 51,913,955
<CURRENT-LIABILITIES> 2,342,261
<BONDS> 0
0
0
<COMMON> 17,585
<OTHER-SE> 49,194,170
<TOTAL-LIABILITY-AND-EQUITY> 51,913,955
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,269,916
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,544,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,544,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,544,052)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
