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, 1999
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
of 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 March 31, 1999, there were 28,927,819 shares of Triangle
Pharmaceuticals, Inc. Common Stock and 170,000 shares of Triangle
Pharmaceuticals, Inc. Series A Preferred Stock outstanding.
<PAGE>
Triangle Pharmaceuticals, Inc.
Table of Contents
Part I. Financial Information
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999 (unaudited) and December 31, 1998................. 3
Condensed Consolidated Statements of Operations (unaudited) -
Three Months Ended March 31, 1999 and March 31, 1998 and
Period From Inception (July 12, 1995) Through March 31, 1999..... 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 31, 1999 and March 31, 1998 and
Period From Inception (July 12, 1995) Through March 31, 1999..... 5
Condensed Consolidated Statements of Stockholders' Equity -
Period From Inception (July 12, 1995) Through
December 31, 1995, 1996, 1997 and 1998 and
the Three Months Ended March 31, 1999 (unaudited)................ 6
Notes to Condensed Consolidated Financial Statements (unaudited)..7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....24-25
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 26
Signatures............................................................... 27
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1999 1998
- ------ --------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 43,752 $ 77,653
Restricted deposits ............................................ 50 49
Investments .................................................... 38,149 22,933
Interest receivable ............................................ 1,114 612
Prepaid expenses ............................................... 768 769
--------- ---------
Total current assets ........................................ 83,833 102,016
--------- ---------
Property, plant and equipment, net ................................. 3,997 4,164
Investments ........................................................ 18,511 18,106
Restricted deposits ................................................ 14 27
--------- ---------
Total assets ................................................ $ 106,355 $ 124,313
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................... $ 10,877 $ 11,778
Capital lease obligation-current ............................... 129 126
Long-term debt-current ......................................... 112 158
Accrued expenses ............................................... 11,418 10,147
--------- ---------
Total current liabilities ................................... 22,536 22,209
--------- ---------
Capital lease obligation-noncurrent ................................ 117 153
--------- ---------
Total liabilities ........................................... 22,653 22,362
--------- ---------
Commitments and contingencies (See notes 4 and 6) .................. -- --
Stockholders' equity:
Convertible Preferred Stock, $0.001 par value; 5,000 shares
authorized; 170 and 0 shares, issued and outstanding,
respectively ................................................... -- --
Common Stock, $0.001 par value; 75,000 shares
authorized; 28,928 and 28,871 shares, issued and outstanding,
respectively ................................................ 29 29
Warrants ....................................................... -- 114
Additional paid-in capital ..................................... 219,010 218,683
Accumulated deficit during development stage ................... (135,254) (116,823)
Accumulated other comprehensive (loss) income .................. (27) 18
Deferred compensation .......................................... (56) (70)
--------- ---------
Total stockholders' equity .................................. 83,702 101,951
--------- ---------
Total liabilities and stockholders' equity .................. $ 106,355 $ 124,313
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Period From
Inception
Three Months (July 12, 1995)
Ended Three Months Ended Through
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Operating expenses:
License fees .............................. $ 200 $ 6,000 $ 10,577
Development ............................... 17,342 8,696 99,667
Purchased research and development ........ -- -- 11,261
Selling, general and administrative ....... 2,359 2,446 23,766
--------- --------- ---------
Loss from operations ........................ (19,901) (17,142) (145,271)
Interest income, net ........................ 1,470 734 10,017
--------- --------- ---------
Net loss .................................... $ (18,431) $ (16,408) $(135,254)
========= ========= =========
Basic and diluted net loss per common share.. $ (0.64) $ (0.82)
========= =========
Shares used in computing net loss per
common share ............................. 28,908 20,007
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Period From
Inception
Three Months (July 12, 1995)
Three Months Ended Ended Through
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (18,431) $ (16,408) $(135,254)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization ................... 281 171 1,584
Purchased research and development .............. -- -- 11,261
Stock-based compensation: license fees .......... -- -- 636
Stock-based compensation: development ........... 10 11 445
Stock-based compensation: general and
administrative ............................... 8 9 277
Change in assets and liabilities:
Receivables .................................. (502) 74 (1,114)
Prepaid expenses ............................. 1 (74) (768)
Accounts payable ............................. (901) (1,151) 10,877
Accrued expenses ............................. 1,267 1,638 11,292
--------- --------- ---------
Net cash used by operating activities .............. (18,267) (15,730) (100,764)
--------- --------- ---------
Cash flows from investing activities:
Sale (purchase) of restricted deposits .......... 12 10 (64)
Purchase of investments ......................... (24,549) (3,000) (142,708)
Proceeds from sale and maturity of investments .. 8,883 13,957 86,021
Purchase of property, plant and equipment ....... (114) (615) (5,406)
Acquisition of Avid Corporation, net of cash
acquired...................................... -- -- (3,053)
--------- --------- ---------
Net cash (used) provided by investing activities ... (15,768) 10,352 (65,210)
--------- --------- ---------
Cash flows from financing activities:
Sale of stock, net of related issuance costs .... 163 126 209,390
Sale of options under salary investment option
grant program ................................ 27 24 195
Proceeds from stock options/warrants exercised .. 23 1 49
Proceeds from notes payable ..................... -- -- 374
Equipment financing ............................. -- -- 354
Principal payments on capital lease
obligations and notes payable ................ (79) (168) (636)
--------- --------- ---------
Net cash provided (used) by financing activities ... 134 (17) 209,726
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ..................................... (33,901) (5,395) 43,752
Cash and cash equivalents at beginning of period ... 77,653 34,698 --
--------- --------- ---------
Cash and cash equivalents at end of period ......... $ 43,752 $ 29,303 $ 43,752
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Comprehensive
---------------------- --------------------- Paid-In Accumulated (Loss)
Shares Amount Warrants Shares Amount Capital Deficit Income
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial sale of stock ....... 933 $ 1 $ -- 1,175 $ 1 $ 710 $ -- $ --
Additional sale of stock .... 4,249 4 -- 1,495 2 3,137 -- --
Stock-based compensation .... -- -- -- -- -- 12 -- --
Comprehensive loss:
Net loss, July 12 through
December 31, 1995 ..... -- -- -- -- -- -- (967) (967)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1995... 5,182 5 -- 2,670 3 3,859 (967) (967)
Sale of stock ............... 3,756 4 -- 4,943 5 59,506 -- --
Stock-based compensation .... -- -- 152 700 1 1,127 -- --
Stock options exercised ..... -- -- -- 317 -- 57 -- --
Conversion of Preferred to
Common Stock ............. (8,938) (9) -- 8,938 9 -- -- --
Comprehensive loss:
Net loss ................. -- -- -- -- -- -- (10,917) (10,917)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1996... -- -- 152 17,568 18 64,549 (11,884) (10,917)
Sale of stock ............... -- -- -- 2,014 2 29,521 -- --
Acquisition of Avid Corp. ... -- -- -- 400 -- 8,117 -- --
Sale of stock options ....... -- -- -- -- -- 70 -- --
Stock-based compensation .... -- -- (38) -- -- -- -- --
Stock options exercised ..... -- -- -- 13 -- 3 -- --
Comprehensive loss:
Net loss ................. -- -- -- -- -- -- (37,668) (37,668)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1997... -- -- 114 19,995 20 102,260 (49,552) (37,668)
Sale of stock ............... 170 -- -- 8,868 9 116,325 -- --
Sale of stock options ....... -- -- -- -- -- 97 -- --
Stock-based compensation .... -- -- -- -- -- -- -- --
Stock options exercised ..... -- -- -- 8 -- 1 -- --
Comprehensive loss:
Change in unrealized gain
on marketable securities.. -- -- -- -- -- -- -- 18
Net loss ................. -- -- -- -- -- -- (67,271) (67,271)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1998... 170 -- 114 28,871 29 218,683 (116,823) (67,253)
(Unaudited)
Sale of stock ............... -- -- -- 19 -- 163 -- --
Sale of stock options ....... -- -- -- -- -- 27 -- --
Stock-based compensation .... -- -- -- -- -- -- -- --
Stock options/warrants
exercised ................... -- -- (114) 38 -- 137 -- --
Comprehensive loss:
Reclassification adjustment
for gains/(losses)
included in net loss ... -- -- -- -- -- -- -- (19)
Change in unrealized
gains/(losses) on
marketable securities... -- -- -- -- -- -- -- (26)
Net loss ................. -- -- -- -- -- -- (18,431) (18,431)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 1999 ..... 170 $ -- $ -- 28,928 $ 29 $ 219,010 $(135,254) $ (18,476)
========= ========= ========= ========= ========= ========= ========= =========
<CAPTION>
Accumulated
Other
Comprehensive Deferred
Income /(Loss) Compensation Total
--------- --------- ---------
<S> <C> <C> <C>
Initial sale of stock ........ $ -- $ -- $ 712
Additional sale of stock ..... -- -- 3,143
Stock-based compensation ..... -- (12) --
Comprehensive loss:
Net loss, July 12 through
December 31, 1995 ...... -- -- (967)
--------- --------- ---------
Balance, December 31, 1995.... -- (12) 2,888
Sale of stock ................ -- -- 59,515
Stock-based compensation ..... -- (141) 1,139
Stock options exercised ...... -- (26) 31
Conversion of Preferred to
Common Stock .............. -- -- --
Comprehensive loss:
Net loss .................. -- -- (10,917)
--------- --------- ---------
Balance, December 31, 1996.... -- (179) 52,656
Sale of stock ................ -- -- 29,523
Acquisition of Avid Corp. .... -- -- 8,117
Sale of stock options ........ -- -- 70
Stock-based compensation ..... -- 48 10
Stock options exercised ...... -- 6 9
Comprehensive loss:
Net loss .................. -- -- (37,668)
--------- --------- ---------
Balance, December 31, 1997.... -- (125) 52,717
Sale of stock ................ -- -- 116,334
Sale of stock options ........ -- -- 97
Stock-based compensation ..... -- 48 48
Stock options exercised ...... -- 7 8
Comprehensive loss:
Change in unrealized gain
on marketable securities .. 18 -- 18
Net loss .................. -- -- (67,271)
--------- --------- ---------
Balance, December 31, 1998.... 18 (70) 101,951
(Unaudited)
Sale of stock ................ -- -- 163
Sale of stock options ........ -- -- 27
Stock-based compensation ..... -- 12 12
Stock options/warrants
exercised .................... -- 2 25
Comprehensive loss:
Reclassification adjustment
for gains/(losses)
included in net loss .... (19) -- (19)
Change in unrealized
gains/(losses) on
marketable securities.... (26) -- (26)
Net loss .................. -- -- (18,431)
--------- --------- ---------
Balance, March 31, 1999 ...... $ (27) $ (56) $ 83,702
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Triangle Pharmaceuticals, Inc. and its wholly-owned subsidiary (the "Company" or
"Triangle") 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 the Company's 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Principles of Consolidation
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
3. Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average
number of shares of Common Stock outstanding during the period. Diluted net loss
per common share is computed using the weighted average number of shares of
common and dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options, warrants and convertible
preferred stock using the treasury stock method and are excluded if their effect
is antidilutive. For the three month periods ended March 31, 1999 and 1998, the
weighted average shares outstanding used in the calculation of net loss per
common share do not include potential shares outstanding because they have the
effect of reducing net loss per common share.
4. Licensing Agreements
The Company's existing license agreements require future payments of up to
$74,250 contingent upon the achievement of certain development milestones and up
to $30,000 upon the achievement of certain sales milestones. One of the
Company's licensors has the option to receive $2,000 of such future milestone
payments in shares of Common Stock (based on the then current market price) in
lieu of a cash payment. The Company is obligated to issue up to 2,100 shares of
Common Stock upon the achievement of certain development milestones relating to
DMP-450 acquired in the acquisition of Avid Corporation ("Avid"). The issuance
of 1,600 of these shares was contingent upon Triangle initiating pivotal Phase
II clinical trials with DMP-450 before February 28, 1999 (the "DMP Milestone
Date"), or electing on or before the DMP Milestone Date to continue the
development of DMP-450 even if such clinical trials had not been initiated. In
February 1999, the Company and representatives of the former stockholders of
Avid agreed to extend the DMP Milestone Date until February 28, 2000. As
consideration for this extension, the Company has agreed to issue 100 of the
1,600 contingent shares in 1999. The issuance of the 100 shares will be recorded
as additional purchase price in the Avid acquisition and will be recorded as
purchased research and development expense in 1999 based on the fair market
value of the Common Stock. The remaining 500 of the 2,100 shares are contingent
upon the achievement of additional development milestones and have not been
affected by this extension. Additionally, the Company will pay royalties based
on a percentage of net sales of
7
<PAGE>
Triangle Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
each licensed product incorporating these drug candidates. Substantially all of
the agreements require minimum royalty payments commencing three years after
regulatory approval. Depending on the Company's success and timing in obtaining
regulatory approval, aggregate annual minimum royalties and annual license
preservation fees could range from $25 (if only a single drug candidate is
approved for one indication) to $46,500 (if all drug candidates are approved for
all indications) under the Company's existing license agreements.
5. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133 is
effective for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The Company intends to adopt SFAS 133 when
required; however, SFAS 133 is not expected to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
6. Stockholder Rights Plan
On January 29, 1999, the Board of Directors ("the Board") adopted a
"Stockholder Rights Plan" in which preferred stock purchase rights were
distributed as a dividend at the rate of one right per share of Common Stock and
ten rights per share of Series A Preferred Stock (i.e., the equivalent of one
right per share of Common Stock issuable upon the conversion of the Series A
Preferred Stock), held as of February 16, 1999. Each right entitles the holder
to acquire one-thousandth of a share of $0.001 par value Series B Junior
Participating Preferred Stock, upon a third party acquiring beneficial ownership
of 15% or more of the Company's Common Stock, at a price of $100.00 per right.
The Company can redeem the rights for $0.001 per right at the discretion of the
Board. The Stockholder Rights Plan is designed to deter a party from gaining
control of the Company without offering a fair price to all stockholders and to
encourage a party to negotiate with the Board prior to attempting to acquire the
Company.
8
<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 or to reflect events or
circumstances arising after the date hereof.
The following discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's 1998 Annual Report on Form 10-K as well as
with the Company's condensed consolidated financial statements and notes thereto
appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
Triangle is 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 its 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 until at least the year 2000. As of March 31, 1999, the
Company's accumulated deficit was approximately $135.3 million.
The Company requires substantial capital expenditures relating to the
development and potential commercialization of its drug candidates, including
expenditures for preclinical testing, chemical synthetic scale-up, manufacture
of drug substance for clinical trials and toxicology studies, clinical trials of
drug candidates, sales and marketing expenses 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
substantially to the expansion of its drug development programs and the addition
of infrastructure necessary to commercialize its drug candidates. The Company
will require substantial capital expenditures relating to activities many of
which may need to occur prior to, and in anticipation of, the potential
regulatory approval of its drug candidates, including expenditures associated
with the establishment of a sales and marketing organization, the manufacture of
drug substance, the development of a distribution system with outside vendors
and other administrative expenditures necessary to support the Company. Many of
these capital expenditures may be incurred irrespective of whether the Company's
drug candidates are approved when anticipated or at all. 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, obtain additional financing and continue to attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing these risks. See "--Risks and Uncertainties--Early
Stage Company; Risk of Unsuccessful Product Development."
The operating expenses of the Company will depend on several factors,
including the level of development expenses and the potential commercialization
of its drug candidates. 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. The level of expenses relating to the
establishment of a sales and marketing organization, the manufacture of drug
substance, the development of a distribution system with outside vendors and
other administrative expenditures will depend on the success of the development
of the Company's drug candidates; however, many of these capital expenditures
may be incurred irrespective of whether the Company's drug candidates are
approved when anticipated or at all. As a result of these factors, the Company
9
<PAGE>
believes that period to period comparisons 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 consolidated operating
results will be below the expectations of market analysts and investors. In such
event, the prevailing market price of the Common Stock could be materially
adversely affected. See "--Risks and Uncertainties--Our Stock Price may be
Volatile."
Results of Operations
Interest Income, Net
The Company had total net interest income of $1.5 million for the three
months ended March 31, 1999 as compared to $734,000 for the same period in 1998.
The increase in interest income is due primarily to an increase in the average
investment balance associated with financing activities in the second and fourth
quarters of 1998. See "--Liquidity and Capital Resources."
License Fees
License fees totaled $200,000 for the three months ended March 31, 1999 as
compared to $6.0 million for the same period in 1998. License fees in 1999
relate to the expense of license preservation fees for our portfolio of drug
candidates as compared to a license initiation fee associated with the
in-licensing of L-FMAU which occurred in February 1998.
Development Expenses
Development expenses totaled $17.3 million for the three months ended
March 31, 1999 as compared to $8.7 million for the same period in 1998.
Development expenses for 1999 consisted primarily of expenses for clinical
trials, drug synthesis and employee compensation. Development expenses for 1998
consisted primarily of expenses for drug synthesis, clinical trials, employee
compensation, toxicology studies, and patent related activities of the Company's
drug candidates. The substantial increase in 1999 development expenses, as
compared to the three month period ending March 31, 1998, is the result of the
Company's continued and more extensive drug development activities on compounds
under active development including the addition of development personnel
necessary to perform these activities. The Company expects its development
expenses to continue to increase in the future due to continued expansion of
drug development activities for its existing portfolio of drug candidates,
including preclinical testing, toxicology studies, clinical trials and the
manufacture of drug substance for preclinical tests 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.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses totaled $2.4 million
for the three months ended March 31, 1999 and 1998. SG&A expenses for 1999
consisted primarily of employee compensation, amounts paid for outside
professional services and rent expense. SG&A expenses for 1998 consisted
primarily of employee compensation, rent expense and amounts paid for outside
professional services. The Company expects that its SG&A expenses will increase
in future periods as the Company continues to expand development activities and
the development of its sales and marketing organization.
Liquidity and Capital Resources
The Company has financed its operations since inception (July 12, 1995)
through March 31, 1999 primarily with the net proceeds received from private
placements of equity securities, which provided aggregate net proceeds of
approximately $111.9 million (net of offering costs), and the Company's initial
and secondary public offerings, which provided aggregate net proceeds of
approximately $96.8 million (net of offering costs). In addition, the Company
has received approximately $2.0 million as reimbursement of certain development
expenses under a license agreement for one of its drug candidates.
10
<PAGE>
At March 31, 1999, the Company had net working capital of $61.3 million, a
decrease of approximately $18.5 million over working capital at December 31,
1998. The decrease is principally the result of payment of development costs for
the Company's drug candidates. At March 31, 1999, the Company's principal source
of liquidity was $43.8 million of cash and cash equivalents and $56.7 million of
investments which are "available for sale," reflecting an approximate $18.3
million decrease of cash, cash equivalent and investment balances over those at
December 31, 1998.
The Company had note payable and secured equipment lease line obligations
totaling $358,000 at March 31, 1999 as compared to $437,000 at December 31,
1998. The decrease in these obligations relates to the Company's normal monthly
principal payments on these obligations.
The Company expects that its capital requirements will increase in future
periods as the Company funds its drug development programs, pays obligations
under its license and/or option agreements, develops a sales and marketing
organization, acquires drug substance from third party manufacturers, develops a
distribution system with outside vendors and incurs other SG&A expenditures
necessary to support the Company's expanding operations. 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, costs under the license and/or option agreements
relating to the Company's drug candidates (including the costs of obtaining
patent protection for the Company's drug candidates), the timing and terms of
the acquisition of any additional drug candidates, the rate of technological
advances, determinations as to the commercial potential of the drug candidates,
administrative and legal expenses, the establishment of internal capacity and
third party arrangements for sales and marketing functions, the establishment of
third party relationships for manufacturing 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 cash
payments of up to $74.3 million contingent upon the achievement of certain
development milestones and up to $30.0 million upon the achievement of certain
sales milestones. One of the Company's licensors has the option to receive $2.0
million of such future milestone payments in shares of Common Stock (based on
the then current market price) in lieu of a cash payment. The Company is also
obligated to issue up to 2,100,000 shares of Common Stock upon the achievement
of certain development milestones relating to DMP-450 acquired in the
acquisition of Avid. The issuance of 1,600,000 of these shares was contingent
upon Triangle initiating pivotal Phase II clinical trials with DMP-450 before
February 28, 1999 (the "DMP Milestone Date"), or electing on or before the DMP
Milestone Date to continue the development of DMP-450 even if such clinical
trials had not been initiated. In February 1999, the Company and representatives
of the former stockholders of Avid agreed to extend the DMP Milestone Date until
February 28, 2000. As consideration of this extension, the Company has agreed to
issue 100,000 of 1,600,000 contingent shares in 1999. The issuance of the
100,000 shares will be recorded as additional purchase price in the Avid
acquisition and will be recorded as purchased research and development expense
in 1999 based on the fair market value of the Common Stock. The remaining
500,000 of the 2,100,000 shares are contingent upon the achievement of
additional development milestones and have not been affected by this extension.
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 and annual license preservation
fees could range from $25,000 (if only a single drug candidate is approved for
one indication) to $46.5 million (if all drug candidates are approved for all
indications) under the Company's existing license agreements.
The Company believes that its existing cash, cash equivalents and
investments will be adequate to satisfy its anticipated capital requirements
through March 2000. 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--Our Need for Future
Capital; Uncertainty of Additional Funding."
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Additional Facility
In February 1999, the Company leased an additional 49,000 square foot
administrative office and laboratory facility, adjacent to its existing 52,000
square foot facility, in order to provide adequate accommodations for expanding
development activities and the growing number of employees. This additional
laboratory and administrative space is expected to provide adequate
accommodations for projected development, selling and administrative growth
through June 2000. Both of our facilities are under lease through September
2003.
License and Settlement Agreements Relating To Coviracil(TM) (emtricitabine)
In May 1999, Emory University ("Emory") and Glaxo Wellcome plc ("Glaxo")
settled its litigation pending in the United States District Court relating to
Coviracil, and Triangle became the exclusive licensee of the United States and
all foreign patent applications and patents filed by Burroughs Wellcome Co.
("Burroughs Wellcome") on the use of Coviracil to treat HBV, subject to United
States antitrust clearance. Pursuant to the license and settlement agreements,
Emory and Triangle were also given access to development and clinical data and
drug substance held by Glaxo relating to Coviracil.
Litigation and Other Contingencies
As discussed below in "--Risks and Uncertainties--Uncertainty of Patents;
Dependence on Patents, Licenses and Proprietary Rights", the Company is
indirectly involved in several opposition and interference proceedings and one
lawsuit filed in Australia regarding the patent rights related to two of its
licensed drug candidates, including Coviracil. Although the Company is not a
named party in any of these proceedings, it is obligated to reimburse its
licensors for certain legal expenses associated with these proceedings. The
Company cannot predict the outcome of these proceedings. The Company believes
that an adverse judgment in these pending proceedings would not result in a
material financial obligation to the Company, nor would the Company have to
recognize an impairment under Statement of Financial Accounting Standards No.
121 "Accounting for Impairment of Long-Lived Assets" as no amounts have been
capitalized related to these drug candidates. However, any development of these
proceedings adverse to the Company's interests, including but not limited to any
adverse development related to the patent rights licensed to the Company for
these two drug candidates or the Company's rights or obligations related
thereto, could have a material adverse effect on the Company's future
consolidated financial position, results of operations and cash flows.
Year 2000 Compliance
The Company recognizes the need to ensure that Year 2000 hardware and
software issues will not adversely impact its operations. The Company has
completed an assessment of its internal informational systems which support
business applications and has completed the modification or replacement of these
portions of software, hardware and other equipment that it has determined are
non-compliant. Testing and verification of all critical systems, by internal
and/or external experts, is expected to be completed by June 30, 1999. Testing
and verification of all other significant existing internal systems is expected
to be completed by September 30, 1999. Additionally, the Company is currently in
the process of confirming compliance regarding Year 2000 issues for the
information systems of its key business vendors. This process entails
communicating with significant suppliers, financial institutions, insurance
companies and other parties that provide significant services to the Company.
The Company expects to have completed its evaluation and contingency planning
for key business vendors by June 30, 1999. Expenditures required to make the
Company Year 2000 compliant will be expensed as incurred and are not expected to
be material to the Company's consolidated financial position or results of
operations.
Stockholder Rights Plan
On January 29, 1999, the Company's Board adopted a "Stockholder Rights
Plan" in which preferred stock purchase rights were distributed as a dividend at
the rate of one right per share of Common Stock and ten rights per share of
Series A Preferred Stock (i.e., the equivalent of one right per share of Common
Stock issuable upon conversion of the Series A Preferred Stock), held as of
February 16, 1999. Each right entitles the holder to acquire one-thousandth of a
share of $0.001 par value Series B Junior Participating Preferred Stock, upon a
third party acquiring beneficial ownership of 15% or more of the Company's
Common Stock, at a price of $100.00 per right.
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The Stockholder Rights Plan is designed to deter a party from gaining control of
the Company without offering a fair price to all stockholders and to encourage a
party to negotiate with the Board prior to attempting to acquire the Company.
Foreign Currency Risk Management
In the ordinary course of business, the Company is exposed to foreign
currency exchange rate risk. This exposure primarily relates to the purchase of
drug substance and/or services from foreign vendors in contracts for which the
obligation is denominated in a foreign currency. The Company periodically enters
into foreign exchange contracts to manage these exposures when it considers it
practical to do so.
The Company has established a control environment, which includes policies
and procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. These policies include only the
hedging of firm commitments and prohibit the holding of derivative instruments
for trading purposes. Specific hedging strategies depend on several factors,
including the magnitude of the exposure, offset through contract terms, cost and
availability of the appropriate instruments, anticipated time horizon, and the
variability of the underlying commitment. The Company monitors the effectiveness
of its hedging structures on an ongoing basis. At March 31, 1999, Triangle had
purchased foreign currency contracts (in currencies participating in the
European Monetary Union) to hedge anticipated foreign currency commitments. The
hypothetical loss associated with a 10% devaluation of these foreign currencies
would not materially affect our consolidated operating results, financial
position or cash flows.
Risk and Uncertainties
In addition to the other information contained herein, the following risks
and uncertainties should be carefully considered in evaluating Triangle and its
business.
Early Stage Company; Risk of Unsuccessful Product Development
We formed our company in July 1995 and we have only a limited operating
history for you to review in evaluating our business. In addition, many of our
drug candidates are at an early stage of development and all of our drug
candidates will require expensive and lengthy testing and regulatory clearances.
None of our drug candidates has been approved by regulatory authorities. We do
not expect any of our drug candidates to be commercially available before the
year 2000. There are many reasons that we may fail in our efforts to develop our
drug candidates, including that:
o our drug candidates will be ineffective, toxic or will not receive
regulatory clearances,
o our drug candidates will be too expensive to manufacture or market
or will not achieve broad market acceptance,
o third parties will hold proprietary rights that may preclude us from
marketing our drug candidates, or
o third parties will market equivalent or superior products.
The success of our business depends upon our ability to successfully
develop and market our drug candidates.
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability
We have incurred losses since our inception. At March 31, 1999, our
accumulated deficit was $135.3 million. Our historical costs relate primarily to
the acquisition and development of our drug candidates and SG&A costs. We have
not generated any revenue to date and do not expect to do so before the year
2000. In addition, we expect annual losses to increase over the next several
years as we expand our drug development efforts. To become profitable, we must
successfully develop and obtain regulatory approval for our drug candidates and
effectively manufacture, market and sell any products we develop. We may never
generate significant revenue or achieve profitable operations.
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Our Need for Future Capital; Uncertainty of Additional Funding
Our drug development programs and potential commercialization of our drug
candidates require substantial capital expenditures, including expenses for
preclinical testing, chemical synthetic scale-up, manufacture of drug substance
for clinical trials and toxicology studies, clinical trials of drug candidates,
sales and marketing expenses and payments to our licensors. We expect our
capital requirements to increase significantly. Our future capital needs will
depend on many factors, including:
o the progress and magnitude of our drug development programs,
o the scope and results of preclinical testing and clinical trials,
o the cost, timing and outcome of regulatory reviews,
o the costs under license and option agreements for our drug
candidates (including the costs of obtaining patent protection for
our drug candidates),
o the costs of acquiring any additional drug candidates,
o the rate of technological advances,
o the commercial potential of our drug candidates,
o the magnitude of our administrative and legal expenses,
o the costs of establishing sales and marketing functions, and
o the costs of establishing third party arrangements for
manufacturing.
We have incurred negative cash flow from operations since we began our
company and do not expect to generate positive cash flow to fund our operations
for at least the next several years. Accordingly, we will need additional future
financings to fund our operations. We may not be able to obtain adequate
financing to fund our operations, and any additional financing we obtain may be
on terms that are not favorable to us. In addition, any additional financings
could substantially dilute our stockholders. If adequate funds are not
available, we will be required to delay, reduce or eliminate one or more of our
drug development programs, or to enter into collaborative arrangements on terms
that are not favorable to us. These collaborative arrangements could result in
the transfer to third parties of rights that we consider valuable. In addition,
we often consider the acquisition of technologies and drug candidates that would
increase our capital requirements. Our inability to meet our capital
requirements would adversely affect our business.
Uncertainties Related to Clinical Trials
To obtain regulatory approvals needed for the sale of our drug candidates,
we must demonstrate through preclinical testing and clinical trials that each
drug candidate is safe and effective. The clinical trial process is complex and
uncertain. Positive results from preclinical testing and early clinical trials
do not ensure positive results in pivotal clinical trials. Many companies in our
industry have suffered significant setbacks in pivotal clinical trials, even
after promising results in earlier trials. Any of our drug candidates may
produce undesirable side effects in humans. These side effects could cause us or
regulatory authorities to interrupt, delay or halt clinical trials of a drug
candidate. These side effects could also result in the U.S. Food and Drug
Administration ("FDA") or foreign regulatory authorities refusing to approve the
drug candidate for any and all targeted indications. We, the FDA or foreign
regulatory authorities may suspend or terminate clinical trials at any time if
we or they believe the trial participants face unacceptable health risks.
Clinical trials may not demonstrate that our drug candidates are safe or
effective.
Clinical trials are lengthy and expensive. They require adequate supplies
of drug substance and sufficient 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 clinical trial. Delays in patient enrollment can
result in increased costs and longer development times. Even if we successfully
complete clinical trials, we may not be able to file any required regulatory
submissions in a timely manner and we may not receive regulatory approval for
the drug candidate. Our failure to successfully complete clinical trials and
obtain regulatory approvals will adversely affect our business.
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Uncertainty of Patents; Dependence on Patents, Licenses and Proprietary Rights
Our success will depend on our ability and the ability of our licensors to
obtain and maintain patents and proprietary rights for our drug candidates and
to avoid infringing the proprietary rights of others, both in the United States
and in foreign countries. We have no patents in our own name and we have a small
number of patent applications of our own pending (one of which is a joint
application with co-inventors from another institution). We have, however,
licensed or we have an option to license patents, patent applications and other
proprietary rights from third parties for each of our drug candidates. If we
breach our licenses, we may lose rights to important technology and drug
candidates.
Our patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved. We may not develop or obtain rights to products
or processes that are patentable. Even if we do obtain patents, they may not
adequately protect the technology we own or have in-licensed. In addition,
others may challenge, seek to invalidate, infringe or circumvent any patents we
own or in-license, and rights we receive under those patents may not provide
competitive advantages to us. Further, the manufacture, use or sale of our
products or processes may infringe the patent rights of others.
Several pharmaceutical and biotechnology companies, universities and
research institutions have filed patent applications or received patents that
cover our technologies or technologies similar to ours. Others have filed patent
applications and received patents that conflict with patents or patent
applications we own or have in-licensed, either by claiming the same methods or
compounds or by claiming methods or compounds that could dominate those owned by
or licensed to us. In addition, we may not be aware of all patents or patent
applications that may impact our ability to make, use or sell any of our drug
candidates. For example, United States patent applications are confidential
while pending in the 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 our patents and limit our
ability to obtain meaningful patent protection. If other companies obtain
patents with conflicting claims, we may be required to obtain licenses to these
patents or to develop or obtain alternative technology. We may not be able to
obtain any such license on acceptable terms or at all. Any failure to obtain
such licenses could delay or prevent us from pursuing the development or
commercialization of our drug candidates, which would adversely affect our
business.
There are significant risks regarding the patent rights of two of our
in-licensed drug candidates. We may not be able to commercialize Coviracil or
DAPD for HIV and/or the hepatitis B virus ("HBV") due to patent rights held by
third parties other than our licensors. Third parties have filed numerous patent
applications and have received numerous issued patents in the United States and
many foreign countries that relate to these drug candidates and their use alone
or coactively to treat HIV and HBV. As a result, our patent position regarding
the use of Coviracil and DAPD to treat HIV and/or HBV is highly uncertain and
involves 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 us, we would not have the right to commercialize Coviracil and/or
DAPD 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 if any of these
questions is favorably resolved, we may still attempt to obtain licenses from
one or more third parties to reduce or eliminate the risks relating to some or
all of these matters. Such licenses may not be available on acceptable terms or
at all. Our inability to commercialize either of these drug candidates could
adversely affect our business.
Coviracil (emtricitabine)
Coviracil, a purified form of FTC, belongs to the same general class of
nucleosides as 3TC. In the United States, the FDA has approved 3TC for the
treatment of HBV and for use in combination with AZT for the treatment of HIV.
Regulatory authorities have approved 3TC for the treatment of HBV in several
other countries and for use in combination with other nucleoside analogues for
the treatment of HIV in a number of other countries. Glaxo currently sells 3TC
for the treatment of HIV and HBV under a license agreement with BioChem Pharma
Inc. ("BioChem Pharma"). We obtained rights to Coviracil under a license from
Emory. In 1990 and 1991, Emory filed in the United States and thereafter in
numerous foreign countries patent applications with claims to compositions of
matter and methods to treat HIV and HBV with Coviracil. In 1991, Yale University
("Yale") filed in the United
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States patent applications on FTC, including Coviracil and its use to treat
HBV, and subsequently licensed its rights under those patent applications to
Emory. Our license arrangement with Emory includes all rights to Coviracil and
its uses claimed in the Yale patent applications.
HIV. Emory received a United States patent in 1993 covering a method to
treat HIV with Coviracil. In September 1998, Emory received United States and
European patents containing composition of matter claims that cover Coviracil.
BioChem Pharma filed a patent application in the United States in 1989 and
received a patent in 1991 covering a group of 1, 3-oxathiolane nucleosides, but
which did not include Coviracil. BioChem Pharma filed foreign patent
applications in 1990, which expanded upon its 1989 United States patent
application to include FTC among a large class of nucleosides. The foreign
patent applications are pending in many countries and have issued in a number of
countries with claims directed to FTC that cover Coviracil and its use to treat
HIV. In addition, BioChem Pharma filed a United States patent application in
1991 specifically directed to Coviracil. BioChem Pharma has received two patents
in the United States based on this patent application, one directed to Coviracil
and the other directed to a method for treating viral diseases with Coviracil.
The PTO has declared an interference between the latter BioChem Pharma patent
and a patent application filed by Emory. Emory may not prevail in the
interference proceeding, and the interference proceeding may also delay the
decision of the PTO regarding Emory's patent application. BioChem Pharma also
filed patent applications in many foreign countries based upon its 1991 United
States patent application and has received patents in certain countries. BioChem
Pharma may have additional patent applications pending in the United States.
In the United States, the first to invent a technology is entitled to
patent protection on that technology. For patent applications filed prior to
January 1, 1996, United States patent law provides that a party who invented a
technology outside the United States 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 filing with the Securities and
Exchange Commission (the "SEC"), BioChem Pharma stated that it conducts
substantially all of its research activities outside the United States. BioChem
Pharma also stated that it considers this to be a disadvantage in obtaining
United States patents as compared to companies that mainly conduct research in
the United States. We do not know whether Emory or BioChem Pharma was the first
to invent the technology claimed in their respective United States patent
applications or patents. We also do not know 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 a
technology, not the first to invent the technology, is entitled to patent
protection on that technology. We believe that Emory filed patent applications
disclosing Coviracil as a useful anti-HIV agent in many foreign countries before
BioChem Pharma filed its foreign patent applications on that technology.
However, BioChem Pharma has received patents in several foreign countries. In
addition, BioChem Pharma has filed patent applications on Coviracil and its uses
in certain countries in which Emory did not file patent applications. Emory has
opposed or otherwise challenged patent claims on Coviracil granted to BioChem
Pharma in Australia, Japan and Norway. Emory may not initiate opposition
proceedings in any other countries or be successful in any foreign proceeding
attempting to prevent the issuance of, revoke or limit the scope of patents
issued to BioChem Pharma. BioChem Pharma has opposed patent claims on Coviracil
granted to Emory in Japan and Australia. BioChem Pharma may make additional
challenges to Emory patents or patent applications, which Emory may not succeed
in defending. Our sales of Coviracil for the treatment of HIV may 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 if the third party patent covers subject
matter that is substantially equivalent in nature to the product or method, even
if the patent does not expressly cover the product or method. If it is
determined that the sale of Coviracil for the treatment of HIV infringes a
BioChem Pharma patent, we would not have the right to make, use or sell
Coviracil for the treatment of HIV in one or more countries in the absence of a
license from BioChem Pharma. We may be unable to obtain such a license from
BioChem Pharma on acceptable terms or at all.
HBV. Burroughs Wellcome filed patent applications in March 1991 and May
1991 in Great Britain on a method to treat HBV with FTC and purified forms of
FTC, that include Coviracil. Burroughs Wellcome filed similar patent
applications in other countries, which we believe includes the United States.
Glaxo subsequently acquired Burroughs Wellcome's rights under those patent
applications. Those patent applications were filed in foreign
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countries prior to the date Emory filed its patent application on the use of
Coviracil to treat HBV. Burroughs Wellcome's foreign patent applications,
therefore, 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 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. In May
1999, Emory and Glaxo settled the litigation, and we became the exclusive
licensee of the Unites States and all foreign patent applications and patents
filed by Burroughs Wellcome on the use of Coviracil to treat HBV, subject to
United States antitrust clearance. Pursuant to the license and settlement
agreements, Emory and we were also given access to development and clinical data
and drug substance held by Glaxo relating to Coviracil.
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. In January 1996, BioChem Pharma received
a patent in the United States, which included a claim to treat HBV with
Coviracil. The PTO has declared an interference between the BioChem Pharma
patent and a patent application filed by Yale. Yale licensed all of its rights
relating to FTC, including Coviracil, and its uses claimed in this patent
application to Emory, which subsequently licensed these rights to us. Yale may
not prevail in the interference proceeding, and the proceeding may delay the
decision of the PTO regarding Yale's patent application. In addition, the PTO
may declare interference proceedings with respect to other patent applications
filed by Emory, Burroughs Wellcome's patent application and BioChem Pharma's
issued United States patent. Emory may not pursue or succeed in any such
proceedings. We will not be able to sell Coviracil for the treatment of HBV in
the United States unless a United States court or administrative body determines
that the BioChem Pharma patent is invalid or unless we obtain a license from
BioChem Pharma. We may be unable to obtain such a license on acceptable terms or
at all In July 1991, BioChem Pharma received a United States patent on the use
of 3TC to treat HBV and has corresponding patent applications pending or issued
in foreign countries. If it is determined that the use of Coviracil to treat HBV
is not substantially different from the use of 3TC to treat HBV, a court could
hold that the use of Coviracil 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 Coviracil, from which BioChem Pharma has
received several patents in the United States and many foreign countries. If we
use a manufacturing method that is covered by patents issued on any of these
applications, we will not be able to manufacture Coviracil without a license
from BioChem Pharma. We may not be able to obtain such a license on acceptable
terms or at all.
DAPD
We obtained our rights to DAPD under a license from Emory and the
University of Georgia Research Foundation, Inc. ("UGARF"). Our rights to DAPD
include five issued United States patents that cover composition of matter, a
method for the synthesis of DAPD, and methods for the use of DAPD alone or in
combination with certain other anti-HBV agents for the treatment of HBV. We also
have rights to several foreign patents that cover methods for the use of DAPD
alone or in combination with certain other anti-HBV agents for the treatment of
HBV. Additional United States and foreign patent applications are pending which
contain claims for the use of DAPD to treat HIV. Emory and UGARF filed patent
applications claiming these inventions in the United States in 1990 and 1992.
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 patent claims granted to BioChem Pharma by the European Patent
Office based, in part, upon Emory's assertion that BioChem Pharma's patent does
not disclose how to make DAPD. In an opposition hearing held at the European
Patent Office on March 4, 1999, the Opposition Division ruled that the BioChem
Pharma European patent covering DAPD is valid. Emory has informed Triangle that
it intends to appeal this decision to the European Patent Office Technical Board
of Appeal. If the Technical Board of Appeal affirms the decision of the
Opposition Division, or if Emory or Triangle do not pursue the appeal, we would
not be able to sell DAPD in Europe without a license from BioChem Pharma, which
may not be available on acceptable terms or at all. Patent claims granted to
Emory on a portion of the DAPD technology by the Australian Patent Office have
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also been opposed by BioChem Pharma. We cannot assure you that a court or
administrative body would invalidate BioChem Pharma's patent claims. Further, a
sale of DAPD by us may infringe BioChem Pharma's patents. If Emory, UGARF and we
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 from
such applications), we 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. We may not be able to obtain such
a license from BioChem Pharma on acceptable terms or at all.
With respect to any of our drug candidates, litigation, opposition and
interference proceedings, including the currently pending proceedings, could
result in substantial costs to us. We expect the costs of the currently pending
proceedings to increase significantly during the next several years. We
anticipate that additional litigation and/or proceedings will be necessary or
may be initiated to enforce any patents we own or in-license, or to determine
the scope, validity and enforceability of other parties' proprietary rights and
the priority of an invention. Any of these activities could result in
substantial costs and/or delays to us. The outcome of any of these proceedings
may significantly affect our drug candidates and technology. United States
patents carry a presumption of validity and generally can be invalidated only
through clear and convincing evidence. As indicated above, the PTO has already
declared two interferences in connection with the emtricitabine technology. We
cannot assure you that a court or administrative body would hold our in-licensed
patents valid or would find an alleged infringer to be infringing. Further, the
license and option agreements with Emory, UGARF, The Regents of the University
of California, The DuPont Pharmaceuticals Company, and Mitsubishi Chemical
Corporation provide that each of these licensors is primarily responsible for
any patent prosecution activities, such as litigation, interference, opposition
or other actions, for the technology licensed to us. These agreements also
provide that in general we are required to reimburse these licensors for the
costs they incur in performing these activities. Similarly, Yale and UGARF, the
licensors of L-FMAU to Bukwang Pharm. Ind. Co., Ltd., are primarily responsible
for patent prosecution activities with respect to L-FMAU at our expense. As a
result, we generally do not have the ability to institute or determine the
conduct of any such patent proceedings unless our licensors elect not to
institute or to abandon such proceedings. If our licensors elect to institute
and prosecute patent proceedings, our rights will depend in part upon the manner
in which these licensors conduct the proceedings. In any proceedings they elect
to initiate and maintain, these licensors may not vigorously pursue or defend or
may decide to settle such proceedings on terms that are unfavorable to us. An
adverse outcome of these proceedings could subject us to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require us to cease using such technology, any of which could adversely affect
our business. Moreover, the mere uncertainty resulting from the initiation and
continuation of any technology related litigation or interference proceeding
could adversely affect our business pending resolution of the disputed matters.
We also rely on unpatented trade secrets and know-how to maintain our
competitive position, which we seek to protect, in part, by confidentiality
agreements with employees, consultants and others. These parties may breach or
terminate these agreements, and we may not have adequate remedies for any
breach. Our trade secrets may also be independently discovered by competitors.
We rely on certain technologies to which we do not have exclusive rights or
which may not be patentable or proprietary and thus may be available to
competitors. We have filed an application for, but have not obtained, a
trademark registration for our corporate name and our logo. Several other
companies use trade names that are similar to our name for their businesses. If
we are unable to obtain any licenses that may be necessary for the use of our
corporate name, we may be required to change our name. Our management personnel
were previously employed by other pharmaceutical companies. The prior employers
of these individuals may allege violations of trade secrets and other similar
claims relating to their drug development activities for us.
Extensive Government Regulation; No Assurance of Regulatory Approval
The FDA and foreign regulatory authorities require rigorous preclinical
testing, clinical trials and other approval procedures for human pharmaceutical
products. Numerous regulations also govern the manufacturing, safety, labeling,
storage, record keeping, reporting and marketing of pharmaceutical products. The
requirements vary widely from country to country, and the time required to
complete preclinical testing and clinical trials and to obtain regulatory
approvals is uncertain. We expect the process of obtaining these approvals and
complying with
18
<PAGE>
appropriate government regulations to be time consuming and expensive. If we
replace a drug candidate in preclinical testing and/or clinical trials with a
modified drug candidate, it may extend the development period. In addition, if
the FDA or similar foreign regulatory authorities require additional clinical
trials, we could face increased costs and significant development delays.
Changes in regulatory policy or additional regulations adopted during product
development and regulatory review of information we submit could also result in
delays or rejections. The FDA has notified us that two of our drug candidates,
Coactinon and Coviracil for the treatment of HIV, qualify for designation as
"fast track" products under provisions of the Food and Drug Administration
Modernization Act of 1997. The fast track provisions are designed to expedite
the review of new drugs intended to treat serious or life-threatening conditions
and essentially codified the criteria previously established by the FDA for
accelerated approval. These drug candidates may not, however, continue to
qualify for expedited review and our other drug candidates may fail to qualify
for expedited review. Even though some of our drug candidates have qualified for
expedited review, the FDA may not approve them at all or any sooner than other
drug candidates that do not qualify for expedited review. Further, any approval
may require postmarketing studies or other conditions. Even after substantial
time and expenditures, our drug candidates may not receive marketing approval on
a timely basis or at all. If we are unable to demonstrate the safety and
effectiveness of our drug candidates to the satisfaction of government
authorities, our business will be adversely affected.
Even if our products receive regulatory approval, we may still face
difficulties in marketing and manufacturing those products. The approval of any
of our drug candidates may limit the indicated uses of the drug candidate. A
marketed product, its manufacturer and the manufacturer's facilities are subject
to continual review and periodic inspections. The discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the 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:
o fines,
o suspended regulatory approvals,
o refusal to approve pending applications,
o refusal to permit exports from the United States,
o product recalls,
o seizure of products,
o injunctions,
o operating restrictions, and
o criminal prosecutions.
Governmental regulation may significantly delay the marketing of our
products, prevent such marketing altogether, impose costly requirements on our
activities or provide our competitors with an advantage in the market. Adverse
clinical results by others could negatively impact the development and approval
of our drug candidates. Some of our drug candidates are intended for use as
coactive therapy with one or more other drugs, and adverse safety, effectiveness
or regulatory developments in connection with such other drugs will also have an
adverse effect on our business. A delay in obtaining or failure to obtain
regulatory approvals for any of our drug candidates will have an adverse effect
on our business. We cannot predict the adverse effects that future government
regulations may have on our business.
We are 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 our development work.
Highly Competitive Industry; Risk of Technological Change
We are engaged in segments of the drug industry that are highly
competitive and rapidly changing. Any of our current drug candidates that we
successfully develop will compete with numerous existing therapies. In addition,
many companies are pursuing novel drugs that target the same diseases we are
targeting. We believe that a significant number of drugs are currently under
development and will become available in the future for the treatment of HIV,
HBV and cancer. We anticipate that we will face intense and increasing
competition as new
19
<PAGE>
products enter the market and advanced technologies become available. Our
competitors' products may be more effective, or more effectively marketed and
sold, than any of our products. Competitive products may render our products
obsolete or noncompetitive before we can recover the expenses of developing and
commercializing our products. Furthermore, the development of a cure or new
treatment methods for the diseases we are targeting could render our drug
candidates noncompetitive, obsolete or uneconomical. Many of our competitors:
o have significantly greater financial, technical and human resources
than we have and may be better equipped to develop, manufacture and
market products,
o have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products, and
o 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. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for our drug candidates, we
will face competition based on the safety and effectiveness of our products, the
timing and scope of regulatory approvals, the availability of supply, marketing
and sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business.
Risks Related to License and Option Agreements
We have in-licensed or obtained an option to in-license our drug
candidates pursuant to agreements with our licensors. These agreements permit
our licensors to terminate the agreements under certain circumstances, such as
our failure to achieve certain development milestones or the occurrence of an
uncured material breach by us. The termination of any of these agreements could
result in the loss of our rights to a drug candidate. Upon termination of most
of our license agreements, we are required to return the licensed technology to
our licensors. In addition, most of these agreements provide that our licensors
are primarily responsible for any patent prosecution activities, such as
litigation, interference, opposition or other actions, for the technology
licensed to us. These agreements also provide that in general we are required to
reimburse our licensors for the costs they incur in performing these activities.
We believe that these costs as well as other costs under our license and option
agreements will be substantial and may increase significantly during the next
several years. Our inability or failure to pay any of these costs with respect
to any drug candidate could result in the termination of the license or option
agreement for the drug candidate. Any such termination could have an adverse
effect on our business.
Lack of Manufacturing Capabilities
We do not have any internal manufacturing capacity and we rely on third
party manufacturers for the manufacture of all of our clinical trial material.
We plan to expand our existing relationships or to establish relationships with
additional third party manufacturers for products that we successfully develop.
We may be unable to establish or maintain relationships with third party
manufacturers on acceptable terms, and third party manufacturers may be unable
to manufacture products in commercial quantities on a cost effective basis. Our
dependence upon third parties for the manufacture of our products may adversely
affect our profit margins and our ability to develop and commercialize products
on a timely and competitive basis. Further, third party manufacturers may
encounter manufacturing or quality control problems in connection with the
manufacture of our products and may be unable to maintain the necessary
governmental licenses and approvals to continue manufacturing our products. Our
business could be adversely affected if we fail to establish or maintain
relationships with third parties for our manufacturing requirements on
acceptable terms.
20
<PAGE>
Lack of Sales and Marketing Capabilities
We will have to develop a sales force or rely on arrangements with third
parties for the marketing, distribution and sale of any products we develop. Any
such third parties may have significant control over important aspects of the
commercialization of our products, including market identification, marketing
methods, pricing, composition of sales force and promotional activities. We will
also be unable to prevent any third party from pursuing alternative products
that could result in the development of products that compete with our products
and the withdrawal of support for our programs. We will have little if any
control over the amount and timing of resources that any third party may devote
to our products. We currently intend to use a direct sales force in the United
States and arrangements with third parties outside the United States to market
most of the drug candidates that we successfully develop. We may be unable to
establish marketing or sales capabilities or to make arrangements with third
parties to perform those activities on favorable terms. Further, any internal
capabilities or third party arrangements may not be successful.
Dependence on Third Parties for Development and Acquisition of Drug Candidates
We have engaged and intend to continue to engage third party contract
research organizations and other third parties ("CROs") to help us develop our
drug candidates. Although we have designed the clinical trials for our drug
candidates, the CROs have conducted many of the clinical trials. As a result,
many important aspects of our drug development programs have been and will
continue to be outside of our direct control. In addition, the CROs may not
perform all of their obligations under arrangements with us. If the CROs do not
perform clinical trials in a satisfactory manner or breach their obligations to
us, the development and commercialization of any drug candidate may be delayed
or precluded. We do not intend to engage in drug discovery. Our strategy for
obtaining additional drug candidates is to utilize the relationships of our
management team and Scientific Advisory Board to identify drug candidates for
in-licensing from companies, universities, research institutions and other
organizations. We may not succeed in acquiring additional drug candidates on
acceptable terms or at all.
Dependence on Key Employees
We are highly dependent on our senior management and scientific staff,
including Dr. David Barry, our Chairman and Chief Executive Officer. We have
entered into employment agreements with each officer of the Company. Dr. Barry's
employment agreement contains certain non-competition provisions. In addition,
the employment agreements for each of the other officers provide for certain
severance payments which are contingent upon the officer's refraining from
competition with the Company. The loss of the services of any member of our
senior management or scientific staff may significantly delay or prevent the
achievement of product development and other business objectives. Our ability to
attract and retain qualified personnel, consultants and advisors is critical to
our success. In order to pursue our drug development programs and marketing
plans, we will need to hire additional qualified scientific and management
personnel. Competition for qualified individuals is intense and we face
competition from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. We may be unable to attract and
retain these individuals, and our failure to do so would have an adverse effect
on our business. In addition, we rely on members of our Scientific Advisory
Board for assistance in formulating our drug development strategy. All of the
members of the Scientific Advisory Board are employed by other employers and any
such member may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to us.
Uncertainty of Health Care Reform Measures and Third Party Reimbursement
The efforts of governments and third party payors to contain or reduce the
cost of health care will continue to affect the business and financial condition
of drug companies. A number of legislative and regulatory proposals to change
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 pressure on drug pricing. While we cannot predict whether
legislative or regulatory proposals will be adopted or what effect those
proposals or managed care efforts may have on our business, the announcement
and/or adoption of such proposals or efforts could have an adverse effect on our
profit margins and financial condition. Sales of prescription drugs depend
significantly on the
21
<PAGE>
availability of reimbursement to the consumer from third party payors, such as
government and private insurance plans. These third party payors frequently
require that drug companies give them predetermined discounts from list prices,
and they are increasingly challenging the prices charged for medical products
and services. If we succeed in bringing one or more products to the market,
these products may not be considered cost effective and reimbursement to the
consumer may not be available or sufficient to allow us to sell our products on
a competitive basis.
No Assurance of Market Acceptance
Our success will depend on the market acceptance of any products we
develop. 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 our
products and their potential advantages over existing treatment methods, and
reimbursement policies of government and third party payors. Physicians,
patients, payors or the medical community in general may not accept or utilize
any product that we may develop.
Uncertainty of Year 2000 Compliance
The Year 2000 issue is the result of date-sensitive devices, systems and
computer programs that use a two digit rather than a four digit recognition
system to define an applicable year. We have initiated a program and task force
to assess the Year 2000 compliance of our systems and the systems of our key
business vendors. We have inventoried and assessed our significant internal
information and operation systems, and we have replaced or modified those
portions of our software, hardware and other equipment which we have determined
are non-compliant. We have completed the required changes to our critical
internal systems and anticipate the testing and verification of these modified
systems to be completed by June 30, 1999. We plan to complete the testing and
verification of all other significant internal systems by September 30, 1999.
Accordingly, we expect that the Year 2000 issue will not pose significant
operational problems for our internal systems and equipment. If, however, we are
unable to fix any technologies utilizing a two digit recognition system, we
could experience system failures or miscalculations causing disruption of
operations, including the temporary inability to process transactions or conduct
normal business activities in the new millennium.
We are also assessing our key business vendors' Year 2000 compliance. We
have requested information from these vendors regarding their compliance efforts
and written assurances of their Year 2000 compliance. We currently plan to
complete our risk assessments, readiness evaluations and action and contingency
plans related to these vendors by June 30, 1999. However, it is extremely
difficult to assess the likelihood of these third parties' Year 2000 compliance
or the impact their noncompliance may have on our operations. If we fail to
implement successfully our Year 2000 compliance plan, our business could be
adversely affected. In addition, significant delays or unanticipated Year 2000
issues with key business vendors could adversely affect the development of our
drug candidates and our financial condition.
Risks Relating to Coactive Therapy
Our success will depend significantly on the market acceptance of coactive
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. Present
coactive 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
limitations in the reimbursement available from third party payors for the
treatment of HIV infection, and we expect that reimbursement pressures will
continue in the future. If coactive therapy gains acceptance as a method to
treat HBV infection, treatment regimens are also likely to be expensive. We
expect that even the cost of monotherapy for HBV will be considered expensive in
developing countries where HBV is most prevalent. Any failure of coactive
therapy to achieve significant market acceptance for the treatment of HIV or HBV
could adversely affect our business.
Limited Product Liability Insurance; Insurance Risks
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of drug products and we may
face product liability claims in the future. We currently have only
22
<PAGE>
limited product liability insurance relating to potential claims arising from
our clinical trials. We intend to expand our insurance coverage if and when we
begin marketing commercial products. We may, however, be unable to obtain
additional product liability insurance on commercially acceptable terms. In
addition, we may be unable to maintain our existing insurance and/or any
additional insurance we may obtain in the future at a reasonable cost or in
sufficient amounts to protect against potential losses. A successful product
liability claim or series of claims brought against us could have an adverse
effect on our business.
Risks of Hazardous Materials
We use hazardous materials, chemicals, viruses and various radioactive
compounds in our drug development programs. Although we believe that our
handling and disposing of these materials comply with state and federal
regulations, the risk of accidental contamination or injury still exists. In the
event of such an accident, we could be held liable for any damages or fines that
result and any such liability could exceed our resources.
Concentration of Stock Ownership; Control by Management and Existing
Stockholders
As of March 31, 1999, our directors, executive officers and their
respective affiliates owned approximately 28% of our outstanding Common Stock.
As a result, these stockholders are able to significantly influence all matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions. This concentration of ownership
could also delay or prevent a change in control of Triangle that may be favored
by other stockholders.
Our Stock Price may be Volatile
The market price of our Common Stock is likely to be volatile and could
fluctuate widely in response to many factors, including:
o announcements of the results of clinical trials,
o developments with respect to patents or proprietary rights,
o announcements of technological innovations,
o announcements of new products or new contracts by us or our
competitors,
o actual or anticipated variations in our operating results due to the
level of development expenses and other factors,
o changes in financial estimates by securities analysts,
o conditions and trends in the pharmaceutical and other industries,
o new accounting standards, and
o general market conditions and other factors.
As a result, it is possible that our operating results will be below the
expectations of market analysts and investors, which could reduce the market
price of our Common Stock.
If our stockholders sell a substantial number of shares of our Common
Stock in the public market, the market price of our Common Stock could be
reduced. As of March 31, 1999, there were 28,927,819 shares of Common Stock
outstanding, of which a majority were immediately eligible for resale in the
public market without restriction. Holders of approximately 12,300,000 of these
shares (excluding shares issuable upon the conversion of outstanding shares of
Series A Preferred Stock) have rights to cause us to register these shares for
sale to the public. We have filed registration statements to register the sale
of approximately 7,100,000 of these shares. Any such sales may make it more
difficult for us to raise needed capital through an offering of our equity or
convertible debt securities and may reduce the market price of our Common Stock.
The stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of equity securities of many
companies in our industry. Often, these fluctuations 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 reduce the market
price of our Common Stock. In the past, following periods of volatility in the
market price of the securities
23
<PAGE>
of companies in our industry, securities class action litigation has often been
instituted against those companies. If we face such litigation in the future, it
would result in substantial costs and a diversion of management attention and
resources, which would negatively impact our business. Any of the risks
described in these "Risks Factors," if they occur, could have a dramatic and
adverse impact on the market price of our Common Stock.
Antitakeover Provisions
We have adopted a number of provisions that could have antitakeover
effects. On January 29, 1999, our Board adopted a preferred stock purchase
rights plan, commonly referred to as a "poison pill." The rights plan is
intended to deter an attempt to acquire the Company in a manner or on terms not
approved by the Board. Thus, the rights plan will not prevent an acquisition of
the Company which is approved by the Board. Our charter authorizes our Board to
issue shares of undesignated preferred stock without stockholder approval on
terms as the Board may determine. 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, voting control of Triangle. Our bylaws divide the Board
into three classes of directors with each class serving a three year term. These
and other provisions of our charter and our 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 Triangle, even if the events could be beneficial to our stockholders.
These provisions could also limit the price that investors might be willing to
pay for our Common Stock.
No Dividends
We have never declared or paid any cash dividends on our Common Stock, and
we currently do not intend to pay any cash dividends on our Common Stock in the
foreseeable future. We intend to retain our earnings, if any, for the operation
of our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Triangle is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. At March 31, 1999, Triangle had
approximately $1.2 million of forward foreign currency contracts to hedge
anticipated foreign currency obligations and was also subject to interest rate
risk associated with its investment portfolio. All derivative financial
instruments are purchased in accordance with established policies and procedures
and require the approval, reporting and monitoring of derivative financial
instrument activities. The following discusses our exposure to market risk
related to changes in interest rates and foreign currency exchange rates.
Interest Rate Sensitivity
Triangle is subject to interest rate risk on its investment portfolio. We
maintain an investment portfolio consisting primarily of high quality government
and corporate bonds with an average maturity of less than one year. We attempt
to mitigate default risk by investing in high credit quality securities and by
monitoring the credit rating of investment issuers. Our investment portfolio
includes only marketable securities with active secondary or resale markets to
help ensure portfolio liquidity and we have implemented guidelines limiting the
duration of investments. These available-for-sale securities are subject to
interest rate risk and will decrease in value if market interest rates increase.
If market rates were to increase by 10% from levels at March 31, 1999, the fair
value of the portfolio is expected to decline by an immaterial aggregate amount
primarily due to the short maturity of the portfolio. At March 31, 1999, our
portfolio consisted of approximately $38.1 million of investments maturing
within one year and approximately $18.5 million of investments maturing after
one year but within 18 months. Additionally, we generally have the ability to
hold our fixed income investments to maturity and therefore do not expect our
consolidated operating results or cash flows to be affected by a significant
amount due to a sudden change in interest rates.
Foreign Currency Exchange Risk
24
<PAGE>
The majority of our transactions occur in U.S. dollars and we do not have
subsidiaries or investments in foreign countries. Therefore, we are not subject
to significant foreign currency exchange risk. We have, however, established
policies and procedures for market risk assessment, including a foreign currency
hedging program. The goal of our hedging program is to economically guarantee,
or lock into, exchange rates on firm foreign currency cash outflows and to
minimize the impact to the Company of foreign currency fluctuations. These
policies specifically provide for the hedging of firm commitments and prohibit
the holding of derivative instruments for speculative or trading purposes. At
March 31, 1999, Triangle had purchased approximately $1.2 million of foreign
currency contracts, in currencies participating in the European Monetary Union
maturing throughout 1999, to hedge anticipated foreign currency commitments. The
hypothetical loss associated with a 10% devaluation of these foreign currencies
would not materially affect our consolidated operating results, financial
position or cash flows.
25
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.1 Computation of Net Loss Per Common Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
On February 10, 1999, the Company filed a Current Report on Form 8-K
dated January 29, 1999 announcing its adoption of a Stockholder
Rights Plan. Accordingly, preferred stock purchase rights were
distributed as a dividend to Common Stock and Series A Preferred
Stockholders of record as of February 16, 1999. The Stockholder
Rights Plan is designed to deter a party from gaining control of the
Company without offering a fair price to all stockholders and to
encourage a party to negotiate with the Board prior to attempting to
acquire the Company.
26
<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 12, 1999 By: /s/ David W. Barry
----------------------------------
David W. Barry
Chairman and Chief Executive Officer
TRIANGLE PHARMACEUTICALS, INC.
Date: May 12, 1999 By: /s/ James A. Klein, Jr.
----------------------------------
James A. Klein, Jr.
Chief Financial Officer and Treasurer
27
EXHIBIT 11.1
Computation of Net Loss Per Common Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Historical weighted average shares outstanding ... 28,908 20,007
-------- --------
Shares used in computing net loss per common share 28,908 20,007
======== ========
Net loss ......................................... $(18,431) $(16,408)
======== ========
Basic and diluted net loss per common share ...... $ (0.64) $ (0.82)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains consolidated summary financial information extracted
from this quarterly report on Form 10-Q for the period ended March 31, 1999 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 43,752,000
<SECURITIES> 38,149,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,833,000
<PP&E> 5,536,000
<DEPRECIATION> (1,539,000)
<TOTAL-ASSETS> 106,355,000
<CURRENT-LIABILITIES> 22,536,000
<BONDS> 117,000
0
170
<COMMON> 29,000
<OTHER-SE> 83,672,830
<TOTAL-LIABILITY-AND-EQUITY> 106,355,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,901,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,431,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,431,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,431,000)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
</TABLE>
