<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000.
REGISTRATION NO. 333-96351
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRAECIS PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 04-3200305
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
PRAECIS PHARMACEUTICALS INCORPORATED
ONE HAMPSHIRE STREET
CAMBRIDGE, MASSACHUSETTS 02139-1572
(617) 494-8400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
MALCOLM L. GEFTER, PH.D.
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND PRESIDENT
ONE HAMPSHIRE STREET
CAMBRIDGE, MASSACHUSETTS 02139-1572
(617) 494-8400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STUART M. CABLE, P.C.
KENT A. COIT, ESQ. KATHRYN I. MURTAGH, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP GOODWIN, PROCTER & HOAR LLP
ONE BEACON STREET EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02108 BOSTON, MASSACHUSETTS 02109
(617) 573-4800 (617) 570-1000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 28, 2000
PROSPECTUS
8,000,000 SHARES
[LOGO]
PRAECIS PHARMACEUTICALS INCORPORATED
COMMON STOCK
$ PER SHARE
---------
We are selling all of the shares of common stock in this offering. We have
granted the underwriters a 30-day option to purchase up to an additional
1,200,000 shares of common stock to cover over-allotments.
This is the initial public offering of our common stock. We currently expect
that the initial public offering price will be between $15.00 and $17.00 per
share. We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "PRCS."
--------------
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -----------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to PRAECIS (before expenses) $ $
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
, 2000.
--------------
SALOMON SMITH BARNEY
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Information Regarding Forward-Looking Statements............ 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 27
Management.................................................. 47
Relationships and Related Party Transactions................ 57
Principal Stockholders...................................... 58
Description of Capital Stock................................ 62
Shares Eligible For Future Sale............................. 67
Underwriting................................................ 69
Legal Matters............................................... 71
Experts..................................................... 71
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
</TABLE>
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER BEFORE
BUYING SHARES IN THIS OFFERING. THEREFORE, YOU SHOULD READ THIS ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION AND OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
OUR COMPANY
We are a drug discovery and development company with a lead product,
abarelix-depot-M, for the treatment of prostate cancer. In our clinical trials
to date, we have treated approximately 1,200 prostate cancer patients with
abarelix-depot-M at more than 100 clinical centers. We expect to file a new drug
application, or NDA, for abarelix-depot-M with the FDA by the end of 2000 and to
commercialize abarelix-depot-M globally with our collaborators, Amgen Inc. and
Sanofi-Synthelabo S.A. We believe that abarelix-depot-M works in a unique way
that will allow this drug to successfully compete in the approximately
$2.0 billion worldwide market for prostate cancer drugs.
In addition to developing abarelix-depot-M, we are developing
abarelix-depot-F for the treatment of women with diseases that respond to a
reduction of the female hormone estrogen. We have demonstrated the potential
usefulness of abarelix-depot-F in a phase I/II study for the treatment of
endometriosis. Endometriosis is a painful, long-lasting condition affecting an
estimated five million women in the United States. We believe that patients
suffering from endometriosis are largely untreated. In our clinical trials to
date, we have treated more than 100 endometriosis patients with abarelix-depot-F
at more than 20 clinical centers. Abarelix-depot-F is now in phase II/III
clinical testing. We believe that abarelix-depot-F will expand the existing
market for drugs to treat endometriosis and fulfill a significant unmet need.
We developed abarelix using our proprietary technology, that we refer to as
Ligand Evolution to Active Pharmaceuticals, or LEAP. Using this technology, we
can rapidly analyze large numbers of molecules and identify those that have
desired properties to be further developed into drugs. In addition, we can
examine in excess of 1,000 times more molecules for drug development with this
technology than conventional technologies would permit, in a fraction of the
time.
We used our LEAP technology to develop Apan, our drug for the treatment of
Alzheimer's Disease, which affects more than four million Americans. We expect
to file an investigational new drug application with the FDA and begin clinical
trials with Apan within the next 12 months. Apan addresses what we and others
believe to be the underlying cause of Alzheimer's Disease, rather than the
symptoms.
To date, LEAP technology has been valuable in the development of our
pipeline of drugs. We believe LEAP's power and usefulness provide us with an
opportunity to realize the potential for new drug targets coming out of the
Human Genome Project, a government sponsored, multi-institutional effort to
determine the entire sequence of the DNA of the genes of human beings.
Our proprietary drug delivery system known as Rel-Ease allows the
administration of our drug on a once-a-month basis. We have demonstrated that
Rel-Ease is useful for producing abarelix-depot-M, abarelix-depot-F and other
drugs in long-acting, or depot forms. We have an issued patent that covers the
general application of this technology for a broad range of drugs.
OUR BUSINESS STRATEGY
Our objective is to combine our skills, expertise and proprietary technology
to develop and commercialize drugs rapidly that address significant clinical
needs. We are pursuing the following strategy to achieve this objective:
- extend the commercial potential of abarelix by expanding into additional
disease areas treatable by lowering male or female hormones;
3
<PAGE>
- use our LEAP technology, together with opportunities that the Human Genome
Project presents, to discover new drugs;
- retain rights to our products until late stages of development to obtain
favorable financial terms with strategic partners; and
- develop drugs licensed from third parties to supplement product
development.
OUR CORPORATE COLLABORATORS
To date, we have entered into a number of corporate collaborations and
licensing arrangements for the discovery, development and commercialization of
drug candidates. We have provided a brief description of these collaborations
and licensing agreements below:
- AMGEN. We entered into an agreement with Amgen for the research,
development and commercialization of abarelix products in the United
States, Canada, Japan and selected other countries. Amgen has agreed to
pay us up to $25 million in signing and performance-based payments. Amgen
will pay all authorized costs and expenses associated with the research,
development and commercialization of abarelix in the United States that we
incur during 1999 and a portion of 2000. Following these expenditures, we
generally will share with Amgen all additional research and development
and sales and marketing costs and expenses, and profits, associated with
the research, development and commercialization of abarelix products in
the United States. In 1999, we recognized $56.8 million of revenues under
the agreement. In addition, Amgen will provide us with a substantial line
of credit, subject to limitations.
- SANOFI-SYNTHELABO. We entered into a license agreement with Synthelabo,
now Sanofi-Synthelabo, for the development and commercialization of
abarelix products in specific geographic areas including Europe, Latin
America, the Middle East and various countries in Africa. Sanofi-
Synthelabo has agreed to pay us up to $64.6 million in signing and
performance-based payments, $5.0 million of the costs and expenses for the
development in the United States of abarelix products for prostate cancer,
and approximately 25% of all United States costs and expenses for the
development of abarelix products for endometriosis and uterine fibroids.
We and Sanofi-Synthelabo will share equally the costs and expenses for the
development of any future additional diseases that are approved by a joint
development committee, subject to various limitations. We will receive a
share of the profits from the sale of abarelix products.
- HUMAN GENOME SCIENCES. We entered into an agreement with Human Genome
Sciences, Inc. for the discovery, development and commercialization of
compounds targeted to proprietary proteins encoded in the genome and
identified by them. Under the agreement, we will use our proprietary LEAP
technology to discover and develop drugs for these targets. We and Human
Genome Sciences will develop these drugs together and share equally in
expenses and revenues.
- PHARMACEUTICAL APPLICATIONS ASSOCIATES. We license the active ingredients
in Latranal, our drug for treating pain associated with muscle and tendon
injury, from Pharmaceutical Applications Associates LLC. We will conduct
preclinical and clinical studies to support the approval of Latranal and
provide for its manufacturing and commercialization. Pharmaceutical
Applications Associates has the right to receive royalties on product
sales.
-------------------
We were incorporated in Delaware in July 1993 under the name Pharmaceutical
Peptides, Inc. In June 1997, we changed our name to PRAECIS PHARMACEUTICALS
INCORPORATED. Our principal executive offices and primary research facilities
are located at One Hampshire Street, Cambridge, Massachusetts 02139, and our
telephone number is (617) 494-8400. Our Web site address is www.praecis.com. We
do not, however, intend that our Web site be part of this prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 8,000,000 shares
Common stock outstanding after this 39,966,545 shares
offering...................................
Use of proceeds.............................. For the production of abarelix drug product,
our new facility and related improvements,
clinical trials, preclinical testing and
other research and development activities,
sales and marketing expenses, the acquisition
of complementary businesses, products or
technologies, working capital and general
corporate purposes.
Proposed Nasdaq National Market symbol....... "PRCS"
</TABLE>
Unless otherwise indicated, all information contained in this prospectus:
- assumes no exercise of the underwriters' option to purchase up to
1,200,000 additional shares of common stock to cover over-allotments;
- reflects a 2-for-1 split of our common stock that we effected on March 8,
2000;
- reflects the automatic conversion of all of our convertible preferred
stock into 25,607,861 shares of our common stock prior to the completion
of this offering; and
- gives effect to the adjustment of certain warrants, so that upon the
closing of this offering the warrants will be exercisable for 111,495
shares of common stock rather than for convertible preferred stock.
The number of shares of common stock to be outstanding immediately after the
offering:
- is based upon 31,966,545 shares outstanding as of December 31, 1999;
- does not take into account 8,211,644 shares of common stock issuable upon
the exercise of options outstanding as of December 31, 1999, at a weighted
average exercise price of $3.35 per share; and
- does not take into account 515,940 shares of common stock issuable upon
the exercise of warrants outstanding as of December 31, 1999, at a
weighted average exercise price of $10.39 per share.
--------------
PRAECIS-TM-, MASTRscreen-TM-, Rel-Ease-TM-, LEAP-TM-, Latranal-TM- and
Apan-TM- are trademarks of our company. This prospectus also contains
trademarks, trade names and service marks of other companies, including
Casodex-TM-, Lupron Depot-TM- and Zoladex-TM-, which are the property of their
respective owners.
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Corporate collaborations...................... $ -- $ -- $15,118 $37,624 $61,514
Contract services............................. -- 876 2,615 1,943 --
------- ------- ------- ------- -------
Total revenues............................ -- 876 17,733 39,567 61,514
Costs and expenses:
Research and development...................... 3,687 7,947 15,013 33,704 48,764
General and administrative.................... 1,609 2,120 3,780 3,605 6,173
------- ------- ------- ------- -------
Operating income (loss)......................... (5,296) (9,191) (1,060) 2,258 6,577
Net income (loss)............................... $(5,099) $(8,564) $ 204 $ 5,674 $ 9,250
======= ======= ======= ======= =======
Net income (loss) per share:
Basic......................................... $ (1.59) $ (2.62) $ 0.05 $ 0.99 $ 1.51
======= ======= ======= ======= =======
Diluted....................................... $ (1.59) $ (2.62) $ 0.01 $ 0.16 $ 0.24
======= ======= ======= ======= =======
Weighted average number of common shares:
Basic......................................... 3,199 3,263 4,446 5,738 6,106
Diluted....................................... 3,199 3,263 28,270 35,139 37,849
</TABLE>
<TABLE>
<S> <C>
Pro forma net income per share:
Basic..................................................................................... $ 0.29
=======
Diluted................................................................................... $ 0.24
=======
Pro forma weighted average number of common shares:
Basic..................................................................................... 31,714
Diluted................................................................................... 37,849
</TABLE>
Pro forma basic and diluted net income per share have been calculated
assuming the conversion of all previously outstanding shares of convertible
preferred stock into common stock as if the stock had been converted immediately
upon its issuance.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $94,525 $212,565
Working capital............................................. 86,220 204,260
Total assets................................................ 140,331 258,371
Total stockholders' equity.................................. 87,716 205,756
</TABLE>
The pro forma as adjusted balance sheet reflects this offering and issuance
of the related shares of common stock and the automatic conversion into our
common stock of all outstanding shares of convertible preferred stock.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE YOU DECIDE TO BUY OUR COMMON
STOCK.
BECAUSE WE HAVE NOT YET MARKETED OR SOLD ANY OF OUR PRODUCTS AND ANTICIPATE
SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES OVER THE NEXT SEVERAL YEARS, WE
MAY NOT BE PROFITABLE IN THE FUTURE
We cannot assure you that we will be profitable in the future or, if we are
profitable, that it will be sustainable. All of our potential products are in
the research or development stage. We have not yet marketed or sold any of our
products, and we may not succeed in developing and marketing any product in the
future. To date, we have derived all of our revenues from payments under our
collaboration and license agreements and will continue to do so for at least the
next several years. In addition, we expect to continue to spend significant
amounts to continue clinical studies, obtain regulatory approval for our product
candidates and expand our facilities. We also intend to spend substantial
amounts to fund additional research and development for other products, enhance
our core technologies, and for general and administrative purposes. As of
December 31, 1999, we had an accumulated deficit of approximately $1.1 million.
We expect that our operating expenses will increase significantly in the near
term, resulting in significant operating losses for fiscal 2000 and the next
several years.
IF OUR CLINICAL TRIALS ARE NOT SUCCESSFUL, OR IF WE ARE OTHERWISE UNABLE TO
OBTAIN AND MAINTAIN THE REGULATORY APPROVAL REQUIRED TO MARKET AND SELL OUR
PRODUCTS, WE WOULD INCUR INCREASING OPERATING LOSSES
The development and sale of our products is subject to extensive regulation
by governmental authorities. Obtaining and maintaining regulatory approval
typically is costly and takes many years. Regulatory authorities have
substantial discretion to terminate clinical trials, delay or withhold
registration and marketing approval, and mandate product recalls. Failure to
comply with regulatory requirements may result in criminal prosecution, civil
penalties, recall or seizure of products, total or partial suspension of
production or injunction, as well as other action against our potential products
or us. Outside the United States, we can market a product only if we receive a
marketing authorization from the appropriate regulatory authorities. This
foreign regulatory approval process includes all of, and in some cases,
additional, risks associated with the FDA approval process we describe above.
To gain regulatory approval from the FDA and foreign regulatory authorities
for the commercial sale of any product, we must demonstrate the safety and
efficacy of the product in clinical trials. If we develop a product to treat a
long-lasting disease, such as cancer or Alzheimer's Disease, we must gather data
over an extended period of time. There are many risks associated with our
clinical trials. For example, we may be unable to achieve the same level of
success in later trials as we did in earlier ones. Additionally, data we obtain
from preclinical and clinical activities are susceptible to varying
interpretations that could impede regulatory approval. Further, some patients in
our prostate cancer and Alzheimer's Disease programs have a high risk of death,
age-related disease or other adverse medical events not related to our products.
These events may effect the statistical analysis of the safety and efficacy of
our products.
In addition, many factors could delay or terminate our ongoing or future
clinical trials. For example, a clinical trial may experience slow patient
enrollment or lack of sufficient drug supplies. Patients may experience adverse
medical events or side effects, and there may be a real or perceived lack of
effectiveness of the drug we are testing. Future governmental action or changes
in FDA policy may also result in delays or rejection. Accordingly, we may not be
able to obtain product registration or marketing approval for abarelix-depot-M,
abarelix-depot-F, or for any of our other products, based on the results of our
clinical trials.
7
<PAGE>
If we obtain regulatory approval for a product, the approval will be limited
to those diseases for which our clinical trials demonstrate the product is safe
and effective. To date, none of our products have received regulatory approval
for commercial sale. If we are delayed in obtaining or are unable to obtain
regulatory approval to market our products, we may exhaust our available
resources, including the proceeds from this offering, significantly sooner than
we had planned. If this happened, we would need to raise additional funds to
complete commercialization of our lead products and continue our research and
development programs. We cannot assure you that we would be able to obtain these
additional funds on favorable terms, if at all. A more detailed discussion
regarding government regulation of our products is included in this prospectus
under the heading "Business--Government Regulation."
EVEN IF WE RECEIVE APPROVAL FOR THE MARKETING AND SALE OF OUR PRODUCTS, THEY MAY
FAIL TO ACHIEVE MARKET ACCEPTANCE AND, ACCORDINGLY, MAY NEVER BE COMMERCIALLY
SUCCESSFUL
Many factors may affect the market acceptance and commercial success of any
of our potential products, including:
- the timing of market entry as compared to competitive products;
- the effectiveness of our products, including any potential side effects,
as compared to alternative treatment methods;
- the rate of adoption of our products by doctors and nurses and acceptance
by the target population;
- the product labeling or product insert required by the FDA for each of our
products;
- the competitive features of our products as compared to other products,
including the frequency of administration of abarelix as compared to other
products, and doctor and patient acceptance of these features;
- the cost-effectiveness of our products and the availability of insurance
or other third-party reimbursement, in particular Medicare, for patients
using our products;
- the extent and success of our marketing efforts and those of our
collaborators; and
- unfavorable publicity concerning our products or any similar products.
If our products are not commercially successful, we may never become profitable.
IF OUR STRATEGIC PARTNERS REDUCE, DELAY OR TERMINATE THEIR FINANCIAL SUPPORT, WE
MAY BE UNABLE TO SUCCESSFULLY DEVELOP, MARKET, DISTRIBUTE OR SELL OUR PRODUCTS
We depend upon our corporate collaborators, in particular Amgen and
Sanofi-Synthelabo, to provide substantial financial support for developing our
products. We also will rely on them in some instances to help us obtain
regulatory approval for our products and to manufacture, market, distribute or
sell our products. Despite our dependence, we have limited control over the
amount and timing of resources that our corporate collaborators devote to our
programs or potential products. Also, our corporate collaborators may terminate
our collaboration agreements in various circumstances. For example, in
December 1998, we and Roche Products Inc. mutually terminated our agreement. We
and each of Amgen and Sanofi-Synthelabo may mutually terminate our agreement,
and, in addition:
- Amgen and Sanofi-Synthelabo each may terminate its agreement with us if
the results of any clinical trial of abarelix materially harms the
product's commercial prospects;
- Amgen may terminate its agreement with us at any time upon 90 days prior
written notice; and
8
<PAGE>
- Sanofi-Synthelabo may terminate its agreement with us if specified adverse
events occur relating to our European patent applications or the related
patents which may be issued covering abarelix or our Rel-Ease technology.
We cannot assure you that any of our present or future collaborators will
meet their obligations to us under the collaboration agreements. If a
collaborator terminates its agreement with us or fails to perform its
obligations, it may delay the development or commercialization of the potential
product or research program. As a result, we could have to devote unforseen
additional resources to development and commercialization or to terminate one or
more of our drug development programs. Due to increased operating costs and lost
revenue associated with the termination of a collaboration agreement, we could
have to seek funds in addition to the net proceeds of this offering to meet our
capital requirements. We cannot assure you that we would be able to raise the
necessary funds or negotiate additional corporate collaborations on acceptable
terms, if at all, and we may have to curtail or cease operations. For instance,
if, following the termination of our agreement with Roche, we had been unable to
enter into an alternative collaboration for the development and
commercialization of our abarelix products in a timely manner, we likely would
have needed to delay or cut back our programs for the development of abarelix or
other drugs and to raise additional funds through one or more equity financings
prior to the time we had planned to do so and possibly on less than favorable
terms.
WE COULD EXPERIENCE DELAYS IN THE RESEARCH, DEVELOPMENT OR COMMERCIALIZATION OF
OUR PRODUCTS AS A RESULT OF CONFLICTS WITH OUR CORPORATE COLLABORATORS OR
COMPETITION FROM THEM
An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities that conflict with our collaborators'
businesses. Disagreements with our collaborators could develop over rights to
intellectual property, including the ownership of technology co-developed with
our collaborators. Our current or future collaborators could develop products in
the future that compete with our products. This could diminish our
collaborators' commitment to us, and reduce the resources they devote to
developing and commercializing our products. Conflicts or disputes with our
collaborators, and competition from them, could harm our relationships with our
other collaborators, restrict our ability to enter future collaboration
agreements and delay research, development or the commercialization of our
products.
ALTERNATIVE TREATMENTS ARE AVAILABLE WHICH MAY IMPAIR OUR ABILITY TO CAPTURE
MARKET SHARE FOR OUR PRODUCTS
Alternative products exist or are under development to treat the diseases
for which we are developing drugs. For example, the FDA has approved several
drugs for the treatment of prostate cancer that responds to changes in hormone
levels. Even if the FDA approves abarelix-depot-M, our product for the treatment
of prostate cancer, for commercialization, it may not compete favorably with
existing treatments that already have an established market share. If
abarelix-depot-M does not achieve broad market acceptance, we may not become
profitable.
MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE DO AND MAY
BE ABLE TO DEVELOP AND COMMERCIALIZE PRODUCTS THAT MAKE OUR PRODUCTS AND
TECHNOLOGIES OBSOLETE AND NON-COMPETITIVE
A biotechnology company such as ours must keep pace with rapid technological
change and faces intense competition. We compete with biotechnology and
pharmaceutical companies for funding, access to new technology, research
personnel and in product research and development. Many of these companies have
greater financial resources and more experience than we do in developing drugs,
obtaining regulatory approvals, manufacturing and marketing. We also face
competition from academic and research institutions and government agencies
pursuing competitive alternatives to our products and technologies. We expect
that all of our products under development will face intense competition from
existing or future drugs.
9
<PAGE>
Our competitors may:
- successfully identify drug candidates or develop products earlier than we
do;
- obtain approvals from the FDA or foreign regulatory bodies more rapidly
than we do;
- develop products that are more effective, have fewer side effects or cost
less than our products; or
- successfully market products that compete with our products.
IF WE ARE UNABLE TO OBTAIN AND ENFORCE VALID PATENTS, WE COULD LOSE OUR
COMPETITIVE ADVANTAGE
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of our technologies and products. If we do not
adequately protect our intellectual property, competitors may be able to use our
technologies and erode our competitive advantage. For example, if we lost our
patent protection for abarelix, another party could produce and market abarelix
in direct competition with us. Some foreign countries lack rules and methods for
defending intellectual property rights and do not protect proprietary rights to
the same extent as the United States. Many companies have had difficulty
protecting their proprietary rights in these foreign countries.
Patent positions are sometimes uncertain and usually involve complex legal
and factual questions. We can protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. To date, we hold seven issued United States patents. We have applied,
and will continue to apply, for patents covering both our technologies and
products as we deem appropriate. Others may challenge our patent applications or
our patent applications may not result in issued patents. Moreover, any issued
patents on our own inventions, or those licensed from third parties, may not
provide us with adequate protection, or others may challenge, circumvent or
narrow our patents. Third party patents may impair or block our ability to
conduct our business. Additionally, third parties may independently develop
products similar to our products, duplicate our unpatented products, or design
around any patented products we develop.
IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS AND PROPRIETARY INFORMATION, WE
COULD LOSE OUR COMPETITIVE ADVANTAGE IN THE MARKET
In addition to patents, we rely on a combination of trade secrets,
confidentiality, nondisclosure and other contractual provisions, and security
measures to protect our confidential and proprietary information. These measures
may not adequately protect our trade secrets or other proprietary information.
If they do not adequately protect our rights, third parties could use our
technology, and we could lose any competitive advantage we may have. In
addition, others may independently develop similar proprietary information or
techniques or otherwise gain access to our trade secrets, which could impair any
competitive advantage we may have.
IF OUR POTENTIAL PRODUCTS CONFLICT WITH THE PATENTS OF COMPETITORS, UNIVERSITIES
OR OTHERS, WE COULD HAVE TO ENGAGE IN COSTLY LITIGATION AND BE UNABLE TO
COMMERCIALIZE THOSE PRODUCTS
Our potential products may give rise to claims that they infringe other
patents. A third party could force us to pay damages or to stop our
manufacturing and marketing of the affected products by bringing a legal action
against us for any infringement. In addition, a third party could require us to
obtain a license to continue to manufacture or market the affected products, and
we may not be able to do so. We believe that significant litigation will
continue in our industry regarding patent and other intellectual property
rights. If we become involved in litigation, it could consume a substantial
portion of our resources. Even if legal actions were meritless, defending a
lawsuit could take significant time, be expensive and divert management
attention from other business concerns.
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<PAGE>
IF THIRD PARTIES TERMINATE OUR LICENSES, WE COULD EXPERIENCE DELAYS OR BE UNABLE
TO COMPLETE THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS
We license some of our technology from third parties. Termination of our
licenses could force us to delay or discontinue some of our development and
commercialization programs. For example, if Advanced Research and Technology
Institutes, Inc. terminated our abarelix license, we could have to discontinue
development and commercialization of our abarelix products. We cannot assure you
that we would be able to license substitute technology in the future. Our
inability to do so could impair our ability to conduct our business because we
may lack the technology necessary to develop and commercialize our potential
products.
BECAUSE WE DEPEND ON THIRD PARTIES TO CONDUCT LABORATORY TESTING AND HUMAN
CLINICAL STUDIES AND ASSIST US WITH REGULATORY COMPLIANCE, WE MAY ENCOUNTER
DELAYS IN PRODUCT DEVELOPMENT AND COMMERCIALIZATION
We have contracts with a limited number of research organizations to design
and conduct our laboratory testing and human clinical studies. If we cannot
contract for testing activities on acceptable terms, or at all, we may not
complete our product development efforts in a timely manner. To the extent we
rely on third parties for laboratory testing and human clinical studies, we may
lose some control over these activities. For example, third parties may not
complete testing activities on schedule or when we request. In addition, these
third parties may not conduct our clinical trials in accordance with regulatory
requirements. The failure of these third parties to carry out their contractual
duties could delay or prevent the development and commercialization of our
products.
IF WE FAIL TO DEVELOP OR MAINTAIN OUR RELATIONSHIPS WITH THIRD PARTY
MANUFACTURERS, OR IF THESE MANUFACTURERS FAIL TO PERFORM ADEQUATELY, WE MAY BE
UNABLE TO COMMERCIALIZE OUR PRODUCTS
Our capacity to conduct clinical trials and commercialize our products will
depend in part on our ability to manufacture our products on a large scale, at a
competitive cost and in accordance with regulatory requirements. We must
establish and maintain a commercial scale formulation and manufacturing process
for all of our potential products to complete clinical trials. We, our
collaborators or third party manufacturers may encounter difficulties with these
processes at any time that could result in delays in clinical trials, regulatory
submissions or in the commercialization of potential products.
We have no experience in large-scale product manufacturing, nor do we have
the resources or facilities to manufacture products on a commercial scale. We
will continue to rely upon contract manufacturers to produce abarelix and other
compounds for preclinical, clinical and commercial purposes for a significant
period of time. If our supply agreements are not satisfactory, we may not be
able to develop or commercialize potential products as planned. The manufacture
of our potential products will be subject to current good manufacturing
practices regulations. Third party manufacturers are subject to regulatory
review and may fail to comply with these good manufacturing practices
regulations. If we need to replace our current third party manufacturers, or
contract with additional manufacturers, we must conduct new product testing and
facility compliance inspections. This testing and inspection is costly and
time-consuming. Any of these factors could prevent, or cause delays in,
obtaining regulatory approvals for, and manufacturing, marketing or selling of,
our products and could also result in significantly higher operating expenses.
For example, Oread Pharmaceutical Manufacturing, Inc., our supplier of
abarelix-depot powder in finished vials, has advised us that it is in default
under its lease and anticipates that it will be unable to continue operations in
the leased premises beyond June 2000 at the latest. Based on this and our
discussions with Oread, we do not believe that Oread will be able to continue to
meet its obligations under our agreement with them. Accordingly, we will need to
make alternative supply arrangements for this step in the manufacture of
abarelix-depot-M. We cannot assure you that we will be able to do so in a timely
manner or on favorable terms, if at all. If we are unable to replace Oread in a
timely manner, regulatory approval and commercialization of abarelix-depot-M
could be delayed, possibly materially. Moreover, even if we are able to enter
into acceptable alternative supply arrangements in a timely manner, the use of a
different manufacturer may require us to undergo additional regulatory review
and compliance procedures which could result in additional expenses and delay
the commercialization of abarelix-depot-M.
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<PAGE>
If we fail to meet our manufacturing and supply obligations under our
agreements with either Amgen or Sanofi-Synthelabo, they may assume manufacturing
responsibility under their agreements. In addition, if this occurs, we must pay
Sanofi-Synthelabo its incremental costs of assuming manufacturing
responsibility.
DUE TO OUR INEXPERIENCE AND OUR LIMITED SALES AND MARKETING STAFF, WE WILL
DEPEND ON THIRD PARTIES TO SELL AND MARKET OUR PRODUCTS
We have no experience in marketing or selling pharmaceutical products and
have a limited marketing and sales staff. To achieve commercial success for any
approved product, we must either develop a marketing and sales force or enter
into arrangements with third parties to market and sell our products. We have
granted Amgen and Sanofi-Synthelabo exclusive commercialization rights for
abarelix products in defined geographic locations. Our marketing and
distribution arrangements with Amgen and Sanofi-Synthelabo may not be successful
and we may not receive any revenues from these arrangements. We cannot assure
you that we will be able to enter into marketing and sales agreements on
acceptable terms, if at all, for any other products.
OUR REVENUES WILL DIMINISH IF WE FAIL TO OBTAIN ACCEPTABLE PRICES OR ADEQUATE
REIMBURSEMENT FOR OUR PRODUCTS FROM THIRD PARTY PAYORS
The continuing efforts of government and third party payors to contain or
reduce the costs of health care may limit our commercial opportunity. If
government and other third party payors do not provide adequate coverage and
reimbursement for our products, physicians may not prescribe them. If we are
unable to offer physicians comparable or superior financial motivation to use
our products, we may not be able to generate significant revenues. For example,
in some foreign markets, pricing and profitability of prescription
pharmaceuticals are subject to government control. In the United States, we
expect that there will continue to be federal and state proposals for similar
controls. In addition, increasing emphasis on managed care in the United States
will continue to put pressure on the pricing of pharmaceutical products. Cost
control initiatives could decrease the price that any of our collaborators or we
receive for any products in the future. Further, cost control initiatives could
impair our collaborators' ability to commercialize our products, and our ability
to earn revenues from this commercialization.
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the availability of reimbursement for our
products from:
- government and health administration authorities;
- private health insurers; and
- other third party payors, including Medicare.
We cannot predict the availability of reimbursement for newly approved
health care products. Third party payors, including Medicare, are challenging
the prices charged for medical products and services. Government and other third
party payors increasingly are limiting both coverage and the level of
reimbursement for new drugs and refusing, in some cases, to provide coverage for
a patient's use of an approved drug for purposes not approved by the FDA. Third
party insurance coverage may not be available to patients for any of our
products.
WE MAY BE UNABLE TO SECURE ADEQUATE DEBT FINANCING FOR THE PURCHASE OF OUR NEW
FACILITY, WHICH COULD FORCE US TO USE MORE OF THE PROCEEDS FROM THIS OFFERING
THAN EXPECTED TO PURCHASE THE NEW FACILITY
We have exceeded the capacity of our current facilities, and recently agreed
to purchase a new facility in the western suburbs of Boston. We will spend
substantial funds to purchase this facility and make necessary improvements. We
may be unable to borrow sufficient funds to do so on a timely basis, or at all.
If we cannot borrow money, we will be required to use more proceeds from this
offering than we currently expect. In addition, we intend to lease part of our
new facility and sub-lease our current
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<PAGE>
facility. We may not be able to find a suitable tenant or sub-tenant to occupy
these spaces in a timely manner, if at all.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
SKILLED PERSONNEL, WE MAY BE UNABLE TO PURSUE OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS
We depend substantially on the principal members of our management and
scientific staff, including Malcolm L. Gefter, Ph.D., our Chief Executive
Officer, President and Chairman of the Board. We do not have employment
agreements with any of our officers or key personnel and none of our employees
have signed non-competition agreements. Any officer or employee can terminate
his or her relationship with us at any time and work for one of our competitors.
The loss of these key individuals could result in competitive harm because we
could experience delays in our product research, development and
commercialization efforts without their expertise.
Recruiting and retaining qualified scientific personnel to perform future
research and development work also will be critical to our success. Competition
for skilled personnel is intense and the turnover rate can be high. We compete
with numerous companies and academic and other research institutions for
experienced scientists. This competition may limit our ability to recruit and
retain qualified personnel on acceptable terms. Failure to attract and retain
personnel would prevent us from successfully developing our products or core
technologies and launching our products commercially. Our planned activities may
require the addition of new personnel, including management, and the development
of additional expertise by existing management personnel. The inability to
acquire these services or to develop this expertise could result in delays in
the research, development and commercialization of our products.
WE MAY HAVE SUBSTANTIAL EXPOSURE TO PRODUCT LIABILITY CLAIMS AND MAY NOT HAVE
ADEQUATE INSURANCE TO COVER THOSE CLAIMS
We may be held liable if any product we develop, or any product made by
others using our technologies, causes injury. We have only limited product
liability insurance coverage for our clinical trials. We intend to obtain
product liability insurance to cover our products approved for marketing and
sale. This insurance may be prohibitively expensive or may not fully cover our
potential liabilities. Our inability to obtain adequate insurance coverage and
at an acceptable cost could prevent or inhibit the commercialization of our
products. If a third party sues us for any injury caused by products made by us
or using our technologies, our liability could exceed our total assets.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS AND POTENTIAL CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL
OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY
Our research and development processes involve the controlled use of
hazardous materials, including chemicals and radioactive and biological
materials. The health risks associated with accidental exposure to abarelix
include temporary impotence or infertility and harmful effects on pregnant
women. Our operations also produce hazardous waste products. We cannot eliminate
the risk of accidental contamination or discharge from hazardous materials and
any resultant injury. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of hazardous materials.
Compliance with environmental laws and regulations may be expensive. Current or
future environmental regulations may impair our research, development or
production efforts. We might have to pay civil damages in the event of an
improper or unauthorized release of, or exposure of individuals to, hazardous
materials.
Some of our collaborators also work with hazardous materials in connection
with our collaborations. We have agreed to indemnify our collaborators in some
circumstances against damages and other liabilities arising out of development
activities or products produced in connection with these collaborations.
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<PAGE>
FLUCTUATIONS IN CURRENCY EXCHANGE RATES COULD INCREASE THE PAYMENTS WE MUST MAKE
UNDER SOME OF OUR SUPPLY AGREEMENTS
We currently conduct all our business transactions in United States dollars.
However, under two of our supply agreements relating to our abarelix products,
the amount we are required to pay our supplier may be adjusted from time to time
if the applicable currency exchange rate varies by more than 10% from the agreed
exchange rate. Accordingly, significant exchange rate fluctuations could
materially increase the required payments under these agreements.
IF WE ENGAGE IN AN ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION
If appropriate opportunities become available, we may attempt to acquire
businesses, products or technologies that we believe are a strategic fit with
our business. We currently have no commitments or agreements for any
acquisitions. If we do undertake any transaction of this sort, the process of
integrating an acquired business, product or technology may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for ongoing development of our
business. Moreover, we may fail to realize the anticipated benefits of any
acquisition. Future acquisitions could dilute your ownership interest in us and
could cause us to incur debt, expose us to future liabilities and result in
amortization expenses related to goodwill and other intangible assets.
OUR OR THIRD PARTIES' COMPUTER SYSTEMS MAY FAIL DURING THE YEAR 2000, WHICH
COULD DELAY DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS
The year 2000 issue arises from computer programs written using two, rather
than four, digits to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. If our computer
systems, or the computer systems of the third parties we rely upon, experience
problems because of the year 2000 issue, it could delay development and
commercialization of our products or reduce our ability to cost-effectively
manage our business during the time required to fix these problems. We have
assessed our computer systems and do not expect any residual year 2000-related
problems. However, our systems could experience residual year 2000-related
problems in the future which could harm our operations. We have not assessed the
year 2000 readiness of our suppliers, corporate collaborators or other third
parties with which we conduct transactions. These third parties may encounter
year 2000-related problems in the future which could result in lost data or
increased operating expenses.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE
ABLE TO RESELL SHARES OF OUR COMMON STOCK FOR A PROFIT
Prior to this offering, there has been no public market for our common
stock. We will determine the initial public offering price with the
underwriters. This price may not be the price at which the common stock will
trade after this offering. The market price of our common stock may decline
below the initial public offering price and an active trading market may not
develop after this offering. We cannot assure you of the extent to which an
active trading market will develop or how liquid that market may become.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME
FLUCTUATIONS
The market price of the common stock may fluctuate substantially due to a
variety of factors, including:
- announcements of technological innovations or new products by us or our
competitors;
- announcement of FDA approval or disapproval of our products;
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<PAGE>
- the success rate of our discovery efforts and clinical trials leading to
performance-based payments and revenues under our collaborations;
- developments or disputes concerning patents or proprietary rights,
including announcements of infringement, interference or other litigation
against us or our licensors;
- the willingness of collaborators to commercialize our products and the
timing of commercialization;
- announcements concerning our competitors, or the biotechnology or
pharmaceutical industry in general;
- public concerns as to the safety of our products or our competitors'
products;
- changes in government regulation of the pharmaceutical or medical
industry;
- changes in the reimbursement policies of third party insurance companies
or government agencies;
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates or recommendations by securities analysts;
- changes in accounting principles; and
- the loss of any of our key scientific or management personnel.
In addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of biotechnology companies,
particularly companies like ours without consistent product revenues and
earnings, have been highly volatile, and may continue to be highly volatile in
the future. This volatility has often been unrelated to the operating
performance of particular companies. In the past, securities class action
litigation has often been brought against companies that experience volatility
in the market price of their securities. Whether or not meritorious, litigation
brought against us could result in substantial costs and a diversion of
management's attention and resources.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to
decline. Some of the factors that could cause our operating results to fluctuate
include:
- the failure of any of our corporate collaborators to meet their payment
obligations, or termination of any of our agreements with them;
- the timing of development and commercialization of our abarelix products
leading to performance-based payments and revenues under our agreements
with our corporate collaborators; and
- the timing of our commercialization of other products resulting in
revenues.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance.
IF OUR EXISTING STOCKHOLDERS SELL A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON
STOCK IN THE PUBLIC MARKET, OUR STOCK PRICE MAY DECLINE
After this offering, we will have outstanding 39,966,545 shares of common
stock. Of these shares, the 8,000,000 shares being offered in this offering will
be freely tradeable. Our directors, executive officers, substantially all of our
stockholders and all of our warrant holders have agreed that they will not sell
or otherwise dispose of any shares of common stock without the prior written
consent of
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<PAGE>
Salomon Smith Barney Inc. for a period of 180 days after the completion of this
offering. Salomon Smith Barney Inc. may waive the restrictions in these lock-up
agreements.
After the completion of this offering, we intend to file a registration
statement covering approximately 9,930,460 shares of common stock issuable under
our stock option plan and our employee stock purchase plan as of December 31,
1999. In addition, holders of 30,652,908 shares of our common stock have
registration rights. In the future, we may issue additional shares to our
employees, directors or consultants, in connection with corporate alliances or
acquisitions, and to raise capital. Due to these factors, sales of a substantial
number of shares of our common stock in the public market could occur at any
time.
OUR OFFICERS AND DIRECTORS WILL CONTROL 45.3% OF OUR COMMON STOCK AND WILL BE
ABLE TO SIGNIFICANTLY INFLUENCE CORPORATE ACTIONS
After this offering, our executive officers, directors and stockholders
affiliated with them will control approximately 45.3% of our common stock, based
on their beneficial ownership as of December 31, 1999 and including options held
by them that are exercisable within 60 days of December 31, 1999. As a result,
these stockholders, acting together, will be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. The interests of this group of stockholders may not always
coincide with our interests or the interests of other stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER, BY-LAWS AND UNDER DELAWARE LAW MAY MAKE
AN ACQUISITION OF US MORE DIFFICULT, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL
TO OUR STOCKHOLDERS
Provisions in our certificate of incorporation and by-laws may delay or
prevent an acquisition of us or a change in our management. In addition, because
we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporate Law. These provisions may prohibit
large stockholders, in particular those owning 15% or more of our outstanding
voting stock, from merging or combining with us. These provisions in our
charter, by-laws and under Delaware law could reduce the price that investors
might be willing to pay for shares of our common stock in the future and result
in the market price being lower that it would be without these provisions.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF THIS OFFERING IN WAYS
WHICH DO NOT YIELD A FAVORABLE RETURN
We have broad discretion to allocate the net proceeds from this offering. As
a result, investors in this offering will be relying upon our judgment with only
limited information about our specific intentions regarding the use of proceeds.
We cannot assure you that the proceeds will be invested to yield a favorable
return.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF
THEIR INVESTMENT
We expect the initial public offering price of our common stock to be
substantially higher than the book value per share of the outstanding common
stock. Investors purchasing shares of common stock in this offering will incur
immediate substantial dilution in the amount of $10.85 per share based upon an
assumed initial public offering price of $16.00 per share. To the extent
outstanding stock options or warrants are exercised, there will be further
dilution to new investors.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
- the progress of our product development programs;
- the status of our clinical development of potential drugs, clinical trials
and the regulatory approval process;
- our estimates for future revenues and profitability;
- our estimates regarding our capital requirements and our needs for
additional financing;
- developments relating to our selection and licensing of drug targets;
- our ability to attract partners with acceptable development, regulatory
and commercialization expertise;
- the benefits to be derived from corporate collaborations, including
collaborations relating to the development and commercialization of
abarelix products;
- the benefits to be derived from license agreements and other collaborative
efforts for the development and commercialization of products; and
- sources of revenues and/or anticipated revenues, including contributions
from corporate collaborations, license agreements and other collaborative
efforts for the development and commercialization of products, and the
continued viability and duration of those agreements and efforts.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
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USE OF PROCEEDS
We expect that we will receive net proceeds of approximately $118,040,000
from the sale of the 8,000,000 shares of common stock we are offering, based on
an assumed initial public offering price of $16.00 per share, and after
deducting underwriting discounts and commissions and estimated offering expenses
that we will pay. If the underwriters exercise their over-allotment option in
full, we will receive net proceeds of approximately $135,896,000. We currently
intend to use the net proceeds of this offering as follows:
- approximately $30.0 million to fund the production of abarelix drug
product;
- approximately $30.0 million towards the purchase of our new facility and
related improvements;
- an undetermined amount for clinical trial expenses related to abarelix and
other preclinical testing and expansion of research and development
activities;
- an undetermined amount for sales and marketing expenses associated with
the commercial launch of abarelix; and
- for working capital and general corporate purposes.
In addition, we also may use a portion of the net proceeds of this offering
for the acquisition of complementary businesses, products or technologies. While
we evaluate these types of opportunities from time to time, there are currently
no agreements or negotiations with respect to any specific transaction.
We have not yet determined all of our expected expenditures, and we cannot
estimate the amounts to be used for each purpose set forth above. Accordingly,
our management will have significant flexibility in applying a significant
portion of the net proceeds of this offering. Pending use of the net proceeds as
described above, we intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
we do not currently intend to pay any cash dividends on the common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors will determine
future dividends, if any.
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CAPITALIZATION
The following table describes our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the automatic conversion of
all of our outstanding shares of convertible preferred stock into common
stock; and
- on a pro forma as adjusted basis to give effect to this offering and
issuance of the related shares of common stock and the automatic
conversion of all of our outstanding shares of convertible preferred stock
into common stock.
You should read this table together with the section of this prospectus with
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements and the related notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock--unallocated, $0.01 par value: 312,700
shares authorized, actual and pro forma; 10,000,000
shares authorized, pro forma as adjusted; none issued
and outstanding, actual, pro forma and pro forma as
adjusted.............................................. $ -- $ -- $ --
Series A, B, C, D and E convertible preferred stock,
$0.01 par value: 3,437,300 shares authorized, actual
and pro forma; none authorized, pro forma as adjusted;
3,417,300 shares issued and outstanding, actual; none
issued and outstanding, pro forma and pro forma as
adjusted.............................................. 35 -- --
Common stock, $0.01 par value: 60,000,000 shares
authorized, actual and pro forma; 200,000,000 shares
authorized, pro forma as adjusted; 6,358,684 shares
issued and outstanding, actual; 31,966,545 shares
issued and outstanding, pro forma; 39,966,545 shares
issued and outstanding, pro forma as adjusted......... 64 320 400
Additional paid-in capital.............................. 88,710 88,489 206,449
Accumulated deficit..................................... (1,093) (1,093) (1,093)
------- ------- --------
Total stockholders' equity............................ 87,716 87,716 205,756
------- ------- --------
Total capitalization................................ $87,716 $87,716 $205,756
======= ======= ========
</TABLE>
The actual, pro forma and pro forma as adjusted information set forth in the
table excludes:
- 1,200,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option;
- 8,211,644 shares of common stock issuable upon the exercise of stock
options outstanding as of December 31, 1999, at a weighted average
exercise price of $3.35 per share;
- 515,940 shares reserved for issuance upon the exercise of warrants
outstanding as of December 31, 1999, at a weighted average exercise price
of $10.39 per share;
- an additional 1,558,816 shares of common stock reserved for issuance under
our Amended and Restated 1995 Stock Plan as of December 31, 1999; and
- an additional 160,000 shares of common stock reserved for issuance under
our Employee Stock Purchase Plan.
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $87,716,000, or $2.74 per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma total
tangible assets less total liabilities, divided by the pro forma number of
shares of common stock outstanding assuming the conversion of all shares of
convertible preferred stock outstanding as of December 31, 1999 into 25,607,861
shares of common stock. Pro forma net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the pro forma net tangible book
value per share of common stock immediately after completion of this offering on
a pro forma as adjusted basis. After giving effect to the sale of the
8,000,000 shares of common stock by us at an assumed initial public offering
price of $16.00 per share, and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of December 31, 1999 would have been $205,756,000, or
$5.15 per share of common stock. This represents an immediate increase in net
tangible book value of $2.41 per share of common stock to existing common
stockholders and an immediate dilution in pro forma net tangible book value of
$10.85 per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $16.00
Pro forma net tangible book value per share before this
offering................................................ $2.74
Increase in pro forma net tangible book value per share
attributable to this offering........................... 2.41
-----
Pro forma net tangible book value per share after this
offering.................................................. 5.15
------
Dilution per share to new investors......................... $10.85
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing and new
investors purchasing shares of common stock in this offering, before deducting
underwriting discounts and commissions and offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 31,966,545 80% $ 89,315,621 41% $ 2.79
New investors................ 8,000,000 20 128,000,000 59 16.00
----------- ----- ------------ -----
Total.................... 39,966,545 100% $217,315,621 100%
=========== ===== ============ =====
</TABLE>
The tables and calculations above assume no exercise of the underwriters'
over-allotment option to purchase up to an additional 1,200,000 shares of common
stock. This information also assumes no exercise of options outstanding under
our 1995 Stock Plan or of outstanding warrants. As of December 31, 1999, there
were 8,211,644 shares of common stock reserved for issuance upon the exercise of
outstanding options at a weighted average exercise price of $3.35 per share and
515,940 shares of common stock reserved for issuance upon the exercise of
outstanding warrants at a weighted average exercise price of $10.39 per share.
To the extent that any of these options or warrants are exercised, there will be
further dilution to new investors.
20
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and the related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. We have derived our statement of operations for each of the
three years in the period ended December 31, 1999, and our balance sheet data at
December 31, 1998 and 1999, from our financial statements that have been audited
by Ernst & Young LLP, independent auditors, and which we include elsewhere in
this prospectus. We have derived our statement of operations data for the years
ended December 31, 1995 and 1996 and the balance sheet data at December 31,
1995, 1996 and 1997 from our audited financial statements which we do not
include in this prospectus. We have presented pro forma net income per share
information to give effect to the assumed conversion of all outstanding shares
of our convertible preferred stock into a total of 25,607,861 shares of common
stock as of their original dates of issuance. We computed pro forma net income
per share on the basis described in Note 2 of the notes to the financial
statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Corporate collaborations.............................. $ -- $ -- $15,118 $37,624 $61,514
Contract services..................................... -- 876 2,615 1,943 --
------- ------- ------- ------- -------
Total revenues...................................... -- 876 17,733 39,567 61,514
Costs and expenses:
Research and development.............................. 3,687 7,947 15,013 33,704 48,764
General and administrative............................ 1,609 2,120 3,780 3,605 6,173
------- ------- ------- ------- -------
Total costs and expenses............................ 5,296 10,067 18,793 37,309 54,937
------- ------- ------- ------- -------
Operating income (loss)................................. (5,296) (9,191) (1,060) 2,258 6,577
Interest income (net)................................... 197 627 1,364 3,516 4,473
------- ------- ------- ------- -------
Income (loss) before income taxes....................... (5,099) (8,564) 304 5,774 11,050
Provision for income taxes.............................. -- -- 100 100 1,800
------- ------- ------- ------- -------
Net income (loss)....................................... $(5,099) $(8,564) $ 204 $ 5,674 $ 9,250
======= ======= ======= ======= =======
Net income (loss) per share:
Basic................................................. $ (1.59) $ (2.62) $ 0.05 $ 0.99 $ 1.51
======= ======= ======= ======= =======
Diluted............................................... $ (1.59) $ (2.62) $ 0.01 $ 0.16 $ 0.24
======= ======= ======= ======= =======
Weighted average number of common shares:
Basic................................................. 3,199 3,263 4,446 5,738 6,106
Diluted............................................... 3,199 3,263 28,270 35,139 37,849
Pro forma net income per share:
</TABLE>
<TABLE>
<S> <C>
Basic................................................................................................. $ 0.29
=======
Diluted............................................................................................... $ 0.24
=======
Pro forma weighted average number of common shares:
Basic................................................................................................. 31,714
Diluted............................................................................................... 37,849
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.................................... $2,595 $15,220 $40,190 $85,298 $ 94,525
Working capital.................................. 1,727 13,092 31,802 76,626 86,220
Total assets..................................... 5,250 18,213 47,361 90,625 140,331
Capital lease obligations, net of current
portion........................................ 864 717 249 59 --
Total stockholders' equity....................... 3,486 14,761 34,907 78,373 87,716
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We were incorporated in July 1993 as Pharmaceutical Peptides, Inc. and began
operations in January 1994. In June 1997, we changed our name to PRAECIS
PHARMACEUTICALS INCORPORATED. Since our inception, we have developed drugs for
the treatment of a variety of human diseases. Our lead program is the
development of abarelix, a drug to treat diseases that respond to the lowering
of hormone levels. We have entered into collaborations with Amgen and Sanofi-
Synthelabo to further develop and commercialize our abarelix products.
Since our inception, we have had no revenues from product sales. We have
received revenues in the form of signing, performance-based, cost sharing and
contract services payments from corporate collaborations. These revenues enabled
us to achieve profitability and positive cash flow before any financing activity
for fiscal 1997, 1998 and 1999. Through December 31, 1999, we recognized
approximately $119.7 million in revenues under these collaboration agreements.
Under these agreements, we could receive additional non-refundable
performance-based payments and reimbursement for ongoing development costs, as
well as a percentage of future product profits. For the next several years, we
expect that our sources of revenue, if any, will consist primarily of interest
income and payments from our corporate collaborators.
Our accumulated deficit as of December 31, 1999 was approximately
$1.1 million. Substantially all of our expenditures to date have been for drug
development activities and for general and administrative expenses.
Due to the high costs associated with preparing to launch our first product,
as well as other research and development and general and administrative
expenses, we expect to have net operating losses for fiscal 2000 and the
following several years. We do not expect to generate operating income until
several years after the FDA approves abarelix-depot-M for marketing. We will
require regulatory approval to market all of our future products.
In August 1996, we entered into a collaboration and license agreement with
Boehringer Ingelheim International GmbH. Under this agreement, Boehringer paid
us approximately $5.4 million over approximately two years. These payments
consisted of an initial signing payment and additional payments for the
screening of Boehringer compounds and reimbursement of personnel and related
materials expenses. We also are entitled to receive royalties on the net sales
of any product containing a Boehringer compound which was screened by us if
Boehringer develops and commercializes the product.
In May 1997, we entered into an agreement with Sanofi-Synthelabo for the
development and commercialization of abarelix products in Europe, Latin America,
the Middle East and various countries in Africa. Under our agreement with
Sanofi-Synthelabo, we could receive up to approximately $69.6 million in
non-refundable fees and performance-based payments. For supply of product to
Sanofi-Synthelabo, we receive a transfer price that varies based on sales price
and volume. Additionally, we are entitled to receive reimbursement for ongoing
development costs. To date, we have received a total of approximately
$30.3 million in non-refundable fees, performance-based payments and
reimbursement for ongoing development costs under the Sanofi-Synthelabo
agreement.
In 1997 and 1998, we entered into agreements with Roche Products for the
research, development and commercialization of abarelix products in all
countries outside of the Sanofi-Synthelabo territory. In December 1998, we and
Roche mutually terminated the agreement. During the term of the
22
<PAGE>
agreement, Roche paid to us approximately $28.2 million in performance-based and
cost-sharing payments. Roche retains no rights to the abarelix program and has
no equity interest in us.
Effective March 1999, we entered into an agreement with Amgen for the
development and commercialization of abarelix products in the countries not
covered by the Sanofi-Synthelabo agreement. Under the agreement, we could
receive up to $25.0 million in signing and performance-based fees. We have
received $10.0 million to date, which is the minimum amount payable under the
agreement. The remaining $15.0 million is payable upon FDA approval of an NDA
relating to abarelix. Amgen will pay all authorized costs and expenses
associated with the research, development and commercialization of abarelix
products in the United States that we incur during 1999 and a portion of 2000.
Following these expenditures, in general we will share with Amgen all subsequent
United States research and development costs for abarelix products through the
launch period and we will reimburse Amgen for a share of costs associated with
establishing a sales and marketing infrastructure in the United States. In
general, we will receive a transfer price and royalty based on a sharing of the
resulting profits on sales of abarelix products in the United States. All
program expenses in Amgen's licensed territory outside the United States will be
borne by Amgen, and we will receive a royalty on net sales of abarelix products
in those territories.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues for the year ended December 31, 1999 were $61.5 million as compared
to $39.6 million for the corresponding period in 1998. The increase in revenues
was due to significantly increased cost-sharing payments under our collaboration
agreements, principally our agreement with Amgen.
Research and development expenses for the year ended December 31, 1999 were
$48.8 million as compared to $33.7 million for the corresponding period in 1998.
The increase in research and development expenses was attributable primarily to
increased expenses related to two pivotal phase III clinical trials for the use
of abarelix to treat prostate cancer and phase I and II/III clinical trials for
the use of abarelix to treat endometriosis. Additional spending increases were
related to our Apan program, our Latranal program and core research and
development activities.
General and administrative expenses for the year ended December 31, 1999
were $6.2 million as compared to $3.6 million for the corresponding period in
1998. The increase in expenses reflects our participation in professional
forums, costs associated with marketing consultants and the purchase of market
data.
Net interest income for the year ended December 31, 1999 was $4.5 million as
compared to $3.5 million for the corresponding period in 1998. This increase was
attributable to an increase in the amount of cash available for investment
following our sale of $37.7 million of equity securities in April 1998.
The provision for income taxes for year ended December 31, 1999 was
$1.8 million as compared to $0.1 million for the corresponding period in 1998.
The provision increased because prior to 1999, we utilized net operating loss
carryforwards to offset substantially all of our taxable income.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues for the year ended December 31, 1998 were $39.6 million as compared
to $17.7 million for the corresponding period in 1997. Revenues for the year
ended December 31, 1998 included approximately $37.6 million earned under our
collaboration agreements and $2.0 million earned under the Boehringer agreement.
Revenues for the year ended December 31, 1997 included approximately
$15.1 million earned under our collaboration agreements and $2.6 million earned
under the Boehringer agreement.
23
<PAGE>
Research and development expenses for the year ended December 31, 1998 were
$33.7 million as compared to $15.0 million for the corresponding period in 1997.
The increase in expenses was attributable to the expansion of clinical trials
relating to abarelix, the hiring of additional research and development
personnel, including the commencement of the Provid Research division's
operations in New Jersey, and increased expenditures relating to the Alzheimer's
Disease program and core research and technologies.
General and administrative expenses for the year ended December 31, 1998
were $3.6 million as compared to $3.8 million for the corresponding period in
1997. The decrease in expenses was attributable to reduced legal expenses
related to collaboration efforts and reduced expenses related to trademark and
patent activities.
Net interest income for the year ended December 31, 1998 was $3.5 million as
compared to $1.4 million for the corresponding period in 1997. The increase in
interest income was attributable to an increase in the amount of cash available
for investment resulting from the net proceeds of our sale of Series E
convertible preferred stock, as well as payments received pursuant to
collaboration agreements.
The provision for income taxes for the year ended December 31, 1998 was
$0.1 million which was consistent with the corresponding period in 1997. The
provision for income taxes during both years reflects our use of net operating
loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception principally through private
placements of equity securities. We have received net proceeds of approximately
$9.5 million from the sale of our common stock, $0.5 million from the sale of
warrants to purchase common stock and $78.5 million from the sale of convertible
preferred stock. Additionally, we have received a total of approximately
$138.4 million for one-time signing payments and performance-based payments,
cost reimbursements and contract service payments under our collaboration
agreements. We also have received $10.9 million from interest on invested cash
balances and paid $0.4 million in interest expense associated with equipment
leasing. As of December 31, 1999, we had cash and cash equivalents of
$94.5 million and working capital of $86.2 million. Based upon our existing
capital resources, together with the net proceeds of this offering, interest
income and payments under our collaboration agreements, we anticipate that we
will be able to maintain currently planned operations for at least the next
several years.
For the year ended December 31, 1999, net cash of $12.9 million was provided
by operating activities principally due to net income and an increase in current
liabilities, partially offset by an increase in accounts receivable and unbilled
revenues. Our investing activities for the year ended December 31, 1999 were
limited to the purchase of property and equipment in the amount of
$3.6 million. Our financing activities for the year ended December 31, 1999 were
minimal since we completed our last equity financing in 1998.
In January 2000, we signed an agreement to purchase, for $41.5 million, land
and a building of approximately 175,000 square feet located in the western
suburbs of Boston, Massachusetts, which we will use as our principal
headquarters and research facility. In connection with our signing this
agreement, we made deposits of $1.2 million. We currently expect to use
approximately $30.0 million of the net proceeds of this offering towards the
purchase of this facility and related improvements, subject to our obtaining
adequate financing for this purchase. We expect to close the transaction in the
second quarter of 2000.
Amgen will also provide us with a line of credit not to exceed $150.0
million through 2002. Under the line of credit, subject to various conditions
each year, we are permitted to draw down a maximum of $25.0 million in 2000,
$75.0 million in 2001, and in 2002, the remaining balance of the line of credit
available after all previous drawdowns. For each drawdown in 2002, we must
demonstrate a cash flow
24
<PAGE>
need reasonably acceptable to Amgen and meet various other specified conditions,
including conditions relating to the commercial sale of abarelix. Borrowings
will bear interest at market rates and will be secured by various receivables
relating to abarelix products. In addition, all borrowings under the line of
credit must be repaid by 2008.
We expect our funding requirements to increase over the next several years
as we continue with current clinical trials for abarelix, initiate clinical
trials for additional products, prepare for a potential commercial launch of
abarelix products, purchase, improve and move into our new facility and continue
to expand our research and development efforts. Our expenditure requirements
will depend on numerous factors, including:
- the progress of our research and development activities;
- the scope and results of preclinical testing and clinical trials;
- the cost, timing and outcomes of regulatory reviews;
- the rate of technological advances;
- determinations as to the commercial potential of our products under
development;
- the status of competitive products;
- our ability to defend and enforce our intellectual property rights;
- the establishment, continuation or termination of third party
manufacturing or sales and marketing arrangements;
- the development of sales and marketing resources;
- the establishment of additional strategic or licensing arrangements with
other companies or acquisitions;
- the availability of financing for the purchase of our new facility;
- our ability to sublease our current facility and part of our new facility;
and
- the availability of other financing.
At December 31, 1999, we had provided a valuation allowance of $3.6 million
for our deferred tax assets. The valuation allowance represents the excess of
the deferred tax asset over the benefit from future losses that could be carried
back if, and when, they occur. The valuation allowance decreased by
$2.7 million in 1999 due to the use of previously unbenefitted tax credit
carryforwards. Due to anticipated operating losses in the future, we believe
that it is more likely than not that we will not realize a portion of the net
deferred tax assets in the future and we have provided an appropriate valuation
allowance.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with an interest rate fixed at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. We believe that a 10% decline in
the average yield of our investments would adversely impact our net interest
income. We do not believe, however, that a 10% decline would have a material
adverse effect on our overall results of operations or cash flows. To minimize
this risk in the future, we intend to maintain our portfolio of cash equivalents
and short-term investments in a variety of securities, including commercial
paper, money market funds and government and non-government debt securities. The
average duration of all
25
<PAGE>
of our investments in 1999 was less than one year. Due to the short-term nature
of these investments, we believe we have no material exposure to interest rate
risk arising from our investments. Therefore, no quantitative tabular disclosure
is required.
We have two supply agreements with vendors located outside the United
States. We currently conduct all transactions under these agreements in United
States dollars, but these transactions are subject to adjustment based upon
significant fluctuations in currency exchange rates. If the exchange rate
undergoes a change of 10%, we do not believe that it would not have a material
impact on our results of operations or cash flows.
YEAR 2000 ISSUES
The year 2000 issue arises from computer programs written using two digits
rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations following December 31, 1999, causing
disruptions of operations for companies using these computer programs or
hardware. Many companies' computer systems may still need to be upgraded or
replaced in order to avoid year 2000-related issues.
We, our corporate collaborators, suppliers and other third parties we rely
upon use a wide variety of information technologies, computer systems and
scientific equipment containing computer chips dedicated to a specific task. As
of March 15, 2000, neither we, nor to our knowledge, any of the third parties we
depend upon, have experienced any material problems associated with the year
2000 issue. If we or these third parties experience problems in the future as a
result of any year 2000-related issues, we could experience an interruption of
our research programs. We currently are unable to estimate the duration and
extent of any potential interruption, or estimate the effect that any
interruption may have on our future revenue. However, we believe that the impact
of any residual year 2000-related issues on our research operations will be
limited to the ongoing execution of new experiments, and we do not expect that
any historical data would be affected. Costs to ensure that our systems and
networks are year 2000 compliant have not been, nor do we expect them to be,
material.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities," which will be effective for 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including various derivative instruments embedded in
other contracts, be recorded on the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. We do not anticipate that Statement of Financial
Accounting Standards No. 133 will have a significant impact on our operating
results or financial condition when adopted, since we currently do not engage in
hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which clarified the Securities and Exchange
Commission's views concerning revenue recognition policies and is effective no
later than the quarter ended March 31, 2000. We believe that our revenue
recognition policies comply with the Staff Accounting Bulletin.
26
<PAGE>
BUSINESS
OVERVIEW
We are a drug discovery and development company. Our product pipeline
includes abarelix-depot-M, which we have tested in two pivotal phase III
clinical trials for the treatment of hormonally responsive prostate cancer, and
abarelix-depot-F, currently in phase II/III clinical trials for the treatment of
endometriosis. We are also developing Latranal, a locally-acting,
topically-applied pain reliever in preclinical development for the treatment of
acute and chronic muscle and tendon related pain, and Apan, our drug for the
treatment of Alzheimer's Disease. Other product candidates are in the research
phase.
We believe that we have established, and that our product pipeline
demonstrates the usefulness of, a new proprietary technology for the rapid and
cost-effective discovery and development of drugs. We developed our technology
to overcome the limitations of existing drug discovery methods. Our technology
combines the biological selection of natural peptide molecules, also known as
ligands, with a chemical modification process that gives the peptides the
pharmacological properties of useful drugs. Ligands can come either from natural
genes or large pools of synthetic genes known as gene libraries. Using our
technology, we can rapidly produce and analyze large numbers of molecules and
identify those that have desired properties for further development into drugs.
We can examine in excess of 1,000 times more molecules for drug development with
this technology than conventional technologies would permit, in a fraction of
the time. We believe that we are the leader in this technological field that we
refer to as Ligand Evolution to Active Pharmaceuticals, or LEAP.
In addition to demonstrating that LEAP is a useful technical approach for
discovering and developing new drugs, we have also demonstrated that it is
cost-effective and practical. Using our private equity capital, we were able to
develop abarelix-depot-M and abarelix-depot-F sufficiently so that we could
satisfactorily demonstrate their clinical and commercial usefulness to potential
sales and marketing partners. We have generated adequate revenues through our
corporate collaborations to allow us to operate at a profit for the last three
years and have an accumulated deficit of only $1.1 million as of December 31,
1999. We intend to market our initial products through our arrangements with
Amgen and Sanofi-Synthelabo.
We have successfully employed LEAP to develop abarelix-depot-M, a drug for
the treatment of prostate cancer. An estimated 180,400 men in the United States
develop prostate cancer each year. We expect to file an NDA for abarelix-depot-M
with the FDA by the end of 2000. We believe that abarelix-depot-M works in a
unique way which will allow this drug to successfully compete in the
approximately $2.0 billion worldwide market for prostate cancer drugs.
We have also developed a unique form of abarelix, called abarelix-depot-F,
for the treatment of women with diseases that respond to a reduction of the
female hormone estrogen. We have demonstrated the potential usefulness of
abarelix-depot-F in a phase I/II study for the treatment of endometriosis.
Endometriosis is a painful, long-lasting condition affecting an estimated five
million women in the United States. We believe that existing medicine does not
adequately serve patients suffering from endometriosis. Due to its unique
composition and the way in which it works in the body, we believe that
abarelix-depot-F will expand the existing market for drugs to treat
endometriosis and fulfill a significant unmet need.
Our LEAP technology was also instrumental in the development of Apan, a drug
candidate for the treatment of Alzheimer's Disease. According to estimates, more
than four-million Americans suffer from Alzheimer's Disease. We expect to begin
clinical trials with Apan within the next 12 months. Apan addresses what we and
others believe to be the underlying cause of Alzheimer's Disease, rather than
the symptoms.
27
<PAGE>
We intend to commercialize both abarelix-depot-M and abarelix-depot-F as
once-a-month injectable drugs. Production of abarelix-depot-M and
abarelix-depot-F in our proprietary drug delivery system, known as Rel-Ease,
makes this possible. We have demonstrated that Rel-Ease also is useful for
formulating other drugs in long-acting, or depot, forms and believe that it may
have significant commercial potential. We have a patent that covers the
application of this technology for a broad range of drugs.
Since our proprietary LEAP technology readily produces drug-like molecules,
we can use it to test and validate potential drug targets much more efficiently
than conventional drug discovery and development methods can. LEAP's usefulness
in drug discovery is comparable to an Internet search engine. Search engines are
essential in the location and selection of useful information from a vast amount
of data, most of which is useless in isolation. We believe that LEAP can
identify useful drug targets imbedded within the sequence of the human genome by
showing which ones, when targeted by a drug, show potential for clinical use.
LEAP selects protein sequences that we can modify into drugs directly and
identifies drug targets against which we can deploy LEAP technology to produce
drugs that treat human diseases.
We have entered into an alliance with one of the world leaders in genomics,
Human Genome Sciences. Through this alliance, we will have access to potential
drug targets that Human Genome Sciences has identified from the genes of humans
and will seek to use LEAP technology to develop drugs for the treatment of
various medical conditions based on these proprietary genomic targets.
We have assembled an experienced and multi-disciplined team of senior
executives and trained scientists and technicians. Our staff, totaling about 100
persons, has the necessary expertise to discover and develop commercially viable
drugs from inception through preclinical and clinical testing and to obtain
regulatory approval. Our areas of expertise include proteomics, chemistry and
medicinal chemistry, molecular biology, biochemistry, cell biology,
pharmacology, toxicology, formulation, manufacturing, quality assurance and
control, medical and regulatory. This collective expertise allows us to license
drug opportunities from third parties to supplement our internal product
development. For example, we have obtained rights to Latranal, that we expect to
test this year in patients with acute and chronic muscle and tendon related
pain. We believe that if successful, this drug will address a market of several
million patients and fulfill an unmet medical need.
In the future, we may enter into alliances for global commercialization
following successful clinical trials of our products, as we have done with Amgen
and Sanofi-Synthelabo, while retaining significant profit sharing potential.
Alternatively, we may choose to sell our products directly and retain 100% of
the profit potential.
OUR BUSINESS STRATEGY
Our objective is to combine our skills, expertise and proprietary technology
to develop and commercialize drugs rapidly that address significant clinical
needs. We are pursuing the following strategy to achieve this objective:
- EXTEND THE COMMERCIAL POTENTIAL OF ABARELIX BY EXPANDING INTO ADDITIONAL
DISEASE AREAS. We believe that abarelix may provide a therapeutic benefit
for the treatment of other diseases which respond to the reduction of
testosterone or estrogen hormone levels, such as benign prostatic
hypertrophy, breast cancer, uterine fibroids, polycystic ovarian disease,
precocious puberty and infertility. We intend to explore new and expanded
product opportunities with our corporate collaborators.
- USE OUR LEAP TECHNOLOGY, TOGETHER WITH OPPORTUNITIES THAT THE HUMAN GENOME
PROJECT PRESENTS, TO DISCOVER NEW DRUG CANDIDATES. Our proprietary LEAP
technology is a powerful tool for the rapid discovery of lead drug
compounds. The Human Genome Project provides us with a database of
28
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newly-identified genes from which we can define new drug targets through
the application of LEAP. We believe that using this database, we will be
able to accelerate the identification of new drug targets and drug
candidates. To this end, we have established a collaboration with Human
Genome Sciences and have identified promising genomic targets to pursue.
- RETAIN SIGNIFICANT RIGHTS TO OUR PRODUCTS UNTIL LATE STAGES OF DEVELOPMENT
TO OBTAIN FAVORABLE FINANCIAL TERMS WITH STRATEGIC PARTNERS. We believe
that we can retain significant product value by developing products to a
late stage before seeking commercialization partners, or by entering into
partnerships where we share the cost of development equally with our
partners. Because of our developmental capabilities and financial
resources, we are able to assume both significant financial and
operational product responsibility and, as a result, we are able to retain
significant profit potential from the sale of our products.
- DEVELOP LICENSED DRUGS FROM THIRD PARTIES TO SUPPLEMENT PRODUCT
DEVELOPMENT. We have gained significant experience in applying our LEAP
technology for the discovery and development of both abarelix and Apan. We
have used this experience to establish the necessary infrastructure to
expand our product base, capture and develop new third party licensing
opportunities, and rapidly and cost-effectively develop internally
discovered compounds.
OUR PRODUCT PIPELINE
We focus our drug development efforts on conditions or diseases where there
are significant unmet needs creating a potential for large product revenues. We
have four programs that have moved beyond the research phase into late
preclinical or clinical testing. We have outlined our development programs and
the clinical indications they address in the following table:
<TABLE>
<S> <C> <C> <C>
<S> <C> <C> <C>
COMPOUND DISEASE STATUS PARTNERS
- ------------------------------- ----------------------------- -------------------- -----------------------
Abarelix-Depot-M Hormonally Responsive Phase III Amgen;
Prostate Cancer Sanofi-Synthelabo
Abarelix-Depot-F Endometriosis Phase II/III Amgen;
Sanofi-Synthelabo
Latranal Acute and Chronic Muscle Preclinical --
and Tendon Related Pain
Apan Alzheimer's Disease Preclinical --
</TABLE>
ABARELIX PROGRAM
Abarelix has potential use in diseases that respond to the reduction of
testosterone, a male hormone, and estrogen, a female hormone. Examples of these
diseases include prostate cancer, endometriosis, uterine fibroids, breast
cancer, benign prostatic hypertrophy, polycystic ovarian disease, infertility
and precocious puberty. Treatments that reduce testosterone or estrogen through
the use of drugs, known as hormonal therapy, result in a therapeutic benefit to
the patient.
Currently available hormonal therapies overstimulate the GnRH receptor,
located on the pituitary gland, a small gland in the center of the brain.
Overstimulation of the pituitary GnRH receptor leads to increased production of
a second hormone, luteinizing hormone, or LH. The increased levels of LH then
cause a surge of testosterone from the testes in males and a surge of estrogen
from the ovaries in females. The temporary surge in hormone levels may result in
a worsening, or flare, of the disease for which the patient takes the therapy.
Only after several weeks following administration of these hormonal therapies
does the desired reduction of hormonal levels occur. Accordingly, current
hormonal
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therapies, such as Lupron Depot, that TAP Pharmaceuticals Inc. markets, and
Zoladex, that AstraZeneca Pharmaceuticals markets, have precautionary labeling
about the hormone-induced flare. The FDA mandates this precautionary labeling,
and the drug labels and packaging for these currently available drugs must
prominently include the precautionary labeling to protect patients and avoid the
use of the drugs in patients who are at risk for developing a disease flare.
In contrast, abarelix has a blocking, or antagonist, effect on the GnRH
receptor. Abarelix immediately shuts off the production of LH and consequently,
immediately reduces the patient's levels of testosterone or estrogen. With
abarelix, unlike commercially available hormonal therapies, there is no increase
in hormonal levels before achieving the desired hormone level reduction. Results
of our prostate cancer and endometriosis clinical trials demonstrate that
abarelix rapidly inhibits hormone production without the initial surge in
hormone levels.
Our most advanced programs involve the development of abarelix-depot-M and
abarelix-depot-F for the treatment of diseases worsened by testosterone in men
or estrogen in women. We believe abarelix-depot-M and abarelix-depot-F represent
the first sustained release formulations of an important class of compounds
known as GnRH antagonists.
ABARELIX-DEPOT-M
BACKGROUND. Prostate cancer is one of the most commonly diagnosed cancers
in men. According to the American Cancer Society, approximately 180,400 new
diagnoses of, and 31,900 deaths from, prostate cancer will occur in the United
States in 2000. Approximately 40% of these newly diagnosed patients have
prostate cancer that has spread beyond the prostate gland, referred to as
non-localized prostate cancer. These patients generally receive long-term
hormonal therapy. The remaining 60% of patients, whose prostate cancer is
localized, are increasingly receiving hormonal therapy in addition to other
therapies, such as radiation therapy, including radioactive seed implantation to
the prostate gland. Hormonally responsive prostate cancer, accounting for
approximately 85% of all initially diagnosed advanced stage prostate cancer, is
a condition where the cancerous cells require androgens, including testosterone
and its derivatives. Androgens stimulate the growth of the cancerous cells in
hormonally responsive prostate cancer. The goal of therapy is to reduce
testosterone to low levels, leading to inhibition of prostate cancer cell
growth. The market for hormonal treatment of prostate cancer was approximately
$2.0 billion worldwide in 1998, the majority of which was related to treatment
for non-localized prostate cancer.
To date, we have focused primarily on the development of abarelix-depot-M as
a treatment for hormonally responsive prostate cancer. Abarelix-depot-M is a
sustained release formulation of abarelix that enables once-per-month
administration. Our pivotal phase III studies demonstrate that abarelix-depot-M
reduces the time required to achieve therapeutically low testosterone levels
without the testosterone surge and the resulting associated symptoms.
Abarelix-depot-M, if approved for marketing, will be the first commercially
available GnRH antagonist in a sustained delivery formulation for the acute and
chronic management of patients with prostate cancer.
The surge of testosterone associated with available hormonal therapies may
last as long as three weeks before the intended medical effect of reduced
testosterone levels take place. In an attempt to mitigate the flare, many
practicing physicians prescribe additional drugs, known as anti-androgens.
Anti-androgens, such as Casodex, that AstraZeneca Pharmaceuticals markets, are
oral drugs given one-to-three times a day. Anti-androgens function by
interfering with the effect of testosterone at the cellular level but do not
reduce circulating testosterone levels. This additional therapy may be only
partially effective in reducing some of the undesirable effects of the flare. In
addition, anti-androgen therapy has side effects, including liver damage, breast
enlargement, lung dysfunction and gastrointestinal distress. Finally,
anti-androgens are expensive and Medicare generally does not
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reimburse their costs. This means that many patients may not receive the
potential benefit of anti-androgens.
In our pivotal phase III studies of over 500 patients, none of the patients
treated with abarelix-depot-M experienced a testosterone surge. In contrast, 85%
of patients treated with Lupron Depot alone or in combination with Casodex
experienced a sustained testosterone surge. A major reason for using
anti-androgens in clinical practice is to avoid the surge and subsequent flare.
We believe that the results of our clinical studies may lessen the perceived
need to use anti-androgens because the use of abarelix-depot-M alone avoids the
surge.
Some patients with advanced stage hormonally responsive prostate cancer are
at higher risk of serious harm resulting from the testosterone surge. Based upon
our studies, these patients constitute approximately 15% of all non-localized
prostate cancer patients. In these patients, the testosterone surge may lead to
urinary blockage, worsening pain, paralysis and nerve damage due to spinal cord
compression, kidney failure and even death. FDA mandated drug product labels
specifically warn against the use of available hormonal therapy in patients with
confirmed spinal metastases. In these cases, patients may require immediate
surgical removal of the testes to both rapidly reduce testosterone levels and
avoid the testosterone surge. Based upon our analysis of our clinical studies,
we believe that abarelix-depot-M may have the potential to provide a
non-surgical alternative for these patients. A significant portion of patients
who do not have confirmed spinal tumors are still at risk for clinical flare.
Approximately 50-60% of all non-localized prostate cancer patients fall into
this group. We believe that both physicians and patients will prefer a treatment
option that eliminates the potential risks of a clinical flare response.
ABARELIX-DEPOT-M CLINICAL STUDIES. We intend to submit comprehensive safety
and efficacy data to the FDA in 2000 to support market approval of
abarelix-depot-M. Our submission will include data from two recently completed
pivotal phase III studies for the treatment of hormonally responsive prostate
cancer, a phase III patient exposure study, an ongoing phase III study in
advanced metastatic prostate cancer patients, as well as previously completed
phase I and phase I/II studies with abarelix-depot-M.
In November 1999, we completed two pivotal phase III clinical trials of
abarelix-depot-M for the treatment of hormonally responsive prostate cancer. The
first phase III clinical trial was a 271 patient study comparing
abarelix-depot-M to Lupron Depot. This study compared the safety of both drugs
and the ability of both drugs to reduce testosterone levels. The second phase
III clinical trial was a 255 patient study comparing the safety and efficacy of
abarelix-depot-M to the combination therapy of Lupron Depot plus Casodex.
In addition to well-defined safety parameters, these studies had three
performance goals:
- the demonstration of the benefit of abarelix-depot-M compared to Lupron
Depot and Lupron Depot plus Casodex in avoiding or eliminating the
testosterone surge;
- the demonstration of the benefit of abarelix-depot-M compared to Lupron
Depot and Lupron Depot plus Casodex in rapidly achieving therapeutically
low testosterone levels, based on a measurement of testosterone levels on
the eighth day following treatment; and
- the demonstration of the similarities of abarelix-depot-M to Lupron Depot
and Lupron Depot plus Casodex in achieving and maintaining therapeutically
low testosterone levels through 85 days of treatment.
To demonstrate the benefit of abarelix-depot-M compared to Lupron Depot and
Lupron Depot plus Casodex in avoiding or eliminating the testosterone surge, we
measured testosterone levels prior to and throughout the first week of
treatment. In our clinical studies, we define testosterone surge as a ten
percent or greater increase in testosterone levels above pre-treatment levels.
None of the abarelix-
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depot-M treated patients demonstrated a testosterone surge based on two
measurements during the first week of treatment. In contrast, more than 80% of
patients treated with Lupron Depot and Lupron Depot plus Casodex experienced
elevations in testosterone levels greater than ten percent.
To demonstrate the benefit of abarelix-depot-M compared to Lupron Depot and
Lupron Depot plus Casodex in rapidly achieving therapeutically low testosterone
levels, we measured testosterone levels on the eighth day of treatment. We
observed that greater than 65% of the abarelix-depot-M treated patients achieved
therapeutically low testosterone levels by the eighth day of treatment. In
contrast, none of the patients treated with either Lupron Depot or Lupron Depot
plus Casodex had achieved therapeutically low testosterone levels on the eighth
day.
To demonstrate the similarity of abarelix-depot-M to Lupron Depot and Lupron
Depot plus Casodex in achieving and maintaining therapeutically low testosterone
levels through 85 days of treatment, we measured serum testosterone levels
frequently throughout the 85 days of treatment. We observed that greater than
85% of the patients, regardless of the treatment that we administered, were able
to achieve and maintain therapeutically low testosterone levels.
From a safety perspective, patients have tolerated treatment with
abarelix-depot-M well to date. We observed some adverse reactions in patients
during our abarelix-depot-M studies, including allergic reactions and temporary
and reversible elevation of some liver enzymes. We expected these reactions and
observed them with similar frequency in patients taking Lupron Depot and Lupron
Depot plus Casodex in our clinical studies.
We believe that the collective data from all of our clinical studies will
support the goals we summarized above. In addition, we believe that these
findings will result in product labeling that is consistent with the absence of
an initial testosterone surge.
In further support of the safety of abarelix-depot-M, we and our partner,
Amgen, are conducting a separate phase III 500 patient exposure study comparing
abarelix-depot-M to Lupron Depot. The primary objective of this study is to gain
more patient exposure to confirm the safety and efficacy performance over a six
month course of therapy. The results of this study will supplement existing
patient drug exposure data and we will include these results in our NDA.
In addition, we are testing abarelix-depot-M in an ongoing phase III
clinical trial to evaluate its use in patients with advanced prostate cancer
where the use of current hormonal therapies could result in a life-threatening
disease flare. The goal of this study is to demonstrate that abarelix-depot-M
provides a medical alternative to immediate surgical removal of the testes for
this high risk population. We have been monitoring these patients' prostate
specific antigen, or PSA, levels as part of our evaluation. PSA is a widely used
screen for identification of patients with prostate cancer. Although the FDA
does not accept PSA levels for its approval purposes, physicians monitor a
patient's progress based on PSA levels over time. We observed an immediate
decrease in median PSA levels in patients with advanced prostate cancer that we
treated with abarelix-depot-M. The graph below depicts the decrease in median
PSA levels that we observed in 42 patients participating in this study:
[Bar graph depicting reduction in PSA levels in response to abarelix-depot-M
therapy over a twelve week period.]
Our partner Sanofi-Synthelabo is conducting a 150 person study in Europe
comparing the safety and efficacy of abarelix-depot-M to Zoladex plus Casodex.
Initial analysis of the results of this study are consistent with the safety and
efficacy results we observed in our two pivotal phase III studies.
In further support of our abarelix-depot-M NDA filing, we will submit data
from earlier clinical trials. In June 1999, we completed a three-month, 236
patient phase I/II clinical study of abarelix-depot-M for the treatment of
hormonally responsive prostate cancer. The study also included patients who
received Lupron Depot or Zoladex with or without anti-androgens. This study
evaluated safety and
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<PAGE>
efficacy parameters similar to those measured in our pivotal phase III studies.
We believe that the results of this study are consistent with and further
support the conclusions and interpretations of our pivotal phase III studies.
In addition, in December 1998, we concluded a 36 patient phase I/II clinical
trial of abarelix in patients with locally confined prostate cancer prior to
radiation therapy or surgical removal of the prostate. In this study we
administered abarelix continuously in an injectable liquid formulation rather
than a depot formulation. This clinical trial evaluated safety parameters, the
rate of prostate gland volume reduction and reduction of testosterone levels. We
believe, based upon analysis of the data from this study, that abarelix
substantially reduces the volume of the prostate gland within one to three
months of commencing treatment and reduces testosterone levels within several
days. These safety results are also consistent with our pivotal phase III
studies.
The cumulative worldwide experience of our clinical studies of approximately
1,200 patients demonstrates that patients tolerate abarelix-depot-M well and
supports our intent to file an NDA for abarelix-depot-M prior to the end of
2000.
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<PAGE>
ABARELIX-DEPOT-F
BACKGROUND. We also are developing abarelix-depot-F for the treatment of
endometriosis. We believe that abarelix-depot-F, if it receives FDA approval for
marketing, will be the first commercially available GnRH antagonist in a
sustained delivery formulation for the rapid and sustained reduction of pain
associated with endometriosis through estrogen suppression. We are currently
evaluating abarelix-depot-F in a phase II/III study for the treatment of pain
and painful symptoms associated with endometriosis.
Endometriosis is a condition where endometrial tissue grows beyond the
uterine lining, most often to the surfaces of organs in the pelvic cavity.
Endometrial tissues, regardless of location in the body, respond to the normal
menstrual cycling of women. When the location of the endometrial tissue prevents
the appropriate sloughing of tissue that normally occurs during menstruation,
inflammation, gastrointestinal symptoms and internal scarring occurs. This
causes, among other things, pain, fatigue, heavy menstrual bleeding, painful
sexual intercourse and infertility. On rare occasions, these displaced
endometrial tissues may even cause bleeding in distant organs, such as the
lungs. Each year, approximately 300,000 women are diagnosed with endometriosis
in the United States. An estimated five million women in the United States
suffer from endometriosis. In addition, as a result of increased awareness of
female health, we believe that the number of patients diagnosed with and treated
for endometriosis will increase.
Existing treatments for endometriosis include the use of pain management
medications, birth control pills and hormonal therapies, of which Lupron Depot
and Zoladex are the most commonly used. The use of current hormonal therapies to
suppress estrogen production causes an initial estrogen surge in women. Lupron
Depot, Zoladex and other drugs that act in a similar way include FDA mandated
drug product labels warning against the adverse effects associated with an
estrogen surge. These labels can include warnings for the worsening in the signs
and symptoms of endometriosis, which include pain, cramping and excessive
bleeding, the risk of tumor flare in breast cancer and the development of
ovarian cysts. Our initial studies show that abarelix-depot-F causes a more
rapid reduction of estrogen levels and associated relief of pain compared to
Lupron Depot, without the estrogen surge.
ABARELIX-DEPOT-F CLINICAL STUDIES. To date, we have completed a phase I/II
study of 40 women with confirmed endometriosis using abarelix-depot-F and are
conducting a phase II/III study of abarelix-depot-F. In these studies, we
administered abarelix-depot-F in a once-per-month injection. In the phase I/II
study, we compared various doses of abarelix-depot-F to the standard dose of
Lupron Depot. Patients receiving Lupron Depot therapy experienced estrogen
surges that required several weeks to reach therapeutically low levels.
Furthermore, patients receiving Lupron Depot therapy had more frequent episodes
of endometriosis-associated menstrual pain during the first month of treatment
compared to patients receiving abarelix-depot-F. Patients have tolerated
treatment with abarelix-depot-F well in this study. To date, the safety profile
for abarelix-depot-F is consistent with the safety profile that we have observed
in the clinical studies of abarelix-depot-M that we have described in detail
above. As expected, we observed some adverse reactions in patients during our
studies of abarelix-depot-F and Lupron Depot, including temporary and reversible
irritation at the injection site and temporary and reversible elevation of some
liver enzymes.
The graphs below illustrate the results of patients treated with either
abarelix-depot-F at a dose of 120 milligrams or Lupron Depot through four weeks
of treatment. In contrast to the Lupron Depot patients, who experienced an
estrogen surge following injection and a resulting increase in pelvic area pain
associated with menstrual bleeding during the third and fourth weeks of
treatment, patients treated with abarelix-depot-F experienced a rapid reduction
of estrogen levels without the initial surge, and a rapid elimination of pelvic
area pain associated with menstrual bleeding during the third and fourth weeks
of treatment.
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ESTROGEN LEVELS AND PELVIC PAIN IN ENDOMETRIOSIS PATIENTS
TREATED WITH ABARELIX-DEPOT-F OR LUPRON DEPOT
[Four Graphs depicting estrogen levels and pelvic pain in endometriosis
patients treated with abarelix-depot-F compared to patients treated with Lupron
- -REGISTERED TRADEMARK- Depot over time.]
Our phase II/III study, begun in June 1999, compares the safety and efficacy
of abarelix-depot-F to Lupron Depot with respect to the ability to provide pain
relief and rapid estrogen suppression. This study includes a 24-week treatment
period and a 12-month follow-up period. We expect to conduct an interim analysis
within the next 12 months after treating approximately 100 patients for 24
weeks.
ADDITIONAL INDICATIONS FOR ABARELIX
We believe that abarelix can treat other diseases where hormone reduction is
a goal of therapy, including benign prostatic hypertrophy, breast cancer and
uterine fibroids. We have not begun clinical trials of abarelix for these
diseases.
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An estimated ten million men over the age of 50 in the United States have
benign prostatic hypertrophy, symptoms of which include impaired urinary flow
and, in the most severe cases, urinary retention. These symptoms are in part
related to the fact that the prostate gland continues to enlarge with age. We
believe that approximately 25% of patients with this disease could benefit from
a reduction in the size of the prostate gland. Based on data from our phase I/II
clinical trial of abarelix-depot-M, in which urinary problems in prostate cancer
patients were assessed, we believe that abarelix may be useful in treating
urinary symptoms associated with diseases of the prostate gland.
The American Cancer Society estimates that there will be approximately
184,200 newly diagnosed cases of, and 41,200 deaths from, female breast cancer
in the United States in 2000. Approximately one-third of all newly diagnosed
patients are pre-menopausal, and in many of these cases, estrogen stimulates the
breast cancer. Studies of patients taking current hormonal therapies, such as
Zoladex, suggest that these therapies are beneficial due to their ability to
suppress estrogen. The FDA has approved the marketing of Zoladex for this use.
We believe abarelix has the potential to treat female breast cancer and reduce
estrogen levels rapidly and without an estrogen surge.
Other conditions in which hormone reduction is an accepted goal of therapy
include uterine fibroids, polycystic ovarian disease, infertility and precocious
puberty. Approximately ten million women in the United States suffer from
uterine fibroids, which are benign enlargements of the uterus. In addition, an
estimated three million women in the United States suffer from polycystic
ovarian disease, a disease characterized by excessive hormonal production caused
by ovarian cysts.
LATRANAL
We are developing Latranal, a drug preparation applied to the skin over an
area of local muscle or tendon pain for pain relief. Pain, whether associated
with injury, illnesses or the general aging process, remains one of the most
serious and poorly treated afflictions. Worldwide, consumers spend approximately
$9.5 billion annually on all medications for pain management. The cost of pain
related issues to society is significant. For example, in the United States,
back pain is the single largest reason for lost days of work. The needs of pain
sufferers, especially those suffering from chronic pain conditions, are
generally poorly met. We estimate that there are several million individuals
suffering from chronic pain in the United States who are experiencing minimal to
no relief from currently available treatment options, including prescription
pain medications.
Latranal is our proprietary topical formulation made from two generically
available compounds. Both of these compounds have been in use as oral
formulations for extended periods of time and have demonstrated acceptable
safety profiles. One of these compounds affects nerve action and the other has
muscle relaxant properties. Pharmaceutical Applications Associates discovered
that the combination of these two compounds, when applied to the skin, may
result in pain relief. To date, the clinical observations by Pharmaceutical
Applications Associates of over 100 patients suggest that relief of acute and
chronic muscle and tendon related pain can occur with the use of this drug
combination.
Through a license from Pharmaceutical Applications Associates, we obtained
rights to the patents filed on this drug formulation and its use as a treatment
for pain.
An academic investigator filed an investigator-sponsored investigational new
drug application with the FDA in July of 1999 for Latranal. Following the
request by the FDA for standard preclinical toxicology studies, ownership of the
application was transferred to us. We are conducting the preclinical toxicology
studies that the FDA requested. Following the satisfactory completion of these
studies, we intend to initiate a phase I clinical trial for Latranal during
2000.
APAN
We are developing Apan for the treatment of Alzheimer's Disease. Alzheimer's
Disease affects an estimated four million people in the United States according
to a 1998 report issued by the National
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Institute of Aging. According to the Alzheimer's Association, Alzheimer's
Disease is expected to become increasingly prevalent as the population ages.
Current therapies provide temporary relief for some of the symptoms of
Alzheimer's Disease, but do not affect the progression of the disease itself.
The hallmark of Alzheimer's Disease is the accumulation of plaque-like
deposits in brain tissue. A major component of this plaque is a small peptide
called beta-amyloid. Over the past several years, a large body of clinical,
biochemical and genetic evidence has emerged indicating that the aggregation of
beta-amyloid peptide is the underlying cause of Alzheimer's Disease. This body
of evidence has led to the widely held theory that when single beta-amyloid
molecules aggregate they become toxic to nerve cells, and that this toxicity
leads to the development and progression of Alzheimer's Disease. We used our
LEAP technology to select Apan to interfere with this aggregation process.
We have shown that Apan specifically inhibits the aggregation of
beta-amyloid and its associated nerve cell toxicity in preclinical experiments.
In addition, we have shown in rats and mice that Apan reaches the brain in
quantities that we believe are sufficient to block the aggregation of
beta-amyloid molecules and alter the course of the disease.
Apan is currently undergoing good laboratory practice toxicology studies to
support our investigational new drug application. We anticipate filing an
application for Apan in 2000 and initiating a phase I clinical trial within the
next 12 months.
OUR TECHNOLOGY
We developed our technology to overcome the limitations of existing drug
discovery methods. We envisioned a technology that combines the biological
selection of natural peptide molecules, also known as ligands, which can come
either from natural genes or large pools of synthetic genes known as gene
libraries, with a chemical modification process that gives peptides the
pharmacological properties of useful drugs.
LEAP
Our proprietary method for discovering drugs is based on a unique system
that combines the power and diversity of biological selection with the favorable
drug-like properties added using medicinal chemistry. We call this process
Ligand Evolution to Active Pharmaceuticals, or LEAP. We believe LEAP is superior
to traditional methods of drug discovery that are limited by the number of
compounds that the traditional methods can make and test mechanically. In a
typical LEAP selection process, we can examine more than a trillion molecules in
a few months. By contrast, conventional screening and medicinal chemistry permit
the examination of fewer than one million molecules with equivalent resources
and require more time.
As in the case of abarelix, LEAP allows us to take a peptide encoded in the
human genome and convert that peptide into a drug. GnRH is a natural peptide
that binds to its receptor target and triggers a biological response. We used
LEAP to convert GnRH into abarelix, a drug that binds to the same receptor
target but blocks the biological response.
If a ligand from the human genome is not available, we can select one
encoded in a synthetic gene library using a process we call biological
evolution. This process involves the natural selection of the best ligand from a
pool containing billions of natural peptides in a biological system. We can
carry out this process in repeated cycles, selecting ligands based on their
functions. We then modify the selected ligand using a unique process that we
call chemical evolution. Chemical evolution is powerful because we can make
pools of thousands of diverse molecules based on the structure of the selected
ligand and composed of synthetic building blocks. We then select the best
molecules from these pools and identify them through our unique application of
the technology called mass spectrometry. These molecules can behave like drugs
because they bind to their target like natural peptides and have the
characteristics of an effective drug.
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DRUG DELIVERY TECHNOLOGY
We can further enhance the clinical utility of our drug candidates by
formulating the drugs with our proprietary sustained release technology,
Rel-Ease. For example, using Rel-Ease technology, we are able to make abarelix
in such a way that a physician only needs to administer it once-per-month,
because Rel-Ease continuously releases the drug in the body over the next
30 days. In many cases, infrequent injections of a drug in a sustained release
formulation are more desirable than oral administration due to patient
compliance, convenience or reimbursement issues. We have formulated a broad
spectrum of molecules with Rel-Ease technology and believe that we can use this
technology to produce sustained release formulations of drugs discovered and
developed in our other disease programs.
PROVID RESEARCH
While we have already demonstrated the clinical utility of LEAP in our
abarelix program, we also have other powerful technologies that can enhance the
value of modified peptides. We established the Provid Research division to
further extend our drug development technologies. Provid's approach to drug
discovery uses the potential of medicinal chemistry and structure-based design
to improve the features of peptides and optimize molecular interactions. This
process facilitates the modification of peptides into small molecules with
enhanced drug-like properties.
MASTRSCREEN
MASTRscreen is our proprietary, rapid and efficient screening procedure that
identifies and evaluates ligands for the most successful class of drug targets,
known as G-protein coupled receptors. The GnRH receptor is a member of this
class of receptors. We developed MASTRscreen in connection with our abarelix
program and it was instrumental in the selection of abarelix from pools of
modified peptides. MASTRscreen is useful because of its sensitivity to low
concentrations of screened material, easily measurable endpoints and
adaptability to various screening systems.
ALZHEIMER'S DISEASE DRUG TESTS
Our proprietary procedures for testing beta-amyloid aggregation measure the
aggregation of beta-amyloid and the ability of candidate molecules to prevent
the aggregation process. We used these testing procedures in the identification
of Apan. In addition, these testing procedures formed the basis of our
collaboration with Boehringer, which was aimed at developing orally administered
drugs to treat Alzheimer's Disease.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, we had a total of 76 employees dedicated to
research and development for abarelix and our other products. In 1998, we
established the Provid Research division to further extend our drug development
technologies. Our Provid Research division currently has 14 employees. We have
spent substantial funds over the past three years to develop abarelix and our
other potential drug candidates and expect to continue to do so in the future.
We spent approximately $15.0 million in 1997, $33.7 million in 1998 and
$48.8 million in 1999 on research and development activities.
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CORPORATE COLLABORATIONS
AMGEN INC.
Effective March 1999, we entered into an agreement with Amgen for the
research, development and commercialization of abarelix products in the United
States, Canada, Japan and other countries the Sanofi-Synthelabo collaboration
does not cover. Under the terms of the Amgen agreement:
- We could receive from Amgen up to $25.0 million in signing and
performance-based payments. We have received $10.0 million to date,
representing the minimum amount payable under the Amgen agreement. We are
recognizing this amount as revenue over the period through December 2001,
during which time we are obligated to participate on a continuing and
substantial basis in the research, development and manufacturing process
development of abarelix products. The remaining $15.0 million is payable
upon FDA approval of an NDA relating to abarelix.
- Amgen will pay all authorized costs and expenses associated with the
research, development and commercialization of abarelix products in the
United States that we incur during 1999 and a portion of 2000. Following
these expenditures, in general we will share with Amgen all subsequent
United States research and development costs for abarelix products through
the launch period and we will reimburse Amgen for a share of costs
associated with establishing a sales and marketing infrastructure in the
United States. In general, we will receive a transfer price and royalty
based on a sharing of the resulting profits on sales of abarelix products
in the United States.
- All program expenses in Amgen's licensed territory outside the United
States will be borne by Amgen, and we will receive a royalty on net sales
of abarelix products in those territories.
- Amgen will provide us with a line of credit not to exceed $150.0 million
through 2002. Under the line of credit, subject to various conditions each
year, we are permitted to draw down a maximum of $25.0 million in 2000,
$75.0 million in 2001, and in 2002, the remaining balance of the line of
credit available after all previous drawdowns. For each drawdown in 2002,
we must demonstrate a cash flow need reasonably acceptable to Amgen and
meet various other specified conditions, including conditions relating to
the commercial sale of abarelix. The loan will be interest-bearing,
secured by receivables relating to the abarelix products and must be
repaid by 2008.
In 1999, we recognized $56.8 million of revenues under the Amgen agreement.
We have granted Amgen exclusive manufacturing and commercialization rights
for abarelix products for all indications in the licensed territories.
Initially, we are responsible for supplying Amgen with its requirements for
abarelix products in the licensed territory. We are transferring manufacturing
responsibility to Amgen and expect the transfer to be complete later this year.
In addition, we are transferring the final decision making authority for the
abarelix endometriosis indication to Amgen later this year.
The agreement, and Amgen's payment obligations under the agreement,
terminate when the last patent right included in the abarelix technology
expires. Following the expiration of the agreement, Amgen will have a fully
paid, compensation free, perpetual, exclusive license under the abarelix
technology to manufacture and commercialize the abarelix products resulting from
the collaboration in the licensed territories. We or Amgen may terminate the
agreement for material breach by the other. Amgen may also terminate the
agreement on 90 days notice or if the results of any clinical trial of abarelix
materially harms its commercial prospects. If Amgen terminates the agreement for
material breach by us, then Amgen retains all licenses granted under the
agreement, subject to continued payment to us of all costs and royalty payments
due under the agreement.
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SANOFI-SYNTHELABO
In May 1997, we entered into a license agreement with Sanofi-Synthelabo, one
of the largest pharmaceutical companies in Europe with a significant urological
franchise, for the development and commercialization of abarelix products in
specific territories including Europe, Latin America, the Middle East and
various countries in Africa.
Sanofi-Synthelabo agreed to pay us up to $64.6 million in signing and
performance-based payments, approximately $5.0 million of the costs and expenses
for the development in the United States of abarelix products for prostate
cancer, and approximately 25% of all United States costs and expenses for the
development of abarelix products for endometriosis and uterine fibroids. Of the
$64.6 million, we are recognizing the $4.7 million initial payment over the
period through December 2001, which is the period during which we are obligated
to participate on a continuing and substantial basis in the research,
development and manufacturing process development of abarelix products. We and
Sanofi-Synthelabo will share equally the costs and expenses for the development
of any future additional indications that are approved by a joint development
committee, subject to various limitations. If we propose to develop abarelix
products for additional applications that the joint development committee does
not approve, we must carry out development activities for those additional
applications at our own expense. Sanofi-Synthelabo will pay all costs and
expenses associated with obtaining regulatory approvals in their territory. To
date, we have received a total of $30.3 million under the agreement. In
addition, in connection with the agreement, Sanofi-Synthelabo purchased
$10.0 million of common stock and warrants to purchase common stock.
Under the agreement, Sanofi-Synthelabo has co-development rights with us,
and exclusive marketing and distribution rights, for abarelix products for all
indications in the licensed territories. We retain manufacturing rights and must
supply Sanofi-Synthelabo with abarelix products in the licensed territories.
Sanofi-Synthelabo pays us a transfer price for abarelix products that varies
based on sales price and sales volumes.
The agreement expires, and the licenses we granted to Sanofi-Synthelabo
become fully paid, perpetual and royalty free, on a country by country basis,
when the last patent licensed in that country expires. If no licensed patents
cover an abarelix product in the country, the license becomes fully paid up,
perpetual and royalty free, ten years after the date of regulatory approval for
the marketing and sale of the abarelix product in the country.
We or Sanofi-Synthelabo may terminate the agreement for material breach by
the other. If Sanofi-Synthelabo terminates the agreement for material breach or
default by us, other than a breach of our supply obligations, the license
granted to Sanofi-Synthelabo would become fully paid, perpetual and royalty free
and Sanofi-Synthelabo would have a fully paid, perpetual and royalty free
license of all manufacturing protocols, know-how and related information and
data necessary to enable it to develop and make licensed products in the
licensed territory from and after the effective date of the termination.
Sanofi-Synthelabo also may terminate the agreement as to an abarelix product for
the treatment of a particular disease in any country within the licensed
territories if the results of clinical trials of the product for that disease in
that country materially impair the product's commercial prospects for that
disease application. In addition, Sanofi-Synthelabo may terminate if annual
sales in that country of a competitor's product containing the same GnRH
antagonist as the abarelix product in a delivery system exceeds more than a
specified percentage of annual sales of the abarelix product in that country.
Sanofi-Synthelabo also may terminate the agreement within nine months after
first becoming aware of any of various specified adverse circumstances or events
relating to the patentability of abarelix products or the Rel-Ease formulation.
The right to terminate in this situation includes a reasonable determination by
Sanofi-Synthelabo that it is not reasonably likely that a European patent will
issue covering abarelix or Rel-Ease.
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HUMAN GENOME SCIENCES
In January 2000, we entered into an agreement with Human Genome Sciences for
the discovery, development and commercialization of compounds targeted to two
proprietary genomic targets that Human Genome Sciences has identified. Under the
agreement, we will use LEAP to make drugs targeted to these molecules. We will
jointly develop clinical drug candidates with Human Genome Sciences on an equal
cost and profit sharing basis, unless a pre-existing option that Human Genome
Sciences granted to SmithKline Beecham applies to the drug candidate and
SmithKline Beecham exercises the option. In that case, we will have no
obligation to participate in any development costs, and we will be entitled to
royalties and performance-based payments instead of a profit share.
BOEHRINGER INGELHEIM INTERNATIONAL GMBH
In August 1996, we entered into a collaboration and license agreement with
Boehringer. Under the agreement, we used various proprietary procedures to
screen compounds that Boehringer supplied to us for beta-amyloid aggregation
inhibition activity, and received screening services payments totaling
$5.4 million. The screening portion of the collaboration ended in August 1998.
Boehringer would be responsible for all development, marketing and other costs
for, and we would be entitled to receive royalties on net sales of, any product
containing any Boehringer compound which we screened, if Boehringer develops and
commercializes the product.
ROCHE PRODUCTS INC.
In August 1997 and June 1998, we granted Roche exclusive co-development
rights with us, and exclusive marketing rights, for abarelix products outside of
the Sanofi-Synthelabo territory. In December 1998, we and Roche mutually
terminated the agreement. Prior to termination, we received $16.0 million in
signing and performance-based payments and approximately $12.2 million in cost
sharing payments from Roche. Roche retains no rights of any kind to abarelix or
any abarelix product.
TECHNOLOGY LICENSES
PHARMACEUTICAL APPLICATIONS ASSOCIATES
In April 1999, we entered into a license agreement with Pharmaceutical
Applications Associates. Under the agreement, we have exclusive worldwide rights
to develop and commercialize Latranal for the treatment of acute and chronic
muscle and tendon related pain. Under the agreement, we will pay for all costs
associated with the development and commercialization of Latranal, and will pay
a $50,000 fee if we proceed with a second clinical efficacy study. We pay a
royalty on net sales of Latranal products to Pharmaceutical Applications
Associates. The license agreement remains in effect until the later of ten years
or the date the last licensed patent expires. We have the right to terminate the
agreement at any time.
INDIANA UNIVERSITY FOUNDATION
In October 1996, we entered into a license agreement with Indiana University
Foundation. We and Indiana University Foundation amended the license in
June 1998 and Indiana University Foundation assigned it to Indiana University's
Advanced Research and Technology Institutes, Inc. Under the agreement, we have
an exclusive worldwide license under patent applications, future patents and
technology of Indiana University Foundation relating to GnRH antagonist
compounds, including abarelix and methods of use for abarelix. We have paid
non-refundable fees of $305,000 and a performance-based payment of $250,000
under this agreement. We have agreed to make performance-based payments of up to
an additional $4.0 million, and to pay royalties on our net sales of products
covered by the license grant. The license agreement remains in effect until the
last licensed patent expires. Expiration of the license will not preclude us
from continuing to develop and market the
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licensed products and use the licensed technology. We must request a
continuation of the license and Advanced Research and Technology may not
unreasonably withhold its consent. We can terminate the agreement at any time
upon 90 days notice. Advanced Research and Technology may terminate upon 90 days
notice if we materially breach the agreement or fail to make required payments.
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
In December 1993, in connection with our initial financing, we entered into
a license agreement with the Massachusetts Institute of Technology. Under this
agreement, MIT granted us an exclusive worldwide license under specified
technology and related patent rights regarding biological screening techniques
and related methodologies developed at MIT by Malcolm L. Gefter, Ph.D. and
another founder of our company. In the agreement, MIT acknowledged that it has
no rights with respect to any intellectual property generated by us, including
any and all enhancements, modifications or additions regarding the licensed
technology or any product or process covered by the licensed future patents.
MANUFACTURING
We generally manufacture the drug supply required to support our preclinical
studies in-house. External contractors provide all of our clinical supplies and
manufacture them in accordance with FDA and European regulations. We have
long-term contracts with third-party manufacturers for the commercial
manufacture of abarelix products. We have a supply agreement with each of UCB
Bioproducts S.A., Salsbury Chemicals, Inc. and Oread Pharmaceuticals
Manufacturing, Inc. We currently are seeking alternative supply arrangements to
replace Oread.
Under the UCB Bioproducts agreement, UCB has agreed to supply us with
commercial volumes of abarelix compound and we have committed to purchase
$56.0 million of pharmaceutical grade peptide between February 1999 and
February 2001. As of December 31, 1999, we had purchased approximately
$25.5 million of peptide. In addition, under the Salsbury agreement, Salsbury
has agreed to supply us with the commercial depot formulations. We contributed
approximately $6.0 million toward Salsbury's construction and outfitting of a
dedicated manufacturing facility, to which we will retain manufacturing process
rights.
Under the Oread agreement, Oread agreed to supply us with abarelix-depot
products in finished vials. Oread has advised us that it is in default under its
lease and anticipates that it will be unable to continue operations in the
leased premises beyond June 2000 at the latest. Based on this and our
discussions with Oread, we do not believe that Oread will be able to continue to
meet its obligations under its agreement with us. Accordingly, we will need to
make alternative supply arrangements for this step in the manufacture of
abarelix-depot-M. We own the key equipment used in this step, and intend to make
it available for use by a substitute manufacturer if that will facilitate a
prompt transition of supply responsibilities. However, we cannot assure you that
we will be able to obtain an alternative supply arrangement in a timely manner
or on acceptable terms, if at all. If we are unable to replace Oread in a timely
manner, regulatory approval and commercialization of abarelix-depot-M could be
delayed, possibly materially. Moreover, even if we are able to enter into
acceptable alternative supply arrangements in a timely manner, the use of a
different manufacturer may require us to undergo additional regulatory review
and compliance procedures which could result in additional expenses and delay
the commercialization of abarelix-depot-M.
In order to effect a favorable pricing environment, we have secured a second
source of supply of abarelix compound. We also intend to secure a second source
for abarelix-depot products and, as noted above in the immediately preceding
paragraph, abarelix-depot products in finished vials.
If we fail to meet our manufacturing and supply obligations, Amgen or
Sanofi-Synthelabo may assume manufacturing responsibility under each company's
agreement with us. If this occurs, we must pay Sanofi-Synthelabo its incremental
costs of assuming manufacturing responsibility. We are
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transferring manufacturing responsibility to Amgen and expect the transfer to be
complete later this year.
PATENTS AND PROPRIETARY RIGHTS
Proprietary protection for our products, technology and processes is
essential to our business. We seek proprietary protection predominantly in the
form of patents on our products and the processes which we use to discover them.
With respect to a particular product, we seek patent protection on the compound
itself, its commercial formulation, its range of applications and its
production. Where possible, we also seek patent coverage that could prevent the
marketing of, or restrict the commercial threat of, competitive products.
We have seven United States patents and an exclusive license to one United
States patent. These patents have expiration dates from 2012 through 2017. In
addition, as of January 20, 2000, we had filed or held exclusive licenses to 34
United States patent applications, as well as 80 related foreign patent
applications, including both Patent Cooperation Treaty filings and national
filings. We also have non-exclusive licenses to four United States patents and
four issued foreign patents, and related United States and foreign applications,
directed to technologies embodied in LEAP.
In particular, we have United States patents that cover both the abarelix
compound and the sustained release formulation enabling its once-per-month
administration. We also have a patent covering the use of abarelix and any other
GnRH antagonist in a variety of therapeutic settings, including in combination
with surgery or radiation therapy. We intend to file additional United States
and foreign patent applications, where appropriate, relating to new product
discoveries or improvements.
We also rely on trade secrets, know-how and continuing technological
advances to protect various aspects of our core technology. We require our
employees, consultants and scientific collaborators to execute confidentiality
and invention assignment agreements with us to maintain the confidentiality of
our trade secrets and proprietary information. Our confidentiality agreements
generally provide that the employee, consultant or scientific collaborator will
not disclose our confidential information to third parties, compete with us or
solicit our employees during the course of their employment with us. These
agreements also provide that inventions conceived by the employee, consultant or
scientific collaborator in the course of working for us will be our exclusive
property. Additionally, our employees also agree not to compete with us or
solicit our employees for one year following termination of their employment
with us.
COMPETITION
A biotechnology company such as ours must keep pace with rapid technological
change and faces intense competition. Many companies, both public and private,
including large pharmaceutical companies, chemical companies and biotechnology
companies, develop products or technologies competitive with our products or
technologies. In addition, academic, government and industry-based research is
intense, resulting in considerable competition in obtaining qualified research
personnel, submitting patent filings for protection of intellectual property
rights and establishing strategic corporate alliances.
Each of our potential products in research or development will face
competition from other products. If approved for marketing and sale, our
products will compete with numerous established or newly introduced products on
the market, including:
- Lupron Depot, Zoladex and other pharmaceuticals approved and marketed for
the treatment of hormonally responsive prostate cancer or endometriosis in
the United States and Europe; and
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- Cetrotide, manufactured by ASTA Medica, and Antagon, manufactured by
Organon, are approved GnRH antagonists for use in infertility and are only
available as daily injectable formulations.
For each of our products, we will face increasing competition from generic
formulations of existing drugs whose active components are no longer covered by
patents. Specifically, we are aware of various formulations of leuprorelin, the
active ingredient of Lupron Depot, including Viadur, manufactured by Crescendo,
which the FDA has recently granted marketing approval.
We believe that our product candidates will compete favorably in the market
with these and other products on the basis of a combination of superior
efficacy, decreased side effects and overall cost-benefit considerations.
GOVERNMENT REGULATION
The manufacture and marketing of pharmaceutical products and our ongoing
research and development activities in the United States require the approval of
numerous governmental authorities, including the FDA. We also must obtain
similar approvals from comparable agencies in most foreign countries. The FDA
has established mandatory procedures and safety standards which apply to the
preclinical testing and clinical trials, as well as to the manufacture and
marketing, of pharmaceutical products. State, local and other authorities also
regulate pharmaceutical manufacturing facilities.
As an initial step in the FDA regulatory approval process, an applicant
typically conducts preclinical studies in animals to assess a drug's efficacy
and to identify potential safety problems. An applicant must conduct specified
preclinical laboratory and animal studies in compliance with the FDA's good
laboratory practice regulations. An applicant must submit the results of these
studies to the FDA as part of an investigational new drug application, which
must receive clearance from the FDA before proposed clinical testing can begin.
We can make no assurance that our submission of an investigational new drug
application will result in FDA authorization to conduct a clinical trial.
Clinical testing must meet requirements for Institutional Review Board
oversight and informed consent, as well as FDA prior review, oversight and good
clinical practice requirements. Typically, clinical testing involves a
three-phase process. Phase I clinical trials involve a small number of subjects
and are designed to provide information about both product safety and the
expected dose of the drug. Phase II clinical trials generally provide additional
information on dosing and safety in a limited patient population. Occasionally,
phase II trials may provide preliminary evidence of product efficacy. Phase III
clinical trials are large-scale, well-controlled studies. The goal of Phase III
clinical trials generally is to provide statistically valid proof of efficacy as
well as safety in the target patient population. The company performing the
preclinical testing and clinical trials of a pharmaceutical product then submits
the results to the FDA in the form of an NDA, for approval to commence
commercial sales. Preparing NDA applications involves considerable data
collection, verification, analysis and expense. In responding to an NDA, the FDA
may grant marketing approval, request additional information or deny the
application if it determines that the application does not satisfy its
regulatory approval criteria. After approval for the initial indications,
further clinical trials would be necessary to gain approval for the use of the
product for any additional diseases.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with good manufacturing practices. In complying with good
manufacturing practices, manufacturers must continue to spend time, money and
effort in the areas of production and quality control to ensure full technical
compliance. Manufacturing facilities are subject to periodic inspections by the
FDA.
The FDA must grant approval of our products, which involves a review of the
manufacturing processes and facilities used to produce these products before we
can market these products in the United States. The process of obtaining
approvals from the FDA can be costly, time consuming and
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subject to unanticipated delays. The FDA may refuse to approve an application if
it believes the product does not meet applicable regulatory criteria. The FDA
also may require additional testing for safety and efficacy of the drug. If the
FDA grants approval of a drug product, the approval will be limited to specific
indications.
If we receive marketing approval, we must comply with FDA requirements for
manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In addition, we must comply with federal and
state anti-kickback and other health care fraud and abuse laws that pertain to
the marketing of drugs. For all drugs, failure to comply with applicable
regulatory requirements after obtaining regulatory approval could, among other
things result in suspension of regulatory approval, as well as possible recalls,
product seizures, injunctions and civil and criminal sanctions.
In addition to regulations enforced by the FDA, we also are subject to
various 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 chemicals,
micro-organisms and various radioactive compounds used in connection with our
research and development activities. Although we believe that our safety
procedures for handling and disposing of these materials comply with the
standards prescribed by state and federal regulations, we cannot assure you that
accidental contamination or injury from these materials will not occur.
Compliance with laws and regulations relating to the protection of the
environment has not had a material effect on our capital expenditures or our
competitive position. However, we cannot accurately predict the extent of
government regulation, and the cost, and effect thereof on our competitive
position, which might result from any legislative or administrative action.
Additionally, we may have to obtain approval of a product from comparable
regulatory authorities in foreign countries prior to the commencement of
marketing of the product in those countries. The approval procedure varies among
countries, may involve additional testing and the time required may differ from
that required for FDA approval. Although there is now a centralized European
Union approval mechanism in place, each European country may nonetheless impose
its own procedures and requirements, many of which could be time consuming and
expensive. Thus, substantial delays could occur in obtaining required approvals
from both the FDA and foreign regulatory authorities after the relevant
applications are filed. We expect to rely on corporate partners and licensees,
along with our expertise, to obtain governmental approval in foreign countries
of drug formulations utilizing our drug candidates. Under the Sanofi-Synthelabo
agreement, Sanofi-Synthelabo is responsible for filing and obtaining necessary
governmental marketing reimbursement and pricing approvals for any abarelix
product in each country in the Sanofi-Synthelabo territory where the abarelix
product will be commercialized under the agreement.
PRODUCT LIABILITY INSURANCE
We maintain product liability insurance for clinical trials in the amount of
$15.0 million per occurrence and $15.0 million in the aggregate. We intend to
expand our insurance coverage to include the manufacture, marketing and sale of
commercial products if marketing approval is obtained for products in
development. However, insurance coverage is becoming increasingly expensive, and
we may be unable to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect us against losses due to liability. In addition,
we may be unable to obtain commercially reasonable product liability insurance
for any products approved for marketing. A successful product liability claim or
series of claims brought against us could result in substantial setbacks for our
business.
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EMPLOYEES
As of December 31, 1999, we had 94 full-time employees, 80 of whom were
employed at our headquarters in Cambridge, Massachusetts and 14 of whom were
employed with our Provid Research division at our facility in Piscataway, New
Jersey. We also employ consultants and independent contractors on a regular
basis to assist in the development of our products. None of our employees are
party to a collective bargaining agreement. We believe our relationship with our
employees is good.
FACILITIES
Our headquarters and primary research facilities are located in Cambridge,
Massachusetts, where we lease and occupy a total of approximately 25,000 square
feet. The lease for these facilities expires in September 2004. In August 1998,
we executed a lease for a total of approximately 15,000 square feet of space in
Piscataway, New Jersey for the operations of our Provid Research division. The
lease for this facility expires in 2008.
In January 2000, we signed an agreement to purchase a building of
approximately 175,000 square feet located in the western suburbs of Boston,
Massachusetts. We expect to complete the acquisition of this facility in
June 2000 and, following additional laboratory and office improvements, to
occupy the new facility by the end of 2000. We intend to occupy approximately
100,000 square feet at this facility and expect to lease a portion of the
remaining space for at least the next five years, although we have not yet found
a tenant. We expect to vacate and sublease our current Cambridge, Massachusetts
premises upon our move to the new facility. Upon completion of our new facility,
we believe that our facilities will be adequate for at least the next seven
years and that we will be able to obtain additional space as needed on
commercially reasonable terms.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table shows information about our executive officers,
directors and other officers as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- -------------------------------- -------- --------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Malcolm L. Gefter, Ph.D......... 58 Chairman of the Board, Chief Executive Officer and
President
Kevin F. McLaughlin............. 43 Chief Financial Officer, Senior Vice President,
Treasurer and Secretary
Marc B. Garnick, M.D............ 54 Executive Vice President and Chief Medical Officer
Dean A. Falb, Ph.D.............. 39 Senior Vice President, Research
Larry D. Alsteil, M.D., Ph.D.... 50 Senior Vice President, Clinical Development
G. Leonard Baker, Jr............ 57 Director
William Laverack, Jr............ 42 Director
Henry F. McCance................ 57 Director
David B. Sharrock............... 63 Director
Damion E. Wicker, M.D........... 39 Director
Albert L. Zesiger............... 70 Director
OTHER OFFICERS
Nicholas P. Barker, Ph.D........ 45 Vice President of Development
Lena M. Bergfors................ 53 Vice President, Human Resources
William L. Kubasek, Ph.D........ 40 Senior Director of Project Management
Paul M. Martha, M.D............. 46 Vice President, Endocrinology
Gary L. Olson, Ph.D............. 55 Senior Vice President, Chemistry Research and
Development and President of Provid Research division
Marc A. Silver.................. 42 Vice President, Corporate Development
Janice M. Swirski............... 38 Vice President, Operations
</TABLE>
Messrs. Baker, Laverack and Wicker are members of our audit committee.
Messrs. McCance, Sharrock and Zesiger are members of our compensation committee.
MALCOLM L. GEFTER, PH.D. is our founder and has served as a director since
July 1993, as Chairman of the Board since February 1994, as our Chief Executive
Officer since July 1996 and as our President since July 1998. From July 1993 to
July 1998, Dr. Gefter was our Treasurer. Dr. Gefter has been a Professor of
Biology at MIT and is now professor emeritus. He has authored more than 200
original scientific papers. Dr. Gefter was a founder of ImmuLogic Pharmaceutical
Corporation, and from 1987 to March 1997, served as Chairman of the Board of
Directors at ImmuLogic. Dr. Gefter received his B.S. in Chemistry from the
University of Maryland and his Ph.D. in Molecular Biology from Albert Einstein
College of Medicine.
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KEVIN F. MCLAUGHLIN has been our Chief Financial Officer since joining us in
September 1996. Since January 1997, he has also been our Secretary and since
July 1998, he has been a Senior Vice President and our Treasurer. From
September 1996 to July 1998, Mr. McLaughlin was one of our Vice Presidents. From
March 1996 to August 1996, he was Vice President and Chief Financial Officer of
Advanced Techcom, Inc., a privately-held communications company. From 1980 to
1996, he held senior level financial positions at Computervision Corporation and
its predecessor Prime Computer, Inc., including Vice President, Treasurer and
Director of Corporate Planning, where he was directly involved with financial,
accounting and investor relations management, as well as public and private
financing. Mr. McLaughlin received his B.S. in Accounting from Northeastern
University and his MBA from Babson College.
MARC B. GARNICK, M.D. joined us in April 1994 as Executive Vice President
and Chief Medical Officer. From 1987 to 1994, he was Vice President, Clinical
Development at Genetics Institute, Inc., a biotechnology company. Dr. Garnick
was a leader in the clinical development of Lupron Depot as a treatment for
hormonally responsive prostate cancer. He is on the faculty of the Harvard
Medical School as a clinical professor of medicine and maintains a clinical
practice at the Beth Israel Deaconess Medical Center, a teaching hospital of the
Harvard Medical School. Dr. Garnick has written over 300 papers, four books and
numerous articles. Dr. Garnick received his A.B. in Biology from Bowdoin College
and his M.D. from the University of Pennsylvania School of Medicine.
Dr. Garnick also is a director of Genome Therapeutics Corporation.
DEAN A. FALB, PH.D. joined us in January 1998 as Senior Vice President,
Research. Dr. Falb was a founding employee of Millennium Pharmaceuticals, Inc.,
a biotechnology company formed in 1993, and was responsible for establishing its
genomics program in cardiovascular diseases. At Millennium, he held the position
of Director of Cardiovascular Diseases and served on the Millennium/Eli Lilly
Joint Management Team. Prior to joining Millennium, Dr. Falb was a scientist at
ImmuLogic. Dr. Falb received his B.S. in Chemistry from Purdue University and
his Ph.D. in Biochemistry and Molecular Biology from Harvard University.
LARRY D. ALSTIEL, M.D., PH.D. joined us in March 2000 as Senior Vice
President, Clinical. From January 1995 to March 2000, Dr. Alstiel was the Senior
Clinical Research Physician and Group Leader for Neurodegenerative Diseases,
focusing on Alzheimer's Disease, at Eli Lilly & Sons. From July 1988 to December
1994, Dr. Alstiel was an attending physician at The Mount Sinai Medical Center.
During that time, Dr. Alstiel also served as the Director of the Division of
Behavioral Neurology at the Bronx Veterans' Administration Medical Center and as
a consulting physician at The Mount Sinai Alzheimer's Disease Research Center.
Dr. Alstiel received his B.S. from the University of Illinois, his Ph.D. from
Rockefeller University and his M.D. from the University of Miami Medical School.
G. LEONARD BAKER, JR. has served as a member of our board of directors since
March 1994. Since 1974, Mr. Baker has been a Managing Director or General
Partner of Sutter Hill Ventures, a venture capital firm. Mr. Baker also is a
director of ThermaWave Inc. and a number of private companies.
WILLIAM LAVERACK, JR. has served as a member of our board of directors since
December 1993. Since 1993, Mr. Laverack has been a General Partner of J.H.
Whitney & Co., a private investment firm. From 1991 to 1993, Mr. Laverack was
employed at Gleacher & Co., Inc. and from 1985 to 1991, Mr. Laverack was
employed at Morgan Stanley & Co. Incorporated, each of which are investment
banking firms. Mr. Laverack also is a director of Steel Dynamics, Inc. and a
number of private companies.
HENRY F. MCCANCE has served as a member of our board of directors since
December 1993. Mr. McCance has been employed at Greylock Management Corporation,
a private venture capital group, since 1969, where he has been Treasurer since
1969, President since 1990 and Chairman of the Board since 1997. Mr. McCance is
a general partner of several venture capital funds affiliated with Greylock.
Mr. McCance also is a director of Peritus Software Services, Inc.
48
<PAGE>
DAVID B. SHARROCK has served as a member of our board of directors since
February 1994. Since 1994, Mr. Sharrock has been a privately employed business
consultant. From 1990 to 1994, Mr. Sharrock was Executive Vice President and
Chief Operating Officer of Marion Merrell Dow Inc. and from 1988 to 1989, he was
President and Chief Operating Officer of Merrell Dow Pharmaceuticals, Inc.
Mr. Sharrock also serves as a director of Broadwing Inc., Interneuron
Pharmaceuticals, Inc., Intercardia, Inc. and Progenitor, Inc.
DAMION E. WICKER, M.D. has served as a member of our board of directors
since April 1998. Dr. Wicker has been a General Partner of Chase Capital
Partners, a private equity and mezzanine capital group, since January 1997 and
was a principal of Chase Capital Partners from April 1993 to December 1996.
Previously, Dr. Wicker was President of Adams Scientific from July 1991 to
December 1992, and, prior to that, held positions with MBW Venture Partners and
Alexon, Inc. Dr. Wicker also was a Commonwealth Fund Medical Fellow for the
National Institute of Health. He currently is a director of Landec Corporation,
V.I. Technologies, Inc. and several privately-held health care companies.
ALBERT L. ZESIGER has served as a member of our board of directors since
July 1996. Mr. Zesinger is a founding Principal of Zesiger Capital Group LLC, a
global investment advisory firm started in 1995. Mr. Zesiger previously was with
BEA Associates, an investment advisory firm where he started in 1968 and most
recently was Managing Director from December 1990 to September 1995. He
currently is a director of Durect Corporation, Eos Biotechnology, Inc., Hayes
Medical Inc. and Virologic Inc. and is the Co-chair of Asphalt Green, Inc., a
non-profit corporation in New York City.
NICHOLAS P. BARKER, PH.D. joined us in June 1996 as Vice President of
Development. From July 1991 to May 1996, Dr. Barker was employed at
Rhone-Poulenc Rorer Inc., where from July 1991 until September 1994, he was
Director, Pharmaceutical Sciences and thereafter, Worldwide Director, Product
Development. He also has held senior level positions with Fisons Pharmaceuticals
and Smith, Kline & French (U.K.). Dr. Barker received his Bachelor of Pharmacy
from the University of Bath (U.K.) and his Ph.D. in Transdermal Drug Delivery/
Pharmaceutics from Nottingham University (U.K.). Dr. Barker is a licensed U.K.
pharmacist with membership in the Royal Pharmaceutical Society of Great Britain.
LENA M. BERGFORS joined us in June 1999 as Vice President of Human
Resources. From December 1980 to May 1999, Ms. Bergfors was employed by Serono
Laboratories, Inc., the United States affiliate of the Ares-Serono Group. While
at Serono, Ms. Bergfors held a variety of positions in human resources, most
recently as Director of Human Resources.
WILLIAM L. KUBASEK, PH.D. joined us in March 1994 as a founding scientist
and has served as our Senior Director of Project Management since July 1999.
From July 1989 to February 1994, Dr. Kubasek was a research fellow at the
Massachusetts General Hospital and the Harvard Medical School. Dr. Kubasek
received his B.S. in Biochemistry from the University of California, Davis and
his Ph.D. in Molecular Biology from the University of Oregon.
PAUL M. MARTHA, M.D. joined us in February 1998 as Vice President,
Endocrinology. From September 1993 to January 1998, Dr. Martha was employed at
Genentech, Inc. in a variety of positions, most recently as Director of
Endocrinology. Previously, Dr. Martha was Assistant Professor of Pediatrics and
Director and Principal Investigator, Laboratory for Neuroendocrine Research at
BayState Medical Center/Tufts University School of Medicine and Tufts New
England Medical Center. Dr. Martha received his B.S. in biology from Trinity
College and his M.D. from the University of Connecticut School of Medicine.
GARY L. OLSON, PH.D. joined us in March 1998 as Senior Vice President,
Chemistry Research and Development and President of our Provid Research
division. From 1971 to February 1998, Dr. Olson held a series of research
positions at Hoffmann-La Roche, including Research Director for chemistry in the
Inflamation/Autoimmune Diseases and the Oncology departments. Dr. Olson has
published over 30 papers in scientific journals and holds 24 United States
patents. He is a member of the board of the
49
<PAGE>
Residential School on Medicinal Chemistry at Drew University, holds the position
of Editor-in-Chief of DRUG DESIGN AND DISCOVERY and is a member of the editorial
boards of several scientific journals. Dr. Olson received his A.B. in Chemistry
from Columbia University and his Ph.D. from Stanford University.
MARC A. SILVER joined us in October 1994. Since September 1996, he has
served as Vice President of Corporate Development and from October 1994 to
September 1996, as Vice President. From 1992 to 1994, Mr. Silver was Vice
President at Harvard Management Corp., an investment management company. Prior
to that time, he was involved in the founding and successful development of a
number of companies, including Arris Pharmaceutical Corporation,
Envirogen, Inc. and TargeTech, Inc. Mr. Silver received his B.S. in Biochemistry
from Carnegie Mellon University and his MBA from MIT Sloan School of Management.
JANICE M. SWIRSKI joined us in May 1998 as Vice President, Operations. From
May 1985 to April 1998, Ms. Swirski served in a variety of management positions
at TAP Pharmaceuticals Inc., a joint venture between Abbott Laboratories and
Takeda Chemical Industries Ltd., involved in Managed Care, Hospital Markets and
Sales Training. Her most recent role was as Regional Business Unit Manager for a
Lupron Depot and Prevacid Sales Team in the mid-Atlantic Region. Ms. Swirski
received her B.S. in Pharmacy from the Massachusetts College of Pharmacy and
Allied Health Sciences.
Under the terms of the amended and restated stockholders agreement dated as
of April 30, 1998, as amended, by and among us and some of our stockholders,
Messrs. Gefter, Laverack, McCance, Baker and Wicker were designated as directors
and were elected to our board of directors. The stockholders agreement provides
that we will use our best efforts to cause these individuals or any other
persons designated in accordance with the stockholders agreement to be nominated
for election and elected as our directors and that the stockholders who are
parties to the stockholders agreement will vote their shares in favor of these
designees. Upon completion of this offering, these obligations will terminate.
All of our directors hold office until the first annual meeting of
stockholders following this offering and until their successors are duly elected
and qualified or their earlier resignation, retirement, disqualification or
removal from office. After election at the annual meeting following this
offering, the directors will then serve for succeeding terms expiring at each
successive annual meeting of stockholders and until they or their successors are
duly elected and qualified.
Our officers serve at the discretion of the board of directors. There are no
family relationships among our directors and officers.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
Our board of directors has an audit committee and a compensation committee.
The audit committee, currently comprised of Messrs. Baker, Laverack and Wicker,
determines our accounting policies and practices and financial reporting and
internal control structures, recommends to the board of directors the
appointment of independent auditors to audit our financial statements each year
and confers with the auditors and our officers for purposes of reviewing our
internal controls, accounting practices, financial structure and financial
reporting.
The compensation committee, currently comprised of Messrs. McCance, Sharrock
and Zesiger, determines salaries, incentives and other forms of compensation for
our executive officers and administers our incentive compensation plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other entity, nor has any interlocking relationship existed in the past.
50
<PAGE>
DIRECTOR COMPENSATION
Except as we otherwise describe below, we have not paid any cash
compensation to members of our board of directors for their services as
directors. David B. Sharrock has received $10,000 each year in connection with
his services as a member of our board of directors. In addition, in
January 1997, we granted to Mr. Sharrock options to purchase 22,500 shares of
common stock at an exercise price of $1.60 per share as additional compensation
for his services as a director. Mr. Sharrock also received $20,000 during 1997
in connection with a consulting service provided to us during 1997.
We reimburse the directors for reasonable expenses in connection with
attendance at board and committee meetings. Directors also are eligible to
receive stock options under our Second Amended and Restated 1995 Stock Plan. In
November 1999, we granted each non-employee director options under the 1995
Stock Plan to purchase 30,000 shares of common stock at an exercise price of
$7.00 per share for services they performed as directors. Each option grant will
vest and become exercisable in equal monthly installments over a three-year
period so long as the individual continues to be a member of our board of
directors. Albert L. Zesiger subsequently declined this option grant and the
shares subject to his grant resumed the status of shares available for grant
under the 1995 Stock Plan.
Upon the closing of this offering, non-employee directors will each receive,
to the extent the internal policies of their respective organizations permit, an
annual director's fee of $12,000, plus $1,000 for each board meeting.
51
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation earned, including salary,
bonuses, stock options and other compensation during the fiscal year ended
December 31, 1999 by Malcolm L. Gefter, Ph.D., our Chief Executive Officer, and
our three other executive officers whose total annual compensation exceeded
$100,000 in 1999. We may refer to these officers as our named executive officers
in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND POSITION(S) SALARY BONUS OPTIONS
- ------------------------------------------------------------ -------- -------- ------------
<S> <C> <C> <C>
Malcolm L. Gefter, Ph.D..................................... $297,675 $104,177 153,080(1)
Chairman of the Board,
Chief Executive Officer
and President
Kevin F. McLaughlin......................................... 187,425 32,785 146,970(2)
Chief Financial Officer,
Senior Vice President,
Treasurer and Secretary
Marc B. Garnick, M.D........................................ 250,000 26,190 60,780(3)
Executive Vice President
and Chief Medical Officer
Dean A. Falb, Ph.D.......................................... 168,692 -- 70,000
Senior Vice President,
Research
</TABLE>
- ------------------------
(1) Includes options to purchase 3,080 shares of common stock granted on
January 13, 2000 in connection with a bonus earned in 1999 and excludes
options to purchase 10,400 shares of common stock granted on January 6, 1999
in connection with a bonus earned in 1998, in each case awarded under our
Executive Management Bonus Plan.
(2) Includes options to purchase 970 shares of common stock granted on
January 13, 2000 in connection with a bonus earned in 1999 and excludes
options to purchase 2,900 shares of common stock granted January 6, 1999 in
connection with a bonus earned in 1998, in each case awarded under our
Executive Management Bonus Plan.
(3) Includes options to purchase 780 shares of common stock granted on
January 13, 2000 in connection with a bonus earned in 1999 under our
Executive Management Bonus Plan.
52
<PAGE>
STOCK OPTION GRANTS
The following table shows information regarding options we granted to the
named executive officers under our 1995 Stock Plan during the year ended
December 31, 1999. We have never granted any stock appreciation rights. The
maximum term of each option granted is ten years from the date of grant, subject
to earlier termination in the event of resignation or termination of employment.
The percentage of the total options granted to employees in 1999 shown in the
table below is based on options to purchase an aggregate of 2,220,742 shares of
common stock granted to our employees, directors and consultants during the year
ended December 31, 1999. The exercise price of each option is equal to the fair
market value of the common stock on the date of grant as determined by the board
of directors.
The potential realizable values are net of the exercise prices and before
taxes associated with the exercise, and we have based them on an assumed initial
public offering price of $16.00 per share and the assumption that our common
stock appreciates at the annual rate shown from the date of the grant until the
expiration of the ten-year option term. We have calculated these numbers based
on the rules of the Securities and Exchange Commission and they do not represent
our estimate or projection of future common stock prices. The amounts reflected
in the table may not necessarily be achieved. The actual amount the executive
officer may realize will depend upon the extent to which the stock price exceeds
the exercise price of the options on the exercise date.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE --------------------------
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------- ---------- ------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm L. Gefter, Ph.D........ 150,000(2) 6.9% $ 6.38 07/08/09 $2,952,347 $5,267,982
3,080(3) 14.50 01/13/10 35,612 83,160
Kevin F. McLaughlin............ 80,000(2) 6.6 6.38 07/08/09 1,574,585 2,809,590
66,000(4) 6.38 07/08/09 1,299,033 2,317,912
970(3) 14.50 01/13/10 11,215 26,190
Marc B. Garnick, M.D........... 60,000(2) 2.7 6.38 07/08/09 1,180,939 2,107,193
780(3) 14.50 01/13/10 9,019 21,060
Dean A. Falb, Ph.D............. 30,000(2) 3.2 6.38 07/08/09 590,469 1,053,596
40,000(5) 6.38 07/08/09 787,293 1,404,795
</TABLE>
- ------------------------
(1) Excludes options granted in January 1999 in connection with bonus awards
earned by Messrs. Gefter, McLaughlin and Garnick in 1998 under our Executive
Management Bonus Plan.
(2) These options will vest and become exercisable as to 16 2/3% of the shares
on July 1, 2001. Thereafter, options with respect to an additional 33 1/3%
of the shares will vest in equal monthly installments through July 1, 2004.
Options with respect to the remaining 50% of the shares vest in equal
monthly installments after July 1, 2004 through July 1, 2007.
(3) Represents options granted in January 2000 in connection with bonus awards
earned in 1999 under our Executive Management Bonus Plan. These options were
fully vested and immediately exercisable on the date of grant.
(4) These options vest and become exercisable in equal monthly installments over
a 33 month period beginning on October 31, 2001.
(5) These options vest and become exercisable in equal monthly installments over
a 17 month period beginning on February 28, 2003.
53
<PAGE>
The following table provides information concerning the number and value of
unexercised options held by the named executive officers at December 31, 1999.
None of the named executive officers exercised any options in 1999.
The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which an option holder would realize if he or she
exercised all of the in-the-money options held at December 31, 1999, and is
determined by multiplying the number of shares of common stock underlying the
options by the difference between an assumed initial public offering price of
$16.00 per share and the per share option exercise price. An option is
in-the-money if the fair market value of the underlying shares exceeds the
exercise price of the option.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Malcolm L. Gefter, Ph.D...................... 571,540 843,862 $8,788,512 $12,285,363
Kevin F. McLaughlin.......................... 182,840 281,060 2,800,382 3,490,114
Marc B. Garnick, M.D......................... 183,422 692,596 2,497,587 8,728,491
Dean A. Falb, Ph.D........................... 159,166 285,836 1,909,992 2,943,162
</TABLE>
EMPLOYMENT AGREEMENTS
None of our named executive officers has an employment agreement, although
all of our executive officers have entered into agreements that contain
non-disclosure and non-solicitation restrictions and covenants.
INCENTIVE PLANS
SECOND AMENDED AND RESTATED 1995 STOCK PLAN
Our board of directors and our stockholders approved and adopted our Second
Amended and Restated 1995 Stock Plan in February 2000. The 1995 Stock Plan, as
amended and restated, will be effective upon the closing of this offering. We
have reserved a total of 11,375,000 shares of common stock for issuance under
the 1995 Stock Plan. Under the terms of the 1995 Stock Plan, our board of
directors may grant incentive stock options, non-qualified stock options, awards
of common stock and opportunities to make direct purchases of common stock, to
our employees, directors and consultants, provided that the board may only grant
incentive stock options to persons who are employees at the time of the grant.
The board of directors and the compensation committee administer the 1995 Stock
Plan. The plan must be administered by a committee consisting of at least two
non-employee directors following the closing of this offering.
The exercise price per share of common stock for:
- non-qualified options must be no less than par value per share of common
stock on the date of grant;
- incentive stock options must be no less than the fair market value per
share of common stock on the date of the grant; and
- incentive stock options granted to an employee owning more than 10% of the
total combined voting power of all classes of our capital stock, or of any
related company, must not be less than 110% of the fair market value per
share of the common stock on the date of the grant.
54
<PAGE>
Initially, each incentive stock option granted is exercisable over a period
determined by the board of directors in its discretion, not to exceed ten years
from the date of grant as required by the Internal Revenue Code of 1986, as
amended. In addition, the exercise period for an incentive stock option may not
exceed five years from the date of grant if the option is granted to an
individual who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of our stock. The board of directors or the
compensation committee generally has the right to accelerate the exercisability
of any options granted under the 1995 Stock Plan which would otherwise be
unexercisable. Upon consolidations or mergers, the board of directors of any
entity assuming our obligations may make equitable adjustments to the options,
accelerate the exercisability of options or terminate them in exchange for a
cash payment.
The 1995 Stock Plan expires on January 5, 2005, except as to options or
awards outstanding on that date. Subject to the terms of the 1995 Stock Plan,
the board of directors may terminate or amend the Plan at any time.
As of December 31, 1999, options for the purchase of an aggregate of
8,211,644 shares of common stock at a weighted average exercise price of $3.35
were outstanding under the 1995 Stock Plan.
EXECUTIVE MANAGEMENT BONUS PLAN
In November 1997, the board of directors adopted the Executive Management
Bonus Plan, which became effective in 1998 and will continue from year to year
unless terminated by the board of directors. We established the Bonus Plan as a
means to attract and retain senior level executives. Pursuant to the Bonus Plan,
individuals holding executive management positions, including our president and
chief executive officer, chief financial officer and our executive vice
presidents, are entitled to annual bonus payments linking performance oriented
objectives, which are defined and approved annually by the board, to a variable
compensation award based upon a percentage of the annual base salary of each
eligible participant. The board of directors has the right to review and
recommend other positions for inclusion as participants in the Bonus Plan.
Under the terms of the Bonus Plan, we will pay bonus awards granted to
participants as follows:
- a minimum of 30% of the total value of the award will be in the form of
stock options, with a value equal to the option exercise price multiplied
by the number of shares of common stock subject to the option; and
- the remaining 70% of the total value will be in the form of cash or stock
options, to the extent elected by the participant.
Each year, prior to the time we grant the bonus awards, each participant
must make an election as to the form of payment of his or her bonus award. The
board of directors will grant stock options in accordance with the Bonus Plan
under our 1995 Stock Plan. The options awarded will be incentive stock options
to the extent possible and will fully vest immediately upon grant. The board of
directors has the sole discretion to grant awards under the Bonus Plan and may
terminate or amend the Bonus Plan at any time, in any manner, without the
consent of any participant.
EMPLOYEE STOCK PURCHASE PLAN
In February 2000, our board of directors and our stockholders approved and
adopted the Employee Stock Purchase Plan, subject to the completion of this
offering. The Employee Stock Purchase Plan will be effective July 3, 2000 and
provides that 40,000 shares of common stock will be available for purchase
during a six month period commencing on the effective date. We will make
available an additional 40,000 shares of common stock, as well as any shares not
purchased during the prior six month period, in each subsequent six month period
until the Employee Stock Purchase Plan terminates. All of our employees or
employees of our affiliates who have completed six months of
55
<PAGE>
service and whose customary employment is at least 20 hours per week and for
more than five months in any calendar year are eligible to participate in the
Employee Stock Purchase Plan. Employees who would own 5% or more of the total
combined voting power or value of our stock immediately after having subscribed
for shares under the Employee Stock Purchase Plan may not participate in the
Plan.
Each eligible employee may purchase shares of common stock through regular
payroll deductions in an amount not less than 1% nor more than 10% of the
employee's compensation for each payroll period. At the end of each six month
period, we will issue shares of common stock on behalf of participating
employees, using the employees' payroll deductions, at a purchase price equal to
85% of the lesser of the last reported sale price of the common stock on the
first or last business day of the six month period. Under the Employee Stock
Purchase Plan, no employee may purchase shares of common stock during any
calendar year with a fair market value in excess of $25,000.
The board of directors may amend or terminate the Employee Stock Purchase
Plan, provided that:
- no amendment or termination may affect shares purchased under the Stock
Purchase Plan or the right of a participant to acquire shares during the
current six month period semiannual cycle without the consent of that
participant; and
- to the extent required by Rule 16b-3 of the Securities Exchange Act of
1934, as amended, or any other law, regulation or stock exchange rule, the
stockholders will have the right to approve amendments prior to their
effectiveness.
In addition, the Employee Stock Purchase Plan provides that our stockholders
must approve any amendment which increases the aggregate number of shares of
common stock which may be issued under the Plan or which expands the class of
persons entitled to participate under the Plan as of the effective date of the
Employee Stock Purchase Plan within twelve months after the adoption of the
amendment.
401(k) PLAN
Effective January 1, 1997, we amended and restated our July 1, 1994
Pharmaceutical Peptides, Inc. 401(k) Plan in its entirety by adopting a 401(k)
Trust Plan and Trust Agreement. This currently existing plan is known as the
PRAECIS Pharmaceutical, Inc. 401(k) Plan. The amended plan does not reduce the
benefits or lessen the rights of any employee with respect to those benefits
accrued prior to January 1, 1997. Employees who are at least 21 years of age and
have satisfied various service eligibility requirements, except for nonresident
aliens with no United States source of income, are eligible to make tax-deferred
contributions. Participants in the 401(k) plan may contribute up to 15% of their
total annual compensation, not to exceed the specified statutory limit, which
was $10,000 in 1999. Under our prior 401(k) plan, our participants received full
and immediate vesting of their contributions. Under our current 401(k) plan,
participants are vested in their non-matching and matching contributions, if
any, on a graded vesting schedule based on years of credited service.
The 401(k) plan permits, but does not require, us to make contributions to
the 401(k) plan on behalf of our employees. To date, we have not made any
matching contributions. All contributions to the 401(k) plan by or on behalf of
employees are subject to aggregate annual limits prescribed by the Internal
Revenue Service.
56
<PAGE>
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that we have executed all of the transactions set forth below on
terms no less favorable to us than terms we could have obtained from
unaffiliated third parties. It is our intention to ensure that all future
transactions, including loans, between us and our officers, directors, principal
stockholders and their affiliates, are approved by a majority of the board of
directors, including a majority of the independent and disinterested members of
the board of directors, and are on terms no less favorable to us than those that
we could obtain from unaffiliated third parties.
PRIVATE PLACEMENTS OF SECURITIES
Since January 1997, we have issued and sold common stock, warrants and
convertible preferred stock to the following persons and/or entities that are
our principal stockholders or directors.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK ISSUABLE UPON
-------------------------------------------
EXERCISE OF CONVERSION OF CONVERSION OF
WARRANT TO SERIES D SERIES E
SHARES OF PURCHASE CONVERTIBLE CONVERTIBLE
COMMON COMMON PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK
- ----------------------------------------------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Sanofi-Synthelabo Inc. (formerly Sylamerica,
Inc.)........................................ 1,617,772 404,445 -- --
Quantum Industrial Partners LDC................ -- -- 2,695,414 --
Chase Venture Capital Associates, L.P.......... -- -- -- 5,357,145
Entities affiliated with Sutter Hill
Ventures..................................... -- -- -- 86,804
J.H. Whitney & Co. and an affiliated entity.... -- -- -- 535,717
Greylock Limited Partnership................... -- -- -- 89,287
Entities affiliated with Zesiger Capital Group
LLC.......................................... -- -- -- 267,855
</TABLE>
Shares held by all affiliated persons and entities have been aggregated. For
additional details on the shares held by each of these purchasers, please refer
to the information in this prospectus under the heading "Principal Stockholders
and Management." The aggregate purchase price for the common stock and the
warrant was $10.0 million in May 1997. The aggregate purchase price for the
Series D convertible preferred stock was $10.0 million, or $3.71 per share, in
June 1997. The per share purchase price for the Series E convertible preferred
stock was $5.60 per share in April 1998.
Damion E. Wicker, M.D., one of our directors, is General Partner of Chase
Capital Partners, a private equity and mezzanine capital group affiliated with
Chase Venture Capital Associates, L.P., G. Leonard Baker, Jr., one of our
directors, is a Managing Director of Sutter Hill Ventures, William Laverack,
Jr., one of our directors, is a General Partner of J.H. Whitney & Co., Henry F.
McCance, one of our directors, is a Managing Partner of Greylock Limited
Partnership and Albert L. Zesiger, one of our directors, is a Principal of
Zesiger Capital Group LLC.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our certificate of incorporation and by-laws provide that we will indemnify
each of our directors and officers to the fullest extent permitted by the
Delaware General Corporation Law.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth information about the beneficial ownership of
our common stock on December 31, 1999, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:
- each named executive officer;
- each of our directors;
- each person known to us to be the beneficial owner of more than 5% of our
common stock; and
- all of our executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on
the tables is c/o PRAECIS PHARMACEUTICALS INCORPORATED, One Hampshire Street,
Cambridge, Massachusetts 02139.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock that they beneficially own, subject to
applicable community property laws. We have based our calculation of the
percentage of beneficial ownership on 31,966,545 shares of common stock
outstanding on December 31, 1999 and 39,966,545 shares of common stock
outstanding upon completion of this offering.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. We did not deem
these shares outstanding, however, for the purpose of computing the percentage
ownership of any other person. Asterisks represent beneficial ownership of less
than one percent.
58
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES OF NUMBER OF BENEFICIALLY OWNED
COMMON STOCK SHARES -------------------
BENEFICIALLY SUBJECT TO BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OPTIONS(1) OFFERING OFFERING
- ---------------------------------------------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C>
Malcolm L. Gefter, Ph.D............................. 877,500 612,158 4.66% 3.73%
Kevin F. McLaughlin................................. 50,000 203,830 * *
Marc B. Garnick, M.D. (2)........................... 458,654 213,608 2.10 1.68
Dean A. Falb, Ph.D.................................. 0 170,834 * *
Larry D. Alsteil, M.D., Ph.D........................ 0 0 * *
G. Leonard Baker, Jr. (3)........................... 1,965,017 2,499 6.15 4.92
c/o Sutter Hill Ventures
755 Page Mill Road
Suite A-200
Palo Alto, CA 94304
William Laverack, Jr. (4)........................... 3,406,194 2,499 10.66 8.53
c/o J. H. Whitney & Co.
177 Broad Street
Stamford, CT 06901
Henry F. McCance (5)................................ 1,793,296 2,499 5.62 4.49
c/o Greylock Limited Partnership
One Federal Street, 26th Floor
Boston, MA 02110
David B. Sharrock................................... 31,875 13,749 * *
1011 Barcamil Way
Naples, FL 34110
Damion E. Wicker, M.D. (6).......................... 7,339,004 2,499 22.97 18.37
c/o Chase Capital Partners
380 Madison Avenue,
12(th) Floor
New York, NY 10017
Albert L. Zesiger (7)............................... 1,529,506 0 4.78 3.83
c/o Zesiger Capital Group LLC
320 Park Avenue
New York, NY 10022
All current directors and executive officers
as a group (11 persons)........................... 17,451,046 1,224,175 56.27 45.34
</TABLE>
- ------------------------
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<PAGE>
(1) Represents the number of shares issuable upon the exercise of options
exercisable within 60 days of December 31, 1999.
(2) Includes 36,000 shares of common stock held by the Garnick Family 1999
Grantor Retained Annuity Trust, of which Dr. Garnick is the trustee.
(3) Consists of 1,288,372 shares of common stock held by Sutter Hill Ventures,
over which Mr. Baker, a member of our board of directors and a managing
director of the general partner of Sutter Hill Ventures, shares voting and
investment power with four other managing directors of the general partner
of Sutter Hill Ventures; 463,842 shares of common stock held by three other
managing directors, one retired managing director and their related family
entities; and shares of common stock held by Mr. Baker and his related
family entities. Mr. Baker disclaims beneficial ownership of the shares of
common stock held by Sutter Hill Ventures and the other persons or entities,
except to the extent of his proportionate partnership interest therein.
(4) Consists of 859,804 shares of common stock held by J. H. Whitney & Co. and
2,546,390 shares of common stock held by Whitney 1990 Equity Fund, L.P., an
affiliated entity of J. H. Whitney & Co. Mr. Laverack is a member of our
board of directors and a general partner of each entity and shares voting
and investment power with respect to these shares. Mr. Laverack disclaims
beneficial ownership of these shares, except to the extent of his
proportionate partnership interest therein.
(5) Consists of 1,793,296 shares of common stock held by Greylock Limited
Partnership, a private venture capital firm of which Mr. McCance is a
Managing Partner. Mr. McCance disclaims beneficial ownership of these
shares, except as to his proportionate partnership interest therein.
(6) Consists of 7,339,004 shares of common stock held by Chase Venture Capital
Associates, L.P., a private equity and mezzanine capital group of which
Dr. Wicker is a general partner. Dr. Wicker disclaims beneficial ownership
of the shares held by Chase Capital Partners, except to the extent of his
pecuniary interest in these shares.
(7) Includes 1,470,178 shares of common stock held in accounts managed for
various parties by Zesiger Capital Group LLC, an investment advisor, for
which Albert L. Zesiger is a Principal. Excludes 2,499 shares of common
stock subject to vested options granted to Mr. Zesiger, which he
subsequently declined. Mr. Zesiger, in his capacity as Managing Director,
has voting and investment power with respect to these shares but disclaims
beneficial ownership with respect thereto.
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<PAGE>
5% STOCKHOLDERS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON STOCK
SHARES OF BENEFICIALLY OWNED
COMMON STOCK -------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Chase Venture Capital Associates, L.P....................... 7,339,004 22.96% 18.36%
c/o Chase Capital Partners
380 Madison Avenue, 12(th) Floor
New York, NY 10017
J. H. Whitney & Co. (1)..................................... 3,406,194 10.66 8.52
177 Broad Street
Stamford, CT 06901
Quantum Industrial Partners LDC............................. 2,695,414 8.43 6.74
888 Seventh Avenue
New York, NY 10106
Sanofi-Synthelabo Inc. (2).................................. 2,022,217 6.33 5.06
90 Park Avenue
New York, NY 10019
Sutter Hill Ventures (3).................................... 1,965,017 6.15 4.92
755 Page Mill Road
Suite A-200
Palo Alto, CA 94304
Greylock Limited Partnership................................ 1,793,296 5.61 4.49
One Federal Street, 26(th) Floor
Boston, MA 02110
Vulcan Ventures, Inc.(4).................................... 1,641,026 5.13 4.11
William D. Savoy
110-110th Avenue Northeast
Suite 550
Bellevue, WA 98004
</TABLE>
- ------------------------
(1) Consists of 859,804 shares of common stock held by J. H. Whitney & Co. and
2,546,390 shares of common stock held by Whitney 1990 Equity Fund, L.P., an
affiliated entity of J. H. Whitney & Co.
(2) Includes 404,445 shares of common stock subject to currently exercisable
warrants.
(3) Consists of 1,288,372 shares of common stock held by Sutter Hill Ventures,
over which Mr. Baker, Jr., a member of our board of directors and a managing
director of the general partner of Sutter Hill Ventures, shares voting and
investment power with four other managing directors of the general partner
of Sutter Hill Ventures; 463,842 shares of common stock held by the three
other managing directors, one retired managing director and their related
family entities; and shares of common stock held by Mr. Baker and his
related family entities.
(4) William D. Savoy, in his capacity as Vice President of Vulcan Ventures,
Inc., has voting and investment power with respect to these shares but
disclaims beneficial ownership with respect thereto.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our amended
and restated certificate of incorporation and our amended and restated by-laws
is a summary. Statements contained elsewhere in this prospectus relating to
these provisions are not necessarily complete, and we refer you to the amended
and restated certificate of incorporation and the amended and restated by-laws
that will be in effect upon the completion of this offering. We have filed
copies of these documents with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus is a part. The
amended and restated certificate of incorporation and the amended and restated
by-laws described below will become effective at the time of completion of this
offering.
Our authorized capital stock will consist of 200,000,000 shares of common
stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par
value $.01 per share, upon the closing of this offering.
COMMON STOCK
As of December 31, 1999, there were 31,966,545 shares of common stock
outstanding and held of record by 118 stockholders. Upon completion of this
offering, there will be 39,966,545 shares of common stock outstanding. In
addition, as of December 31, 1999, there were outstanding stock options for the
purchase of a total of 8,211,644 shares of common stock and outstanding warrants
to purchase of 515,940 shares of common stock. Shares of common stock have the
following rights, preferences and privileges:
VOTING RIGHTS. Each outstanding share of common stock is entitled to one
vote on all matters submitted to a vote of our stockholders, including the
election of directors. There are no cumulative voting rights, and therefore, the
holders of a plurality of the shares of common stock voting for the election of
directors may elect all of our directors standing for election.
DIVIDENDS. Holders of common stock are entitled to receive dividends if and
when dividends are declared by our board of directors out of assets legally
available for the payment of dividends, subject to preferential rights of
outstanding shares of preferred stock, if any.
LIQUIDATION. In the event of a liquidation, dissolution or winding up of
the affairs of PRAECIS, whether voluntary or involuntary, after payment of our
debts and other liabilities of and making provision for the holders of
outstanding shares of preferred stock, if any, we will distribute the remainder
of our assets ratably among the holders of shares of common stock.
RIGHTS AND PREFERENCES. The common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, preferences and
privileges of holders of common stock are subject to, and may be impaired by,
the rights of the holders of shares of any series of preferred stock that we may
designate and issue in the future.
FULLY PAID AND NONASSESSABLE. All outstanding shares of common stock are,
and the shares of common stock to be issued pursuant to this offering will be,
fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into common stock. Pursuant to the terms of our amended and
restated certificate of incorporation, the board of directors will be
authorized, subject to any limitations prescribed by Delaware law, without
further stockholder approval, to issue from time to time up to an aggregate of
10,000,000 shares of preferred stock, in one or more classes or series, and to
fix the voting powers, if any, and the distinctive designations, preferences and
relative, participating, optional or other special rights and the
qualifications, limitations or restrictions of these rights, of the shares of
each class or series. The board
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<PAGE>
of directors is authorized to issue preferred stock with voting, conversion and
other rights and preferences that could impair the voting power or other rights
of the holders of common stock.
We have no current plans to issue any preferred stock. However, the issuance
of preferred stock or of rights to purchase preferred stock could make it more
difficult or less desirable for a third party to acquire a majority of our
outstanding common stock.
WARRANTS
In connection with a Master Lease Agreement dated March 29, 1995, as
amended, between us and Comdisco, Inc., we agreed to issue Comdisco warrants to
purchase shares of our Series A convertible preferred stock. All of these
warrants are subject to adjustment in accordance with their terms and expire on
March 29, 2005. Upon the closing of this offering, these warrants will convert
to warrants to purchase common stock at an exercise price of $1.35 per share.
The warrants issued to Comdisco were exercisable for a total of 111,495 shares
of common stock. In August 1998, Comdisco transferred to a third party warrants
to purchase 12,722 shares of common stock. Comdisco currently holds warrants to
purchase 98,773 shares of common stock. All of these warrants are currently
exercisable.
Pursuant to a Stock and Warrant Purchase Agreement dated as of May 13, 1997,
we issued to Sanofi-Synthelabo Inc., formerly Sylamerica, Inc., warrants which
are currently exercisable for 404,445 shares of common stock at an exercise
price of $12.88 per share. These warrants are subject to adjustment in
accordance with their terms and expire on May 13, 2002.
REGISTRATION RIGHTS
Pursuant to the amended and restated stockholders agreement dated as of
April 30, 1998, as amended, among some of our stockholders and us, and the stock
and warrant purchase agreement between Sanofi-Synthelabo and us, the holders of
30,652,908 shares of common stock have rights to have their shares of common
stock registered under the Securities Act of 1933, as amended. Under the
stockholders agreement and the stock and warrant purchase agreement, if we
propose to register any of our securities under the Securities Act, subject to
various conditions, we must give notice to the parties to these agreements of
the registration and allow those parties to include their shares of common stock
in the registration statement. We have the right, however, to cut back or
completely exclude shares proposed to be registered in an underwritten public
offering to the extent the managing underwriter advises us to do so due to
market conditions.
In addition, the holders of at least 66 2/3% of the outstanding securities
issued upon conversion of the Series A convertible preferred stock, Series C
convertible preferred stock, Series D convertible preferred stock and Series E
convertible preferred stock may demand, at any time, and up to three times, that
we file a registration statement under the Securities Act covering some or all
of their shares. Under these demand registration rights, we must use our
reasonable best efforts to cause the shares requested, and all other shares held
by holders of securities entitled to registration rights under the stockholders
agreement requested, to be included in the registration statement, subject to
customary conditions and limitations.
In addition, at any time after the first anniversary of the closing of this
offering, holders of at least a majority of the outstanding securities issued
upon conversion of the Series E convertible preferred stock may demand, on one
occasion, that we file a registration statement to register their shares. We
must use our reasonable best efforts to cause those shares requested and all
other shares held by the stockholders entitled to demand registration rights
requested to be included in the registration statement to be registered, subject
to customary conditions and limitations.
Once we become eligible to file a registration statement on Form S-3, the
holders of 10% of the outstanding securities entitled to registration rights
under the stockholders agreement may require us to
63
<PAGE>
register, on up to three occasions, all or a portion of their securities on a
registration statement on Form S-3 and may participate in a Form S-3
registration by us, subject to conditions and limitations described in the
stockholders agreement. These holders may not request a Form S-3 registration on
more than one occasion in any twelve month period. In addition, the Series E
convertible preferred stockholders may require us, on one occasion, to register
all or a portion of their securities on a registration statement on Form S-3 and
may participate in a similar registration by us, subject to conditions and
limitations described in the stockholders agreement.
The exercise of any of the registration rights described above may hinder
our efforts to arrange future financing and may lower the market price of the
common stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER AND BY-LAWS AND OF DELAWARE
LAW
Our amended and restated certificate of incorporation and by-laws, effective
upon completion of this offering, contain provisions that could discourage,
delay or prevent a tender offer or takeover attempt at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might otherwise pay in the future for shares of common
stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
BLANK CHECK PREFERRED STOCK. As noted above, our board of directors,
without stockholder approval, will have the authority under our certificate of
incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could be issued quickly
and easily, could impair the rights of holders of common stock and could be
issued with terms calculated to delay or prevent a change of control or make
removal of management more difficult.
ELECTION OF DIRECTORS. Our amended and restated certificate of
incorporation provides that only a majority of directors then in office may fill
newly created directorships, provided that a quorum is present. Only a majority
of directors then in office may fill any other vacancy occuring on the board of
directors, even though less than a quorum may then be in office. These
provisions may discourage a third party from voting to remove incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by that removal with its own nominees.
STOCKHOLDER ACTION. Our certificate of incorporation provides that
stockholders may only act at meetings of stockholders and not by written consent
in lieu of a stockholders' meeting.
STOCKHOLDER MEETINGS. Our certificate of incorporation and by-laws provide
that stockholders may not call a special meeting of the stockholders. Rather,
only the chairman of the board, the president, any vice president, the
secretary, or any assistant secretary, acting pursuant to a resolution of a
majority of the board of directors, will be able to call special meetings of
stockholders. Our by-laws also provide that stockholders may only conduct
business at special meetings of stockholders that was specified in the notice of
the meeting. These provisions may discourage another person or entity from
making a tender offer, even if it acquired a majority of our outstanding voting
stock, because the person or entity could only take action at a duly called
stockholders' meeting relating to the business specified in the notice of
meeting and not by written consent.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our by-laws provide that a stockholder seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice of
this intention in writing. To be timely, a stockholder must deliver or mail the
notice and we must receive the notice at our principal executive offices not
less than 90 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders. However, if we change the
date of the annual meeting of stockholders to a date that is not within 30 days
before or
64
<PAGE>
after the anniversary of our previous annual meeting of stockholders, then we
must receive the stockholder's notice no later than the close of business on the
later of the 90(th) day before the date of the annual meeting and the 10(th) day
after the date on which we mail notice of the date of the meeting or we make a
public announcement, whichever first occurs. The by-laws also include a similar
requirement for making nominations at special meetings and specify requirements
as to the form and content of the stockholder's notice. These provisions could
delay stockholder actions that are favored by the holders of a majority of our
outstanding stock until the next stockholders' meeting.
SUPER-MAJORITY VOTING. Delaware law generally provides that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation, unless a corporation's
certificate of incorporation requires a greater percentage. We have provisions
in our certificate of incorporation which require a vote of at least 85% of the
stockholders entitled to vote in the election of directors to amend, alter,
change or repeal the anti-takeover provisions of our certificate of
incorporation.
DELAWARE ANTI-TAKEOVER STATUTE
We are a Delaware corporation subject to Section 203 of the Delaware General
Corporation Law. Under Section 203, some business combinations between a
Delaware corporation whose stock generally is publicly traded or held of record
by more than 2,000 stockholders and an interested stockholder are prohibited for
a three-year period following the date that the stockholder became an interested
stockholder, unless:
- the corporation has elected in its certificate of incorporation not to be
governed by Section 203;
- the board of directors of the corporation approved the transaction which
resulted in the stockholder becoming an interested stockholder before the
stockholder became an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction, excluding voting stock owned by directors
who are also officers or held in employee benefit plans in which the
employees do not have a confidential right to tender stock held by the
plan in a tender or exchange offer; or
- the board of directors approves the business combination and holders of
two-thirds of the voting stock which the interested stockholder did not
own authorize the business combination at a meeting.
We have not made an election in our amended and restated certificate of
incorporation to opt-out of Section 203.
In addition to the above exceptions to Section 203, the three-year
prohibition does not apply to some business combinations proposed by an
interested stockholder following the announcement or notification of an
extraordinary transaction involving the corporation and a person who was not an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors. For the purposes of Section 203, a business combination generally
includes mergers or consolidations, transactions involving the assets or stock
of the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. Also, an
interested stockholder generally includes a stockholder who becomes beneficial
owner of 15% or more of a Delaware corporation's voting stock, together with the
affiliates or associates of that stockholder.
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<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation and amended and
restated by-laws provide that we shall indemnify our directors and officers to
the full extent that Delaware law permits. Delaware law permits a corporation to
indemnify any director, officer, employee or agent made or threatened to be made
a party to any pending or completed proceeding if the person acted in good faith
and in a manner that the person reasonably believed to be in the best interests
of the corporation and, with respect to any criminal proceeding, had no
reasonable cause to believe that his or her conduct was unlawful.
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors will not be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us under the
provisions that we describe above or otherwise, we have been informed that in
the opinion of the Securities and Exchange Commission, this indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Our by-laws also permit us to purchase and maintain insurance on behalf of
any officer or director for any liability arising out of his or her actions in
that capacity, regardless of whether our by-laws would otherwise permit
indemnification for that liability. We are in the process of obtaining liability
insurance for our officers and directors.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of PRAECIS in which indemnification
will be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
SALE OF RESTRICTED SHARES
Upon completion of this offering, based upon the number of shares
outstanding as of December 31, 1999, we will have an aggregate of 39,966,545
outstanding shares of common stock, or 41,166,545 shares if the underwriters
exercise the over-allotment option in full, excluding 8,211,644 shares
underlying outstanding options and 515,940 underlying outstanding warrants. Of
these shares, all of the 8,000,000 shares sold in this offering, or 9,200,000
shares if the underwriters over-allotment option is exercised in full, will be
freely tradable without restriction or further registration under the Securities
Act, except that any shares purchased by our affiliates, as that term is defined
in Rule 144 under the Securities Act, may generally only be sold in compliance
with the limitations of Rule 144 described below. As defined in Rule 144, an
affiliate of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls, is controlled by or is under common control with
the issuer. The remaining outstanding shares of common stock will be deemed
"restricted securities" as that term is defined under Rule 144. Restricted
securities may be sold in the public market only if they qualify for an
exemption from registration under Rule 144, including Rule 144(k), or Rule 701
under the Securities Act.
LOCK-UP AGREEMENTS
Our directors, executive officers, warrant holders and all of our
stockholders have agreed not to offer, sell, contract to sell or, with limited
exception, otherwise dispose of any shares of common stock or any security
convertible into or exchangeable for common stock for a period of 180 days from
the date of this prospectus without the prior written consent of Salomon Smith
Barney. Persons and entities who have agreed to these restrictions may dispose
of shares as a gift or distribution, provided that the recipients of those
shares agree to the same restrictions. Immediately following this offering, our
existing stockholders will own 31,966,545 restricted shares, representing
approximately 80% of the then outstanding shares of common stock, or
approximately 78% if the underwriters' over-allotment option is exercised in
full. Our executive officers and directors will own 18,675,221 shares, based
upon their beneficial ownership as of December 31, 1999 and including options
held by them that are exercisable within 60 days of December 31, 1999. Upon
expiration of the lock-up period, 180 days after the date of this prospectus,
30,348,754 shares will be available for resale to the public in accordance with
Rule 144.
We have agreed not to issue, sell or otherwise dispose of any shares of
common stock during the 180-day period following the date of the prospectus,
except we may grant options to purchase shares of common stock under the 1995
Stock Plan and issue shares of common stock either upon the exercise of
outstanding options under our 1995 Stock Plan or under our Employee Stock
Purchase Plan.
RULE 144
In general, under Rule 144 as currently in effect, commencing 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year, including a person who is an affiliate, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 399,665 shares upon completion of this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to a sale, subject to restrictions
specified in Rule 144.
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Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell those
shares without regard to the volume, manner-of-sale or other limitations
contained in Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is eligible
to resell the shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with various restrictions,
including the holding period, contained in Rule 144.
STOCK OPTIONS
As of December 31, 1999, options to purchase a total of 8,211,644 shares of
common stock were outstanding, of which 2,776,546 were then exercisable. Upon
completion of this offering, we intend to file a registration statement to
register for resale an aggregate of approximately 9,770,460 shares of common
stock reserved for issuance under our Second Amended and Restated 1995 Stock
Plan as of December 31, 1999 and 160,000 shares of common stock reserved for
issuance under our Employee Stock Purchase Plan. That registration statement
will become effective immediately upon filing. Accordingly, shares covered by
that registration statement will become eligible for sale in the public markets,
subject to vesting restrictions, Rule 144 volume limitations applicable to our
affiliates or the lock-up agreements with Salomon Smith Barney. All of our
option holders have entered into lock-up agreements.
REGISTRATION RIGHTS
Upon completion of this offering, under specified circumstances and subject
to customary conditions, the holders of an aggregate of 30,652,908 shares of our
common stock, will be entitled to rights with respect to the registration under
the Securities Act of some or all of their shares, subject to the 180-day
lock-up period described above. These holders of registration rights are subject
to lock-up periods of not more than 180 days following the date of this
prospectus or any subsequent prospectus. Please refer to the information in this
prospectus under the heading "Description of Capital Stock--Registration Rights"
for a more detailed discussion of these registration rights.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, each
underwriter named below has severally agreed to purchase, and we have agreed to
sell to each underwriter, the number of shares set forth opposite the name of
that underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ------------------------------------------------------------ ---------
<S> <C>
Salomon Smith Barney Inc....................................
CIBC World Markets Corp.....................................
Credit Suisse First Boston Corporation......................
-------
Total.....................................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by their counsel and to other conditions. The
underwriters must purchase all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., CIBC World Markets
Corp. and Credit Suisse First Boston Corporation are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to dealers at the public offering price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may reallow, a
concession not in excess of $ per share on sales to other dealers. If all of
the shares are not sold at the initial offering price, the representatives may
change the public offering price and the other selling terms. The
representatives have advised us that the underwriters do not intend to confirm
any sales to any accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,200,000 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise that option solely to cover over-allotments, if any,
in connection with this offering. To the extent the option is exercised, each
underwriter must, subject to specified conditions, purchase a number of
additional shares approximately proportionate to that underwriter's initial
purchase commitment.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 400,000 of the shares, or 5%, of our common stock to
be sold in this offering for sale to our directors, officers and employees and
friends and family of our directors, officers and employees. The underwriters
will reduce the number of shares available for sale to the general public to the
extent that any reserved shares are purchased. Any reserved shares not purchased
will be offered by the underwriters on the same basis as the other shares
offered.
We, our officers and directors, warrant holders and all of our stockholders
have agreed that, with limited exceptions, for a period of 180 days from the
date of this prospectus, we or they will not, without the prior written consent
of Salomon Smith Barney Inc., dispose of or hedge any shares of our common stock
or any securities convertible into or exchangeable for common stock. Salomon
Smith Barney Inc. in its sole discretion may release any of the securities
subject to these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for the common
stock. Consequently, we and the representatives determined the initial public
offering price for the shares through negotiations. Among the factors considered
in determining the initial public offering price were our record of operations,
our current financial condition, our future prospects, our markets, the economic
conditions in and future prospects for the biotechnology and pharmaceutical
industries, our management and
69
<PAGE>
currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies considered
comparable to us. However, the prices at which the shares will sell in the
public market after this offering may be lower than the price at which they are
sold by the underwriters and an active trading market in the common stock may
not develop or continue after this offering.
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "PRCS."
The following table shows the underwriting discounts and commissions we will
pay to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY PRAECIS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include over-allotment, syndicate covering transactions
and stabilizing transactions. Over-allotment involves syndicate sales of common
stock in excess of the number of shares to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases of common stock made to
prevent or retard a decline in the market price of the common stock while the
offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to other underwriters a portion of the
underwriting discount received by it because the other underwriters have
repurchased shares sold by or for the account of the underwriter in stabilizing
or short covering transactions.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. The underwriters may effect these activities on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, the underwriters may discontinue these activities at any time.
In addition, in connection with this offering, some of the underwriters may
engage in passive market making transactions in the common stock on the Nasdaq
National Market, prior to the pricing and completion of the offering. Passive
market making consists of displaying bids on the Nasdaq National Market no
higher than the bid prices of independent market makers and making purchases at
prices no higher than those independent bids and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average daily trading volume
in the common stock during a specified period and must be discontinued when that
limit is reached. Passive market making may cause the price of the common stock
to be higher than the price that otherwise would exist in the open market in the
absence of these transactions. If the underwriters commence passive market
making, they may discontinue it at any time.
A prospectus in electronic format will be made available on the Web sites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their on line brokerage
account holders. The representatives will allocate shares to the underwriters
that make Internet distributions on the same basis as other allocations.
E*OFFERING
70
<PAGE>
Corp. will be participating in the offering as a member of the selling group and
plans to use the Internet as one of several means of retail distribution.
We estimate that the total expenses of this offering will be approximately
$1,000,000.00.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Various legal matters with respect to the validity of the common stock
offered by this prospectus will be passed upon for us by Skadden, Arps, Slate,
Meagher & Flom LLP, Boston, Massachusetts. Various legal matters in connection
with this offering will be passed upon for the underwriters by Goodwin,
Procter & Hoar LLP, Boston, Massachusetts.
EXPERTS
Our financial statements at December 31, 1998 and 1999 and for each of the
three years in the period ended December 31, 1999 appearing in this prospectus
and elsewhere in the registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon this report given upon the
authority of such firm as experts in accounting and auditing.
The statements in this prospectus relating to patents appearing in the
section entitled "Risk Factors" under the captions "If we are unable to obtain
and enforce valid patents, we could lose our competitive advantage" and "If our
potential products conflict with the patents of competitors, universities or
others, we could be subject to costly litigation and be able to commercialize
those products," and in the section entitled "Business" under the sub-heading
"Patents and Proprietary Rights" and other references in this prospectus to
patents have been examined by and passed upon for us by Lahive & Cockfield, LLP,
and are included in reliance upon such examination and upon the authority of
such counsel as experts on patents.
71
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act with respect to the shares of
common stock offered in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in the
registration statement, or the exhibits which are part of the registration
statement, parts of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission. For further information about us and
the shares of our common stock to be sold in this offering, please refer to the
registration statement and the exhibits which are part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or any other document are not necessarily complete. Each statement in
this prospectus regarding the contents of the referenced contract or other
document is qualified in all respects by our reference to the copy filed with
the registration statement.
For further information about us and our common stock, we refer you to our
registration statement and its attached exhibits, copies of which may be
inspected without charge at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You can request copies of these documents
by writing to the Securities and Exchange Commission and paying a duplicating
fee. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. The Commission maintains a
World Wide Web site on the Internet at HTTP://WWW.SEC.GOV that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the Commission. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and Web site
of the Commission referred to above.
We intend to furnish our stockholders with annual reports containing audited
financial statements and an opinion thereon expressed by independent certified
public accountants. We also intend to furnish other reports as we may determine
or as required by law.
72
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets at December 31, 1998 and 1999................ F-3
Statements of Operations for the years ended December 31,
1997, 1998 and 1999....................................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PRAECIS PHARMACEUTICALS INCORPORATED
We have audited the accompanying balance sheets of PRAECIS PHARMACEUTICALS
INCORPORATED as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PRAECIS PHARMACEUTICALS
INCORPORATED at December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 2, 2000
F-2
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS' EQUITY
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- --------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 85,298 $ 94,525
Accounts receivable....................................... 680 8,121
Unbilled revenue.......................................... -- 4,259
Materials inventory....................................... -- 21,100
Prepaid expenses and other assets......................... 526 708
Deferred income taxes..................................... 280 5,575
-------- --------
Total current assets.................................... 86,784 134,288
Property and equipment, net................................. 3,841 6,043
-------- --------
Total assets............................................ $ 90,625 $140,331
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,206 $ 9,878
Accrued expenses.......................................... 7,231 6,859
Deferred revenue.......................................... 1,302 5,501
Advance payments.......................................... -- 21,100
Income taxes payable...................................... 230 4,672
Current portion of capital lease obligations.............. 189 58
-------- --------
Total current liabilities............................... 10,158 48,068
Deferred revenue............................................ 2,035 4,547
Capital lease obligations, net of current portion........... 59 --
Commitments and contingencies
Stockholders' equity:
Preferred Stock--Unallocated, $0.01 par value, 312,700
shares authorized; no shares issued or outstanding...... $ -- $ -- $ --
Series A Convertible Preferred Stock, $0.01 par value;
1,061,166 shares authorized; 1,041,166 shares issued and
outstanding in 1998 and 1999 ($10,500 aggregate
liquidation preference); no shares issued and
outstanding pro forma................................... 10 10 --
Series B Convertible Preferred Stock, $0.01 par value;
63,700 shares authorized, issued and outstanding in 1998
and 1999 ($642 aggregate liquidation preference); no
shares issued and outstanding pro forma................. 1 1 --
Series C Convertible Preferred Stock, $0.01 par value;
1,052,632 shares authorized, issued and outstanding in
1998 and 1999 ($20,000 aggregate liquidation
preference); no shares issued and outstanding pro
forma................................................... 11 11 --
Series D Convertible Preferred Stock, $0.01 par value;
359,324 shares authorized, issued and outstanding in
1998 and 1999 ($10,000 aggregate liquidation
preference); no shares issued and outstanding pro
forma................................................... 4 4 --
Series E Convertible Preferred Stock, $0.01 par value;
900,478 shares authorized, issued and outstanding in
1998 and 1999 ($37,820 aggregate liquidation
preference); no shares issued and outstanding pro
forma................................................... 9 9 --
Common Stock, $0.01 par value; 60,000,000 shares
authorized; 5,920,174 shares in 1998; 6,358,684 shares
in 1999 issued and outstanding; and 31,966,545 shares
issued and outstanding pro forma........................ 59 64 320
Additional paid-in capital................................ 88,622 88,710 88,489
Accumulated deficit....................................... (10,343) (1,093) (1,093)
-------- -------- --------
Total stockholders' equity.............................. 78,373 87,716 $ 87,716
-------- -------- ========
Total liabilities and stockholders' equity.............. $ 90,625 $140,331
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Corporate collaborations.................................. $15,118 $37,624 $61,514
Contract services......................................... 2,615 1,943 --
------- ------- -------
Total revenues.......................................... 17,733 39,567 61,514
Costs and expenses:
Research and development.................................. 15,013 33,704 48,764
General and administrative................................ 3,780 3,605 6,173
------- ------- -------
Total costs and expenses................................ 18,793 37,309 54,937
------- ------- -------
Operating income (loss)..................................... (1,060) 2,258 6,577
Interest income............................................. 1,466 3,562 4,484
Interest expense............................................ (102) (46) (11)
------- ------- -------
Income before income taxes.................................. 304 5,774 11,050
Provision for income taxes.................................. 100 100 1,800
------- ------- -------
Net income.................................................. $ 204 $ 5,674 $ 9,250
======= ======= =======
Net income per share:
Basic..................................................... $ 0.05 $ 0.99 $ 1.51
======= ======= =======
Diluted................................................... $ 0.01 $ 0.16 $ 0.24
======= ======= =======
Weighted average number of common shares:
Basic..................................................... 4,446 5,738 6,106
Diluted................................................... 28,270 35,139 37,849
Unaudited pro forma net income per share:
Basic.......................................................................... $ 0.29
=======
Diluted........................................................................ $ 0.24
=======
Unaudited pro forma weighted average number of common
shares:
Basic.......................................................................... 31,714
Diluted........................................................................ 37,849
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
-------------------- ------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 1,041,166 $10 63,700 $1 1,052,632 $11
Issuance of Common Stock........
Issuance of warrants to purchase
Common Stock..................
Common Stock issued upon
exercise of stock options.....
Repurchase of Treasury Stock....
Retirement of Treasury Stock....
Issuance of Series D Convertible
Preferred Stock............... 359,324 $4
Net income......................
--------- --- ------ -- --------- --- ------- --
Balance at December 31, 1997.... 1,041,166 10 63,700 1 1,052,632 11 359,324 4
Issuance of Series E Convertible
Preferred Stock...............
Common Stock issued upon
exercise of stock options.....
Net income......................
--------- --- ------ -- --------- --- ------- --
Balance at December 31, 1998.... 1,041,166 10 63,700 1 1,052,632 11 359,324 4
Common Stock issued upon
exercise of stock options.....
Net income......................
--------- --- ------ -- --------- --- ------- --
Balance at December 31, 1999.... 1,041,166 $10 63,700 $1 1,052,632 $11 359,324 $4
========= === ====== == ========= === ======= ==
<CAPTION>
PREFERRED STOCK
-------------------
SERIES E COMMON STOCK TREASURY STOCK ADDITIONAL
------------------- -------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- --------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 3,341,402 $34 $30,926 $(16,221)
Issuance of Common Stock........ 1,617,772 16 9,448
Issuance of warrants to purchase
Common Stock.................. 500
Common Stock issued upon
exercise of stock options..... 123,082 1 18
Repurchase of Treasury Stock.... 17,498 $(2)
Retirement of Treasury Stock.... (17,498) (17,498) 2 (2)
Issuance of Series D Convertible
Preferred Stock............... 9,957
Net income...................... 204
------- -- --------- --- ------- --- ------- --------
Balance at December 31, 1997.... 5,064,758 51 50,847 (16,017)
Issuance of Series E Convertible
Preferred Stock............... 900,478 $9 37,622
Common Stock issued upon
exercise of stock options..... 855,416 8 153
Net income...................... 5,674
------- -- --------- --- ------- --- ------- --------
Balance at December 31, 1998.... 900,478 9 5,920,174 59 88,622 (10,343)
Common Stock issued upon
exercise of stock options..... 438,510 5 88
Net income...................... 9,250
------- -- --------- --- ------- --- ------- --------
Balance at December 31, 1999.... 900,478 $9 6,358,684 $64 $88,710 $ (1,093)
======= == ========= === ======= === ======= ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996.... $14,761
Issuance of Common Stock........ 9,464
Issuance of warrants to purchase
Common Stock.................. 500
Common Stock issued upon
exercise of stock options..... 19
Repurchase of Treasury Stock.... (2)
Retirement of Treasury Stock....
Issuance of Series D Convertible
Preferred Stock............... 9,961
Net income...................... 204
-------
Balance at December 31, 1997.... 34,907
Issuance of Series E Convertible
Preferred Stock............... 37,631
Common Stock issued upon
exercise of stock options..... 161
Net income...................... 5,674
-------
Balance at December 31, 1998.... 78,373
Common Stock issued upon
exercise of stock options..... 93
Net income...................... 9,250
-------
Balance at December 31, 1999.... $87,716
=======
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 204 $ 5,674 $ 9,250
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization............................. 754 1,005 1,354
Deferred income taxes..................................... -- (280) (5,295)
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,213) 1,867 (7,441)
Unbilled revenues....................................... (1,071) 1,071 (4,259)
Materials inventory..................................... -- -- (21,100)
Prepaid expenses and other assets....................... 115 (328) (182)
Accounts payable........................................ 1,252 (213) 8,672
Accrued expenses........................................ 3,280 2,468 (372)
Deferred revenue........................................ 4,931 (2,265) 6,711
Advance payments........................................ -- -- 21,100
Income taxes payable.................................... -- 230 4,442
-------- -------- --------
Net cash provided by operating activities................... 7,252 9,229 12,880
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (1,819) (1,492) (3,556)
Sale of short-term investments.............................. 4,960 -- --
-------- -------- --------
Net cash provided by (used in) investing activities......... 3,141 (1,492) (3,556)
FINANCING ACTIVITIES:
Proceeds from sale of Convertible Preferred Stock........... 9,961 37,631 --
Principal repayments of capital lease obligations........... (405) (421) (190)
Proceeds from the issuance of Common Stock, options and
warrants.................................................. 9,983 161 93
Repurchase of treasury stock................................ (2) -- --
-------- -------- --------
Net cash provided by (used in) financing activities......... 19,537 37,371 (97)
-------- -------- --------
Increase in cash and cash equivalents....................... 29,930 45,108 9,227
Cash and cash equivalents at beginning of year.............. 10,260 40,190 85,298
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 40,190 $ 85,298 $ 94,525
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
THE COMPANY
PRAECIS PHARMACEUTICALS INCORPORATED (the "Company") was incorporated under
the name Pharmaceutical Peptides, Inc. in July 1993 under the laws of the State
of Delaware. The Company is a drug discovery and development company engaged in
the development of drugs for the treatment of human diseases.
USE OF ESTIMATES
The preparation of financial statements in accordance 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 income and expenses during the reporting
period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist principally of money market funds with original
maturities of three months or less at the date of purchase.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit quality financial
institutions and, by policy, limits the credit exposure to any one financial
instrument; accounts receivable are limited to amounts due from collaborators.
UNBILLED REVENUE
Unbilled revenue represents reimbursable costs incurred by the Company but
not yet billed under corporate collaboration agreements. Billings are prepared
monthly upon receipt of all reimburseable cost documentation.
INVENTORY
Materials inventory is carried at the lower of actual cost or market (net
realizable value).
PROPERTY AND EQUIPMENT
Equipment is recorded at cost, and includes capitalized leases which are
stated at the present value of future minimum lease obligations at the date of
inception of the lease. Depreciation is recorded over the shorter of the
estimated useful life of the asset or the term of the lease (four years) using
the straight-line method. Leasehold improvements are stated at cost and are
amortized over the remaining life of the building lease.
REVENUE RECOGNITION
Revenue is deemed earned when all of the following have occurred: all
obligations of the Company relating to the revenue have been met and the earning
process is complete; the monies
F-7
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
received or receivable are not refundable irrespective of research results; and
there are neither future obligations nor future milestones to be met by the
Company with respect to such revenue.
CORPORATE COLLABORATIONS. Revenues are earned based upon research expenses
incurred and milestones achieved. Non-refundable payments upon initiation of
contracts are deferred and amortized over the period which the Company is
obligated to participate on a continuing and substantial basis in the research
and development activities outlined in each contract. Amounts received in
advance of reimbursable expenses are recorded as deferred revenue until the
related expenses are incurred. Milestone payments are recognized as revenue in
the period in which the parties agree that the milestone has been achieved.
CONTRACT SERVICES. Revenues are earned as services are performed or the
related expenses are incurred. Amounts received in advance of reimbursable
services to be performed are recorded as deferred revenue until the related
services are performed.
INCOME TAXES
The Company provides for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Under this
method, deferred taxes are recognized using the liability method, whereby tax
rates are applied to cumulative temporary differences between carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes based on when and how they are expected to affect the
tax return.
TECHNOLOGY, LICENSES AND PATENTS
Costs associated with acquired technology, licenses and patents are expensed
as incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25., ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), in accounting for
its stock-based employee compensation plans, rather than the alternative fair
value accounting method provided for under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), as SFAS No. 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of options granted under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is required.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
effective for fiscal year 2001. This Statement requires all derivatives to be
carried on the balance sheet as assets or liabilities at fair value. The
accounting for changes in fair value would depend on the hedging relationship
and would be reported in the income statement or as a component of comprehensive
income. The Company believes that the adoption of this new accounting standard
will not have a material impact on the Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, which clarified the Staff's views concerning revenue
recognition policies and is effective no later than
F-8
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the quarter ended March 31, 2000. The Company believes its revenue recognition
policies are in compliance with the Staff Accounting Bulletin.
NET INCOME PER SHARE
Basic net income per share represents net income divided by the weighted
average shares of common stock outstanding during the period. Diluted net income
per share includes the effect of all dilutive, potentially issuable common
shares using the treasury stock method. The difference between basic and diluted
shares used in the computation of net income per share is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average number of common shares outstanding
used in basic net income per share................ 4,446 5,738 6,106
Effect of dilutive securities:
Convertible Preferred Stock....................... 17,680 23,387 25,608
Stock options..................................... 6,007 5,868 5,989
Warrants.......................................... 137 146 146
------ ------ ------
Weighted average number of common shares used in
diluted net income per share...................... 28,270 35,139 37,849
====== ====== ======
</TABLE>
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series A, B, C, D and E convertible preferred stock will
convert into 25,607,861 shares of common stock. The pro forma presentation of
stockholders' equity has been prepared assuming the conversion of all of the
outstanding shares of preferred stock into shares of common stock on
December 31, 1999.
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share is computed using the historical basic and
diluted weighted average number of outstanding shares of common stock assuming
conversion of the outstanding shares of Series A, B, C, D and E convertible
preferred stock into a total of 25,607,861 shares of common stock (as of their
original dates of issuance), which will occur upon the closing of the initial
public offering as contemplated herein (See note 6).
F-9
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Laboratory and office equipment........................... $ 4,127 $ 6,271
Leasehold improvements.................................... 2,113 3,711
Construction in progress.................................. 460 274
------- -------
6,700 10,256
Less accumulated depreciation and amortization............ 2,859 4,213
------- -------
$ 3,841 $ 6,043
======= =======
</TABLE>
4. LEASES
The Company has capitalized leased equipment totaling approximately
$1.6 million at December 31, 1998 and $0.3 million at December 31, 1999, and
related accumulated amortization of approximately $1.4 million and $0.3 million
at December 31, 1998 and 1999, respectively.
The Company leases its laboratory and office space under operating lease
agreements with fixed terms of ten years plus renewal options. In addition to
the minimum lease commitments, the leases require payment of the Company's pro
rata share of property taxes and building operating expenses. The leases also
contain certain rent inducements, which are being amortized over the term of the
agreements using the straight-line method.
At December 31, 1999, future minimum commitments under leases with
noncancelable terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDED DECEMBER 31, LEASES LEASES
- ------------------------ -------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000....................................................... $59 $ 590
2001....................................................... -- 590
2002....................................................... -- 590
2003....................................................... -- 590
2004....................................................... -- 626
Thereafter................................................. -- 1,117
--- ------
Total...................................................... 59 $4,103
======
Less amount representing interest.......................... (1)
---
Present value of current minimum lease payments............ $58
===
</TABLE>
F-10
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASES (CONTINUED)
Total rent expense amounted to approximately $0.3 million in 1997,
$0.5 million in 1998 and $0.6 million in 1999. Interest paid under all financing
and leasing arrangements during each of the years presented approximated
interest expense.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Clinical trial costs........................................ $5,072 $4,116
Professional fees........................................... 645 533
Other....................................................... 1,514 2,210
------ ------
$7,231 $6,859
====== ======
</TABLE>
6. STOCKHOLDERS' EQUITY
STOCK SPLIT
On February 2, 2000, the Company's Board of Directors approved a two-for-one
stock split of the common stock, effected in the form of a 100% stock dividend.
All common share and per share data in the accompanying financial statements
have been retroactively adjusted to reflect the stock split.
CONVERTIBLE PREFERRED STOCK
The issuance date, purchase price per share, number of shares issued and
conversion terms of the Company's Series A, B, C, D and E convertible preferred
stock are summarized in the table below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
DATE OF PER SHARE NUMBER OF SHARES ISSUABLE UPON CONVERSION
ISSUANCE PURCHASE PRICE ORIGINALLY ISSUED CONVERSION RATIO
--------------- -------------- ----------------- ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Series A................... December 1993/ $10.085 1,041,166 7,777,887 7.47-to-1
March 1994
Series B................... December 1993 $10.085 63,700 475,860 7.47-to-1
Series C................... April 1996 $ 19.00 1,052,632 7,905,118 7.51-to-1
Series D................... June 1997 $ 27.83 359,324 2,695,414 7.50-to-1
Series E................... April 1998 $ 42.00 900,478 6,753,582 7.50-to-1
</TABLE>
Each share of Series A, C, D and E Convertible Preferred Stock is
convertible into common stock at the option of the stockholder. The shares of
Series A, B, C, D and E Convertible Preferred Stock shall, by action of the
Board of Directors, be automatically converted into a total of 25,607,861 shares
of common stock upon the closing of an initial public offering with an initial
public offering price per share of common stock being at least $7.56.
Each holder of Series A, C, D and E Convertible Preferred Stock is entitled
to vote on all matters and is entitled to that number of votes equal to the
number of shares of common stock into which such preferred stock can be
converted. Holders of Series B Convertible Preferred Stock have no voting
rights, except as otherwise provided by law. In the event of a liquidation, the
holders of the Series A,
F-11
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
B, C, D and E convertible preferred stock would be entitled to receive an amount
equal to the price per share originally paid to the Company for those shares,
plus all declared, but unpaid, dividends, if any. After payments of such
liquidation amounts to the holders of the Series A, B, C, D and E convertible
preferred stock, the holders of common stock are entitled to receive a certain
amount, after which the holders of the Series A, B, C, D and E convertible
preferred stock and the holders of common stock are entitled to share in any
remaining assets available for distribution, with the holders of the Series A,
B, C, D and E convertible preferred stock participating based on the number of
shares of common stock into which such convertible preferred stock is then
convertible.
WARRANTS
In connection with its lease financing arrangement entered into March 29,
1995, the Company agreed to issue warrants to purchase 14,925 shares of
Series A Convertible Preferred Stock at $10.085 per share, which, pursuant to
the terms thereof will convert into warrants to purchase 111,495 shares of
common stock at $1.35 per share upon the completion of the initial public
offering contemplated herein. The fair value of the warrants, when issued
periodically over the two year period from March 1995 through March 1997, was
not material. These warrants expire on March 29, 2005 or two years from the date
of an initial public offering, whichever is later.
In May 1997, Sanofi-Synthelabo Inc. (a wholly owned subsidiary of
Sanofi-Synthelabo S.A.) formerly Sylamerica, Inc. (a wholly owned subsidiary of
Synthelabo S.A.) purchased 1,617,772 shares of common stock and a warrant to
purchase 404,445 shares of common stock, for an aggregate purchase price of
$10.0 million. The warrant has a five-year term and is exercisable at a price of
$12.88 per share. The Company allocated $0.5 million to the value of the
warrant. This value was estimated using the Black-Scholes valuation model using
assumptions that are substantially consistent with those used in valuing the
Company's common stock options under SFAS No. 123 (See "Stock Option Plan"
below).
STOCK OPTION PLAN
The Amended and Restated 1995 Stock Plan (the "Plan") allows for the
granting of incentive and nonqualified options and awards to purchase shares of
common stock. At December 31, 1999, the Plan provided for the issuance of up to
11,375,000 shares of common stock. Incentive options granted to employees
generally vest at 20% on the first anniversary of the date of grant, with the
remaining shares vesting equally over four years following such anniversary
date. However, options to purchase 600,002 shares of common stock for $3.71 per
share vest ratably over ten years or immediately upon the attainment of a
targeted price per share of common stock of $41.24 per share, whichever occurs
first. Nonqualified options generally vest over the period of service with the
Company.
F-12
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding options under the Plan is summarized below:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
-------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Outstanding at December 31, 1996................... 5,170 $0.25
Granted............................................ 1,762 2.77
Canceled........................................... (170) 0.49
Exercised.......................................... (124) 0.15
----- -----
Outstanding at December 31, 1997................... 6,638 0.92
Granted............................................ 1,814 4.68
Canceled........................................... (858) 0.83
Exercised.......................................... (856) 0.19
----- -----
Outstanding at December 31, 1998................... 6,738 2.03
Granted............................................ 2,230 6.47
Canceled........................................... (318) 1.50
Exercised.......................................... (438) 0.21
----- -----
Outstanding at December 31, 1999................... 8,212 $3.35
===== =====
Options exercisable at December 31:
1997........................................... 2,038 $0.24
===== =====
1998........................................... 1,998 $0.66
===== =====
1999........................................... 2,777 $1.61
===== =====
</TABLE>
F-13
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average per share fair value of options granted was $1.73 in
1997, $2.90 in 1998 and $4.07 in 1999. At December 31, 1999, there were
1,558,816 options available for grant and 35,894,790 shares of common stock
reserved for the exercise of stock options and warrants and the conversion of
preferred shares.
The following table presents weighted average price and life information
about significant option groups outstanding at December 31, 1999 (option amounts
in thousands):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.14-$1.60.............................. 3,316 5.88 $0.45 1,967 $0.40
$3.71-$7.00.............................. 4,896 8.60 $5.33 810 $4.53
</TABLE>
Pursuant to the requirements of SFAS No. 123, the following are the pro
forma net income (loss) for each year as if the compensation cost for the stock
option plan had been determined based on the fair value at the grant date for
grants for each year:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....................... $ 204 $ (797) $5,674 $2,914 $9,250 $ 5,405
====== ======= ====== ====== ====== =======
Diluted net income (loss) per common
share................................. $ 0.01 $ (0.18) $ 0.16 $ 0.08 $ 0.24 $ 0.14
====== ======= ====== ====== ====== =======
</TABLE>
The fair value of the stock options at the date of grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6%; the volatility factor of the
expected market price of the common stock of 70%; and a weighted-average
expected life of the options of five years. The Company has never declared or
paid any cash dividends on any of its capital stock and does not expect to do so
in the foreseeable future.
The effects on pro forma net income of expensing the fair value of stock
options are not necessarily representative of the effects on reported results of
operations for future years as the periods presented include only two, three,
and four years, respectively, of option grants under the Company's plan.
F-14
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The Company's provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ 85 $ 280 $ 5,295
State........................................... 15 100 1,800
------- ------- -------
100 380 7,095
Deferred:
Federal......................................... -- (280) (5,295)
State........................................... -- -- --
------- ------- -------
(280) (5,295)
------- ------- -------
$ 100 $ 100 $ 1,800
======= ======= =======
</TABLE>
A reconciliation of the Company's income tax provision to the statutory
federal provision is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax provision.......... $ 261 $ 2,327 $ 3,868
State income taxes.............................. 19 362 620
Decrease in valuation allowance................. -- -- (2,688)
Utilization of net operating losses............. (180) (2,589) --
------- ------- -------
Income tax provision............................ $ 100 $ 100 $ 1,800
======= ======= =======
</TABLE>
In 1997 and 1998, respectively, the Company utilized approximately
$4.6 million and $10.3 million of net operating loss carryforwards to offset
taxable income.
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue........................................ $ 1,221 $ 3,743
Property and equipment.................................. 2,395 4,104
Accrued expenses........................................ 438 1,169
Research and development tax credit carryforwards....... 2,238 --
Other................................................... 286 169
------- -------
Total deferred tax assets................................. 6,578 9,185
Valuation allowance....................................... (6,298) (3,610)
------- -------
$ 280 $ 5,575
======= =======
</TABLE>
F-15
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
At December 31, 1998 and 1999, the Company has provided a valuation
allowance for the excess of the deferred tax asset over the benefit from future
losses that could be carried back if, and when, they occur. The valuation
allowance decreased by $2.7 million in 1999 due primarily to utilization of
previously unbenefitted tax credit carryforwards. Due to anticipated operating
losses in the future, the Company believes that it is more likely than not that
it will not realize a portion of the net deferred tax assets in the future and
has provided an appropriate valuation allowance.
Income tax payments amounted to approximately $0.2 million in 1998 and
$2.6 million in 1999.
8. CORPORATE COLLABORATIONS
SANOFI-SYNTHELABO AGREEMENT
In May 1997, the Company entered into a license agreement with Synthelabo
S.A., who subsequently merged with Sanofi S.A. forming Sanofi-Synthelabo S.A.
(Sanofi-Synthelabo), for the development and commercialization of the Company's
abarelix products. Upon initiation, the Company received a one-time,
non-refundable payment of $4.7 million. This initiation fee is being recognized
into revenue through the end of 2001, which coincides with the estimated period
in which the Company is obligated to participate on a continuing and substantial
basis in the research and development activities outlined in the
Sanofi-Synthelabo agreement. Should the estimated period through which the
Company will be required to perform these activities change, then the Company
will, on a prospective basis, adjust the remaining amortization period
accordingly. Sanofi-Synthelabo received marketing rights in Europe, Latin
America, the Middle East and various countries in Africa in exchange for the
following additional consideration: (a) 30 million French Francs (approximately
US $5 million) funding over three years to be applied toward future research and
development costs; (b) funding of certain additional research and development
expenses; (c) payments of up to $59.9 million upon achievement of specific
milestones; and (d) payment of a transfer price that varies based on sales price
and volume. The Company retained worldwide manufacturing rights. The Company
recognized revenues of $10.7 million in 1997, $13.8 million in 1998 and
$4.7 million in 1999 under the Sanofi-Synthelabo agreement.
ROCHE AGREEMENT
In August 1997, the Company entered into an agreement with Roche
Products Inc. (Roche) in return for a nonrefundable $2.0 million option fee and
reimbursement of certain development costs. The agreement provided Roche with
the option to enter into a definitive collaboration agreement with the Company.
In 1997, the Company recognized $4.4 million in revenues under the agreement.
In June 1998, Roche exercised their option and entered into a definitive
agreement with the Company for the development and commercialization of the
Company's abarelix products. Roche received marketing rights in the United
States, Canada and the Pacific Rim in exchange for: (a) a one-time,
nonrefundable payment to the Company upon initiation; (b) funding of a portion
of additional research and development expenses; (c) payments upon achievement
of specific milestones; and (d) specified percentages of product sales, if any,
representing product cost payment. The Company retained worldwide manufacturing
rights. In November 1998, Roche and the Company entered into a termination
agreement as allowed for under the definitive agreement. Pursuant to the
termination agreement, Roche surrendered any rights with respect to the
Company's abarelix products, and neither party has any further obligations to
the other on account of, or arising from, the Roche
F-16
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CORPORATE COLLABORATIONS (CONTINUED)
definitive agreement. In 1998, the Company recognized $23.8 million of revenues
under the definitive agreement and termination agreements with Roche.
AMGEN AGREEMENT
Effective March 1999, the Company entered into a binding agreement in
principle with Amgen Inc. (Amgen) for the development and commercialization of
the Company's abarelix products. Under terms of the agreement, Amgen has agreed
to assist in the development of abarelix for all indications and has received
the right to commercialize abarelix in the United States, Canada, Japan and all
other countries not covered by the Sanofi-Synthelabo Agreement.
Under terms of the agreement, Amgen will pay the Company up to $25 million
in signing and milestone payments. Of this $25.0 million, the Company received a
$10.0 million, one-time, non-refundable payment upon initiation. This initiation
fee is being recognized into revenue through the end of 2001, which coincides
with the estimated period in which the Company is obligated to participate on a
continuing and substantial basis in the research and development activities
outlined in the Amgen agreement. On or before the end of 2001, the majority of
the Company's efforts related to abarelix products will transfer to Amgen.
Should the estimated period through which the Company will be required to
perform these activities change, then the Company will, on a prospective basis,
adjust the remaining amortization period accordingly. The remaining
$15.0 million is payable upon FDA approval of an NDA relating to abarelix. In
addition to the signing and milestone payments, Amgen will pay all costs
associated with the development and commercialization of abarelix products,
including the cost of materials, in the United States incurred by Amgen and the
Company in 1999 and a substantial portion of such costs incurred in 2000. The
materials are consigned to Amgen until such time as they are used in the
manufacture of the final product and/or title passes to Amgen. At that time,
advance payments previously received are recognized as revenue.
Following these expenditures in 1999 and a portion of 2000, in general the
Company will share with Amgen all subsequent United States research and
development costs for abarelix products through the launch period and the
Company will reimburse Amgen for a share of costs associated with establishing a
sales and marketing infrastructure in the United States. In general, the Company
will receive a transfer price and royalty based on a sharing of the resulting
profits on sales of abarelix products in the United States. All program expenses
in Amgen's licensed territory outside the United States will be borne by Amgen,
and the Company will receive a royalty on net sales of abarelix products in
those territories.
Amgen will also provide us with a line of credit not to exceed $150.0
million through 2002. Under the line of credit, subject to various conditions
each year, we are permitted to draw down a maximum of $25.0 million in 2000,
$75.0 million in 2001, and in 2002, the remaining balance of the line of credit
available after all previous drawdowns. For each drawdown in 2002, we must
demonstrate a cash flow need reasonably acceptable to Amgen and meet various
other specified conditions, including conditions relating to the commercial sale
of abarelix. Borrowings under the line will bear interest at market rates, will
be secured by Company receivables relating to abarelix products and must be
repaid by 2008.
The agreement can be terminated by either party for material breach, or by
Amgen by giving 90-days notice.
F-17
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CORPORATE COLLABORATIONS (CONTINUED)
In 1999, the Company recognized $56.8 million of revenues under the Amgen
agreement, which includes $53.8 million of reimbursed costs and that portion of
the signing payment recognized in 1999.
9. CONTRACT SERVICES
In August 1996, the Company entered into a service agreement with Boehringer
Ingelheim International GmbH (Boehringer) for the screening of certain
Boehringer compounds for $3.0 million of fees as well as reimbursement of
certain research personnel, equipment and materials expenses in connection with
the screening of those compounds. In August 1998, the Company completed its
responsibility for screening Boehringer compounds. Boehringer would be
responsible for all development, marketing and other costs with respect to any
Boehringer compound screened by the Company and developed and commercialized by
Boehringer or its licensee. The Company would be entitled to receive royalties
on net sales of any product containing a Boehringer compound which the Company
screened, if Boehringer or its licensee develops and commercializes the product.
10. COMMITMENTS
INDIANA UNIVERSITY FOUNDATION (IUF) LICENSE AGREEMENT
The Company has a license agreement with IUF with respect to rights to
abarelix and certain related technology. In exchange for the license, the
Company agreed to pay (a) fees of $0.3 million, (b) up to an additional
$4.3 million upon achievement of specific milestones and (c) a royalty
percentage of net sales of licensed products, if any. The Company made fee
payments of $50,000 in 1997 and $495,000 in 1998 under the IUF agreement; no
such payments were made in 1999.
UCB SUPPLY AGREEMENT
In March 1998, the Company entered into an agreement with UCB-Bioproducts
S.A. (the UCB Agreement) for the development and supply of clinical and
commercial volumes of pharmaceutical-grade peptide. As of December 31, 1999, the
Company has purchased approximately $25.5 million of pharmaceutical-grade
peptide related to its commitment to UCB. In 1998, the Company did not purchase
any pharmaceutical-grade peptide under the UCB Agreement. As of December 31,
1999, the Company is committed to purchase an additional $30.5 million of
pharmaceutical-grade peptide through January 2001.
SALSBURY SUPPLY AGREEMENT
In July 1998, the Company entered into a seven-year agreement with Salsbury
Chemicals, Inc. (Salsbury) for the development and supply of clinical and
commercial depot formulation. Under the agreement, in 1998 and 1999, the Company
contributed $1.7 million and $4.3 million, respectively, towards construction of
the manufacturing facility which it has expensed as manufacturing start up
costs. As of December 31, 1999, the Company is committed to purchase $1.4
million of clinical depot formulation through December 2000. The Company has no
obligations beyond this initial commitment, but anticipates making additional
purchases in the future.
F-18
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS (CONTINUED)
PHARMACEUTICAL APPLICATIONS ASSOCIATES AGREEMENT
In April 1999, the Company entered into a license agreement with
Pharmaceutical Applications Associates LLC (PAA) for the worldwide rights to
develop and commercialize Latranal. The Company must pay PAA a royalty on the
net sales, if any, of Latranal products. The agreement, which may be terminated
by the Company at any time, expires in April 2009 or upon expiration of the last
licensed patent, whichever occurs later.
BUILDING
On January 14, 2000, the Company signed a purchase and sale agreement to
purchase, for $41.5 million, land and a building to be used as its principal
headquarters and research facility. In connection with the agreement, the
Company has made deposits of $1.2 million and expects the transaction to close
in the second quarter of 2000.
11. SUBSEQUENT EVENTS
On February 2, 2000, the Board of Directors approved an Amended and Restated
Certificate of Incorporation, which will become effective upon consummation of
the initial public offering, and increased the Company's shares of common stock
by 140,000,000 shares (for a total of 200,000,000 authorized shares of common
stock) and provides for a total of 10,000,000 authorized shares of preferred
stock, par value $0.01 per share. The preferred stock will be issuable in one or
more classes or series, each of such classes or series to have such rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as may be determined by the
Board of Directors.
On February 2, 2000, the Board of Directors adopted, subject to consummation
of the initial public offering, an Employee Stock Purchase Plan and authorized
the reservation of 160,000 shares of common stock for issuance thereunder. Under
the Employee Stock Purchase Plan, commencing July 3, 2000, eligible employees
may purchase shares of common stock at a price per share equal to 85% of the
lower of the fair market value per share of the common stock at the beginning or
the end of each six month period during the two-year term of the Employee Stock
Purchase Plan. Participation is limited to the lesser of 10% of the employee's
compensation or $25,000 in any calendar year.
In February 2000, the Company entered into an agreement with Human Genome
Sciences Inc. (HGS) for the discovery, development and commercialization of
compounds targeted to two proprietary molecules identified by HGS. Under the
terms of the agreement, the Company will apply its technology to these molecules
and any clinical drug candidates will be jointly developed by the parties on an
equal cost and profit sharing basis.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8,000,000 SHARES
PRAECIS PHARMACEUTICALS INCORPORATED
COMMON STOCK
[LOGO]
------
PROSPECTUS
, 2000
---------
SALOMON SMITH BARNEY
CIBC WORLD MARKETS
CREDIT SUISSE FIRST BOSTON
- --------------------------------------------------
- --------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
We estimate that the expenses, other than underwriting discounts and
commissions, that we will incur in connection with the issuance and distribution
of the securities we are registering under this registration statement will be
as follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 41,290
NASD filing fees............................................ 16,140
The Nasdaq National Market listing fee...................... 95,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 425,000
Accounting fees and expenses................................ 200,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent fees......................................... 25,000
Miscellaneous............................................... 37,570
----------
Total................................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporate Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. Our amended and restated certificate of
incorporation and our amended and restated by-laws, effective upon the closing
of this offering, provide that we will indemnify our directors and officers to
the fullest extent authorized or permitted by law.
Our amended and restated certificate of incorporation further provides that
our directors will not be personally liable to us or any stockholder for
monetary damages for breach of fiduciary duty, except to the extent such
exemption is not permitted by law. Section 102 of the Delaware General Corporate
Law provides that officers and directors will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions or otherwise, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Our by-laws also permit us to purchase and maintain insurance on behalf of
any officer or director for any liability arising out of his or her actions in
such capacity, regardless of whether our by-laws
II-1
<PAGE>
would otherwise permit indemnification for that liability. We are in the process
of obtaining directors' and officers' liability insurance which would indemnify
our directors and officers against damages arising out of claims which might be
made against them based on their negligent acts or omissions while acting in
their capacity as officers and directors.
The underwriting agreement provides that the underwriters must, under
various circumstances, indemnify our directors, officers and controlling persons
against some liabilities, including liabilities under the Securities Act.
Reference is made to the form of underwriting agreement filed as Exhibit 1.1 to
this registration statement.
Under agreements with J.H. Whitney & Co. and affiliated entities, William
Laverack, Jr., a director, is indemnified for certain liabilities which he may
incur in his capacity as a director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, we
have issued the securities set forth below that we did not register under the
Securities Act. We adjusted the common stock share amounts and the option and
warrant exercise prices set forth below to give effect to the 2-for-1 stock
split of the common stock effected March 8, 2000.
(a) ISSUANCE OF CAPITAL STOCK.
In May 1997, we issued to one accredited investor 1,617,772 shares of common
stock and a warrant to purchase 404,445 shares of common stock, at an exercise
price of $12.88 per share, for an aggregate purchase price of $10,000,000.
In June 1997, we issued to one accredited investor 359,324 shares of our
Series D convertible preferred stock, par value $.01 per share, for an aggregate
purchase price of $10,000,000. Upon the closing of this offering, the shares of
Series D convertible preferred stock will automatically convert into
2,695,414 shares of common stock.
In April 1998, we issued to 23 accredited investors 900,478 shares of our
Series E convertible preferred stock, par value $.01 per share, for an aggregate
purchase price of $37,820,076. Upon the closing at this offering, the shares of
Series E convertible preferred stock will automatically convert into
6,753,582 shares of common stock.
No underwriters were involved in the foregoing sales of securities. We made
the sales of capital stock in reliance upon an exemption from registration under
the Securities Act provided by Section 4(2) of the Securities Act, and its
related rules and regulations, regarding sales by an issuer not involving a
public offering. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
(b) GRANTS AND EXERCISES OF STOCK OPTIONS AND STOCK AWARDS.
As of December 31, 1999, we had granted options to employees, directors and
consultants under our Amended and Restated 1995 Stock Plan, as amended, to
purchase a total of 12,273,780 shares of common stock at a weighted average
exercise price of $3.35 per share. Of these options, options to purchase
1,604,540 shares of common stock have been exercised for an aggregate
consideration of $297,016 as of December 31, 1999. Subsequent to December 31,
1999 through March 2, 2000, we granted options to purchase an additional
550,430 shares of common stock at an exercise price of $14.50 per share. Options
to purchase an additional 531,874 shares of common stock have been exercised for
an aggregate consideration of $388,194.
In March 2000, we issued a stock award for 1,500 shares of common stock,
with an estimated fair market value of $21,750.00, to one of our consultants for
services rendered.
II-2
<PAGE>
The issuance of options and common stock awards, and the issuance of common
stock upon the exercise of options, were exempt from registration under the
Securities Act either pursuant to Rule 701 under the Securities Act, as a
transaction pursuant to a compensatory benefit plan, or pursuant to Section 4(2)
of the Securities Act, as a transaction by an issuer not involving a public
offering. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
**3.1 Amended and Restated Certificate of Incorporation, as
amended
**3.2 Amendment to Amended and Restated Certificate of
Incorporation, as amended
**3.3 Form of Amended and Restated Certificate of Incorporation
(to be filed upon the closing of this offering)
**3.4 Amended and Restated By-Laws
**3.5 Form of Amended and Restated By-Laws (to become effective
upon the closing of this offering)
**4.1 Specimen certificate representing shares of common stock
**4.2 Warrant to purchase Series A Convertible Preferred Stock
dated as of August 12, 1998 held by Comdisco, Inc.
**4.3 Warrant to purchase Series A Convertible Preferred Stock
dated as of August 12, 1998 held by Gregory Stento
**4.4 Warrant to purchase Common Stock dated May 13, 1997
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
**10.1 Form of Second Amended and Restated 1995 Stock Plan
**10.2 Executive Management Bonus Plan
**10.3 Form of Employee Stock Purchase Plan
**10.4 Amended and Restated Stockholders Agreement dated as of
April 30, 1998 by and among PRAECIS and certain stockholders
referred to therein, as amended by Amendment No. 1 dated as
of May 14, 1998, Amendment No. 2 dated as of July 21, 1998
and Amendment No. 3 dated January 31, 2000
**10.5 Stock and Warrant Purchase Agreement dated as of May 13,
1997 by and between Sylamerica, Inc. and PRAECIS
**+10.6 License Agreement dated as of May 13, 1997 by and between
PRAECIS and Synthelabo, as amended by a letter dated July
31, 1997
**+10.7 Amended and Restated Binding Agreement in Principle
effective as of March 8, 1999 by and between PRAECIS and
Amgen Inc.
**+10.8 Collaboration Agreement dated as of January 31, 2000 by and
between Human Genome Sciences, Inc. and PRAECIS
**+10.9 Collaboration and License Agreement dated as of August 1,
1996 by and between PRAECIS and Boehringer Ingelheim
International GmbH
**+10.10 License Agreement effective as of October 17, 1996 by and
between PRAECIS and Indiana University Foundation, as
amended as of June 3, 1998
**+10.11 License Agreement dated as of April 15, 1999 between
Pharmaceutical Applications Associates LLC, C. Donald
Williams, M.D.C.G.P., Robert Murdock, R.Ph. and PRAECIS
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
**+10.12 Development and Supply Agreement effective as of March 12,
1998 between UCB-Bioproducts S.A. and PRAECIS
**+10.13 Supply Agreement dated as of July 23, 1998 by and between
PRAECIS and Salsbury Chemicals, Inc.
**+10.14 Supply Agreement dated as of February 2, 2000 between Oread
Pharmaceutical Manufacturing Inc. and PRAECIS
**10.15 License Agreement dated December 23, 1993 between
Massachusetts Institute of Technology and PRAECIS
**10.16 Lease dated as of April 28, 1994 by and between PRAECIS and
The Charles Stark Draper Laboratory, Inc.
**10.17 Lease dated as of August 19, 1998 by and between PRAECIS and
BDG Piscataway, LLC
**10.18 Contract of Sale dated as of January 14, 2000 by and between
Best Property Fund, L.P. and PRAECIS, as amended as of
February 7, 2000
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
**23.3 Consent of Lahive & Cockfield, LLP
**24.1 Power of Attorney (included on the signature page of this
registration statement)
**27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment
** Previously filed
+ Confidential treatment requested as to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities and Exchange
Commission.
(b) FINANCIAL STATEMENT SCHEDULES:
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in the
denominations and registered in the names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
The registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act is deemed to be part of this
registration statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus is deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
will be deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Amendment
No. 2 to the registration statement to be signed on its behalf by the
undersigned, there unto duly authorized, in Cambridge, Massachusetts on
March 28, 2000.
<TABLE>
<S> <C> <C>
PRAECIS PHARMACEUTICALS INCORPORATED
By /s/ KEVIN F. MCLAUGHLIN
-----------------------------------------
Kevin F. McLaughlin
CHIEF FINANCIAL OFFICER, SENIOR VICE
PRESIDENT, SECRETARY AND TREASURER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons in
the capacities indicated on March 28, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
*
------------------------------------------- Chairman of the Board, Chief Executive Officer
Malcolm L. Gefter, Ph.D. and President (PRINCIPAL EXECUTIVE OFFICER)
/s/ KEVIN F. MCLAUGHLIN Chief Financial Officer, Senior Vice
------------------------------------------- President, Secretary and Treasurer
Kevin F. McLaughlin (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
*
------------------------------------------- Director
G. Leonard Baker, Jr.
*
------------------------------------------- Director
William Laverack, Jr.
*
------------------------------------------- Director
Henry F. McCance
*
------------------------------------------- Director
David B. Sharrock
*
------------------------------------------- Director
Damion E. Wicker, M.D.
*
------------------------------------------- Director
Albert L. Zesiger
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ KEVIN F. MCLAUGHLIN
--------------------------------------
Kevin F. McLaughlin
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
**3.1 Amended and Restated Certificate of Incorporation, as
amended
**3.2 Amendment to Amended and Restated Certificate of
Incorporation, as amended
**3.3 Form of Amended and Restated Certificate of Incorporation
(to be filed upon the closing of this offering)
**3.4 Amended and Restated By-Laws
**3.5 Form of Amended and Restated By-Laws (to become effective
upon the closing of this offering)
**4.1 Specimen certificate representing shares of common stock
**4.2 Warrant to purchase Series A Convertible Preferred Stock
dated as of August 12, 1998 held by Comdisco, Inc.
**4.3 Warrant to purchase Series A Convertible Preferred Stock
dated as of August 12, 1998 held by Gregory Stento
**4.4 Warrant to purchase Common Stock dated May 13, 1997
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
**10.1 Form of Second Amended and Restated 1995 Stock Plan
**10.2 Executive Management Bonus Plan
**10.3 Form of Employee Stock Purchase Plan
**10.4 Amended and Restated Stockholders Agreement dated as of
April 30, 1998 by and among PRAECIS and certain stockholders
referred to therein, as amended by Amendment No. 1 dated as
of May 14, 1998, Amendment No. 2 dated as of July 21, 1998
and Amendment No. 3 dated January 31, 2000
**10.5 Stock and Warrant Purchase Agreement dated as of May 13,
1997 by and between Sylamerica, Inc. and PRAECIS
**+10.6 License Agreement dated as of May 13, 1997 by and between
PRAECIS and Synthelabo, as amended by a letter dated July
31, 1997
**+10.7 Amended and Restated Binding Agreement in Principle
effective as of March 8, 1999 by and between PRAECIS and
Amgen Inc.
**+10.8 Collaboration Agreement dated as of January 31, 2000 by and
between Human Genome Sciences, Inc. and PRAECIS
**+10.9 Collaboration and License Agreement dated as of August 1,
1996 by and between PRAECIS and Boehringer Ingelheim
International GmbH
**+10.10 License Agreement effective as of October 17, 1996 by and
between PRAECIS and Indiana University Foundation, as
amended as of June 3, 1998
**+10.11 License Agreement dated as of April 15, 1999 between
Pharmaceutical Applications Associates LLC, C. Donald
Williams, M.D.C.G.P., Robert Murdock, R.Ph. and PRAECIS
**+10.12 Development and Supply Agreement effective as of March 12,
1998 between UCB-Bioproducts S.A. and PRAECIS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
**+10.13 Supply Agreement dated as of July 23, 1998 by and between
PRAECIS and Salsbury Chemicals, Inc.
**+10.14 Supply Agreement dated as of February 2, 2000 between Oread
Pharmaceutical Manufacturing Inc. and PRAECIS
**10.15 License Agreement dated December 23, 1993 between
Massachusetts Institute of Technology and PRAECIS
**10.16 Lease dated as of April 28, 1994 by and between PRAECIS and
The Charles Stark Draper Laboratory, Inc.
**10.17 Lease dated as of August 19, 1998 by and between PRAECIS and
BDG Piscataway, LLC
**10.18 Contract of Sale dated as of January 14, 2000 by and between
Best Property Fund, L.P. and PRAECIS, as amended as of
February 7, 2000
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
**23.3 Consent of Lahive & Cockfield, LLP
**24.1 Power of Attorney (included on the signature page of this
registration statement)
**27 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment
** Previously filed
+ Confidential treatment requested as to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities and Exchange
Commission.
<PAGE>
Exhibit 1.1
PRAECIS PHARMACEUTICALS INCORPORATED
8,000,000 Shares(1)
Common Stock
($.01 par value)
Underwriting Agreement
New York, New York
April __, 2000
Salomon Smith Barney Inc.
CIBC World Markets Corp.
Credit Suisse First Boston Corporation
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
PRAECIS PHARMACEUTICALS INCORPORATED, a corporation organized under the
laws of the State of Delaware (the "COMPANY"), proposes to sell to the several
underwriters named in Schedule I hereto (the "UNDERWRITERS"), for whom you (the
"REPRESENTATIVES") are acting as representatives, 8,000,000 shares of Common
Stock, $.01 par value ("COMMON STOCK") of the Company (said shares to be issued
and sold by the Company being hereinafter called the "UNDERWRITTEN SECURITIES").
The Company also proposes to grant to the Underwriters an option to purchase up
to 1,200,000 additional shares of Common Stock to cover over-allotments (the
"OPTION SECURITIES"; the Option Securities, together with the Underwritten
Securities, being hereinafter called the "SECURITIES"). To the extent there are
no additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires. Certain terms used herein are defined in Section 17 hereof. As
part of the offering contemplated by this Agreement, Salomon Smith Barney Inc.
has agreed to reserve out of the Securities set forth opposite its name on the
Schedule I to this Agreement, up to 400,000 shares of Common Stock, for sale to
the Company's employees, officers, and directors and customers and vendors of
the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus under
the heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Securities to be
sold by Salomon Smith Barney Inc. pursuant to the Directed Share Program (the
"Directed Shares") will be sold by Salomon Smith Barney Inc. pursuant to this
Agreement at the public offering price. Any Directed Shares not orally confirmed
for
- ----------------------------
(1) Plus an option to purchase from the Company, up to 1,200,000
additional Securities to cover over-allotments.
<PAGE>
purchase by any Participants by the end of the business day on which this
Agreement is executed will be offered to the public by Salomon Smith Barney Inc.
as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to, and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-96351) on Form S-1, including a related
preliminary prospectus, for registration under the Act of the offering and sale
of the Securities. The Company has filed [ ] amendments thereto, each including
a related preliminary prospectus, each of which has previously been furnished to
you. The Company will next file with the Commission either (1) prior to the
Effective Date of such registration statement, a further amendment to such
registration statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b). In the case of clause (2), the Company has included
in such registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and the rules
thereunder to be included in such registration statement and the Prospectus. As
filed, such amendment and form of final prospectus, or such final prospectus,
shall contain all Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree in
writing to a modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not completed at
the Execution Time, shall contain only such specific additional information and
other changes (beyond that contained in the latest Preliminary Prospectus) as
the Company has advised you, prior to the Execution Time, will be included or
made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in accordance with
Rule 424(b) and on the Closing Date (as defined herein) and on any date on which
Option Securities are purchased, if such date is not the Closing Date (a
"SETTLEMENT DATE"), the Prospectus (and any supplements thereto) will, comply in
all material respects with the applicable requirements of the Act and the rules
thereunder. On the Effective Date and at the Execution Time, the Registration
Statement did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. On the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date of
any filing pursuant to Rule 424(b) and on the Closing Date and any settlement
date, the Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Notwithstanding
anything in this Agreement to the contrary, the Company makes no representations
or warranties as to the information contained in or omitted from the
Registration Statement, or the Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion in the Registration Statement or the Prospectus (or
any supplement thereto).
2
<PAGE>
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction in
which it is chartered or organized with full corporate power and authority to
own or lease, as the case may be, and to operate its properties and conduct its
business as described in the Prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the failure to be
so qualified would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company, except as set forth in or contemplated in
the Prospectus (exclusive of any supplement thereto);
(d) The Company does not and as of the Closing Date will not
have any subsidiaries;
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly and validly authorized and
issued and are fully paid and nonassessable; the Securities have been duly and
validly authorized, and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be fully paid and nonassessable;
the Securities are duly listed, and admitted and authorized for trading, subject
to official notice of issuance and evidence of satisfactory distribution, on the
Nasdaq National Market; the certificates for the Securities are in valid and
sufficient form in accordance with applicable laws; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive or other
rights to subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or ownership interests
in the Company are outstanding;
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or Prospectus,
or to be filed as an exhibit thereto, which is not described or filed as
required.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation of the
Company enforceable in accordance with its terms.
(h) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under the
Act and the Exchange Act, and such as may be required (i) under the state
securities or blue sky laws of any jurisdiction in connection with the purchase
and distribution of the Securities by the Underwriters in the manner
contemplated
3
<PAGE>
herein and in the Prospectus, (ii) in connection with the listing of the
Securities on the Nasdaq National Market and (iii) by the federal and provincial
laws of Canada.
(j) Neither the issuance and sale of the Securities nor the
consummation of any other transactions herein contemplated nor the fulfillment
of the terms hereof will conflict with or, result in a breach or violation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company pursuant to, (i) the certificate of incorporation or by-laws of the
Company, (ii) the terms of any indenture, contract, lease, mortgage, deed of
trust, note agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company is a party or bound or to which its
property is subject, or (iii) any statute, law, rule, regulation, judgment,
order or decree applicable to the Company of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties, except, with respect to
clauses (ii) and (iii) above, for such conflicts, breaches, violations and
impositions which would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company.
(k) Except as described in the Prospectus, no holders of
securities of the Company have rights to the registration of such securities
under the Registration Statement.
(l) The historical financial statements and schedules of the
Company included in the Prospectus and the Registration Statement present fairly
in all material respects the financial condition, results of operations and cash
flows of the Company as of the dates and for the periods indicated, comply as to
form with the applicable accounting requirements of the Act and have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved (except as otherwise noted
therein). The selected financial data set forth under the caption "SELECTED
FINANCIAL DATA" in the Prospectus and Registration Statement fairly present, on
the basis stated in the Prospectus and the Registration Statement, the
information included therein.
(m) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), no action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or its property is pending or, to the best knowledge of
the Company, threatened that (i) could reasonably be expected to have a material
adverse effect on the performance by the Company of this Agreement or the
consummation by the Company of any of the transactions contemplated hereby or
(ii) could reasonably be expected to have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or properties
of the Company.
(n) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), the Company owns or leases all such
properties as are necessary to the conduct of its operations as presently
conducted.
(o) The Company is not in violation or default of (i) any
provision of its certificate of incorporation or bylaws, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant
4
<PAGE>
or instrument to which it is a party or bound or to which its property is
subject, or (iii) any statute, law, rule, regulation, judgment, order or decree
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of its
properties, as applicable, except, in the case of clauses (ii) and (iii) above,
for such violations or defaults which would not, individually or in the
aggregate, have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company.
(p) Ernst & Young, LLP, who have certified certain financial
statements of the Company and delivered their report with respect to the audited
financial statements and schedules included in the Prospectus, are independent
public accountants with respect to the Company within the meaning of the Act and
the applicable published rules and regulations of the Commission thereunder.
(q) There are no transfer taxes or other similar fees or
charges under federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery of
this Agreement or the issuance or sale by the Company of the Securities.
(r) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof, except in any case in which the failure so to file would not have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied against it, to
the extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith or
as would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company.
(s) No labor problem or dispute with the employees of the
Company exists or, to the best knowledge of the Company, is threatened or
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, contractors or
customers, that would have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the Company,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(t) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses (and at the stage of such business)
in which they are engaged. All policies of insurance and fidelity or surety
bonds insuring the Company or any of its businesses, assets, employees, officers
and directors are in full force and effect. The Company is in compliance with
the terms of such policies and instruments in all material respects. There are
no claims by the Company under any such policy or instrument as to which any
insurance company is denying liability or defending under a reservation of
rights clause. The Company has not been refused any insurance coverage sought or
applied for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to
obtain similar
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coverage from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the Company,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(u) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), the Company possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct its
business. The Company has not received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of the
Company.
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles as
applied in the United States and to maintain asset accountability; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(x) The Company is (i) in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii)
has received and is in compliance with all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct business and (iii)
has not received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or toxic
substances or wastes, pollutants or contaminants, except where such
non-compliance with Environmental Laws, failure to receive required permits,
licenses or other approvals, or liability would not, individually or in the
aggregate, have a material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company, except
as set forth in or contemplated in the Prospectus (exclusive of any supplement
thereto). The Company has not been named as a "potentially responsible party"
under the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended.
(y) The Company has fulfilled its obligations, if any, under
the minimum funding standards of Section 302 of the United States Employee
Retirement Income Security Act
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of 1974 ("ERISA") and the regulations and published interpretations thereunder
with respect to each "plan" (as defined in Section 3(3) of ERISA and such
regulations and published interpretations) in which employees of the Company are
eligible to participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such regulations
and published interpretations. The Company has not incurred any unpaid liability
to the Pension Benefit Guaranty Corporation (other than for the payment of
premiums in the ordinary course) or to any such plan under Title IV of ERISA.
(z) The Company owns, possesses, licenses or has other rights
to use, all patents, patent rights, inventions, know-how, technology, trade
secrets (including other unpatentable proprietary or confidential information,
systems or procedures), copyrights, trademarks, service marks, trade names,
trade dress, logos, and all applications for any of the foregoing necessary for
the conduct of the Company's business in all material respects as now conducted
as described in the Prospectus (collectively, the "INTELLECTUAL PROPERTY").
Except as set forth in the Prospectus, (a) there are no third parties, other
than parties to agreements whereby the Company licenses Intellectual Property,
that have rights to any such Intellectual Property; (b) there is no material
infringement by third parties of any such Intellectual Property; (c) there is no
pending or, to the Company's knowledge, threatened action, suit, proceeding or
claim by others challenging the Company's rights in or to any such Intellectual
Property, and the Company is unaware of any facts which would form a reasonable
basis for any such claim; (d) there is no pending or, to the Company's
knowledge, threatened action, suit, proceeding or claim by others challenging
the validity or scope of any such Intellectual Property, and the Company is
unaware of any facts which would form a reasonable basis for any such claim; (e)
there is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others that the Company infringes or otherwise violates
any patent, trademark, copyright, trade secret or other proprietary rights of
others, and the Company is unaware of any other fact which would form a
reasonable basis for any such claim; (f) there is no U.S. patent or published
U.S. patent application which contains claims that dominate or may dominate any
Intellectual Property described in the Prospectus as being owned by or licensed
to the Company or that interferes with the issued or pending claims of any such
Intellectual Property; and (g) there is no prior art of which the Company is
aware that may render any U.S. patent held by the Company invalid or any U.S.
patent application held by the Company unpatentable which has not been disclosed
to the U.S. Patent and Trademark Office; except, in each case, other than such
rights, infringements, actions, suits proceedings or claims that, individually
and in the aggregate, would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of the
Company.
(aa) The statements contained in (A) the "PROSPECTUS SUMMARY"
section of the Prospectus under the caption "OUR CORPORATE COLLABORATORS," (B)
the "RISK FACTORS" section of the Prospectus under the captions "IF OUR CLINICAL
TRIALS ARE NOT SUCCESSFUL, OR IF WE ARE OTHERWISE UNABLE TO OBTAIN AND MAINTAIN
THE REGULATORY APPROVAL REQUIRED TO MARKET AND SELL OUR PRODUCTS, WE WOULD INCUR
INCREASING OPERATING LOSSES," "IF OUR STRATEGIC PARTNERS REDUCE, DELAY OR
TERMINATE THEIR FINANCIAL SUPPORT, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP,
MARKET, DISTRIBUTE OR SELL OUR PRODUCTS," "IF WE ARE UNABLE TO OBTAIN AND
ENFORCE VALID PATENTS, WE COULD LOSE OUR COMPETITIVE ADVANTAGE," and
"ANTI-TAKEOVER PROVISIONS IN OUR CHARTER, BY-LAWS AND UNDER
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DELAWARE LAW MAY MAKE AN ACQUISITION OF US MORE DIFFICULT, EVEN IF AN
ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS," (C) the "BUSINESS" section
of the Prospectus under the captions "CORPORATE COLLABORATIONS," "TECHNOLOGY
LICENSES," "MANUFACTURING," "PATENTS AND PROPRIETARY RIGHTS," and "GOVERNMENT
REGULATION," (D) the "MANAGEMENT" section of the Prospectus under the caption
"INCENTIVE PLANS," and (E) the "DESCRIPTION OF CAPITAL STOCK" and "SHARES
ELIGIBLE FOR FUTURE SALE" sections of the Prospectus, insofar as such statements
summarize legal or regulatory matters, agreements, documents, or proceedings
discussed therein, are accurate and fair summaries of such legal or regulatory
matters, agreements, documents or proceedings.
(bb) The Company (i) does not have any material lending or
other relationship with any bank or lending institution, which to the best
knowledge of the Company, is an affiliate of Salomon Smith Barney Holdings Inc.
and (ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any person or entity,
which to the best knowledge of the Company, is an affiliate of Salomon Smith
Barney Holding Inc.
(cc) The Registration Statement, the Prospectus, and the
Preliminary Prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the securities
laws and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees to sell
to each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the amount
of the Underwritten Securities set forth opposite such Underwriter's name in
Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, jointly and severally, up to
1,200,000 Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the settlement date. The
number of Option Securities to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Securities to be
purchased by the
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several Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute discretion shall
make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York, New York time, on April
___, 2000, or at such time on such later date not more than three Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement between the Representatives and the Company
or as provided in Section 9 hereof (such date and time of delivery and payment
for the Securities being herein called the "CLOSING DATE"). Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. Delivery of the Underwritten Securities and the Option Securities
shall be made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) to the Representatives, at 388
Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective as soon as practicable following the
Execution Time and not later than the time set forth in Section 6(a) below.
Prior to the termination of the offering of the Securities, the Company will not
file any amendment of the Registration Statement or supplement to the Prospectus
or any Rule 462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such proposed
amendment or supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective pursuant
to Rule 430A, or filing of the Prospectus is otherwise required under
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Rule 424(b), the Company will cause the Prospectus, properly completed, and any
supplement thereto to be filed with the Commission pursuant to the applicable
paragraph of Rule 424(b) within the time period prescribed and will provide
evidence reasonably satisfactory to the Representatives of such timely filing.
The Company will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become effective,
(2) when the Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule 462(b)
Registration Statement shall have been filed with the Commission, (3) when,
prior to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4) of any
request by the Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any supplement to
the Prospectus or for any additional information, (5) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that purpose
and (6) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any jurisdiction
or the institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
or the suspension of any such qualification and, if issued, to obtain as soon as
possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein in the light of the circumstances under which they
were made not misleading, or if it shall be necessary to amend the Registration
Statement or supplement the Prospectus to comply with the Act or the rules
thereunder, the Company shall promptly (1) notify the Representatives of any
such event, (2) prepare and file with the Commission, subject to the second
sentence of paragraph (a) of this Section 5, an amendment or supplement which
will correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an earnings
statement which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters one signed copy of the Registration Statement
(including exhibits thereto) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any supplement
thereto as the Representatives may reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such jurisdictions as
the Representatives may designate and will maintain such qualifications in
effect so long as required for the distribution of the Securities; provided that
in no event shall the Company be obligated to qualify to do business, or
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subject itself to taxation in respect thereof, in any jurisdiction where it is
not now so qualified or taxed, or to take any action that would subject it to
service of process in suits, other than those arising out of the offering or
sale of the Securities, in any jurisdiction where it is not now so subject.
(f) Except as expressly contemplated hereby, the Company will
not, without the prior written consent of Salomon Smith Barney Inc., offer,
sell, contract to sell, pledge, or otherwise dispose of, (or enter into any
transaction which is designed to, or might reasonably be expected to, result in
the disposition (whether by actual disposition or effective economic disposition
due to cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, including by filing (or participation in the
filing of) a registration statement with the Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act, any
other shares of Common Stock, or any securities convertible into, or exercisable
or exchangeable for, shares of Common Stock, or publicly announce an intention
to effect any such transaction, for a period of 180 days after the date of the
Underwriting Agreement; PROVIDED, HOWEVER, that the Company may (i) grant
options to purchase common stock and issue and sell Common Stock pursuant to any
employee stock option plan, stock ownership plan or dividend reinvestment plan
of the Company described in the Prospectus and (ii) issue Common Stock issuable
upon the conversion of securities or the exercise of warrants outstanding at the
Execution Time.
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Preliminary Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus, and all amendments or supplements to any
of them, as may, in each case, be reasonably requested for use in connection
with the offering and sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Securities,
including any stamp or transfer taxes in connection with the original issuance
and sale of the Securities; (iv) the printing (or reproduction) and delivery of
this Agreement, any blue sky memorandum and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Securities; (v) the registration of the Securities under the Exchange Act and
the listing of the Securities on the Nasdaq National Market; (vi) any
registration or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to such
registration and qualification); (vii) any filings required to
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<PAGE>
be made with the National Association of Securities Dealers, Inc. (including
filing fees and the reasonable fees and expenses of one counsel for the
Underwriters relating to such filings); (viii) the transportation and other
expenses incurred by or on behalf of Company representatives in connection with
presentations to prospective purchasers of the Securities; (ix) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; and (x) all other costs
and expenses incident to the performance by the Company of its obligations
hereunder.
(i) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. Salomon Smith Barney Inc. will notify the Company as to which
Participants will need to be so restricted. The Company will direct the removal
of such transfer restrictions upon the expiration of such period of time.
(j) The Company will pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share Program and
stamp duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program, up to $25,000 in the
aggregate. Furthermore, the Company covenants with Salomon Smith Barney Inc.
that the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
(k) The Company shall promptly amend its charter to effectuate
such changes consistent with the description contained in the Registration
Statement and the Prospectus, including the information set forth under the
caption "DESCRIPTION OF CAPITAL STOCK."
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in writing to a
later time, the Registration Statement will become effective not later than (i)
6:00 PM New York, New York time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New York,
New York time on such date or (ii) 9:30 AM on the Business Day following the day
on which the public offering price was determined, if such determination
occurred after 3:00 PM New York, New York time on such date; if filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and within the
time period required by Rule 424(b); and no stop order
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<PAGE>
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
threatened.
(b) The Company shall have requested and caused Skadden, Arps,
Slate, Meagher & Flom LLP, special counsel for the Company, to have furnished to
the Representatives their opinion, dated the Closing Date and addressed to the
Representatives, substantially in the form of EXHIBIT A attached hereto. In
rendering the opinion contained in EXHIBIT A, such counsel may rely as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials.
(c) The Company shall have requested and caused Lahive and
Cockfield, LLP, special patent counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to the
Representatives, to the effect that the statements contained in (A) the "RISK
FACTORS" section of the Prospectus under the caption "IF WE ARE UNABLE TO OBTAIN
AND ENFORCE VALID PATENTS, WE COULD LOSE OUR COMPETITIVE ADVANTAGE," and (B) the
"BUSINESS" section of the Prospectus under the captions "TECHNOLOGY LICENSES,"
"PATENTS AND PROPRIETARY RIGHTS," and "LEGAL PROCEEDINGS," in each case, insofar
as such statements constitute matters of law or legal conclusions or summarize
legal or regulatory matters or proceedings, have been reviewed by them and are
accurate and fair descriptions of such matters of law or legal conclusions or
summaries of such legal or regulatory matters or proceedings.
In rendering such opinion such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
Commonwealth of Massachusetts or the federal laws of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters and (B) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials.
(d) The Company shall have requested and caused Hyman Phelps &
McNamara P.C., special regulatory counsel for the Company, to have furnished to
the Representatives their opinion, dated the Closing Date and addressed to the
Representatives, to the effect that the statements contained in (A) the "RISK
FACTORS" section of the Prospectus under the caption "IF OUR CLINICAL TRIALS ARE
NOT SUCCESSFUL, OR IF WE ARE OTHERWISE UNABLE TO OBTAIN AND MAINTAIN REGULATORY
APPROVAL REQUIRED TO MARKET AND SELL OUR PRODUCTS, WE WOULD INCUR INCREASING
OPERATING LOSSES" AND (B) the "BUSINESS" section of the Prospectus under the
caption "GOVERNMENT REGULATION," insofar as such statements constitute matters
of law or legal conclusions or summarize legal or regulatory matters or
proceedings, have been reviewed by them and are accurate and fair descriptions
of such matters of law or legal conclusions or summaries of such legal or
regulatory matters or proceedings.
(e) The Representatives shall have received from Goodwin,
Procter & Hoar LLP, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and addressed to the Representatives, with respect to the
issuance and sale of the Securities, the Registration Statement, the Prospectus
(together with any supplement thereto) and other related
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<PAGE>
matters as the Representatives may reasonably require, and the Company shall
have furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by (i) the Chief Executive Officer and
President of the Company and (ii) the Chief Financial Officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectus, any supplements
to the Prospectus and this Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct on and as of the
Closing Date with the same effect as if made on the Closing
Date and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, except as set
forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(g) The Company shall have requested and caused Ernst & Young
LLP to have furnished to the Representatives letters, dated respectively as of
the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants within the meaning of the Act and the applicable rules and
regulations adopted by the Commission thereunder and stating in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the related rules and
regulations adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company;
carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the
stockholders, directors and audit and compensation committees
of the Company; and inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters of the Company as
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to transactions and events subsequent to December 31, 1999,
nothing came to their attention which caused them to believe
that:
(1) with respect to the period subsequent to
December 31, 1999, there were any changes, at a
specified date not more than five days prior to the
date of the letter, in the capital stock of the
Company or decreases in the stockholders' equity of
the Company as compared with the amounts shown on the
December 31, 1999 balance sheet included in the
Registration Statement and the Prospectus; or for the
period from January 1, 2000 to such specified date
there were any decreases, as compared with the period
from January 1, 1999 to __________ 1999 in income
before income taxes or in total or per share amounts
of net income of the Company, except in all instances
for changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives; and
(2) the information included in the
Registration Statement and Prospectus in response to
Regulation S-K, Item 301 (Selected Financial Data),
is not in conformity with the applicable disclosure
requirements of Regulation S-K.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company) set forth in the Registration Statement and the
Prospectus, including the information set forth under the
captions "SELECTED FINANCIAL DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Prospectus, agrees with the accounting
records of the Company, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (g) include any
supplement thereto at the date of the letter.
(h) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified pursuant to
paragraph (g)(ii)(1) in the letter or letters referred to in paragraph (g) of
this Section 6 or (ii) any change, or any development involving a prospective
change, in or affecting the condition (financial or otherwise), prospects,
earnings, business or properties of the Company, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto) the effect
of which, in any case referred to in clause (i) or (ii) above, is, in the sole
judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the
15
<PAGE>
Registration Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(i) On or prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
this Agreement and all obligations of the Underwriters hereunder may be canceled
at, or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office of Goodwin, Procter & Hoar LLP, counsel for the
Underwriters, at Exchange Place, Boston, Massachusetts 02109, on the Closing
Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney Inc. on demand for all reasonable
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them solely in connection with the proposed
purchase and sale of the Securities.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person who controls any Underwriter within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as originally
filed or in any amendment thereof, or in any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
16
<PAGE>
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives specifically for inclusion therein;
PROVIDED FURTHER, that with respect to any untrue statement or omission of
material fact made in any Preliminary Prospectus, the indemnity agreement
contained in this Section 8(a) shall not inure to the benefit of any Underwriter
from whom the person asserting any such loss, claim, damage or liability
purchased the Securities concerned, to the extent that any such loss, claim,
damage or liability of such Underwriter occurs under the circumstance where it
shall have been determined by a court of competent jurisdiction by final and
nonappealable judgment that (w) the Company had previously furnished copies of
the Prospectus to the Representatives, (x) delivery of the Prospectus was
required by the Act to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Prospectus was
corrected in the Prospectus and (z) there was not sent or given to such person,
at or prior to the written confirmation of the sale of such securities to such
person, a copy of the Prospectus. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
The Company agrees to indemnify and hold harmless Salomon Smith Barney
Inc., the directors, officers, employees and agents of Salomon Smith Barney Inc.
and each person who controls Salomon Smith Barney Inc. within the meaning of
either the Act or the Exchange Act ("SALOMON SMITH BARNEY INC. ENTITIES"), from
and against any and all losses, claims, damages and liabilities to which they
may become subject under the Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim), insofar as such losses,
claims damages or liabilities (or actions in respect thereof) (i) arise out of
or are based upon any untrue statement or alleged untrue statement of a material
fact contained in the prospectus wrapper material prepared by or with the
consent of the Company for distribution in foreign jurisdictions in connection
with the Directed Share Program attached to the Prospectus or any preliminary
prospectus, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statement therein, when considered in conjunction with the Prospectus
or any applicable preliminary prospectus, not misleading; (ii) are caused by the
failure of any Participant to pay for and accept delivery of the securities
which immediately following the Effective Date of the Registration Statement
were subject to a properly confirmed agreement to purchase, provided that in any
such event the Company shall have the express right to mitigate any such losses,
claims, damages or liabilities through the re-allocation of any such Directed
Shares to other Participants; or (iii) are related to, arising out of, or in
connection with the Directed Share Program, provided that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of Salomon Smith Barney Inc. specifically for inclusion therein.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each
17
<PAGE>
Underwriter, but only with reference to written information relating to such
Underwriter furnished to the Company by or on behalf of such Underwriter through
the Representatives specifically for inclusion in the documents referred to in
the foregoing indemnity. This indemnity agreement will be in addition to any
liability which any Underwriter may otherwise have. The Company acknowledges
that the statements set forth in the last paragraph of the cover page regarding
delivery of the Securities, and, under the heading "UNDERWRITING", (i) the list
of Underwriters and their respective participation in the sale of the
Securities, (ii) the sentences related to concessions and reallowances (iii) the
paragraph related to stabilization, syndicate covering transactions and penalty
bids and (iv) the paragraph relating to electronic distributions of the Common
Stock in any Preliminary Prospectus and the Prospectus constitute the only
information furnished in writing by or on behalf of the several Underwriters for
inclusion in any Preliminary Prospectus or the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
PROVIDED, HOWEVER, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding anything contained herein to the contrary, if indemnity
may be sought pursuant to the second paragraph of 8(a) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of counsel (in addition to any local counsel) for Salomon Smith Barney
Inc., the directors, officers, employees and agents of Salomon Smith Barney
Inc., and all persons, if any, who control Salomon Smith Barney Inc. within the
meaning of either the Act or the Exchange Act for the defense of any losses,
claims, damages and liabilities arising out of the Directed Share Program.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such
18
<PAGE>
action or (iv) the indemnifying party shall authorize the indemnified party to
employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending the same) (collectively "LOSSES") to which the
Company and one or more of the Underwriters may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and by the Underwriters on the other from the offering of the
Securities; PROVIDED, HOWEVER, that in no case shall any Underwriter (except as
may be provided in any agreement among underwriters relating to the offering of
the Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company and the Underwriters
severally shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and of the Underwriters on the other in connection with the statements
or omissions which resulted in such Losses as well as any other relevant
equitable considerations. Benefits received by the Company shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by it, and benefits received by the Underwriters shall be deemed to be
equal to the total underwriting discounts and commissions, in each case as set
forth on the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company on the one hand or
the Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
19
<PAGE>
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on such
exchange or the Nasdaq National Market, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Prospectus
(exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon
20
<PAGE>
Smith Barney Inc. General Counsel (fax no.: (212) 816-7912) and confirmed to the
General Counsel, Salomon Smith Barney Inc., at 388 Greenwich Street, New York,
New York, 10013, Attention: General Counsel; or, if sent to the Company, will be
mailed, delivered or telefaxed to PRAECIS PHARMACEUTICALS INCORPORATED, 1
Hampshire Street, Cambridge, Massachusetts 02139-1572, (fax no.: (617) 494-8414)
and confirmed to Skadden, Arps, Slate, Meagher & Flom LLP, One Beacon Street,
Boston, Massachusetts 02108-3194, Attention: Kent A. Coit, Esq.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New
York, New York, or Boston, Massachusetts.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
21
<PAGE>
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
22
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
PRAECIS PHARMACEUTICALS INCORPORATED
By:
-------------------------------------------
Name: Malcolm L. Gefter
Title: Chief Executive Officer and President
23
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
CIBC World Markets Corp.
Credit Suisse First Boston Corporation
By: Salomon Smith Barney Inc.
By:
---------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
24
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
SECURITIES TO BE
UNDERWRITERS PURCHASED
<S> <C>
Salomon Smith Barney Inc. . . . . . . .
CIBC World Markets Corp.. . . . . . . . . . . .
Credit Suisse First Boston Corporation. . . . . . . .
------------
Total . . . . . . . . .
============
</TABLE>
<PAGE>
Lock-up Agreement
PRAECIS PHARMACEUTICALS INCORPORATED
PUBLIC OFFERING OF COMMON STOCK
____________, 2000
Salomon Smith Barney Inc.
CIBC World Markets
Credit Suisse First Boston
As Representative of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, NY 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between PRAECIS
PHARMACEUTICALS INCORPORATED, a Delaware corporation (the "Company"), and you as
representative of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, $.01 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer to sell, sell, contract to sell,
pledge or otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including by filing (or participating in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
and Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreement, other than shares of Common Stock disposed
of either (i) as bona fide gifts or (ii) as a distribution to the undersigned's
partners or shareholders of such entities, provided that the donee(s) or such
partners or shareholders agree in writing prior to such disposition to be bound
by the restrictions set forth herein.
<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
-----------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
Form of Opinion of
Skadden, Arps, Slate, Meagher & Flom LLP
1. The Company has been duly incorporated and is existing and
in good standing under the laws of the State of Delaware. The Company is
qualified to do business and is in good standing as a foreign corporation under
the laws of the Commonwealth of Massachusetts, the State of New Jersey and the
State of Califor nia.
2. The Company has the corporate power and corporate authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement.
3. Upon the filing of the Restated Charter with the Delaware
Secretary on the date hereof, the authorized capital stock of the Company will
be as set forth in the Prospectus and will conform in all material respects to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, and were not issued in violation of any
preemptive rights arising under the General Corporation Law of the State of
Delaware (the "DGCL") or under any Applicable Contract. In rendering the opinion
set forth in this paragraph 3, we have with your permission relied solely on the
Stock Records of the Company in determining the number of all issued and
outstanding shares of capital stock of the Company and have relied solely on the
Officer's Certificate as to the receipt by the Company of the consideration
referred to therein in respect of the issuance of shares of capital stock of the
Com pany.
4. Except as described or referred to in the Prospectus or the
Registration Statement, no options, warrants or other similar rights to
purchase, agreements or other obligations to issue, or rights to convert any
obligation into or exchange any securities for, shares of capital stock of the
Company, in each case pursuant to any Applicable Contract, are outstanding.
5. The Shares to be issued and sold by the Company pursuant to
the Underwriting Agreement have been duly authorized by the Company, and, when
issued and
<PAGE>
delivered against payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and nonassessable.
The issuance of the Shares is not subject to any preemptive or other similar
rights to subscribe to purchase any such Shares arising under the Charter, the
By-Laws, the DGCL or under any Applicable Contract.
6. The Specimen Certificate complies with all applicable
statutory requirements under the DGCL.
7. The Company has the corporate power and corporate authority
to enter into the Underwriting Agreement and to perform its obligations
thereunder and to consummate the transactions contemplated thereby, including
the issuance, sale and delivery of the Shares to be issued, delivered and sold
by it to the Under writers.
8. The Underwriting Agreement has been duly authorized,
executed and delivered by the Company.
9. No Governmental Approval is legally required to be obtained
or made by the Company for the Company to execute and deliver the Underwriting
Agreement, or for the issuance or sale to the Underwriters of the Shares as
provided in the Underwriting Agreement, except such as may be required under the
Act and the Securities Exchange Act of 1934, as amended, which have been
obtained or made.
10. The execution and delivery by the Company of the Underwrit
ing Agreement, and the performance by the Company of its obligations thereunder,
including the issuance and sale to the Underwriters of the Shares as provided
therein, does not breach or violate, or impose any lien, charge or encumbrance
upon any property or assets of the Company pursuant to, (i) the Certificate of
Incorporation or By-Laws, (ii) the terms of any Applicable Contract (except that
we do not express any opinion as to any covenant, restriction or provision of
any such agreement or instrument with respect to financial covenants, ratios or
tests or any aspect of the financial condition or results of operations of the
Company) or (iii) any Applicable Law or any Applicable Order.
11. The Registration Statement, as of its effective date, and
the Prospectus, as of its date, appeared on their face to be appropriately
responsive in all material respects to the requirements of the Act and
<PAGE>
the Rules and Regulations, except that, in each case, we express no opinion as
to the financial statements, schedules and other financial and statistical data
included or excluded therefrom or the exhibits to the Registration Statement,
and we do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Regis tration Statement or the
Prospectus, except to the extent specifically stated in paragraphs 14 and 15
below.
12. To our knowledge, there are no contracts or documents of a
character required to be filed as exhibits to the Registration Statement which
are not filed as required.
13. To our knowledge, no holders of securities of the Company
have rights to the registration of shares of Common Stock or other securities of
the Company pursuant to any Applicable Contract because of the filing of the
Registra tion Statement by the Company or the offering contemplated thereby.
14. The descriptions in the Prospectus of certain provisions
of the DGCL, Restated Charter and Restated By-Laws set forth under the caption
"Descrip tion of Capital Stock," to the extent that such descriptions purport to
summarize such provisions (or portions thereof) referred to therein, fairly
summarize such provisions (or portions thereof) in all material respects.
15. The descriptions in the Prospectus of certain provisions
of Rules 144 and 701 under the Act set forth under the caption "Shares Eligible
for Future Sale," to the extent that such descriptions purport to summarize such
provi sions (or portions thereof) referred to therein, fairly summarize such
provisions (or portions thereof) in all material respects.
16. To our knowledge, there are no legal or governmental pro
ceedings pending against the Company of a character required to be described in
the Registration Statement or the Prospectus that are not described as required.
17. The Company is not, and upon completion of the sale of the
Shares and the application of the net proceeds thereof as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Com pany Act of 1940, as amended.
<PAGE>
We have been orally advised by the Commission that the
Registration Statement was declared effective under the Act at [ ], Washington,
D.C. time, on [ ], 2000. We have been orally advised by the Commission that no
stop order suspend ing the effectiveness of the Registration Statement has been
issued and, to the best of our knowledge, no proceedings for that purpose have
been instituted or are pending or threatened by the Commission. The Prospectus
was filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations within the time period required by Rule 424(b). Based solely on our
review of the Nasdaq Letter, the Shares have been included for quotation, and
are admitted and authorized for trading, subject to official notice of issuance
and evidence of satisfactory distribution, on the Nasdaq National Market.
In addition, we have participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants of the Company, your counsel and you, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although we are not passing upon, and do not assume any responsibility for,
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus and have made no independent check or
verification thereof (except for those made under the caption "Description of
Capital Stock" in the Prospectus, insofar as they relate to provisions (or
portions thereof) of the DGCL, the Restated Charter or Restated By-Laws
described therein and for those made under the caption "Shares Eligible for
Future Sale" in the Prospectus, insofar as they relate to certain provisions (or
portions thereof) of Rules 144 and 701 under the Act), on the basis of the
foregoing, no facts have come to our attention that have led us to believe that
the Registration Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, as of its date, contained an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that, in each case, we express no opinion or belief with
respect to the financial statements, schedules and other financial and
statistical data included therein or excluded therefrom or the exhibits to the
Registration Statement.
<PAGE>
[Letterhead of
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108-3194
(617) 573-4800]
March 28, 2000
PRAECIS PHARMACEUTICALS INCORPORATED
One Hampshire Street
Cambridge, Massachusetts 02139-1572
Re: PRAECIS PHARMACEUTICALS INCORPORATED --
REGISTRATION STATEMENT ON FORM S-1
---------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to PRAECIS PHARMACEUTICALS
INCORPORATED, a Delaware corporation (the "Company"), in connection with the
public offering by the Company of an aggregate of up to 9,200,000 shares
(including 1,200,000 shares subject to an over-allotment option) (the "Shares")
of the Company's common stock, par value $.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Securities Act").
In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement on Form S-1 (File No. 333-96351), relating to the Shares,
as filed with the Securities and Exchange Commission (the "Commission") under
the Securities Act on February 8, 2000, Amendment No. 1 thereto, as filed with
the Commission under the Securities Act on March 10, 2000 and Amendment No. 2
thereto, as filed with the Commission under the Securities Act on the date
hereof (such Registration Statement, as so amended, being hereinafter referred
to as the "Registration Statement");
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
March 28, 2000
Page 2
(ii) the form of the Underwriting Agreement (the "Underwriting Agreement")
proposed to be entered into among the Company, as issuer, and Salomon Smith
Barney Inc., CIBC World Markets Corp. and Credit Suisse First Boston
Corporation, as representatives of the several underwriters named therein (the
"Underwriters"), the form of which is filed as an exhibit to the Registration
Statement; (iii) a specimen certificate representing the Common Stock (the
"Specimen Certificate"), the form of which is filed as an exhibit to the
Registration Statement; (iv) a certified copy of the Amended and Restated
Certificate of Incorporation of the Company, as amended, as currently in effect,
filed as an exhibit to the Registration Statement; (v) the Amended and Restated
Certificate of Incorporation of the Company, to be filed with the Secretary of
State of the State of Delaware (the "Delaware Secretary") upon the closing of
the offering, the form of which is filed as an exhibit to the Registration
Statement; (vi) the Amended and Restated By-Laws of the Company, as currently in
effect, filed as an exhibit to the Registration Statement; (vii) the Amended and
Restated By-Laws of the Company, to be effective upon the filing of the Amended
and Restated Certificate of Incorporation referred to in clause (v) above with
the Delaware Secretary, the form of which is filed as an exhibit to the
Registration Statement; and (viii) certain resolutions adopted by the Board of
Directors of the Company (the "Board") dated as of February 2, 2000 and drafts
of certain resolutions (the "Draft Offering Committee Resolutions") proposed to
be adopted by the Offering Committee appointed by the Board (the "Offering
Committee"), in each case relating to the issuance and sale of the Shares and
certain related matters. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies,
and the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of
<PAGE>
PRAECIS PHARMACEUTICALS INCORPORATED
March 28, 2000
Page 3
such documents and the validity and binding effect thereof on such parties. As
to any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon oral or written
statements and representations of officers and other representatives of the
Company and others.
Members of our firm are admitted to the Bar in the State of
Delaware, and we do not express any opinion as to the laws of any jurisdiction
other than the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion
that when (i) the Registration Statement becomes effective under the Securities
Act; (ii) the price at which the Shares are to be sold to the Underwriters
pursuant to the Underwriting Agreement and other matters relating to the
issuance and sale of the Shares have been approved by the Offering Committee in
accordance with the Draft Offering Committee Resolutions and such Draft Offering
Committee Resolutions have been adopted by the Offering Committee; (iii) the
Underwriting Agreement has been duly executed and delivered; and (iv)
certificates representing the Shares in the form of the Specimen Certificate
examined by us have been (A) duly executed by an authorized officer of the
transfer agent and registrar for the Common Stock, (B) registered by such
transfer agent and registrar and (C) delivered to and paid for by the
Underwriters at a price per Share not less than the per Share par value of the
Shares as contemplated by the Underwriting Agreement, the issuance and sale of
the Shares will have been duly authorized, and the Shares will be validly
issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving such consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations of the Commission promulgated
thereunder.
This opinion is furnished by us, as your special counsel, in
connection with the filing of the Registration Statement and, except as provided
in the immediately preceding paragraph, is not to be used, circulated, quoted
or otherwise referred to for any other purpose or relied upon by any other
person without our prior written permission.
Very truly yours,
/s/Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 2,
2000 in the Registration Statement (Form S-1 No. 333-96351) and related
Prospectus of PRAECIS PHARMACEUTICALS INCORPORATED.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 24, 2000
