<PAGE>
AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON
NOVEMBER 3, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BIOMEDICINES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 68-0364181
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
</TABLE>
1301 MARINA VILLAGE PARKWAY
SUITE 200
ALAMEDA, CALIFORNIA 94501
(510) 814-0112
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
MARK MORAN
CHIEF EXECUTIVE OFFICER
BIOMEDICINES, INC.
1301 MARINA VILLAGE PARKWAY
ALAMEDA, CALIFORNIA 94501
(510) 814-0112
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES C. KITCH, ESQ. DONALD J. MURRAY, ESQ.
BRETT D. WHITE, ESQ. DEWEY BALLANTINE LLP
COOLEY GODWARD LLP 1301 AVENUE OF THE AMERICAS
FIVE PALO ALTO SQUARE NEW YORK, NY 10019
3000 EL CAMINO REAL (212) 259-8000
PALO ALTO, CA 94306-2155
(650) 843-5000
</TABLE>
------------------------------
APPROXIMATE DATE 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 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 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. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
COMMON STOCK, $0.001 PAR VALUE.............................. $57,500,000 $15,180
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration in accordance with Rule 457(c) under the Securities Act of
1933, as amended.
------------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PRELIMINARY 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 PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION NOVEMBER 3, 2000
--------------------------------------------------------------------------------
SHARES
[LOGO]
COMMON STOCK
----------------------------------------------------------------------
This is the initial public offering of shares of common stock of BioMedicines,
Inc. No public market currently exists for our common stock. We expect the
public offering price to be between $ and $ per share.
We intend to apply to have our common stock listed on the Nasdaq National Market
under the symbol "BIOS."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "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 PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
----------------------------------------------------------------------------------
PUBLIC OFFERING PRICE $ $
----------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS AND COMMISSIONS $ $
----------------------------------------------------------------------------------
PROCEEDS, BEFORE EXPENSES, TO BIOMEDICINES $ $
----------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. The underwriters
may exercise this option only to cover over-allotments, if any. If the
underwriters exercise the option in full, the total underwriting discounts and
commissions will be $ , and our total proceeds, before expenses, will be
$ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about .
UBS WARBURG LLC
U.S. BANCORP PIPER JAFFRAY
PACIFIC GROWTH EQUITIES, INC.
<PAGE>
--------------------------------------------------------------------------------
Through and including , 2001 (the 25th day after commencement of this
offering), federal securities law may require all dealers selling shares of our
common stock, whether or not participating in this offering, to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus summary..................... 3
The offering........................... 5
Summary financial data................. 6
Risk factors........................... 7
Forward-looking information............ 18
Use of proceeds........................ 19
Dividend policy........................ 19
Capitalization......................... 20
Dilution............................... 21
Selected financial data................ 22
Management's discussion and analysis of
financial condition and results of
operations........................... 24
Business............................... 30
Management............................. 49
Related party transactions............. 63
Principal stockholders................. 66
Description of capital stock........... 68
Shares eligible for future sale........ 71
Underwriting........................... 73
Legal matters.......................... 76
Change in independent auditors......... 76
Experts................................ 76
Where you can find more information.... 76
Index to financial statements.......... F-1
</TABLE>
BioMedicines-TM- and DEALS-TM- are trademarks of BioMedicines, Inc. This
prospectus also refers to service marks, trademarks and trade names of other
organizations.
--------------------------------------------------------------------------------
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in the prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock that we discuss under "Risk factors" beginning on page 7.
OUR BUSINESS
We are a biopharmaceutical company that acquires and develops chemical and
biological drug products in the areas of cancer, immunology and infectious
disease. We identify alternative or improved development strategies for drug
candidates in which other companies have previously made substantial investments
in clinical and other development activities. We apply our proprietary Database
Evaluation and Linkage System, or DEALS, algorithms to analyze large public and
private chemical, biological and clinical databases. Through DEALS, we have
identified and acquired rights to a portfolio of product candidates for which we
are:
- redirecting product development toward valuable alternative indications;
- expanding development to related indications to enlarge market potential; or
- otherwise improving the product's development prospects.
OUR PRODUCTS
To date, we have successfully assembled a portfolio of five drug candidates. We
have initiated new clinical development programs with respect to three of these
drug candidates. We estimate that these clinical-stage drug candidates represent
at least $85 million in previous research and development investment by our
licensors. We have acquired rights to these three drug candidates under license
agreements with Schering AG, Boehringer Ingelheim International GmbH and G.D.
Searle & Co. These drug candidates are:
- ATAMESTANE. We are developing atamestane to treat post-menopausal women with
metastatic breast cancer. We have initiated Phase III clinical trials in the
United States.
- OMEGA INTERFERON. We are developing omega interferon to treat patients with
chronic hepatitis C. We are conducting Phase II clinical trials in Europe
and the United States.
- BIOMED 101. We are developing Biomed 101 to be used in conjunction with
interleukin-2 to treat patients with metastatic melanoma or kidney cancer.
We are conducting a Phase Ib clinical trial in the United States.
In connection with our acquisition of product rights, we have also obtained
valuable regulatory and clinical information and inventories of the drugs. As a
result, we have saved both time and money in initiating our clinical development
programs.
INDUSTRY BACKGROUND
Large pharmaceutical companies are under intense pressure to develop and bring
to market new drugs that can generate substantial sales. Given budgetary
constraints, these companies must evaluate and determine as early as possible
which among a number of competing drug programs to continue to fund. We estimate
that only 10% to 20% of drug candidates in early-stage clinical testing progress
to Phase III trials. The reasons for terminating development vary, but include:
- a drug candidate does not show positive activity in the disease area that is
the market focus of a particular company even though it may show useful
activity in another area;
3
<PAGE>
- a drug candidate shows positive activity but is deemed unlikely to meet the
substantial sales threshold of a major pharmaceutical company; and
- a company encounters technological or manufacturing barriers that, at the
time, cannot be surmounted.
THE BIOMEDICINES APPROACH
During the development process, extensive information on these potential
products is captured in various databases. These systematic applications of our
DEALS algorithms identify potentially viable product candidates from these
unexploited assets. We seek to capitalize on the significant historical
investments made by major pharmaceutical companies, shortening our own product
development efforts. We acquire drug candidates when we see opportunities to:
- REDIRECT DEVELOPMENT. We redirect development efforts for existing product
candidates toward new clinical applications that represent valuable
alternative commercial opportunities.
- EXPAND DEVELOPMENT. We continue development for the original indication and
add other indications to increase the potential value of the product.
- IMPROVE DEVELOPMENT. We improve development to treat more effectively the
original target disease, possibly by changing the product formulation.
- OVERCOME OTHER OBSTACLES. We develop insights into the application of newly
developed technologies to improve the economics of manufacturing or to solve
a technical problem that had impeded previous development efforts.
OUR STRATEGY
We seek to commercialize products of high clinical value to patients while
minimizing our product acquisition and development costs. Our strategy to
achieve this objective incorporates the following key elements:
- the development and commercialization of our current portfolio of cancer,
immunology and infectious disease product candidates;
- the identification and acquisition of additional product candidates;
- the establishment of strategic collaborations with our licensors to gain
future competitive preferences;
- the creation of new intellectual property; and
- the outsourcing of many aspects of drug development that require capital
intensive facilities.
------------------------
We were incorporated in Delaware in June 1995. Our principal executive offices
are located at 1301 Marina Village Parkway, Suite 200, Alameda, California
94501. Our telephone number is (510) 814-0112. Our website is on the world wide
web located at "biomedicinesinc.com." Information found on our website is not a
part of this prospectus.
4
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise their
over-allotment option to purchase additional shares in the offering.
<TABLE>
<S> <C>
Common stock we are offering................. shares
Common stock to be outstanding after the
offering................................... shares
Proposed Nasdaq National Market Symbol....... BIOS
Use of proceeds.............................. To fund our product development activities,
including clinical trials, acquisition of
product candidates and working capital and
general corporate purposes. See "Use of
proceeds."
</TABLE>
Unless we indicate otherwise, when analyzing the information in this prospectus
you should assume that outstanding share of our preferred stock convert into
shares of our common stock upon the closing of this offering.
The number of shares of common stock outstanding after the offering as shown
above is based on the number of shares outstanding as of September 30, 2000,
excluding:
- 16,500 shares of common stock issuable upon exercise of outstanding options
at an exercise price of $0.225 per share, plus an additional 729,500 shares
of common stock available for future grant under our 1998 Stock Option Plan;
- 2,000,000 shares of common stock available for future grant under our 2000
Equity Incentive Plan; and
- 300,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan.
Unless otherwise noted, the information in this prospectus assumes:
- the filing of our amended and restated certificate of incorporation
following this offering; and
- the underwriters have not exercised their over-allotment option.
We have agreed to issue an additional shares if the underwriters exercise
their over-allotment option in full, which we describe in "Underwriting." If the
underwriters exercise this option in full, shares of our common stock will
be outstanding after this offering.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data below should be read 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. See Note 1 of the notes to financial statements for an
explanation of the method used to determine the number of shares used in
computing per share data below. See Note 6 of the notes to financial statements
for information concerning the deemed dividends to preferred stockholders. In
the "as adjusted" column below, we have adjusted the actual balance sheet data
to give effect to the automatic conversion of all our preferred stock into
shares of common stock upon the completion of this offering and to give effect
to receipt of the net proceeds from the sale in this offering of shares of
our common stock at an assumed initial public offering price of $ per share
after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED NINE MONTHS ENDED (JUNE 28,
DECEMBER 31, SEPTEMBER 30, 1995) TO
------------------------------------ ----------------------------- SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
STATEMENTS OF (UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------
Research and development
expenses......................... $81 $732 $2,184 $1,395 $3,144 $6,142
Total operating expenses........... 196 898 4,920 2,834 8,279 14,299
Net loss........................... (178) (857) (4,520) (2,589) (7,684) (13,246)
Deemed dividend to preferred
stockholders..................... -- -- -- -- (10,362) (10,362)
Net loss attributable to common
stockholders..................... (178) (857) (4,520) (2,589) (18,046) (23,608)
Basic and diluted net loss per
common share..................... $(0.83) $(2.22) $(5.44) $(3.35) $(15.00)
Weighted-average shares used in
computing basic and diluted net
loss per share................... 214 387 832 773 1,203
Pro forma basic and diluted net
loss per share................... $(0.70) $(2.03)
Weighted-average shares used in
computing pro forma basic and
diluted net loss per share....... 6,465 8,875
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
---------------------------------
ACTUAL AS ADJUSTED
(UNAUDITED)
BALANCE SHEET DATA
(IN THOUSANDS)
------------------------------------------------------------ ---------------------------------
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $41,986 $
Working capital............................................. 41,764
Total assets................................................ 44,229
Deficit accumulated during the development stage............ (13,246)
Convertible preferred stock................................. 12,203
Total stockholders' equity.................................. 43,459
</TABLE>
6
<PAGE>
--------------------------------------------------------------------------------
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED. IN SUCH AN EVENT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO CONTINUE TO INCUR SIGNIFICANT OPERATING LOSSES, AND WE MAY NEVER
ACHIEVE PROFITABILITY.
We have never generated revenue from any products and have incurred significant
net operating losses in each year since our inception. As of September 30, 2000,
we had an accumulated deficit of $13.2 million. The extent of our future losses
is highly uncertain, and we may never achieve profitable operations. We expect
that our losses will increase as we proceed with Phase III testing of
atamestane, conduct our other clinical trials and begin new drug development
programs. Even if we succeed in developing a commercial product, there is no
guarantee that we will become profitable. We will receive product revenues to
offset our losses only if we complete clinical trials for our drug candidates,
receive regulatory approvals and successfully commercialize our products. We
anticipate that it will be at least several years before we commercialize any of
our current product candidates, if at all.
OUR STRATEGY FOR ACQUIRING RIGHTS TO DEVELOP, MARKET AND MANUFACTURE NEW PRODUCT
CANDIDATES IS NOVEL. WE HAVE NOT YET COMMERCIALIZED ANY PRODUCTS USING THIS
STRATEGY AND, TO DATE, WE HAVE LIMITED EXPERIENCE IN ADVANCING ACQUIRED PRODUCT
CANDIDATES THROUGH THE CLINICAL DEVELOPMENT PROCESS.
A key component of our strategy is to acquire rights to develop, market and
manufacture product candidates that were previously pursued for commercial
development by others. We have developed our DEALS algorithms to assist us in
identifying potential product candidates for us to acquire. Our DEALS algorithms
also facilitate our formulation of new hypotheses as to how we might redirect
development of these candidates to new indications or otherwise improve their
commercial prospects. We believe this strategy for acquiring new product
candidates is novel. However, we have not yet developed and commercialized any
products using this strategy and, to date, we have limited experience in
advancing acquired product candidates through the development process. We cannot
assure you that this strategy will prove to be commercially viable.
WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS FOR A
NUMBER OF REASONS, ANY ONE OF WHICH WOULD PREVENT US FROM BECOMING PROFITABLE
AND COULD CAUSE OUR STOCK PRICE TO DECLINE.
Prior to marketing any of our products, we must complete extensive preclinical
and clinical trials of our product candidates and rigorous regulatory approval
processes. Conducting clinical trials is a lengthy, time-consuming and expensive
process. To date, none of our product candidates has been approved for sale in
the United States or in any foreign market. Any delays in, or termination of,
our clinical trials will materially and adversely affect our development and
commercialization timelines, which could cause our stock price to decline. If we
do not complete clinical trials for a product candidate and obtain regulatory
approval, we will not be able to recover any of the substantial direct costs
invested by us in the development of the product candidate. Further, we expend
considerable
--------------------------------------------------------------------------------
7
<PAGE>
RISK FACTORS
--------------------------------------------------------------------------------
indirect resources, including management time, on clinical trials, which will
not be recovered if the trials do not yield marketable drugs. Any of these
events would also seriously impede our ability to obtain additional financing.
The regulatory review process takes many years, requires the expenditure of
substantial resources and involves post-marketing surveillance. The length of
time of clinical trials generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. The results from
preclinical testing and early clinical trials are often not predictive of
results obtained in later clinical trials. In conducting clinical trials, we may
fail to establish the effectiveness of a compound for the targeted indication or
discover unforeseen side effects. Clinical trials, moreover, may require the
enrollment of large numbers of patients, and suitable patients may be difficult
to identify and recruit. Patients participating in the trials may die before
completion of the period of the trial or suffer adverse medical effects
unrelated to treatment with our product candidate. Clinical trials are often
subject to unanticipated delays. For example, we reduced the rate of dosage
escalation of Biomed 101 for several months pending an investigation by us of
two adverse events which we ultimately concluded were associated with IL-2 and
not with Biomed 101. A number of companies in the pharmaceutical industry have
suffered significant setbacks in every stage of clinical trials, even in
advanced clinical trials after promising results in earlier trials. Failure to
complete, or delays in, any of our clinical trials, regulatory submissions or
regulatory approvals could adversely affect our ability to develop products and
result in a decline in our stock price.
We cannot predict whether we will obtain regulatory approval for any of our
product candidates. We may fail to obtain approval from the United States Food
and Drug Administration, referred to as the "FDA," or foreign regulatory
agencies for our product candidates, or experience delays in obtaining such
clearance, due to varying interpretation of data or failure to satisfy efficacy,
safety or quality standards. Furthermore, we may encounter delays or rejections
due to changes in governmental regulations based on future legislation or
administrative action during the period of the trials.
EVEN IF WE OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THOSE APPROVALS AND
ONGOING REGULATION OF OUR PRODUCTS MAY LIMIT HOW WE MANUFACTURE AND MARKET OUR
PRODUCTS, WHICH COULD PREVENT US FROM REALIZING THE FULL BENEFIT OF OUR EFFORTS.
Once regulatory approval has been granted, the product and its manufacturer are
subject to continual review. We and the manufacturers of our products are
required to comply with current good manufacturing practice regulations, which
include requirements relating to quality control and quality assurance as well
as the corresponding maintenance of records and documentation. Further,
manufacturing facilities must be approved by regulatory agencies before they can
be used to manufacture our products and are subject to additional regulatory
inspection. Discovery of previously unknown problems with a product or
manufacturer may result in restrictions or sanctions with respect to the
product, manufacturer and relevant manufacturing facility, including withdrawal
of the product from the market. Failure to comply with FDA or other applicable
regulatory requirements may result in criminal prosecution, civil penalties,
recall or seizure of products, partial or total suspension of production or
withdrawal of a product from the market.
FAILURE TO ESTABLISH OR MAINTAIN RELATIONSHIPS WITH LICENSORS AND COLLABORATORS
MAY DELAY OR PRECLUDE SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF PRODUCT
CANDIDATES.
Our strategy for developing product candidates depends in large part upon
maintaining and entering into licensing and collaboration agreements with
pharmaceutical companies or other parties. We have
--------------------------------------------------------------------------------
8
<PAGE>
RISK FACTORS
--------------------------------------------------------------------------------
entered into a number of agreements with different pharmaceutical companies to
obtain development and marketing rights and drug supplies, including our
agreements with Schering AG, Boehringer Ingelheim and Searle. If we fail to
satisfy payment requirements and other obligations under our current licensing
and collaboration agreements, we may have to forfeit product rights, discontinue
existing programs, renegotiate terms or undertake activities at our own expense
that may be impractical or significantly increase our capital requirements. If a
licensing or collaborative relationship is disrupted or terminated for a given
product opportunity, it is unlikely that we will be able to gain access to the
technology and data from another party. Even if we are able to identify a new
product opportunity, we cannot assure you that we will establish a favorable
licensing or collaborative relationship with the party owning the technology,
data or means of production relating to the new product opportunity.
Because we are dependent upon licensing and collaborative relationships, we are
subject to risks that are beyond our control, including the following:
- changes in a licensor's or collaborative party's business strategy,
ownership or financial condition may adversely affect its willingness or
ability to complete its obligations under an agreement with us;
- a licensor or collaborative party may have failed to obtain adequate patent
protection or other rights licensed to us; and
- we may have disagreements with a licensor or collaborator regarding the
terms of our agreement or ownership of proprietary rights.
These factors and other possible disagreements with our licensors or
collaborators could lead to delays in the research, development and
commercialization of our products or could require or result in litigation or
arbitration, which would be time-consuming and expensive.
WE RELY ON THIRD PARTIES TO CONDUCT THE CLINICAL TRIALS FOR OUR PRODUCT
CANDIDATES, AND WE COULD BE HARMED BY THE CONDUCT OF THESE PARTIES IF THEY DO
NOT SUCCESSFULLY PERFORM THEIR OBLIGATIONS TO US.
Although we design the clinical trials for our product candidates, we rely on
contract research organizations and other third parties to assist us in
managing, monitoring and otherwise carrying out these trials. If these third
parties do not successfully carry out their duties under their agreements with
us, fail to comply with clinical trial protocols or fail to meet expected
deadlines, our clinical trials may be adversely affected and we may not be able
to obtain regulatory approvals.
OUR CURRENT DEPENDENCE UPON OUR LICENSORS AND OTHER THIRD PARTIES FOR THE
MANUFACTURE OR SUPPLY OF OUR PRODUCTS MAY ADVERSELY AFFECT OUR ABILITY TO
SUCCESSFULLY COMMERCIALIZE PRODUCTS.
We depend on our licensors and other third parties to manufacture or supply
materials for use in our preclinical and clinical trials, and we expect to be
dependent on these parties for the manufacture of products for commercial
resale. If we do not maintain agreements with our licensors or other third
parties or establish new agreements for the supply of these materials for our
products in sufficient quantities and at an acceptable cost, we will be unable
to complete testing for our product candidates or meet demand for our products.
Our products may be subject to manufacturing delays if licensors or outside
contractors give greater priority to the production of other products over our
own. We and our licensors and contract manufacturers are required to comply with
applicable FDA manufacturing practice regulations, which include requirements
relating to quality control and quality assurance as
--------------------------------------------------------------------------------
9
<PAGE>
RISK FACTORS
--------------------------------------------------------------------------------
well as corresponding maintenance of records and documentation. For these and
other reasons, our licensors and contract manufacturers may not be able to
manufacture materials for use in trials or our products in a cost-effective or
timely manner. If not performed in a timely manner, clinical trials of our
product candidates could be delayed, and our ability to deliver commercial
products on a timely basis could be impaired or precluded.
OUR RESULTS OF OPERATIONS MAY FLUCTUATE SIGNIFICANTLY FROM PERIOD TO PERIOD, AND
A FAILURE TO MEET THE EXPECTATIONS OF INVESTORS OR THE FINANCIAL COMMUNITY AT
LARGE COULD RESULT IN A DECLINE IN OUR STOCK PRICE.
Our results of operations may fluctuate significantly on a quarterly and annual
basis due to, among other factors:
- the timing of any up-front payments that we may be required to pay in
connection with any future acquisition of product rights;
- the timing of milestone payments that we may be required to pay to our
current or future licensors;
- the timing of vesting of stock options with milestone vesting and vesting of
restricted common stock purchased by our employees, and the difference
between the purchase price and the fair market value of our common stock at
the time of vesting, which could result in significant charges;
- fluctuations in our research and development and other costs in connection
with ongoing product development programs;
- the timing of regulatory approvals and product launches;
- the level of revenue generated by commercialized products;
- the timing of the acquisition and integration of businesses, assets,
products and technologies; and
- general and industry-specific business and economic conditions.
Any adverse fluctuations in our results of operations, or failure to meet
analyst or investor expectations, could cause our stock price to decline
dramatically.
IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL NOT
BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES.
We currently have no sales, marketing or distribution capability. To
commercialize any product candidates, we must internally develop sales,
marketing and distribution capabilities or make arrangements with third parties
to perform these services. We cannot assure you that we will be successful in
these efforts and, therefore, we may not be able to profitably sell our
products. To market any of our products directly, we must commit financial and
managerial resources to develop a marketing and sales force with technical
expertise and with supporting distribution capabilities. If we rely on
pharmaceutical companies with established distribution systems to market our
products, we will need to establish and maintain marketing arrangements on
acceptable terms. To the extent that we enter into co-promotion or other
licensing arrangements, our product revenues may be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon the
efforts of third parties, which efforts may not be successful.
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10
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RISK FACTORS
--------------------------------------------------------------------------------
We have granted Schering AG an option to co-promote atamestane in the United
States and an option to exclusively license atamestane for commercialization
outside of the United States. In addition, we have granted Boehringer Ingelheim
and Searle the right to negotiate with us for commercialization rights relating
to omega interferon and Biomed 101, respectively, prior to our negotiating with
any other third party for these rights. There can be no guarantee that our
licensors will be interested in collaborating further with us to commercialize
our product candidates. If we enter into further collaborative arrangements with
these parties or with other third parties in connection with the
commercialization of any of our products, our success may be dependent in large
part on the subsequent efforts of these parties.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL NECESSARY TO FUND OUR OPERATIONS. IF WE
ARE UNABLE TO DO SO, WE MAY HAVE TO DISCONTINUE DRUG DEVELOPMENT PROGRAMS,
RELINQUISH OUR RIGHTS TO SOME OR ALL OF OUR PRODUCT CANDIDATES OR DECLARE
BANKRUPTCY. THE MANNER IN WHICH WE RAISE ANY ADDITIONAL FUNDS MAY AFFECT THE
VALUE OF YOUR INVESTMENT IN OUR COMMON STOCK.
Our cash flow from operations will be negative at least until the time we can
successfully commercialize one or more of our products. As a result, we expect
that we will require additional financing in the future to fund our drug
development programs and to expand our infrastructure and research and
development activities. If we fail to obtain the necessary capital, we will not
be able to fund our operations. We have no committed sources of additional
capital. We do not know whether additional financing will be available when
needed on terms favorable to us, if at all. Failure to acquire new product
candidates for development or to advance our current product candidates to later
stage trials could create difficulties in obtaining additional financing. We may
raise any additional capital through public or private equity offerings, debt
financings or additional corporate collaboration and licensing arrangements.
We believe that the net proceeds to us from this offering and our current cash
and investment securities will be sufficient to support our current operating
plan through at least the end of 2002. Although we have based this estimate on
assumptions that we believe to be reasonable, these assumptions may prove to be
wrong. Our future capital requirements depend on many factors that affect our
research and development activities, including timing, extent and results of
clinical trials, the timing of acquiring new drug candidates, payments required
under our current and any future collaborations, and costs associated with
conducting preclinical and clinical testing. See "Management's discussion and
analysis of financial condition and results of operations" for a further
discussion of our liquidity and capital resources.
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience dilution. We may grant future investors rights
superior to those of the common stock sold in this offering. To the extent that
we raise additional funds through collaborations and licensing arrangements, it
may be necessary to relinquish some rights to our technologies, product
candidates or products, or grant licenses on terms that are not favorable to us.
If we raise additional funds by incurring debt, we could incur significant
interest expense and become subject to covenants in the related transaction
documentation that could affect the manner in which we conduct our business.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, OUR COMPETITIVE
POSITION WOULD BE HARMED.
Our commercial success will depend in part on obtaining patent protection and
other proprietary rights for our products and successfully defending these
patents and other rights against third-party
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challenges. The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies can be highly uncertain and involve complex legal and
factual questions. We will be able to protect our intellectual property rights
from unauthorized use by third parties only to the extent that our technologies
are covered by valid and enforceable patents or are effectively maintained as
trade secrets. With regard to the technologies we license from others, we rely
upon the patent protection and intellectual property rights obtained by the
licensor or collaborator. The degree of future protection for our proprietary
rights is uncertain, and we will not be able to ensure that:
- we or our collaborators were the first to make the inventions covered by
patent applications;
- we or our collaborators were the first to file patent applications for
inventions;
- others will not independently develop similar or alternative technologies or
duplicate any of our technologies without infringing our intellectual
property rights;
- any of our pending patent applications will result in issued patents;
- any patents issued or licensed to us will provide a basis for commercially
viable products or will provide us with any competitive advantages or will
not be challenged by third parties;
- we will develop proprietary technologies that are patentable; or
- the patents of others will not have an adverse effect on our ability to do
business.
The rights to product candidates we acquire from licensors or collaborators are
protected by patents and proprietary rights owned by them, and we rely on the
patent protection and rights established or acquired by them. We cannot assure
you that our licensors' or collaborators' patents, patent applications and
proprietary rights will not be challenged. In addition, we generally do not
unilaterally control the prosecution of in-licensed technology. Accordingly, we
are unable to exercise the same degree of control over this intellectual
property as we may exercise over internally developed technology.
We rely on trade secrets to protect technology where we believe patent
protection is inappropriate or not obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements and agreements to assign
intellectual property rights to us, we may not be able to adequately protect our
trade secrets or other proprietary information. Our DEALS algorithms are not
patented. We rely on trade secrets to protect this intellectual property.
WE ARE AWARE OF INTELLECTUAL PROPERTY RIGHTS HELD BY THIRD PARTIES, TO WHICH WE
DO NOT HAVE RIGHTS, THAT MAY LIMIT, DELAY OR PREVENT OUR COMMERCIALIZATION OF
ATAMESTANE AND OMEGA INTERFERON.
Our product candidates could become the subject of third-party claims of
intellectual property infringement. Any legal action against us or our
collaborators claiming damages and seeking to enjoin developmental or marketing
activities relating to affected products and processes could, in addition to
subjecting us to potential liability for damages, require us or our
collaborators to obtain a license to continue to develop, manufacture or market
the affected products and processes. We cannot predict whether we or our
collaborators would prevail in any of these actions or whether any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. If we are required to defend or otherwise engage in
patent suits, it could consume a substantial portion of our managerial and
financial resources.
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With respect to our proposed atamestane combination therapy, we are aware of an
issued US patent and foreign counterparts relating generally to combination
therapies for the treatment of breast cancer. We do not currently have rights to
these patents. We believe that a large pharmaceutical company controls the
rights to these patents. If this company were to make a claim of infringement
against us and if we were found to infringe a valid patent, we could incur
substantial damages and be required either to seek a license or to discontinue
commercialization efforts. We believe that the US patent, insofar as it relates
to our proposed commercialization of atamestane, is invalid because the
pertinent claim is anticipated by prior art that was not disclosed to the US
patent office. However, if we are forced to defend infringement litigation, we
may not be able to establish invalidity through clear and convincing evidence
sufficient to overcome the presumption that issued patents are valid.
With respect to omega interferon, we are aware of a US patent issued to Berlex
Laboratories Incorporated relating to the manufacture of interferons in
mammalian cells. This patent covers the methods of manufacturing omega
interferon that we use. We are currently in discussions with Berlex regarding a
license under this patent. However, we cannot assure you that we can
successfully secure a license on reasonable terms, if at all.
In addition, we are aware of two US patents held by Genentech that relate to the
composition of matter of omega interferon. Boehringer Ingelheim has license
rights to these US patents under which we believe omega interferon can be
marketed in the United States in the event Boehringer Ingelheim, our licensor
and the manufacturer of omega interferon, elects to commercialize omega
interferon with us. Boehringer Ingelheim does not have the right to sublicense
these license rights without the consent of Genentech. As a result, we will not
be able to commercialize omega interferon in the United States without
Boehringer Ingelheim unless Genentech consents to a sublicense or otherwise
permits us to access its US patent rights. If Boehringer Ingelheim elects not to
enter into a commercialization agreement with us, it has agreed to use its best
reasonable efforts to grant us a sublicense to these rights and to secure the
required consent of Genentech.
We may be required to defend infringement actions or challenge the validity of
third-party patents in court in order to commercialize our proposed atamestane
combination therapy and/or omega interferon. However, we may not have sufficient
resources to bring these actions to a successful conclusion. If we do not
successfully defend any infringement actions to which we become a party or are
unable to have infringed patents declared invalid, we may:
- have to pay substantial monetary damages which can be tripled if the
infringement is deemed willful; or
- be required to discontinue or significantly delay commercialization and
development of the affected products.
We will be materially harmed if we are unable to successfully defend any
infringement litigation relating to these patents or are unable to obtain any
required license or sublicense to these patents.
IF WE FAIL TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL, IT WILL DELAY OUR
PRODUCT DEVELOPMENT PROGRAMS.
We are a small company and had only 16 employees as of September 30, 2000. Our
success depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense. In
particular, our product development programs depend on our ability to attract
and retain highly skilled chemists and clinical development personnel. If we
lose the services of any of these personnel, in
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particular, Mark Moran, our Chief Executive Officer, it could impede
significantly the achievement of our research and development objectives. We
maintain key management personnel insurance in the amount of $4 million with
respect to Dr. Moran. We do not know if we will be able to attract or retain
personnel.
IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS, DEMAND FOR OUR PRODUCTS MAY BE REDUCED OR ELIMINATED.
There is intense competition in our target markets of cancer and infectious
disease. Our ability to successfully market drugs will be limited if our
competitors develop and market products that are more effective, have fewer side
effects or are less expensive than our product candidates. With respect to our
drug development programs, other companies have product candidates in clinical
trials to treat each of the diseases for which we are seeking to develop
products, including cancer and viral hepatitis. Many of these competing
potential drugs are further advanced in development than are any of our
potential products. Our competitors may succeed in developing and marketing
products that are either more effective than those we may develop or are
marketed before any products we develop are marketed.
Our competitors include fully-integrated pharmaceutical companies,
biopharmaceutical companies and universities and public and private research
institutions and may include our licensors, who are not generally restricted
from competing with us. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater marketing capabilities than we do. If our
competitors successfully enter into partnering arrangements or license
agreements with pharmaceutical companies or academic research institutions, we
will then be precluded from pursuing those specific opportunities. Since each of
these opportunities is unique, we may not be able to find an acceptable
substitute.
OUR LICENSORS AND OTHER COLLABORATORS MAY DEVELOP PRODUCTS IN RELATED FIELDS
THAT ARE COMPETITIVE OR HAVE THE POTENTIAL TO COMPETE WITH THE PRODUCTS OR
POTENTIAL PRODUCTS THAT ARE THE SUBJECT OF OUR COLLABORATIONS.
The development of potentially competing products by a licensor or collaborator
could cause the licensor or collaborator to be less willing to support our
product candidates. Since our current licensors and other collaborators have
significantly greater financial resources and established distribution systems
than we do, they would be in a better position to market their products.
OUR ABILITY TO GENERATE REVENUES WILL BE DIMINISHED IF WE FAIL TO OBTAIN
ACCEPTABLE PRICES OR AN ADEQUATE LEVEL OF 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 through various means will limit our commercial
opportunity. 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 a number of federal and state
proposals to implement similar government control. In addition, increasing
emphasis on managed care in the United States will continue to put pressure on
the pricing of pharmaceutical products. Government and other third-party payors
increasingly are attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drugs and by refusing, in some
cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling
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RISK FACTORS
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approval. Cost control initiatives could decrease the price that we or any of
our collaborators receive for our products from third-party payors, including
private health insurers and governmental providers.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
PRODUCT CANDIDATES.
The testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our product candidates. Our inability to obtain sufficient
product liability insurance at an acceptable cost to protect against potential
product liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop. We currently carry product liability
insurance covering our clinical studies, but in the future we may not be able to
obtain insurance at a reasonable cost, if at all.
RISKS RELATED TO THE OFFERING
IF OUR OFFICERS, DIRECTORS AND LARGEST STOCKHOLDERS CHOOSE TO ACT TOGETHER, THEY
MAY BE ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS, ACTING IN THEIR BEST
INTERESTS AND NOT NECESSARILY IN THE INTERESTS OF OTHER STOCKHOLDERS.
Following completion of this offering, our directors, executive officers and
holders of 5% or more of our outstanding common stock and their affiliates will
beneficially own approximately % of our common stock based on their
beneficial ownership as of September 30, 2000, and % if the underwriters
exercise their over-allotment option in full. Accordingly, they collectively
will have the ability to determine the election of all of our directors and to
determine the outcome of most corporate actions requiring stockholder approval.
They may exercise this ability in a manner that advances their best interests
and not necessarily those of other stockholders.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR OUR COMMON STOCK AND
AFTER THE OFFERING OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR
STOCK COULD DECLINE IN VALUE.
Our common stock has not been publicly traded prior to this offering. We do not
know how our common stock will trade in the future. The market prices for
securities of biopharmaceutical companies have been highly volatile and may
continue to be highly volatile in the future independent of company performance.
The following factors, in addition to other risk factors described in this
section, may have a significant impact on the market price of our common stock:
- announcements of technological innovations or new commercial products by our
competitors or us;
- results of clinical trials;
- approval or disapproval of our product candidates by the FDA or other
regulatory agencies;
- loss of key personnel;
- developments concerning proprietary rights, including patents;
- developments concerning our collaborations;
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- publicity regarding actual or potential medical results relating to products
under development by our competitors or us;
- regulatory developments in the United States and foreign countries;
- litigation;
- economic and other external factors or other disasters or crises;
- changes in earnings estimates by market research analysts; and
- period-to-period fluctuations in financial results.
BECAUSE OF OUR POTENTIAL STOCK PRICE VOLATILITY, WE ARE AT RISK OF SECURITIES
CLASS ACTION LITIGATION.
In the past, securities class action litigation has been brought against a
company following a decline in the market price of its securities. This risk is
especially acute for us because biopharmaceutical companies have experienced
significant stock price volatility in recent years. As a result, we may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources and could
seriously harm our business.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THIS
PUBLIC OFFERING, INCLUDING SHARES ISSUED UPON THE EXERCISE OF OUTSTANDING
OPTIONS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.
The market price of our common stock may decline due to sales of a large number
of shares of our common stock or the perception that such sales may occur. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
After this offering, we will have outstanding shares of common stock,
shares if the underwriters exercise their over-allotment option in full,
based upon the number of outstanding share as of September 30, 2000. Of these
shares, shares, plus an additional shares if the underwriters
exercise their over-allotment option in full, will be freely tradeable without
restriction or further registration under the Securities Act. Of the remaining
shares, a total of approximately shares held by our directors, executive
officers and our existing stockholders are subject to lock-up agreements
generally providing that these stockholders will not sell or otherwise dispose
of their shares for a period of 180 days following the date of the final
prospectus for this offering without the prior written consent of
UBS Warburg LLC. UBS Warburg LLC can release these lock-up agreements at any
time. In addition, options to purchase 16,500 shares of our common stock are
outstanding as of September 30, 2000. Following this offering, we expect to
register the shares underlying these options. Subject to the exercise of these
options, shares included in such registration will be available for sale in the
open market immediately after the 180-day lock-up period expires.
After this offering, the holders of approximately 14,103,494 shares of common
stock will be entitled to rights with respect to registration of such shares
under the Securities Act. If such holders, by exercising their registration
rights, cause a large number of securities to be registered and sold in the
public market, these sales could have an adverse effect on the market price for
our common stock. If we were to initiate a registration and include shares held
by these holders pursuant to the exercise of their registration rights, these
sales may impair our ability to raise capital.
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PROVISIONS IN DELAWARE LAW AND OUR CHARTER MAY PREVENT OR DELAY A CHANGE OF
CONTROL, EVEN IF THAT CHANGE OF CONTROL MAY BE BENEFICIAL TO OUR STOCKHOLDERS.
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in business combinations with any stockholder, including all affiliates and
associates of the stockholder, who owns 15% or more of the corporation's
outstanding voting stock, for three years following the date that the
stockholder acquired 15% or more of the corporation's voting stock unless
specified conditions are met, as further described in "Description of capital
stock."
Our certificate of incorporation and bylaws include a number of provisions that
may deter or impede hostile takeovers or changes of control or management. These
provisions include:
- our board is classified into three classes of directors as nearly equal in
size as possible with staggered three-year terms;
- the authority of our board to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of
these shares, without stockholder approval;
- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent; and
- special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the board.
These provisions may have the effect of delaying or preventing a change of
control.
PURCHASERS OF COMMON STOCK IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE.
Purchasers in the public offering will experience immediate and substantial
dilution of $ in the net tangible book value per share of common stock
from the initial public offering price. Assuming an initial public offering
price of $ per share of common stock, our net tangible book value, after
giving effect to this offering, would be $ per share. See "Dilution" for
more details regarding the dilution purchasers in this offering will experience.
Additional dilution will occur upon exercise of options granted by us.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING AND MAY USE THE
PROCEEDS IN A MANNER WITH WHICH YOU MAY NOT AGREE.
We have not allocated any specific portion of the proceeds from this offering to
any particular use. We will have substantial flexibility and broad discretion in
applying the net proceeds from this offering and you will be relying on the
judgment of our management regarding the application of these proceeds. We
cannot assure you that management will use these funds in a manner that you
would approve of.
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FORWARD-LOOKING INFORMATION
Some of the statements under "Prospectus summary," "Risk factors," "Management's
discussion and analysis of financial condition and results of operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by any forward-looking statements. Some of these factors are listed
under "Risk factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "intends," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. Neither we nor any other person assumes
responsibility for the accuracy and completeness of those statements. Except as
required by law, we undertake no obligation to update any of the forward-looking
statements after the date of this prospectus or to conform them to actual
results or changes in our expectations.
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USE OF PROCEEDS
The net proceeds to us from the sale of common stock in this offering are
estimated to be $ million, or $ million if the
underwriters exercise their over-allotment option in full, assuming a public
offering price of $ per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses.
We currently intend to use the net proceeds of this offering to fund product
development activities, including clinical trials, the acquisition of product
candidates, and working capital and general corporate purposes. We have not
determined the amount of net proceeds that we will use for each of these
purposes.
We may also use a portion of the net proceeds to acquire or invest in other
businesses, although no acquisitions are currently planned or being negotiated
as of the date of this prospectus, and no portion of the net proceeds has been
allocated for a specific acquisition.
Until we use the net proceeds of this offering for the above purposes, we intend
to invest the net proceeds temporarily in investment-grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock and do not
anticipate declaring or paying any dividends on our common stock in the
foreseeable future. Any future determination relating to our dividend policy
will be made at the discretion of our board of directors and will depend on then
existing conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors our board of directors may deem relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares of
preferred stock into 12,203,494 shares of common stock upon the completion
of this offering; and
- on a pro forma as adjusted basis to reflect our receipt of the net proceeds
from our sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Convertible preferred stock, $0.001 par value, 12,203,494
shares authorized, 12,203,494 issued and outstanding,
actual; 12,203,494 shares authorized, no shares issued and
outstanding, pro forma; 5,000,000 shares undesignated
preferred stock authorized, no shares issued and
outstanding, pro forma as adjusted........................ $12 $-- $--
Common stock, $0.001 par value; 16,000,000 shares
authorized, 2,798,000 shares issued and outstanding,
actual; 16,000,000 shares authorized, 15,001,494 shares
issued and outstanding, pro forma; and 75,000,000 shares
authorized, shares issued and outstanding, pro forma
as adjusted............................................... 3 15 --
Additional paid-in capital.................................. 58,470 58,470
Notes receivable from stockholders.......................... (282) (282) (282)
Deferred compensation....................................... (1,498) (1,498) (1,886)
Deficit accumulated during the development stage............ (13,246) (13,246) (8,568)
----------- ----------- -----------
Total stockholders' equity.................................. $43,459 $43,459 $
=========== =========== ===========
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of September 30, 2000 and excludes:
- 16,500 shares of common stock issuable upon exercise of outstanding options
at an exercise price of $0.225 per share, plus an additional 729,500 shares
of common stock available for future grant under our 1998 Stock Option Plan;
- 2,000,000 shares of common stock available for future grant under our 2000
Equity Incentive Plan; and
- 300,000 shares of common stock available for issuance under our 2000
Employee Stock Purchase Plan.
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DILUTION
Purchasers of common stock in this offering will experience immediate and
substantial dilution in the net tangible book value of the common stock from the
initial public offering price. Net tangible book value per share represents the
amount of our total tangible assets less our total liabilities, divided by the
number of our shares of common stock outstanding, assuming the conversion of all
outstanding shares of convertible preferred stock into 12,203,494 shares of
common stock effective immediately prior to the closing of this offering. As of
September 30, 2000, we had a net tangible book value of $43.5 million, or $2.90
per share of common stock. After giving effect to the sale of shares of
common stock in this offering at an assumed public offering price of $ per
share and after the deduction of estimated underwriting discounts and
commissions and estimated offering expenses, our net tangible book value would
have been $ million, or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing stockholders
and an immediate and substantial dilution of $ per share to new investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
Net tangible book value as of September 30, 2000............ $2.90
Increase attributable to new investors......................
------
Pro forma net tangible book value after the offering........
-------
Dilution in pro forma net tangible book value to new
investors................................................. $
=======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30, 2000,
after giving effect to this offering, the total number of shares of common stock
purchased from us and the total consideration and the average price per share
paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 15,001,494 % $ 52,422,438 % $ 3.49
New investors............................ % %
----------- -------- ------------ --------
Total.................................. 100% $ 100%
=========== ======== ============ ========
</TABLE>
The discussion and tables above exclude 16,500 shares of common stock issuable
upon exercise of outstanding options to purchase common stock at $0.225 per
share. The issuance of common stock in connection with the exercise of these
options will result in further dilution to new investors. See
"Management--Employee Benefit Plans."
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SELECTED FINANCIAL DATA
This section presents our historical selected financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements, and "Management's discussion and analysis of
financial condition and results of operations." The selected data in this
section is not intended to replace the financial statements.
We derived the statement of operations data for the years ended December 31,
1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999
from the audited financial statements included in this prospectus audited by
Ernst & Young LLP. We derived the balance sheet data as of December 31, 1997
from audited financial statements not included in this prospectus. The financial
data as of September 30, 2000 and for the nine months ended September 30, 2000
and 1999 and for the period from inception (June 28, 1995) to September 30, 2000
are derived from unaudited financial statements included elsewhere in this
prospectus. We have prepared this unaudited information on the same basis as the
audited financial statements and have included all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for such periods.
As we commenced operations in 1997, the only activity in 1995 and 1996 consisted
of general and administrative expenses of $6,729.
Historical results are not necessarily indicative of future results. See the
notes to the financial statements for an explanation of the method used to
determine the number of shares used in computing per share data below and for
information concerning the deemed dividend to preferred stockholders.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED (JUNE 28, 1995)
YEAR ENDED DECEMBER 31, SEPTEMBER 30, TO
--------------------------------- ----------------------------- SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development................ $ 81 $ 732 $ 2,184 $ 1,395 $ 3,144 $ 6,142
General and administrative.............. 115 166 468 318 578 1,332
Stock-based compensation (see
Note A)................................ -- -- 2,268 1,121 4,557 6,825
--------- --------- --------- ------------- ------------- ----------------
Loss from operations...................... (196) (898) (4,920) (2,834) (8,279) (14,299)
--------- --------- --------- ------------- ------------- ----------------
Other income, net......................... 18 41 400 245 595 1,053
--------- --------- --------- ------------- ------------- ----------------
Net loss.................................. (178) (857) (4,520) (2,589) (7,684) (13,246)
========= ========= ========= ============= ============= ================
Deemed dividend to preferred
stockholders............................ -- -- -- -- (10,362) (10,362)
========= ========= ========= ============= ============= ================
Net loss attributable to common
stockholders............................ $ (178) $ (857) $ (4,520) $ (2,589) $ (18,046) $ (23,608)
========= ========= ========= ============= ============= ================
Basic and diluted net loss per share...... $ (0.83) $ (2.22) $ (5.44) $ (3.35) $ (15.00)
========= ========= ========= ============= =============
Weighted-average shares used in computing
basic and diluted net loss per share.... 214 387 832 773 1,203
========= ========= ========= ============= =============
Pro forma basic and diluted net loss per
share................................... $ (0.70) $ (2.03)
========= =============
Weighted-average shares used in computing
pro forma basic and diluted net loss per
share................................... 6,465 8,875
========= =============
Note A: Stock-based compensation relates
to the following:
Research and development................ $ -- $ -- $ 1,213 $ 577 $ 2,550 $ 3,762
General and administrative.............. -- -- 1,055 544 2,007 3,063
--------- --------- --------- ------------- ------------- ----------------
$ -- $ -- $ 2,268 $ 1,121 $ 4,557 $ 6,825
========= ========= ========= ============= ============= ================
</TABLE>
--------------------------------------------------------------------------------
22
<PAGE>
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
(UNAUDITED)
BALANCE SHEET DATA
(IN THOUSANDS)
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments........... $4,398 $ 1,007 $ 9,688 $ 41,986
Working capital............................................. 785 968 9,588 41,764
Total assets................................................ 811 1,068 11,114 44,229
Deficit accumulated during the development stage............ (185) (1,042) (5,562) (13,246)
Total stockholders' equity (net capital deficiency)......... (212) (1,024) (3,262) 43,459
</TABLE>
--------------------------------------------------------------------------------
23
<PAGE>
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES TO
THOSE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. AS A RESULT OF MANY FACTORS, SUCH AS THOSE SET FORTH UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, OUR ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
We were incorporated in June 1995 and began operations in February 1997. We are
a biopharmaceutical company that acquires and develops drug candidates for which
we have identified improved or alternative development strategies. Since our
inception, we have devoted substantially all of our efforts to the acquisition,
preclinical research and clinical development of our drug candidates.
We have incurred significant losses since our inception. As of September 30,
2000, our accumulated deficit was $13.2 million. The process of developing our
drugs will require significant additional preclinical studies and clinical
trials, as well as regulatory approval and manufacturing and commercialization
activities. We expect these activities, together with our general and
administrative expenses, to result in significant additional operating losses
for the foreseeable future. We will receive revenue from product sales only if
we complete clinical trials, obtain regulatory approvals and successfully
commercialize at least one of our drug candidates.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were approximately $3.1 million for the nine
months ended September 30, 2000, compared with approximately $1.4 million for
the nine months ended September 30, 1999. This increase primarily was a result
of:
- additional personnel costs;
- expenditures in support of planned clinical trials of atamestane;
- costs of clinical trials for omega interferon; and
- costs of clinical trials for Biomed 101.
We expect that research and development expenses will increase significantly in
the future, particularly as we commence later stage clinical trials for other
drug candidates.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $578,000 for the nine
months ended September 30, 2000, compared with approximately $319,000 for the
nine months ended September 30, 1999. This increase was primarily attributable
to increased costs for additional personnel and occupancy costs. We expect that
general and administrative expenses will increase in the future to support
continued growth of our research and development efforts and to accommodate new
demands associated with operating as a public company.
--------------------------------------------------------------------------------
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
AMORTIZATION OF DEFERRED COMPENSATION AND OTHER STOCK-BASED COMPENSATION
EXPENSES
Stock-based compensation was approximately $4.6 million for the nine months
ended September 30, 2000, which consisted of $1.1 million of amortization of
deferred stock-based compensation and $3.5 million of compensation expense
related to restricted stock issued to one of our officers compared with
approximately $1.1 million for the nine months ended September 30, 1999 almost
entirely related to compensation expense associated with restricted stock issued
to one of our officers. We recorded aggregate deferred stock-based compensation
of approximately $2.8 million during the period from April 1999 through
September 2000, representing the difference between the exercise price of
options and the fair value of our common stock as determined by management in
light of this initial public offering and the expected initial public offering
price per share.
Based on deferred stock-based compensation recorded as of September 30, 2000, we
expect to record amortization for deferred stock-based compensation as follows:
approximately $280,000 for the remaining three months in 2000, $733,000 in 2001,
$359,000 in 2002, $109,000 in 2003 and $18,000 in 2004.
In addition, as performance incentives, we have attached either milestones or
vesting accelerators to option grants to some of our employees. Under these
arrangements, the employee has to meet a specific performance milestone in order
to commence vesting. Options that commence vesting only upon achievement of
milestones will be valued at the date such milestones are achieved and to the
extent the fair value of our common stock exceeds the exercise price of the
shares on the date the milestones are achieved, such amount will be accounted
for as compensation expense. This amount may be material. As of December 31,
1999 and September 30, 2000, we had 68,000 options and 117,500 options (of which
101,000 options were exercised early), respectively, subject to milestone-based
vesting. We do not anticipate granting options or issuing restricted stock to
our employees in the future with exercise or purchase prices below fair market
value on the date of grant or issuance. However, if we grant options subject to
milestone-based vesting in the future, we may be subject to additional and
substantial stock-based compensation charges.
In November 1998 and 1999, we issued an aggregate of 1,000,000 shares of common
stock to one of our officers pursuant to a restricted stock purchase agreement,
under which we have repurchase rights that lapse, in part, upon achievement of
certain milestones. To the extent that the fair value of our common stock on the
date the milestones are achieved exceeds the issuance price of the shares, this
amount will be accounted for as compensation expense. We recorded $1.1 million
and $3.5 million in stock-based compensation for the nine months ended
September 30, 1999 and 2000, respectively. Both the November 1998 and 1999
restricted stock purchases were consummated through the issuance of
full-recourse notes to us, which will be forgiven upon the closing of this
offering. Due to this performance-based forgiveness feature, we are subject to
the provisions of EITF 95-16 and are required to apply variable accounting on
all these restricted shares vested until the earlier of either the triggering of
the performance feature or the board of directors approving early forgiveness of
the amount due. As a result, for the nine months ended September 30, 1999 and
2000, additional stock-based compensation expense of $597,000 and $3.1 million,
respectively, was recorded. These amounts are included in the stock-based
compensation expense previously presented above. In addition, as a result of the
achievement of a milestone linked to this offering, our repurchase rights will
lapse with respect to 250,000 of these restricted shares upon the completion of
this offering. Based on an initial public offering price of $ per share, we
expect to record additional stock-based compensation expense of $ upon the
completion of this offering.
--------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
OTHER INCOME, NET
Other income, net was approximately $595,000 for the nine months ended
September 30, 2000, compared with approximately $245,000 for the nine months
ended September 30, 1999. The increase was due to increased interest income
earned on higher average balances of cash, cash equivalents and short-term
investments during the 2000 period resulting from the investment of the net
proceeds from the sale of Series B convertible preferred stock in April 1999 and
the sale of Series C convertible preferred stock in September 2000.
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS
In September 2000, we sold 4,834,606 shares of Series C preferred stock for
proceeds of $38 million. At the date of issuance, we believed that the Series C
preferred stock was issued at fair value. However, after reevaluating the fair
value of our common stock in contemplation of this offering, we determined that
the issuance of the Series C preferred stock resulted in a beneficial conversion
feature of approximately $10.4 million, calculated in accordance with Emerging
Issues Task Force Consensus No. 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features." This amount has been recorded as a deemed
dividend to the Series C stockholders for the nine months ended September 30,
2000. There was no effect on total stockholders equity as the dividend was
recorded as a simultaneous charge and credit to additional paid in capital.
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were approximately $2.2 million in 1999,
compared with approximately $732,000 in 1998 and approximately $81,000 in 1997.
Research and development expenditures in 1999 consisted primarily of:
- up-front and other costs associated with the acquisition of atamestane, and
expenses associated with INDs for Biomed 101 and omega interferon; and
- hiring and personnel costs.
Research and development expenditures in 1998 consisted primarily of:
- up-front and other costs associated with the acquisition of Biomed 101 and
omega interferon; and
- personnel costs.
Research and development expenditures in 1997 consisted primarily of:
- personnel costs; and
- costs associated with the acquisition of Biomed 101.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately $468,000 in 1999,
compared with approximately $166,000 in 1998 and approximately $114,000 in 1997.
These increases were primarily attributable to increased costs for additional
personnel and occupancy costs.
AMORTIZATION OF DEFERRED COMPENSATION AND OTHER STOCK-BASED COMPENSATION
EXPENSES
Stock-based compensation was approximately $2.3 million for 1999. This amount
consisted of $262,000 of amortization of deferred stock-based compensation and
$2.0 million of compensation expense related to restricted stock granted to one
of our officers. There was no amortization of deferred compensation for 1998 or
1997. We recorded aggregate deferred stock-based compensation of
--------------------------------------------------------------------------------
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
approximately $1.0 million during 1999 representing the difference between the
exercise price and the fair value of our common stock as determined by
management in light of this initial public offering and the expected initial
public offering price per share.
In November 1998 and 1999, we issued an aggregate of 1,000,000 shares of common
stock to one of our officers pursuant to a restricted stock purchase agreement,
under which we have repurchase rights that lapse, in part upon achievement of
certain milestones. To the extent that the fair value of our common stock on the
date the milestones are achieved exceeds the issuance price of the shares, this
amount will be accounted for as compensation expense. We recorded $2.0 million
in stock-based compensation in 1999. Both the November 1998 and 1999 restricted
stock purchases were consummated through the issuance of full-recourse notes to
us, which will be forgiven upon the closing of this offering. Due to this
performance-based forgiveness feature, we are subject to the provisions of
EITF 95-16 and are required to apply variable accounting on all these restricted
shares vested until the earlier of either the triggering of the performance
feature or the board of directors approving early forgiveness of the amount due.
As a result, for the year ended December 31, 1999, additional stock-based
compensation expense of $1.1 million was recorded. These amounts have been
included in the stock-based compensation expense previously presented above.
OTHER INCOME, NET
Other income, net was approximately $400,000, $41,000 and $18,000 in 1999, 1998
and 1997, respectively. These increases were due primarily to increased interest
income earned on higher average balances of cash, cash equivalents and
short-term investments as a result of preferred stock financings in 1999, 1998
and 1997.
INCOME TAXES
As of December 31, 1999, we had approximately $2.6 million in federal and state
net operating loss carryforwards. If not utilized, net operating loss and credit
carryforwards will expire at various dates beginning in 2012 for federal income
tax purposes and beginning in 2005 for state tax purposes. Utilization of the
net operating losses and credits may be subject to a substantial annual
limitation due to ownership change limitations provided by the Internal Revenue
Code of 1986. The annual limitation may result in the expiration of our net
operating losses and credits before they can be used. You should read Note 8 of
notes to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of preferred stock and interest income. As of September 30, 2000, we
had received net proceeds of approximately $49.8 million from the sale of
convertible preferred stock.
We had cash, cash equivalents and short-term investments of approximately
$42.0 million at September 30, 2000, an increase of approximately $32.3 million
from $9.7 million at December 31, 1999. We received net proceeds of
approximately $35.7 million from the sale of our Series C preferred stock in
September 2000. Cash used in operations during the nine months ended
September 30, 2000 was approximately $3.0 million. Cash used in operating
activities was primarily due to funding of net operating losses.
During the three-year period ended December 31, 1999, cash used in operating
activities was approximately $2.2 million. Cash used in operating activities was
primarily due to funding of net operating losses. Cash flow from financing
activities of approximately $14.1 million for the three-year
--------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
period ended December 31, 1999 included the sale of Series A preferred stock in
August 1997 and August 1998 for approximately $2.0 million and the sale of
Series B preferred stock in April 1999 for approximately $12.1 million.
Under the terms of our license agreements with Schering AG, Boehringer Ingelheim
and Searle, we are obligated to make payments of up to $10.5 million in the
aggregate upon the achievement of development milestones.
We believe our existing cash, cash equivalents and short-term investments,
together with cash flows and the net proceeds of this offering, will be
sufficient to fund our operating expenses, debt obligations and capital
requirements at least through the next two years. Our future capital uses and
requirements depend on numerous factors, including:
- the extent to which our product candidates progress into later stages of
development;
- our ability to acquire new product candidates;
- our progress with research and development; and
- regulatory changes, competition and technological developments in the
market.
Therefore, our capital requirements may increase in future periods. As a result,
we may require additional funds and may attempt to raise additional funds
through equity or debt financings, collaborative arrangements with corporate
partners or from other sources.
We have no commitments for any additional financings. Additional funding may not
be available to finance our operations when needed or, if available, the terms
for obtaining such funds may not be favorable or may result in dilution to our
stockholders.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital
until it is required to fund operations while at the same time maximizing the
income we receive from our investments without significantly increasing risk. To
minimize this risk, we maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and corporate debt securities. The average maturity of all our investments
in 1999 and the first nine months of 2000 was less than six months. Due to the
short-term nature of these investments, a 10% movement in market interest rates
would not have a material impact on the total fair market value of our portfolio
as of September 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities," referred to as "SFAS 133," as amended by SFAS 137 and
SFAS 138, which will be effective for the year ending December 31, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments imbedded in
other contracts, be recorded in 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 believe the adoption of SFAS 133 will not have a
material effect on our financial statements, since we currently do not engage in
hedging activities and hold no derivative financial instruments.
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28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, referred to as "SAB 101." SAB 101 summarizes the SEC's views
in applying generally accepted accounting principles to revenue recognition. We
believe the adoption of SAB 101 will have no significant impact on our revenue
recognition policy.
In March 2000, the FASB issued Interpretation No. 44, referred to as "FIN 44,"
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25," which contains rules to clarify the applications of
APB 25. This Interpretation is effective July 1, 2000, but certain conclusions
in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. We believe the adoption of FIN 44 will
not have a material impact on our operating results or financial position.
--------------------------------------------------------------------------------
29
<PAGE>
--------------------------------------------------------------------------------
BUSINESS
OVERVIEW
We are a biopharmaceutical company that acquires and develops drug candidates
for which we have identified alternative or improved development strategies. We
apply our proprietary Database Evaluation and Linkage System, or DEALS,
algorithms to analyze large public and private chemical, biological and clinical
databases. DEALS enables us to identify potential drug candidates in which other
companies have previously made substantial investments in clinical and other
development activities directed toward a particular indication. Based on this
approach, we have acquired rights to a portfolio of product candidates for which
we are:
- redirecting product development toward valuable alternative indications;
- expanding development to related indications to enlarge market potential; or
- otherwise improving the product's development prospects.
To date, we have successfully assembled a portfolio of five drug candidates. We
have initiated new clinical development programs with respect to three of these
drug candidates. We estimate that these clinical-stage drug candidates represent
at least $85 million in previous research and development investment by our
licensors. We have acquired rights to these three drug candidates under license
agreements with Schering AG, Boehringer Ingelheim International GmbH and G.D.
Searle & Co. These drug candidates are:
- ATAMESTANE. We are developing atamestane to treat post-menopausal women with
metastatic breast cancer. We have initiated Phase III clinical trials in the
United States.
- OMEGA INTERFERON. We are developing omega interferon to treat patients with
chronic hepatitis C. We are conducting Phase II clinical trials in Europe
and the United States.
- BIOMED 101. We are developing Biomed 101 to be used in conjunction with
interleukin-2 to treat patients with metastatic melanoma or kidney cancer.
We are conducting a Phase Ib clinical trial in the United States.
In connection with our acquisition of product rights, we have also obtained
valuable regulatory and clinical information and inventories of the drugs. As a
result, we have saved both time and money in initiating our clinical development
programs. We have acquired product rights and supply, designed clinical
development programs, made related regulatory filings, begun conducting clinical
testing on two of these products and obtained regulatory approval to initiate
clinical testing on a third, all for aggregate expenditures through
September 30, 2000 of approximately $6.1 million.
If our development and commercialization efforts prove to be successful, we will
have created valuable commercial products and our licensors will receive, at a
minimum, financial returns they may not have otherwise realized. Moreover, we
believe that successes in our initial development programs may enable us to
obtain from our licensors preferred access to additional product acquisition
opportunities in the future.
INDUSTRY BACKGROUND
Large pharmaceutical companies are under intense pressure to develop and bring
to market new drugs that can generate substantial sales. The Pharmaceutical
Research and Manufacturers of America organization, or PhRMA, estimates that
pharmaceutical companies will spend approximately $26 billion in 2000 generating
preclinical and clinical data for thousands of potential products and
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30
<PAGE>
BUSINESS
--------------------------------------------------------------------------------
that the average cost of bringing one new medicine to market is in excess of
$500 million. According to PhRMA, it takes on average 12 to 15 years to develop
and obtain regulatory approval for a new medicine. As a promising new drug
advances from discovery through late-stage clinical development, the required
rate of investment significantly increases. Given budgetary constraints,
pharmaceutical companies face considerable pressure to evaluate and determine as
early as possible which among competing drug programs to continue to fund.
From publicly available information, we have determined that pharmaceutical
companies terminated development on more than 200 clinical-stage product
candidates in 1999. We estimate that only 10% to 20% of drug candidates in
early-stage clinical testing progress to Phase III trials. One of the reasons
for terminating development is that a drug candidate may not show positive
activity in the disease area that is the market focus of a particular company,
even though it may show useful activity in another area. In addition, a
pharmaceutical company may terminate development if a drug candidate shows
positive activity but is deemed unlikely to meet a required sales threshold. A
pharmaceutical company may also terminate development if it encounters
technological or manufacturing barriers that, at the time, cannot be surmounted.
During the development process, extensive information on these potential
products is captured in various databases. However, major pharmaceutical
companies have little incentive to prepare these drug candidates for licensing
to other companies, particularly if additional spending may be necessary and
potential development partners could be competitors. Even if relevant new
information subsequently becomes available, it is unlikely that a major
pharmaceutical company will re-initiate development. As a result, potentially
valuable assets may remain unexploited.
THE BIOMEDICINES APPROACH
We have developed a systematic approach to identify and acquire potentially
viable product candidates from these unexploited assets. We have used this
approach to assemble a portfolio of five drug candidates. We acquire drug
candidates when we see opportunities to:
- REDIRECT DEVELOPMENT. We redirect development efforts for existing product
candidates toward new clinical applications that represent valuable
alternative commercial opportunities.
- EXPAND DEVELOPMENT. We continue development for the original indication and
add other indications to increase the potential value of the product.
- IMPROVE DEVELOPMENT. We improve development to treat more effectively the
original target disease, possibly by changing the product formulation.
- OVERCOME OTHER OBSTACLES. We develop insights into the application of newly
developed technologies to improve the economics of manufacturing or to solve
a technical problem that had impeded previous development efforts.
Our approach is based on our proprietary DEALS algorithms that incorporate a
predetermined series of decision rules. DEALS enables us to efficiently evaluate
large amounts of biological and chemical data to identify opportunities for new
product acquisition and development. We then generate hypotheses regarding
redirected, expanded or improved uses for existing drug candidates, devise
preliminary new drug development plans, and we may, if appropriate, file patent
applications to protect new intellectual property that we may create. Finally,
we approach the pharmaceutical companies regarding opportunities to license
these product candidates.
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31
<PAGE>
BUSINESS
--------------------------------------------------------------------------------
OUR STRATEGY
We seek to commercialize products of high clinical value to patients while
minimizing our product acquisition and development costs. Our strategy to
achieve this objective incorporates the following key elements:
DEVELOP AND COMMERCIALIZE OUR CURRENT PORTFOLIO OF CANCER, IMMUNOLOGY AND
INFECTIOUS DISEASE PRODUCTS
We are initially focusing on the areas of cancer and viral diseases. These are
areas where there is significant unmet medical need and potential for
accelerated development and approval status by the FDA. By initially focusing on
these particular disease areas, we believe we can assemble a product portfolio
that will enable us to realize development and marketing synergies.
IDENTIFY AND ACQUIRE ADDITIONAL PRODUCT CANDIDATES
Utilizing our proprietary DEALS algorithms, we intend to continue to identify
and acquire clinical stage products with significant historical investment. We
believe that we can save significant amounts of time and capital by acquiring
drug candidates for which there is a substantial amount of preclinical, clinical
and manufacturing data.
ESTABLISH STRATEGIC COLLABORATIONS WITH OUR LICENSORS TO GAIN COMPETITIVE
PREFERENCES
We seek to develop ongoing relationships with our licensors. We intend to treat
our licensors as strategic collaborators, keeping them informed of our progress
and, at the appropriate stage, providing them with the opportunity to become our
commercialization partners. We believe this approach may lead to new product
acquisition opportunities and potentially enable us to obtain competitive
preferences for future opportunities.
CREATE NEW INTELLECTUAL PROPERTY
To supplement our acquired intellectual property, we intend to file new patent
applications to protect the insights and other intellectual contributions that
we bring to our product development programs. We intend to pursue new use,
combination therapy, composition of matter, formulation and, if appropriate,
manufacturing process patents.
OUTSOURCE MANY ASPECTS OF DRUG DEVELOPMENT
We intend to outsource to third parties those aspects of drug development that
require capital intensive facilities for their conduct, including manufacturing,
pharmacology, pharmacokinetics and toxicology. We intend to continue to focus on
our core expertise--drug identification, acquisition and clinical development.
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32
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BUSINESS
--------------------------------------------------------------------------------
PRODUCTS UNDER DEVELOPMENT
The following table summarizes our current product portfolio.
<TABLE>
<CAPTION>
DEVELOPMENTAL
PRODUCT FORMULATION INDICATION STATUS LICENSOR
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------
Atamestane Oral Treatment of estrogen dependent Phase III--US Schering AG
breast cancer
--------------------------------------------------------------------------------------------------------------
Omega interferon Injectable Previously untreated hepatitis C Phase II--Europe Boehringer
Injectable Alpha interferon resistant hepatitis Phase II--US Ingelheim
C
Oral Previously untreated and alpha Preclinical
interferon resistant hepatitis C
--------------------------------------------------------------------------------------------------------------
Biomed 101 Oral Reduction of IL-2 toxicity in Phase Ib--US G.D. Searle
patients with kidney cancer and
melanoma
--------------------------------------------------------------------------------------------------------------
Biomed 536 Oral Treatment of hormone resistant Preclinical Jenapharm
tumors (option)
--------------------------------------------------------------------------------------------------------------
Biomed 081 Oral Improved radiation therapy Preclinical N/A
</TABLE>
ATAMESTANE
OVERVIEW
We are developing atamestane for use as part of a primary, or "first-line,"
combination therapy for metastatic breast cancer in post-menopausal women, and
as an alternative, or "second-line," monotherapy when other first-line
treatments have failed. The National Cancer Institute estimates that in the
United States there are approximately 2.0 million women who have breast cancer
and that another 180,000 women are diagnosed with breast cancer annually. We
believe that there is a similar prevalence and incidence of breast cancer in
Europe. More than 60% of women with breast cancer have tumors with estrogen
receptors. In these women, the naturally occurring hormone estrogen promotes
tumor growth when it binds to the estrogen receptor.
We estimate that approximately 75% of women with breast cancer are
post-menopausal. Because post-menopausal women with breast cancer have lower
levels of estrogen than pre-menopausal women, they are more likely to respond to
interventions that reduce estrogen production or activity and less likely to
sustain significant adverse effects. Post-menopausal women with metastatic
breast cancer have limited therapeutic options, primarily hormonal monotherapy
or toxic chemotherapy. Tamoxifen and toremifene, both known as "antiestrogens"
or "estrogen receptor blockers," are each approved as a hormonal monotherapy in
post-menopausal women with metastatic breast cancer. Recently, anastrozole, an
inhibitor of estrogen synthesis that does not block the estrogen receptor, has
also been approved as a hormonal monotherapy.
We believe that the current first-line monotherapies are inadequate. When an
estrogen receptor blocker is used alone, natural estrogen synthesis can be
stimulated to high levels. These natural estrogens can overcome the effect of
the estrogen receptor blocker and stimulate tumor growth. In contrast, when an
estrogen synthesis inhibitor is used alone, inhibition of estrogen synthesis is
usually incomplete, allowing the residual estrogens to stimulate tumor growth.
We believe that superior suppression of tumor growth requires the simultaneous
blockade of estrogen synthesis and estrogen receptors from two different
chemical classes. Moreover, the pair of drugs must be selected so as to avoid
adverse interaction between the two drugs. We have filed a patent application
relating to the process of determining therapeutically appropriate combinations
of estrogen receptor blockers and inhibitors of estrogen synthesis.
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BUSINESS
--------------------------------------------------------------------------------
Atamestane is a potent, specific and irreversible inhibitor of estrogen
synthesis. We believe that atamestane, when combined with an appropriate
estrogen receptor blocker, will produce significant inhibition of both the
synthesis and the effects of estrogens.
APPLICATION OF OUR ALGORITHMS
Using our DEALS algorithms, we identified atamestane from public and private
databases as an estrogen synthesis inhibitor for which extensive animal and
human safety data existed through prior developmental efforts by Schering AG.
Schering AG had conducted 23 clinical studies involving atamestane:
- PHASE IA/IB: Twelve studies to evaluate the safety and tolerability,
pharmacokinetics or phamacologic effects of atamestane in healthy normal
males and females, in post-menopausal females, in elderly males and in males
with benign prostatic hypertrophy, a condition associated with excessive
growth of prostate tissue.
- PHASE II: Nine studies to assess the clinical benefit of atamestane
treatment in men with benign prostatic hypertrophy; and two studies to
assess the clinical benefit of monotherapy with atamestane in women with
metastatic breast cancer.
In the course of these clinical trials, Schering AG generated pharmacokinetic
and safety data on more than 900 patients.
In the Phase II studies by Schering AG mentioned above, 120 women with
metastatic cancer recurring after treatment with tamoxifen received therapy with
atamestane alone. The drug significantly lowered estrogen levels and prevented
tumor growth for a median of seven months, suggesting useful anti-tumor
activity. Ten percent of these metastatic cancer patients in the study survived
for 36 months on continuous atamestane therapy. In addition, atamestane appeared
to have low side effects. Only 2.5% of patients discontinued dosing because of
adverse effects. Nevertheless, given that atamestane had failed in its primary
target indication for the treatment of benign prostatic hypertrophy, Schering AG
elected not to dedicate additional resources to further development.
Our DEALS algorithms led us to the hypothesis that atamestane could have
enhanced utility as part of a combination therapy in post-menopausal women with
primary metastatic estrogen dependent breast cancer. We also recognized that
atamestane could be used as a monotherapy in women with recurrent estrogen
dependent breast cancer. We also believed that this compound was chemically
stable and that its synthesis could be improved. We therefore identified
atamestane as a potential candidate for redirected development.
Based on our hypothesis about the alternative use of atamestane as part of
first-line combination therapy, we approached Schering AG and, in
February 1999, we acquired worldwide rights to atamestane under a license
agreement, as is further described under "--Licensing Agreements."
DEVELOPMENT STATUS
Based on the historical development of atamestane by Schering AG, including the
positive data in breast cancer for atamestane monotherapy, we filed an
Investigational New Drug application, or "IND," with the FDA in April 2000 that
has been accepted. We met with the FDA in May 2000 to discuss the details for
our proposed Phase III clinical trial of atamestane in combination with
toremifene, a marketed estrogen receptor blocker, as a first-line combination
therapy for estrogen dependent metastatic breast cancer. We have agreed with the
FDA on the details of the trial design, including endpoints for registration,
and have initiated this Phase III study.
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Our Phase III study is randomized, double-blind and placebo-controlled in design
and will involve approximately 300 patients in each of two treatment groups.
Both groups will be given toremifene orally once a day. One group of patients
will also receive atamestane orally twice a day, while the other group will
receive a placebo. We will measure time to progression as the primary clinical
endpoint. Because of the safety profile of atamestane, we are not obligated to
conduct a trial with mortality as the primary endpoint, which will save us a
significant amount of time and money.
We have proposed a second Phase III study of atamestane as second-line
monotherapy in post-menopausal women with recurrent metastatic breast cancer.
The FDA has also accepted this proposed study. One group of patients will
receive atamestane orally twice a day, while the other will receive monotherapy
with a currently approved product such as anastrozole. We will measure response
rate as the primary clinical endpoint (the percentage of patients who have
complete or partial responses to treatment). The FDA has advised us that if the
results of these two independent studies are positive, the product, if approved,
would be labeled for both first and second-line indications:
- first-line combination therapy for post-menopausal women with primary
metastatic breast cancer; and
- second-line monotherapy for post-menopausal women with recurrent metastatic
breast cancer.
OMEGA INTERFERON
OVERVIEW
We are developing omega interferon for the first-line treatment of previously
untreated, and certain forms of drug-resistant, hepatitis C. The World Health
Organization estimates that more than 170 million people worldwide are infected
with chronic viral hepatitis C. The Centers for Disease Control and Prevention
estimate that approximately 2.7 million people in the United States have chronic
viral hepatitis C. Progressive hepatitis C often results in cirrhosis of the
liver. Fatal liver cancer develops in a significant percentage of these
patients. The most commonly prescribed treatment for hepatitis C is alpha
interferon, given either alone or in combination with the antiviral drug
ribavirin. A modified form of an alpha interferon, known as "pegylated
interferon," has recently been approved for use as a monotherapy and is
undergoing Phase III clinical trials for possible use in combination with
ribavirin. The sponsor of these Phase III clinical trials has recently announced
positive results of this combination therapy.
In patients with chronic hepatitis C, the amount of virus in the blood, referred
to as "viral load," is a principal measure of the severity of the infection. The
goal of therapy is to reduce viral load as much as possible and when possible to
achieve a "durable response," defined as a permanent reduction in viral load
even after therapy is discontinued. We believe that currently approved therapies
are deficient in that the durable response rate is relatively low. Used alone,
alpha interferon is associated with a durable antiviral response in
approximately 12% of patients. Pegylated interferon used alone may achieve a
durable response in approximately 25% of patients. Alpha interferon in
combination with ribavirin may achieve a durable response in approximately 40%
of patients. Therefore, depending upon which currently approved treatment is
used, the failure rate will vary from approximately 60% to 88%. Recently
reported Phase III clinical trial results suggest that a combination therapy
consisting of pegylated interferon and ribavirin will be more effective than
currently approved therapies but may still have a failure rate approaching 40%.
Current therapies are also inconvenient to administer for many patients,
limiting compliance. Alpha interferon must be given by frequent
injections--typically three to five times a week for unmodified alpha interferon
or once weekly for the pegylated form. The need to administer from 52 to 260
injections each year is a burden for many patients, particularly when the
durable response rate is low.
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In addition, the side effects of current therapies are numerous and sometimes
severe. We believe that the systemic side effects of current therapies occur at
relatively high rates because the majority of the dose for any injected alpha
interferon does not actually reach the infected liver in a patient with
hepatitis C. Rather, most of the drug is delivered to and absorbed by tissues
outside the liver, inducing adverse effects in those tissues.
APPLICATION OF OUR ALGORITHM
Using our DEALS algorithms, we identified omega interferon as a biologically
active, genetically engineered human interferon with what we believed was
potentially novel pharmacological activity, a unique molecular structure and a
distinctive immunological profile. From DEALS, we also determined that extensive
preclinical, Phase I clinical and manufacturing information existed as a result
of prior developmental efforts by Boehringer Ingelheim to develop an injectable
form for possible use in patients with viral diseases. The preclinical testing
results showed omega interferon to be more potent than alpha interferon for
inhibiting viral replication. Further testing also demonstrated that omega
interferon induced antiviral effects in infected cells that distinguished omega
interferon from alpha interferon.
Boehringer Ingelheim had conducted three randomized, double-blind,
placebo-controlled or actively-controlled Phase I clinical trials utilizing
several dose levels of omega interferon in normal volunteers. Approximately 100
subjects were studied with single or multiple doses of omega interferon. In
these clinical studies, omega interferon had an acceptably low incidence of side
effects. There was evidence of biological activity in humans comparable to alpha
interferon in these Phase I trials. Nevertheless, with only one formulation of
omega interferon available at the time, with the extent of resistance to alpha
interferon not yet widely appreciated and with novel chemical techniques not yet
readily available to improve the delivery of omega interferon, Boehringer
Ingelheim elected not to invest significant additional resources.
Based on our analyses, we formed new hypotheses regarding the use and delivery
of omega interferon. First, because of the potency and pharmacological profile
of omega interferon, we hypothesized that this drug might be useful in treating
the large number of patients who had failed to respond to alpha interferon.
Secondly, because of the molecular structure and chemical stability of omega
interferon, we also recognized that this molecule could be particularly well
suited for a long-term depot administration to treat all patients with
hepatitis C. This would mean potentially only one injection procedure every
three to six months, which we believe would be a marked advance in the treatment
of patients with hepatitis C. In addition, because of the chemical structure of
omega interferon, we hypothesized that this molecule could be chemically
modified to permit oral administration which would be more likely to reach the
liver rather than peripheral tissues. Our analyses suggested that this could
increase effectiveness while simultaneously reducing side effects.
In July 1998, we acquired exclusive rights from Boehringer Ingelheim to omega
interferon for the treatment of hepatitis C, cancer and all other human diseases
except for multiple sclerosis, as further described in "--Licensing Agreements."
DEVELOPMENT STATUS
We are expanding and improving the potential use of omega interferon by:
- DETERMINING A SAFETY, TOLERABILITY AND ACTIVITY PROFILE IN PATIENTS
PREVIOUSLY UNTREATED FOR HEPATITIS C. We initiated Phase II clinical testing
in Germany during the second quarter of 2000 in patients with chronic
hepatitis C. Eight or more patients will be studied in each of three
different dosing groups. The duration of dosing is scheduled to be a minimum
of three months but may extend to a maximum of twelve. The primary purpose
of this study is to examine the safety,
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tolerability and activity of omega interferon in patients who have not
previously received antiviral therapy for hepatitis C. The initial results
from this study show that even the lowest tested dose of omega interferon is
able to reduce viral load significantly in these previously untreated
patients.
- TREATING PATIENTS WITH ALPHA INTERFERON RESISTANT HEPATITIS C. We have filed
an IND in the United States for omega interferon that was accepted by the
FDA. We began Phase II clinical testing at the Scripps Institute during the
second quarter of 2000 in patients with an alpha interferon resistant form
of chronic hepatitis C. The primary purpose of this study is to examine the
safety, tolerability and activity of omega interferon in patients who have
failed previous therapy with alpha interferon. Up to eight patients will be
studied in each of three dosing groups. Enrollment is complete in the first
dosing group and continuing in the second dosing group. The initial results
show that even the lowest tested dose is able to reduce the viral load
significantly within two weeks of initiation of treatment, sometimes to
undetectable levels.
- DEVELOPING A MODIFIED FORM OF OMEGA INTERFERON TO BE DELIVERED ORALLY AND
TARGETED TO THE LIVER. All currently approved interferons are administered
by injection. Because these interferons reach tissues other than the liver,
they can cause severe systemic side effects. We believe that we have
identified an approach to orally administer omega interferon for delivery to
the diseased liver in a targeted and specific fashion. Laboratory
feasibility testing for this approach has begun. The initial new chemical
structures have been synthesized, and biological activity testing has
commenced.
- PURSUING DEVELOPMENT OF A LONG-TERM INJECTABLE DEPOT FORM FOR EASIER USE. We
also intend to pursue development of a long-term injectable form of omega
interferon that would release omega interferon at a steady controlled rate
for many weeks or months with a single injection. We believe that a three to
six month form of omega interferon would offer significant advantages over
all other injectable interferons. This effort will require enabling
technology to which we are seeking to acquire rights.
- PURSUING COMBINATION THERAPIES INCORPORATING OMEGA INTERFERON. We have
evaluated several non-interferon molecules that could be administered in
combination with one or more of our formulations of omega interferon. We
have initiated preliminary discussions with potential partners, but there
can be no guarantee that any of these discussions will lead to an agreement
regarding combination therapy.
BIOMED 101
OVERVIEW
We are developing Biomed 101 for the reduction of IL-2 toxicity in cancer
patients. IL-2, or interleukin-2, is an approved anticancer agent that is
effective in the treatment of patients with metastatic kidney cancer or
metastatic melanoma. In the United States and Europe, there are approximately
500,000 patients who have been diagnosed with metastatic melanoma and another
250,000 with metastatic kidney cancer. IL-2 is the primary treatment for these
diseases. However, IL-2 use is limited because of its systemic toxicity, which
is sometimes life-threatening or even fatal. A therapeutic intervention that
would reduce the side effects of IL-2 and permit more effective anticancer doses
to be used would, we believe, represent an important clinical advance.
APPLICATION OF OUR ALGORITHMS
In Phase I trials using daily dosing of this molecule in normal volunteers,
Searle observed that some patients responded to continuous dosing with mild,
reversible but definite evidence of liver irritation. In addition, Searle
observed during manufacturing that two different forms of the drug could be
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produced and that there was sometimes difficulty in controlling which form was
manufactured. Accordingly, Searle stopped development for its target clinical
use, inflammatory bowel disease, which would have required daily administration
of the drug for months or years.
Using our DEALS algorithms, we identified this molecule, which we have
designated Biomed 101, as a molecule which inhibited a cellular factor that we
believed was central to IL-2 induced toxicity. We therefore hypothesized that
this drug could be useful in improving the treatment of cancer patients who
receive IL-2. In addition, we determined that Biomed 101 had significant amounts
of preclinical and Phase I clinical data that we believed would be useful in our
redirected development program for this molecule. Furthermore, for our new use,
we recognized that we would be able to change the dosing regimen to avoid
continuous daily administration of the drug, thereby minimizing the risk of
inducing adverse effects on the liver. Finally, we believed that a modification
of the manufacturing process was feasible and that this modification would
result in the reproducible production of the desired form of the drug.
Based on this information, we acquired exclusive worldwide rights to Biomed 101
in the fields of cancer and immunology from Searle in December 1997, as further
described under "--Licensing Agreements."
DEVELOPMENT STATUS
During 1998 we conducted animal testing for the proposed new use and
successfully modified the manufacturing process. We filed an IND with the FDA in
1998 and, with the new manufacturing process, initiated Phase Ib clinical
testing in 1999 at the University of California, Los Angeles in patients with
metastatic kidney cancer. We are administering Biomed 101 orally at different
dose levels to groups of patients being treated with intravenous IL-2.
BIOMED 536
We are studying Biomed 536 for the treatment of hormone resistant tumors with
Jenapharm & Co. KG, a subsidiary of Schering AG. Jenapharm has demonstrated
activity of this molecule in the field of fertility control. We have identified
potential uses in the treatment of hormone resistant breast and prostate cancers
and have formulated a patent strategy. In January 2000, we signed an option
agreement with Jenapharm regarding Biomed 536, as described further under
"--Licensing Agreements."
BIOMED 081
We are studying Biomed 081 for improving tumor radiotherapy. Biomed 081, which
we believe is not subject to composition-of-matter patent protection in the
United States or Europe, has been studied in Japan in patients with
cardiovascular disease. Using our DEALS algorithms, we identified a possible
alternative use in the field of cancer. We have independently synthesized Biomed
081 and have initiated preclinical pharmacology testing for the alternative use.
We are now studying Biomed 081 for its potential use in changing the resistance
of tumors to radiation therapy. If the results are positive, we intend to
file a new use patent for this molecule in anticipation of beginning formal
clinical development.
OTHER PRODUCTS
We continue to apply the DEALS algorithms to identify additional drug
development opportunities. As warranted, we will synthesize other molecules for
preclinical testing in various applications to confirm
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hypotheses. If results are positive, we intend to file new patent applications
where appropriate and, if necessary or desirable, enter into negotiations to
obtain rights to develop such products. We are currently studying one molecule
for an oncology indication for which we have filed a new use patent application
and are negotiating with a third party to acquire other patent rights to this
molecule.
LICENSING AGREEMENTS
We have entered into the following significant licensing arrangements with
respect to our product candidates:
SCHERING AG
In February 1999, we entered into an agreement with Schering AG to obtain
exclusive worldwide license rights to atamestane in the field of treatment of
breast cancer. Schering AG agreed to provide us with access to historical data
and its remaining bulk drug inventory and to collaborate with us to improve
manufacturing processes and to develop a source of commercial supply. In
exchange, we paid Schering AG an initial fee and agreed to make milestone
payments based on the success of our development program. In addition, we will
be required to pay Schering AG royalties on commercial sales by us or our
marketing partners.
We have formed a joint development committee with Schering AG to provide
collaborative oversight of our atamestane development program. While the
committee is responsible for overseeing the development program, we have the
right to make the final decision on all matters pertaining to the development
program, except for human safety matters, which may be decided by an independent
panel of experts. Schering AG has agreed to assist in manufacturing process
development and has the right to elect to become our source of commercial
supply. Based on the results of our first Phase III clinical trial, Schering AG
also has options to co-promote atamestane with us in the United States and to
obtain exclusive marketing rights to atamestane for markets outside the United
States. If Schering AG exercises these options, it will assume responsibility
for all further development activities, reimburse us for development costs that
we have incurred prior to exercise of these options and make additional payments
to us upon product approval. In addition, if Schering AG exercises these
options, we will receive a royalty from Schering AG on sales outside the United
States and a share of profits from joint commercialization in the United States.
Prior to the earlier of February 1, 2001 and the delivery to Schering AG of a
final Phase III clinical trial report, Schering AG also has the right to
reacquire rights to atamestane on specified terms in the event that Dr. Mark
Moran, our Chief Executive Officer and President, is no longer involved in the
development of atamestane in a managerial or clinical advisory capacity (other
than as a result of death or disability) and a successor to Dr. Moran that is
reasonably acceptable to Schering AG is not engaged within six months
thereafter.
The agreement generally may be terminated by either party to the agreement only
in the event of an uncured material breach by, or as a result of the insolvency
of, the other party. Under the license agreement, Schering AG is generally not
precluded from developing other products that might compete with atamestane.
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BOEHRINGER INGELHEIM INTERNATIONAL GMBH
In July 1998, we entered into an agreement with Boehringer Ingelheim to acquire
exclusive license rights to omega interferon outside the United States for all
diseases except multiple sclerosis. An affiliate of Boehringer Ingelheim has
agreed to manufacture and supply omega interferon for development and
commercialization by us.
We are aware of two US patents held by Genentech that relate to the composition
of matter of omega interferon. Boehringer Ingelheim has license rights to these
US patents, but does not have the right to grant sublicenses without the consent
of Genentech. As a result, we will not be able to commercialize omega interferon
in the United States without Boehringer Ingelheim unless Genentech consents to a
sublicense or otherwise permits us to access its US patent rights. If Boehringer
Ingelheim elects not to collaborate with us on the commercialization of omega
interferon, it has agreed to use its best reasonable efforts to secure the
required consent of Genentech and to grant us a sublicense to these rights.
Pursuant to the Boehringer Ingelheim agreement, Boehringer Ingelheim agreed to
provide us with access to its historical development data and bulk drug and
finished drug product sufficient for our currently planned Phase I and Phase II
studies. We paid Boehringer Ingelheim an initial fee and agreed to make
additional milestone payments based on the success of our development program.
Boehringer Ingelheim has also agreed to collaborate with us in the development
of production process improvements and to produce and supply us with drug
product for use in late-stage clinical trials and for commercialization. The
transfer price for commercial supplies will include compensation to Boehringer
Ingelheim for the licenses it has granted to us as well as compensation for its
manufacturing activities.
For markets other than Asia, Boehringer Ingelheim has a right to review clinical
results from our development program and to pursue negotiations with us in the
event it desires to commercialize omega interferon. Subject to this obligation
and Boehringer Ingelheim's right to object to particular marketing partners on
specified grounds, we are free to commercialize the product ourselves or
sublicense it to third parties on terms that are no more favorable to our
sublicensee than the terms, if any, that Boehringer Ingelheim offered to us.
The agreement generally may be terminated by either party to the agreement only
in the event of an uncured material breach by, or as a result of the insolvency
of, the other party. Under the license agreement, Boehringer Ingelheim is
generally not precluded from developing other products that might compete with
omega interferon.
G.D. SEARLE & CO.
In December 1997, we entered into an agreement with Searle to acquire exclusive
worldwide license rights to Biomed 101 for all indications in the fields of
oncology and immunology. Searle agreed to provide us with access to its
historical data and two kilograms of bulk drug supplies, which we believe are
sufficient to conduct the Phase I and Phase II studies that we have proposed. We
paid Searle an initial fee and agreed to make additional milestone payments
based on the progress of our development program. We will also pay royalties to
Searle based on sales by us or a marketing partner. Searle has a right to review
clinical results from our development program and to pursue good faith
negotiations with us if it desires to commercialize Biomed 101. Subject to this
obligation, we are free to commercialize the product ourselves or sublicense it
to third parties on terms that are no more favorable to our sublicensee than the
terms, if any, that Searle offered to us.
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The agreement generally may be terminated by either party to the agreement only
in the event of an uncured material breach by, or as a result of the insolvency
of, the other party. Under the agreement, Searle is generally not precluded from
developing other products that might compete with Biomed 101.
JENAPHARM & CO. KG
In January 2000, we signed an option agreement with Jenapharm regarding possible
co-development of Biomed 536 for new uses in the field of cancer. The option
expires on December 31, 2001 and gives us the exclusive right to negotiate an
agreement with Jenapharm covering the further clinical development and
commercialization of Biomed 536. We are now conducting preclinical studies in
tumor models using drug supplied to us by Jenapharm. If the results of these
studies are positive, we intend to enter into negotiations for a licensing
agreement with Jenapharm on terms to be agreed to by both parties. We expect
that any licensing agreement that we may enter into with Jenapharm will provide
that Jenapharm will be responsible for development and commercialization of
Biomed 536 outside North America and that we will be responsible for these
activities in North America.
MANUFACTURING
As part of each of our product development programs, we review the manufacturing
process and, where appropriate, modify the manufacturing process in an effort to
reduce cost, ensure quality or support new formulations. Currently, we do not
anticipate building or operating our own manufacturing facilities. All
manufacturing activities with respect to drugs utilized in our research and
development efforts are currently conducted under our direction, and we
anticipate that this will be the case in the future. We seek to contract with
qualified third-party manufacturers for the production of our products. This
will enable us to devote our financial resources to the acquisition and
development of products rather than to the capital intensive aspects of
maintaining a regulatory compliant manufacturing infrastructure. Each of the
third-party manufacturers with whom we contract is registered with the FDA as a
drug manufacturer and is subject to periodic FDA inspection for compliance with
the FDA's current good manufacturing practices, or "cGMP," standards. Our
current manufacturing arrangements with respect to products under development
are set forth below.
ATAMESTANE
Under our agreement with Schering AG, if Schering AG elects to become our
supplier of atamestane, synthesis of bulk drug for development and
commercialization would be performed at the Schering AG facility in Bergkamen,
Germany. Clinical supplies for our US studies are produced from bulk drug at
Patheon, Inc. in Mississauga, Ontario, Canada. Packaging, storage, and
distribution of clinical supplies is performed by Omnicare Pharmaceutics, Inc.
of Ft. Washington, Pennsylvania. Analytical and stability testing is conducted
by Boston Analytical Laboratories of Salem, New Hampshire. We acquired
approximately 670 kilograms of pure atamestane from Schering AG's existing
inventory, which we believe will be sufficient for our planned Phase III trials.
We believe that we will be able to benefit from favorable changes in the cost of
key components in the synthesis of atamestane, which will lower the cost of
goods for atamestane. In addition, we acquired from Schering AG the rights to
new process patents for manufacturing atamestane that reduce the number of steps
to synthesize atamestane. We believe that, when implemented, these new processes
should lower our cost of producing atamestane.
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OMEGA INTERFERON
In July 1998, we entered into a manufacturing agreement with a subsidiary of
Boehringer Ingelheim for the manufacture of omega interferon. Clinical supplies
of omega interferon have been manufactured by a subsidiary of Boehringer
Ingelheim at facilities in Vienna, Austria and can also be manufactured at
Boehringer Ingelheim Pharma KG in Biberach, Germany. Packaging, storage, and
distribution of clinical supplies is performed by Omnicare Pharmaceutics, Inc.
of Ft. Washington, Pennsylvania. Analytical and stability testing is conducted
by Panlabs, Inc. of Bothell, Washington. We have initiated a program of process
improvements designed to meet newly emerging manufacturing standards for
genetically engineered products while lowering the cost of producing omega
interferon.
BIOMED 101
New bulk drug is synthesized by SERES Laboratories, Inc. of Santa Rosa,
California. Manufacturing of clinical supplies, packaging, storage, and
distribution is performed by Omnicare Pharmaceutics, Inc. of Ft. Washington,
Pennsylvania. Analytical and stability testing is conducted by ALPHA Chemical
and Biological Laboratories, Inc. of Petaluma, California. We have made
improvements to the manufacturing process that we believe have increased the
reliability of the process while lowering the cost of producing Biomed 101.
INTELLECTUAL PROPERTY
We have obtained intellectual property rights to our drug candidates primarily
through our license agreements. These rights consist of issued patents, patent
applications, manufacturing trade secrets and know-how. The issued patents to
which we have licenses relate to composition of matter and manufacturing
processes.
We have rights to one US and related foreign patents granted with respect to
atamestane covering composition of matter. These patents will expire, unless
extended, in 2004. We also have rights to three manufacturing process patents
relating to atamestane that have been granted in multiple foreign countries
expiring between 2012 and 2014 and for which US patent office action is still
pending. In addition, we have rights to a fourth patent application regarding a
manufacturing process for atamestane, for which patent office action is pending
in the United States and in foreign jurisdictions. We have also filed a patent
application relating to the process of determining therapeutically appropriate
combinations of estrogen receptor blockers and inhibitors of estrogen synthesis.
With respect to our proposed atamestane combination therapy, we are aware of
issued US and foreign patents also relating generally to combination therapies
for the treatment of breast cancer and to which we do not have rights. We
believe that a large pharmaceutical company controls the rights to this patent.
If this company were to make a claim of infringement against us and if we were
found to infringe a valid patent, we could incur substantial damages and be
required either to seek a license or to discontinue commercialization efforts.
For omega interferon, we have rights to one foreign patent related to the
composition of matter that has been granted in multiple countries that will
expire between 2002 and 2013. We are aware of two US patents held by Genentech
that relate to the composition of matter of omega interferon. Boehringer
Ingelheim has license rights to these US patents under which we believe omega
interferon can be marketed in the United States in the event Boehringer
Ingelheim, our licensor and manufacturer of omega interferon, elects to
commercialize omega interferon with us. Boehringer Ingelheim does not have the
right to sublicense these license rights without the consent of Genentech. As a
result, we will not be able to commercialize omega interferon in the United
States without Boehringer Ingelheim unless Genentech consents to a sublicense or
otherwise permits us to access its US patent rights. If Boehringer Ingelheim
elects not to enter into a commercialization agreement with us, it has agreed to
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use its best reasonable efforts to grant us a sublicense to these rights and to
secure the required consent of Genentech. In addition, we are aware of a US
patent issued to Berlex Laboratories Incorporated relating to the manufacture of
interferons in mammalian cells. This patent may cover the methods of
manufacturing omega interferon that we use. We are currently in discussions with
Berlex regarding a license under this patent. However, we cannot assure you that
we can successfully secure a license on reasonable terms, if at all.
For Biomed 101, we have rights to one US and related foreign patents and patent
applications covering composition of matter that, without patent term extension,
will expire in 2007 or 2008. We have also filed a patent application relating to
the use of Biomed 101 for reducing the toxicity caused by treatment with IL-2.
We actively seek to create new intellectual property for each of our drug
candidates that we have licensed from others. In this regard, we have filed new
method-of-use patent applications for atamestane and Biomed 101 as described
above, and for one other product for which we are in active negotiations. If our
efforts to develop a new oral form of omega interferon are successful, we also
plan to file new patent applications covering claims related to composition of
matter, formulation and use. We also believe that we may be able to extend
patent protection for our products according to provisions of 35 U.S.C. 156,
which were created under the Drug Price Competition and Patent Term Restoration
Act of 1984.
Under the Drug Price Competition and Patent Term Restoration Act, certain US
product patents or use patents may be extended for up to five years. The
extension is available only under certain circumstances and is intended to
compensate the patent holder for the time required for FDA regulatory review of
the product. The benefits of the Drug Price Competition and Patent Term
Restoration Act are available only to the first approved use of the active
ingredient in the drug product and may be applied only to one patent per drug
product. This law also establishes a period following FDA approval of certain
new drug applications during which other sponsors may not submit an abbreviated
new drug application for the same drug. Although we believe this protection may
be useful for certain of our potential products, we cannot assure you that we
will be able to take advantage of legal provisions governing either patent term
extension or market exclusivity.
In addition to seeking the protection of patents and licenses, we also rely on
trade secrets to maintain our competitive position. We rely solely on trade
secrets to protect our DEALS algorithms. It is our practice to enter into
confidentiality agreements with employees, consultants, partners, potential
partners and licensees. We also require employees, academic collaborators and
consultants to enter into agreements to assign intellectual property rights to
us. However, we cannot assure you that these measures will provide meaningful
protection for our trade secrets in case of the unauthorized disclosure or use
of such information.
We cannot assure you that others will not obtain patents claiming aspects
similar to those covered by the patents or applications we own or license or
that the patents of others will not have an adverse effect on our ability to do
business. We believe that obtaining foreign patents may be, in some cases, more
difficult than obtaining domestic patents. We believe that this is true because
of differences in patent laws. In addition, the protection provided by foreign
patents, once they are obtained, may be weaker than that provided by domestic
patents. Consequently, we recognize that our patent position may be stronger in
the United States than abroad.
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COMPETITION
There is intense competition in the pharmaceutical products market. There are
many companies, including pharmaceutical and biotechnology companies, that
engage in the development of products for some of the applications being pursued
by us. Moreover, products currently exist in the market that will compete
directly with the products that we are seeking to develop. Most of these
companies have substantially greater financial, research and development,
manufacturing and marketing experience and resources than we do. Accordingly,
they may succeed in discovering and developing competing products more rapidly
than we do, and these pharmaceutical products may be safer, more effective or
less costly than any that may be developed by us and our collaborative partners.
Competitors may also prove more adept at marketing competing products than we
will. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
established biotechnology companies. Academic institutions, governmental
agencies and other public and private research organizations also conduct
clinical development, seek patent protection and establish collaborative
arrangements for the development of pharmaceutical products. We will face
competition based on product efficacy and safety, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent position. We cannot assure you that our
competitors will not:
- develop more safe and effective products;
- obtain patent protection or intellectual property rights that limit our or
our collaborative partners' ability to commercialize products that may be
developed; or
- commercialize products earlier than we will.
The industry in which we compete is characterized by extensive research and
development efforts and rapid technological progress. Developments occur and are
expected to continue to occur at a rapid pace. We cannot assure you that
discoveries or commercial developments by our competitors will not render some
or all of our potential products obsolete or non-competitive. If this occurs, it
would have a materially adverse effect on our business. Our competitive position
also depends on our ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, implement development and
marketing plans, obtain patent protection and secure adequate capital resources.
GOVERNMENTAL REGULATION
The production and marketing of our products and our research and development
activities are subject to comprehensive regulation by various federal, state and
local authorities in the United States and by governmental authorities of other
countries. In particular, the FDA exercises regulatory authority over the
development, testing, formulation, manufacture, labeling, storage, record
keeping, quality control, advertising and promotion of our products in the
United States. Failure to comply with applicable FDA or other applicable
requirements may result in criminal prosecution, civil penalties, recall or
seizure of products, partial or total suspension of production or withdrawal of
a product from the market.
A new drug may not be marketed in the United States until it has been rigorously
tested by the sponsor and then approved by the FDA. The drug may then be
marketed only with or for the specific
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indications, uses, formulation, dosage forms and strengths approved by the FDA.
Similar requirements are imposed by foreign regulators. The steps required
before a drug may be marketed in the United States include:
- preclinical laboratory and animal tests;
- submission to the FDA of an IND exemption, which must become effective
before human clinical trials may commence;
- human clinical trials to establish the safety and efficacy of the drug;
- the submission of a detailed New Drug Application, referred to as an "NDA,"
or Biologics License Application, referred to as a "BLA," to the FDA; and
- FDA approval of the NDA or BLA. In addition to obtaining FDA approval for
each product, each domestic establishment where the drug is to be
manufactured must be registered with the FDA.
Domestic manufacturing establishments must comply with cGMP standards and are
subject to periodic inspections by the FDA. Foreign manufacturing establishments
also must comply with cGMP and are subject to periodic inspection by the FDA or
by local authorities under agreement with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and animal
studies to assess the potential safety and efficacy of the product. Products
must be formulated according to cGMP, and preclinical tests must be conducted by
laboratories that comply with FDA regulations regarding current good laboratory
practice. The results of preclinical tests are submitted to the FDA as part of
an IND, which must become effective before the sponsor may conduct clinical
trials in human subjects. Unless the FDA requests additional information or
objects to an IND, the IND becomes effective 30 days following its receipt by
the FDA.
Clinical trials involve the administration of the investigational drug to
patients. Clinical trials typically are conducted in three phases, which
generally are conducted sequentially, and test for safety, side effects, dosage
tolerance, metabolism and clinical pharmacology. With respect to anticancer and
certain antiviral agents, early testing typically is done with small groups of
patients that have proved unresponsive to other forms of therapy. Phase I
testing typically takes one year to complete. Phase II involves tests in a
larger but still limited patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to identify
possible side effects and safety risks. Phase II testing for an indication
typically takes from one and one-half to two and one-half years to complete. If
a drug proves to be efficacious in Phase II evaluations, expanded Phase III
trials are undertaken to evaluate the overall risks and benefits of the drug in
relationship to the treated disease in light of other available therapies. Phase
III studies generally take from two and one-half to five years to complete.
However, we cannot assure you that Phase I, Phase II or Phase III testing will
be completed successfully within any specified time, if at all. All sponsors of
clinical trials conducted under a US IND are required to submit annual reports
regarding the status of development for any investigational drug. In addition,
sponsors are required to submit reports regarding adverse events occurring
during the course of product development that otherwise meet specific criteria
described in federal regulations. If the FDA decides at any time that patients
are being exposed to a significant health risk, the FDA may require the
modification, suspension or termination of trials. We believe that we have
submitted all required reports, and the FDA has not required any changes to our
trials as a result of these reports.
The results of the preclinical studies and clinical trials are submitted to the
FDA as part of an NDA or BLA. The NDA or BLA also includes information
pertaining to the chemistry, formulation, activity and manufacture of the drug
and each component of the final product, as well as details relating to the
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sponsoring company. The NDA or BLA review process takes more than two years on
average to complete, although reviews of treatments for cancer and other
life-threatening diseases may be accelerated. However, the process may take
substantially longer if the FDA has questions or concerns about a product. In
general, the FDA requires at least two adequate and well-controlled clinical
studies demonstrating efficacy in order to approve an NDA. The FDA may request,
however, additional information, such as long-term toxicity studies or other
studies relating to product safety. Notwithstanding the submission of such data,
the FDA ultimately may decide that the application does not satisfy its
regulatory criteria for approval. Finally, the FDA may require additional
clinical tests following NDA or BLA approval.
In 1988, the FDA issued regulations intended to expedite the development,
evaluation and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. We cannot assure you that any of our current or future product
candidates, if eligible, will be approved for marketing at all or, if approved
for marketing, will be approved for marketing sooner than would be otherwise
expected. Regulatory approval granted under these regulations may be restricted
by the FDA as necessary to ensure the safe use of the drug. In addition,
post-marketing clinical studies may be required. If drugs do not perform
satisfactorily in such post-marketing clinical studies, the products would
likely be required to be withdrawn from the market.
Although we may benefit from the previous development efforts of our licensors,
our drug development efforts will require the commitment of substantial
resources to conduct the preclinical development and clinical trials necessary
to bring such compounds to market. Drug research and development by its nature
is uncertain. There is a risk of delay or failure at any stage, and the time
required and cost involved in successfully accomplishing our objectives cannot
be predicted.
The FDA also may require post-marketing testing and surveillance to monitor the
product and its continued compliance with regulatory requirements. Upon
approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved levels. Adverse experiences with the
product must be reported to the FDA. Among the requirements for product approval
is the requirement that prospective manufacturers conform to the FDA's cGMP
standards, which also must be observed at all times following approval.
Accordingly, manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to ensure compliance with cGMP
standards. Failure to so comply subjects the manufacturer to possible FDA
action, such as the suspension of manufacturing or product seizure or recall.
Product approvals may also be withdrawn if compliance with regulatory standards
is not maintained or if problems concerning safety or efficacy of the product
are discovered following approval.
The Prescription Drug User Fee Act of 1992 was enacted to expedite FDA review
and approval of new drugs by providing the FDA additional funds through the
imposition of user fees. The Act imposes three kinds of user fees on
manufacturers of prescription drugs:
- a one-time fee for each single-source prescription drug application
submitted on or after September 1, 1992;
- an annual fee for each establishment that produces single-source
prescription drugs; and
- an annual fee for each single-source prescription drug product marketed.
We will also be subject to foreign regulatory requirements governing clinical
trials, manufacturing of products, marketing of products and product approvals.
Whether or not FDA approval has been obtained, approval of a product by the
comparable regulatory authorities of foreign countries must be
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obtained prior to the commencement of marketing of the product in those
countries. The approval process varies from country to country and the time
required may be longer or shorter than that required for FDA approval.
Health care reform, if enacted, could result in significant change in the
financing and regulation of the health care business. We are unable to predict
whether such changes will be enacted or, if enacted, whether there will be an
effect of such changes on the future operation of our business. Changes
affecting drug pricing, drug reimbursement, prescription benefits and levels of
reimbursement for drugs, among other changes, could have a material adverse
effect on us.
Pursuant to the Orphan Drug Act, the FDA may designate a drug intended to treat
a "rare disease or condition" as an "orphan drug." A "rare disease or condition"
is one that affects fewer than 200,000 people in the United States. A rare
disease or condition is also one that affects more than 200,000 people but for
which the cost of development and distribution of the drug will not be recovered
from sales of the drug in the United States. Upon approval of an NDA for an
orphan drug, such drug may be eligible for exclusive marketing rights in the
United States for seven years. Orphan drugs may also be eligible for federal
income tax credits for certain clinical trial expenses. We believe that Biomed
101 may be eligible for orphan drug designation, but we have not yet determined
whether to apply; and we cannot assure you that this product would receive
orphan drug status. Moreover, the Orphan Drug Act could be repealed, amended or
reinterpreted adversely. Therefore, we cannot assure you as to the precise scope
of protection that may be afforded by orphan drug status in the future.
The activities of our vendors involve the controlled use of potentially harmful
biological materials as well as hazardous materials and chemicals. They are
subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified waste products.
In the event of contamination or injury, although our vendors are primarily
responsible for compliance with environmental laws at their facilities, we could
potentially be held liable for damages that result. These damages could be
significant.
EMPLOYEES
As of September 30, 2000, we had 16 employees, 13 of whom are engaged in
research and development activities, and 10 of whom have one or more advanced
degrees. None of our employees is covered by a collective bargaining agreement.
We believe our relations with our employees are good. In addition, we oversee
and direct, via contracts, a development staff of more than 80 people who are
employed by our licensors and vendors.
FACILITIES
Our facilities consist of approximately 6,000 square feet of office space in
Alameda, California that is leased to us until April 2004.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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SCIENTIFIC ADVISORS
We utilize scientists and physicians to advise us on scientific and medical
matters. The following individuals are scientific advisors to us:
<TABLE>
<CAPTION>
NAME CURRENT POSITION
<S> <C>
--------------------------------------------------------------------------------------------
Robert Figlin, MD*........................... Professor of Medicine, UCLA Medical Center,
University of California, Los Angeles,
California
Wolfram Samlowski, MD........................ Professor of Medicine, University of Utah
Raymond Taetle, MD........................... Clinical Professor of Medicine, University of
Arizona, Tucson, Arizona
John Thompson, MD............................ Associate Professor of Medicine, University
of Washington School of Medicine, Seattle,
Washington
Willis Maddrey, MD........................... Executive Vice President for Clinical
Affairs, Professor of Medicine, The
University of Texas Southwestern Medical
Center at Dallas, Dallas, Texas
John McHutchison, MD*........................ Head, Liver Transplant Unit, Scripps
Institute, La Jolla, California
Avidan Neumann, PhD.......................... Professor of Medicine, Bar-Ilan University,
Ramat Gan, Israel
Myron Tong, MD, PhD.......................... Huntington Memorial Hospital, Pasadena,
California
</TABLE>
If advisors are clinical investigators for us, there is no compensation for
their advisory activities. If advisors are not serving as clinical
investigators, we provide a daily honorarium of $1,500 to $2,000, limited to
$20,000 annually.
---------
* Investigator in our clinical trials.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers and
directors as of September 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark Moran, MD.......................... 52 Chief Executive Officer, President and
Director
Peter J. Langecker, MD, PhD............. 49 Vice President of Clinical Affairs and
Chief Medical Officer
Curtis L. Scribner, MD.................. 49 Vice President of Regulatory Affairs and
Chief Regulatory Officer
Hana Berger, PhD........................ 55 Vice President of Chemical Development
and Manufacturing
James M. Ahlers......................... 36 Senior Director of Finance and
Operations
Brian G. Atwood......................... 47 Chairman of the Board of Directors
Jean Deleage, PhD....................... 60 Director
Paul Nicholson, MB, FFPM................ 62 Director
Arnold L. Oronsky, PhD.................. 60 Director
Debra Yu, MD............................ 35 Director
</TABLE>
MARK MORAN, MD, founded BioMedicines and has served as our President, Chief
Executive Officer and a director since we commenced operations in March 1997.
From April 1995 to February 1997, Dr. Moran was President, Chief Executive
Officer and a director of Ansan Pharmaceuticals, Inc., a biotechnology company.
Dr. Moran was employed by Glycomed Inc., a pharmaceutical company, as Vice
President of Operations from July 1994 to April 1995, and Vice President of
Medical Affairs from October 1991 to July 1994. From August 1986 to
October 1991, Dr. Moran was employed by G.D. Searle & Co., a pharmaceutical
company, as Associate Director, Director, and then Sr. Director of Clinical
Research. Prior to joining Searle, Dr. Moran was an Assistant Professor of
Medicine at the Stanford University School of Medicine. Dr. Moran is also
currently appointed as Clinical Associate Professor of Medicine at the
University of California, San Francisco. Dr. Moran holds an MD from Washington
University School of Medicine, an MBA from the Kellogg Graduate School of
Management at Northwestern University and a BS in mathematics from the
University of Oklahoma.
PETER J. LANGECKER, MD, PHD, has served as our Vice President of Clinical
Affairs and Chief Medical Officer since October 1999. From July 1997 to
September 1999, Dr. Langecker served as Vice President of Clinical Affairs of
Sugen, Inc., a biotechnology company. From July 1995 to July 1997,
Dr. Langecker served as Vice President of Clinical Research of Coulter
Pharmaceutical, Inc., a biotechnology company, and from March 1992 to July 1995
he served as Director of Clinical Research, Oncology, at Schering-Plough Corp.,
an international pharmaceutical company. Dr. Langecker received an MD and a PhD
in medical sciences from the University of Munich.
CURTIS L. SCRIBNER, MD, has served as our Vice President of Regulatory Affairs
since January 2000. From November 1997 to January 2000, he was Senior Consultant
at Quintiles Consulting, a clinical research organization. From October 1995 to
November 1997, he was the Deputy Director, Office of Blood Research and Review,
Center for Biologics Evaluation and Research, US Food and Drug Administration.
From November 1992 to October 1995, Dr. Scribner was the Deputy Director of the
Division of Blood Applications, Office of Blood Research and Review, Center for
Biologics Evaluation
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and Research, US Food and Drug Administration. Dr. Scribner holds a BA in
biology from Grinnell College, an MD from the University of Colorado School of
Medicine and an MBA from the University of Maryland.
HANA BERGER, PHD, has served as our Vice President of Chemical Development and
Manufacturing since October 1999. From May 1999 to October 1999, Dr. Berger
served as a consultant to us. From January 1997 to April 1999, Dr. Berger served
as Senior Vice President of Regulatory Affairs of SangStat Medical Corporation,
a biotechnology company, and as Vice President of Regulatory Affairs of SangStat
Medical Corporation from April 1994 to January 1997. Dr. Berger holds an MS
degree in chemical engineering in pharmaceutical sciences and technology from
the Slovak Institute of Technology and a PhD in organic chemistry from the
Feinberg Graduate School at the Weizmann Institute of Science in Rehovoth,
Israel.
JAMES M. AHLERS has served as our Senior Director of Finance and Operations
since March 2000. From June 1999 to March 2000, Mr. Ahlers served as a
consultant to us. From December 1994 to January 1996 and from December 1997 to
June 1999, Mr. Ahlers was Director of Finance and Administration of Titan
Pharmaceuticals Inc., a pharmaceutical company. From January 1996 to
December 1997, he served as Director of Finance and Operations of Ansan
Pharmaceuticals, Inc., a pharmaceutical company. Mr. Ahlers holds a BS in
accounting from the University of San Francisco.
BRIAN G. ATWOOD has served as our chairman of the board of directors since
August 1997. Mr. Atwood is a Managing Director at Versant Ventures, a venture
capital firm. From 1995 to 1997, Mr. Atwood was a Venture Partner at Brentwood
Venture Capital, and Mr. Atwood became a General Partner at Brentwood Venture
Capital in 1998. From December 1993 to May 1995, Mr. Atwood served as President
and Chief Executive Officer of Glycomed Incorporated, a biotechnology company.
From July 1988 to November 1993, Mr. Atwood also served as Vice President of
Operations of Glycomed Incorporated. From January 1986 to June 1987, Mr. Atwood
was a director at Perkin-Elmer/Cetus Instrument Systems, a joint venture formed
by Perkin-Elmer Corp. and Cetus Corporation. Mr. Atwood received his BA in
biology from the University of California, Irvine, and MS in ecology from the
University of California, Davis, and received his MBA from the Harvard Business
School.
JEAN DELEAGE, PHD, has served as one of our directors since April 1999.
Dr. Deleage is a founding member of Alta Partners, a venture capital firm, which
was formed in January 1996. Currently, Dr. Deleage is a Managing Director at
Alta Partners. Dr. Deleage is also a Vice President of Burr, Egan, Deleage &
Co., a venture capital company, a position he has held since 1979. Dr. Deleage
was the founder of Sofinnova, a venture capital organization in Paris, France,
and in 1976 formed Sofinnova, Inc., a US subsidiary of Sofinnova. Dr. Deleage
has been a director of ACLARA BioSciences, Inc., a microfluidics company, since
January 1999, and a director at Flamel Technologies, a polymer engineering
company, since August 1990. Dr. Deleage received an MA in electrical engineering
from Ecole Superieure d'Electricite. He received a PhD in economics from the
Sorbonne. He has received the ORDRE NATIONAL DU MERITE and the Legion of Honor
from the French government.
PAUL NICHOLSON, MB, FFPM, has served as one of our directors since July 1999.
From 1991 until his retirement in May 1999, Dr. Nicholson served as Senior Vice
President for Worldwide Development for SmithKline Beecham, a healthcare
company. From 1985 to 1991, Dr. Nicholson served as Senior Vice President of
Medical Research for G.D. Searle, a pharmaceutical company, and from 1980 to
1985, he also served as European Medical Director for G.D. Searle.
Dr. Nicholson is a Fellow of the Faculty of Pharmaceutical Medicine of the Royal
College of Physicians, London and Chairman of the
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Board of Trustees of the Royal Botanic Garden, Edinburgh. He is also a
non-executive director of Cambridge Antibody Technology plc and British
Biotechnology plc. Dr. Nicholson received his medical degree from Durham
University, Newcastle upon Tyne.
ARNOLD L. ORONSKY, PHD, has served as one of our directors since April 1999.
Dr. Oronsky has served as chairman of the board of directors of Coulter
Pharmaceuticals since February 2000 and as a director of Corixa Corporation
since December 1994, both biotechnology companies. From March 1995 to May 1996,
Dr. Oronsky served as the President and Chief Executive Officer of Coulter
Pharmaceuticals. From December 1993 to the present, Dr. Oronsky has been a
General Partner at InterWest Partners, a venture capital firm. From June 1977 to
December 1993, Dr. Oronsky served as the Vice President for discovery research
at the Lederle Laboratories, a division of the American Cyanamid Company, a
biotechnology company. Dr. Oronsky holds a PhD in immunology from Columbia
University College of Physicians & Surgeons and a BA in history from New York
University.
DEBRA YU, MD, has served as one of our directors since August 1997. Since
March 1999, Dr. Yu has served as a Managing Director of Bay City Capital, a
merchant banking firm focused on life sciences companies. Since March 1999,
Dr. Yu has also served as acting President and Chief Executive Officer of
Molecular Applications Group, a bioinformatics data analysis company. Dr. Yu has
served on the board of directors of Permanente Company, a biotechnology company,
since December 1999 and Xenogen Corporation, a biotechnology company, since
January 1998. From October 1995 until January 1999, Dr. Yu was a General Partner
at Delphi Ventures, a venture fund focusing on the health care industry. From
March 1992 until October 1995, Dr. Yu was a consultant at McKinsey & Co. Dr. Yu
holds a BA in molecular biology from Princeton University and an MD from Harvard
University.
Our President and Chief Executive Officer, Dr. Mark Moran, and our Vice
President of Chemical Development and Manufacturing, Dr. Hana Berger, are
husband and wife. Except for this relationship, there are no family
relationships among any of our directors or executive officers.
BOARD COMPOSITION
We currently have authorized six directors. Upon the completion of this
offering, the terms of office of our directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2001; Class II, whose terms will expire at the annual meeting of
stockholders to be held in 2002; and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2003. The Class I directors are
Debra Yu and Arnold L. Oronsky, the Class II directors are Brian G. Atwood and
Jean Deleage and the Class III directors are Paul Nicholson and Mark Moran. At
each annual meeting of stockholders after the initial classification, directors
shall be elected for a full term of three years to succeed the directors whose
terms expired at that annual meeting. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one third of
the directors. This classification of our board of directors may have the effect
of delaying or preventing changes in control or management of our company.
BOARD COMMITTEES
AUDIT COMMITTEE
The audit committee meets with our independent auditors to review the results of
the annual audit and discuss the financial statements, recommends to the board
of directors the independent auditors to be
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MANAGEMENT
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retained and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The audit committee is composed of three
non-employee directors: Mr. Atwood, Dr. Deleage and Dr. Yu.
COMPENSATION COMMITTEE
The compensation committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
our stock option plans and otherwise determines compensation levels and performs
such other functions regarding compensation as the board of directors may
delegate. The compensation committee is composed of two non-employee directors:
Mr. Atwood and Dr. Yu.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, our compensation committee consisted of Mr. Atwood and Dr. Yu. None
of the members of our compensation committee was at any time during 1999 one of
our officers or employees. No member of our compensation committee and none of
our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
COMPENSATION OF DIRECTORS
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in connection
with attendance at board and committee meetings. Directors are eligible to
participate in our stock option plans. See "Employee Benefits Plans" for a
description of these plans. In July 1999, Dr. Nicholson received an option to
purchase 20,000 shares of our common stock at an exercise price of $0.225 per
share. Dr. Nicholson exercised his option in full upon the receipt of this grant
by delivery to us of cash plus a promissory note in the amount of $4,480. Four
thousand of these shares vested on July 20, 1999, and the remaining 16,000 vest
in equal monthly amounts over 48 months. In September 1998, Mr. Atwood received
an option to purchase 35,000 shares of our common stock at an exercise price of
$0.10 per share. Mr. Atwood exercised this option in full for cash in
January 1999, subject to repurchase of unvested shares. Of these shares, 14,000
shares vested on September 22, 1998, and the remaining 21,000 vest in equal
amounts over 36 months.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid for the year ended
December 31, 1999 to our Chief Executive Officer. No salary (including bonus) of
any executive officer, except for Dr. Moran, exceeded $100,000 in 1999.
SUMMARY COMPENSATION
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION RESTRICTED
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK AWARDS
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dr. Mark Moran ............................................. $ 240,000 -- 1,000,000(1)
Chief Executive Officer, President
and Director
</TABLE>
------------
(1) THE SHARES WERE GRANTED UNDER A RESTRICTED STOCK PURCHASE AGREEMENT, DATED
NOVEMBER 23, 1999, AT A PURCHASE PRICE OF $0.225 PAID BY A PROMISSORY NOTE IN
THE AMOUNT OF $112,500. WE HAVE AN OPTION TO REPURCHASE THESE SHARES AT THE
PURCHASE PRICE OF THE SHARES TOGETHER WITH INTEREST AT A RATE OF 6.0% PER
ANNUM. OUR REPURCHASE RIGHTS LAPSE UPON ACHIEVEMENT OF MILESTONES, AS
FOLLOWS: (A) 250,000 SHARES UPON CLOSING OF AN AGREEMENT FOR THE ACQUISITION
OF A PRODUCT CANDIDATE FROM A THIRD PARTY; (B) 250,000 SHARES UPON ENTERING
AN AGREEMENT FOR A PRODUCT CANDIDATE WHICH HAS BEEN INDEPENDENTLY ASSESSED TO
HAVE POTENTIAL ANNUAL SALES REVENUE OF $50 MILLION; (C) 100,000 SHARES UPON
FILING OF A US IND OR EQUIVALENT FOREIGN FILING FOR ALTERNATIVE FORMULATION
OR DELIVERY SYSTEMS FOR OUR PRODUCT CANDIDATES; (D) 100,000 SHARES UPON
INITIATION OF A CLINICAL TRIAL TO EXPAND THE USE OF A PRODUCT CANDIDATE;
(E) 150,000 SHARES UPON OBTAINING POSITIVE DATA FROM TRIALS; (F) 50,000
SHARES UPON FILING OF A PATENT APPLICATION CLAIMING AN INVENTION BY
DR. MORAN INDIVIDUALLY OR JOINTLY WITH OTHERS; AND (G) 250,000 SHARES UPON
COMPLETION OF A PUBLIC OFFERING OF OUR COMMON STOCK BEFORE FEBRUARY 15, 2003,
AFTER WHICH THE VALUATION OF OUR COMPANY IS AT LEAST $120 MILLION. AS OF
SEPTEMBER 30, 2000, 100,000 OF THESE SHARES HAVE BEEN RELEASED FROM OUR
REPURCHASE OPTION. WE HAVE NOT PAID AND DO NOT INTEND TO PAY IN THE
FORESEEABLE FUTURE DIVIDENDS ON SUCH RESTRICTED STOCK.
OPTION GRANTS IN LAST FISCAL YEAR, OPTION EXERCISES AND FISCAL YEAR-END OPTION
VALUES
We did not grant any stock options to our Chief Executive Officer in 1999. Our
Chief Executive Officer did not exercise any options to purchase our capital
stock in 1999, and as of December 31, 1999, he did not hold any unexercised
options to purchase our capital stock.
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION PLAN
On September 22, 1998, our 1998 Stock Option Plan was adopted by our board of
directors and was approved by our stockholders. The plan will terminate
simultaneously with the effectiveness of this offering. The terms of the plan
are described below.
SHARE RESERVE
A total of 731,000 shares of our common stock was reserved for issuance under
the 1998 Incentive Stock Option Plan.
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ADMINISTRATION
Our board administers the 1998 Stock Option Plan. Our board, however, may
delegate this authority to a committee of one or more board members. The board
or a committee of the board has the authority to construe, interpret and amend
the 1998 Stock Option Plan as well as to determine the terms of an option.
Our board may amend or modify the 1998 Stock Option Plan at any time. However,
no amendment or modification shall adversely affect the rights and obligations
with respect to outstanding options unless the holder consents to that amendment
or modification. Our board of directors, in connection with its adoption of our
2000 Equity Incentive Plan described below, determined that upon the closing of
this offering no further options will be granted under our 1998 Stock Option
Plan.
ELIGIBILITY
The 1998 Stock Option Plan permits us to grant stock options to our employees,
directors and consultants or to those of certain of our affiliates. A stock
option may be an incentive stock option, or ISO, within the meaning of
Section 422 of the Internal Revenue Code, or a nonstatutory stock option, or
NSO.
STOCK OPTION PROVISIONS GENERALLY
In general, the duration of a stock option granted under the 1998 Stock Option
Plan cannot exceed ten years. The exercise price of an ISO cannot be less than
100% of the fair market value of the common stock on the date of grant. The
exercise price of an NSO cannot be less than 85% of the fair market value of the
common stock on the date of grant. An ISO may be transferred only on death, but
an NSO may be transferred as permitted in an individual stock option agreement.
ISOs may be granted only to our employees, including those of certain
affiliates. The aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to which ISOs are exercisable for the
first time by an optionholder during any calendar year under all of our stock
plans may not exceed $100,000. An ISO granted to a person who at the time of
grant owns or is deemed to own more than 10% of the total combined voting power
of us or any of our affiliates must have a term of no more than five years and
an exercise price that is at least 110% of fair market value at the time of
grant.
EFFECT ON STOCK OPTIONS OF CERTAIN CORPORATE TRANSACTIONS
If we dissolve or liquidate, then outstanding stock options will terminate
immediately prior to such dissolution or liquidation. However, we treat
outstanding stock options differently in the following situations:
- a sale, lease or other disposition of all or substantially all of our
assets;
- a merger or consolidation in which we are not the surviving corporation; or
- a reverse merger in which we are the surviving corporation but the shares of
our common stock outstanding immediately preceding the merger are converted
by virtue of the merger into other property.
Under any of the situations listed above, if the surviving entity determines not
to assume or substitute for these stock options, the vesting of stock options
held by persons whose service with us or our affiliates has not already
terminated will accelerate in full prior to such corporate transaction.
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OTHER PROVISIONS
If there is a transaction or event which changes our stock that does not involve
our receipt of consideration, such as a merger, consolidation, reorganization,
stock dividend or stock split, the board will appropriately adjust the class and
the maximum number of shares subject to the 1998 Stock Option Plan.
2000 EQUITY INCENTIVE PLAN
In October 2000, our board of directors adopted our 2000 Equity Incentive Plan.
SHARE RESERVE
A total of 2,000,000 shares of our common stock have been reserved for issuance
under the 2000 Equity Incentive Plan. On January 1 of each year, commencing with
January 1, 2002, the share reserve will increase by the lowest of:
- 2% of our total outstanding common stock (on a fully diluted, as converted
basis) at the time of the increase;
- 1,500,000 shares; or
- an amount less than that above as determined by our board.
When a stock award expires or is terminated before it is exercised, the shares
not acquired pursuant to the stock award again become available for issuance
under the 2000 Equity Incentive Plan.
ADMINISTRATION
Our board administers the 2000 Equity Incentive Plan. Our board, however, may
delegate this authority to a committee of one or more board members. The board
or a committee of the board has the authority to construe, interpret and amend
the 2000 Equity Incentive Plan as well as to determine the terms of an option.
Our board may amend or modify the 2000 Equity Incentive Plan at any time.
However, no amendment or modification shall adversely affect the rights and
obligations with respect to stock awards unless the holder consents to that
amendment or modification. In addition, our board may, if required or desirable,
seek the approval of our stockholders to:
- increase the maximum number of shares issuable under incentive stock options
under the 2000 Equity Incentive Plan or the rate at which shares are added
to the reserve of the 2000 Equity Incentive Plan (except for permissible
adjustments in the event of certain changes in our capitalization);
- materially modify the eligibility requirements for participation; or
- materially increase the benefits accruing to participants.
ELIGIBILITY
The 2000 Equity Incentive Plan permits us to grant stock awards to our
employees, directors and consultants or to those of certain of our affiliates. A
stock award may be an incentive stock option, or ISO, within the meaning of the
term in Section 422 of the Internal Revenue Code, a nonstatutory stock option,
or NSO, a right to purchase restricted stock, or a restricted stock bonus.
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SECTION 162(m) LIMIT
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer or any of the four highest compensated officers (excluding the
chief executive officer) in a taxable year to the extent that the compensation
of that officer exceeds $1 million. To prevent options granted under the 2000
Equity Incentive Plan from being included in this compensation, in any calendar
year the board may not grant options under the 2000 Equity Incentive Plan to an
employee covering an aggregate of more than 1,000,000 shares.
STOCK OPTION PROVISIONS GENERALLY
In general, the duration of a stock option granted under the 2000 Equity
Incentive Plan cannot exceed ten years. The exercise price of an ISO cannot be
less than 100% of the fair market value of the common stock on the date of
grant. The exercise price of an NSO cannot be less than 85% of the fair market
value of the common stock on the date of grant. An ISO may be transferred only
on death, but an NSO may be transferred as permitted in an individual stock
option agreement.
ISOs may be granted only to our employees, including those of certain
affiliates. The aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to which ISOs are exercisable for the
first time by an optionholder during any calendar year under all of our stock
plans may not exceed $100,000. An ISO granted to a person who at the time of
grant owns or is deemed to own more than 10% of the total combined voting power
of us or any of our affiliates must have a term of no more than five years and
an exercise price that is at least 110% of fair market value at the time of
grant.
PROVISIONS OF OTHER STOCK AWARDS GENERALLY
The board or a committee of the board determines the purchase price of other
stock awards, which for nonstatutory stock options and stock purchase awards
cannot be less than 85% of the stock's fair market value at the time of grant.
Stock bonuses, however, may be awarded in consideration of past services without
additional payment. Shares that we sell or award under the 2000 Equity Incentive
Plan may, but need not be, restricted and subject to a repurchase option in our
favor in accordance with a vesting schedule. The board or committee, however,
may accelerate the vesting of restricted stock.
EFFECT ON STOCK AWARDS OF CERTAIN CORPORATE TRANSACTIONS
If we dissolve or liquidate, then outstanding stock awards will terminate
immediately prior to such dissolution or liquidation. However, we treat
outstanding stock awards differently in the following situations:
- a sale, lease or other disposition of all or substantially all of our
assets,
- a merger or consolidation in which we are not the surviving corporation, or
- a reverse merger in which we are the surviving corporation but the shares of
our common stock outstanding immediately preceding the merger are converted
by virtue of the merger into other property.
Under any of the situations listed above, if the surviving entity determines not
to assume or substitute for these stock awards, the vesting of stock awards held
by persons whose service with us or our affiliates has not already terminated
will accelerate in full prior to such corporate transaction.
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OTHER PROVISIONS
If there is a transaction or event which changes our stock that does not involve
our receipt of consideration, such as a merger, consolidation, reorganization,
stock dividend or stock split, the board will appropriately adjust the class and
the maximum number of shares subject to the 2000 Equity Incentive Plan, the
maximum number of shares available for ISOs, and the Section 162(m) limit.
PLAN TERMINATION
The 2000 Equity Incentive Plan will terminate in October 2010 unless the board
of directors terminates it sooner.
2000 EMPLOYEE STOCK PURCHASE PLAN
In October 2000, our board of directors adopted the 2000 Employee Stock Purchase
Plan.
SHARE RESERVE
The 2000 Employee Stock Purchase Plan authorizes the issuance of 300,000 shares
of our common stock pursuant to purchase rights granted to eligible employees.
In addition, on January 1 of each year, commencing with January 1, 2002 and
ending on January 1, 2010, the share reserve will increase by the lowest of:
- 0.5% of our outstanding shares on a fully-diluted basis;
- 200,000 shares; or
- an amount less than that above as determined by our board.
ELIGIBILITY
The 2000 Employee Stock Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of the term in Section 423 of the
Internal Revenue Code. The purchase plan provides a means by which eligible
employees may purchase our common stock through payroll deductions. We implement
the purchase plan by offerings of purchase rights to eligible employees.
Generally, all of our employees may participate in the offerings under the 2000
Employee Stock Purchase Plan. However, no employee may participate in the 2000
Employee Stock Purchase Plan if immediately after we grant the employee a
purchase right, the employee has voting power over 5% or more of our outstanding
capital stock.
OFFERINGS
The board of directors has the authority to set the terms of an offering. It may
specify offerings of up to 27 months where common stock is purchased for
accounts of participating employees at a price per share equal to the lower of:
- 85% of the fair market value of a share on the first day of this offering;
or
- 85% of the fair market value of a share on the purchase date.
The first offering will begin on the effective date of this initial public
offering, and we will offer shares registered on a Form S-8 registration
statement. The fair market value of the shares on the first date of this
offering will be the price per share at which our shares are first sold to the
public as specified in the final prospectus with respect to our initial public
offering. Otherwise, fair market value generally means the closing sales price
(rounded up where necessary to the nearest whole cent) for these shares (or the
closing bid, if no sales were reported) as quoted on the Nasdaq National Market
on the last trading day prior to the relevant determination date, as reported in
The Wall Street Journal.
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The board of directors may provide that employees who become eligible to
participate after the offering period begins nevertheless may enroll in the
offering. These employees will purchase our stock at the lower of:
- 85% of the fair market value of a share on the day they acquire purchase
rights under the purchase plan; or
- 85% of the fair market value of a share on the purchase date.
The board of directors has determined that participating employees may authorize
payroll deductions of up to 20% of their earnings for the purchase of stock
under the 2000 Employee Stock Purchase Plan. These employees may end their
participation in the offering at any time up to 10 days before a purchase date.
Their participation ends automatically on termination of their employment.
OTHER PROVISIONS
A participant's right to purchase our stock under the 2000 Employee Stock
Purchase Plan, plus any other purchase plans established by us and by our
affiliates, is limited. It may accrue at a rate of no more than $25,000 of the
fair market value of our stock for each calendar year in which the purchase
rights are outstanding. We determine the fair market value of our stock, for the
purpose of this limitation, as of the first day of the offering.
In the event of certain corporate transactions, the board of directors may
provide that the successor corporation either will assume or replace outstanding
purchase rights. Alternatively, the board may shorten the ongoing offering
period and provide that our stock will be purchased for the participants
immediately before the corporate transaction.
SHARES ISSUED
The 2000 Employee Stock Purchase Plan will not be effective until this public
offering of our stock. Therefore, as of the date hereof, no shares of common
stock have been purchased under the purchase plan.
PLAN TERMINATION
The 2000 Employee Stock Purchase Plan has no set termination date but the board
may terminate the purchase plan at any time after the end of an offering.
401(k) PLAN
In January 2000, our board of directors adopted a tax-qualified employee savings
plan under Section 401(k) of the Internal Revenue Code covering our employees.
Pursuant to the 401(k) plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 25% of their annual compensation or
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. In addition, eligible employees may make
rollover contributions to the 401(k) plan from a tax-qualified retirement plan.
The 401(k) plan is intended to qualify under Section 401(a) of the Code, so that
contributions by employees or our company to the 401(k) plan, and income earned
on the 401(k) plan contributions, are not taxable to employees until withdrawn
from the 401(k) plan, and so that contributions by our company, if any, will be
deductible by our company when made.
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EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS
On August 14, 1997, we entered into an employment agreement with Dr. Mark Moran,
our President and Chief Executive Officer. The employment agreement provides for
base compensation of $200,000 per year. On November 23, 1999, the employment
agreement was amended to increase the base compensation to $240,000 per year
with a bonus of up to $25,000 in 1999. On May 26, 2000, our board of directors
approved a salary increase for Dr. Moran to a base compensation of $275,000 per
year. Dr. Moran received a bonus in the amount of $50,000 on May 26, 2000 and an
option to purchase 100,000 shares of our common stock at $0.225 per share which
he exercised early with a promissory note in the amount of $22,400. Under
Dr. Moran's employment agreement, 200,000 shares of the 1,000,000 shares of
common stock acquired by Dr. Moran on August 14, 1997 are vested shares, and the
remaining 800,000 shares are subject to a right of repurchase by us. The
repurchase option allows us to repurchase the shares at the original purchase
price within 60 days of termination of employment. Our option to repurchase
these shares lapses in equal monthly allotments over a 48-month period
commencing on September 1, 1997.
Upon a change of control of our company, 50% of the shares that are then subject
to repurchase are immediately released from our repurchase option if Dr. Moran
is retained as an employee of the surviving entity at the same or greater level
of responsibility and compensation, and 100% of these shares are released if he
is not so retained. If Dr. Moran is terminated without cause, then Dr. Moran is
entitled to severance pay of 12 months base salary and benefits for 12 months
following termination. In addition, upon termination without cause, as of
September 30, 2000, up to 216,917 shares of Dr. Moran's common stock subject to
repurchase by us would automatically vest. The agreement provided that the
interest under the $50,000 promissory note described below will be forgiven
through November 23, 1999. In the event of an initial public offering or a
change in control, we will forgive up to $162,500 of the unpaid principal
balance of the outstanding loans made by us to Dr. Moran in connection with his
purchase of our capital stock, and we will make a "tax gross up" payment to
Dr. Moran equal to 94% of the principal amount forgiven, provided Dr. Moran is
an employee as of the closing date of the applicable transaction. As of
September 30, 2000, the aggregate outstanding principal amount of Dr. Moran's
loans was $184,900.
Dr. Moran purchased 500,000 shares of our common stock at a price of $0.10 per
share under a stock purchase agreement dated November 23, 1998. The purchase
price was payable by a promissory note in the amount of $50,000. We have the
right to repurchase these shares at the purchase price of the shares together
with interest at a rate of 6.0% per annum. The shares are released from our
repurchase option as follows: 20% of shares earned upon achievement of
milestones vest immediately, and 80% of shares earned upon achievement of
milestones vest in equal monthly installments over a 48-month period commencing
on September 1, 1997. The milestones to be achieved under this vesting schedule
include the completion of clinical trials, approval of INDs and NDAs and
establishment of licensing arrangements. As of September 30, 2000, 306,250 of
these 500,000 shares have been released from our repurchase option.
We sold an additional 500,000 shares of common stock to Dr. Moran at a purchase
price of $0.225 per share under a stock purchase agreement dated November 23,
1999. The purchase price was payable by a promissory note in the amount of
$112,500. As of September 30, 2000, 100,000 of these shares have vested upon the
achievement of performance milestones. The remaining 400,000 shares vest in
fixed amounts upon successful completion of clinical trials, filing of INDs,
filing of patent applications, the establishment of licensing arrangements and
the completion of a public offering of our stock.
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We entered into an employment agreement with Dr. Peter J. Langecker, our Vice
President of Clinical Affairs and Chief Medical Officer, on September 3, 1999.
This agreement provides for base compensation of $231,000 per year with a cash
bonus of up to 20% of his base salary. We have agreed to provide Dr. Langecker
an additional $15,000 for relocation costs. We have also granted him an option
to purchase 130,000 shares of common stock at a price of $0.225 per share. The
options with respect to 80,000 shares vest based upon the passage of time, as
follows: 1/4th of the option shares will vest on the first anniversary of date
of grant and the remaining shares vest thereafter in 36 equal monthly
installments. The time-vested options become immediately vested and exercisable
as to 50% of the options upon a change in control of our company, except that if
Dr. Landecker is not offered a position of substantially the same responsibility
following a change in control, the time-vested options will become immediately
vested and exercisable as to 100% of the options. The options with respect to
50,000 shares vest based upon the achievement of certain performance goals,
including, the filing of INDs, initiation of Phase III testing, filing or
approval of NDAs, filing of patent applications, development and identification
of new products and establishment of licensing arrangements. The
performance-vested options become immediately vested and exercisable as to 50%
of the options upon the equivalent of a US IND filing, initiation of phase III
testing, or marketing application approval, with an additional 50% vesting when
the related event occurs in the United States.
We entered into an employment agreement with Dr. Hana Berger, our Vice President
of Chemical Development and Manufacturing, on September 3, 1999. This agreement
provides for base compensation of $195,000 per year with a cash bonus of up to
20% of her base salary. We granted Dr. Berger an option to purchase 130,000
shares of common stock at a price of $0.225 per share. The options with respect
to 90,000 shares vest based upon the passage of time, as follows: 1/4th of the
option shares will vest on the first anniversary of date of grant and the
remaining shares vest thereafter in 36 equal monthly installments. The options
with respect to 40,000 shares vest based upon the achievement of certain
performance goals, including the filing of INDs, initiation of Phase III
testing, approval of NDAs, filing of patent applications, development and
identification of new products and establishment of licensing arrangements. If
Dr. Berger is terminated without good cause, she will receive 3 months severance
and benefits if her employment was for less than 12 months prior to termination,
6 months severance and benefits if employment was between 12 and 24 months, and
9 months severance and benefits if employment was for greater than 24 months. In
addition, vesting of the time-vested options accelerate by 3 months if her
employment prior to termination was for less than 12 months, by six months if
her employment was between 12 and 24 months, and by 9 months if her employment
was for more than 24 months. Further, shares that vest automatically upon
performance of milestones may vest following her employment, if the milestone is
achieved within the 9-month period following her termination.
We entered into an employment agreement with Dr. Curtis L. Scribner, our Vice
President of Regulatory Affairs, on November 23, 1999. This agreement provides
for base compensation of $195,000 per year with a cash bonus of up to 20% of his
base salary. We paid Dr. Scribner a one time moving expense allowance of $20,000
and a signing bonus of $40,000. We loaned Dr. Scribner $105,000 at an interest
rate of 7.75% per year to provide financing for the purchase of a home in
California. Dr. Scribner subsequently paid back this loan in full in June 2000.
In addition, we granted Dr. Scribner an option to purchase 130,000 shares of
common stock at a price of $0.225 per share. The options with respect to
80,000 shares vest based upon the passage of time, as follows: 1/4th of the
option shares will vest on the first anniversary of date of grant and the
remaining shares vest thereafter in 36 equal monthly installments. The
time-vested options become immediately vested and exercisable as to 50% of the
options upon a change in control of our company, except that if Dr. Scribner is
not offered a position of substantially the same responsibility following a
change in control, the
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time-vested options will become immediately vested and exercisable as to 100% of
the options. The options with respect to 50,000 shares vest based upon the
achievement of certain performance goals, including filing of INDs, initiation
of Phase III testing, approval of NDAs, filing of patent applications,
development and identification of new products, invention of products for which
a patent is issued and establishment of licensing arrangements. The
performance-vested options become immediately vested and exercisable as to 50%
of the options upon the equivalent of a US IND filing, initiation of phase III
testing, or marketing application approval, with an additional 50% vesting when
the related event occurs in the United States.
We entered into an employment agreement with James M. Ahlers, our Senior
Director of Finance and Operations, on May 14, 1999. This agreement provides for
base compensation of $130,000 per year with a one-time signing bonus of $12,000.
We granted Mr. Ahlers an option to purchase 60,000 shares of common stock at a
price of $0.225 per share. The option with respect to these shares vests based
upon the passage of time, as follows: 1/4th of the options shares will vest on
the first anniversary of the date of grant and the remaining shares vest
thereafter in 36 monthly installments. The time-vested options becomes
immediately vested and exercisable as to 50% of the option upon a change in
control of our company, at the discretion of our board of directors if
Mr. Ahlers is not offered a position of substantially the same responsibility
following a change in control. The option with respect to 4,000 shares becomes
immediately vested and exercisable in the event that our company raises at least
$20 million in a private financing within two years of Mr. Ahlers' employment.
The option with respect to 6,000 shares becomes immediately vested and
exercisable in the event our company completes a successful public offering.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Our certificate of incorporation limits the liability of our directors to the
maximum extent permitted by Delaware law. Under this provision, a director of a
corporation will not be personally liable for monetary damages for breach of
that director's fiduciary duties except for:
- any breach of the director's duty of loyalty to the company or to its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or redemptions
as provided in Section 174 of the Delaware General Corporation Law; or
- any transaction from which a director derives an improper personal benefit.
Our bylaws provide that we must indemnify our directors and executive officers
and may indemnify our officers, employees and other agents to the fullest extent
not prohibited by law. Our bylaws also permit us to advance expenses incurred by
an indemnified party in connection with the defense of any action or proceeding
arising out of his or her status or service as a director, officer, employee or
other agent of BioMedicines upon an undertaking by him or her to repay any
advances if it is ultimately determined that he or she is not entitled to
indemnification.
We intend to enter into separate indemnification agreements with our directors
and officers. These agreements will require us to, among other things, indemnify
the director or officer against expenses, including attorney's fees, judgements,
fines and settlements paid by the individual in connection with any action, suit
or proceeding arising out of the individual's status or service as our director
or officer, other than liabilities arising from willful misconduct or conduct
that is knowingly fraudulent or deliberately dishonest, and to advance expenses
incurred by the individual in connection with any
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proceeding against him or her individually with respect to which he or she may
be entitled to indemnification by us. We believe that our certificate of
incorporation and bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and executive officers. We
also maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding involving
any of our directors, officers, employees or agents where indemnification will
be required or permitted. Furthermore, we are not aware of any threatened
litigation or proceeding that might result in a claim for indemnification.
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RELATED PARTY TRANSACTIONS
SALES OF SECURITIES
The following is a summary of transactions since September 1997 to which we have
been a party in which the amount involved exceeded $60,000 and in which any
executive officers, directors or 5% stockholders had or will have a direct or
indirect material interest, other than compensation arrangements which are
described under "Management."
- In August 1998, we sold an aggregate of 1,000,000 shares of Series A
preferred stock at a price of $1.00 per share.
- In April 1999, we sold an aggregate of 5,368,889 shares of Series B
preferred stock at a price of $2.25 per share.
- In September 2000, we sold an aggregate of 4,834,606 shares of Series C
preferred stock at a price of $7.86 per share.
The following persons or entities purchased securities in the amounts set forth
in the chart below.
<TABLE>
<CAPTION>
COMMON
PURCHASER(1) STOCK SERIES A SERIES B SERIES C
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Mark Moran, MD, MBA(2)............................ 2,100,000 -- -- --
James M. Ahlers(3)................................ 60,000 -- -- --
Peter J. Langecker, MD, PhD....................... 130,000 -- -- --
Hana Berger, PhD(4)............................... 130,000 -- -- --
Curtis L. Scribner, MD, MBA(5).................... 130,000 -- -- --
Brian G. Atwood, MBA(6)........................... 35,000 -- -- --
Paul Nicholson, MB, BS, FFPM(7)................... 20,000 -- -- --
PRINCIPAL STOCKHOLDERS
Alta California Partners II, L.P.(8).............. -- -- 1,541,305 314,098
Alta Embarcadero Partners II, LLC(8).............. -- -- 14,251 3,968
Brentwood Affiliates Fund, L.P.(9)................ -- 20,000 44,444 --
Brentwood Associates VII, L.P(9).................. -- 480,000 1,066,667 318,066
Delphi BioInvestments IV, L.P.(10)................ -- 10,100 22,444 643
Delphi Ventures IV, L.P.(10)...................... -- 489,900 1,088,667 31,164
InterWest Investors VI, L.P.(11).................. -- -- 47,289 9,669
InterWest Partners VI, L.P.(11)................... -- -- 1,508,266 308,397
Pictet Global Sector Fund Biotech................. -- -- -- 890,500
Bay City Capital Fund II, L.P.(10)................ -- -- -- 298,480
Bay City Capital Fund II Coinvestment Fund,
L.P.(10)........................................ -- -- -- 19,520
OTHER TRANSACTION INFORMATION
Price per share................................... $0.02-$0.23 $1.00 $2.25 $7.86
</TABLE>
---------
(1) SEE "PRINCIPAL STOCKHOLDERS" FOR MORE DETAIL ON SHARES HELD BY THESE
PURCHASERS.
(2) IN NOVEMBER 1998, DR. MORAN PURCHASED 500,000 SHARES AT A PRICE OF $0.10
PER SHARE BY DELIVERING A $50,000 PROMISSORY NOTE WHICH BEARS INTEREST AT A
RATE OF 6.0% PER ANNUM. ACCRUED INTEREST ON THIS NOTE IN THE AMOUNT OF
$3,000 HAS BEEN FORGIVEN AS PART OF DR. MORAN'S COMPENSATION FOR 1999.
ADDITIONAL INTEREST ACCRUED ON THIS LOAN MAY BE FORGIVEN AT THE
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DISCRETION OF THE BOARD OF DIRECTORS BASED ON DR. MORAN'S ANNUAL
PERFORMANCE. IN NOVEMBER 1999, DR. MORAN PURCHASED 500,000 SHARES OF COMMON
STOCK AT A PURCHASE PRICE OF $0.225 PER SHARE BY DELIVERING TO US A
$112,500 PROMISSORY NOTE WHICH BEARS INTEREST AT A RATE OF 6.0% PER ANNUM.
IN MAY 2000, DR. MORAN PURCHASED 100,000 SHARES OF COMMON STOCK AT A
PURCHASE PRICE OF $0.225 PER SHARE BY DELIVERING TO US A $22,400 PROMISSORY
NOTE WHICH BEARS INTEREST AT A RATE OF 6.4% PER ANNUM. THE PRINCIPAL AMOUNT
OF THESE LOANS PLUS ALL ACCRUED INTEREST WILL BE FORGIVEN UPON THE CLOSING
OF THIS OFFERING.
(3) MR. AHLERS EXERCISED OPTIONS TO PURCHASE 60,000 SHARES OF COMMON STOCK, IN
PART BY DELIVERING A PROMISSORY NOTE IN THE AMOUNT OF $13,440. THIS NOTE
BEARS INTEREST AT A RATE OF 6.8% PER ANNUM.
(4) DR. BERGER EXERCISED OPTIONS TO PURCHASE 130,000 SHARES OF COMMON STOCK, IN
PART BY DELIVERING A PROMISSORY NOTE IN THE AMOUNT OF $29,120. THIS NOTE
BEARS INTEREST AT A RATE OF 6.2% PER ANNUM.
(5) DR. SCRIBNER EXERCISED OPTIONS TO PURCHASE 130,000 SHARES OF COMMON STOCK,
IN PART BY DELIVERING A PROMISSORY NOTE IN THE AMOUNT OF $29,120. THIS NOTE
BEARS INTEREST AT A RATE OF 6.8% PER ANNUM.
(6) IN 1999, MR. ATWOOD EXERCISED AN OPTION TO PURCHASE 35,000 SHARES OF COMMON
STOCK BY DELIVERING TO US $3,500.
(7) IN 1999, DR. NICHOLSON EXERCISED AN OPTION TO PURCHASE 20,000 SHARES OF
COMMON STOCK, IN PART BY DELIVERING TO US A PROMISORY NOTE IN THE AMOUNT OF
$4,480. THIS NOTE BEARS INTEREST AT A RATE OF 6.2% PER ANNUM.
(8) DR. JEAN DELEAGE, ONE OF OUR DIRECTORS, IS A MANAGING DIRECTOR OF ALTA
PARTNERS. DR. DELEAGE DISCLAIMS BENEFICIAL OWNERSHIP OF THE 1,873,622
SHARES OWNED BY ALTA CALIFORNIA PARTNERS II, L.P. AND ALTA EMBARCADERO
PARTNERS II, LLC EXCEPT TO THE EXTENT OF HIS PECUNIARY INTEREST.
(9) MR. BRIAN ATWOOD, ONE OF OUR DIRECTORS, IS A GENERAL PARTNER OF BRENTWOOD
VENTURE CAPITAL, BUT NOT OF ANY OF THE BRENTWOOD FUNDS INVESTED IN OUR
COMPANY.
(10) DR. DEBRA YU, ONE OF OUR DIRECTORS, WAS A GENERAL PARTNER AT DELPHI
VENTURES. DR. YU CURRENTLY HAS A SPECIAL LIMITED PARTNERSHIP INTEREST IN
DELPHI VENTURES ONLY WITH RESPECT TO INVESTMENT IN OUR COMPANY. DR. YU IS
A MEMBER OF BAY CITY CAPITAL MANAGEMENT II, LLC, THE GENERAL PARTNER OF
THE TWO BAY CITY FUNDS REFERRED TO ABOVE. DR. YU DISCLAIMS BENEFICIAL
OWNERSHIP OF THE 2,142,918 SHARES OWNED BY DELPHI VENTURES, DELPHI BIO
INVESTMENTS IV, L.P. AND DELPHI VENTURES IV, L.P. AND THE 318,000 SHARES
OWNED BY BAY CITY CAPITAL FUND II, L.P. AND BAY CITY CAPITAL COINVESTMENT
FUND, L.P. EXCEPT TO THE EXTENT OF HER PECUNIARY INTEREST.
(11) DR. ARNOLD ORONSKY, ONE OF OUR DIRECTORS, IS A GENERAL PARTNER OF
INTERWEST PARTNERS.
REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with our preferred stockholders and Dr. Moran
in connection with their investment in our company, pursuant to which they will
have registration rights with respect to their shares of common stock following
this offering. This agreement also provided these investors with information
rights and a right of first refusal on subsequent sales of our capital stock,
which information rights and right of first refusal will terminate upon the
closing of this offering. Upon completion of this offering, all shares of our
preferred stock will be automatically converted into an equal number of shares
of common stock.
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64
<PAGE>
RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
VOTING AGREEMENT
We have entered into an agreement with Dr. Moran, Delphi Ventures IV, L.P.,
Delphi BioInvestments IV, L.P., Brentwood Associates Venture Partners II, LLC,
InterWest Partners VI, L.P., InterWest Investors VI, L.P. and the holders of our
Series C preferred stock, pursuant to which the parties agreed to vote their
shares to elect the following persons to our board of directors: Dr. Moran; one
designee of the Delphi entities; one designee of the Brentwood entities; one
designee of Alta California Partners II, L.P.; one designee of the InterWest
entities; and one designee of the holders of Series C preferred stock. These
rights to designate nominees for director are conditioned upon continuing to
hold at least 500,000 shares of our capital stock (1,000,000 shares in the case
of the Series C holders). The initial designee of the Brentwood entities is
Brian Atwood, the initial designee of the Alta entities is Jean Deleage, the
initial designee of the InterWest entities is Arnold Oronsky, and the initial
designee of the holders of Series C preferred stock is Debra Yu. There is
currently no designee for the Delphi entities. The voting agreement will
terminate upon the closing of this offering.
OTHER TRANSACTIONS
In 1999, Dr. Hana Berger, our Vice President of Chemical Development and
Manufacturing and spouse of Dr. Moran, received $107,000 for her services as a
consultant to us prior to her employment with us.
In January 2000, we loaned Dr. Curtis Scribner $105,000 at a rate of interest of
7.75% per year to provide financing for the purchase of a home in California.
Dr. Scribner subsequently paid back this loan in full in June 2000. Under the
terms of the loan, any accrued interest would be forgiven monthly while he
remained as an employee. We received repayment of the principal amount of the
loan.
In September 1999, to assist with the purchase of a home, we offered Dr. Peter
Langecker a loan for up to $300,000 at the prevailing fixed-rate, first mortgage
rate. Under the term of the loan, interest payments would be forgiven based on
satisfactory performance. Up to $100,000 of the principal amount would be
forgiven over a five-year period of continuous employment. Any unpaid principal
balance would be due upon the earlier of (i) 60 days after Dr. Langecker
voluntarily ceases to be a full-time employee or is dismissed with cause,
(ii) the sale of the home purchased with the loan or (iii) a declaration of
bankruptcy by Dr. Langecker. The loan would be secured by a second mortgage on
Dr. Langecker's home. In January 2000, Dr. Langecker received a bonus of $30,000
for waiving his rights to this loan.
We have entered into employment arrangements with some of our executive officers
as described in "Management--Employment Agreements and Change of Control
Agreements."
We intend to enter indemnification agreements with directors and officers as
described in "Management--Limitations of Liability and Indemnification of
Officers and Directors."
All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested directors.
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65
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of September 30, 2000, and as
adjusted to reflect the completion of this offering by:
- each person or group who beneficially owns more than 5% of our common stock;
- our executive officer listed in the compensation table under
"Management--Executive Compensation;"
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the Securities
and Exchange Commission and generally includes any shares over which a person
exercises sole or shared voting or investment power. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock held by them. Shares of common stock subject to
options or warrants currently exercisable or exercisable within 60 days of
September 30, 2000 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options or warrants, but are not deemed outstanding for
calculating the percentage of any other person. Applicable percentage ownership
in the following table is based on 15,001,494 shares of common stock outstanding
as of September 30, 2000, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock upon the closing of the
offerings. Unless otherwise indicated, the address of each of the named
individuals is: c/o BioMedicines, Inc., 1301 Marina Village Parkway, Suite 200,
Alameda, California 94501.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OWNED PERCENT OWNED
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNERS OWNED OFFERING OFFERING
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Mark Moran, MD, MBA(1)...................................... 2,230,000 14.9%
Brian G. Atwood(2).......................................... 35,000 *
Jean Deleage, PhD(3)........................................ 1,873,622 12.5%
Paul Nicholson, MB, FFPM(4)................................. 20,000 *
Arnold L. Oronsky, PhD(5)................................... 1,873,621 12.5%
Debra Yu, MD(6)............................................. 318,000 *
All directors and officers as a group (10 persons)(7)....... 6,800,243 45.3%
</TABLE>
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66
<PAGE>
PRINCIPAL STOCKHOLDERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OWNED PERCENT OWNED
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNERS OWNED OFFERING OFFERING
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS
Entities affiliated with Brentwood Venture Capital(8)....... 2,429,177 16.2%
11150 Santa Monica Blvd.
Suite 1200
Los Angeles, CA 90025
Entities affiliated with Alta Partners(9)................... 1,873,622 12.5%
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Entities affiliated with InterWest Partners(10)............. 1,873,621 12.5%
3000 Sand Hill Road
Bldg. 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Delphi Ventures(11)................ 2,142,918 14.3%
3000 Sand Hill Road
Bldg. 1, Suite 135
Menlo Park, CA 94025
Pictet Global Sector Fund Biotech........................... 890,500 5.9%
Bd Georges-Favon 29
CH-1204 Geneva, Switzerland
</TABLE>
------------
* REPRESENTS BENEFICIAL OWNERSHIP OF LESS THAN ONE PERCENT.
(1) INCLUDES 130,000 SHARES HELD BY HIS WIFE, DR. HANA BERGER, AND INCLUDES
861,250 SHARES SUBJECT TO REPURCHASE BY US. DR. MORAN DISCLAIMS BENEFICIAL
OWNERSHIP OF THE SHARES HELD BY DR. BERGER.
(2) CONSISTS OF 35,000 SHARES OF COMMON STOCK DIRECTLY HELD BY MR. ATWOOD, OF
WHICH 5,250 SHARES ARE SUBJECT TO REPURCHASE BY US. DOES NOT INCLUDE
2,429,177 SHARES IDENTIFIED IN FOOTNOTE 8. MR. ATWOOD IS A PARTNER OF
BRENTWOOD VENTURE CAPITAL BUT NOT OF FUNDS REFERRED TO IN FOOTNOTE 8.
(3) CONSISTS SOLELY OF SHARES IDENTIFIED IN FOOTNOTE 9. DR. DELEAGE IS A
MANAGING DIRECTOR OF ALTA PARTNERS AND DISCLAIMS BENEFICIAL OWNERSHIP OF
THESE SHARES EXCEPT TO THE EXTENT OF HIS PECUNIARY INTEREST IN THEM.
(4) INCLUDES 10,677 SHARES SUBJECT TO REPURCHASE BY US.
(5) CONSISTS SOLELY OF SHARES IDENTIFIED IN FOOTNOTE 10. DR. ORONSKY IS A
GENERAL PARTNER AT INTERWEST PARTNERS AND DISCLAIMS BENEFICIAL OWNERSHIP OF
THESE SHARES EXCEPT TO THE EXTENT OF HIS PECUNIARY INTEREST IN THEM.
(6) CONSISTS OF 298,480 SHARES OWNED BY BAY CITY CAPITAL II, L.P. AND
19,520 SHARES OWNED BY BAY CITY CAPITAL COINVESTMENT FUND, L.P. DR. YU IS A
MANAGING DIRECTOR OF BAY CITY CAPITAL AND ALSO A MEMBER OF BAY CITY CAPITAL
MANAGEMENT II, LLC, THE GENERAL PARTNER OF THESE BAY CITY FUNDS. DR. YU
DISCLAIMS BENEFICIAL OWNERSHIP OF THESE SHARES EXCEPT TO THE EXTENT OF HER
PECUNIARY INTEREST IN THEM.
(7) INCLUDES 4,295,243 SHARES OF COMMON STOCK HELD BY ENTITIES AFFILIATED WITH
DIRECTORS OR EXECUTIVE OFFICERS. SEE FOOTNOTES ABOVE. ALSO INCLUDES
1,086,199 SHARES SUBJECT TO A RIGHT OF REPURCHASE BY US.
(8) CONSISTS OF 2,344,733 SHARES HELD BY BRENTWOOD ASSOCIATES VII, L.P. AND
84,444 SHARES HELD BY BRENTWOOD AFFILIATES FUND, L.P. BRENTWOOD VII
VENTURES L.P. IS THE GENERAL PARTNER OF EACH OF THESE FUNDS.
(9) CONSISTS OF 1,855,403 SHARES HELD BY ALTA CALIFORNIA PARTNERS II, L.P. AND
18,219 SHARES HELD BY ALTA EMBARCADERO PARTNERS II, LLC. DR. JEAN DELEAGE
IS A MANAGING DIRECTOR OF ALTA PARTNERS AND DISCLAIMS BENEFICIAL OWNERSHIP
OF THESE SHARES EXCEPT TO THE EXTENT OF HIS PECUNIARY INTEREST IN THEM.
(10) CONSISTS OF 1,816,663 SHARES HELD BY INTERWEST PARTNERS VI, L.P. AND
56,958 SHARES HELD BY INTERWEST INVESTORS VI, L.P. DR. ORONSKY IS A
GENERAL PARTNER AT INTERWEST PARTNERS AND DISCLAIMS BENEFICIAL OWNERSHIP
OF THESE SHARES EXCEPT TO THE EXTENT OF HIS PECUNIARY INTEREST IN THEM.
(11) CONSISTS OF 2,102,145 SHARES HELD BY DELPHI VENTURES IV, L.P. AND 40,773
SHARES HELD BY DELPHI BIOINVESTMENTS IV, L.P.
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67
<PAGE>
--------------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offering, our authorized capital stock will consist of
75,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
preferred stock, $0.001 par value.
COMMON STOCK
As of September 30, 2000, there were 15,001,494 shares of common stock
outstanding that were held of record by 46 stockholders, after giving effect to
the conversion of all of our outstanding preferred stock into an equivalent
number of common stock upon completion of this offering. There will be
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after
September 30, 2000) after giving effect to the sale of the shares of common
stock offered by us in this offering.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares voting are able to
elect all of the directors. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets legally
available therefor as our board of directors may from time to time determine.
Upon liquidation, dissolution or winding up of our company, holders of our
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued in this
offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, our certificate of incorporation will
authorize 5,000,000 shares of preferred stock. Our board of directors will have
the authority, without further action by the stockholders, to issue the
preferred stock, in one or more series, and to determine the rights,
preferences, privileges and restrictions of the preferred stock, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, and the number of shares constituting any series or the
designation of any series. Any or all of these rights may be greater than the
rights of common stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of our company without
further action by the stockholders. For example, the board of directors could
issue preferred stock that has the power to prevent a change of control
transaction. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting powers of the holders of common stock, including
the loss of voting control to others and may adversely affect the likelihood
that such holders will receive dividend payments and payments upon liquidation.
We have no present plan to issue any shares of preferred stock.
REGISTRATION RIGHTS
Upon completion of this offering, holders of an aggregate of 14,103,494 shares
of common stock will be entitled to rights to register these shares under the
Securities Act as provided in our Amended and Restated Investors' Rights
Agreement, dated September 12, 2000. If we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of others, the holders
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68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
of these shares are entitled to notice of the registration and are entitled to
include, at our expense, their shares of common stock in the registration and
any related underwriting, provided, among other conditions, that the
underwriters may limit the number of shares to be included in the registration
and in some cases, including in connection with this offering, exclude these
shares entirely. In addition, the holders of these shares may require us, at our
expense and on not more than two occasions at any time beginning six months from
the date of the closing of the offerings, to file a registration statement under
the Securities Act with respect to their shares of common stock, and we will be
required to use our best efforts to effect the registration. We may, in certain
circumstances, defer such registrations and any underwriters in connection with
these registrations have the right, subject to certain limitations, to limit the
number of shares included in these registrations. Further, the holders may
require us at our expense, but limited to twice per year, to register their
shares on Form S-3 when this form becomes available to us.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
Until November 2000, we are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless:
- prior to that date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder;
- upon consummation of the transaction that 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 time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers, and by employee stock plans in which shares
held subject to the plan will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by our
board of directors and is authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock not owned by the interested
stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
- any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock or any class or series of the
corporation beneficially owned by the interested stockholder; and
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
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69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
--------------------------------------------------------------------------------
On the closing of this offering, our certificate of incorporation and bylaws
will include a number of provisions that may deter or impede hostile takeovers
or changes of control or management. These provisions include:
- our board is classified into three classes of directors as nearly equal in
size as possible with staggered three-year terms;
- the authority of our board to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of
these shares, without stockholder approval;
- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent; and
- special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the board.
These provisions may have the effect of delaying or preventing a change of
control.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
NATIONAL MARKET LISTING
We intend to apply for listing of our common stock on the Nasdaq National Market
under the trading symbol "BIOS."
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70
<PAGE>
--------------------------------------------------------------------------------
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market, or
the possibility of such sales occurring, could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Based on the number of shares outstanding at September 30, 2000, after this
offering we will have outstanding shares of common stock, assuming
no exercise of the underwriters' over-allotment option and no exercise of
outstanding options after September 30, 2000. Of these shares, all of the shares
being offered hereby are freely tradable without restriction or further
registration under the Securities Act, unless these shares are purchased by
affiliates as that term is defined in Rule 144 of the Securities Act. The
remaining shares of common stock held by existing stockholders are
restricted and may first be sold, subject to the lock-up agreements described
below, as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------------------------------------------------------------------------------------
<C> <S>
On the date of this prospectus
At 90 days from the date of this prospectus
At various times after 90 days from the date of this
prospectus
</TABLE>
Restricted securities may be sold in the public market only if registered under
the Securities Act or if they qualify for an exemption from registration
described below under Rules 144, 144(k) or 701 promulgated under the Securities
Act.
Our officers and directors and substantially all of our stockholders have
entered into lock-up agreements pursuant to which they have agreed, subject to
limited exceptions, not to offer or sell any shares of common stock or
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days from the date of this prospectus without the
prior written consent of UBS Warburg LLC. UBS Warburg LLC may, at any time and
without notice, waive any of the terms of the lock-up. Following the lock-up
period, these shares will not be eligible for sale in the public market without
registration under the Securities Act unless these sales meet the conditions and
restrictions of Rules 144 or 701 as described below. As restrictions on resale
end, the market price could drop significantly if the holders of these
restricted shares sell them or are perceived by the market as intending to sell
them.
In general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock, or approximately
shares based on the number of shares to be outstanding
immediately after this offering; or
- the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the SEC.
Sales under Rule 144 are also subject to certain provisions relating to notice
and manner of sale and the availability of current public information about us.
In addition, a person (or persons whose shares are aggregated) who is not deemed
to have been one of our affiliates at any time during the 90 days immediately
preceding a sale, and who has beneficially
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71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
--------------------------------------------------------------------------------
owned the shares for at least two years, would be entitled to sell such shares
under Rule 144(k) without regard to the volume limitation and other conditions
described above. Therefore, unless otherwise restricted, Rule 144(k) shares may
be sold immediately upon the completion of this offering. The foregoing summary
of Rule 144 is not intended to be a complete description.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisors prior to the date we become subject to the reporting
requirements of the Exchange Act. To be eligible for resale under Rule 701,
shares must have been issued pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons. In addition, the
SEC has indicated that Rule 701 will apply to typical stock options granted by
an issuer before it becomes subject to the reporting requirements of the
Exchange Act, along with the shares acquired upon exercise of such options
(including exercises after the date of the offering). Securities issued in
reliance on Rule 701 are restricted securities and, subject to the lock-up
agreements described above, beginning 90 days after the date of this prospectus,
may be sold by persons other than affiliates, subject only to the manner of sale
provisions of Rule 144, and by affiliates, under Rule 144 without compliance
with its one-year minimum holding period requirements. The foregoing summary of
Rule 701 is not intended to be a complete description.
We intend to file a registration statement under the Securities Act to register
the shares of common stock available for issuance pursuant to our 2000 Equity
Incentive Plan and 2000 Employee Stock Purchase Plan. Shares issued pursuant to
these plans after the effective date of such registration statement will be
available for sale in the open market and, for our affiliates, subject to the
conditions and restrictions of Rule 144. As of September 30, 2000, options to
purchase a total of 16,500 shares of common stock were outstanding.
For a description of certain rights of our existing stockholders to require us
to register their common stock under the Securities Act, see "Description of
capital stock--Registration Rights."
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72
<PAGE>
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UNDERWRITING
We will enter into an underwriting agreement with the underwriters named below
concerning the shares being offered. Subject to conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. UBS Warburg LLC, U.S. Bancorp Piper Jaffray Inc. and Pacific Growth
Equities, Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------------------------------
<S> <C>
UBS Warburg LLC.............................................
U.S. Bancorp Piper Jaffray Inc..............................
Pacific Growth Equities, Inc................................
----------------------
Total...................................................
======================
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table able, the underwriters have a 30-day option to buy from us up to an
additional shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase the shares
in approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
-----------------------------------------------------------------------------------------
<S> <C> <C>
Per share................................................... $ $
Total................................................... $ $
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Share sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
The underwriters have informed us that they do not expect sales to discretionary
sales to exceed 5% of the total shares of common stock to be offered.
We, our directors, officers and our stockholders have agreed, subject to limited
exceptions, with the underwriters not to offer, sell, contract to sell, hedge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act of 1933 relating to, any of our
common stock or securities convertible into or exchangeable for shares of our
common stock during the period beginning on the date of this prospectus
continuing through the date 180 days after the date of this prospectus without
the prior written consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
up to shares of our common stock being offered for sale to our
friends and selected persons. At the discretion of our management, other
parties, including our employees, may participate in our reserved share
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73
<PAGE>
UNDERWRITING
--------------------------------------------------------------------------------
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares in this offering.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the representatives of the underwriters. The principal factors to be
considered by the representatives and us in determining the initial public
offering price include:
- the information set forth in this prospectus and otherwise available to the
representatives;
- the history and the prospects for the industry in which we compete;
- the ability of our management;
- our prospects for future earnings, the present state of our development, and
our current financial position;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include stabilizing
transactions. Stabilizing transactions consist of bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress. These transactions may also include
short sales and purchases to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of shares than they are
required to purchase in the offering. Short sales may be either "covered short
sales" or "naked short sales." Covered short sales are sales made in an amount
not greater than the underwriters' over-allotment option to purchase additional
shares in the offering. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing shares
in the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. Naked short
sales are sales in excess of the over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market place of our common stock. As a result, the price of our common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected by the underwriters on the Nasdaq
National Market, in the over-the-counter market or otherwise.
--------------------------------------------------------------------------------
74
<PAGE>
UNDERWRITING
--------------------------------------------------------------------------------
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933 and to contribute to
payments that the underwriters may be required to make in respect thereof.
Persons and entities affiliated with Pacific Growth Equities, Inc., one of the
representatives of the underwriters in this offering, hold a total of 13,333
shares of our Series B preferred stock, which will convert into an aggregate of
13,333 shares of our common stock in connection with this offering. The
Series B preferred stock was purchased in April 1999 at a price of $2.25 per
share, for an aggregate purchase price of approximately $30,000.
--------------------------------------------------------------------------------
75
<PAGE>
UNDERWRITING
--------------------------------------------------------------------------------
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Cooley Godward LLP, Palo Alto, California and for the underwriters by
Dewey Ballantine LLP, New York, New York. As of the date of this prospectus, an
investment partnership of Cooley Godward LLP beneficially owns an aggregate of
22,222 shares of our common stock and holds an option to purchase an additional
15,000 shares of our common stock.
CHANGE IN INDEPENDENT AUDITORS
Effective December 1999, Ernst & Young LLP was engaged as our independent
auditors and replaced PricewaterhouseCoopers LLP who were dismissed as our
independent auditors on the same date. Prior to and as of Ernst & Young LLP's
appointment, there were no disagreements with our former auditors on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of our former auditors, would have caused them to make reference
thereto in any of their reports. The former accountants issued unqualified
opinions on our financial statements as of and for the years ended December 31,
1998 and 1997 and for each of the periods from inception (June 28, 1995) to
December 31, 1998 and 1997. The former accountants' reports are not included in
this prospectus. Prior to December 1999, we had not consulted with Ernst & Young
LLP on items that involved our accounting principles or the form of audit
opinion to be issued on our financial statements.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial statements
at December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999 as set forth in their report. We have included our
financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including, exhibits, schedules and amendments) under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all of the information in the
registration statement. For further information with respect to us and the
shares of common stock to be sold in this offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete. Whenever a reference is made in this prospectus to any contract, or
other document of ours, the reference is qualified in all respects by such
contract or document filed as part of the registration statement. You should
refer to the exhibits that are a part of the registration statement for a copy
of the contract or document.
You may read and copy all or any portion of the registration statement or any
other information that we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the SEC's Website located at www.sec.gov.
--------------------------------------------------------------------------------
76
<PAGE>
--------------------------------------------------------------------------------
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and
in accordance therewith, will file periodic reports, proxy statements and other
information with the SEC.
We intend to provide our stockholders with annual reports containing financial
statements audited by our independent public accountants and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three fiscal quarters of each fiscal year.
This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors of
these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.
--------------------------------------------------------------------------------
77
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------------------------------------------------------------------
<S> <C>
Report of Independent Auditors.............................. F-2
Audited Financial Statements
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Net Capital Deficiency)............. F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
--------------------------------------------------------------------------------
F-1
<PAGE>
--------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BioMedicines, Inc.
We have audited the accompanying balance sheets of BioMedicines, Inc. (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended December 31, 1999, and for the period from
inception (June 28, 1995) to December 31, 1999 (not separately presented
herein). 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 BioMedicines, Inc. (a
development stage company) 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, and for the period from inception (June 28, 1995) to
December 31, 1999 (not separately presented herein), in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
April 21, 2000
--------------------------------------------------------------------------------
F-2
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
(UNAUDITED) (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 906,796 $ 3,730,641 $ 36,226,180
Short-term investments........................... 100,075 5,957,285 5,759,363
Prepaid expenses and other current assets........ 53,799 195,862 548,703
----------- ----------- ------------
Total current assets............................... 1,060,670 9,883,788 42,534,246
Long-term investments.............................. -- 998,950 1,473,270
Property and equipment, net........................ 7,430 193,409 183,552
Deposits and other assets.......................... -- 37,611 37,611
----------- ----------- ------------
$ 1,068,100 $11,113,758 $ 44,228,679
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable................................. $ 75,390 $ 100,622 $ 49,810
Accrued compensation............................. 16,815 25,701 36,734
Other accrued liabilities........................ -- 169,429 683,350
----------- ----------- ------------
Total current liabilities.......................... 92,205 295,752 769,894
Commitments
Redeemable convertible preferred stock, $0.001 par
value; 2,000,000 and 8,264,444 shares authorized
at December 31, 1998 and 1999, respectively (none
at September 30, 2000), issuable in series;
2,000,000 and 7,368,888 shares issued and
outstanding at December 31, 1998 and 1999,
respectively (none at September 30, 2000)
(aggregate liquidation preference of $2,000,000
and $14,080,000 at December 31, 1998 and 1999,
respectively).................................... 2,000,000 14,080,000 --
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par value;
12,203,494 shares authorized at September 30,
2000 (12,203,494 shares pro forma), issuable in
series; 12,203,494 shares issued and outstanding
at September 30, 2000 (none pro forma)
(aggregate liquidation preference of $52,080,000
at September 30, 2000).......................... -- -- 12,203 $ --
Common stock; $0.001 par value; 8,000,000,
12,000,000, and 16,000,000 shares authorized in
1998, 1999, and September 30, 2000, respectively
(16,000,000 shares pro forma); 1,500,000,
2,127,000, and 2,798,000 shares issued and
outstanding in 1998, 1999, and September 30,
2000, respectively (15,001,494 shares pro
forma).......................................... 1,500 2,127 2,798 15,001
Additional paid-in capital....................... 66,190 3,252,058 58,470,433 58,470,433
Notes receivable from stockholders............... (50,000) (167,000) (281,975) (281,975)
Deferred stock-based compensation................ -- (787,417) (1,498,563) (1,498,563)
Deficit accumulated during the development
stage........................................... (1,041,795) (5,561,762) (13,246,111) (13,246,111)
----------- ----------- ------------ ------------
Total stockholders' equity (net capital
deficiency)...................................... (1,024,105) (3,261,994) 43,458,785 $ 43,458,785
----------- ----------- ------------ ============
$ 1,068,100 $11,113,758 $ 44,228,679
=========== =========== ============
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-3
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED INCEPTION
YEAR ENDED DECEMBER 31, SEPTEMBER 30, (JUNE 28, 1995) TO
---------------------------------------- -------------------------- SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Research and
development........ $ 81,344 $ 732,349 $ 2,183,619 $1,394,906 $ 3,144,484 $ 6,141,796
General and
administrative..... 114,309 165,546 467,845 318,511 577,923 1,332,352
Stock-based
compensation (see
Note A)............ -- -- 2,268,378 1,120,745 4,556,572 6,824,950
--------- --------- ----------- ----------- ------------ ------------
Loss from
operations.......... (195,653) (897,895) (4,919,842) (2,834,162) (8,278,979) (14,299,098)
Other income, net..... 17,552 40,930 399,875 245,432 594,630 1,052,987
--------- --------- ----------- ----------- ------------ ------------
Net loss.............. (178,101) (856,965) (4,519,967) (2,588,730) (7,684,349) (13,246,111)
Deemed dividend on
Series C convertible
preferred stock..... -- -- -- -- (10,361,989) (10,361,989)
--------- --------- ----------- ----------- ------------ ------------
Net loss attributable
to common
stockholders........ $(178,101) $(856,965) $(4,519,967) $(2,588,730) $(18,046,338) $(23,608,100)
========= ========= =========== =========== ============ ============
Net loss per common
share, basic and
diluted............. $ (0.83) $ (2.22) $ (5.44) $ (3.35) $ (15.00)
========= ========= =========== =========== ============
Shares used in
computing basic and
diluted net loss per
share............... 213,889 386,611 831,506 772,518 1,203,039
========= ========= =========== =========== ============
Pro forma net loss per
share, basic and
diluted
(unaudited)......... $ (0.70) $ (2.03)
=========== ============
Shares used in
computing pro forma
net loss per share
(unaudited)......... 6,464,699 8,875,355
=========== ============
Note A: Stock-based compensation relates to the following:
Research and
development......... $ -- $ -- $ 1,212,649 $ 576,707 $ 2,549,806 $ 3,762,455
General and
administrative...... -- -- 1,055,729 544,038 2,006,766 3,062,495
--------- --------- ----------- ----------- ------------ ------------
$ -- $ -- $ 2,268,378 $1,120,745 $ 4,556,572 $ 6,824,950
========= ========= =========== =========== ============ ============
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-4
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
--------------------------------------------------------------------------------
FOR THE PERIOD FROM INCEPTION (JUNE 28, 1995) TO DECEMBER 31, 1999 AND
(UNAUDITED) THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
REDEEMABLE CONVERTIBLE
CONVERTIBLE PREFERRED COMMON
PREFERRED STOCK STOCK STOCK
------------------------- ---------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock to founder for cash at $0.00651 per
share in June through December 1995....................... -- $ -- -- $ -- 1,000,000
Net loss and comprehensive loss............................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at December 31, 1995.............................. -- -- -- -- 1,000,000
Capital contributed by founders in January through December
1996...................................................... -- -- -- -- --
Net loss and comprehensive loss............................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at December 31, 1996.............................. -- -- -- -- 1,000,000
Capital contributed by founder in January through December
1997...................................................... -- -- -- -- --
Issuance of Series A redeemable convertible preferred stock
in August 1997 for cash at $1.00 per share................ 1,000,000 1,000,000 -- -- --
Net loss and comprehensive loss............................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at December 31, 1997.............................. 1,000,000 1,000,000 -- -- 1,000,000
Issuance of Series A redeemable convertible preferred stock
in August 1998 for cash at $1.00 per share................ 1,000,000 1,000,000 -- -- --
Restricted stock purchase in November 1998 in exchange for a
note receivable, at $0.10 per share....................... -- -- -- -- 500,000
Net loss and comprehensive loss............................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at December 31, 1998.............................. 2,000,000 2,000,000 -- -- 1,500,000
Issuance of Series B redeemable convertible preferred stock
in April 1999 for cash at $2.25 per share................. 5,368,888 12,080,000 -- -- --
Exercise of stock options in 1999 in exchange for cash, at
$0.10-$0.225 per share.................................... -- -- -- -- 107,000
Restricted stock purchase in November 1999 in exchange for a
note receivable, at $0.225 per share...................... -- -- -- -- 500,000
Exercise of stock options in 1999 in exchange for a note
receivable, at $0.225 per share........................... -- -- -- -- 20,000
Deferred stock-based compensation related to stock
options................................................... -- -- -- -- --
Amortization of deferred stock-based compensation........... -- -- -- -- --
Compensation expense related to restricted stock granted to
an officer of the Company................................. -- -- -- -- --
Net loss and comprehensive loss............................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at December 31, 1999................................ 7,368,888 $ 14,080,000 -- $ -- 2,127,000
Issuance of common stock upon exercise of stock options for
notes receivable and cash at $0.225 per share
(unaudited)............................................... -- -- -- -- 675,000
Stock repurchased upon termination (unaudited).............. -- -- -- -- (4,000)
Issuance of Series C convertible preferred stock in
September 2000 for cash at $7.86 per share, net of
$2,414,121 of issuance costs (unaudited).................. -- -- 4,834,606 4,835 --
Issuance of stock options to consultants for services
rendered (unaudited)...................................... -- -- -- -- --
Elimination of redemption rights of redeemable convertible
preferred stock (unaudited)............................... (7,368,888) (14,080,000) 7,368,888 7,368 --
Deferred stock-based compensation (unaudited)............... -- -- -- -- --
Amortization of deferred stock-based compensation
(unaudited)............................................... -- -- -- -- --
Compensation expense related to restricted stock granted to
an officer of the Company (unaudited)..................... -- -- -- -- --
Net loss and comprehensive loss (unaudited)................. -- -- -- -- --
---------- ------------ ---------- ------- ---------
Balance at September 30, 2000 (unaudited)................... -- $ -- 12,203,494 $12,203 2,798,000
========== ============ ========== ======= =========
<S> <C> <C> <C> <C>
ADDITIONAL DEFERRED RECEIVABLE
-------- PAID-IN STOCK-BASED FROM
AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
-----------------------------------------------------------------------------------------------------------------------
Issuance of common stock to founder for cash at $0.00651 per
share in June through December 1995....................... $1,000 $ 5,510 $ -- $ --
Net loss and comprehensive loss............................. -- -- -- --
------ ----------- ----------- ---------
Balance at December 31, 1995.............................. 1,000 5,510 -- --
Capital contributed by founders in January through December
1996...................................................... -- 4,250 -- --
Net loss and comprehensive loss............................. -- -- -- --
------ ----------- ----------- ---------
Balance at December 31, 1996.............................. 1,000 9,760 -- --
Capital contributed by founder in January through December
1997...................................................... -- 6,930 -- --
Issuance of Series A redeemable convertible preferred stock
in August 1997 for cash at $1.00 per share................ -- -- -- --
Net loss and comprehensive loss............................. -- -- -- --
------ ----------- ----------- ---------
Balance at December 31, 1997.............................. 1,000 16,690 -- --
Issuance of Series A redeemable convertible preferred stock
in August 1998 for cash at $1.00 per share................ -- -- -- --
Restricted stock purchase in November 1998 in exchange for a
note receivable, at $0.10 per share....................... 500 49,500 -- (50,000)
Net loss and comprehensive loss............................. -- -- -- --
------ ----------- ----------- ---------
Balance at December 31, 1998.............................. 1,500 66,190 -- (50,000)
Issuance of Series B redeemable convertible preferred stock
in April 1999 for cash at $2.25 per share................. -- -- -- --
Exercise of stock options in 1999 in exchange for cash, at
$0.10-$0.225 per share.................................... 107 13,593 -- --
Restricted stock purchase in November 1999 in exchange for a
note receivable, at $0.225 per share...................... 500 112,000 -- (112,500)
Exercise of stock options in 1999 in exchange for a note
receivable, at $0.225 per share........................... 20 4,480 -- (4,500)
Deferred stock-based compensation related to stock
options................................................... -- 1,048,949 (1,048,949) --
Amortization of deferred stock-based compensation........... -- -- 261,532 --
Compensation expense related to restricted stock granted to
an officer of the Company................................. -- 2,006,846 -- --
Net loss and comprehensive loss............................. -- -- -- --
------ ----------- ----------- ---------
Balance at December 31, 1999................................ $2,127 $ 3,252,058 $ (787,417) $(167,000)
Issuance of common stock upon exercise of stock options for
notes receivable and cash at $0.225 per share
(unaudited)............................................... 675 151,200 -- (114,975)
Stock repurchased upon termination (unaudited).............. (4) (896) -- --
Issuance of Series C convertible preferred stock in
September 2000 for cash at $7.86 per share, net of
$2,414,121 of issuance costs (unaudited).................. -- 35,581,047 -- --
Issuance of stock options to consultants for services
rendered (unaudited)...................................... -- 146,674 -- --
Elimination of redemption rights of redeemable convertible
preferred stock (unaudited)............................... -- 14,072,632 -- --
Deferred stock-based compensation (unaudited)............... -- 1,745,366 (1,745,366) --
Amortization of deferred stock-based compensation
(unaudited)............................................... -- -- 1,034,220 --
Compensation expense related to restricted stock granted to
an officer of the Company (unaudited)..................... -- 3,522,352 -- --
Net loss and comprehensive loss (unaudited)................. -- -- -- --
------ ----------- ----------- ---------
Balance at September 30, 2000 (unaudited)................... $2,798 $58,470,433 $(1,498,563) $(281,975)
====== =========== =========== =========
<S> <C> <C>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
-----------------------------------------------------------------------------------------------------------------------
Issuance of common stock to founder for cash at $0.00651 per
share in June through December 1995....................... $ -- $ 6,510
Net loss and comprehensive loss............................. (3,086) (3,086)
------------ -----------
Balance at December 31, 1995.............................. (3,086) 3,424
Capital contributed by founders in January through December
1996...................................................... -- 4,250
Net loss and comprehensive loss............................. (3,643) (3,643)
------------ -----------
Balance at December 31, 1996.............................. (6,729) 4,031
Capital contributed by founder in January through December
1997...................................................... -- 6,930
Issuance of Series A redeemable convertible preferred stock
in August 1997 for cash at $1.00 per share................ -- --
Net loss and comprehensive loss............................. (178,101) (178,101)
------------ -----------
Balance at December 31, 1997.............................. (184,830) (167,140)
Issuance of Series A redeemable convertible preferred stock
in August 1998 for cash at $1.00 per share................ -- --
Restricted stock purchase in November 1998 in exchange for a
note receivable, at $0.10 per share....................... -- --
Net loss and comprehensive loss............................. (856,965) (856,965)
------------ -----------
Balance at December 31, 1998.............................. (1,041,795) (1,024,105)
Issuance of Series B redeemable convertible preferred stock
in April 1999 for cash at $2.25 per share................. -- --
Exercise of stock options in 1999 in exchange for cash, at
$0.10-$0.225 per share.................................... -- 13,700
Restricted stock purchase in November 1999 in exchange for a
note receivable, at $0.225 per share...................... -- --
Exercise of stock options in 1999 in exchange for a note
receivable, at $0.225 per share........................... -- --
Deferred stock-based compensation related to stock
options................................................... -- --
Amortization of deferred stock-based compensation........... -- 261,532
Compensation expense related to restricted stock granted to
an officer of the Company................................. -- 2,006,846
Net loss and comprehensive loss............................. (4,519,967) (4,519,967)
------------ -----------
Balance at December 31, 1999................................ $ (5,561,762) $(3,261,994)
Issuance of common stock upon exercise of stock options for
notes receivable and cash at $0.225 per share
(unaudited)............................................... -- 36,900
Stock repurchased upon termination (unaudited).............. -- (900)
Issuance of Series C convertible preferred stock in
September 2000 for cash at $7.86 per share, net of
$2,414,121 of issuance costs (unaudited).................. -- 35,585,882
Issuance of stock options to consultants for services
rendered (unaudited)...................................... -- 146,674
Elimination of redemption rights of redeemable convertible
preferred stock (unaudited)............................... -- 14,080,000
Deferred stock-based compensation (unaudited)............... -- --
Amortization of deferred stock-based compensation
(unaudited)............................................... -- 1,034,220
Compensation expense related to restricted stock granted to
an officer of the Company (unaudited)..................... -- 3,522,352
Net loss and comprehensive loss (unaudited)................. (7,684,349) (7,684,349)
------------ -----------
Balance at September 30, 2000 (unaudited)................... $(13,246,111) $43,458,785
============ ===========
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-5
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED INCEPTION
YEAR ENDED DECEMBER 31, SEPTEMBER 30, (JUNE 28, 1995)
---------------------------------------- --------------------------- TO SEPTEMBER 30,
1997 1998 1999 1999 2000 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. $ (178,101) $ (856,965) $ (4,519,967) $(2,588,730) $(7,684,349) $(13,246,111)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 439 1,554 26,817 13,989 41,943 70,753
Noncash charges related to
stock-based compensation........... -- -- 2,268,378 1,120,745 4,556,572 6,824,950
Changes in operating assets and
liabilities:
Prepaid expenses and other current
assets........................... (59,455) 5,656 (142,063) (313,043) (352,841) (548,703)
Deposits and other assets......... -- -- (37,611) (37,611) -- (37,611)
Accounts payable.................. 6,940 68,450 25,232 (66,217) (50,812) 49,810
Accrued liabilities............... 15,733 1,082 178,315 409,429 524,954 720,084
---------- ---------- ------------ ----------- ----------- ------------
Net cash used in operating
activities.......................... (214,444) (780,223) (2,200,899) (1,461,438) (2,964,533) (6,166,828)
INVESTING ACTIVITIES
Acquisition of property and
equipment........................... (3,541) (5,882) (212,796) (173,020) (32,086) (254,305)
Purchase of available for sale
securities.......................... (500,557) (100,075) (10,956,160) (6,995,140) (7,261,398) (18,818,190)
Maturities of available for sale
securities.......................... 100,000 400,557 4,100,000 2,100,000 6,985,000 11,585,557
---------- ---------- ------------ ----------- ----------- ------------
Net cash provided by (used in)
investing activities................ (404,098) 294,600 (7,068,956) (5,068,160) (308,484) (7,486,938)
FINANCING ACTIVITIES
Net proceeds from issuance of
preferred stock..................... 1,000,000 1,000,000 12,080,000 12,080,000 35,732,556 49,812,556
Net proceeds from issuance of common
stock............................... -- -- 13,700 8,300 36,000 56,210
Capital contributions from founders... 6,930 -- -- -- -- 11,180
---------- ---------- ------------ ----------- ----------- ------------
Net cash provided by financing
activities.......................... 1,006,930 1,000,000 12,093,700 12,088,300 35,768,556 49,879,946
---------- ---------- ------------ ----------- ----------- ------------
Net increase in cash and cash
equivalents......................... 388,388 514,377 2,823,845 5,558,702 32,495,539 36,226,180
Cash and cash equivalents at beginning
of period........................... 4,031 392,419 906,796 906,796 3,730,641 --
---------- ---------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end of
period.............................. $ 392,419 $ 906,796 $ 3,730,641 $ 6,465,498 $36,226,180 $ 36,226,180
========== ========== ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Issuance of restricted stock for notes
receivable.......................... $ -- $ 50,000 $ 112,500 $ -- $ -- $ 162,500
========== ========== ============ =========== =========== ============
Issuance of equity instruments for
services in connection with
preferred stock financing........... $ -- $ -- $ -- $ -- $ 146,674 $ 146,674
========== ========== ============ =========== =========== ============
Exercise of stock options for notes
receivable.......................... $ -- $ -- $ 4,500 $ -- $ 114,975 $ 119,475
========== ========== ============ =========== =========== ============
Deferred stock-based compensation..... $ -- $ -- $ 1,048,949 $ 302,178 $ 1,745,366 $ 2,794,315
========== ========== ============ =========== =========== ============
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
F-6
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BioMedicines, Inc. (the "Company") was incorporated in Delaware in June 1995.
The Company is a biopharmaceutical company that acquires and develops chemical
and biological drug products in the areas of cancer, immunology and infectious
disease. The Company identifies alternative or improved development strategies
for drug candidates in which other companies have previously made substantial
investments in clinical or other developmental activities.
Operations substantially commenced in February 1997 and have consisted
principally of the acquisition and development of initial products, raising
capital, establishing facilities, and recruiting personnel. Accordingly, the
Company is considered to be in the development stage. The Company expects
increasing losses over the next several years as development efforts continue.
The Company plans to meet its capital requirements primarily through issuances
of equity securities, and in the longer term, revenue from product sales and
services. If financing arrangements contemplated by management are not realized,
the Company may have to seek other sources of capital or reevaluate its
operating plans.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 2000 and for the nine months ended
September 30, 1999 and 2000 is unaudited but, in the opinion of management, has
been prepared on the same basis as the annual financial statements and includes
all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair presentation of the financial position at
such date and the operating results and cash flows for such periods. Results for
the nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for any subsequent period.
UNAUDITED PRO FORMA INFORMATION
If the Company's initial public offering ("IPO") as described in Note 9 is
consummated, all of the preferred stock outstanding will automatically be
converted into common stock. The unaudited pro forma stockholders' equity at
September 30, 2000 has been adjusted for the assumed conversion of preferred
stock outstanding at September 30, 2000.
CASH, CASH EQUIVALENTS, AND INVESTMENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. Investments not classified
as cash equivalents with maturities of less than twelve months are considered to
be short-term investments; investments with maturities greater than twelve
months are considered to be long-term investments.
--------------------------------------------------------------------------------
F-7
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS, AND INVESTMENTS (CONTINUED)
The Company invests its excess cash primarily in deposits with banks and
short-term and medium-term highly-rated marketable debt securities. These
investments primarily include corporate notes, money market funds, and
government securities.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such determination as of each balance sheet
date. Through September 30, 2000, the Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses reported as a component
of accumulated other comprehensive income. Unrealized gains and losses have not
been material, and have, therefore, not been shown separately. The estimated
fair value amounts have been determined by the Company using available market
information.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in other
income, net. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities, if any, are also included
in other income, net. The Company has not sold any investments prior to maturity
and therefore has not realized any gains or losses on its investments to date.
The cost of securities sold is based on the specific identification method.
Interest and dividends are included in other income, net.
The following is a summary of the fair value of available-for-sale securities:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1998 1999 2000
(UNAUDITED)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money market funds................................... $ 704,446 $ 2,538,930 $30,487,963
Corporate debt securities............................ 300,067 7,606,284 12,698,553
----------- ------------- -----------
Total................................................ $ 1,004,513 $ 10,145,214 $43,186,516
=========== ============= ===========
</TABLE>
Above amounts are included in the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1998 1999 2000
(UNAUDITED)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash equivalents................................... $ 904,438 $ 3,188,979 $35,953,883
Investments:
Short-term....................................... 100,075 5,957,285 5,759,363
Long-term........................................ -- 998,950 1,473,270
---------- ----------- -----------
$1,004,513 $10,145,214 $43,186,516
========== =========== ===========
</TABLE>
--------------------------------------------------------------------------------
F-8
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts payable,
accrued liabilities and accrued compensation are carried at cost, which
management believes approximates fair value given their short-term nature.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist of interest-bearing investments. The Company maintains cash, cash
equivalents and investments with various major financial institutions. The
Company performs both periodic evaluations of its investments and the relative
credit standing of these financial institutions and limits the amount of credit
exposure with any one institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets (generally three to five years). Leasehold
improvements are amortized over the shorter of the term of the lease or the
estimated useful lives of the assets.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of costs incurred for internal,
subcontracted and collaborative research and development activities. These costs
include direct and research-related overhead expenses and are expensed as
incurred. The Company has entered into several agreements for subcontracted
research at other organizations. These agreements are generally cancelable upon
thirty days written notice and may be extended by mutual consent of both
parties. Costs to acquire the right to develop, market, and manufacture
technologies which are utilized in research and development and which have no
alternative future use are expensed when incurred.
INCOME TAXES
The Company uses the liability method for income taxes, whereby deferred income
taxes are provided on items recognized for financial reporting purposes over
different periods than for income tax purposes. Valuation allowances are
provided when the expected realization of tax assets does not meet a
more-likely-than-not criteria.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes rules for the reporting and display of comprehensive income and its
components in the financial statements. SFAS 130 requires unrealized gains and
losses on the Company's available-for-sale securities to be included in
comprehensive income or loss. As unrealized gains and losses on the Company's
available-for-sale securities have not been material to date, net loss
approximates comprehensive loss for all periods presented.
--------------------------------------------------------------------------------
F-9
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through
September 30, 2000, there have been no such losses.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its employee
stock option grants and to disclose the pro forma effect of SFAS 123 (see
Note 7). Options granted to nonemployees are accounted for using the
Black-Scholes method, and in accordance with Emerging Issues Task Force
Consensus No. 96-18 ("EITF 96-18") the options are subject to periodic
revaluation over their vesting terms.
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity with the
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), for all periods presented. Following the guidance given by the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and preferred stock that has been issued or granted for nominal
consideration prior to the anticipated effective date of an initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if these shares had been outstanding for all periods presented.
To date, the Company has not issued or granted shares for nominal consideration.
In accordance with SFAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per common share has been computed as described above, and also
gives effect to the conversion of the convertible preferred stock which will
automatically convert to common stock immediately prior to the completion of the
Company's initial public offering (using the if-converted method) from the
original date of issuance.
The Company has excluded all convertible preferred stock, outstanding stock
options, and shares subject to repurchase from the calculation of diluted loss
per common share because all such securities are antidilutive for all periods
presented. Such securities, had they been dilutive, would have been included in
the computations of diluted net loss per share.
--------------------------------------------------------------------------------
F-10
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
The following table presents the calculation of basic and diluted and pro forma
basic and diluted net loss per share:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ---------------------------
1997 1998 1999 1999 2000
(UNAUDITED)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss........................ $(178,101) $(856,965) $(4,519,967) $(2,588,730) $(7,684,349)
Deemed dividend on Series C
convertible preferred stock
(see Note 6).................. -- -- -- -- (10,361,989)
--------- ------------ ----------- ----------- -------------
Net loss attributable to common
stockholders.................. $(178,101) $(856,965) $(4,519,967) $(2,588,730) $(18,046,338)
========= ============ =========== =========== =============
Basic and diluted
weighted-average shares:
Weighed-average shares of
common stock outstanding..... 533,333 1,083,333 1,658,000 1,567,000 2,659,667
Less: weighted-average shares
subject to repurchase........ (319,444) (696,722) (826,494) (794,482) (1,456,628)
--------- ------------ ----------- ----------- -------------
Weighted-average shares used
in computing basic and
diluted net loss per share... 213,889 386,611 831,506 772,518 1,203,039
========= ============ =========== =========== =============
Basic and diluted net loss per
share......................... $(0.83) $(2.22) $(5.44) $(3.35) $(15.00)
========= ============ =========== =========== =============
Pro forma:
Net loss attributable to
common stockholders.......... $(178,101) $(856,965) $(4,519,967) $(2,588,730) $(18,046,338)
========= ============ =========== =========== =============
Shares used above............. 213,889 386,611 831,506 772,518 1,203,039
Pro forma adjustment to
reflect weighted effect of
assumed conversion of
convertible preferred stock
(unaudited).................. 380,822 1,380,822 5,633,193 5,048,270 7,672,316
--------- ------------ ----------- ----------- -------------
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)... 594,711 1,767,433 6,464,699 5,820,788 8,875,355
========= ============ =========== =========== =============
Pro forma basic and diluted
net loss per share
(unaudited).................. $(0.30) $(0.48) $(0.70) $(0.44) $(2.03)
========= ============ =========== =========== =============
</TABLE>
--------------------------------------------------------------------------------
F-11
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
Effective in January 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company has
determined that it operates in only one segment. Accordingly, the adoption of
this statement had no impact on the Company's financial statements.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") as amended by SFAS 137 and SFAS 138, which
will be effective for the year ending December 31, 2001. This statement
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in 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. The Company believes the adoption of SFAS 133 will
not have a material effect on its financial statements, since it currently does
not engage in hedging activities and holds no derivative financial instruments.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 summarizes the SEC's views in applying
generally accepted accounting principles to revenue recognition. The adoption of
SAB 101 had no significant impact on the Company's revenue recognition policy.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB 25,"
which contains rules to clarify the applications of APB 25. This Interpretation
is effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN 44 did not have a material impact on the Company's operating
results or financial position.
--------------------------------------------------------------------------------
F-12
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1998 1999 2000
(UNAUDITED)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and office equipment............................ $9,423 $192,256 $224,342
Leasehold improvements.................................... -- 29,963 29,963
------ -------- --------
9,423 222,219 254,305
Less accumulated depreciation............................. (1,993) (28,810) (70,753)
------ -------- --------
Property and equipment, net............................... $7,430 $193,409 $183,552
====== ======== ========
</TABLE>
3. COMMITMENTS
FACILITY LEASE
On December 1, 1998, the Company entered into a noncancelable operating lease
for a facility in Alameda, California for the period from May 1999 to
April 2004. Rent expense amounted to approximately $84,000 for the year ended
December 31, 1999 and $96,000 for the nine months ended September 30, 2000.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
2000................................................ $128,316
2001................................................ 131,636
2002................................................ 134,960
2003................................................ 138,276
2004................................................ 46,460
--------
$579,648
========
</TABLE>
--------------------------------------------------------------------------------
F-13
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
3. COMMITMENTS (CONTINUED)
LICENSE AGREEMENTS
The Company has licensed certain technologies and products under development
from third parties. The license arrangements generally provide the Company with
access to the licensor's historical product data and certain quantities of bulk
drug inventory. In consideration for the licenses, the Company has made initial
license payments of $400,000 in the aggregate through September 30, 2000. The
Company is also required to make payments upon the achievement of certain
development milestones, as defined in the related agreements, that could
aggregate up to $10.6 million (of which a $100,000 milestone was paid and
expensed in 1998). The Company pays substantially all of the development
expenses for the licensed technologies and product candidates and is generally
required to pay royalties on commercial sales, if any. The Company anticipates
that any revenue received for licensed products will be recognized when earned.
The most significant of these arrangements are discussed below.
In December 1997, the Company entered into an agreement with G.D. Searle & Co.
to acquire exclusive worldwide rights to Biomed 101 for all indications in the
fields of oncology and immunology. Pursuant to the license agreement, the
Company has granted Searle the right to negotiate with it for commercialization
rights relating to Biomed 101, prior to the Company negotiating with any other
third party for these rights.
In July 1998, the Company entered into an agreement with Boehringer Ingelheim
International GmbH to acquire exclusive license rights to omega interferon
outside the United States for all diseases except multiple sclerosis.
Additionally, the Company has granted Boehringer Ingelheim the right to
negotiate with it for commercialization rights relating to omega interferon
prior to the Company negotiating with any other third party for these rights.
In February 1999, the Company entered into an agreement with Schering AG to
obtain exclusive worldwide license rights to atamestane in the field of
treatment of breast cancer. The Company has granted Schering AG an option to
co-promote atamestane in the United States and an option to exclusively license
atamestane for commercialization outside of the United States.
4. RELATED PARTY NOTES RECEIVABLE
In November 1998, and 1999, the Company entered into full-recourse loan
agreements with an officer of the Company who is a principal stockholder. The
officer borrowed an aggregate of $162,500 for the purchase of the Company's
common stock. This loan amount bears interest at 6% per annum and is repayable
in two installments, November 2003 ($50,000) and November 2004 ($112,500). These
loans have been collateralized by 1,000,000 shares of common stock. Interest on
these loans may be forgiven at the discretion of the Board of Directors, and the
principal amount of these loans to this officer together with all accrued
interest is forgivable upon the closing of an initial public offering or in the
event the Company gets acquired. In addition, this officer borrowed an
additional $22,400 upon the exercise of stock options to purchase 100,000 shares
of stock. This loan bears interest at 6.4% per annum and is due in May 2005. The
loan of $22,400 is not forgivable.
--------------------------------------------------------------------------------
F-14
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
4. RELATED PARTY NOTES RECEIVABLE (CONTINUED)
During the year ended December 31, 1999 and the nine months ended September 30,
2000, the Company had also issued common stock to employees and Directors in
exchange for full recourse promissory notes in the aggregate of $4,480 and
$92,575, respectively. These promissory notes accrue interest at rates between
6.2% and 6.8% with principal repayment due on the fifth anniversary of the date
of each note.
5. CONVERTIBLE PREFERRED STOCK
At December 31, 1999, there were 2,000,000 shares of Series A and 5,368,888
shares of Series B convertible preferred stock issued and outstanding, each of
which carried redemption rights. In connection with the issuance of 4,834,606
shares of Series C preferred stock in September 2000 (see Note 6), the
redemption rights of the Series A and Series B redeemable convertible preferred
stock were eliminated (all other rights, preferences and privileges of the
Series A and Series B convertible preferred stock were not modified).
Accordingly, the Series A and Series B convertible preferred stock has been
reclassified to stockholders' equity in the September 30, 2000 balance sheet.
All series of preferred stock are convertible at the stockholders' option at any
time into common stock on a one-for-one basis, subject to adjustment for
antidilution. Each series of preferred stock shall be automatically converted
into common stock, at the then applicable conversion price, (i) upon the date
when a majority of stockholders of the affected series shall so elect,
(ii) with respect to the Series A and Series B preferred, upon the closing of a
firmly underwritten public offering with aggregate offering proceeds exceeding
$10,000,000 and an offering price of at least $5.00 per share (appropriately
adjusted for any stock splits, stock dividends, or similar events), or
(iii) with respect to Series C preferred, upon the closing of a firmly
underwritten public offering with aggregate offering proceeds exceeding
$20,000,000 and an offering price of at least $11.50 per share (appropriately
adjusted for any stock splits, stock dividends, or similar events).
The holders of the Series A, B and C convertible preferred stock are entitled to
receive dividends at the rate of $0.08, $0.20 and $0.71, respectively, per share
per year. Such dividends are payable if and when declared by the board of
directors, and are not cumulative. These dividends are to be paid in advance of
distributions to common stockholders. No dividends have been declared to date.
In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series A, B and C convertible preferred stock are entitled to a
liquidation preference of $1.00, $2.25 and $7.86 per share, respectively (as
adjusted for any stock dividends, combinations, or splits), plus any declared
but unpaid dividends on such shares, over holders of common shares.
The holders of the convertible preferred stock are entitled to the number of
votes they would have upon conversion of their preferred shares into common
stock.
Prior to September 2000, the holders of at least a majority of the outstanding
Series A and Series B redeemable convertible preferred stock had the right at
any time on or before July 13, 2005 or April 26, 2006, respectively, to require
the Company to redeem the redeemable convertible preferred
--------------------------------------------------------------------------------
F-15
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
5. CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock by paying in cash a sum equal to the original purchase price of the
redeemable convertible preferred stock plus any declared and unpaid dividends.
At December 31, 1999, the redemption value was $2,000,000 for the Series A stock
and $12,080,000 for the Series B stock.
The authorized, issued and outstanding Series A, B, and C shares of convertible
preferred stock (Series A and B redeemable convertible preferred stock as of
December 31, 1998 and 1999) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------
SHARES AGGREGATE
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A............................................. 2,000,000 2,000,000 $ 2,000,000
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------
SHARES AGGREGATE
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A............................................. 2,000,000 2,000,000 $ 2,000,000
Series B............................................. 6,264,444 5,368,888 12,080,000
---------- ---------- -----------
8,264,444 7,368,888 $14,080,000
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
(UNAUDITED)
----------------------------------------
SHARES AGGREGATE
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series A............................................. 2,000,000 2,000,000 $ 2,000,000
Series B............................................. 5,368,888 5,368,888 12,080,000
Series C............................................. 4,834,606 4,834,606 38,000,000
---------- ---------- -----------
12,203,494 12,203,494 $52,080,000
========== ========== ===========
</TABLE>
6. SERIES C BENEFICIAL CONVERSION
In September, 2000, the Company completed a private placement for the sale of
4,834,606 shares of Series C convertible preferred stock resulting in gross
proceeds of $38,000,000 or $7.86 per share. At the date of issuance, the Company
believed the per share price of $7.86 represented the fair value of the
preferred stock. Subsequent to the commencement of the Company's initial public
offering process, it reevaluated the fair value of its common stock.
Accordingly, the increase in fair value has resulted in a beneficial conversion
feature, in accordance with Emerging Issues Task Force Consensus No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features," of
$10,400,000, that has
--------------------------------------------------------------------------------
F-16
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
6. SERIES C BENEFICIAL CONVERSION (CONTINUED)
been recorded as a deemed dividend to preferred stockholders in 2000. The
Company recorded the deemed dividend at the date of issuance by an offsetting
charge and credit to additional paid-in capital, without any effect on total
stockholders' equity.
7. STOCKHOLDERS' EQUITY
RESTRICTED STOCK PURCHASE
During 1995, the Company issued 1,000,000 shares of common stock to an officer
of the Company. In August 1997, upon the first issuance of Series A preferred
stock, the officer signed a restricted stock purchase agreement under which
800,000 of the shares became subject to repurchase by the Company (the "1997
Agreement"). The Company's repurchase right lapses ratably over the 48-month
period from the date of the 1997 Agreement. In November 1998, the Company issued
an additional 500,000 shares of common stock to the same officer pursuant to a
restricted stock purchase agreement, under which the shares become eligible for
vesting upon the achievement of certain milestones. Following the achievement of
a milestone, the Company's repurchase rights as to 20% of the shares identified
with such milestone lapse immediately. The Company's repurchase rights with
respect to the remaining 80% of the shares identified with such milestone lapse
over the 48-month period retroactive to August 1997.
In November 1999, the Company issued another 500,000 shares of common stock to
the same officer pursuant to a restricted stock purchase agreement under which
the Company had repurchase rights with respect to 400,000 shares. The Company's
repurchase rights lapse upon the achievement of certain milestones. All
milestones relate to specific research and development accomplishments, except
for one for which the Company's repurchase right on 250,000 shares of common
stock lapses upon the closing of an initial public offering. For restricted
stock subject to milestones, to the extent that the fair value of the Company's
common stock exceeds the issuance price of the shares on the date the milestones
are achieved, such amount will be accounted for as compensation expense. During
1999, the Company had recorded $2,006,846 in stock-based compensation. For the
nine months ended September 30, 2000, the Company recorded $3,522,352 in
stock-based compensation. No milestones were achieved during the nine months
ended September 30, 2000.
Both the November 1998 and 1999 restricted stock transactions were consummated
through the issuance of full-recourse notes to the Company (as described in
Note 4), which are forgivable upon the closing of an initial public offering.
Due to this performance-based forgiveness feature, the Company is subject to the
provisions of EITF 95-16 and is required to apply variable accounting on these
restricted shares vested until the earlier of either the triggering of the
performance feature or the board approving early forgiveness of the amount due.
For the year ended December 31, 1999 and for the nine months ended
September 30, 2000, additional stock-based compensation expense of $1,068,102
and $3,050,755, respectively, was recorded. These amounts have been included in
the stock-based compensation expense previously presented above.
At December 31, 1998 and 1999 and September 30, 2000, 962,400, 983,333, and
777,083 shares, respectively, of common stock under these agreements were
subject to repurchase.
--------------------------------------------------------------------------------
F-17
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
1998 STOCK OPTION PLAN
In 1998, the Company authorized the 1998 Stock Option Plan (the "Plan") under
which the board of directors may issue incentive stock options to employees,
including officers and members of the board of directors who are also employees,
and nonqualified stock options to employees, officers, directors, consultants,
and advisors of the Company. Under the Plan, incentive options to purchase the
Company's common shares may be granted to employees at prices not lower than
fair value at the date of grant, as determined by the board of directors.
Nonqualified options may be granted to key employees, including directors and
consultants, at prices not lower than 85% of fair value at the date of grant
(110% in certain cases), as determined by the board of directors. Options have a
term of ten years. Generally, options granted are immediately exercisable.
Shares issued pursuant to the exercise of an unvested option are subject to the
Company's right of repurchase which lapse over periods specified by the board of
directors, generally four years from the date of grant.
As of September 30, 2000, a total of 1,450,000 shares of common stock have been
authorized for issuance under the 1998 Plan.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES NUMBER PRICE PER
AVAILABLE OF SHARES SHARE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares authorized.......................................... 700,000 -- --
Options granted............................................ (12,000) 12,000 $0.100
Options canceled........................................... 12,000 (12,000) $0.100
--------- --------
Balance at December 31, 1998............................... 700,000 -- --
Shares authorized.......................................... 1,000,000 -- --
Options granted............................................ (396,500) 396,500 $0.225
Options exercised.......................................... -- (44,000) $0.225
--------- --------
Balance at December 31, 1999............................... 1,303,500 352,500 $0.225
Reduction of shares authorized (unaudited)................. (250,000) -- --
Option granted (unaudited)................................. (324,000) 324,000 $0.225
Options exercised (unaudited).............................. -- (675,000) $0.225
--------- --------
Balance at September 30, 2000 (unaudited).................. 729,500 1,500 $0.225
========= ========
</TABLE>
--------------------------------------------------------------------------------
F-18
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
1998 STOCK OPTION PLAN (CONTINUED)
Details of the Company's stock options under the Plan by exercise price is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------
OPTIONS OUTSTANDING
---------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER OF REMAINING AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE
PRICE OPTIONS LIFE PRICE
---------------------------------------------------------------
<S> <C> <C> <C>
$0.225 352,500 9.75 $0.225
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 (UNAUDITED)
------------------------------------------------------------
OPTIONS OUTSTANDING
------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
NUMBER OF REMAINING AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE
------------------------------------------------------------
<S> <C> <C> <C>
$0.225 1,500 10.00 $0.225
</TABLE>
The 1998 Stock Option Plan allows for early exercise of stock options granted,
and as of December 31, 1999 and September 30, 2000 there were 38,334 and 677,230
shares subject to repurchase at $0.225 per share, respectively. Generally, the
Company's right of repurchase lapses over four years. As a performance
incentive, the Company has attached either milestones or vesting accelerators to
certain option grants. Under certain arrangements, the employee has to meet a
specific performance milestone in order to commence vesting. Options that
commence vesting only upon achievement of milestones will be valued at the date
such milestones are achieved and to the extent that the fair value of the
Company's common stock exceeds the issuance price of the shares on the date the
milestones are achieved, such amount will be accounted for as compensation
expense. As of December 31, 1999 and September 30, 2000, the Company has 68,000
options and 117,500 options (of which 101,000 options were exercised early),
respectively, subject to milestone-based vesting. As of December 31, 1999 and
September 30, 2000, the Company has 50,000 options and 62,000 options that were
early exercised, respectively, which vest upon a specified date but are subject
to accelerated vesting under certain circumstances. Upon an employee meeting a
condition, the Company will recognize any remaining unamortized deferred stock
compensation related to the number of options that accelerate.
As of September 30, 2000, the Company has granted options to purchase 98,000
shares of common stock at $0.10 per share outside of the 1998 Stock Option Plan,
of which 15,000 options are outstanding and 83,000 have been early exercised,
subject to repurchase at $0.10 per share.
--------------------------------------------------------------------------------
F-19
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
1998 STOCK OPTION PLAN (CONTINUED)
For the nine months ended September 30, 2000, the Company granted 15,000 fully
vested common stock options to consultants in exchange for services rendered for
the Series C preferred stock financing. In accordance with SFAS 123, the fair
value assigned to these options, as determined using the Black-Scholes valuation
model, was approximately $146,674. This amount was offset against the gross
proceeds derived from Series C preferred stock issuance.
The weighted-average fair value of options granted in 1998 and 1999 and the nine
months ended September 30, 2000 was $0.02, $0.06, and $0.06, respectively.
STOCK COMPENSATION
The Company recorded deferred compensation in accordance with APB No. 25 in
connection with certain stock option grants, net of forfeitures, of $1,048,949
in 1999 representing the difference between the exercise price and the fair
value of the Company's common stock as determined by management in light of the
Company's planned initial public offering and the expected initial public
offering price per share. An additional $1,745,366 of deferred compensation was
recorded for the nine months ended September 30, 2000. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense on a graded vesting method. The Company amortized deferred compensation
of $261,532 in 1999. Amortization of deferred compensation for the nine months
ended September 30, 1999 and 2000 was $54,448 and $1,034,220, respectively. The
remaining deferred compensation at September 30, 2000 was $1,498,563, which will
be amortized as follows: $279,590 for the three months ending December 31, 2000,
$732,915 for the year ending December 31, 2001, $359,231 for the year ending
December 31, 2002, $108,685 for the year ending December 31, 2003, and $18,142
for the year ending December 31, 2004.
Pro forma net loss information is required by Statement of Financial Accounting
Standards No. 123, ("SFAS 123"), which also requires that the information be
determined as if the Company has accounted for its employee stock-based awards
under the fair value method of that Statement. The fair value of these awards
was estimated at the date of grant using the minimum value method option pricing
model for employees, with the following weighted average assumptions for 1999
and 2000, respectively: a risk-free interest rate of 5.5% and 6.0%; a dividend
yield of 0%; and a weighted average expected life of five years.
The effect of applying SFAS 123 to the Company's stock option awards did not
result in pro forma net loss that was materially different from historical
amounts reported (pro forma net loss, in thousands, as of December 31, 1999 and
for the nine-months ended September 30, 2000 was $4,521 and $7,692,
respectively). Future pro forma net income (loss) results may be materially
different from actual amounts reported. The pro forma effect of SFAS 123 will
not be fully reflected until 2001.
--------------------------------------------------------------------------------
F-20
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
RESERVED SHARES
At September 30, 2000, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred
stock.................................. 12,203,494
1998 Stock Option Plan................... 731,000
Stock options outside of stock option
plans.................................. 15,000
----------
12,949,494
==========
</TABLE>
8. INCOME TAXES
No provision for income taxes exists due to operating losses with no current tax
benefit.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards............................ $358,000 $1,048,000
Research and development credits............................ 29,000 19,000
Other....................................................... 7,000 91,000
Valuation allowance......................................... (394,000) (1,158,000)
-------- ----------
$ -- $ --
======== ==========
</TABLE>
As of December 31, 1999, the Company had approximately $2,600,000 federal and
state net operating loss carryforwards. These carryforwards will begin to expire
in 2012 for federal income tax purposes and in 2005 for state tax purposes.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets have been fully offset by valuation allowances at December 31, 1998 and
1999.
Utilization of net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar provisions. The
annual limitation may result in expiration of net operating loss and tax credit
carryforwards before full utilization.
9. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
In October 2000, the board of directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a
--------------------------------------------------------------------------------
F-21
<PAGE>
BIOMEDICINES, INC.
(A DEVELOPMENT STAGE COMPANY)
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 2000 AND FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
INITIAL PUBLIC OFFERING (CONTINUED)
proposed initial public offering. If the offering contemplated by this
prospectus is consummated, the preferred stock outstanding as of the closing
date will automatically be converted into shares of the Company's common stock.
Concurrent with the closing of the Company's initial public offering, the
Company will record stock-based compensation expense related to the 250,000
shares of restricted stock issued to an officer that become unrestricted and for
the loans to that officer which will be forgiven upon the close of the Company's
initial public offering.
2000 EMPLOYEE STOCK PURCHASE PLAN
In October 2000, the Company's board of directors adopted, subject to
stockholder approval, its 2000 Employee Stock Purchase Plan (the "Purchase
Plan"). A total of 300,000 shares of the Company's common stock have been
reserved for issuance under the Purchase Plan. In addition, the Purchase Plan
provides for annual increases in the number of shares available for issuance
under the Purchase Plan on January 1 of each year, commencing in 2002 and ending
on January 1, 2010, equal to the lesser of 200,000 shares, 0.5% of the
outstanding shares on the date of the annual increase or such amount as may be
determined by the board. The Purchase plan permits eligible employees to
purchase common stock at a discount through payroll deductions during defined
offering periods. The price at which the stock is purchased is equal to the
lower of 85% of the fair market value of the common stock on the first day of
the offering or 85% of the fair market value of the Company's common stock on
the purchase date. The initial offering period will commence on the effective
date of the offering.
2000 EQUITY INCENTIVE PLAN
In October 2000, the Company's board of directors adopted, subject to
stockholder approval, the 2000 Equity Incentive Plan, with a total of 2,000,000
shares of common stock for issuance thereunder. In addition, the Equity
Incentive Plan provides for annual increases in the number of shares available
for issuance under the Equity Incentive Plan on January 1 of each year,
commencing in 2002 and ending on January 1, 2010, equal to the lesser of
1,500,000 shares, 2% of the outstanding shares on the date of the annual
increase or such amount as may be determined by the board.
AMENDED CERTIFICATE OF INCORPORATION
In October 2000, the board of directors authorized, subject to stockholder
approval, an amendment to the Company's Certificate of Incorporation to increase
the authorized stock of the Company to 87,203,494 shares, consisting of
75,000,000 shares of common stock and 12,203,494 shares of preferred stock. In
addition, in October 2000, the board of directors authorized, subject to
stockholder approval, the amendment and restatement of the Company's Certificate
of Incorporation, to be filed immediately following the closing of the Company's
initial public offering, to delete all references to the Series A, B and C
preferred stock and to authorize 5,000,000 shares of undesignated preferred
stock.
--------------------------------------------------------------------------------
F-22
<PAGE>
[LOGO]
<PAGE>
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us, in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $15,180
NASD filing fee............................................. 6,250
Nasdaq National Market listing fee.......................... *
Blue sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Printing and engraving costs................................ *
Miscellaneous expenses...................................... *
-------
Total................................................... $ *
=======
</TABLE>
---------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- for any breach of duty of loyalty to us or to our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and agents to the fullest extent permitted by Delaware
law. We believe that indemnification under our amended and restated certificate
of incorporation covers negligence and gross negligence on the part of
indemnified parties.
We have entered into indemnification agreements with each of our directors and
certain officers. These agreements, among other things, require us to indemnify
each director and officer for certain expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of BioMedicines,
arising out of the person's services as our director or officer, any subsidiary
of ours or any other company or enterprise to which the person provides services
at our request.
--------------------------------------------------------------------------------
II-1
<PAGE>
PART II
--------------------------------------------------------------------------------
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) During the past three years, we have issued unregistered securities to a
limited number of persons as described below:
1) an aggregate of 1,000,000 shares of Series A preferred stock for an
aggregate purchase price of $1,000,000 in August 1998 to Brentwood
Affiliates Fund, L.P., Brentwood Associates VII, L.P., Delphi
BioInvestments IV, L.P., Delphi Ventures IV, L.P.
2) an aggregate of 5,368,888 shares of Series B preferred stock for an
aggregate purchase price of $12,079,998 in April 1999 to Brentwood
Associates VII, L.P., Brentwood Affiliates Fund, L.P. Delphi Ventures IV,
L.P., Delphi BioInvestments IV, L.P., Alta California Partners II, L.P.,
Alta Embarcadero Partners II, LLC, InterWest Partners VI, L.P., InterWest
Investors VI, L.P., Pacific Growth Equities, B.M., L.P. and GC & H
Investments.
3) an aggregate of 4,834,606 shares of Series C preferred stock for an
aggregate purchase price of $38,000,003 in September 2000 to Alta
California Partners II, L.P., Alta Embarcadero Partners II, LLC, Banio
Unione De Credito, Bank Julius Baer & Co., Banque SCS Alliances SA, Bay
City Capital Fund II Co-Investment Fund, L.P., Bay City Capital Fund II,
L.P., Bim Azionario Globale, Bim Bilanciato, Pierangelo Bottinelli,
Brentwood Associates VII, L.P., BSI SA, CBG Compagnie Bancaire Geneve,
Centro International Handelsbank AG, Charter Ventures IV, L.P., Neal R.
Cutler, M.D., Delphi BioInvestments IV, L.P., Delphi Ventures IV, L.P.,
Robert D. English, Esperia Performance Fund, Fidurhone, Fin-Sirio SRL,
Garfin SPA, Philip and Sarah Howard, Interwest Investors VI, L.P.,
Interwest Partners VI, L.P., LGT Bank In Liechtenstein AG, Lombard Odier
& Cie, Pictet Global Sector Fund Biotech, RBB Bank AG, Vienna,
Swisspartners Investment Network, LTD, Trefoil SA, Triaxis Trust AG,
Ursula Vollenweider.
4) an aggregate of 500,000 shares of common stock at $0.10 per share in
November 1998 to Mark Moran, M.D.
5) an aggregate of 500,000 shares of common stock at $0.225 per share in
November 1999 to S. Mark Moran, M.D.
6) options to purchase 803,500 shares of common stock at a weighted average
exercise price of $0.21 per share to officers, employees, consultants and
directors. Of these options, options to purchase 83,000 shares were
granted outside the plan and options to purchase 720,000 shares were
granted pursuant to our 1998 Equity Incentive Plan. Of the options to
purchase shares granted outside our 1998 Equity Incentive Plan, options
to purchase 83,000 shares have been exercised. Of the options to purchase
shares granted pursuant to the 1998 Equity Incentive Plan, options to
purchase 719,000 shares have been exercised and 4,000 of these shares
have been repurchased.
7) options to purchase 15,000 shares of common stock at an exercise price
of $0.225.
(b) There were no underwriters employed in with any of the transactions set
forth in Item 15(a).
The issuances described in Items 15(a)(1) through (5) and (7) were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the securities issued in such
--------------------------------------------------------------------------------
II-2
<PAGE>
PART II
--------------------------------------------------------------------------------
transactions. All recipients had adequate access, through their relationships
with us, to information about us, and represented to us that they were
accredited investors. Each series of preferred stock will convert to common
stock upon the closing of this offering on a one-for-one basis.
The granting of options and issuances of common stock upon exercise thereof or
otherwise, to our directors, executives, employees and consultants as described
in 15(a)(6) above, these grants and issuances were exempt from registration
pursuant to Rule 701 promulgated under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be effective upon the closing of the
offering made pursuant to this registration statement.
3.3 Bylaws of the Registrant.
3.4 Form of Amended and Restated Bylaws of Registrant to be
effective upon the closing of the offering made pursuant to
this registration statement.
4.1* Specimen Stock Certificate.
4.2 Amended and Restated Investor Rights Agreement dated
September 12, 2000.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement between the Registrant and its
directors and officers.
10.2 Form of 2000 Equity Incentive Plan, Form of 2000 Equity
Incentive Plan Stock Option Agreement, and Form of 2000
Equity Incentive Grant Notice and Notice of Exercise.
10.3 Form of 2000 Employee Stock Purchase Plan and Form of
Offering Document.
10.4** License Agreement, by and between Schering
Aktiengesellschaft and the Registrant dated February 1999.
10.5** License Agreement, by and between G.D. Searle & Co. and the
Registrant dated December 1997.
10.6** License Agreement by and between Boehringer Ingelheim
International GmbH and the Registrant dated July 1998.
10.7** Amendment to License Agreement by and between Boehringer
Ingelheim International GmbH and the Registrant dated
February 21, 2000.
10.8** Research and Development Contract, by and between Boehringer
Ingelheim Pharma KG and the Registrant dated July 1998.
10.9 Commercial Property Lease, by and between Alameda Real
Estate Investments and the Registrant dated December 1,
1998.
10.10 Amendment to Commercial Property Lease, by and between
Alameda Real Estate Investment, as Lessor, and the
Registrant, as Lessee, dated June 1, 1999.
10.11 Employment Agreement of Mark Moran, dated August 14, 1997.
10.12 Amendment to Employment Agreement of Mark Moran, dated
November 23, 1999.
10.13 Employment Agreement of Peter J. Langecker, dated September
4, 1999.
10.14 Employment Agreement of Hana Berger, dated October 12, 1999.
10.15 Employment Agreement of Curtis L. Scribner, dated November
25, 1999.
10.16 Consulting Agreement between Hana Berger and the Registrant,
dated May 1, 1999.
10.17 Employment Agreement of James Ahlers, dated May 14, 1999,
and Amendment to Accounting Services and Operations
Agreement, dated August 17, 1999.
</TABLE>
--------------------------------------------------------------------------------
II-3
<PAGE>
PART II
--------------------------------------------------------------------------------
<TABLE>
<C> <S>
16.1 Letter regarding change in certifying accountant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Cooley Godward LLP (See Exhibit 5.1)
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
---------
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
All 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 registrant hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement 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 hereunder, 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.
The registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act, 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 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering.
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II-4
<PAGE>
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
BioMedicines, Inc. has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Alameda, State of California, on the 3rd day of November 2000.
<TABLE>
<S> <C>
BIOMEDICINES, INC.
By: /s/ MARK MORAN, M.D.
--------------------------------------------
Mark Moran, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mark Moran and James M. Ahlers, and each
of them, his or her true and lawful agent, proxy and attorney-in-fact, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead, in any and all capacities, to (i) act on, sign and file with
the Securities and Exchange Commission any and all amendments (including
post-effective amendments) to this registration statement together with all
schedules and exhibits thereto and any subsequent registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together
with all schedules and exhibits thereto, (ii) act on, sign and file such
certificates, instruments, agreements and other documents as may be necessary or
appropriate in connection therewith, (iii) act on and file any supplement to any
prospectus included in this registration statement or any such amendment or any
subsequent registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and (iv) take any and all actions which may
be necessary or appropriate to be done, as fully for all intents and purposes as
he or she might or could do in person, hereby approving, ratifying and
confirming all that such agent, proxy and attorney-in-fact or any of his
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ MARK MORAN
--------------------------------- Chief Executive Officer and Director November 3, 2000
Mark Moran (Principal Executive Officer)
/s/ JAMES M. AHLERS Senior Director, Finance &
--------------------------------- Operations (Principal Finance and November 3, 2000
James M. Ahlers Accounting Officer)
/s/ BRIAN G. ATWOOD
--------------------------------- Director November 3, 2000
Brian G. Atwood
/s/ JEAN DELEAGE
--------------------------------- Director November 3, 2000
Jean Deleage
</TABLE>
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II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ PAUL NICHOLSON
--------------------------------- Director November 3, 2000
Paul Nicholson
/s/ ARNOLD L. ORONSKY
--------------------------------- Director November 3, 2000
Arnold L. Oronsky
/s/ DEBRA YU
--------------------------------- Director November 3, 2000
Debra Yu
</TABLE>
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II-6
<PAGE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of
the Registrant to be effective upon the closing of the
offering made pursuant to this registration statement.
3.3 Bylaws of the Registrant.
3.4 Form of Amended and Restated Bylaws of Registrant to be
effective upon the closing of the offering made pursuant to
this registration statement.
4.1* Specimen Stock Certificate.
4.2 Amended and Restated Investor Rights Agreement dated
September 12, 2000.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement between the Registrant and its
directors and officers.
10.2 Form of 2000 Equity Incentive Plan, Form of 2000 Equity
Incentive Plan Stock Option Agreement, and Form of 2000
Equity Incentive Grant Notice and Notice of Exercise.
10.3 Form of 2000 Employee Stock Purchase Plan and Form of
Offering Document.
10.4** License Agreement, by and between Schering
Aktiengesellschaft and the Registrant dated February 1999.
10.5** License Agreement, by and between G.D. Searle & Co. and the
Registrant dated December 1997.
10.6** License Agreement between Boehringer Ingelheim International
GmbH and the Registrant dated July 1998.
10.7** Amendment to License Agreement by and between Boehringer
Ingelheim International GmbH and the Registrant dated
February 21, 2000.
10.8** Research and Development Contract, by and between Boehringer
Ingelheim Pharma KG and the Registrant dated July 1998.
10.9 Commercial Property Lease, by and between Alameda Real
Estate Investments and the Registrant dated December 1,
1998.
10.10 Amendment to Commercial Property Lease, by and between
Alameda Real Estate Investment, as Lessor, and the
Registrant, as Lessee, dated June 1, 1999.
10.11 Employment Agreement of Mark Moran, dated August 14, 1997.
10.12 Amendment to Employment Agreement of Mark Moran, dated
November 23, 1999.
10.13 Employment Agreement of Peter J. Langecker, dated September
4, 1999.
10.14 Employment Agreement of Hana Berger, dated October 12, 1999.
10.15 Employment Agreement of Curtis L. Scribner, dated November
25, 1999.
10.16 Consulting Agreement between Hana Berger and the Registrant,
dated May 1, 1999.
10.17 Employment Agreement of James Ahlers, dated May 14, 1999 and
Amendment to Accounting Services and Operations Agreement,
dated August 17, 1999.
16.1 Letter regarding change in certifying accountant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Cooley Godward LLP (See Exhibit 5.1)
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
</TABLE>
---------
* To be filed by amendment.
** Confidential treatment has been requested with respect to portions of this
exhibit.
