AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TANOX, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2836 76-0196733
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
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10301 STELLA LINK, SUITE 110
HOUSTON, TEXAS 77025-5497
(713) 664-2288
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------------
NANCY T. CHANG, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TANOX, INC.
10301 STELLA LINK, SUITE 110
HOUSTON, TEXAS 77025-5497
(713) 664-2288
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service)
------------------------------------
COPIES TO:
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<S> <C>
WILBURN O. MCDONALD, JR., ESQ. RODD M. SCHREIBER, ESQ.
CHAMBERLAIN, HRDLICKA, SKADDEN, ARPS, SLATE, MEAGHER
WHITE, WILLIAMS & MARTIN & FLOM (ILLINOIS)
1200 SMITH STREET, SUITE 1400 333 WEST WACKER DRIVE
HOUSTON, TEXAS 77002-4310 CHICAGO, ILLINOIS 60606
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
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,
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
========================================================================================================================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AMOUNT OF
SECURITIES TO BE AGGREGATE REGISTRATION
REGISTERED OFFERING PRICE(1) FEE
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<S> <C> <C>
Common Stock, $.01 par value per share...................... $126,000,000 $33,264
========================================================================================================================
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(1) Estimated solely for the purpose of calculating the amount of the
Registration Fee in accordance with Rule 457(o) of 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SHARES
Tanox, Inc.
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
This is an initial public offering of common stock of Tanox, Inc.
Tanox expects that the price to the public in the offering will be between
$ and $ per share. The market price of the shares after the offering may
be higher or lower than the offering price.
We have applied to include the common stock on the Nasdaq National Market under
the symbol "TNOX."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
PER SHARE TOTAL
---------- ----------
Price to the public.................. $ $
Underwriting discount................
Proceeds to Tanox....................
Tanox has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of additional
shares from Tanox within 30 days following the date of this prospectus to cover
over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
ROBERTSON STEPHENS
WARBURG DILLON READ LLC
ADAMS, HARKNESS & HILL, INC.
KBC SECURITIES
The date of this prospectus is , 2000.
<PAGE>
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<CAPTION>
The Allergy Cascade How Anti-IgE Works
<S> <C> <C> <C>
[graphic] When an allergy-prone [graphic] Anti-IgE binds
person is exposed to an to IgE and
allergen such as ragweed,
[graphic] he or she makes large [graphic] prevents IgE from
amounts of IgE antibody attaching to mast
to ragweed. cells.
[graphic] These IgE antibodies bind
to receptors on mast cells.
[graphic] The next time a person [graphic] Without IgE on the mast
encounters ragweed, it cross- cell, ragweed cannot cause
links the IgE antibodies on the mast cell to release its
mast cells and the IgE-primed powerful chemicals,
mast cell releases its powerful
chemicals, including histamine.
[graphic] These chemicals cause the [graphic] and the person's asthma
person to suffer asthma and allergy symptoms
and allergy symptoms, such as are prevented or reduced.
wheezing, bronchospasm,
sneezing, runny nose, watery
eyes and itching.
</TABLE>
2
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TABLE OF CONTENTS
PAGE
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Prospectus Summary...................... 4
Risk Factors............................ 8
Forward-Looking Statements.............. 20
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Dilution................................ 22
Selected Consolidated Financial Data.... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 24
Business................................ 29
Management.............................. 47
Principal Stockholders.................. 55
Certain Transactions.................... 57
Description of Capital Stock............ 58
Shares Eligible for Future Sale......... 61
Underwriting............................ 63
Legal Matters........................... 65
Experts................................. 65
Where You Can Find More Information..... 65
Index to Consolidated Financial
Statements............................ F-1
------------------------------------
We were incorporated in Texas in March 1986 and we reincorporated in Delaware in
January 2000. Our corporate headquarters, manufacturing facility and principal
research laboratories are located at 10301 Stella Link, Houston, Texas
77025-5497 and our telephone number is 713-664-2288.
Tanox and our logo are our registered service marks. Our website is located at
http://www.tanox.com. Information contained on our website is not part of this
prospectus. In this prospectus, references to "Tanox," "we," "us" and
"our" refer to Tanox, Inc. and/or its subsidiaries.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters. On February
1, 2000, we effected a 1.6 for 1 stock split by paying a stock dividend. All
common share numbers in this prospectus reflect the stock split.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.
3
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY.
WHO WE ARE
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious disease
and cancer. E25, our most advanced product in development, is an
anti-immunoglobulin E, or anti-IgE, antibody being developed in collaboration
with Novartis Pharma AG and Genentech, Inc. E25 has successfully completed Phase
III clinical trials in both allergic asthma and seasonal allergic rhinitis (hay
fever). Based on the results of these trials, a biologics license application,
or BLA, is expected to be filed with the Food and Drug Administration, or FDA,
concurrent with a European registration in mid-2000 for both indications. In
addition, we are developing a number of monoclonal antibodies to treat other
allergic diseases or conditions, such as severe allergic reactions to peanuts,
autoimmune diseases, HIV and to restore the immune systems of chemotherapy
patients with neutropenia.
THE OPPORTUNITY IN MONOCLONAL ANTIBODY THERAPEUTICS
Genetically engineered monoclonal antibodies represent an exciting area of novel
therapeutic development. Monoclonal antibodies are man-made antibodies that
target a specific foreign substance, or antigen. Advances in antibody
technologies have enabled the development of antibody products that can be
administered to patients on a chronic basis with little concern for adverse
response by the human immune system and can be manufactured more
cost-effectively. As a result, a large number of monoclonal antibodies in
clinical and preclinical development has emerged. According to an industry
survey, 74 out of 350, or 21% of all, biotechnology medicines in clinical trials
in 1998 were antibodies. The FDA has approved eight therapeutic antibodies, six
of them in the last three years. In 1999, total sales of these products exceeded
$1.3 billion.
OUR PRODUCTS IN DEVELOPMENT
E25. In 1987, we discovered a novel approach for the treatment of allergies and
asthma by using monoclonal antibodies to inhibit IgE. E25, a product based on
our discovery, is a humanized (human-like) anti-IgE monoclonal antibody in
development for the treatment of allergic asthma and allergic rhinitis. We
estimate that in the United States, allergic asthma afflicts approximately 11
million people, and allergic rhinitis afflicts approximately 40 million people,
of whom approximately 32 million are seasonal sufferers. Published Phase III
clinical results have demonstrated E25's ability to prevent or reduce symptoms
of seasonal allergic rhinitis. Phase III trials have also been successfully
completed in allergic asthma and will be presented at the American Academy of
Allergy Asthma and Immunology in March 2000. As mentioned above, Novartis and
Genentech expect to file for marketing approval in the United States and Europe
in mid-2000.
OTHER PRODUCT CANDIDATES. Using our comprehensive understanding of the human
immune system, we have built a diverse pipeline of monoclonal antibody product
candidates. In addition to E25, we have two other products in clinical
development and several product candidates being evaluated in preclinical and
research studies.
o HU-901 is a humanized anti-IgE monoclonal antibody similar to E25 that
is in a Phase I/II trial to test its effectiveness in reducing severe
allergic reactions to peanuts. According to a recently published survey,
peanut or tree nut (e.g., walnut, almond and cashew) allergy affects
about 3 million Americans. If Hu-901 is effective in reducing
sensitivity to peanuts, we may also investigate its benefit to patients
with
4
<PAGE>
other food allergies. Novartis and Genentech are currently disputing our
right to independently develop this product.
o 5D12 is an anti-CD40 monoclonal antibody that we are developing for
treatment of autoimmune diseases. We are currently conducting a Phase
I/II trial in patients with Crohn's disease. We expect the results of
this trial to play an important role in determining clinical indications
that we will pursue with this product. We have exclusive rights to 5D12
in Europe and Japan under a license from Chiron Corporation. We believe
potential autoimmune disease indications, such as Crohn's disease,
rheumatoid arthritis, multiple sclerosis and psoriasis, represent
significant market opportunities in Europe and Japan.
o 5A8 is an anti-CD4 antibody that is in preclinical development for
treatment of HIV.
o 166-32 is a complement factor D inhibiting antibody in research studies
for treatment of acute inflammation.
o 163-93 is an anti-G-CSF receptor activating antibody in research studies
for treatment of neutropenia caused by chemotherapy.
OUR STRATEGY
Our objective is to leverage our expertise in monoclonal antibodies and our
understanding of the human immune system to advance our product pipeline and
become a profitable biopharmaceutical company. We intend to accomplish this
through the following strategic initiatives:
o continuing to identify and develop novel monoclonal antibodies using our
demonstrated expertise in immunology and monoclonal antibody technology;
o maximizing the market opportunity for anti-IgE antibodies by exploring
indications beyond allergic asthma and seasonal allergic rhinitis;
o building our product pipeline through attractive acquisition and
in-licensing opportunities;
o forming strategic collaborations to optimize our research and
development resources and enhance the value of our product development
programs; and
o capturing additional value from our pipeline by retaining marketing
rights for products that can be effectively sold by a small, targeted
sales force.
5
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THE OFFERING
Common stock offered................. shares
Common stock to be outstanding after
the offering....................... shares(1)
Use of proceeds...................... For research and development activities,
for capital expenditures, to finance
possible acquisitions and investments in
technology, products or businesses and
for working capital and other general
corporate purposes.
Proposed Nasdaq National Market
symbol............................. TNOX
- ---------------------------
(1) The number of shares outstanding immediately after the offering is based on
the number of shares outstanding at February 1, 2000 and excludes:
o 3,183,920 shares of common stock issuable on exercise of outstanding
options at a weighted average exercise price of $4.39 per share; and
o 7,732,480 shares of common stock reserved for issuance pursuant to
future grants under our stock option plans.
6
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 8,939 $ 2,422 $ 1,405
Research and development............. 6,926 11,933 17,163
General and administrative........... 2,230 3,431 8,582
--------- ---------- ----------
Total operating costs and expenses... 9,156 15,364 25,745
--------- ---------- ----------
Income (loss) from operations........ (217) (12,942) (24,340)
Other income, net.................... 1,045 1,240 1,028
--------- ---------- ----------
Income (loss) before income taxes.... 828 (11,702) (23,312)
(Provision) benefit of income
taxes.............................. (198) 1,533 (34)
--------- ---------- ----------
Net income (loss).................... $ 630 $ (10,169) $ (23,346)
========= ========== ==========
Earnings (loss) per share:
Basic........................... $ 0.02 $ (0.35) $ (0.75)
========= ========== ==========
Diluted......................... $ 0.02 $ (0.35) $ (0.75)
========= ========== ==========
Shares used in computing earnings
(loss) per share:
Basic........................... 27,909 29,105 31,113
Diluted......................... 31,190 29,105 31,113
DECEMBER 31, 1999
--------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 47,254 $
Working capital...................... 42,718
Total assets......................... 55,328
Long term debt....................... 10,000 10,000
Retained earnings (deficit).......... (30,461) (30,461)
Total stockholders' equity........... 40,007
- ---------------------------
(1) As adjusted for the sale of shares of common stock in this offering
at an assumed public offering price of $ per share, after deducting
estimated underwriters' discounts and commissions and offering expenses.
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
WE HAVE A HISTORY OF NET LOSSES; WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses since our inception. As of December 31, 1999, we had
an accumulated deficit of approximately $30.5 million, including a net loss of
approximately $23.3 million for the year ended December 31, 1999. Our losses
have primarily been the result of costs incurred in our research and development
programs and from our general and administrative costs.
We have not earned any revenues from commercial sales of any of our therapeutic
products, and we do not expect sales to commence until at least 2001, if at all.
We have funded our operations principally from licensing fees and milestone
payments under our current or former collaborations and private placements of
our common stock. We expect to continue to incur substantial operating losses
for the foreseeable future, particularly as we increase our research and
development, manufacturing, clinical trial and administrative activities. We
expect that losses will continue until such time, if ever, that we are able to
generate sufficient revenue from milestone payments and royalties on our lead
product candidate, E25, to cover our expenses.
Our ability to achieve and maintain long term profitability is dependent to a
significant extent on obtaining regulatory approval for and successfully
commercializing E25, and also on successfully completing preclinical and
clinical trials, obtaining required regulatory approvals and successfully
developing, manufacturing and marketing our other current and future product
candidates. We cannot assure you that we will be able to achieve any of the
foregoing or that we will be profitable even if we successfully commercialize
our products.
FAILURE TO COMMERCIALIZE OUR LEAD PRODUCT CANDIDATE, E25, WOULD HAVE A
SIGNIFICANT AND ADVERSE EFFECT ON US AND OUR STOCK PRICE.
E25 is our lead product candidate. Our success will depend, to a great degree,
on the success of E25. In order to successfully commercialize E25, our
collaborators, Novartis and Genentech, must be able to, among other things,
obtain regulatory approvals for and achieve market acceptance of E25.
E25 has not yet been approved by the FDA or European regulatory agencies. We
anticipate that a BLA will be filed for E25 in the United States and
registration will be filed in Europe by mid-year 2000. We cannot assure you that
the FDA or other regulatory authorities will accept these filings, that E25 will
be approved in a timely manner or that it will be approved at all.
Even if E25 is approved by the FDA, we cannot be certain that E25 will be
accepted in the United States or in any foreign markets. A number of factors may
affect the rate and level of market acceptance of E25, including:
o regulatory developments related to the manufacture or use of E25;
o the price of E25 relative to other products or competing treatments;
o the effectiveness of Novartis' and Genentech's sales and marketing
efforts;
o the perception by physicians and other members of the healthcare
community of E25's safety, efficacy and benefits compared to those of
competing products or therapies;
o the willingness of physicians to adopt a new allergy treatment regimen;
o the availability of third-party reimbursement; and
o unfavorable publicity concerning E25 or comparable products or
therapies.
8
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If our collaborators fail to successfully obtain regulatory approval for and
commercialize E25, our business, financial condition and results of operations
will be materially harmed. Moreover, since E25 is our most advanced product
candidate, a setback of this nature would cause a sharp drop in our stock price.
Failure of our E25 program could also reflect adversely on our Hu-901 program,
which is also based on anti-IgE technology.
WE DEPEND ON NOVARTIS AND GENENTECH TO DEVELOP, OBTAIN REGULATORY APPROVAL FOR,
MANUFACTURE, MARKET AND DISTRIBUTE E25 AND OTHER ANTI-IGE PRODUCTS. FAILURE BY
NOVARTIS OR GENENTECH TO PERFORM UNDER OUR COLLABORATION AGREEMENTS MAY DELAY OR
SIGNIFICANTLY IMPAIR OUR ABILITY TO GENERATE REVENUES OR OTHERWISE ADVERSELY
AFFECT OUR PROFITABILITY.
Under the terms of our collaboration agreements, Novartis and Genentech are
responsible for developing, obtaining regulatory approval for, manufacturing,
marketing and distributing E25 and other anti-IgE products that may be selected
for development through our collaboration. We expect for the extended future
that Novartis and Genentech will manufacture, market and distribute E25 and
other selected anti-IgE products, if any of these products are approved by the
FDA. We also rely on Novartis and Genentech for significant financial and
technical contributions to the development of products covered by our
collaboration agreements. Our ability to profit from these products depends on
Novartis' and Genentech's performance under their agreements with us. We cannot
control the amount and timing of resources Novartis and Genentech will devote to
any of our products. If Novartis or Genentech experiences manufacturing or
distribution difficulties, does not actively market E25 or other selected
anti-IgE products or does not otherwise perform under our collaboration
agreements, our potential for revenue from those products will be dramatically
reduced. Novartis and Genentech may terminate our collaboration agreements on
short notice. If Novartis or Genentech terminates our collaboration, we would
experience increased capital requirements to undertake development and marketing
at our expense, and we cannot assure you that we would be able to develop E25 or
our other anti-IgE products on our own.
NONE OF OUR PRODUCTS HAVE RECEIVED REGULATORY APPROVAL. IF WE DO NOT RECEIVE AND
MAINTAIN REGULATORY APPROVALS, WE WILL NOT BE ABLE TO MARKET OUR PRODUCTS.
None of our products, including E25, have been approved by the FDA or any other
regulatory authority. We cannot assure you that the data collected from our
completed or future clinical trials will be sufficient to support any approvals
by the FDA or other regulatory authorities. Approval from the FDA is required to
manufacture and market pharmaceutical products in the United States. Other
countries have similar requirements.
The process that pharmaceutical products must undergo to receive this approval
is extensive, and includes preclinical testing and clinical trials to
demonstrate safety and efficacy and a review of the manufacturing process to
ensure compliance with good manufacturing practices. This process can last many
years, be very costly and still be unsuccessful. FDA approval can be delayed,
limited or not granted at all for many reasons, including:
o a product candidate may not be safe or effective;
o data from preclinical testing and clinical trials can be interpreted by
FDA officials in different ways than we interpret it;
o the FDA might not approve our manufacturing processes or facilities or
the processes or facilities of our collaboration partners;
o the FDA may change its approval policies or adopt new regulations; and
o a product candidate may not be approved for all the indications
requested.
The process of obtaining approvals in foreign countries is subject to delay and
failure for the same reasons. Any delay in or failure to receive approval for
E25 or any of our current or future product candidates, could materially harm
our business, financial condition and results of operations.
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Our products other than E25 require significant additional laboratory
development and/or clinical testing and investment prior to commercialization.
We cannot assure you that our product candidates will prove to be safe and
effective in clinical trials. Further, any of our products may prove to have
undesirable and unintended side effects. We may not successfully develop
products currently in research and development, and our products may not meet
applicable regulatory standards, obtain required regulatory approvals, be
capable of being produced in commercial quantities at an acceptable cost and in
compliance with applicable regulatory guidelines or be successfully marketed.
Approval of a product candidate could also be contingent on post-marketing
studies. In addition, any marketed product and its manufacturer continue to be
subject to strict regulation after approval. Any unforeseen problems with an
approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market. Delays in receipt of or
failure to receive regulatory approvals, or the loss of previously received
approvals, would delay or prevent product commercialization, which would
adversely affect our business, financial condition and results of operations.
WE ARE INVOLVED IN LEGAL PROCEEDINGS WITH OUR FORMER ATTORNEYS THAT MAY BE VERY
COSTLY TO US.
We have been involved in an arbitration regarding a fee dispute with our former
attorneys who represented us in our 1993 lawsuit against Genentech and F.
Hoffman-La Roche, Ltd. and its affiliates, and a 1994 lawsuit filed against us
by Genentech. The arbitration panel issued an award which entitled those
attorneys to receive approximately $3.5 million, including interest, payments
ranging from 33 1/3% to 40% of any future milestone payments received by us from
Genentech following product approval and 10% of the royalties which we receive
on sales of anti-IgE products. We sought a court order vacating the arbitration
award. However, a judgment was entered confirming the award. We intend to pursue
all available remedies, including appealing the decision.
We may not be successful in this proceeding. If this proceeding continues to
result in decisions unfavorable to us, we could lose substantial value from our
collaboration with Novartis and Genentech which could negatively affect our
stock price and harm our business, financial condition and results of
operations. Whether or not we are successful in this proceeding, we expect it to
consume substantial amounts of our financial and managerial resources.
WE ARE INVOLVED IN LITIGATION AND ARBITRATION PROCEEDINGS WITH NOVARTIS AND
GENENTECH THAT MAY BE VERY COSTLY TO US AND COULD RESULT IN THE LOSS OF OUR
RIGHTS TO INDEPENDENTLY DEVELOP PRODUCTS.
We are also a party to arbitrations and a related federal district court lawsuit
with Novartis and Genentech relating to our rights to develop Hu-901 and other
anti-IgE antibodies independently of our collaboration with Novartis and
Genentech. Novartis and Genentech have disputed our right to pursue development
of Hu-901 independently and have claimed that we are using unspecified
confidential and proprietary information of Novartis and Genentech that we have
no right to use.
If we are not successful in these proceedings, we could incur substantial
damages that would harm our financial position and we could lose our rights to
independently develop products covered by the collaboration, including Hu-901.
Even if we are successful, we may not be able to secure any recovery or develop
anti-IgE products independently of the collaboration. In either case, we expect
these proceedings to consume substantial amounts of our financial and managerial
resources. Further, because of the substantial amount of discovery required in
connection with this type of litigation, there is a risk that some of our
confidential information could be compromised by disclosure.
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OUR DEPENDENCE ON COLLABORATION PARTNERS TO DEVELOP, MANUFACTURE, MARKET AND
DISTRIBUTE OUR PRODUCTS MAY DELAY OR IMPAIR OUR ABILITY TO GENERATE SIGNIFICANT
REVENUE OR OTHERWISE ADVERSELY AFFECT OUR PROFITABILITY.
We will rely on collaboration partners for developing, manufacturing,
commercializing and marketing our products. Many of our competitors are
similarly seeking to develop or expand their collaboration and license
arrangements with pharmaceutical companies. The success of these efforts by our
competitors could have an adverse impact on our ability to form future
collaboration arrangements. We cannot assure you that we will be able to
negotiate acceptable collaboration agreements in the future or that efforts
under any current or future collaboration agreements will be successful. To the
extent that we choose not to or are unable to enter into future collaboration
agreements and maintain existing collaborations, we would experience increased
capital requirements to undertake research, development and marketing at our own
expense. In addition, we may encounter significant delays in introducing our
product candidates or find that the development, manufacture or sale of our
product candidates is adversely affected by the absence of such collaboration
agreements.
Our reliance on collaboration partners poses the following additional risks:
o disputes with our partners may arise, leading to delays in or
termination of the research, development or commercialization of product
candidates or resulting in significant litigation or arbitration;
o contracts with our partners may fail to provide significant protection
or may become unenforceable if one of these partners fails to perform;
o our partners could independently develop, or develop with third parties,
products or treatments that compete with our products;
o our partners may not commit enough capital or other resources to
successfully develop our products;
o our partners may not pursue further development and commercialization of
products resulting from their collaboration with us;
o our partners with marketing and distribution rights to one or more of
our products may not commit enough resources to the marketing and
distribution of our products;
o our contracts with collaboration partners may expire or be terminated
and we may not be able to replace them; and
o the terms of our contracts with our partners may not be favorable to us
in the future.
If any of these risks occur, our product development and productivity may
suffer, and our business, financial condition and results of operations would be
materially harmed.
OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE
NEGATIVE, WE MAY BE FORCED TO TERMINATE DEVELOPMENT OF PRODUCTS IMPORTANT TO THE
FUTURE OF OUR COMPANY.
We must demonstrate through preclinical studies and clinical trials that our
products are safe and effective for use in each target indication before we can
obtain regulatory approvals for the commercial sale of those products. These
studies and trials may be very costly and time consuming. The results of
preclinical studies and initial clinical trials of our products are not
necessarily predictive of the results from later-stage clinical trials. Drugs in
later stages of clinical trials may fail to show the desired safety and efficacy
traits despite having progressed through initial clinical testing. We cannot
assure you that the data collected from clinical trials of our products will be
sufficient to support approval by the FDA or other regulatory authorities.
The speed with which we are able to enroll patients in clinical trials is an
important factor in determining how quickly clinical trials may be completed.
Many factors affect patient enrollment, including the size of the patient
population, the proximity of patients to clinical sites and the eligibility
criteria for the study. Our clinical trial protocols may be targeted at
indications that have small patient populations, which may make it difficult for
us to enroll enough patients to complete the trials. Delays in patient
enrollment in the
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trials may result in increased costs, program delays, or both, which could slow
down our product development and approval process, and could materially harm our
business.
The administration of any product we develop may produce undesirable side
effects in humans. The occurrence of side effects could interrupt or delay
clinical trials of products and could result in the FDA or other regulatory
authorities denying approval of our products for any or all targeted
indications. The FDA, other regulatory authorities or we may suspend or
terminate clinical trials at any time. Even if we received FDA and other
regulatory approvals, our products may later exhibit adverse effects that limit
or prevent their widespread use or that force us to withdraw those products from
the market. We cannot assure you that any of our products will be safe for human
use.
WE HAVE LIMITED EXPERIENCE AND CAPABILITY IN MANUFACTURING AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS THAT COULD RESULT IN LOST REVENUE.
To be successfully commercialized, our products must be manufactured in
commercial quantities in compliance with regulatory requirements and at an
acceptable cost, either by us or by our collaboration partners. If the
facilities at which our products are manufactured cannot pass a pre-approval or
periodic plant inspection, FDA approval of our products may not be granted or
the sale of our products may be barred. Although we expect Genentech and
Novartis to manufacture E25 and other anti-IgE products developed through our
collaboration if such products are approved by the FDA or other regulatory
authorities, we have reserved the right to manufacture up to 50% of the
worldwide requirements for such products. We currently have a process
development and manufacturing facility for biological products located in
Houston, Texas. However, we have no experience in manufacturing commercial
quantities of antibodies and currently have limited manufacturing capacity. In
order to obtain regulatory approvals and to create capacity to produce our
products in sufficient quantities for commercial sale at an acceptable cost, we
will have to develop or acquire additional technology for large scale
manufacturing and build or otherwise obtain access to adequate facilities, which
will require substantial additional funds. We will also be required to
demonstrate to the FDA and corresponding foreign authorities our ability to
manufacture our products using controlled, reproducible processes. We cannot
assure you that we can develop the necessary manufacturing technology or that we
will be able to fund or build an adequate commercial manufacturing facility
necessary to obtain regulatory approvals and to produce adequate commercial
supplies of our potential products on a timely basis. We cannot assure you that
we, operating alone or with the assistance of others, will be able to
successfully make the transition to commercial production.
WE LACK SALES AND MARKETING EXPERIENCE, WHICH MAKES US DEPENDENT ON THIRD
PARTIES FOR THEIR EXPERTISE IN THIS AREA.
Assuming that we receive the required regulatory approvals, we expect to market
and sell our products principally through distribution, co-marketing,
co-promotion or licensing arrangements with third parties. Under our current
collaboration agreement, Novartis and Genentech have exclusive marketing rights
with respect to E25 and other selected anti-IgE products. However,
commercialization rights may revert back to us on termination of our
collaboration. We currently have no sales, marketing or distribution
capabilities. Any revenues we receive from our E25 collaboration will depend
primarily on the efforts of our collaboration partners. We intend to retain
marketing rights in the United States and selected Asian countries for products
that we develop that can be served effectively with a small, targeted sales
force. If we elect to market products directly, we would require significant
additional expenditures and management resources to develop an internal sales
force. We cannot assure you that we would be able to establish a successful
sales force should we choose to do so.
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WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE THAT COULD RESULT IN
PRODUCTS THAT ARE SUPERIOR TO THE PRODUCTS WE ARE DEVELOPING.
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. We have numerous competitors in the United
States and abroad, including, among others, major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. These competitors may develop technologies and products that are
more effective or less costly than any of our current or future products or that
could render our technologies and products obsolete or noncompetitive. Many of
these competitors have substantially more resources and product development,
production and marketing capabilities than we do. In addition, many of our
competitors have significantly greater experience than we do in undertaking
preclinical testing and clinical trials of new or improved pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. If we are successful in achieving significant commercial sales of
our products, we also will be competing in manufacturing efficiency and
marketing capability, areas in which we have limited or no experience.
Furthermore, our competitors may obtain FDA approval for products sooner and be
more successful in manufacturing and marketing their products than are we or our
collaborators.
Products currently exist in the market that will compete directly with the
products that we are seeking to develop. Any product candidate that we develop
and for which we receive regulatory approval must then compete for market
acceptance and market share. Our product candidates may not gain market
acceptance among physicians, patients, healthcare payors and the medical
community. Significant factors in determining whether we will be able to compete
successfully include:
o efficacy and safety of our products;
o timing and scope of regulatory approval;
o product availability;
o potential advantages over alternative treatment methods;
o development, marketing, distribution and manufacturing capabilities and
support of our collaborators;
o reimbursement coverage from insurance companies and others;
o price and cost-effectiveness of our products; and
o patent protection.
If our products are not competitive based on these or other factors, our
business, financial condition and results of operations will be materially
harmed.
WE ARE DEPENDENT ON OUR PATENTS AND PROPRIETARY RIGHTS. THE VALIDITY,
ENFORCEABILITY AND COMMERCIAL VALUE OF THESE RIGHTS ARE HIGHLY UNCERTAIN.
Our success is dependent in part on obtaining, maintaining and enforcing
patents, licensing the rights to patents and patent applications owned by others
maintaining trade secrets and operating without infringing on the proprietary
rights of third parties. While we file and prosecute patent applications to
protect our inventions, our pending patent applications may not result in the
issuance of valid patents and our issued patents may not provide competitive
advantages. Also, our patent protection may not prevent others from developing
competitive products using related technology. We cannot assure you that pending
patent applications licensed to us will result in patents being issued or that,
if issued, the patents will give us an advantage over competitors with similar
technology.
We own or have licenses to certain issued patents. The patents we own that are
most material to our business are five United States patents and six foreign
patents relating to anti-IgE antibodies. However, the patent position of
biotechnology and pharmaceutical firms is highly uncertain and involves many
complex legal and technical issues. There is no clear policy involving the
breadth of claims allowed or the degree of protection afforded under such
patents. Issued patents can be challenged in litigation in the courts and in
proceedings in the patent office. Issuance of a patent is not conclusive as to
its validity, enforceability or
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the scope of its claim. We cannot assure you that our patents will not be
successfully challenged, invalidated, or limited in the scope of their coverage.
Moreover, the cost of litigation to uphold the validity of patents and to
prevent infringement can be substantial and can result in the diversion of
technical and management personnel's time and attention which may materially
harm our business, financial condition and results of operations. If the outcome
of litigation is adverse to us, third parties may be able to use our patented
invention without payment to us. Moreover, we cannot assure you that our patents
will not be infringed or successfully avoided through design innovation. Any of
these events may materially and adversely effect our business.
There may be patent rights belonging to others that require us to alter our
products, pay licensing fees or cease certain activities. If our products
conflict with patent rights of others, the owners of those patent rights could
bring legal actions against us claiming damages and seeking to stop us from
manufacturing and marketing the affected products. If these legal actions are
successful, in addition to any potential liability for damages, we could be
required to obtain a license in order to continue to manufacture or market the
affected products. We cannot assure you that we would prevail in any such action
or that any license required under any such patent would be made available on
acceptable terms or at all. Any of these events may materially harm our
business, financial condition and results of operations.
The research, development and commercialization of a biopharmaceutical product
often involves alternative development and optimization routes, which are
presented at various stages in the development process. We cannot predict the
preferred routes at the outset of a research and development program, because
they will depend on subsequent discoveries and test results. There are numerous
third-party patents in our field, and it is possible that, to pursue the
preferred development route of one or more of our products, we will need to
obtain a license to a patent, which would decrease the ultimate profitability of
the applicable product. If we cannot negotiate a license, we might have to
pursue a less desirable development route or terminate the program altogether.
We are aware that other groups have claimed discoveries similar to those covered
by our patent applications. We do not expect to know for several years the
relative strength of our patent position as compared to these other groups. In
addition, other companies, some of which may be our competitors, have filed
applications for or have been issued patents and may obtain additional patents
and proprietary rights relating to products or processes used in, necessary to,
competitive with or otherwise related to our patents and products. These
products and processes include, among other items, patents covering technology
relating to humanized monoclonal antibodies that we anticipate developing.
Protein Design Labs, Inc. owns certain patents and patent applications relating
to such humanized antibodies. We have recently taken a non-exclusive license to
these patents and patent applications for one of our products. We do not know if
licenses from Protein Design Labs will be available for our other antibody
products.
We are required to make substantial cash payments and achieve certain milestones
and satisfy certain conditions, including filing investigational new drug
applications, obtaining product approvals and introducing products, to maintain
our rights under certain of our licenses, including our licenses from Chiron and
Biogen, Inc. We cannot assure you that we will be able to maintain our rights
under these licenses. Termination of any of these licenses could result in our
being unable to commercialize any related product.
In addition to the intellectual property rights described above, we also rely on
unpatented technology, trade secrets and confidential information. We cannot
assure you that others will not independently develop substantially equivalent
information and techniques or otherwise gain access to our technology or
disclose such technology, or that we can effectively protect our rights in
unpatented technology, trade secrets and confidential information. We require
each of our employees, consultants and advisors to execute a confidentiality
agreement at the commencement of an employment or consulting relationship with
us. We cannot assure you, however, that these agreements will provide effective
protection in the event of unauthorized use or disclosure of this confidential
information.
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WE MAY EXPERIENCE DIFFICULTIES IN MANAGING GROWTH, WHICH COULD MATERIALLY HARM
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
If our product development efforts and the product development efforts of our
collaborators are successful, our growth could strain our operations, product
development and other managerial and operating resources. Future growth will
impose significant added responsibilities on members of management, including
the need to identify, recruit, maintain and integrate additional employees,
including management. In the future, our financial performance and our ability
to compete effectively will depend, in part, on our ability to manage any future
growth effectively. To that end, we will have to be able to:
o manage our research and development efforts effectively;
o expand the capacity, scalability and performance of our product
development infrastructure;
o develop our administrative, accounting and management information
systems and controls;
o improve coordination among our research, accounting, finance, marketing
and operations personnel; and
o hire and train additional qualified personnel.
We cannot assure you that we will be able to accomplish these tasks, and if we
are unable to accomplish any of these tasks, our business, financial condition
and results of operations may be materially harmed.
FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL AND PRINCIPAL MEMBERS OF OUR
SCIENTIFIC AND MANAGEMENT STAFF COULD MATERIALLY HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Our success depends greatly on our abilities to attract and retain qualified
scientific and technical personnel, as well as to retain the services of our
existing technical management staff. To expand our research and development
programs and pursue our product development plans, we will be required to hire
additional qualified scientific and technical personnel, as well as personnel
with expertise in clinical testing and government regulation. There is intense
competition for qualified staff, and we cannot assure you that we will be able
to attract and retain the necessary qualified staff for the development of our
business. The failure to attract and retain key scientific and technical
personnel and management staff or the loss of any of our current management team
could materially harm our business and financial condition. We do not maintain,
and do not currently intend to obtain, key employee global life insurance on any
of our personnel.
WE MAY NEED ADDITIONAL FINANCING, BUT OUR ACCESS TO CAPITAL FUNDING IS
UNCERTAIN.
Our current and anticipated development projects require substantial additional
capital. We expect that the net proceeds from this offering, together with our
existing assets and revenue from operations, will be sufficient to fund our
operations for the next three years. However, our future capital needs will be
dependent on many factors, including successful commercialization of E25,
receipt of milestone payments from our collaboration partners, progress in our
research and development activities, the magnitude and scope of these
activities, the progress and level of unreimbursed costs associated with
preclinical studies and clinical trials, the costs associated with acquisitions,
the costs of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements, the establishment of additional collaboration and
licensing arrangements, and the cost of manufacturing scale-up and development
of marketing activities, if undertaken by us. We do not have committed external
sources of funding and we cannot assure you that we will be able to obtain
additional funds on acceptable terms, if at all. If adequate funds are not
available, we may be required to:
o delay, reduce the scope of or eliminate one or more of our development
programs;
o obtain funds through arrangements with collaboration partners or others
that may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves; or
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o license rights to technologies, product candidates or products on terms
that are less favorable to us than might otherwise be available.
If we raise additional funds by issuing additional stock, further dilution to
our stockholders may result, and new investors could have rights superior to
existing stockholders. If funding is insufficient at any time in the future, we
may be unable to develop or commercialize our products, take advantage of
business opportunities or respond to competitive pressures.
WE ARE SUBJECT TO THE UNCERTAINTY RELATED TO REIMBURSEMENT POLICIES AND
HEALTHCARE REFORM MEASURES.
In recent years, there have been numerous proposals to change the healthcare
system in the United States. Some of these proposals have included measures that
would limit or eliminate payments for medical procedures and treatments or
subject the pricing of pharmaceutical products to government control. In
addition, as a result of the trend towards managed healthcare in the United
States, as well as legislative proposals to reduce government insurance
programs, third-party payors are increasingly attempting to contain healthcare
costs by limiting both coverage and the level of reimbursement of new drug
products. Consequently, significant uncertainty exists as to the reimbursement
status of newly-approved healthcare products. If we or any of our collaborators
succeed in bringing one or more of our products to market, we cannot assure you
that third-party payors will establish and maintain price levels sufficient for
us to realize an appropriate return on our investment in product development.
Significant changes in the healthcare system in the United States or elsewhere,
including changes resulting from adverse trends in third-party reimbursement
programs, could materially reduce our profitability. Such changes could also
significantly harm our ability to raise the capital we would need to continue
our operations. Furthermore, if these proposals affect our collaborators, our
ability to commercialize the products we develop jointly with them would also be
harmed.
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND IT IS UNCERTAIN THAT INSURANCE
AGAINST THESE CLAIMS WILL BE AVAILABLE TO US AT A REASONABLE RATE IN THE FUTURE.
Our business exposes us to potential product liability risks, which are inherent
in the testing, manufacturing, marketing and sale of pharmaceutical products. We
may be held liable if any product we develop, or any product that is made with
the use or incorporation of any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We cannot assure you that we will be able to avoid product liability exposure.
Product liability insurance for the biopharmaceutical industry is generally
expensive, when available at all. We have obtained product liability insurance
coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million
aggregate limitation. However, we cannot assure you that our present insurance
coverage is now or will continue to be adequate. In addition, some of our
license and collaboration agreements require us to obtain product liability
insurance. It is possible that future license and collaboration agreements may
also include such a requirement. We cannot assure you that adequate insurance
coverage will be available to us at a reasonable cost in the future. Our
inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit the commercialization of products developed by us or our collaborators.
If we are sued for any injury caused by our products, our liability could exceed
our total assets.
WE DEAL WITH HAZARDOUS MATERIALS AND MUST COMPLY WITH ENVIRONMENTAL LAWS AND
REGULATIONS, WHICH CAN BE EXPENSIVE AND RESTRICT HOW WE DO BUSINESS. WE COULD
ALSO BE LIABLE FOR DAMAGES, PENALTIES OR OTHER FORMS OF CENSURE IF WE ARE
INVOLVED IN A HAZARDOUS WASTE SPILL OR OTHER ACCIDENT.
Our research and development work and manufacturing processes involve the
controlled use of hazardous materials, including chemical, radioactive and
biological materials. Our operations also produce hazardous waste products. We
are subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials. Despite
precautionary procedures that we
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implement for handling and disposing of these materials, we cannot eliminate the
risk of accidental contamination or discharge or any resultant injury from these
materials. In the event of a hazardous waste spill or other accident, we could
also be liable for damages, penalties or other forms of censure. In addition, we
may be sued for injury or contamination that results from our use or the use by
third parties of these materials, and our liability could exceed our total
assets. Although we believe that we are in compliance in all material respects
with applicable environmental laws and regulations, we cannot assure you that we
will not be required to incur significant costs to comply with environmental
laws and regulations in the future. In addition, current or future environmental
laws and regulations may impair our research, development or production efforts.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND WILL CONTINUE TO CONTROL OUR COMPANY AND THE OUTCOME OF MATTERS PUT TO A
VOTE OF STOCKHOLDERS AFTER THIS OFFERING.
Immediately after this offering is completed, our executive officers and
directors and their affiliates will, in the aggregate, own shares representing
approximately % of our outstanding common stock. As a result, these
stockholders, acting together, will be able to have a significant influence on
all matters submitted to our stockholders for approval, including the election
of directors and the approval of changes in control, and on general management
and affairs of our company. Such control could discourage others from initiating
potential merger, takeover or other change of control transactions. As a result,
the market price of our common stock could be adversely affected. For a more
detailed description of our management team and their ownership of common stock,
please refer to "Management" on page 47.
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE
LAW CONTAIN CERTAIN PROVISIONS THAT COULD DELAY OR PREVENT A TAKEOVER AND
SUPPRESS OUR STOCK PRICE.
Provisions of our amended and restated certificate of incorporation, bylaws and
Delaware law could delay, defer or prevent a third party from acquiring us,
despite the possible benefit to our stockholders, or otherwise adversely affect
the price of our common stock.
The provisions of our amended and restated certificate of incorporation and
bylaws include the following:
o the ability of our board of directors to issue shares of preferred stock
and to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
o a staggered board of directors;
o a limitation on who may call special meetings of stockholders; and
o advance notice requirements for nomination for election to the board of
directors or for proposing matters that can be acted on by stockholders
at stockholder meetings.
In addition to these provisions, we are subject to certain Delaware laws,
including one that prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. We may also
adopt a shareholder rights plan or "poison pill" after this offering. All of
this may discourage potential takeover attempts, discourage bids for our common
stock at a premium over market price or could adversely affect the market price
of, and the voting and other rights of the holders of, our common stock.
YOU MAY NOT BE ABLE TO TRADE OUR COMMON STOCK IF AN ACTIVE TRADING MARKET DOES
NOT DEVELOP.
Prior to this offering, there has been no public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of an active trading market in our common stock or how liquid that
market might become. The initial public offering price for our shares will be
determined by negotiations between us and the representatives of the
underwriters, and may not be indicative of prices that will prevail in any
future trading market. You may not be able to sell shares of our common stock at
or above our initial public offering price.
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MARKET VOLATILITY MAY AFFECT OUR STOCK PRICE AND THE VALUE OF YOUR INVESTMENT
MAY BE SUBJECT TO SUDDEN DECREASES.
The trading price for our common stock is likely to be volatile. Prices for our
common stock will be determined in the marketplace and may be influenced by many
factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors' perceptions of us and our
financial prospects, results of the governmental approval process for our
products, results of clinical trials, changes in government regulations,
developments in our relationships with our collaboration partners, developments
in our litigation, announcements of new products, technologies or treatments by
us or our competitors and general economic, industry and market conditions. In
addition, the stock markets from time to time have experienced extreme price and
volume fluctuations. In particular, the market prices of the securities of
biotechnology companies have been especially volatile, and often these
fluctuations have been unrelated to operating performance. These broad
fluctuations may adversely affect the trading price of our common stock,
regardless of our actual operating performance.
In the past, following periods of market volatility, security holders have
instituted class action litigation. If the market value of our stock experiences
adverse fluctuations and we become involved in this type of litigation, we could
incur substantial legal costs and management's attention could be diverted,
which could materially harm our business or the market price of our stock.
SALES OF COMMON STOCK MAY HAVE AN ADVERSE IMPACT ON THE MARKET PRICE OF OUR
COMMON STOCK.
Sales of significant amounts of our common stock after this offering or the
perception that such sales will occur could adversely affect the market price of
our common stock or our future ability to raise capital through an offering of
equity securities. After this offering is completed, shares of our
common stock will be issued and outstanding. All of the shares of common stock
to be sold in this offering will be freely tradable without restriction or
further registration under the federal securities laws unless purchased by our
"affiliates" within the meaning of Rule 144 under the Securities Act. The
33,324,402 remaining shares of outstanding common stock will be "restricted
securities" under the Securities Act, subject to restrictions on the timing,
manner and volume of sales of those shares.
Our officers and directors and stockholders who together own shares of
common stock have agreed for a period of 180 days after the date of this
prospectus not to sell or otherwise dispose of any shares of our common stock,
other than shares acquired in this offering. When the lock-up periods expire,
the shares owned by these persons prior to completion of this offering may be
sold into the public market without a registration statement, to the extent
permitted by Rule 144 or exemptions under the Securities Act. Moreover,
following this offering, a substantial number of shares of common stock issuable
on exercise of outstanding options will be eligible for sale in the public
market.
For a more detailed description of additional shares that may be sold in the
future, please refer to "Shares Eligible for Future Sale" on page 61 and
"Underwriting" on page 63.
AS A NEW INVESTOR, YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK
VALUE OF YOUR SHARES.
The public offering price for our shares will be substantially higher than our
net tangible book value per share, which at December 31, 1999, was $1.20 per
share. If you purchase shares of our common stock in this offering, you will
suffer immediate, substantial net tangible book value dilution of $ per share,
or $ per share, if the underwriters' over-allotment option is exercised in
full. You will also incur additional dilution if the holders of outstanding
options to purchase common stock at prices below our net tangible book value per
share after this offering exercise such options. For a more detailed discussion
of dilution, please refer to "Dilution" on page 22.
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OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO ALLOCATE THE NET PROCEEDS OF THIS
OFFERING AND THE PROCEEDS MAY NOT BE USED APPROPRIATELY.
Our management will retain broad discretion allocating the proceeds of this
offering. We estimate the net proceeds from this offering to be approximately
$ million, after deducting estimated offering expenses. We plan to use these
proceeds to substantially increase funding of clinical development of our
products, expand our research and development infrastructure and research
facilities in the United States, The Netherlands and Taiwan, acquire or license
additional technologies and products and market our products. We have no
specific allocations for any other net proceeds of this offering. The amount of
proceeds we will actually expend on general corporate purposes will vary
depending on a number of factors, including the successful commercialization of
E25, progress in and scope of our research and development activities, changes
in or termination of existing collaboration and licensing arrangements, costs
and magnitude of product or technology acquisitions and our need for
manufacturing capacity. Consequently, management will retain a significant
amount of discretion over the application of these proceeds. Because of the
number and variability of factors that will determine the use of these proceeds,
how we spend these proceeds may vary substantially from our current intentions.
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FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements may be found
under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue" or similar
words, although some forward-looking statements are expressed differently. You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
o the ability to develop safe and efficacious drugs;
o failure to achieve positive results in clinical trials;
o failure to successfully commercialize our products;
o relationships with our collaboration partners;
o variability of royalty, license and other revenues;
o ability to enter into future collaboration agreements;
o competition and technological change; and
o existing and future regulations affecting our business.
You should also consider carefully the statements under "Risk Factors" and
other sections of this prospectus, which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking
statements.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common stock in
this offering will be approximately $ . If the underwriters fully exercise
their over-allotment option, the net proceeds of the shares sold by us will be
$ . "Net Proceeds" are what we expect to receive after paying the
underwriters' discounts and commissions and other expenses of the offering. For
the purpose of estimating net proceeds, we are assuming an initial public
offering price of $ per share.
We intend to use the net proceeds of this offering primarily for research and
development, capital expenditures and general corporate purposes, including
working capital. We may use a portion of the proceeds to acquire or invest in
technologies, products or businesses which we believe may be complementary to
our business. We currently have no agreements or commitments in this regard. The
amount of proceeds we will actually expend on general corporate purposes will
vary depending on a number of factors, including the successful
commercialization of E25, progress in and scope of our research and development
activities, changes in or termination of existing collaboration and licensing
arrangements, costs and magnitude of product or technology acquisitions and our
need for manufacturing capacity. Our management will have broad discretion over
allocation of the net proceeds of this offering. Pending such uses, we intend to
invest the net proceeds of this offering in short-term, interest-bearing
investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain earnings to support operations and to finance the
growth and development of our business. Therefore, we do not expect to pay cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table shows:
o Our capitalization on December 31, 1999.
o Our capitalization on December 31, 1999, assuming the completion of the
offering as adjusted for the sale of shares of common stock by us at an
assumed public offering price of $ per share, net of estimated
underwriters' discounts and commissions and offering expenses.
o The shares of common stock outstanding in the actual and as adjusted
columns exclude 3,183,920 shares of common stock issuable upon exercise
of options outstanding at December 31, 1999 at a weighted average
exercise price of $4.39 per share.
DECEMBER 31, 1999
------------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
Long term debt....................... $ 10,000 $ 10,000
-------- ------------
Stockholders' equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized, no
shares issued and outstanding;
no shares issued or outstanding,
as adjusted..................... -- --
Common stock, $.01 par value;
120,000,000 shares authorized;
33,324,402 shares issued and
outstanding, actual; ( )
shares issued and outstanding,
as adjusted..................... 333
Additional paid-in capital......... 71,701
Deferred compensation.............. (651) (651)
Loans receivable from employees.... (1,086) (1,086)
Other comprehensive income,
cumulative translation
adjustment...................... 171 171
Retained earnings (deficit)........ (30,461) (30,461)
-------- ------------
Total stockholders'
equity................... 40,007
-------- ------------
Total capitalization....... $ 50,007 $
======== ============
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DILUTION
Our net tangible book value on December 31, 1999 was approximately $39,965,000,
or $1.20 per share. "Net tangible book value" is total assets minus the sum of
liabilities and intangible assets. "Net tangible book value per share" is net
tangible book value divided by the total number of shares outstanding.
After giving effect to adjustments relating to the offering, our pro forma net
tangible book value on December 31, 1999, would have been $ or $ per share.
The adjustments made to determine pro forma net tangible book value per share
are the following:
o an increase in total assets to reflect the net proceeds of the offering
as described under "Use of Proceeds" assuming that the public offering
price will be $ per share; and
o the addition of the number of shares offered by this prospectus to the
number of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $ per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:
Assumed public offering price per
share........................... $
---------
Net tangible book value per share
as of December 31, 1999......... $ 1.20
---------
Increase in net tangible book value
per share attributable to the
offering........................
---------
Pro forma net tangible book value
per share as of December 31,
1999, after giving effect to the
offering........................
---------
Dilution per share to new investors
in the offering................. $
=========
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from Tanox, the total
consideration paid and the average price paid per share. The table assumes that
the public offering price will be $ per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 33,324,402 % 61,924,000 % $ 1.86
New investors........................
------------ ------- ------------- -------
Total........................... 100.0% 100.0%
============ ======= ============= =======
</TABLE>
The discussion and tables above assume no exercise of outstanding options to
purchase shares of common stock. As of December 31, 1999, there were outstanding
options to purchase a total of 3,183,920 shares of common stock at a weighted
average exercise price of $4.39 per share. To the extent that any outstanding
options are exercised, there will be further dilution to new investors.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our selected historical financial data. You should read
carefully the consolidated financial statements included in this prospectus,
including the notes to the consolidated financial statements. The selected data
in this section is not intended to replace the consolidated financial
statements.
We derived the statement of operations data for the years ended December 31,
1997, 1998 and 1999, and balance sheet data as of December 31, 1998 and 1999
from the audited consolidated financial statements in this prospectus. Those
financial statements were audited by Arthur Andersen LLP, independent public
accountants. We derived the statement of operations data for the years ended
December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995,
1996 and 1997 from audited consolidated financial statements that are not
included in the prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 6,957 $ 15,017 $ 8,939 $ 2,422 $ 1,405
Research and development............. 5,499 5,626 6,926 11,933 17,163
General and administrative........... 1,707 1,165 2,230 3,431 8,582
--------- --------- --------- ---------- ----------
Total operating costs and expenses... 7,206 6,791 9,156 15,364 25,745
--------- --------- --------- ---------- ----------
Income (loss) from operations........ (249) 8,226 (217) (12,942) (24,340)
Other income, net.................... 470 433 1,045 1,240 1,028
--------- --------- --------- ---------- ----------
Income (loss) before income taxes.... 221 8,659 828 (11,702) (23,312)
(Provision) benefit of income
taxes.............................. (10) (1,922) (198) 1,533 (34)
--------- --------- --------- ---------- ----------
Net income (loss).................... $ 211 $ 6,737 $ 630 $ (10,169) $ (23,346)
========= ========= ========= ========== ==========
Earnings (loss) per share:
Basic........................... $ 0.01 $ 0.26 $ 0.02 $ (0.35) $ (0.75)
========= ========= ========= ========== ==========
Diluted......................... $ 0.01 $ 0.23 $ 0.02 $ (0.35) $ (0.75)
========= ========= ========= ========== ==========
Shares used in computing earnings
(loss) per share:
Basic........................... 26,215 26,215 27,909 29,105 31,113
Diluted......................... 29,418 29,382 31,190 29,105 31,113
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 15,443 $ 18,235 $ 36,857 $ 33,735 $ 47,254
Working capital...................... 13,847 15,575 35,871 34,323 42,718
Total assets......................... 18,147 25,871 44,831 43,422 55,328
Long term debt....................... 7,000 7,000 9,000 10,000 10,000
Retained earnings (deficit).......... (4,313) 2,424 3,054 (7,115) (30,461)
Total stockholders' equity........... 8,470 15,811 34,428 31,540 40,007
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH THE FINANCIAL STATEMENTS AND OTHER
FINANCIAL INFORMATION INCLUDED IN THIS PROSPECTUS.
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious disease
and cancer. E25, our most advanced product in development, is an
anti-immunoglobulin E, or anti-IgE, antibody being developed in collaboration
with Novartis and Genentech. E25 has successfully completed Phase III clinical
trials in both allergic asthma and seasonal allergic rhinitis (hay fever). Based
on the results of these trials, a BLA is expected to be filed with the FDA
concurrent with a European registration in mid-2000 for both indications. In
addition, we are developing a number of monoclonal antibodies to treat certain
other allergic diseases or conditions, such as severe allergic reactions to
peanuts, autoimmune diseases, HIV and to restore the immune systems of
chemotherapy patients with neutropenia.
We currently have no products available for sale and are focusing on product
development, clinical trials and process development. We have incurred
substantial losses since inception and incurred an accumulated deficit through
December 31, 1999, of $30.5 million. We expect to continue to incur substantial
operating losses for the foreseeable future, particularly as we increase our
research and development, manufacturing, clinical trial and administrative
activities. We expect that losses will continue until such time, if ever, that
we are able to generate sufficient revenue from royalties on E25 to cover our
expenses.
Historically, our revenues primarily have been milestone payments and product
development funding under our collaboration agreements. In the future, our
principal revenues are expected to be milestone payments and royalties from
Genentech and milestone payments, royalties and profit-sharing payments from
Novartis. We may also receive royalties from Hoffman-La Roche Ltd. should it
participate in selling E25 in Europe. Our revenues will be particularly
dependent on the success of our collaboration partners in developing,
manufacturing, obtaining regulatory approvals for and marketing E25. Because a
substantial portion of our revenues for the foreseeable future will be dependent
on the achievement of development and commercialization milestones, we
anticipate that our results of operations will vary substantially from year to
year and even quarter to quarter.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues decreased to $1.4 million in 1999 from $2.4 million in 1998,
a decrease of $1.0 million. This decrease was primarily due to a difference of
$1.3 million in milestone and cost reimbursement revenues pursuant to our
agreements with Novartis and Genentech. These agreements accounted for 76% of
our revenues in 1999 and 98% of our revenues in 1998. The $1.3 million decrease
was partially offset by higher revenues of $0.4 million from foreign government
grants and technology licensing fees.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
to $17.2 million in 1999 from $11.9 million in 1998, an increase of $5.3
million. This increase was principally due to increased personnel, expansion of
preclinical and clinical development activities and a $2.7 million non-cash
charge resulting from the extension of the exercise periods for stock options to
some research and development employees. In addition, we incurred a $3.4 million
charge in 1999 and a $2.8 million charge in 1998 for in-process research and
development costs from the first two purchase payments made to the former
shareholders of PanGenetics B.V., a company we acquired in 1998. Please see
"Acquisition of PanGenetics B.V."
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $8.6 million in 1999 from $3.4 million in 1998, an increase of $5.2
million. This increase was primarily attributable to
24
<PAGE>
recognition of an arbitration award of $3.5 million to the attorneys who
represented us in our litigation against Genentech, and a $1.9 million non-cash
charge for stock-based compensation, due to the extension of some employee and
consultant stock options.
OTHER INCOME. Other income decreased to $1.0 million in 1999 from $1.2 million
in 1998, a decrease of $0.2 million. This decrease was principally due to a
decline in interest income as a result of lower average cash balances and a loss
in 1999 on foreign currency transactions.
NET LOSS. Net loss increased to $23.3 million in 1999 from $10.2 million in
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues decreased to $2.4 million in 1998 from $8.9 million in 1997,
a decrease of $6.5 million. This decrease was due to a $4.0 million decline in
revenues from our agreements with Novartis and Genentech and a decline of $2.5
million in revenues from a former collaboration. Revenues from our collaboration
agreements with Novartis and Genentech accounted for 98% of our 1998 revenues
and 71% of our 1997 revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
to $11.9 million in 1998 from $6.9 million in 1997, an increase of $5.0 million.
This increase was primarily due to expanding our research organization,
including $2.8 million of in-process research and development expenses
associated with purchasing PanGenetics in the first quarter of 1998.
Additionally, we incurred a $1.5 million charge in 1998 to license patents that
may be required for the commercialization of one of our products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.4 million in 1998 from $2.2 million in 1997, an increase of $1.2
million. This increase was principally due to increased expenses associated with
our legal proceedings.
OTHER INCOME. Other income increased to $1.2 million in 1998 from $1.0 million
in 1997, an increase of $0.2 million. This increase was primarily due to a $0.4
million increase in interest income due to higher average cash balances,
partially offset by a $0.2 increase in interest expense.
NET LOSS/INCOME. Net loss totaled $10.2 million in 1998, compared to net income
of $0.6 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through collaboration
and grant revenues, sales of equity securities, interest income and equipment
financing agreements. From inception through 1999, we recognized approximately
$59.3 million in collaboration, grant and other revenues. Additionally, we have
raised approximately $54.9 million from sales of equity securities and have
earned approximately $8.8 million in interest income. As of December 31, 1999,
we had approximately $47.3 million in cash, cash equivalents and short-term
investments available for working capital.
During 1999, we used $8.2 million to finance our operating activities. The
primary use of cash for operating purposes was our net loss of $23.3 million,
although $10.0 million of this amount was attributable to non-cash items. Our
investing activities generated $0.9 million in 1999. Financing activities
generated $23.0 million in 1999, principally from selling our common stock. The
combination of the above items resulted in a cash increase of $15.9 million
during the year.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a loan
agreement to finance our new clinical manufacturing facility. The loan bears
interest at the London Interbank Offered Rate, or LIBOR, plus 2% (7.3% and 8.1%
at December 31, 1998 and 1999, respectively). Through December 31, 1999,
Novartis has agreed to forgive interest on the loan. For the years 1997, 1998
and 1999, the interest forgiven by Novartis has been reflected as interest
expense and a capital contribution. Although the loan is currently scheduled to
be due in full on December 31, 2005, Novartis may partially or totally forgive
the principal and future interest payments based on the future use of the
facility.
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<PAGE>
From inception through December 31, 1999, we have invested approximately $11.6
million in property and equipment, primarily to support research and product
development activities and to construct our new clinical manufacturing facility.
We pledged all of the assets of the new clinical manufacturing facility as
security for the Novartis loan.
We have agreed to loan some employees up to $1.5 million in April 2000 for the
payment of their tax obligations pursuant to the exercise of stock options.
We are currently engaged in litigation and arbitration relating to a fee dispute
with the law firms that represented us in connection with the Genentech
litigation. An arbitration panel issued an award entitling the attorneys to
receive approximately $3.5 million, including interest, payments ranging from
33 1/3% to 40% of the future payments we would receive from Genentech following
product approval, and 10% of the royalties that we would receive on all sales of
anti-IgE products by Genentech and Novartis. We are contesting this award.
During the appeals process, we will either post a bond or place amounts in
escrow to secure payment of the award. See "Business -- Pending Legal
Proceedings."
At December 31, 1999, we had a net operating loss of approximately $6.6 million
for federal income tax reporting purposes, which begin to expire in 2019. We
also have a foreign net operating loss carryforward of approximately $5.2
million. Additionally, we have an unused U.S. research and development tax
credit carryforward of approximately $1.0 million, which will begin to expire in
2011. Because we have incurred cumulative losses to date and there is no
assurance of future taxable income, we have established a valuation allowance to
fully offset the deferred tax asset at December 31, 1999.
We expect to incur substantial additional capital, research and development,
manufacturing and other costs as we continue to develop our products.
Consequently, we may need to raise substantial additional funds. We expect that
the net proceeds from this offering, together with our existing assets and
revenue from operations, will be sufficient to fund our operations for the next
three years. However, our future capital needs will be dependent upon many
factors, including successful commercialization of E25, receipt of milestone
payments from our collaboration partners, progress in our research and
development activities, the magnitude and scope of these activities, the
progress and level of unreimbursed costs associated with preclinical studies and
clinical trials, the costs and magnitude of product or technology acquisitions,
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements, the establishment of additional collaboration and
licensing arrangements, and the cost of manufacturing scale-up and development
of marketing activities, if undertaken by us. We do not have committed external
sources of funding and we cannot assure that we will be able to obtain
additional funds on acceptable terms, if at all. If adequate funds are not
available, we may be required to:
o delay, reduce the scope of or eliminate one or more of our programs;
o obtain funds through arrangements with collaboration partners or others
that may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves; or
o license rights to technologies, product candidates or products on terms
that are less favorable to us than might otherwise be available.
ACQUISITION OF PANGENETICS B.V.
In March 1998, we purchased PanGenetics B.V., now our subsidiary Tanox Pharma
B.V., for an initial payment to its shareholders of $0.5 million in cash and
226,409 shares of our common stock, valued at $11.25 per share, for a total
initial consideration of $3.1 million. In addition, we agreed to pay future
consideration, in two installments, totaling up to $0.7 million in cash and
484,147 shares of our common stock upon occurrence of certain future events.
26
<PAGE>
In September 1999, we paid the second installment of $0.3 million in cash and
242,075 shares of our common stock, valued at $12.50 per share, for a total
consideration of $3.4 million. If the final future payment is made as scheduled
in March 2001, we will record an additional purchase price amount based on the
cash paid and the fair value of the common stock issued at the time of payment.
If we make the final payment in March 2001, the final payment will be
principally allocated to acquired in-process research and development and
goodwill based upon the appraisal obtained as of the date of the acquisition.
The acquisition of PanGenetics was accounted for under the purchase method of
accounting. At the time of the acquisition, the total current and future
consideration of the acquisition was valued for accounting purposes at $9.2
million, based on the total of the cash and then fair value of common stock
paid, or expected to be paid, to PanGenetics shareholders. Of this amount, we
allocated approximately $7.2 million to in-process research and development and
$2.0 million to goodwill and other assets. See "Note 2 of the Notes to
Consolidated Financial Statements."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of risks, including foreign currency exchange
fluctuations and changes in interest rates. In the normal course of business, we
have established policies and procedures to manage these risks.
FOREIGN CURRENCY EXCHANGE RATES. During 1999, our operating results reflect
foreign exchange losses of $0.1 million and our balance sheet reflects a foreign
currency translation adjustment of $0.2 million. We are subject to foreign
currency exchange risk because:
o we invest in our foreign subsidiaries;
o we incur a significant portion of our costs and expenses and a smaller
portion of our revenues in the local currencies of the countries where
we do business; and
o we finance part of the cost of our subsidiaries' operations through
dollar denominated inter-company loans and equity investments that are
recorded on their books in their respective local currency.
Fluctuations in exchange rates have not had a material impact on our revenues or
costs and expenses, but have affected the value of our equity investments and
inter-company loans. As a result of our international operations and our current
financing approach, our operating results are subject to the impact of
fluctuations in exchange rates of the currencies in which we have foreign
subsidiaries versus the United States dollar. We are primarily exposed to gains
and losses with respect to Dutch guilders and Taiwan dollars because our
subsidiaries conduct business in these currencies. To date, we have not
implemented a program to hedge our foreign currency risk, but we may do so in
the future.
INTEREST RATE RISK. Cash and short-term investments were approximately $47.3
million at December 31, 1999. These assets were primarily invested in investment
grade commercial paper with the intent of holding the securities to maturity. We
do not invest in derivative securities. Although our portfolio is subject to
fluctuations in interest rates and market conditions, no gain or loss on any
security would actually be recognized in earnings unless the asset was sold. In
addition, our loan from Novartis is based on a premium over LIBOR. As such, if
general interest rates increase, our interest costs will increase.
THE YEAR 2000
During 1998 and 1999, we had a Year 2000 Project (Y2K Project) in place to
address the potential exposures related to the impact on our computer systems
and scientific and manufacturing equipment containing computer-related
components for the Year 2000 and beyond. As of December 31, 1999, all scheduled
Y2K work was completed. As of the date hereof, we have encountered no material
Y2K system problems and no impact on operations or expenses has occurred.
Nevertheless, we do use and rely on a wide variety of information technologies,
computer systems and scientific and manufacturing equipment containing
computer-related components (such as programmable logic controllers and other
embedded systems). As a result, time-sensitive functions of those software
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<PAGE>
programs and equipment may yet misinterpret dates after January 1, 2000, to
refer to the twentieth century rather than the twenty-first century. Although we
do not anticipate any material problems, we could suffer system or equipment
shutdowns, failures or miscalculations. Such conditions could result in
inaccuracies in computer output or disruptions of operations, including, among
other things, inaccurate processing of financial information and/or temporary
inabilities to process transactions, manufacture products, or engage in similar
normal business activities.
In addition, although all of our significant suppliers and our significant
service providers indicated that they were or expected to be Year 2000 compliant
by December 31, 1999, and although as of the date of this prospectus we are not
aware of any material Year 2000 compliance problems with these third parties'
systems, we cannot be certain that the representations of these third parties
were accurate or that their systems are or will continue to be Year 2000
compliant. If any of our significant suppliers or significant service providers
experience Year 2000 compliance problems and we are unable to replace them with
alternate sources, our business would be harmed.
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<PAGE>
BUSINESS
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious disease
and cancer. In 1987, we discovered a novel approach for treatment of allergies
and asthma by using monoclonal antibodies capable of inhibiting immunoglobulin
E, or IgE. E25, our most advanced product in development is a genetically
engineered monoclonal antibody that attaches to, and inhibits, the activity of
IgE. We are developing E25 in collaboration with Novartis and Genentech for
treatment of allergic asthma and allergic rhinitis (hay fever). We estimate that
in the United States, allergic asthma afflicts approximately 11 million people,
and allergic rhinitis afflicts approximately 40 million people, of whom
approximately 32 million are seasonal sufferers. E25 has successfully completed
Phase III clinical trials for the prevention of symptoms caused by allergic
asthma and seasonal allergic rhinitis. Based on the results of these trials, our
collaboration partners intend to file a BLA with the FDA concurrently with
European registration for both indications in mid-2000.
Using our extensive understanding of the human immune system, we have built a
diverse pipeline of monoclonal antibody product candidates. We are conducting
clinical trials with two additional monoclonal antibodies: Hu-901, an anti-IgE
antibody distinct from E25 and currently in a Phase I/II trial for the treatment
of severe peanut allergy, and 5D12, an anti-CD40 antibody, currently in a Phase
I/II trial for the treatment of Crohn's disease and in preclinical studies for
other autoimmune diseases. We are conducting preclinical and research studies
with 5A8, an anti-CD4 antibody for treatment of HIV, 166-32, a complement factor
D inhibiting antibody for treatment of acute inflammation and 163-93, an
anti-G-CSF receptor activating antibody for treatment of neutropenia in
chemotherapy patients.
STRATEGY
Our objective is to leverage our expertise in monoclonal antibodies and
understanding of the human immune system to advance our product pipeline and
become a profitable biopharmaceutical company. We intend to accomplish this
through the following strategic initiatives:
o CONTINUING TO IDENTIFY AND DEVELOP NOVEL MONOCLONAL ANTIBODIES. We have
focused on the research and development of monoclonal antibodies since
our inception and have successfully identified and obtained patents for
novel monoclonal antibodies with potential therapeutic applications. We
believe that monoclonal antibodies will be one of the primary areas for
pharmaceutical development for the foreseeable future, particularly as
genomic research identifies novel disease targets. We will continue to
apply our expertise in immunology to identify new antibodies that may
bind to these novel targets. We will focus on diseases for which current
therapies are substandard or unavailable and the market opportunities
are large. With product candidates targeting autoimmune diseases, HIV,
inflammation and cancer, we believe that we have a diverse monoclonal
antibody product pipeline.
o MAXIMIZING THE MARKET OPPORTUNITY FOR ANTI-IGE ANTIBODIES. We are
focused on identifying diseases and conditions for which anti-IgE
antibodies are likely to provide a safe and effective therapy. In this
regard, we would like to work cooperatively with our partners, Novartis
and Genentech, in establishing market awareness for E25 in asthma,
allergic rhinitis and potential future indications targeted through the
collaboration. Concurrent with this effort, we are pursuing the
independent development of Hu-901 to demonstrate the efficacy of
anti-IgE antibodies for indications not currently being pursued by our
partners.
o IDENTIFYING ATTRACTIVE ACQUISITION AND IN-LICENSING CANDIDATES. In
addition to our in-house development efforts, we will continue our
efforts to identify opportunities to acquire or in-license products and
technologies. We believe that we are well positioned to continue to
attract in-licensing and acquisition candidates as a result of our
demonstrated expertise in immunology and monoclonal antibodies. Our
anti-CD40 and anti-CD4 programs are the result of this strategy.
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<PAGE>
o FORMING STRATEGIC COLLABORATIONS TO SUPPORT DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS. We often deem it advantageous to
partner with large pharmaceutical and biotechnology companies to obtain
funding and marketing support for our development activities. These
collaborations generally:
- enable us to develop a greater number of products than otherwise
would be possible;
- lower the substantial financial investment that is required of us to
develop our products; and
- provide us with domestic and international marketing and sales
expertise for our partnered products once approved.
Under future collaborations, we expect to retain strategically important
development, manufacturing or marketing rights in order to enhance the value
of our drug development opportunities.
o CAPTURING ADDITIONAL VALUE FROM OUR PRODUCT PIPELINE. As we pursue
strategic collaborations, we intend to reserve strategic marketing
rights for our products. We will focus initially on markets for which
our products have a clear advantage over other therapies or which can be
marketed using a relatively small, targeted sales force.
HUMAN IMMUNE SYSTEM
The human immune system has three general mechanisms that protect the body
against infections, toxins and cancer by responding to and clearing foreign
agents, or antigens, that have penetrated the body's protective barriers. These
mechanisms are:
o ANTIBODIES. The body produces proteins called antibodies that deactivate
and help remove the antigens from the body. Each antibody matches an
antigen much as a key matches a lock. Antibodies are made by specialized
white blood cells called B cells, with the help of other white blood
cells, called helper T cells. When a B cell encounters its triggering
antigen, it manufactures millions of identical antibody molecules and
releases them into the bloodstream.
o CELL-MEDIATED IMMUNE RESPONSE. The second protective immune mechanism
relies on cells to recognize and destroy foreign antigens. This
mechanism is known as cell-mediated immunity. T cells are important in
cell-mediated immune responses. Some T cells, called killer T cells,
seek out and kill cancer cells or virus-infected cells. Helper T cells
also play a role in cell-mediated immune response by stimulating
inflammatory cells called macrophages to actively destroy foreign
antigens, microorganisms and cancer cells.
o INNATE IMMUNE RESPONSE. Innate immunity is the body's first line of
defense against injury and infection and serves a surveillance and
maintenance role. One part of the innate immune system involves large
white blood cells called phagocytes (literally "cell-eaters") that can
engulf and digest foreign microorganisms and other antigens. Important
phagocytes include macrophages, that rid the body of dead cells and
other debris, and granulocytes, including neutrophils, that contain
granules filled with potent chemicals. These chemicals, in addition to
destroying microorganisms, play a key role in acute inflammatory
reactions. Another part of the innate immune response is known as the
complement system. The complement system is made up of a series of
proteins that work to "complement" the activity of antibodies in
destroying bacteria, either by stimulating the macrophages and
neutrophils, or by puncturing the bacterial cell membrane to kill the
cells. These proteins also cause the neutrophils to accumulate at the
site of infection or tissue damage.
Most of the time, the immune system protects us from infections, cancer and some
toxic agents. However, sometimes the immune system actually causes the disease
or symptoms of the disease. For example, in the case of allergic diseases, such
as asthma and hay fever, the immune system responds to the antigen, or allergen
in this case, by producing an IgE form of antibody. IgE is instrumental in
triggering the symptoms of the disease. In other cases, T and B cells may
recognize a part of the body as foreign, triggering an immune response against
the body resulting in an autoimmune disease and associated tissue destruction.
30
<PAGE>
MONOCLONAL ANTIBODIES AS THERAPEUTICS
Genetically engineered monoclonal antibodies represent an exciting area of novel
therapeutic product development. Monoclonal antibodies are man-made antibodies
that target a specific antigen. Most monoclonal antibodies are derived from
animals such as mice. Advances in antibody design technologies have enabled the
development of humanized (human-like) and fully human antibody products that can
be administered to patients on a chronic basis with little concern for adverse
response by the human immune system. Advances in antibody production
technologies, such as high productivity fermentation and transgenic plants and
animals, have enabled antibody products to be produced more cost-effectively.
The result of these technologies has been the emergence of a large number of
monoclonal antibodies in clinical and preclinical investigation. According to a
survey conducted by the Pharmaceutical Research and Manufacturers of America, 74
out of 350, or 21% of all, biotechnology medicines in clinical trials in 1998
were antibodies. The FDA has approved eight therapeutic antibodies, six of them
in the last three years, with total sales in 1999 in excess of $1.3 billion.
Generally speaking, there are three basic methods for using monoclonal
antibodies as therapeutics. Each of the approaches described below capitalizes
on the monoclonal antibody's precise targeting of selected receptors on specific
cells:
o BLOCKING CELL ACTIVITY AND IMMUNE FUNCTIONS -- monoclonal antibodies can
be produced to bind to specific bioactive molecules or cell receptors to
prevent undesirable cell responses, such as allergic reactions and
autoimmune diseases.
o ACTIVATING CELL ACTIVITY AND IMMUNE FUNCTIONS -- monoclonal antibodies
can be produced to bind to specific cell receptors in order to activate
a desired cellular response.
o DELIVERING THERAPEUTIC AGENTS -- monoclonal antibodies bind to specific
target receptors. Consequently, antibodies can be used to deliver active
agents, such as radioactive isotopes and toxins, to specific cells and
tissues targeted for destruction.
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PRODUCT DEVELOPMENT PROGRAMS
We have three products in clinical development and several product candidates
being evaluated in preclinical and research studies. Our drugs target various
elements or malfunctions of the immune system, and all are monoclonal
antibodies. We have drugs that are designed to deactivate or reduce the activity
of the immune system for diseases caused by over-activation or inappropriate
activation of immune responses, such as autoimmune and allergic diseases and
acute inflammation. We also have drugs designed to activate the immune system
for treatment of diseases where boosting immune protection is desirable, such as
AIDS, infectious diseases and cancer. Our products have either resulted from our
internal research and development activities or were in-licensed or acquired.
The following is a summary of the development status for our principal product
candidates.
<TABLE>
<CAPTION>
ANTIBODY
PRODUCT DESCRIPTION INDICATION STATUS PARTNERS
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
E25 Anti-IgE Allergic Asthma Phase III Completed Novartis/Genentech
Seasonal Allergic Phase III Completed Novartis/Genentech
Rhinitis
Hu-901(1) Anti-IgE Severe Peanut Phase I/II --
Allergy
5D12(2) Anti-CD40 Crohn's Disease Phase I/II --
Other Autoimmune Preclinical --
Diseases
5A8 Anti-CD4 HIV/AIDS Preclinical --
166-32 Anti-complement Acute Research --
Factor D Inflammation
163-93 Anti-G-CSF Chemotherapy-Induced Research --
Receptor Neutropenia
</TABLE>
1 Our rights to independently develop this product are the subject of a pending
legal dispute with Novartis and Genentech. Information regarding this dispute
is contained in this prospectus in the section entitled "Business -- Pending
Legal Proceedings."
2 We have the right to develop and commercialize this product in Europe and
Japan.
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ANTI-IGE DEVELOPMENT -- E25
E25 is a humanized anti-IgE monoclonal antibody designed to prevent symptoms of
allergic asthma and allergic rhinitis by reducing the immune system's ability to
be activated by allergens. We are developing E25 in collaboration with Novartis
and Genentech. The product has successfully completed Phase III clinical trials
in both allergic asthma and seasonal allergic rhinitis. Our partners intend to
file a BLA with the FDA concurrently with European registration for both
indications by mid-2000. E25 is expected to be administered by subcutaneous
injections once or twice per month.
In allergic diseases, the immune system responds to the antigen, or allergen in
this case, by producing IgE. IgE binds to the surface of mast cells and
basophils. These cells, which are found in tissue and also circulate in the
blood, contain chemicals such as histamine and leukotrienes, which induce
inflammation. The first time an allergy-prone person is exposed to an allergen,
he or she makes large amounts of an IgE antibody specific to that allergen.
These IgE molecules attach to the surfaces of mast cells or basophils. When an
IgE antibody sitting on a mast cell or basophil next comes in contact with its
specific allergen, the IgE antibody signals the mast cell or basophil to release
its powerful chemicals, causing inflammation of tissues, and the symptoms of
asthma and allergy, including wheezing, bronchospasm, sneezing, runny nose,
watery eyes and itching. E25 blocks the binding of IgE to mast cells and
basophils, thereby inhibiting the allergic response.
<TABLE>
<CAPTION>
The Allergy Cascade How Anti-IgE Works
<S> <C> <C> <C>
[graphic] When an allergy-prone [graphic] Anti-IgE binds
person is exposed to an to IgE and
allergen such as ragweed,
[graphic] he or she makes large [graphic] prevents IgE from
amounts of IgE antibody attaching to mast
to ragweed. cells.
[graphic] These IgE antibodies bind
to receptors on mast cells.
[graphic] The next time a person [graphic] Without IgE on the mast
encounters ragweed, it cross- cell, ragweed cannot cause
links the IgE antibodies on the mast cell to release its
mast cells and the IgE-primed powerful chemicals,
mast cell releases its powerful
chemicals, including histamine.
[graphic] These chemicals cause the [graphic] and the person's asthma
person to suffer asthma and allergy symptoms
and allergy symptoms, such as are prevented or reduced.
wheezing, bronchospasm,
sneezing, runny nose, watery
eyes and itching.
</TABLE>
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<PAGE>
MARKET OPPORTUNITY.
Allergic reactions triggered by IgE include allergic rhinitis and allergic
asthma.
ALLERGIC RHINITIS. Allergic rhinitis is a disease characterized by runny nose,
sneezing, congestion, itchy eyes and similar symptoms, and includes hay fever.
Allergic rhinitis afflicts at least 39.5 million people in the United States,
most of whom have seasonal allergies. In 1993, it was estimated that the total
cost associated with all forms of allergic rhinitis in the United States was
$3.4 billion. Doctors commonly treat the symptoms of allergic rhinitis with
antihistamines, decongestants, nasal steroids and other drugs. For many
patients, however, these medications do not completely alleviate the allergic
reactions or eliminate the symptoms. According to a 1997 study, only 26% of
treated allergic rhinitis patients reported symptoms as "well" or completely
controlled. Doctors sometimes prescribe allergy shots, called hyposensitization
therapy, for severely allergic persons to treat allergic rhinitis and systemic
allergic reactions. If the specific allergen to which the patient is reacting is
known, hyposensitization can be effective. However, the difficulty in
identifying the patient's allergy and the frequent and lengthy treatment
protocols, as well as the potential for serious adverse side effects, generally
make hyposensitization undesirable.
ASTHMA. Asthma makes breathing difficult and is potentially life threatening.
According to a 1998 report by the Centers for Disease Control, approximately 17
million people in the United States suffer from asthma. Published reports also
indicate that asthma's prevalence in the United States has increased 75% from
1980 to 1994. Approximately two-thirds of these patients have allergic asthma.
According to the American Lung Association, it is estimated that over $9.8
billion is spent annually on asthma-related costs in the United States.
Corticosteroids and beta-agonists, the mainstay of asthma therapy, are
effective, yet each is associated with specific safety drawbacks. Particular
side effects of corticosteroid treatment include growth retardation in children,
osteoporosis and cataracts. Beta-agonists offer only short-term relief and do
not control the underlying inflammation. Leukotriene modifiers, a new class of
controller medications with the potential to reduce steroid requirements, appear
to be modestly effective for some patients. However, these modifiers have been
associated with drug interactions and adverse events including liver injury.
Increasing use of beta-agonists indicates inadequate control of the underlying
inflammation of asthma.
DEVELOPMENT STATUS AND CLINICAL DATA.
SEASONAL ALLERGIC RHINITIS. A Phase III clinical trial with E25 for seasonal
allergic rhinitis was conducted in Scandinavia during the spring 1998 birch
season. The randomized, placebo-controlled, multicenter clinical trial examined
symptoms of rhinoconjunctivitis and rescue medication usage in 251 adult and
adolescent patients with a history of birch pollen allergy. Patients were
treated with 300 mg of E25 or placebo via subcutaneous injection every three or
four weeks and treatment lasted eight or nine weeks. Patients received rescue
medications, such as antihistamines, when their symptoms were severe enough to
require additional medication. This Phase III clinical trial confirmed the
statistically significant results of an earlier pivotal Phase II trial in 536
patients conducted during the 1997 ragweed season in the United States.
Results from the Phase III seasonal allergic rhinitis trial were reported in May
1999 and showed that:
o E25 DECREASED THE SEVERITY OF NASAL AND OCULAR ALLERGY SYMPTOMS.
Compared to placebo, E25 treatment improved average daily nasal
(p<0.001) and ocular (p=0.031) symptom severity scores. Patients treated
with placebo experienced recurring sneezing, itchy nose and similar
symptoms that increased over the pollen season and were greatest during
highest pollen exposure. In contrast, patients treated with E25 did not
experience an increase in nasal symptoms over the whole E25 treatment
period compared to symptoms reported before the pollen season began and
before treatment began. 21% of patients treated with E25 reported
complete control of symptoms and an additional 59% reported symptom
control was improved compared to previous seasons. In addition, 6 of 7
patients who discontinued treatment because of unsatisfactory treatment
effects were in the placebo group, even though there were twice as many
patients receiving E25.
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o E25 DECREASED USE OF RESCUE MEDICATION. Patients receiving E25 used an
average 0.5 antihistamine tablets per day versus 1.3 tablets per day in
the placebo group (p<0.001), and required rescue medication on half as
many days (p<0.001). Increased use of rescue medication by placebo group
patients may have blunted the difference in symptom scores reported.
o E25 IMPROVED PATIENTS' QUALITY OF LIFE. E25 treatment delivered
clinically meaningful and statistically significant improvement over
placebo in total rhinitis quality of life score (p<0.001) and in the
specific categories of activity limitations, nasal symptoms, non-nose
and -eye symptoms and practical problems. E25 treated patients also
experienced improvements in sleep, eye symptoms and emotional state.
o E25 TREATMENT WAS SAFE AND WELL TOLERATED. In this and in the previous
trials, no antibodies against E25 were detected and no serum sickness,
immune complex disease, severe allergic reactions or other
allergy-related side effects were reported. Less than 2% of patients
experienced side effects of headache (1.8%) and upper respiratory
infection (1.2%). Three subjects reported urticaria (skin itching and
hives) following E25 injections (0.5% of all E25 injections). The
incidence of adverse events was similar for the E25 and placebo groups.
In addition, Novartis has announced the initiation of a Phase IV evaluation in
perennial (year-round) allergic rhinitis in the third quarter of 1999.
ALLERGIC ASTHMA. Phase III trials in allergic asthma have been completed in the
United States, in both adults and children. The trials included an initial
treatment phase, in which E25 was added to patients' current treatment regimens
of inhaled or oral corticosteroid and beta-agonist, followed by a steroid
withdrawal phase. Additionally, these trials had treatment extensions for one
year so that long term safety could be evaluated. In December 1999, the
preliminary analysis of these studies showed that results from these trials were
positive and consistent with the statistically significant results of the
earlier Phase II trials, which were published in the December 23, 1999 issue of
the New England Journal of Medicine. The results from the Phase III asthma
trials are expected to be presented at the American Academy of Allergy Asthma
and Immunology meeting in San Diego in March 2000.
A BLA filing for E25 in the United States and registration in Europe are planned
for mid-year 2000 for both allergic asthma and seasonal allergic rhinitis.
We and our collaboration partners have begun clinical development of E26, a
humanized anti-IgE monoclonal antibody with improved binding to IgE. Although
E26 may be several years behind the development of E25, the product is expected
to require lower doses to achieve the same clinical benefits as E25.
ANTI-IGE DEVELOPMENT -- HU-901
Hu-901 is a humanized anti-IgE monoclonal antibody that we are developing for
prevention of symptoms of peanut induced anaphylaxis, a severe, life-threatening
allergic reaction. Hu-901 binds IgE in a way similar to E25, and is designed to
prevent allergic reactions. At the initiation of our collaboration with Novartis
and Genentech in 1996, Novartis and we were developing Hu-901, and Genentech was
developing E25. We agreed with our collaboration partners to select E25 for
joint development primarily because commercial-scale manufacturing capability
existed for E25.
In July 1999, we initiated our first independent clinical trial with Hu-901. As
discussed in this prospectus under the heading "Business -- Pending Legal
Proceedings," Novartis and Genentech are contesting our right to independently
develop Hu-901. Regardless of the outcome, we believe that our development
program will highlight the potential for additional indications for the use of
anti-IgE antibodies, and encourage our partners to expand the development of
anti-IgE more rapidly into additional indications. If we lose the litigation, we
will be required to terminate independent development of Hu-901.
MARKET OPPORTUNITY. We believe anti-IgE antibodies, such as Hu-901, have
potential applications beyond asthma and allergic rhinitis in treating other
allergic reactions and diseases, including peanut and other food allergies. For
example, patients with severe peanut allergy suffer gastrointestinal, skin and
respiratory
35
<PAGE>
symptoms, and may also suffer potentially life-threatening anaphylaxis in
response to ingestion of peanuts. According to a recently published survey,
peanut or tree nut (e.g., walnut, almond and cashew) allergy affects about 3
million Americans, 1.1% of the U.S. population. There is no approved preventive
therapeutic for food allergies. Current treatment is avoidance of peanuts and
peanut oil, which is used in preparing many food products. Complete avoidance
requires constant vigilance and is difficult because peanut-derived ingredients
are not always identified in prepared foods. Accidental exposures can result in
serious allergic reactions and sometimes death. Patients with severe peanut
allergy take antihistamines for accidental exposure and epinephrine for severe
anaphylactic reactions.
It is estimated that 2 to 4% of children and 1 to 2% of adults in the United
States suffer from food allergies. If Hu-901 is effective in reducing
sensitivity to peanuts, we may also investigate its use in other food allergies.
Another indication for possible treatment with our anti-IgE product is atopic
dermatitis, or eczema, a disease resulting in itching, blisters, redness,
swelling and scaling or hardness of the skin. Eczema is correlated with higher
IgE levels and is prevalent in asthma patients. Severe eczema causes much
distress to patients and greatly impairs their quality of life. Eczema is
usually treated with skin hydration and topical steroids, and sometimes treated
with antihistamines. Some individuals are resistant to conventional therapies or
develop unacceptable side effects. Eczema is the most common skin condition in
children under the age of eleven. The percentage of children diagnosed with
eczema has increased in the United States from 3% in the 1960s to 10% in the
1990s.
DEVELOPMENT STATUS. We recently initiated a randomized, placebo-controlled,
multicenter Phase I/II trial with Hu-901. We designed the trial to determine the
extent to which Hu-901 treatment of patients with histories of severe reactions
to peanut products decreases sensitivity to eating small amounts of a peanut
preparation.
ANTI-CD40 DEVELOPMENT -- 5D12
5D12 is an anti-CD40 monoclonal antibody that we are developing for treatment of
autoimmune diseases. 5D12 blocks the CD40 pathway. The CD40 pathway enables B
cells to produce antibodies and regulates cellular immune responses, including
activation of macrophages and killer T cells. T and B cells sometimes recognize
a part of the body as "non-self," triggering an immune response against the
body that results in an autoimmune disease and associated tissue destruction. We
believe that 5D12 is the only antibody in clinical development that binds to
CD40 and inhibits cellular activation. We have exclusive rights to 5D12 in
Europe and Japan under a license from Chiron.
Preclinical studies have shown that interfering with the CD40 pathway may be
beneficial for treatment of autoimmune diseases, including multiple sclerosis
and lupus, and in preventing rejection of grafted organs. 5D12 has potently
inhibited activation of B cells and macrophages in tissue culture systems. 5D12
also was biologically active in preventing or delaying the appearance of
clinical signs and symptoms in a primate model for multiple sclerosis.
MARKET OPPORTUNITY. Based on our research and preclinical studies with 5D12, we
believe the product could reduce production of antibodies and the activation of
cellular immune responses that cause autoimmune diseases. Examples of such
diseases and estimated potential market sizes in Europe and Japan include:
o Crohn's disease, an inflammatory disease of the bowel (over 165,000
people);
o rheumatoid arthritis (approximately 3 million people);
o multiple sclerosis (approximately 200,000 people);
o lupus (approximately 320,000 people); and
o psoriasis (approximately 1 million people).
36
<PAGE>
DEVELOPMENT STATUS. We have initiated a 20 patient Phase I/II clinical study
with 5D12 in Crohn's disease in Europe. The trial is a single dose,
dose-escalating study designed to provide data regarding the safety of the
product, its behavior, including half-life and clearance characteristics, and
its biological activity using histological examination of biopsy tissue. The
results of this study are expected to play an important role in determining
clinical indications that we will pursue with 5D12.
ANTI-CD4 DEVELOPMENT -- 5A8
5A8 is a humanized anti-CD4 monoclonal antibody that is in preclinical
development for treatment of human immunodeficiency virus, or HIV. The virus
enters the host cell by binding to the CD4 receptors on these cells. In lab
studies, our 5A8 antibody binds to the CD4 receptor on the cell surface and
prevents viral entry into the cell, thereby blocking infection. We have
exclusive worldwide rights to 5A8 through a license with Biogen.
MARKET OPPORTUNITY. According to the World Health Organization, HIV infects
approximately 1.4 million people in North America and Western Europe. A number
of drugs targeting viral replication are being used, often in combination. About
30% of the patients treated with drug combinations, however, no longer respond
since HIV has become drug resistant. In addition, many drug combinations produce
a variety of undesirable toxic side effects.
DEVELOPMENT STATUS. 5A8 is now in preclinical development to determine its
usefulness for treatment of HIV-infected patients. In preliminary preclinical
testing, 5A8 has potently blocked infections in all twenty-five strains of
primary HIV isolates tested in cell culture. In a primate model for HIV
infection, 5A8 showed robust antiviral activity. Preclinical tests with our 5A8
antibody showed no reduction in CD4-positive cell numbers, no evidence that any
function of the immune system was suppressed and no toxic effects.
OTHER PRODUCT CANDIDATES
ANTI-FACTOR D DEVELOPMENT. 166-32 is a monoclonal antibody that binds to Factor
D, a component of the complement system, and is in research for the treatment of
acute inflammation. The complement system is the body's first line of defense
against infection. 166-32 binds to Factor D and inhibits complement activation.
While the complement system generally functions to protect the body, activation
of the complement system can become excessive and uncontrolled, resulting in
inflammation and tissue damage. This can occur in cases of acute tissue injury
or surgical procedures that reduce blood flow into a tissue. In addition, during
heart surgery involving cardiopulmonary bypass (CPB), the shunting of blood
outside the body for circulation through mechanical devices has been shown to
activate complement and result in tissue injury. Research studies with 166-32 in
laboratory models for heart injury showed that low levels of 166-32 prevented
heart damage, and that 166-32 inhibited complement activation in a model for
CPB.
ANTI-G-CSF RECEPTOR DEVELOPMENT. 163-93 is a monoclonal antibody that binds to
the receptor for granulocyte colony stimulating factor (G-CSF) to treat
neutropenia associated with chemotherapy in cancer patients. Granulocytes are
specialized white blood cells that contain granules filled with potent
chemicals. Neutropenia is a deficiency of a type of granulocyte called
neutrophils, which results in a compromised immune system and susceptibility to
infection. Granulocytes engulf and destroy bacteria and other microbial
pathogens. G-CSF binds specific receptors on the surface of granulocytes and
stimulates their proliferation and controls their activities. Recombinant G-CSF
is sold by Amgen as Neupogen and has been used in cancer patients to help
restore their immune protection. Amgen reported 1999 sales of $1.3 billion for
Neupogen.
We are developing 163-93 to stimulate proliferation and activity of granulocytes
just as does G-CSF. 163-93 activates the same intracellular signaling pathway as
G-CSF and supports the production of granulocytes
37
<PAGE>
from human bone marrow as does G-CSF. In a preliminary study in primates,
injection of 163-93 stimulated the production of granulocytes without affecting
any other blood cells or causing any toxicity. We believe that 163-93 could
provide an alternative to G-CSF for therapeutic use in cancer patients during
chemotherapy and may have the advantage of less frequent dosing.
ADDITIONAL PRODUCTS IN RESEARCH AND DEVELOPMENT. We have additional discovery
research projects directed towards development of new products and technologies
for treatment of immunological diseases and cancer.
COLLABORATION AND LICENSING AGREEMENTS
COLLABORATION WITH NOVARTIS AND GENENTECH. We are developing our lead product,
E25, in collaboration with Novartis and Genentech. In 1990, we established a
collaboration with Novartis to jointly develop anti-IgE antibodies for the
treatment of allergic diseases. In 1996, Genentech joined our collaboration with
Novartis and we agreed to combine our respective anti-IgE development programs
in a three-party collaboration. We and our collaboration partners selected E25
as the lead product for development and commercialization.
Currently, under the terms of the collaboration agreements:
o DEVELOPMENT. Novartis and Genentech are responsible for completing the
development of and obtaining the regulatory approval for E25 and the
other anti-IgE products developed through the collaboration. All
development costs relating to E25 and other anti-IgE products that may
be selected for development through the collaboration in the United
States and Europe are to be shared by Novartis and Genentech.
Development costs relating to China, Hong Kong, Korea, Singapore and
Taiwan are to be shared equally between Novartis and us. Novartis is
responsible for development costs in the rest of the world.
o MANUFACTURING. Novartis and Genentech are responsible for manufacturing
E25 and other selected anti-IgE products worldwide, subject to our right
to manufacture up to 50% of the worldwide requirements of those
products.
o MARKETING. Novartis and Genentech share U.S. marketing rights, and
Novartis has marketing rights in Europe (with Roche retaining the option
to participate in Europe) to products developed through the
collaboration. Novartis is responsible for marketing these products in
the rest of the world, including China, Hong Kong, Korea, Singapore and
Taiwan.
o MILESTONE PAYMENTS. We are entitled to receive payments of up to $63.5
million based on the completion of development and marketing milestones
for E25, $6.5 million of which has already been received. We may also
receive payments of up to $14.0 million based on completion of
development milestones for E26, $1.0 million of which has already been
received. Our next milestone payments totaling $12 million are due upon
filing of the BLA for E25.
o ROYALTIES AND PROFIT SHARING. We are entitled to receive royalties based
on net sales of E25 and other selected anti-IgE products in the United
States and a share of Novartis' profits on such sales. We are also
entitled to receive royalties on net sales of E25 and other selected
anti-IgE products in Europe and the rest of the world (except for China,
Hong Kong, Korea, Singapore and Taiwan). Additionally, we are entitled
to an equal share of Novartis' profits from sales of E25 and other
selected anti-IgE products in China, Hong Kong, Korea, Singapore and
Taiwan.
Our rights to the full amount of the payments that we receive could be affected
by the on-going legal proceedings with our former attorneys described under
"Business -- Pending Legal Proceedings."
The collaboration agreements provide that we may independently develop, without
our collaboration partners, any anti-IgE product that the collaboration partners
are not developing through the collaboration. In the event that we choose to
independently develop a product, Novartis has a right of first refusal on the
licensing of that anti-IgE product. As described in this prospectus under the
heading "Business -- Pending Legal Proceedings," we are currently involved in a
dispute with our collaboration partners
38
<PAGE>
regarding our rights to independently pursue development of Hu-901 and our right
to use certain know-how and other information in our independent development
efforts.
Roche has an option to participate in the commercialization of E25 and other
anti-IgE products selected for development by the collaboration in Japan and
Europe. This option is exercisable on the occurrence of specified events
relating to commercialization of the product. Roche has waived this option for
E25 in Japan. In addition, Roche has an option to assume Genentech's position in
the collaboration if Genentech withdraws from the collaboration, as described
below.
Either Novartis or Genentech may withdraw from the collaboration on short
notice. If either Novartis or Genentech withdraws, rights to E25 and any other
products developed by the collaboration (including by the withdrawing partner)
revert to us and the remaining collaborator and, in the event that Genentech is
the withdrawing party, to Roche should Roche exercise the option described
above. In the event that the collaboration is dissolved in its entirety, we
would continue to retain rights to develop anti-IgE antibodies under the terms
of separate agreements with Novartis and Genentech.
In addition to the collaboration agreements, we and Genentech entered into a
cross-license agreement under which each party has an option to license the
other party's patents relating to the development of anti-IgE antibodies for use
in the development of specific products. This option may be exercised at any
time if either party chooses to independently develop a product as permitted
under the collaboration agreements, if our collaboration with Novartis and
Genentech is terminated or as we and Genentech may mutually agree.
OTHER COLLABORATIONS AND LICENSE AGREEMENTS
CHIRON LICENSE. Our European subsidiary Tanox Pharma, B.V. has entered into a
cross-license with Chiron under which Tanox Pharma licensed exclusive research
and development rights (except as to Chiron) to Chiron's murine monoclonal
antibodies against CD40. Subject to our obligations to develop an anti-CD40
product and, under certain circumstances, to pay maintenance fees, we have an
option to obtain a commercial license to Chiron's anti-CD40 antibodies, patents
and technology for Europe and Japan. Chiron retains its commercial rights in the
United States and the rest of the world. Additionally, Chiron has an option to
obtain a commercial license for the United States and the rest of the world
outside Europe and Japan to use anti-CD40 patents and technology that Tanox
Pharma develops. Chiron has two awarded United States patents and has patents
pending in Europe, Japan and Canada.
Upon registration of a product in Japan, the United Kingdom, France or Germany,
Tanox Pharma has agreed to pay Chiron a registration fee and royalties based on
its European and Japanese sales. Tanox Pharma has also agreed to pay Chiron
milestone payments if a product is developed and commercialized. Chiron has
agreed to pay us royalties based on its sales in the United States and the rest
of the world.
BIOGEN. In 1998, we entered into a license agreement with Biogen in which
Biogen licensed us its anti-CD4 monoclonal antibody and intellectual property on
an exclusive worldwide basis with limited sublicense rights. Biogen owns issued
U.S. and European patents and pending applications in Australia, Canada and
Japan. We paid Biogen a license fee and agreed to pay continuing royalties to
Biogen based on annual net sales revenue levels. Additionally, we agreed to make
milestone payments to Biogen that increase as product development continues and
if certain corporate development events occur.
BIOVATION. We entered into an agreement in 1999 with Biovation Limited of
Aberdeen, United Kingdom, in which Biovation agreed to apply its proprietary
deimmunization technology to certain of our monoclonal antibodies and protein
products. In this agreement, Biovation also licensed the patents needed to
develop and commercialize any deimmunized monoclonal antibodies it developed,
and if the deimmunized monoclonal antibodies meet certain criteria, the license
is subject to royalty payments by us. Additionally, Tanox Pharma and Biovation
have agreed to develop together their respective protein engineering
technologies.
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<PAGE>
PATENTS AND PROPRIETARY RIGHTS
We pursue patent protection for our proprietary technology and products. We
typically file United States patent applications, then international
applications, usually followed by filing foreign patent applications on our
technology and products in those countries where business considerations warrant
filings. These countries include Japan, Canada, Australia, countries of the
European Union, other European countries, certain other Asian countries and
South Africa.
We have five U.S. patents that cover and/or relate to the use of anti-IgE and
other allergy/asthma products. We also hold patents in Europe, Canada, Japan,
Singapore, Hong Kong and Australia covering such products. We have additional
anti-IgE patents pending in the United States and internationally. Some of our
patents are co-owned with Novartis, and Tanox is also cross licensed under
Genentech's patents covering anti-IgE products.
We have filed U.S. and international patent applications relating to anti-Factor
D antibodies and anti-G-CSF receptor antibodies. We anticipate filing
corresponding national phase applications in selected jurisdictions at the
appropriate time. We have a number of other United States and foreign patents
covering certain other proprietary technology and products, with over forty
United States patents granted to date. We cannot assure you that one or more of
the patents noted above would not be rescinded or successfully opposed or
revoked.
Patenting biotechnology-related products and processes can involve uncertain and
complex legal and factual questions and, to date, policies regarding the breadth
of claims allowed in biotechnology patents are not necessarily consistent.
Patents, if issued, may be challenged, invalidated, limited in their scope of
coverage or circumvented. Thus, any patents that we own or license from third
parties may not provide any protection against competitors. Our pending patent
applications, those we may file in the future, or those we may license from
third parties, may not result in patents being issued. Also, patent rights may
not provide us with proprietary protection or competitive advantages against
competitors with similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we have developed.
Moreover, the laws of certain foreign countries do not protect our intellectual
property rights to the same extent as do the laws of the United States.
Litigation may be necessary to enforce any patents issued or licensed to us or
to determine the scope and validity of such patents. We could incur substantial
costs and the diversion of technical and management personnel's time and
attention if we are required to participate in such suits or if we are required
to defend ourselves against patent suits against us. If the outcome of
litigation is adverse to us, third parties may be able to use our patented
invention without payment to us. Moreover, we cannot assure you that our patents
will not be infringed or successfully avoided through design innovation. Any of
these events may materially and adversely affect our business.
In addition, other companies, some of which may be our competitors, have filed
applications for or have been issued patents and may obtain additional patents
and proprietary rights relating to products or processes used in, necessary to,
competitive with or otherwise related to our patents and products. These
products and processes include, among other items, patents covering technology
relating to humanized monoclonal antibodies that we anticipate developing.
Protein Design Labs, Inc. owns certain patents and patent applications relating
to such humanized antibodies. We have recently taken a non-exclusive license to
these patents and patent applications for one of our products. We do not know if
licenses from Protein Design Labs will be available for our other antibody
products. The Medical Research Council also owns patents relating to humanized
antibodies, for which we hold a license. Our Medical Research Council license
includes a sublicense to the Boss patent relating to antibody co-expression
owned by Celltech, Ltd. Genentech has a pending application (the Cabilly
Application) that is involved in an interference before the United States Patent
& Trademark Office with the Celltech Boss patent.
We may also develop products that are chimeric antibodies. Genentech owns a
patent (the Cabilly Patent) relating to chimeric antibodies and instituted suit
against us in 1994 for infringement of this patent. We settled the lawsuit and,
pursuant to the settlement, we acquired a non-exclusive license to the Cabilly
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Patent, the Cabilly Application and other Genentech patents (or patents to which
Genentech has a license and is free to grant a sublicense) for our anti-IgE
antibody products. We also have certain rights to acquire a non-exclusive
license from Genentech for the Cabilly Patent, the Cabilly Application and
certain other Genentech patents for products not exclusively or co-exclusively
licensed by Genentech to a third party and for certain products that do not
compete with those of Genentech or its affiliates. In addition, other parties
also own patents covering chimeric and/or recombinant antibodies and/or
processes applicable to making these antibodies.
In addition, we hold a non-exclusive license to certain patents and patent
applications, including two United States patents, owned by Immunex Corporation,
relating to the G-CSF receptor. The patents and applications cover certain
reagents which may be involved in making our anti-G-CSF receptor antibodies and
other products we are developing, under which we are obligated to pay license
execution and maintenance fees, milestone payments for each developed product
and royalties on net sales of such product.
The scope and validity of these patents, the extent to which we may be required
to obtain licenses under these patents or under other proprietary rights and the
cost and availability of licenses are unknown, but these factors may limit our
ability to market our products. Moreover, even if a license were available, the
payments that would be required could render uneconomic our efforts to market
certain of our products. Should we elect to manufacture or market these products
without a license or absent a favorable result in litigation, damages could be
assessed which could be materially adverse to us. Further, failure to obtain a
license could result in an injunction prohibiting us from manufacturing or
selling the affected lines of products.
In addition to patents, we rely on trade secrets and proprietary know-how. We
seek protection, in part, through confidentiality and proprietary information
agreements. These agreements may not provide meaningful protection or adequate
remedies for our technology in the event of unauthorized use or disclosure of
such information. The parties to these agreements may breach them. Furthermore,
our trade secrets may otherwise become known to, or be independently developed
by, our competitors.
We require our employees, directors, consultants, advisors, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment, consulting or
other contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual during the
course of the relationship is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees and certain
other parties, the agreements provide that all inventions conceived by the
individual shall be our exclusive property. We cannot assure you, however, that
these agreements will provide meaningful protection for our confidential
information or trade secrets against or in the event of unauthorized use or
disclosure of such information.
GOVERNMENT REGULATION
The production and marketing of our products and our research and development
activities are subject to regulations relating to product safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of our
products.
Before a pharmaceutical product may be marketed in the United States, the FDA
requires that the following steps must be completed:
o preclinical laboratory and animal tests;
o submission to the FDA of an investigational new drug application, or
IND, which must become effective before human clinical trials may
commence;
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o adequate and well controlled human clinical trials in conformance with
good laboratory and clinical practices to establish the safety and
efficacy of the product;
o submission to the FDA of a New Drug Application, or NDA, with respect to
drugs, and a Biologics License Application, or BLA, with respect to
biological products; and
o FDA approval of the NDA or BLA before any commercial sale or shipment of
the product.
In addition, the FDA requires the registration of each drug and approval of each
manufacturing establishment. For our monoclonal antibody products we are subject
to the simplified, interim procedure for well-characterized biologicals.
Domestic manufacturing establishments are subject to FDA inspection and must
comply with current good manufacturing practices, or cGMP, for pharmaceutical
products. To supply products for use in the United States, foreign manufacturing
establishments must comply with cGMP and are subject to periodic inspection by
the FDA or by regulatory authorities under reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation and animal studies to assess the
potential safety and efficacy of the product and its formulation. Such
preclinical safety tests are conducted by laboratories that comply with FDA
regulations regarding Good Laboratory Practices. The results of the preclinical
tests are submitted to the FDA as part of an IND and are reviewed by the FDA
before the commencement of human clinical trials. Unless the FDA objects, the
IND will become effective 30 days following its receipt. There is no certainty
that submission of an IND will result in FDA authorization to commence clinical
trials. If a biological product produced within the United States will be
shipped to a foreign country for clinical trials, the product must comply with
export regulations promulgated by the FDA before shipment.
Human clinical trials involve the administration of the investigational compound
to patients or other volunteers under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be conducted under
the auspices of an independent institutional review board, or IRB, at the
institution where the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Clinical trials are typically conducted in four sequential phases, which may
overlap. In Phase I, the initial introduction of the product into human
subjects, the product is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion and clinical pharmacology. Phase II involves
studies in a limited patient population:
o to determine the efficacy of the product for specific, targeted
indications;
o to determine dosage tolerance and optimal dosage; and
o to identify possible adverse effects and safety risks.
When a product is found to be effective and to have an acceptable safety profile
in Phase II evaluations, Phase III trials are undertaken:
o to continue to evaluate clinical efficacy; and
o to test further for safety within an expanded patient population at
geographically dispersed clinical study sites.
We cannot assure you that clinical testing of our products will be completed
successfully within any specified time period, if at all. Furthermore, the FDA
or we may suspend clinical trials at any time if it is felt that the subjects or
patients are being exposed to an unacceptable health risk. Phase IV studies are
typically done post-FDA approval to address safety issues not addressed in the
Phase I/II/III programs, for example, chronic use of the product.
In the case of agents for life-threatening diseases, the initial human testing
is generally done in patients rather than in healthy volunteers. Since these
patients already are afflicted with the target disease, it is
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possible that such studies may provide results traditionally obtained in Phase
II trials, potentially expediting the approval process. These trials are
frequently referred to as "Phase I/II" trials.
The results of the pharmaceutical development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA or BLA for approval of
the marketing and commercial shipment of the product. The testing and approval
process frequently requires substantial time and effort and we cannot assure you
that any approval will be granted on a timely basis, if at all. The FDA may deny
an NDA or BLA if applicable regulatory criteria are not satisfied, require
additional testing or information or require postmarketing testing and
surveillance to monitor the safety and efficacy of the product. Notwithstanding
the submission of such data, the FDA may ultimately decide that the application
does not satisfy its regulatory criteria for approval. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
Among the conditions for NDA or BLA approval is that the prospective
manufacturer's quality control and manufacturing procedures conform to cGMP. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full compliance.
In addition to FDA regulations, we are subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
present and future federal, state or local regulations.
For marketing outside the United States, we also are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. Whether or not FDA approval has been obtained, approval of a product by
the comparable regulatory authorities of foreign countries must be obtained
before manufacturing or marketing the product in those countries. The approval
process varies from country to country and the time required for such approvals
may differ substantially from that required for FDA approval. We cannot assure
you that clinical trials conducted in one country will be accepted by other
countries or that approval in one country will result in approval in any other
country. For clinical trials conducted outside the United States, the clinical
stages are comparable to the phases of clinical development established by the
FDA.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by rapidly
evolving technology and intense competition. Many companies, including major
pharmaceutical and chemical companies, as well as specialized biotechnology
companies, are engaged in activities similar to ours. Many of these companies
have substantially greater financial and other resources, larger research and
development staffs and more extensive marketing and manufacturing organizations
than ours. Many of these companies have significant experience in preclinical
testing, human clinical trials and other regulatory approval procedures.
Consequently, we chose to enter into the collaboration agreements with Novartis
and Genentech, in part to secure the benefit of their experience in these areas,
as well as the contribution of their greater financial resources. In addition,
colleges, universities, governmental agencies and other public and private
research organizations conduct research and may market commercial products on
their own or through joint ventures. These institutions are becoming more active
in seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed. We compete with these institutions
in recruiting and retaining highly qualified scientific personnel.
The diseases that we have targeted, including allergic diseases, autoimmune
diseases, transplantation, cancer, inflammation, and HIV infection, are
intensely competitive areas being targeted by both pharmaceutical companies and
other biotechnology companies, including our collaborators, Novartis and
Genentech. All of these companies may have competitive products on the market,
may be testing their products in clinical trials or may be focusing on product
approaches that could prove to be superior to our approaches. For instance, we
are aware that some of these companies, which may be our competitors, have filed
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applications for or have been issued patents and may obtain additional patent
and proprietary rights relating to products or processes used in, necessary to,
competitive with or otherwise related to, our products or processes. Such
patents include, among other items, patents relating to humanized monoclonal
antibodies.
Additionally, our competition will be determined in part by the potential
indications for which our antibodies are developed and ultimately approved by
regulatory authorities. For some of our potential products, an important factor
in competition may be the timing of market introduction of our products or
competitive products. Accordingly, the relative speed with which we develop our
products, complete the necessary approval processes and are able to generate and
market commercial quantities of the products is expected to be an important
competitive factor. We expect that competition among products approved for sale
will also be based, among other factors, on product efficacy and safety, timing
and scope of regulatory approval, product availability, advantages over
alternative treatment methods, price and cost-effectiveness, development,
distribution and marketing capabilities, third-party reimbursement and patent
position.
We are aware that several companies, including Novartis, have existing products
that will compete with E25, if it is approved for sale, including
corticosteriods, beta-agonists, antihistamines, leukotriene inhibitors and
allergen immunotherapy. In addition, several companies have products in
development that may compete with E25. These companies include, but are not
limited to, IDEC (Anti-CD23), Immunex (sIL-4R), CellTech/Schering-Plough
(Anti-IL5), Merck/Biogen (VLA-4 inhibitors), Magainin/Genentech (anti-IL-9) and
Protein Design Labs (Anti-IL4).
Our competitive position also depends upon our ability to:
o attract and retain qualified personnel;
o obtain patent protection or otherwise develop proprietary products or
processes;
o discover new therapeutic products that successfully treat human
diseases;
o secure sufficient capital resources to complete product development and
regulatory processes;
o build or obtain manufacturing facilities; and
o build or obtain a sales organization.
MANUFACTURING
We have a small-scale production and purification facility in which our products
have been produced in compliance with cGMP standards for use in Phase I and/or
Phase II clinical trials. With funding from Novartis, we recently completed
construction of a pilot manufacturing facility that can be used for larger-scale
process development and cGMP production of animal cell culture derived products.
The facility includes a 1500L bioreactor and occupies approximately 14,000
square feet of space now under lease to us in Houston, Texas. The new
manufacturing facility is not yet operational, and the Company is pursuing
required cGMP validation. The facility is available to both us and other
companies for production of monoclonal antibodies and other biologic products
for large-scale clinical trials and initial market launch.
Under our agreements with Novartis and Genentech, Novartis and Genentech are
responsible for manufacturing E25 and any other anti-IgE products selected by us
and our collaboration partners for development, although we have retained the
right to manufacture and supply up to 50% of the worldwide requirements for E25
and the other selected products. Genentech will supply the initial quantities of
E25 for product launch and until Novartis is capable of meeting worldwide
demand. Novartis has announced that it intends to supply E25 from a facility now
under construction that has a capacity of more than one ton of active substance
per year.
Our current facility will not be adequate for commercial scale manufacturing
requirements if our products are successfully developed. In the event we decide
to establish a full-scale manufacturing facility, we will require substantial
additional funds and will be required to hire and train significant numbers of
employees and comply with the extensive FDA regulations applicable to that
facility.
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MARKETING AND SALES
E25 and the other products selected for development by the collaboration will be
marketed by Novartis and Genentech. Novartis and Genentech share U.S. marketing
rights, and Novartis has marketing rights in Europe (with Roche retaining the
option to participate in Europe). Novartis is responsible for marketing these
products in the rest of the world, including China, Hong Kong, Korea, Singapore
and Taiwan, where we will share costs and profits with Novartis.
To effectively serve the worldwide markets, we intend to continue to collaborate
with major pharmaceutical companies or prominent pharmaceutical sales and
distribution organizations that can successfully market our products on a
worldwide basis or within specific geographic territories. As we pursue
strategic collaborations, we intend to reserve marketing rights for our
products, to the extent commercially reasonable, including rights in the United
States and selected Asian countries. We will focus initially on markets for
which our products have a clear advantage over other therapies or which can be
targeted using a relatively small sales force. We currently do not have an
internal sales and marketing capability. If we elect to retain marketing rights,
we will have to build a sales and marketing infrastructure.
FACILITIES
We currently lease 35,624 square feet of laboratories and office space in
Houston, Texas. This lease expires in March 2002, subject to a five-year renewal
option. This space includes a biological product manufacturing facility
occupying approximately 14,000 square feet of space. We lease approximately
2,690 square feet of temporary laboratory and office space in the Amsterdam
Science Park in The Netherlands and intend to lease approximately 10,760 square
feet of space there when it becomes available in 2001. We also lease
approximately 6,500 square feet of space in the Hsinchu Science Based Industrial
Park in Taiwan.
We believe that these facilities are adequate for our immediate needs.
Additional space will be required, however, as we expand our research
activities, clinical development activities and production capability. We are
exploring alternatives to provide additional space in Houston for research and
development laboratories. We do not foresee any significant difficulties in
obtaining additional facilities, as necessary.
HUMAN RESOURCES
Including the employees of our subsidiaries, we have 72 full-time employees, 58
of whom are based in the United States, 13 of whom are based in The Netherlands
and one of whom is based in Taiwan. Approximately 55 of our employees are
involved in research and product development activities. Twenty-nine of our
employees hold Ph.D., M.D. or Sc.D. degrees and ten employees hold other
advanced degrees. We consider our relations with our employees to be good. None
of our employees are covered by collective bargaining agreements. We enter into
confidentiality agreements with all of our employees, directors and consultants.
We do not maintain, and do not currently intend to obtain, key employee life
insurance on any of our personnel.
PENDING LEGAL PROCEEDINGS
TANOX BIOSYSTEMS, INC. VS. AKIN, GUMP, STRAUSS, HAUER AND FELD, L.L.P., THE
ROBINSON LAW FIRM AND WILLIAMS, BIRNBERG & ANDERSON, AMERICAN ARBITRATION
ASSOCIATION NO. 70-199-0167-96. We have been involved in an arbitration
regarding a fee dispute with the law firms that represented us in connection
with a lawsuit involving Genentech and Roche relating to, among other things,
the intellectual property rights of the parties surrounding the development of
anti-IgE technology. The litigation was settled contemporaneously with the
formation of our collaboration with Genentech.
We initiated the arbitration proceeding after we and our attorneys could not
reach agreement on the fee owed pursuant to the terms of our written fee
agreement. The arbitration panel issued an award entitling the attorneys to
receive approximately $3.5 million, including interest, payments ranging from
33 1/3% to 40% of
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the future milestone payments received by us from Genentech under the
collaboration following product approval and 10% of the royalties that we
receive on sales of anti-IgE products.
We sought a court order vacating the arbitration award on the grounds that the
arbitration decision exceeds the scope of the fee agreement in dispute, deviates
materially from the evidence presented and is unsupportable as a matter of law.
However, a judgment was entered confirming the award. We intend to pursue all
available remedies, including appealing the decision.
TANOX, INC. VS. NOVARTIS PHARMA AG, AMERICAN ARBITRATION ASSOCIATION NO. 50 T
153 00119 99; GENENTECH, INC., GENENTECH INTERNATIONAL LIMITED AND NOVARTIS
PHARMA AG VS. TANOX, INC., CASE NO. C 99-2060; AND TANOX, INC. VS. GENENTECH,
INC. AND GENENTECH INTERNATIONAL LIMITED, AMERICAN ARBITRATION ASSOCIATION NO.
74 Y 181 1113 99. We are currently pursuing clinical development of Hu-901 to
determine its potential in treating peanut induced anaphylaxis independently of
Novartis and Genentech. Novartis and Genentech have disputed our right to pursue
development of Hu-901 independently and have claimed that we are using
unspecified confidential and proprietary information of Novartis and Genentech
that we have no right to use. We believe our agreements with Novartis and
Genentech allow us to pursue the development of Hu-901.
In an effort to resolve this dispute, we initiated an arbitration with Novartis
in March 1999, pursuant to the arbitration provisions of our agreement with
Novartis, seeking interim relief including, among other items, confirmation of
our rights to independently develop certain anti-IgE products, including Hu-901,
and to use know-how and other information received from Novartis. We also are
seeking a final award to confirm these rights and address other claims relating
to our agreements with Novartis and compensate us for damages we believe
resulted from Novartis' efforts to prevent us from exercising our rights under
the applicable agreements. Novartis has claimed that the dispute does not
constitute a dispute for which arbitration is required under our agreements and
that our claimed rights to independently develop Hu-901 do not exist. Novartis
has also claimed damages arising from our action.
In response to the arbitration initiated by us against Novartis, Novartis and
Genentech jointly filed suit against us in April 1999 in the United States
District Court for the Northern District of California alleging breach of
contract, unfair competition and other causes of action and seeking declaratory,
injunctive and compensatory relief, as well as punitive damages, attorney's fees
and costs of suit and interest on judgment. Among the injunctive relief sought,
Novartis and Genentech are seeking to stop Hu-901 development, and to prevent
any arbitration of these claims under other agreements with Novartis and
Genentech.
In connection with the lawsuit, Novartis also asked the Federal court for an
emergency temporary stay of the arbitration requested by us. The United States
District Court Judge denied Novartis' request and ordered Novartis to proceed
with the arbitration.
We also initiated arbitration with Genentech in July 1999 claiming, among other
things, that Genentech's claim in the lawsuit that we have no independent
development rights for Hu-901 is unsupportable and that Genentech expressly
acknowledged our independent development rights in our agreement with them.
In September 1999, the United States District Court Judge issued an order which
stays all proceedings in the lawsuit and both arbitrations, except for the
parties' opportunity to engage in limited written discovery in the form of
requests for production of documents and written questions to each other. The
Judge's order required the parties with their respective chief executive
officers present, to undertake to mediate all matters in dispute between them.
The mediation took place on November 2 and 3, 1999 in San Francisco, California,
and has concluded unsuccessfully. To continue our arbitration proceedings, we
must ask the court to allow our respective arbitrations with Novartis and
Genentech to proceed.
We intend to continue to pursue independent development of Hu-901 during the
pendency of the above-described actions. In the event that we are unsuccessful
in these actions, we would be prevented from independently developing Hu-901 and
other anti-IgE products covered by the collaboration with Novartis and
Genentech.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and key employees, and their ages and
positions as of February 1, 2000 are:
NAME AGE POSITION
- ----------------------------------- --- ------------------------------
Nancy T. Chang, Ph.D. ............. 50 Chairman of the Board,
President and Chief Executive
Officer
John C. Morris..................... 56 Senior Vice President of
Operations
David W. Thomas, Ph.D. ............ 52 Senior Vice President of
Research and Development
David Duncan, Jr. ................. 51 Vice President of Finance and
Chief Financial Officer
John Blickenstaff.................. 46 Vice President of
Administration, Secretary and
Treasurer
George Y. Wang, Sc.D. ............. 46 Vice President of Process
Development and Production
Eric P. Mirabel, J.D., LL.M. ...... 43 Vice President of Intellectual
Property
Tse Wen Chang, Ph.D. .............. 52 Director
Osama I. Mikhail, Ph.D.(1)(2)...... 52 Director
Cheng Ming Lee, Ph.D.(1)(2)........ 57 Director
William J. Jenkins, M.D.(2)........ 52 Director
- ---------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
NANCY T. CHANG, PH.D. is one of our co-founders and has served as our President
and Chairman of the Board of Directors since our organization in March 1986. Dr.
Chang has served as our Chief Executive Officer since June 1990. From 1986 to
1992, Dr. Chang served as an Associate Professor at Baylor College of Medicine
in the Division of Molecular Virology. Between 1981 and 1986, Dr. Chang was
employed by Centocor, Inc., serving as the Director of Research, Molecular
Biology Group, from 1984 to 1986. From 1980 to 1981, she was employed by Roche
Institute of Molecular Biology. Dr. Chang received her Ph.D. in biological
chemistry from Harvard University.
JOHN C. MORRIS has served as our Senior Vice President of Operations since
September 1997. From September 1996 to September 1997, he served as our Vice
President of Quality Assurance. Prior to coming to us, Mr. Morris served as
President at Oread Laboratories, Inc. from 1995 to 1996. From 1992 to 1995, Mr.
Morris served as Vice President of Production Development, Regulatory Affairs
and Quality Assurance at Sanofi Animal Health Inc. Mr. Morris received an M.S.
in microbial biochemistry from the University of Missouri.
DAVID W. THOMAS, PH.D. has served as our Senior Vice President of Research and
Development since November 1997. Prior to joining us, Dr. Thomas served as Vice
President of Biological Research at Hybridon, Inc. in 1997. From 1988 to 1997,
he served as Director of Cell Biology and Immunology at Biogen, Inc. Prior to
his positions at Biogen and Hybridon, Dr. Thomas held professorships at the
University of Michigan Medical School and Washington University in St. Louis,
Missouri. He received his Ph.D. degree in microbiology and immunology from the
University of Colorado Health Sciences Center, followed by a postdoctoral
fellowship in the Laboratory of Immunology of the National Institute of Allergy
and Infectious Disease at the National Institutes of Health.
DAVID DUNCAN, JR. has served as our Vice President of Finance and Chief
Financial Officer since August 1998. Prior to joining us, he served as Chief
Financial Officer at Neuromedical Systems, Inc. from 1994 to March 1998. From
1988 to 1994, Mr. Duncan served as Chief Financial Officer at Telios
Pharmaceuticals,
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Inc. From 1983 to 1988, he served as the Controller at Hybritech Incorporated.
Mr. Duncan received an MBA from Indiana University.
JOHN BLICKENSTAFF has served as our Vice President of Administration since April
1989 and has also served as Vice President of Finance from that time until March
1996. Mr. Blickenstaff also served as our Chief Financial Officer from June 1990
until March 1996. He joined us in March 1987 as Director of Finance and
Administration, becoming our Secretary and Treasurer in September 1987. Between
1984 and 1987, Mr. Blickenstaff served as Operations Manager at Montgomery
Engineering Company. Mr. Blickenstaff holds a B.S. in health sciences and an MBA
from Brigham Young University.
GEORGE Y. WANG, SC.D. has served as our Vice President of Process Development
and Production since October 1994. He joined us in 1991 as our Assistant
Director, BioProcessing Development. Prior to joining us, Dr. Wang held various
engineering and management positions at IDEC Pharmaceuticals Corp., BP Amoco
Corp. and MGI Pharma, Inc. Dr. Wang received his Sc.D. in biochemical
engineering from Massachusetts Institute of Technology.
ERIC MIRABEL has served as our Vice President of Intellectual Property since
1994. He joined us in 1990 as our Patent Counsel. From 1986 to 1990 Mr. Mirabel
practiced intellectual property law with the Houston firm of Butler and Binion.
Mr. Mirabel received a B.S. in biochemistry from the University of British
Columbia, a J.D. from Northwestern School of Law at Lewis and Clark College, and
an LL.M. in patent and trade regulation law from the National Law Center at
George Washington University.
TSE WEN CHANG, PH.D. is one of our co-founders and has served as a member of our
board of directors since our organization in March 1986. Dr. Chang served as our
Vice President of Research and Development and Chief Scientific Officer from
March 1986 until January 1997 when he resigned that position to assume the
position of Dean of the College of Life Sciences at National Tsing Hua
University in Taipei, Taiwan. Dr. Chang is currently a professor there. Dr.
Chang was an adjunct professor at Baylor College of Medicine in the Division of
Molecular Virology from 1986 to 1991. From 1984 to 1986, Dr. Chang served as
Vice President of Research at Centocor, Inc. Dr. Chang obtained his Ph.D. from
Harvard University in cell and developmental biology.
OSAMA MIKHAIL, PH.D. has served as a member of our board of directors since
1994, and also has served as a consultant to us since 1993. Dr. Mikhail is
currently Senior Vice President and Chief Strategic Officer at St. Luke's
Episcopal Health System and Professor of Management and Policy Sciences at the
University of Texas, School of Public Health, both in the Texas Medical Center,
Houston, Texas. Dr. Mikhail has been associated with St. Luke's and the
University of Texas School of Public Health since 1989. Dr. Mikhail received an
MBA from the University of Pennsylvania's Wharton School and an M.S. and Ph.D.
from the Graduate School of Industrial Administration, Carnegie-Mellon
University.
CHENG MING LEE, PH.D. has served as a member of our board of directors since
March 1997. He is President and Chief Executive Officer of six venture capital
funds -- Cheng Xin Technology Development Corporation, Win Win Venture Capital
Corporation, Apex Venture Capital Corporation, Win Plus Capital Corporation,
Super Tech Venture Capital Corporation and First Bio Venture Capital
Corporation. Dr. Lee serves as Chairman of the Board of Aries Research Inc. and
Taiwan High-Tech Corporation. Dr. Lee received an M.S. in chemical engineering
from Stanford University and a Ph.D. in chemical engineering from the University
of Houston.
WILLIAM J. JENKINS, M.D. has served as a member of our board of directors since
November 1999. Since the beginning of 1999, Dr. Jenkins has been a strategic
consultant to the pharmaceutical industry, primarily at Hoffman-La Roche Inc.
Prior to that, he served as Head of Clinical Development & Regulatory Affairs
and a member of the board of directors of Novartis Pharma AG in Basel,
Switzerland since 1992. Dr. Jenkins served as Head of Clinical Research for the
Glaxo Group from 1988 to 1992. Dr. Jenkins received his medical degrees from the
University of Cambridge.
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SCIENTIFIC ADVISORS
An important component of our scientific strategy is to establish collaborative
relationships with leading researchers in our fields of interest. Certain of our
scientific advisors attend periodic meetings and provide us with specific
expertise in both research and clinical development. In addition, we have
collaborative research relationships with certain individual advisors. None of
our scientific advisors is employed by us, and they may have commitments to or
consulting or advisory agreements with other entities that may limit their
availability to us. These companies may also compete with us. Several of our
advisors have, from time to time, devoted significant time and energy to our
affairs. In general, our scientific advisors may hold stock options, own our
stock and/or receive financial remuneration for their services.
Our scientific advisors include:
NAME TITLE AND AFFILIATION
- -------------------------------------------------------------------------
K. Frank Austen, M.D................ Director, Inflammation and Allergic
Diseases
Brigham and Women's Hospital, Boston,
Massachusetts
James Larrick, M.D., Ph.D........... Managing Director and Founder,
Panorama Research, Inc.
Ethan M. Shevach, M.D............... Chief, Cellular Immunology Section,
National Institutes of Health
COMPOSITION OF THE BOARD OF DIRECTORS
Our amended and restated certificate of incorporation and bylaws provide that
the board of directors be divided into three classes of equal number: Classes I,
II and III. At the first annual meeting of stockholders, our stockholders
elected directors comprising Class I to a term of office to expire at the next
annual meeting of stockholders after that election; directors comprising Class
II to a term of office to expire at the second annual meeting of stockholders
after that election; and directors comprising Class III to a term of office to
expire at the third annual meeting of stockholders after that election. At each
annual meeting of stockholders thereafter, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting of stockholders following election
and until a successor will have been duly elected and will have qualified. The
board of directors has no present plans to increase the number of directors.
Our bylaws authorize the board of directors to fix the number of directors at
not less than one nor more than nine. The board of directors currently has five
members. Subject to the reelection of the current board at the 2000 annual
meeting of stockholders, Osama Mikhail is designated as a Class I director,
whose term expires at the 2001 annual meeting of stockholders; Tse Wen Chang and
Cheng Ming Lee are designated as Class II directors, whose terms expire at the
2002 annual meeting of stockholders; and Nancy T. Chang and William J. Jenkins
are designated as Class III directors, whose terms expire at the 2003 annual
meeting of stockholders. Each officer serves at the discretion of the board of
directors.
There are no family relationships among any of our directors, executive officers
or key employees, although Drs. Nancy T. Chang and Tse Wen Chang previously were
married.
Our amended and restated certificate of incorporation and bylaws also require
the affirmative vote of holders of at least two-thirds of the issued and
outstanding shares of common stock to remove any director or the entire board of
directors. Directors can only be removed for "cause."
DIRECTOR COMPENSATION
As compensation for serving on the board of directors, we granted Dr. Mikhail
options to acquire 108,000 shares of common stock, 96,000 of which were granted
at a price per share of $1.04 and are all currently exercisable, 8,000 of which
were granted at an exercise price of $4.06, none of which are currently
exercisable, and 4,000 of which were granted at an exercise price of $12.50,
none of which are currently exercisable. All of his options vest over a
three-year period. Outside directors also receive $1,000 for each board meeting
attended and $150 for each committee meeting attended, except for Dr. Tse Wen
Chang, who is compensated under a consulting agreement with us. Other than the
foregoing, the directors receive
49
<PAGE>
no other compensation for their services as directors. We reimburse our outside
directors, on request, for reasonable out-of-pocket expenses incurred in
attending board meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors currently has two committees: an audit committee and a
compensation committee.
The audit committee makes recommendations to our board of directors regarding
the selection of independent auditors, reviews the results and scope of audit
and other services provided by our independent auditors and reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements.
The compensation committee reviews and makes recommendations to our board of
directors regarding the compensation of officers and other managerial employees.
The compensation committee also considers and recommends grants of stock options
under our stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee made decisions concerning the compensation of our
executive officers for the years ended December 31, 1997, 1998 and 1999, during
which time Nancy T. Chang, our Chairman of the Board, President and Chief
Executive Officer has been a member of the committee. No interlocking
relationship exists between any member of our board of directors or our
compensation committee and any member of the board of directors or compensation
committee of any other company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual compensation we paid during the year
1999 to our chief executive officer and the four highest paid executive officers
whose total annual salary and bonus exceeded $100,000. These individuals are
referred to as the "named executive officers" here and elsewhere in this
prospectus.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
Nancy T. Chang....................... $ 368,622 $58,000 $12,132(1)
Chairman of the Board, President
and Chief Executive Officer
John C. Morris....................... 154,587 10,000 --
Senior Vice President of Operations
David W. Thomas...................... 199,548 10,000 --
Senior Vice President of Research
and Development
David Duncan, Jr..................... 164,221 5,000 10,569(2)
Vice President of Finance and
Chief Financial Officer
George Y. Wang....................... 134,359 -- --
Vice President of Process
Development and Production
</TABLE>
- ---------------------------
(1) Dr. Chang's other annual compensation includes $7,549 of taxable income
associated with a company car, $4,000 associated with 401(k) matching and
$583 relating to group term life insurance.
(2) Mr. Duncan's other annual compensation includes $8,800 related to housing
expenses, $1,054 associated with 401(k) matching and $715 relating to group
term life insurance.
50
<PAGE>
1999 OPTION GRANTS
The following table sets forth information regarding options granted to each of
our named executive officers during the year 1999. The exercise prices of the
options we granted were the fair market value of our common stock on the date of
grant, as determined by the compensation committee of our board of directors. In
determining the fair market value, the compensation committee considered
information contained in a then current valuation report made for tax purposes,
market conditions, business prospects, and the absence of a market for our
common stock.
The amounts shown as potential realizable value are based on assumed 5% and 10%
rates of stock price appreciation from the date of grant to the end of the
option term and are provided in accordance with the rules of the Securities and
Exchange Commission. They do not represent our estimate or projections of the
future common stock price. Actual gains may vary, based on future performance of
our common stock. In estimating the gain realized by these option holders, we
have deducted the option exercise price, but we have not deducted taxes or any
other expenses payable upon the exercise of the option or the sale of the common
stock underlying the option.
The options in this table were granted under our 1997 Stock Plan, have 10-year
terms, will terminate before their expiration dates if the optionee leaves his
employment with us, and, unless otherwise noted, vest over a period of 5 years.
We have not granted any stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUES AT
ASSUMED ANNUAL RATES
OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES OPTION TERM
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED YEAR 1999(1) PER SHARE DATE 5% 10%
- ------------------------------------- ------------ ---------------- ---------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nancy T. Chang....................... -- -- -- -- -- --
John C. Morris(2).................... 16,000 13.7% $ 8.13 01/25/09 $ 81,807 $ 207,314
8,000 6.8 12.50 12/01/09 62,889 159,374
David W. Thomas(3)................... 16,000 13.7 8.13 01/25/09 81,807 207,314
16,000 13.7 12.50 12/01/09 125,779 318,748
David Duncan, Jr..................... -- -- -- -- -- --
George Y. Wang(4).................... 4,000 3.4 12.50 12/01/09 31,445 79,687
</TABLE>
- ---------------------------
(1) The percentage of options granted is based on an aggregate of 117,120
options to employees granted by us during 1999.
(2) The vesting start date for the options to purchase 16,000 shares of common
stock granted to Mr. Morris is January 25, 1999. 9,600 of these options
vest over a period of 3 years, and the remaining 6,400 of these options
vest over a period of 5 years. The vesting start date for the options to
purchase 8,000 shares of common stock granted to Mr. Morris is December 1,
1999. 4,800 of these options vest over a period of 3 years, and the
remaining 3,200 of these options vest over a period of 5 years.
(3) The vesting start date for the options to purchase 16,000 shares of common
stock granted to Mr. Thomas is January 25, 1999. The vesting start date for
the options to purchase an additional 16,000 shares of common stock granted
to Mr. Thomas is December 1, 1999.
(4) The vesting start date for these options is December 1, 1999.
51
<PAGE>
1999 OPTION VALUES
The following table describes for the named executive officers the exercisable
and unexercisable options held by them as of December 31, 1999. No options were
exercised by the named executive officers during the fiscal year ended December
31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Nancy T. Chang....................... 260,800 391,200 $ 1,304,000 $1,956,000
John C. Morris....................... 51,199 100,801 255,995 454,005
David W. Thomas...................... 80,000 152,000 700,000 1,120,000
David Duncan, Jr..................... 38,399 153,601 167,996 672,004
George Y. Wang....................... 201,600 4,000 2,297,571 --
</TABLE>
- ---------------------------
(1) The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $12.50 per share, the fair market value of our common
stock as of December 31, 1999, as determined by the board of directors,
less the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
EMPLOYMENT AGREEMENTS
We do not have employment agreements with our executive officers, other than
agreements that we maintain with all of our employees and option agreements
under which we issue incentive and non-qualified stock options to employees.
EMPLOYEE BENEFIT PLANS
1987 STOCK OPTION PLAN
Our 1987 Stock Option Plan expired on June 24, 1997. This plan provided for the
grant of incentive stock options, which were intended to qualify for favorable
tax treatment, and non-qualified stock options to eligible parties who were
employees. The plan was adopted by the board of directors and approved by our
stockholders in June 1987. Under the terms of the plan, as amended in April
1989, we could issue options on 4,320,000 shares of our common stock.
Special provisions applied to incentive stock options granted under the plan,
including requirements that the exercise price of incentive stock options be at
least equal to the fair market value of the common stock on the date of the
grant. There was also a $100,000 limit on the value of stock, determined at the
time of grant, covered by incentive stock options that first become exercisable
by a holder in any calendar year.
No person could receive an incentive stock option under the plan if, at the time
of grant, the person owned directly or indirectly more than 10% of our total
combined voting power. This restriction did not apply, however, if the option
price was at least 110% of the fair market value of the common stock, and the
exercise period was limited to five years.
If a reorganization, recapitalization, stock dividend, merger, consolidation or
other change in corporate structure affecting the number of issued shares of our
common stock occurred, then our board of directors could make equitable
adjustments to the terms of this plan. In particular, the board could make an
equitable adjustment in the number and type of shares authorized by this plan,
the number and type of shares covered by outstanding awards under this plan and
the exercise prices of these awards. After the adjustments, any incentive stock
options granted under the plan must have continued to constitute incentive stock
options under applicable tax laws. Our board of directors could amend or
terminate this plan at any
52
<PAGE>
time, although certain amendments required stockholder approval and an amendment
or termination could not adversely affect any rights under outstanding stock
options without the holder's consent.
For the year ended December 31, 1999, no options were granted, options to
purchase 1,738,320 shares of common stock were exercised and options to purchase
32,000 shares were canceled. As of December 31, 1999, options to purchase an
aggregate of 2,242,800 shares of common stock held by 26 employees were
outstanding under the plan at exercise prices ranging from $0.28 to $7.50 per
share with a weighted average exercise price of $4.03 per share. These options
consist of incentive stock options to purchase 856,264 shares at a weighted
average exercise price of $3.78 per share and non-qualified options to purchase
1,386,536 shares at a weighted average exercise price of $4.19 per share. At
December 31, 1999, there were no shares available for future option grants under
the plan.
1997 STOCK PLAN
Our 1997 Stock Plan was adopted by the board of directors on September 19, 1997,
and was approved by our stockholders to be effective as of November 1, 1997.
This plan provides for the grant of incentive stock options to our employees and
the grant of non-qualified stock options, awards of stock, stock appreciation
rights, purchase rights and performance units to all types of eligible parties.
The plan is administered by the board of directors or, in the discretion of the
board, by the compensation committee or other committee appointed by the board
of directors, consisting of at least two members of the board of directors. We
may grant options or other rights under the plan to some of our and our
subsidiaries' directors, employees, consultants and advisors. We may also, with
the consent of the holder, convert a holder's incentive stock options into
non-qualified stock options. We have reserved 8,000,000 shares of authorized but
unissued common stock for issuance under the plan. The plan extends for a
10-year period, beginning November 1, 1997.
Special provisions apply to incentive stock options granted under the plan in a
manner that is similar to those granted under the 1987 Stock Option Plan. The
1997 Stock Plan also contains adjustment provisions that are similar to those in
the 1987 Stock Option Plan.
For the year ended December 31, 1999, we granted options to purchase an
aggregate of 125,120 shares of common stock under the 1997 Stock Plan at a
weighted average exercise price of $10.60 per share. This includes incentive
stock options to purchase 102,720 shares at a weighted average exercise price of
$10.59 per share and non-qualified options to purchase 22,400 shares at a
weighted average exercise price of $10.63 per share. In 1999, options to
purchase 3,200 shares of common stock were exercised and options to purchase
8,000 shares were cancelled.
As of December 31, 1999, thirty individuals held options to purchase a total of
636,320 shares of common stock under the plan at exercise prices ranging from
$3.75 to $12.50 per share with a weighted average exercise price of $7.05 per
share. These options consist of incentive stock options to purchase 206,656
shares at a weighted average exercise price of $9.71 per share and non-qualified
options to purchase 429,664 shares at a weighted average exercise price of $5.77
per share. At December 31, 1999, there were 7,360,480 shares available for
future option grants under the plan.
1992 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Under our 1992 Non-Employee Directors Stock Option Plan, we may grant
non-qualified stock options to certain directors who are not also our employees.
The plan was adopted by the board of directors and approved by our stockholders
on January 10, 1992. The number of shares of common stock eligible for issuance
under the plan is 480,000. The compensation committee administers the plan.
Options may be issued under the plan at any exercise price determined by the
compensation committee. Generally, options granted under the plan expire upon
voluntary resignation of the holder from the board of directors. Upon
termination of a holder's tenure as a director for any other reason, the holder
must exercise the options within 60 days thereafter or within 180 days after the
holder's death or disability, but in no event later than the originally
prescribed term of the option. Unless otherwise determined by the compensation
committee,
53
<PAGE>
options granted under the plan vest over a three-year period. The plan
terminates on January 10, 2002, unless earlier terminated by the board of
directors.
For the year ended December 31, 1999, we granted options to purchase a total of
12,000 shares of common stock under the plan at a weighted average exercise
price of $6.88 per share. As of December 31, 1999, options to purchase an
aggregate of 108,000 shares of common stock held by one director were
outstanding under the plan at exercise prices ranging from $1.04 to $12.50 per
share with a weighted average of $1.69 per share. At December 31, 1999, there
were 372,000 shares available for future option grants under the plan. No
options issued under the plan have been exercised.
GENERAL
We intend to file a registration statement on Form S-8 upon the completion of
this offering to register the sale of common stock issuable upon exercise of
stock options issued under our stock option plans.
401(K) PLAN
Effective January 1, 1992, we adopted a qualified retirement plan, or 401(k)
plan, covering all of our employees who are at least 21 years of age and have
completed at least one year of service with us. Under the plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit ($10,500 in 2000) and have the amount of the reduction contributed
to the plan. The plan is covered by the Employee Retirement Income Security Act
of 1974. We also intend for the plan to satisfy certain federal income tax law
requirements so that the contributions by employees or by us to the plan, and
income earned on plan contributions, are not taxable to employees until they
withdraw from the plan. We also intend for any contributions we make to the plan
to be deductible by us for federal income tax purposes.
The trustee of the plan, at the direction of each participant, invests the
assets of the plan in any of nine investment options. The plan permits, but does
not require, us to make additional matching contributions on behalf of all
participants in the plan. For the year ended December 31, 1998, we contributed
matching contributions of approximately $66,000 to the plan. Our matching
contribution for the year ending December 31, 1999 was 50% of employee
contributions up to a maximum employer contribution of 2.5% of each
participant's total compensation. Our matching contribution for the year ending
December 31, 2000 will be 50% of employee contributions up to a maximum employer
contribution of 2.5% of each participant's total compensation. The compensation
committee of the board of directors administers the plan.
OTHER OPTIONS
We have granted non-qualified stock options not covered by the 1987 Stock Option
Plan, the 1997 Stock Plan or the 1992 Non-Employee Directors Stock Option Plan
to an outside, non-affiliated director and to key advisors and consultants to
purchase an aggregate of 196,800 shares of common stock, net of cancellations,
as of December 31, 1999, at a weighted average exercise price of $1.31 per
share. All of these options are currently exercisable.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of February 1, 2000 by:
o each stockholder known by us to be the beneficial owner of more than 5%
of the outstanding shares of common stock;
o each of our directors;
o each of our named executive officers; and
o all directors and officers as a group.
Beneficial ownership is determined according to the rules of the Securities and
Exchange Commission, and generally means that person has beneficial ownership of
a security if he or she possesses sole or shared voting or investment power of
that security, and includes options that are currently exercisable or
exercisable within 60 days. Information with respect to beneficial ownership has
been furnished to us by each director, officer or 5% or more stockholder, as the
case may be. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on the information each of them
has given to us, have sole investment and voting power with respect to their
shares, except where community property laws may apply.
This table lists applicable percentage ownership based on 33,324,402 shares of
common stock outstanding as of February 1, 2000, and also lists applicable
percentage ownership based on shares of common stock outstanding
after completion of this offering. Options to purchase shares of our common
stock that are exercisable within 60 days of February 1, 2000, are deemed to be
beneficially owned by the persons holding these options for the purpose of
computing percentage ownership of that person, but are not treated as
outstanding for the purpose of computing any other person's ownership
percentage. Shares underlying options that are deemed beneficially owned are
listed in this table separately in the column labeled "Shares Subject to
Options." These shares are included in the number of shares listed in the
column labeled "Total Number."
Unless otherwise indicated, the principal address of each stockholder below is:
c/o Tanox, Inc., 10301 Stella Link, Houston, Texas 77025.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------------------------------------
TOTAL SHARES SUBJECT PERCENT BEFORE PERCENT AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER TO OPTIONS OFFERING OFFERING
- ------------------------------------- --------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
DIRECTORS AND NAMED OFFICERS
Nancy T. Chang(1).................... 6,973,781 260,800 20.8% %
Tse Wen Chang(2)..................... 6,564,239 -- 19.7
Cheng Ming Lee(3).................... 743,892 -- 2.2
George Y. Wang....................... 209,924 201,600 *
Osama I. Mikhail(4).................. 103,467 103,467 *
David W. Thomas(5)................... 84,000 83,200 *
John C. Morris....................... 54,399 54,399 *
David Duncan, Jr. ................... 38,399 38,399 *
William J. Jenkins(6)................ -- -- --
All directors and officers as a group
(11 persons)(7).................... 15,327,781 1,037,065 44.6%
5% STOCKHOLDERS
Novartis AG(8)....................... 6,373,732 -- 19.1
Alafi Capital Company(9)............. 2,298,724 -- 6.9
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
55
<PAGE>
- ---------------------------
* Less than 1%
(1) Includes 6,420,585 shares of common stock owned by Robinhood Ventures,
L.P. and 34,816 shares of common stock owned by AMC Ventures, L.P. Apex
Enterprises, Inc., a corporation wholly-owned by Dr. Chang, is the sole
general partner of Robinhood Ventures, L.P. and AMC Ventures, L.P. and has
voting and investment control over the common stock owned by them.
Includes 257,580 shares held in trust by Dr. Chang for her children. Does
not include 460,800 shares held by the 1992 Chang Family Trusts
established for the benefit of Dr. Chang's children. Dr. Chang disclaims
beneficial ownership of the shares held by these trusts. John Blickenstaff
is the trustee of these trusts.
(2) Includes 256,481 shares held in trust by Dr. Chang for his children. Does
not include 460,800 shares held by the 1992 Chang Family Trusts
established for the benefit of Dr. Chang's children. Dr. Chang disclaims
beneficial ownership of the shares held by these trusts. John Blickenstaff
is the trustee of these trusts. Dr. Chang's address is College of Life
Sciences, National Tsing Hua University, Hsinchu, Taiwan, Republic of
China.
(3) Includes 533,332 shares held by Apex Venture Capital Corp., 28,000 shares
held by Cheng Xin Technology Development Corporation, 48,000 shares held
by First Bio Venture Capital Corporation and 48,000 shares held by Win Win
Venture Capital Corporation. Dr. Lee is the President and Chief Executive
Officer of each of these companies. Also includes 86,560 shares held by
Hwa Xing Capital Corporation, of which Dr. Lee is the Managing Director.
Dr. Lee's address is 5th Floor, 143, Section 2, Min-Sheng E. Road, Taipei,
Taiwan, Republic of China.
(4) Dr. Mikhail's address is 6720 Bertner Ave., Suite B111, Houston, Texas
77030.
(5) Does not include 1,500 shares held by Dr. Thomas' spouse and children,
with respect to which Dr. Thomas disclaims beneficial ownership.
(6) Dr. Jenkins' address is Gelham, Church Road, Waxham, Norfolk NR12 0DY,
United Kingdom.
(7) See footnotes 1 through 3 and 5 above.
(8) The address of Novartis AG is S-202.502, CH-4002, Basel, Switzerland.
(9) Does not include 135,000 shares of common stock held by the Graduate
School of Human Behavior, an organization whose President is Margaret
Alafi, spouse of Moshe Alafi, with respect to which Dr. Alafi disclaims
beneficial ownership. Mr. Alafi is the General Partner of Alafi Capital
Company. Alafi Capital Company's address is P.O. Box 7338, Berkeley,
California 94707.
56
<PAGE>
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
Some of our stockholders, including Nancy T. Chang, our Chairman, President and
Chief Executive Officer, and Novartis and Tse Wen Chang, each of whom owns more
than 10% of our common stock, have certain registration rights which they may
exercise after this offering. They may request that we register their shares for
sale with the Securities and Exchange Commission, and, if all of the conditions
that are contained in our agreements with them are met, we must register their
shares. We would be required to bear all the expenses of a registration. There
are some restrictions on their rights, including that we are not obligated to
effect more than one registration for their shares, except that we may be
required, in certain circumstances, to register their shares up to three times
using a short-form registration. For a more detailed description see also
"Description of Capital Stock -- Registration Rights."
NOVARTIS NOTE PAYABLE
We have a loan agreement with Novartis, which, prior to this offering, held
19.1% of our common stock. Under the agreement, Novartis loaned us $10.0
million, bearing interest at a rate equal to LIBOR plus 2% (8.1% at December 31,
1999). Novartis has agreed to forgive interest on the loan through December 31,
1999. The loan is due December 31, 2005. Tanox and Novartis have agreed in
principle that the principal and future interest payments may be partially or
totally forgiven by Novartis based on our future use of the facility.
COLLABORATION AGREEMENTS WITH NOVARTIS
We also have agreements with Novartis to jointly develop anti-IgE antibody
products. For a more detailed description see "Business -- Collaboration and
License Agreements."
TRANSACTIONS WITH DIRECTORS
In addition to being one of our directors, Tse Wen Chang is also a consultant to
us. In 1999, we paid $48,000 to Dr. Chang under the terms of his consulting
agreement. Our Taiwan subsidiary, TanAsia Pharma, Ltd., also entered into a
collaboration agreement, which expired in June 1999, with Dr. Chang and the
National Tsing Hua University. Dr. Chang is a professor, and was formerly Dean
of the College of Life Sciences, at National Tsing Hua University. Under the
agreement with the university, Dr. Chang and other scientists at the university
participated in certain research and development activities for our benefit. In
1999, we paid the university $20,250 under the terms of that agreement.
LOANS TO MANAGEMENT
In April 1999, we loaned John Blickenstaff, our Vice President of
Administration, Secretary and Treasurer, $161,250 to enable him to purchase
258,000 shares of our common stock, pursuant to stock options he held which were
soon to expire. This full recourse loan is secured by shares of our common stock
owned by Mr. Blickenstaff, bears interest at a rate of 8.5% and is due and
payable in full in September 2001.
In October 1999, we loaned David W. Thomas, our Senior Vice President of
Research and Development, $150,000 to enable him to purchase a residence in
Houston. The loan is unsecured, bears interest at a rate of 8.5% per annum and
is due and payable in full on the first to occur of the sale of his
Massachusetts residence or July 15, 2000.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
In accordance with our amended and restated certificate of incorporation, we are
authorized to issue up to 120,000,000 shares of common stock, par value $.01 per
share, and 10,000,000 shares of preferred stock, par value $.01 per share. As of
February 1, 2000, there were 33,324,402 shares of common stock outstanding held
by 156 stockholders of record, and no shares of preferred stock were
outstanding.
The following summary description of our capital stock is not intended to be
complete and is qualified by reference to the provisions of applicable law and
to our amended and restated certificate of incorporation and our bylaws, filed
as exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
Based on the number of shares outstanding as of February 1, 2000 and giving
effect to the issuance of the shares of common stock offered pursuant to
this prospectus there will be shares of common stock outstanding upon the
completion of this offering. In addition, as of February 1, 2000, there were
outstanding stock options to purchase 3,183,920 shares of common stock.
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors.
Holders of common stock are entitled to receive ratably the dividends, if any,
declared from time to time by the board of directors out of legally available
funds. Holders of common stock have no conversion, redemption or preemptive
rights to subscribe to any of our securities. In the event of any liquidation,
dissolution or winding-up of our affairs, holders of common stock will be
entitled to share ratably in our assets remaining after provision for payment of
liabilities to creditors. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of any shares of preferred
stock which we may issue in the future.
PREFERRED STOCK
We have no present plans to issue any shares of preferred stock. However, the
board of directors has the authority, without action by the stockholders, to
designate and issue preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, which may be greater than the
rights of the common stock.
REGISTRATION RIGHTS
After the completion of this offering, the holders of 21,522,247 shares of
common stock will be entitled to rights with respect to the registration of
these shares under the Securities Act. These rights include demand registration
rights.
Under the terms of the agreements providing registration rights, the holders of
a specified minimum number of shares can demand that we register their shares.
We are required to use our best efforts to effect any such registration, subject
to conditions and limitations. We are not required to effect more than three of
these registrations pursuant to these demand registration rights. Under the
terms of the agreements providing registration rights, if we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, these
holders are entitled to notice of the registration and are entitled to include
shares of common stock in the registration. The rights are subject to conditions
and limitations, among them the right of the underwriters of an offering subject
to the registration to limit the number of shares included in the registration.
These registration rights have been waived with respect to this offering.
Furthermore, stockholders with demand registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations. We are generally required to bear all of the expenses of all of
these registrations, except underwriting discounts and selling commissions. We
also have agreed to indemnify stockholders whose shares are included in a
registration statement from losses arising from violations by us of applicable
securities laws in connection with the registration. Registration of any of the
shares of common stock held by stockholders
58
<PAGE>
with registration rights would result in shares becoming freely tradable without
restriction under the Securities Act immediately upon effectiveness of such
registration.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law which
regulates corporate takeovers. Subject to some exceptions, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless:
o before the date of the business combination, the transaction is approved
by the board of directors of the corporation;
o upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or
o the business combination is approved by the board of directors and by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect immediately after the completion of this offering and are summarized in
the following paragraphs, may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including those attempts that might result
in a premium over the market price for the shares held by stockholders.
REMOVAL OF DIRECTORS; VACANCIES. Our amended and restated certificate of
incorporation provides that directors may be removed from office only for cause
and only by the affirmative vote of the holders of at least two-thirds of our
total outstanding voting stock. Vacancies on our board of directors, including
those resulting from an increase in the number of directors, may be filled only
by the remaining directors, not by stockholders.
CLASSIFIED BOARD OF DIRECTORS. Our bylaws provide for our board to be divided
into three classes of directors serving staggered, three year terms. The
classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 40 days
prior to the annual meeting of stockholders or the special meeting at which the
stockholder desires the nominations to be made; provided, that if less than 50
days notice has been given to the stockholders for such meeting, notice by the
stockholder, to be timely, must be so received not later than the close of
business on the 10th day following the date on which notice of the meeting is
given to stockholders.
59
<PAGE>
Our bylaws also specify certain requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS. Our bylaws provide that special meetings of
our stockholders may be called only by a majority of the board of directors, the
chairman of our board of directors or our president or chief executive officer
or by our president at the request of holders of one-fifth of our common stock.
PREFERRED STOCK. The board of directors has the authority, without action by
the stockholders, to designate and issue preferred stock in one or more series
and to designate the rights, preferences and privileges of each series, which
may be greater than the rights of the common stock. We cannot predict the effect
of the issuance of any shares of preferred stock upon the rights of holders of
our common stock until the board of directors determines the specific rights of
the holders of our preferred stock. However, the effects could include one or
more of the following:
o restricting dividends on our common stock;
o diluting the voting power of our common stock;
o impairing the liquidation rights of our common stock; or
o discouraging or preventing a change in our control.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Section 145 of the Delaware General Corporation Law authorizes a corporation's
board of directors to grant indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities, including reimbursement for expenses incurred, arising under
the Securities Act.
As permitted by Delaware law, our amended and restated certificate of
incorporation includes a provision that eliminates the personal liability of our
directors for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Tanox or its stockholders; (2) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law; (3) under Section
174 of the Delaware General Corporation Law regarding unlawful dividends and
stock purchases; or (4) for any transaction from which the director derived an
improper personal benefit.
As permitted by Delaware law, our bylaws provide that (1) Tanox is required to
indemnify its directors and officers to the fullest extent permitted by Delaware
law; (2) Tanox is required to advance expenses, as incurred, to its directors
and officers in connection with a legal proceeding, subject to certain limited
exceptions; and (3) the rights conferred in the bylaws are not exclusive.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our officers and directors to give them
additional contractual assurances regarding the scope of the indemnification
provided in our amended and restated certificate of incorporation and bylaws and
to provide additional procedural protections.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock Transfer
and Trust Company, New York, New York.
LISTING
We will apply for quotation of the common stock on the Nasdaq National Market
under the symbol "TNOX."
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
or the perception that sales could occur, could adversely affect the market
price of our common stock and our ability to sell equity securities.
When the offering is completed, we will have a total of shares of
common stock outstanding. The shares offered by this prospectus will be
freely tradeable unless they are purchased by our "affiliates," as defined in
Rule 144 under the Securities Act. Shares purchased by affiliates may generally
only be sold pursuant to an effective registration statement under the
Securities Act or in compliance with Rule 144 as described below. The remaining
shares are "restricted," which means they were originally sold in offerings
that were not subject to a registration statement filed with the Securities and
Exchange Commission. These restricted shares may be resold only through
registration under the Securities Act or under an available exemption from
registration, such as provided through Rule 144.
Directors and officers and stockholders who together own shares of common
stock will be subject to lock-up agreements providing that they will not offer,
sell or otherwise dispose of common stock owned by them for a period of 180 days
after the date of this prospectus. CIBC World Markets Corp., however, may in its
sole discretion, at any time, without notice, release all or any portion of the
shares subject to lock-up agreements. Upon expiration of the lock-up agreements,
shares will become eligible for sale pursuant to Rule 144(k),
shares will become eligible for sale under Rule 144 and shares will
become eligible for sale under Rule 701.
RULE 144
Generally, Rule 144 as currently in effect provides that, beginning 90 days
after the first date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period, a number of shares that does not exceed the
greater of:
o 1% of the number of shares of common stock then outstanding, which,
based on the shares outstanding as of February 1, 2000 will equal
approximately shares; or
o the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
the notice on Form 144 with respect to the sale.
Rule 144 provides limitations on the manner of sales and imposes requirements as
to notice and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, may sell his or her shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, a person
who has been a non-affiliate for at least two years may sell his or her shares
in the open market immediately after the lock-up agreements expire.
RULE 701
Rule 701 permits any of our employees, officers, directors, or consultants who
purchased their shares under a compensatory stock or option plan or other
written agreement prior to the effective date of this offering to sell such
shares under Rule 144 without complying with the holding period, public
information, volume limitation or notice requirements of Rule 144. All holders
of Rule 701 shares may not sell their Rule 701 shares until 90 days after the
date of this prospectus. However, substantially all shares of our common stock
issued under Rule 701 are subject to lock-up agreements described above.
61
<PAGE>
Shortly following the date of this prospectus, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
reserved for issuance under our stock option plans. Shares registered under this
registration statement will, subject to Rule 144 volume limitations applicable
to our affiliates, be available for sale in the open market immediately after
the lock-up agreements expire. As of February 1, 2000, an aggregate of 3,183,920
shares of common stock were subject to outstanding options.
REGISTRATION RIGHTS
As of February 1, 2000, holders of 21,522,247 shares of common stock will be
entitled to certain rights with respect to the registration of those shares
under the Securities Act. After these shares are registered, they will be freely
tradeable. For a description of these rights, see "Description of Capital
Stock."
62
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., FleetBoston Robertson Stephens Inc., Warburg
Dillon Read LLC, Adams, Harkness & Hill, Inc. and KBC Securities Inc. are acting
as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
- ------------------------------------- -------------------------
CIBC World Markets Corp. ............
FleetBoston Robertson Stephens Inc. .
Warburg Dillon Read LLC..............
Adams, Harkness & Hill, Inc. ........
KBC Securities Inc. .................
-------------------------
Total..............................
=========================
The underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The shares should be ready for delivery on or about , 2000, against payment
in immediately available funds. The representatives have advised us that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to other securities dealers at
such price less a concession of $ per share. The underwriters may also allow,
and such dealers may reallow, a concession not in excess of $ per share to
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the public
will be $ , and the total proceeds to us will be $ . The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
they will each purchase a number of additional shares proportionate to the
underwriter's initial amount reflected in the above table.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
---------- -------------------------- ----------------------------
<S> <C> <C> <C>
Tanox................................ $ $ $
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
63
<PAGE>
We and our officers and directors and substantially all other stockholders have
agreed to a 180-day "lock up" with respect to shares of common stock that
they beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to certain exceptions, for a period of
180 days following the date of this prospectus, we and such persons may not
offer, sell, pledge or otherwise dispose of these securities without the prior
written consent of CIBC World Markets Corp.
The representatives have informed us that they do not expect discretionary sales
by the underwriters to exceed 5% of the shares offered by this prospectus.
The underwriters have reserved for sale up to shares for employees,
directors and other persons associated with us. These reserved shares will be
sold at the initial public offering price that appears on the cover page of this
prospectus. The number of shares available for sale to the general public in the
offering will be reduced to the extent reserved shares are purchased by such
persons. The underwriters will offer to the general public, on the same terms as
other shares offered by this prospectus, any reserved shares that are not
purchased by such persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by us and the representatives, based on the
following factors:
o prevailing market and general economic conditions;
o our financial information;
o our history and prospects;
o Tanox and the industry in which we compete;
o an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues; and
o the present stage of our development and the above factors in relation
to the market values and various valuation measures of other companies
engaged in activities similar to ours.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
o Stabilizing transactions -- The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of
the shares, so long as stabilizing bids do not exceed a specified
maximum.
o Over-allotment and syndicate covering transactions -- The underwriters
may create a short position in the shares by selling more shares than
are set forth on the cover page of this prospectus. If a short position
is created in connection with the offering, the representatives may
engage in syndicate covering transactions by purchasing shares in the
open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.
o Penalty bids -- If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from the underwriters and selling
group members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If such transactions are commenced, they may be discontinued without notice at
any time.
64
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the shares
of common stock offered by this prospectus will be passed upon for us by
Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois.
EXPERTS
The financial statements as of December 31, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999 included in this prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
Certain legal matters with respect to the statements in this prospectus under
the captions "Risk Factors -- We are dependent on our patents and proprietary
rights. The validity, enforceability and commercial value of these rights are
highly uncertain," and "Business -- Patents and Proprietary Rights" have been
reviewed and approved by Chamberlain, Hrdlicka, White, Williams & Martin,
Houston, Texas, our patent counsel who are experts in these matters and are
subject to an opinion to be rendered to the underwriters. We are including this
information relying on their review and approval.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with this offering. In addition, upon
completion of the offering, we will be required to file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission.
You may read and copy the registration statement and any other documents filed
by us at the Securities and Exchange Commission's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the Public
Reference Room. Our Securities and Exchange Commission filings are also
available to the public at the Securities and Exchange Commission's Internet
site at "http://www.sec.gov."
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of Tanox, the
reference may not be complete and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
After the offering, we intend to provide annual reports to our stockholders that
include financial information examined and reported on by an independent public
accounting firm.
65
<PAGE>
TANOX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----------
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets as of
December 31, 1998 and 1999......... F-3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for
the years ended December 31, 1997,
1998 and 1999...................... F-4
Consolidated Statements of
Stockholders' Equity for the years
ended December 31, 1997, 1998 and
1999............................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31,
1997, 1998 and 1999................ F-6
Notes to Consolidated Financial
Statements......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tanox, Inc.:
We have audited the accompanying consolidated balance sheets of Tanox, Inc., a
Delaware corporation, and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tanox, Inc., and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
December 31, 1999, in conformity with generally accepted accounting principles.
Houston, Texas
February 1, 2000
F-2
<PAGE>
TANOX, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1998 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 28,352,000 $ 44,242,000
Short-term investments.......... 5,383,000 3,012,000
Accounts receivable............. 74,000 125,000
Interest receivable............. 253,000 414,000
Income taxes receivable......... 2,052,000 132,000
Prepaid expenses................ 91,000 114,000
------------- -------------
Total current assets....... 36,205,000 48,039,000
PROPERTY AND EQUIPMENT:
Laboratory and office
equipment...................... 8,709,000 9,369,000
Leasehold improvements.......... 1,902,000 2,102,000
Furniture and fixtures.......... 92,000 119,000
------------- -------------
10,703,000 11,590,000
Less -- Accumulated depreciation
and amortization............... (3,577,000) (4,577,000)
------------- -------------
Net property and
equipment............... 7,126,000 7,013,000
OTHER ASSETS, net of accumulated
amortization of $25,000 and
$59,000, respectively........... 91,000 276,000
------------- -------------
Total assets............... $ 43,422,000 $ 55,328,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 802,000 $ 874,000
Accrued liabilities............. 1,080,000 947,000
Accrued arbitration award....... -- 3,500,000
------------- -------------
Total current
liabilities............. 1,882,000 5,321,000
NOTE PAYABLE TO RELATED PARTY........ 10,000,000 10,000,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par
value; 10,000,000 shares
authorized; none outstanding... -- --
Common stock, $.01 par value;
120,000,000 shares authorized;
29,310,175 shares in 1998 and
33,324,402 shares in 1999
issued and outstanding......... 293,000 333,000
Additional paid-in capital...... 39,266,000 71,701,000
Deferred compensation........... (902,000) (651,000)
Loans receivable from
employees...................... -- (1,086,000)
Other comprehensive income,
cumulative translation
adjustment..................... (2,000) 171,000
Retained earnings (deficit)..... (7,115,000) (30,461,000)
------------- -------------
Total stockholders'
equity.................. 31,540,000 40,007,000
------------- -------------
Total liabilities and
stockholders' equity.... $ 43,422,000 55,328,000
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TANOX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ -------------- --------------
<S> <C> <C> <C>
REVENUES:
Development agreement with
related party................. $ 1,271,000 $ 2,369,000 $ 1,063,000
Other development agreements and
licensing fees................ 7,668,000 53,000 342,000
------------ -------------- --------------
Total revenues........ 8,939,000 2,422,000 1,405,000
OPERATING COSTS AND EXPENSES:
Research and development........ 6,926,000 11,933,000 17,163,000
General and administrative...... 2,230,000 3,431,000 8,582,000
------------ -------------- --------------
Total operating costs
and expenses........ 9,156,000 15,364,000 25,745,000
------------ -------------- --------------
LOSS FROM OPERATIONS................. (217,000) (12,942,000) (24,340,000)
OTHER INCOME (EXPENSE):
Interest income................. 1,684,000 2,061,000 1,884,000
Interest expense................ (639,000) (825,000) (741,000)
Other........................... -- 4,000 (115,000)
------------ -------------- --------------
Total other income.... 1,045,000 1,240,000 1,028,000
------------ -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES.... 828,000 (11,702,000) (23,312,000)
(Provision) benefit of
income taxes........ (198,000) 1,533,000 (34,000)
------------ -------------- --------------
NET INCOME (LOSS).................... $ 630,000 $ (10,169,000) $ (23,346,000)
============ ============== ==============
EARNINGS (LOSS) PER SHARE:
Basic........................... $ 0.02 $ (0.35) $ (0.75)
============ ============== ==============
Diluted......................... $ 0.02 $ (0.35) $ (0.75)
============ ============== ==============
SHARES USED IN COMPUTING EARNINGS
(LOSS) PER SHARE:
Basic........................... 27,909,000 29,105,000 31,113,000
============ ============== ==============
Diluted......................... 31,190,000 29,105,000 31,113,000
============ ============== ==============
COMPREHENSIVE NET INCOME (LOSS):
Net income (loss)............... $ 630,000 $ (10,169,000) $ (23,346,000)
Foreign currency translation
adjustment.................... -- (2,000) 173,000
------------ -------------- --------------
TOTAL COMPREHENSIVE NET INCOME
(LOSS)............................. $ 630,000 $ (10,171,000) $ (23,173,000)
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TANOX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
LOANS
COMMON STOCK RECEIVABLE
--------------------- ADDITIONAL DEFERRED TREASURY FROM
SHARES PAR VALUE PAID-IN CAPITAL COMPENSATION STOCK EMPLOYEES
--------- --------- --------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996.......... 26,215,004 $262,000 $13,125,000 $ -- $ -- $ --
Issuance of common stock for
cash, $7.50 per share, net of
issuance costs................. 2,331,262 23,000 17,308,000 -- -- --
Purchase of treasury stock,
10,425 shares.................. -- -- -- -- (78,000 ) --
Issuance of common stock upon
exercise of stock options...... 36,614 1,000 (9,000) -- 78,000 --
Capital contribution from
forgiveness of interest by
related party.................. -- -- 639,000 -- -- --
Deferred compensation related to
stock options.................. -- -- 750,000 (750,000) -- --
Amortization of deferred
compensation related to stock
options........................ -- -- -- 25,000 -- --
Net income....................... -- -- -- -- -- --
--------- --------- --------------- ------------ -------- ----------
BALANCES, December 31, 1997.......... 28,582,880 286,000 31,813,000 (725,000) -- --
Issuance of common stock for
cash, $11.25 per share, net of
issuance costs................. 273,686 3,000 3,046,000 -- -- --
Issuance of common stock upon
exercise of stock options...... 230,400 2,000 223,000 -- -- --
Exchange of mature common stock
to exercise stock options...... (3,200) -- (36,000) -- -- --
Issuance of common stock to
acquire foreign subsidiary..... 226,409 2,000 2,545,000 -- -- --
Income tax benefit from stock
options exercised.............. -- -- 400,000 -- -- --
Capital contribution from
forgiveness of interest by
related party.................. -- -- 825,000 -- -- --
Deferred compensation related to
stock options.................. -- -- 450,000 (450,000) -- --
Amortization of deferred
compensation related to stock
options........................ -- -- -- 273,000 -- --
Exchange translation
adjustment..................... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
--------- --------- --------------- ------------ -------- ----------
BALANCES, December 31, 1998.......... 29,310,175 293,000 39,266,000 (902,000) -- --
Issuance of common stock for
cash, $12.50 per share, net of
issuance costs................. 1,896,000 19,000 22,907,000 -- -- --
Issuance of common stock upon
exercise of stock options...... 1,789,520 18,000 1,131,000 -- -- --
Issuance of common stock on a net
issuance basis upon exercise of
warrants....................... 86,632 -- -- -- -- --
Issuance of common stock to
acquire foreign subsidiary..... 242,075 3,000 3,023,000 -- -- --
Capital contribution from
forgiveness of interest by
related party.................. -- -- 738,000 -- -- --
Deferred compensation related to
stock options.................. -- -- 4,636,000 (60,000) -- --
Amortization of deferred
compensation related to stock
options........................ -- -- -- 311,000 -- --
Loans receivable from
employees...................... -- -- -- -- -- (1,086,000)
Exchange translation
adjustment..................... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
--------- --------- --------------- ------------ -------- ----------
BALANCES, December 31, 1999.......... 33,324,402 $333,000 $71,701,000 $ (651,000) $ -- $(1,086,000)
========= ========= =============== ============ ======== ==========
OTHER
COMPREHENSIVE
INCOME-
CUMULATIVE RETAINED TOTAL
TRANSLATION EARNINGS STOCKHOLDERS'
ADJUSTMENT (DEFICIT) EQUITY
------------- ----------- -------------
BALANCES, December 31, 1996.......... $ -- $ 2,424,000 $15,811,000
Issuance of common stock for
cash, $7.50 per share, net of
issuance costs................. -- -- 17,331,000
Purchase of treasury stock,
10,425 shares.................. -- -- (78,000)
Issuance of common stock upon
exercise of stock options...... -- -- 70,000
Capital contribution from
forgiveness of interest by
related party.................. -- -- 639,000
Deferred compensation related to
stock options.................. -- -- --
Amortization of deferred
compensation related to stock
options........................ -- -- 25,000
Net income....................... -- 630,000 630,000
------------- ----------- -------------
BALANCES, December 31, 1997.......... -- 3,054,000 34,428,000
Issuance of common stock for
cash, $11.25 per share, net of
issuance costs................. -- -- 3,049,000
Issuance of common stock upon
exercise of stock options...... -- -- 225,000
Exchange of mature common stock
to exercise stock options...... -- -- (36,000)
Issuance of common stock to
acquire foreign subsidiary..... -- -- 2,547,000
Income tax benefit from stock
options exercised.............. -- -- 400,000
Capital contribution from
forgiveness of interest by
related party.................. -- -- 825,000
Deferred compensation related to
stock options.................. -- -- --
Amortization of deferred
compensation related to stock
options........................ -- -- 273,000
Exchange translation
adjustment..................... (2,000) -- (2,000)
Net loss......................... -- (10,169,000) (10,169,000)
------------- ----------- -------------
BALANCES, December 31, 1998.......... (2,000) (7,115,000) 31,540,000
Issuance of common stock for
cash, $12.50 per share, net of
issuance costs................. -- -- 22,926,000
Issuance of common stock upon
exercise of stock options...... -- -- 1,149,000
Issuance of common stock on a net
issuance basis upon exercise of
warrants....................... -- -- --
Issuance of common stock to
acquire foreign subsidiary..... -- -- 3,026,000
Capital contribution from
forgiveness of interest by
related party.................. -- -- 738,000
Deferred compensation related to
stock options.................. -- -- 4,576,000
Amortization of deferred
compensation related to stock
options........................ -- -- 311,000
Loans receivable from
employees...................... -- -- (1,086,000)
Exchange translation
adjustment..................... 173,000 -- 173,000
Net loss......................... -- (23,346,000) (23,346,000)
------------- ----------- -------------
BALANCES, December 31, 1999.......... $ 171,000 $(30,461,000) $40,007,000
============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TANOX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ 630,000 $ (10,169,000) $ (23,346,000)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities --
Depreciation and
amortization............. 199,000 934,000 1,034,000
Interest expense forgiven
by related party......... 639,000 825,000 738,000
Amortization of deferred
compensation related to
stock options............ 25,000 273,000 4,887,000
In-process research and
development.............. -- 2,798,000 3,359,000
Changes in operating assets and
liabilities --
Increase in accounts and
interest receivables and
prepaid expenses......... (17,000) (15,000) (235,000)
Change in taxes receivable
or payable............... (463,000) (1,576,000) 1,920,000
(Decrease) increase in
accounts payable and
accrued liabilities...... (694,000) 391,000 3,439,000
Decrease in collaboration
advances................. (500,000) -- --
------------- -------------- --------------
Net cash used in
operating
activities.......... (181,000) (6,539,000) (8,204,000)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term
investments................... -- (9,517,000) (12,082,000)
Maturity of short-term
investments................... -- 4,134,000 14,453,000
Purchases of property and
equipment..................... (520,000) (455,000) (887,000)
Increase in other assets........ -- -- (219,000)
Purchase of wholly owned
subsidiary (net of cash
acquired)..................... -- (364,000) (333,000)
------------- -------------- --------------
Net cash provided by
(used in) investing
activities.......... (520,000) (6,202,000) 932,000
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of note payable to
related party................. 2,000,000 1,000,000 --
Issuance of employee loans in
connection with the exercise
of stock options.............. -- -- (1,086,000)
Proceeds from issuance of common
stock......................... 17,401,000 3,238,000 24,075,000
Purchases of treasury stock..... (78,000) -- --
------------- -------------- --------------
Net cash provided by
financing activities..... 19,323,000 4,238,000 22,989,000
IMPACT OF EXCHANGE RATES ON CASH..... -- (2,000) 173,000
------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................ 18,622,000 (8,505,000) 15,890,000
CASH AND CASH EQUIVALENTS, beginning
of year............................ 18,235,000 36,857,000 28,352,000
------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 36,857,000 $ 28,352,000 $ 44,242,000
============= ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
taxes $ 661,000 $ 37,000 $ 137,000
Noncash investing and financing
activities --
Capital contribution from
forgiveness of interest
by a related party....... 639,000 825,000 738,000
Receivable related to
income tax benefit from
stock options
exercised................ -- 400,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND RISK FACTORS:
Tanox, Inc. (Tanox), was formerly known as Tanox Biosystems, Inc. and was
originally incorporated as a Texas corporation on March 19, 1986. Tanox was
reincorporated in Delaware in January 2000. Tanox is engaged in the discovery
and development of therapeutic products that beneficially influence or are
derived from the immune system. Tanox is focusing its product development
efforts on therapeutics in three broad areas: immunology (asthma/allergy,
autoimmune diseases and inflammation), infectious diseases and oncology.
Tanox has not yet generated any significant revenues from product sales, nor is
there any assurance of significant future revenues from product sales. The
research and development activities engaged in by Tanox involve a high degree of
risk and uncertainty. The ability of Tanox to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors could include, but are not limited to, the need for additional
financing, the reliance on collaborative arrangements for research and
development, marketing and product commercialization and the ability to develop
or obtain manufacturing, sales and marketing capabilities. Additional factors
could include resolution of ongoing contingencies, including legal proceedings,
changes in the level of sponsored research revenue, uncertainties as to patents
and proprietary technologies, technological change and risk of obsolescence,
development of its products, competition, government regulations and regulatory
approval, and product liability exposure. As a result of the aforementioned
factors and related uncertainties, there can be no assurance of Tanox's future
success.
Tanox entered into a development and licensing agreement with Novartis Pharma AG
(Novartis) in May 1990. Under this agreement, Tanox and Novartis agreed to
jointly develop certain products for IgE-mediated diseases, including asthma and
allergies. Tanox received a contract payment upon signing the agreement and has
received additional contract payments and reimbursement payments upon the
occurrence of specified events. Under a separate agreement (the Stock
Agreement), Tanox and Novartis also agreed to the sale and purchase of shares of
Tanox's common stock. Sales of these shares were completed in May 1990, May 1992
and June 1994. Tanox notified Novartis of the termination of the Stock Agreement
as provided therein, and the termination was effective as of May 10, 1997.
Novartis owned approximately 19.1 percent of Tanox's outstanding common stock at
December 31, 1999.
On December 22, 1993, Tanox sued Genentech, Inc. (Genentech), F. Hoffman-La
Roche Ltd., Roche Holdings, Inc., Roche Holding Ltd. and Hoffman-La Roche, Inc.
(collectively referred to as "Roche"), in Harris County District Court in
Houston, Texas. The action arose from collaboration discussions between Tanox
and Genentech in 1989 and 1990 relating to Tanox's anti-IgE product as a
treatment for IgE-mediated diseases, including allergy and asthma. In response,
Genentech filed suit against Tanox for patent infringement and subsequently
named Novartis in the suit. Tanox's litigation against Genentech and Roche and
Genentech's litigation against Tanox and Novartis were settled in July 1996.
Contemporaneously with the settlement, Genentech, Novartis and Tanox also
entered into a binding agreement in principle to combine their existing anti-IgE
antibody programs into a cooperative effort to develop and commercialize
selected anti-IgE antibodies (the Three-Party Collaboration). Tanox also entered
into additional licensing arrangements with Genentech. Tanox received an initial
payment upon entering into the Three-Party Collaboration and settling the
litigation. Tanox received and will receive additional milestone and royalty
payments upon the accomplishment of specified subsequent events. Novartis or
Genentech may terminate their participation in the Three-Party Collaboration on
short notice, subject to reversion of product rights to Tanox and the remaining
collaborator.
F-7
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF PANGENETICS B.V.:
In March 1998, Tanox acquired the common stock of Tanox Pharma B.V. (formerly
PanGenetics), a biotechnology company located in Amsterdam, The Netherlands.
Tanox recorded the transaction for accounting purposes as a purchase, and the
consolidated financial statements include the operations of Tanox Pharma
subsequent to the acquisition date. Under the terms of the agreement, Tanox
purchased Tanox Pharma for an initial cash payment of $508,000 and 226,409
shares of common stock, valued at $11.25 per share, for a total initial
consideration of $3,055,000. In addition, Tanox agreed to pay future
consideration, in two installments, totaling up to $667,000 in cash and 484,147
shares of common stock upon occurrence of specified future events. In September
1999, Tanox made the second installment payments of $333,000 in cash and 242,075
shares of common stock valued at $12.50 per share, for a total additional
consideration of $3,359,000. If specified future events take place and the final
future payment is made in March 2001, Tanox will record an additional purchase
price amount based on the cash paid and fair value of the common stock issued at
the time of payment.
Tanox engaged an independent firm to perform an appraisal of the assets acquired
in the transaction. The appraisal was completed and the report issued in 1998.
The acquisition of Tanox Pharma was accounted for under the purchase method of
accounting in which the aggregate purchase price was allocated to tangible and
intangible assets acquired based on their relative fair values as of the date of
the transactions. At the time of the acquisition, the total current and future
consideration of the acquisition was valued for accounting purposes at $9.2
million, based on the total of the cash and then fair value of common stock paid
to Tanox Pharma shareholders. Of this amount, we allocated approximately $0.2
million to tangible fixed assets, $0.1 million to intangible assets, $7.2
million to in-process research and development and $1.7 million to goodwill.
The valuation of acquired in-process research and development considered:
o the current technological feasibility, scientific and development states
of the anti-CD40 research project;
o the expected amount of time and resources required to complete the
projects;
o the alternative future use of the acquired research and development; and
o valuation and allocation approaches.
Tanox's ability to commercialize the acquired anti-CD40 research project is
affected by several risks. These risks include:
o Tanox's ability to construct low cost versions of the antibody;
o successful preclinical testing;
o successful completion of Phase I, II and III clinical testing;
o successful filing and acceptance of European and Japanese regulatory
submissions;
o Tanox's ability to successfully commercialize the anti-CD40 monoclonal
antibody by itself or in connection with a collaborative partner; and
o Tanox's ability to manufacture the anti-CD40 monoclonal antibody
at a competitive cost.
At the time of the acquisition, the anti-CD40 monoclonal antibody required
additional development work and preclinical testing to enter clinical trials. In
order for anti-CD40 to become a marketable product, it was necessary to conduct
several clinical trials and to improve the manufacturing of the product. Tanox
estimated at the time of the acquisition that it would take from seven to nine
years and cost at least $50 million to complete the development of the anti-CD40
product.
F-8
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The initial purchase price installment was allocated as follows:
In-process research and
development........................ $ 2,798,000
Net working capital.................. 125,000
Intangible assets.................... 100,000
Tangible fixed assets................ 22,000
Noncurrent financial assets.......... 10,000
------------
Total........................... $ 3,055,000
============
The allocation of the second installment payment of $3,359,000 was assigned to
in-process research and development based on the appraisal. Accordingly, Tanox's
financial statements for the years ended December 31, 1998 and 1999 include a
charge of $2,798,000 in 1998 and $3,359,000 in 1999 for expensing the cost of
the in-process research and development. If the final purchase price payments
are made to the former shareholders of Tanox Pharma in 2001, Tanox anticipates
that the cost of such additional payments will be allocated to acquired
in-process research and development and goodwill based upon the appraisal
obtained as of the date of the acquisition.
If Tanox had acquired PanGenetics prior to January 1, 1997, the unaudited pro
forma financial results would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Total assets......................... $ 44,984,000 $ 43,422,000 $ 55,328,000
Total revenues....................... 9,384,000 2,439,000 1,405,000
Net income (loss).................... 557,000 (7,473,000) (19,988,000)
Basic earnings (loss) per share...... 0.02 (0.25) (0.64)
Diluted earnings (loss) per share.... 0.02 (0.25) (0.64)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Tanox
and its wholly owned subsidiaries, Tanox Pharma International, Inc., Tanox
Pharma B.V. and TanAsia Pharma, Ltd. Intercompany transactions and balances are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues associated with development agreements which include rights to license
or sublicense Tanox's technology are recognized when payments are earned.
Development revenues are received under best efforts contracts, and such
revenues are not refundable. Revenues earned in connection with sponsored
research are recognized as Tanox performs its obligations related to such
research. Any revenue contingent upon future
F-9
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance by Tanox is deferred and recognized as the performance is completed.
Any revenue from milestones is recognized when the milestones are achieved.
Tanox recognized revenues of $6.3 million, $2.4 million and $1.1 million during
1997, 1998 and 1999, respectively, under the Three-Party Collaboration described
in Note 1. Included in these revenues are milestone payments of $5.0 million,
$1.5 million and $1.0 million, respectively. Expenses incurred related to these
agreements were approximately $1.3 million, $0.2 million and $0.1 million in
1997, 1998 and 1999, respectively. Revenues from collaborative agreements with
Novartis accounted for 15 percent of 1997 revenues, 98 percent of 1998 revenues
and 76 percent of 1999 revenues. Revenues from collaborative agreements with
Genentech accounted for 56 percent of 1997 revenues and none of 1998 and 1999
revenues. At December 31, 1998, Tanox had accounts receivable of approximately
$14,000 for estimated costs reimbursable under the Three-Party Collaboration.
There were no receivables under the Three-Party Collaboration at December 31,
1999.
Tanox recognized revenues of $2.5 million in 1997 from advances made to Tanox in
1996 and 1997 under a development and licensing agreement (the Takara Agreement)
with Takara Shuzo, Ltd.. The Takara Agreement was concluded effective November
30, 1997. The Takara Agreement accounted for 28 percent of 1997 revenues.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased.
SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. Government agency debt obligations and
investment grade commercial paper with an original maturity greater than three
months but less than one year. Tanox's policy is to hold short-term investments
until maturity. Short-term investments are recorded at cost, which approximates
fair value. Tanox has no available-for-sale or trading securities.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciated on a straight-line
basis over the estimated useful economic lives of the assets or, in the case of
leasehold improvements, over the remaining term of the lease. The estimated
useful lives employed in computing depreciation are three to seven years for
laboratory and office equipment, five to seven years for furniture and fixtures,
and the lesser of nine years or the remaining lease term for leasehold
improvements. When property is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in income. Maintenance and repairs are charged to expense when
incurred.
Tanox has adopted Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." Management periodically reviews long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If factors
indicate that an asset should be evaluated for possible impairment, management
compares estimated undiscounted future operating cash flow from the related
asset to the carrying amount of the asset. If the carrying amount of the asset
were greater than undiscounted future operation cash flow, an impairment loss
would be recognized. Any impairment loss would be computed as the excess of the
carrying amount of the asset over the estimated fair value of the asset
(calculated based on discounting estimated future operating cash flows).
F-10
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The application of SFAS No. 121 has had no material impact on Tanox's financial
position or results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs, including incidental patent costs, are expensed
as incurred.
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1999, consist of the following:
1998 1999
------------ ----------
Accrued payroll...................... $ 413,000 $ 282,000
Accrued vacation..................... 178,000 153,000
Accrued taxes........................ 122,000 55,000
Accrued rent......................... 7,000 24,000
Accrued professional fees............ 270,000 264,000
Other................................ 90,000 169,000
------------ ----------
$ 1,080,000 $ 947,000
============ ==========
See Note 9 for discussion of accrued arbitration award as of December 31, 1999.
INCOME TAXES
Tanox accounts for income taxes using the liability method prescribed by SFAS
No. 109, "Accounting for Income Taxes." Under this method, deferred income tax
assets and liabilities reflect the impact of temporary differences between the
financial accounting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FOREIGN CURRENCY TRANSACTIONS AND TRANSLATIONS
The balance sheet accounts of Tanox are generally translated into U.S. dollars
at exchange rates in effect on reporting dates. These amounts are reflected in
other comprehensive income. Income statement items are translated at average
exchange rates in effect during the financial statement period. Gains and losses
resulting from foreign currency transactions denominated in currency other than
the functional currency are classified as other income (expense).
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding during the
year. Diluted EPS is computed in the same manner as basic EPS, except that
diluted EPS reflects the potential dilution that would occur if outstanding
options and warrants were exercised.
F-11
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reconciles basic and diluted EPS for the year ended December
31, 1997. Since Tanox incurred net losses for the years ended December 31, 1998
and 1999, basic and diluted EPS are the same.
NET PER SHARE
INCOME SHARES AMOUNT
---------- ------------ ---------
For the year ended December 31,
1997 --
Basic EPS....................... $ 630,000 27,909,000 $0.02
=========
Effect of dilutive securities --
Options and warrants
outstanding................... -- 3,281,000
---------- ------------
Diluted EPS..................... $ 630,000 31,190,000 $0.02
========== ============ =========
OTHER COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and displaying comprehensive income and its components in an entity's
financial statements, and is effective for fiscal years beginning after December
15, 1997. The standard requires that all items that meet the definition of
components of comprehensive income be reported in Tanox's financial statements.
Tanox has included comprehensive income in its consolidated statements of
operations and comprehensive income (loss).
CONCENTRATION OF CREDIT RISK
Tanox's receivables are primarily associated with research collaborations with
pharmaceutical and biotechnology companies and grants from foreign government
entities. Tanox does not believe this concentration of credit risk presents a
material risk to Tanox. Tanox does not require collateral from these entities.
Tanox has invested its excess cash generally in high-quality commercial paper
and U.S. Government agency debt obligations. As of December 31, 1999, these
investments mature within 68 days of year-end and, therefore, management
believes that they bear minimal risk. Tanox has not experienced any losses on
its investments.
F-12
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. GEOGRAPHIC AREAS:
Tanox operates in a single business segment. Tanox's operations by geographic
area for the years ended December 31, 1997, 1998 and 1999, are presented below:
<TABLE>
<CAPTION>
TOTAL NET INCOME IDENTIFIABLE
REVENUES (LOSS) ASSETS
--------- ----------- -------------
<S> <C> <C> <C>
Year ended December 31, 1997 --
North America................... $8,939,000 $ 630,000 43,330,000
Asia............................ -- -- 1,501,000
--------- ----------- -------------
$8,939,000 $ 630,000 $ 44,831,000
========= =========== =============
Year ended December 31, 1998 --
North America................... $3,089,000 $(8,983,000) $ 42,794,000
Europe.......................... 39,000 (1,192,000) 282,000
Asia............................ -- 6,000 1,507,000
Interarea eliminations.......... (706,000) -- (1,161,000)
--------- ----------- -------------
$2,422,000 $(10,169,000) $ 43,422,000
========= =========== =============
Year ended December 31, 1999 --
North America................... $3,865,000 $(19,242,000) $ 58,522,000
Europe.......................... 244,000 (4,039,000) 754,000
Asia............................ -- (65,000) 1,534,000
Interarea eliminations.......... (2,704,000) -- (5,482,000)
--------- ----------- -------------
$1,405,000 $(23,346,000) $ 55,328,000
========= =========== =============
</TABLE>
5. NOTE PAYABLE TO RELATED PARTY:
Novartis has advanced Tanox $10.0 million pursuant to a loan agreement to
finance a new clinical manufacturing facility. The loan bears interest at LIBOR
plus two percent (7.3 percent and 8.1 percent at December 31, 1998 and 1999,
respectively). Through December 31, 1999, Novartis has agreed to forgive
interest on the loan. For the years ended December 31, 1997, 1998 and 1999, the
interest forgiven by Novartis has been reflected as interest expense and a
capital contribution. These amounts totalled $639,000, $825,000 and $738,000,
respectively for the years 1997 through 1999. The loan is due December 31, 2005.
Subject to modifications agreed to in principle concurrent with completion of
the Three-Party Collaboration, the principal and future interest payments may be
partially or totally forgiven by Novartis based on the future use of the
facility.
6. INCOME TAXES:
Tanox's pretax income (loss) consists of the following:
1997 1998 1999
------------ -------------- --------------
U.S. .......................... $ 1,253,000 $ (7,973,000) $ (16,505,000)
Foreign........................ (425,000) (3,729,000) (6,807,000)
------------ -------------- --------------
$ 828,000 $ (11,702,000) $ (23,312,000)
============ ============== ==============
F-13
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
1997 1998 1999
---------- ------------- ---------
Current.............................. $ 198,000 $ (1,533,000) $ 34,000
Deferred............................. -- -- --
---------- ------------- ---------
$ 198,000 $ (1,533,000) $ 34,000
========== ============= =========
Tanox's effective income tax rate for 1997 was less than the statutory federal
income tax rate of 35 percent primarily due to benefits from franchise tax
adjustments and research and developments tax credits that were partially offset
by increases in the valuation allowance. For 1998 and 1999, the benefit was less
than that computed at the statutory rate primarily due to an increase in the
valuation allowance and nondeductible foreign losses. At December 31, 1998,
Tanox recorded a $2.1 million income tax receivable related to the carryback of
1998 losses to prior periods. Of this receivable $2.0 million was collected in
1999 and the remaining $0.1 million will be received in 2000.
Significant components of Tanox's deferred tax assets are as follows:
1998 1999
------------- --------------
Federal net operating loss
carryforward....................... $ -- $ 1,821,000
In-process research and
development........................ 979,000 2,038,000
Foreign net operating loss
carryforwards...................... 417,000 1,831,000
Deferred compensation related to
stock options...................... 360,000 1,909,000
Research and development tax
credits............................ 278,000 1,019,000
Alternative minimum tax credit....... 171,000 248,000
Differences in book and tax
depreciation....................... 211,000 --
Capitalized interest................. 308,000 300,000
Accruals not currently deductible.... 157,000 1,291,000
Other, net........................... 4,000 28,000
------------- --------------
Total deferred tax assets....... 2,885,000 10,485,000
Differences in book and tax
depreciation....................... -- (130,000)
Deferred tax valuation allowance..... (2,885,000) (10,355,000)
------------- --------------
Net deferred taxes.............. $ -- $ --
============= ==============
At December 31, 1999, Tanox has a net operating loss of approximately $6,560,000
for federal income tax reporting purposes. Tanox's intent is to carry back
approximately $1,360,000 of the net operating loss to prior years to obtain a
refund of approximately $132,000. The remaining net operating loss will begin to
expire in 2019. Tanox also has a foreign net operating loss carryforward of
approximately $5,230,000 which will be available to offset the separate company
taxable incomes of certain foreign subsidiaries. Additionally, Tanox has an
unused U.S. research and development tax credit carryforward at December 31,
1999, of approximately $1,019,000 which will begin to expire in 2011. Tanox also
has alternative minimum tax credit carryforwards of approximately $248,000 as of
December 31, 1999. As Tanox has incurred cumulative losses to date and there is
no assurance of future taxable income, a valuation allowance has been
established to fully offset the deferred tax asset at December 31, 1998 and
1999. Tanox's valuation allowance increased from $2,885,000 at December 31,
1998, to $10,355,000 at December 31, 1999, primarily due to Tanox's increase in
net operating loss carryforwards, tax credit carryforwards and deferred
compensation.
F-14
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE OBLIGATIONS:
Tanox leases its facilities pursuant to various operating leases that expire at
various dates through March 2002. Future minimum lease obligations under
noncancelable leases at December 31, 1999, are as follows:
Year ending December 31 --
2000............................ $ 305,000
2001............................ 258,000
2002............................ 65,000
----------
Total...................... $ 628,000
==========
Tanox incurred rent expense of $287,000, $344,000 and $331,000 in 1997, 1998 and
1999, respectively. Certain of the facility leases include escalation clauses
for operating expenses and real estate taxes.
At December 31, 1999, Tanox had outstanding an unsecured, irrevocable letter of
credit for $20,000 related to a lease agreement.
8. CAPITAL STOCK:
PREFERRED STOCK
Tanox is authorized to issue up to 10,000,000 shares of $.01 par value
preferred stock. The board of directors has the authority to issue these shares
in one or more series and to establish the rights, preferences and dividends. No
shares of preferred stock have been issued.
STOCK SPLIT
On March 31, 1997, Tanox declared a stock dividend to effect a stock split that
provided two shares of Tanox's common stock for every one share of Tanox's
common stock held by stockholders of record as of March 21, 1997. On February 1,
2000, Tanox declared a stock dividend to effect a stock split that provided 1.6
shares of Tanox's common stock for every one share of Tanox's common stock held
by stockholders of record as of January 31, 2000. In both cases the aggregate
par value of the dividend was transferred from additional paid-in capital to
common stock. The stock splits have been retroactively reflected in the
accompanying consolidated financial statements.
STOCK OPTIONS
During 1987, Tanox established the 1987 Stock Option Plan (the 1987 Plan)
covering key employees, officers and directors of Tanox. Under the terms of the
1987 Plan, as amended, the number of shares of common stock eligible for
issuance was 4,320,000. Options issued under the 1987 Plan were generally
granted at a purchase price equal to the fair market value at the date of grant
and are generally exercisable beginning two years after the date of grant for 40
percent of the shares, with the balance to become exercisable cumulatively in
three installments of 20 percent each year thereafter. Options expire ten years
after the date of grant. At December 31, 1999, options to purchase 2,242,800
shares of Tanox's common stock were outstanding under the 1987 Plan. The 1987
Plan expired June 24, 1997, and no more shares may be granted under this plan.
Tanox established the 1997 Stock Plan (the 1997 Plan) in November 1997. Under
the terms of the 1997 Plan, Tanox may grant options to purchase up to 8,000,000
shares of Tanox's common stock to employees,
F-15
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors, advisors and consultants. The 1997 Plan also provides for several
types of grants including incentive stock options, non-qualified stock options,
stock appreciation rights, stock awards, stock purchases and performance units.
Incentive stock options provide the right to purchase common stock at a price
not less than 100 percent of the fair value of common stock on the date of the
grant. Non-qualified stock options provide the right to purchase common stock at
a price not less than 50 percent of the fair value of the common stock on the
date of the grant. The options granted under the 1997 Plan generally expire ten
years after date of grant and are generally completely exercisable five years
after the grant date. At December 31, 1999, options to purchase 636,320 shares
of common stock were outstanding and 7,360,480 were available for future grants.
The 1997 Plan will expire on October 31, 2007.
In January 1992, Tanox established the 1992 Non-Employee Directors Stock Option
Plan (the Directors Plan) and reserved 480,000 shares of common stock for
issuance upon the exercise of options granted pursuant to the Directors Plan.
Unless otherwise provided, options granted under the Directors Plan will vest
one-third annually from the date of grant. The exercise price of the options
granted will be determined by a committee appointed by Tanox's board of
directors. At December 31, 1999, options to purchase 108,000 shares of Tanox's
common stock were outstanding under the Directors Plan and options to purchase
372,000 shares were available for future grants.
In addition to the plans discussed above, Tanox has entered into various stock
option agreements with certain outside consultants and advisors. At December 31,
1999, options to purchase 196,800 shares of Tanox's common stock were
outstanding under such agreements. All of the outstanding options issued under
these agreements were issued prior to 1996, are currently exercisable and expire
in either 2002 or 2003.
At December 31, 1999, options to purchase 3,183,920 shares were outstanding with
a weighted average exercise price of $4.39 per share, of which options to
purchase 2,106,318 shares were exercisable at a weighted average exercise price
of $2.79 per share. The following table summarizes stock option transactions
since December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
------------ ------------- --------------
<S> <C> <C> <C>
Outstanding, December 31, 1996....... 3,680,400 $ 0.21- 5.28 $ 0.95
Granted......................... 1,337,600 3.75- 7.50 6.94
Exercised....................... (47,040) 0.63- 2.50 1.50
Canceled........................ (54,240) 0.21- 3.02 1.47
------------ ------------- --------------
Outstanding, December 31, 1997....... 4,916,720 0.21- 7.50 2.57
Granted......................... 322,400 5.63-11.25 7.81
Exercised....................... (230,400) 0.21- 2.29 0.98
Canceled........................ (127,600) 2.29- 7.50 6.86
------------ ------------- --------------
Outstanding, December 31, 1998....... 4,881,120 0.21-11.25 2.88
Granted......................... 137,120 4.06-12.50 10.27
Exercised....................... (1,789,520) 0.63- 5.63 0.64
Canceled........................ (44,800) 2.29-11.25 7.61
------------ ------------- --------------
Outstanding, December 31,
1999.......................... 3,183,920 $ 0.21-12.50 $ 4.39
============ ============= ==============
Exercisable, December 31,
1999.......................... 2,106,318 $ 0.21-12.50 $ 2.79
============ ============= ==============
</TABLE>
F-16
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tanox follows SFAS No. 123 which permits one of two methods of accounting for
stock options. Tanox adopted Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options. SFAS No. 123, however, requires Tanox
to disclose the income statement effect of the alternative fair value method
assuming Tanox was required to record compensation expense for stock options
equal to the assumed fair value on the grant date.
Under APB No. 25, Tanox recognizes as compensation expense the excess of the
estimated fair value of the common stock issuable upon exercise of such options
over the aggregate exercise price of such options. This compensation expense is
amortized ratably over the vesting period of each option. The compensation
expense of such options, net of reversals for terminations, was $25,000,
$273,000 and $311,000 during the years ended December 31, 1997, 1998 and 1999,
respectively.
The fair value of each option grant is estimated using the Black-Scholes option
pricing model. The Black-Scholes model uses grant price, as stated in the option
agreements, market price as established by stock sales in 1997, 1998 and 1999
and deemed market prices established by the Compensation Committee of Tanox's
board of directors. The following assumptions were used for options granted in
1997: risk-free interest rate of six percent, expected option life of ten years,
no expected dividends, no expected turnover and a 20 percent volatility factor.
The following assumptions were used for options granted in 1998: risk-free
interest rate of five percent, expected option life of six years, no expected
dividends, expected turnover of 20 percent and a volatility factor of 20
percent. The assumptions used for options granted in 1999 were the same as those
used in 1998, with the exception of the risk-free interest rate which was six
percent and the volatility factor which was 42 percent.
Assuming the compensation cost for these plans had been determined pursuant to
the fair value method under SFAS No. 123, Tanox's pro forma net income (loss)
would have been as follows:
1997 1998 1999
---------- -------------- --------------
Net income (loss) --
As reported................ $ 630,000 $ (10,169,000) $ (23,346,000)
Pro forma.................. 176,000 (11,260,000) (24,551,000)
Basic EPS --
As reported................ 0.02 (0.35) (0.75)
Pro forma.................. 0.01 (0.39) (0.79)
Diluted EPS --
As reported................ 0.02 (0.35) (0.75)
Pro forma.................. 0.01 (0.39) (0.79)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1996, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-17
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The number and weighted average fair value of options granted in 1997, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Option price equals fair market
value.............................. 1,137,600 $3.69 234,400 $2.71 129,120 $5.24
Option price greater than fair market
value.............................. -- -- 8,000 1.18 -- --
Option price less than fair market
value.............................. 200,000 5.46 80,000 5.63 8,000 5.65
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ---------------------------------
OUTSTANDING REMAINING EXERCISABLE
AS OF CONTRACTUAL WEIGHTED AS OF WEIGHTED
RANGE OF DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1999 (IN YEARS) EXERCISE PRICE 1999 EXERCISE PRICE
- ------------------------------------- ------------ ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$ 0.21 - $ 2.50 1,386,000 2.3 $ 1.06 1,386,000 $ 1.06
2.50 - 5.00 354,400 5.7 3.46 226,400 3.28
5.00 - 7.50 1,080,000 7.1 7.35 443,839 7.30
7.50 - 10.00 264,800 8.8 8.13 42,079 8.13
10.00 - 12.50 98,720 8.9 12.20 8,000 12.50
------------ ------------
$ 0.21 - 12.50 3,183,920 5.0 $ 4.39 2,106,318 $ 2.79
============ ============
</TABLE>
In April 1999, Tanox loaned 12 employees approximately $1,086,000 to enable the
employees to exercise 1,738,320 options to purchase shares of Tanox's common
stock, pursuant to stock options held by such employees. All of the loans are
full-recourse, secured by shares of Tanox's common stock owned by the employees,
bear interest at a rate of 8.5 percent, and are due and payable in full in
September 2001. The loans have been reflected as a contra equity in the
accompanying financial statements.
Also during 1999, Tanox agreed to extend, for an additional three-year period,
the term of 524,400 stock options held by certain employees and consultants that
were scheduled to expire. In connection with this extension, Tanox expensed, for
accounting purposes, approximately $4,576,000 of deferred compensation expense
representing the fair value of the options as of the remeasurement date.
WARRANTS
In connection with the issuance of notes payable to an unrelated company for
equipment financing in 1989, Tanox issued warrants to purchase 93,053 shares of
Tanox's common stock at $0.86 per share. All of the warrants were exercised on a
net issuance basis in 1999 and converted into 86,632 shares of common stock. As
of December 31, 1999, there were no outstanding warrants.
F-18
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
ARBITRATIONS
Following settlement of Tanox's lawsuit against Genentech and Roche referred to
in Note 1, Tanox filed a demand for arbitration against the attorneys who
represented Tanox in the litigation in order to resolve a dispute over the
amount of attorneys' fees due by Tanox. On September 29, 1999, the arbitration
panel issued an award entitling the attorneys to receive approximately $3.5
million, including interest, payments ranging from 33 1/3 percent to 40 percent
of the future payments that Tanox may receive from Genentech following product
approval and ten percent of the royalties that Tanox may receive on sales of
anti-IgE products. At December 31, 1999, Tanox has reflected an accrued expense
of $3.5 million for the arbitration award in its consolidated financial
statements.
Tanox sought a court order vacating this arbitration award. However, a judgment
was entered confirming the award. Tanox intends to pursue all available
remedies, including appealing the decision. If Tanox is ultimately required to
pay all or part of the award to the attorneys, Tanox could be required to pay up
to $3.5 million, plus accrued interest would become due, and the award would
effectively reduce certain future milestone payments from Genentech by up to 40
percent and reduce future royalties from the Three-Party Collaboration by ten
percent. Tanox's future revenues, results of operations, cash flows and
financial condition could be materially adversely affected. During the appeals
process we will either post a bond or place cash in escrow to secure payment of
the award.
Tanox is also engaged in a dispute with Novartis and Genentech over its right to
independently develop certain of its anti-IgE monoclonal antibodies, which are
not being developed in connection with the Three-Party Collaboration. Tanox is
attempting to resolve the dispute in separate arbitrations with each of Novartis
and Genentech and they are attempting to resolve the dispute in federal court.
If Tanox ultimately loses its right to independently develop these anti-IgE
monoclonal antibodies, Tanox may be required to discontinue development of
Hu-901.
LITIGATION
From time to time, Tanox is a defendant in lawsuits incidental to its business.
Management believes that the outcome of these lawsuits will not be material to
Tanox's financial statements.
MILESTONES AND ROYALTIES
Tanox has agreements with several institutions that call for payments upon the
achievement of milestones by Tanox and royalty payments based upon a percentage
of product sales. No milestone or royalty expense has been incurred related to
these agreements.
LOAN COMMITMENTS
Tanox has agreed that under certain conditions, it will lend certain of its
employees up to $1,500,000 in April 2000 for payment of their tax obligations
pursuant to the exercise of their stock options.
F-19
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REGISTRATION RIGHTS
Some of Tanox's stockholders including founders, some early investors and
persons who hold 15 percent or more of our stock, have certain registration
rights.
401(K) PLAN
Effective January 1, 1992, Tanox adopted a qualified retirement plan (the 401(k)
Plan) covering all of Tanox's employees who are at least 21 years of age and
have completed at least one year of service with Tanox. Pursuant to the 401(k)
Plan, employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions by Tanox on behalf of all participants in the
401(k) Plan. Tanox's contributions totaled approximately $81,000, $54,000 and
$66,000 in 1997, 1998 and 1999, respectively, representing matching 50 percent
of employee contributions, including those made by executive officers. Tanox's
matching contribution only applies to the first five percent of each employee's
total compensation.
F-20
<PAGE>
(This page has been intentionally left blank)
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
Tanox, Inc.
SHARES
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
, 2000
CIBC WORLD MARKETS
ROBERTSON STEPHENS
WARBURG DILLON READ LLC
ADAMS, HARKNESS & HILL, INC.
KBC SECURITIES
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting discounts
and commissions payable by the Registrant in connection with the sale of the
common stock being registered. All the amounts shown are estimates except for
the registration fee and the NASD filing fee.
Registration fee..................... $ 33,264
NASD filing fee...................... 13,100
Nasdaq National Market listing fee... 95,000
Printing and engraving expenses...... *
Legal fees and expenses.............. *
Accounting fees and expenses......... *
Blue Sky fees and expenses........... *
Transfer agent and registrar fees.... *
Premium for directors and officers
insurance............................ *
Miscellaneous........................ *
---------
Total........................... *
=========
- ---------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our amended and restated certificate of incorporation requires us to indemnify
our directors and officers against liabilities they may incur in these
capacities, including liabilities under the Securities Act, as amended, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
Our bylaws require that we indemnify each of our directors and officers for the
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with any type of threatened, pending or
completed action, suit or proceeding (other than actions by us or on our behalf)
if he or she:
o acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to our best interests; and
o in the case of a criminal proceeding (including preliminary), had no
reason to believe his or her conduct was unlawful.
Under our bylaws we also must indemnify a director and officer for expenses of
an action brought by us or on our behalf if he or she acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to our best
interests. We may not indemnify a director or officer for expenses of an action
brought by us or on our behalf if the director or officer is adjudged liable to
the corporation, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he or she is entitled to indemnification of
such expenses.
We have a duty to indemnify only if the director or officer has met the
applicable standard of conduct described above. This is determined by:
o a majority vote of the disinterested directors; or
o a majority vote of a committee of disinterested directors designated by
a majority vote of the disinterested directors; or
II-1
<PAGE>
o if there are no disinterested directors, or if the disinterested
directors so direct, independent legal counsel in a written opinion; or
o the stockholders.
We must indemnify a director or officer for all expenses of litigation or other
legal proceedings actually and reasonably incurred when he or she is successful
on the merits or otherwise in defense of the litigation or proceeding or in
defense of any claim, issue or matter therein.
We must advance to a director the actually and reasonably incurred expenses
incurred in defending an action before the action is finally disposed if the
director undertakes to repay these expenses if the director is ultimately
determined not entitled to be indemnified in connection with the action to which
the expenses relate. We may advance to an officer the expenses incurred in
defending an action before the action is finally disposed if the board of
directors authorizes the advance, and the officer undertakes to repay these
expenses if the officer is ultimately determined not entitled to be indemnified
in connection with the action to which the expenses relate. The board of
directors may not consider the officer's financial ability to repay these
advances in determining whether to authorize the advancement.
We may purchase and maintain insurance on behalf of any director and officer to
the extent permitted by Section 145. We intend to purchase liability insurance
policies covering our directors and officers in certain circumstances.
In addition to the indemnification rights described above, our amended and
restated certificate of incorporation eliminates, in certain circumstances, our
directors' liability for monetary damages for breach of fiduciary duty as a
director. These provisions do not eliminate a director's liability:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law, which relates
to the declaration of dividends and purchase or redemption of shares in
violation of this law; or
o for any transaction from which the director derived an improper personal
benefit.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our directors and officers to give them
additional contractual assurances regarding the scope of the indemnification
provided in our amended and restated certificate of incorporation and bylaws and
to provide additional procedural protections.
The underwriting agreement (exhibit 1.1 to this Registration Statement) provides
that the underwriters must, under some circumstances, indemnify our directors,
officers and controlling persons against specified liabilities, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1997, the Registrant has sold and issued the following
unregistered securities:
(a) Between February 21, 1997 and September 4, 1997, the Registrant issued and
sold an aggregate of 2,331,260 shares of its common stock to 23 non-U.S.
persons in reliance on Regulation S promulgated under the Securities Act
for an aggregate consideration of $17,484,468.
(b) Between February 16, 1998 and April 6, 1998, the Registrant issued and
sold an aggregate of 273,684 shares of its common stock to 8 non-U.S.
persons in reliance on Regulation S promulgated under the Securities Act
for an aggregate consideration of $3,078,972.
(c) Between August 31, 1999 and December 30, 1999, the Registrant issued and
sold an aggregate of 880,000 shares of its common stock to 14 non-U.S.
persons in reliance on Regulation S promulgated under the Securities Act
for an aggregate consideration of $11,000,000. The placement agent was KBC
Securities, NV. The Registrant paid to KBC Securities, N.V. a placement
agent fee of $715,000.
(d) Between October 25, 1999 and December 10, 1999, the Registrant issued and
sold an aggregate of 1,016,000 shares of its common stock to 12 non-U.S.
persons in reliance on Regulation S promulgated under the Securities Act
for an aggregate consideration of $12,700,000.
II-2
<PAGE>
(e) Between March 12, 1998 and September 12, 1999, the Registrant issued
468,726 shares of its common stock, at a price per share (as of March 12,
1998) of $18, with an aggregate value of $4,395,150, to 3 United States
residents and 5 non-U.S. persons in connection with the Registrant's
acquisition of Tanox Pharma, formerly PanGenetics B.V. The sale and
issuance to the United States residents were exempt from registration
under Section 4(2) of the Securities Act. With respect to the 5 persons
who were not residents of the United States, the transaction was not a
"sale," because the offer and sale to those 5 persons occurred outside
the United States, and therefore exemption from registration was
unnecessary.
(f) From time to time since January 1, 1997, the Registrant has granted stock
options to purchase shares of its common stock to various employees,
directors and consultants pursuant to its 1997 Stock Plan and its 1992
Non-Employee Directors Stock Option Plan. With respect to all grants of
options, exemption from registration was unnecessary in that the
transactions did not involve a "sale" of securities as that term is used
in Section 2(a)(3) of the Securities Act.
(g) As of , 2000, the Registrant had issued and sold, in the
aggregate, 1,898,960 shares of its common stock for per share exercise
prices ranging from $0.63 to $5.63 to employees and one consultant
pursuant to their exercise of stock options granted under the Registrant's
1987 Stock Option Plan and 1997 Stock Plan. The Registrant relied on the
exemption provided by Rule 701 under the Securities Act.
(h) Between June 24, 1997 and October 1, 1999, the Registrant issued and sold
168,000 shares of its common stock for per share exercise prices ranging
from $0.21 to $1.04, to consultants of the Registrant, pursuant to their
exercise of stock options. The Registrant relied on the exemption provided
by Rule 701 under the Securities Act.
(i) On October 25, 1999, the Registrant issued and sold to Phoenix Leasing
Incorporated 86,632 shares of its common stock, on a net issuance basis,
at a price per share of $0.86, for an aggregate consideration of 6,421
shares of common stock, pursuant to the exercise by Phoenix Leasing
Incorporated of warrants.
All sales of common stock made pursuant to the exercise of stock options were
made in reliance on Section 701 under the Securities Act or Section 4(2) of the
Securities Act. All other sales were made in reliance on Section 4(2) of the
Securities Act and/or Regulation S promulgated under the Securities Act. These
sales were made without general solicitation or advertising, to investors who
were sophisticated and had access to all relevant information necessary to
evaluate the investment, and who represented to the Registrant that they were
acquiring the securities for investment and appropriate legends were affixed to
the share certificates issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1.1+ -- Form of Underwriting Agreement.
3.1+ -- Amended and Restated Certificate of
Incorporation of the Registrant, as
amended, as currently in effect.
3.2+ -- Bylaws of the Registrant, as
currently in effect.
4.1+ -- Specimen of Common Stock Certificate,
$.01 par value, of the Registrant.
4.2+ -- Warrant to Purchase 6,462 Shares of
Common Stock, dated November 1989, by
and between the Registrant and
Phoenix Venture Incorporated.
5.1+ -- Opinion of Chamberlain, Hrdlicka,
White, Williams & Martin.
10.1+ -- Form of Indemnification Agreement
between the Registrant and its
officers and directors.
10.2+ -- 1987 Stock Option Plan of the
Registrant, as amended.
10.3+ -- 1992 Non-employee Directors Stock
Option Plan of the Registrant.
II-3
<PAGE>
10.4+ -- 1997 Stock Plan of the Registrant.
10.5+ -- Lease of premises at 10301 Stella
Link, Suite 110, Houston, Texas,
dated December 3, 1986, as amended.
10.6+ -- Stock Purchase Agreement, dated July
14, 1987, by and among the Registrant
and Tse Wen Chang, Nancy T. Chang,
Alafi Capital Company, Shireen Alafi,
Joseph Heskel, Trustee for
Christopher Alafi, and Invitron
Corporation.
10.7+ -- License for Winter Patent, dated June
26, 1989, by and between Medical
Research Council and the Registrant.
10.8+ -- Amendment to the License for Winter
Patent, dated February 9, 1990, by
and between Medical Research Council
and the Registrant.
10.9+ -- Development and Licensing Agreement,
dated May 11, 1990, by and between
the Registrant and Ciba-Geigy
Limited.
10.10+ -- Term Sheet for Secured Loan, dated
December 14, 1994, by and between the
Registrant and Ciba-Geigy Limited.
10.11+ -- Chiron-PanGenetics Research and
Development License and Options for
Commercial License, dated September
25, 1995, by and between PanGenetics,
B.V., Panorama Research, Inc. and
Chiron Corporation.
10.12+ -- Stock Purchase Agreement, dated as of
March 12, 1998, by and between the
Registrant and the holders of shares
of PanGenetics, B.V.
10.13+ -- License Agreement, dated June 1,
1998, by and between Biogen, Inc. and
the Registrant.
10.14+ -- Outline of Terms for Settlement of
the Litigations Among Genentech,
Inc., Genentech International, Ltd.,
the Registrant and Ciba-Geigy Limited
Relating to Anti-IgE Inhibiting
Monoclonal Antibodies, dated July 8,
1996.
10.15+ -- Supplemental Agreement between the
Registrant and Ciba-Geigy Limited, dated
July 8, 1996.
10.16+ -- Settlement and Cross-Licensing
Agreement, dated July 8, 1996, by and
between the Registrant and Genentech,
Inc. and Genentech International
Limited.
10.17+ -- Settlement and Participation Agreement,
dated July 8, 1996, by and between
the Registrant and F. Hoffman-La Roche,
Ltd., Hoffman-La Roche, Inc., Roche
Holding Ltd. and Roche Holdings, Inc.
10.18+ -- Patent License Agreement, dated June
30, 1998, by and between Protein
Design Labs, Inc. and the Registrant.
10.19+ -- Amendment to Patent License
Agreement, dated June 28, 1999, by
and between Protein Design Labs, Inc.
and the Registrant.
10.20+ -- Research and License Agreement, dated
April 21, 1999, by and between the
Registrant and Biovation Limited.
10.21+ -- Material Transfer and Commercial
Evaluation Agreement, dated March 9,
1999, by and between Tanox, Inc. and
Biovation Limited.
10.22+ -- G-CSF Receptor Non-exclusive License
Agreement, dated January 11, 2000, by
and between Immunex Corporation and
the Registrant.
21.1+ -- List of Subsidiaries of the
Registrant.
23.1 -- Consent of Arthur Andersen LLP dated
February 1, 2000.
23.2+ -- Consent of Chamberlain, Hrdlicka,
White, Williams & Martin (included in
Exhibit 5.1).
24.1 -- Power of Attorney (included on signature
pages).
27 -- Financial Data Schedule.
- ---------------------------
+ To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) That 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) That for the purposes of determining any liability under the Securities
Act, each posteffective 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 thereof.
(3) 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.
II-5
<PAGE>
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Nancy T. Chang and John Blickenstaff and each of
them, his true and lawful attorneys-in-fact and agents with full power of
substitution for him or her and in his or her name, place and stead in any and
all capacities, to sign the Registration Statement on Form S-1 of Tanox, Inc.
and any and all amendments thereto, and to file same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done to comply with the provisions of the
Securities Act, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his or her substitutes, may lawfully do or
cause to be done by virtue thereof.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS
ON , 2000.
TANOX, INC.
By: __________________________________
NANCY T. CHANG, PH.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
-------------- -------------------- ----------
<C> <S> <C>
_______________________________ Chairman of the Board,
NANCY T. CHANG, PH.D. President, and Chief
Executive Officer
_______________________________ Vice President of Finance and
DAVID DUNCAN, JR. Chief Financial Officer
_______________________________ Director
TSE WEN CHANG, PH.D.
_______________________________ Director
OSAMA MIKHAIL, PH.D.
_______________________________ Director
CHENG MING LEE, PH.D.
_______________________________ Director
WILLIAM J. JENKINS, M.D.
</TABLE>
II-6
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Houston, Texas
February 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM COMPANY'S FINANCIAL STATEMENTS BEGINNING ON PAGE F-1 OF THIS FORM S-1
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,242
<SECURITIES> 3,012
<RECEIVABLES> 671
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,039
<PP&E> 11,590
<DEPRECIATION> (4,577)
<TOTAL-ASSETS> 55,328
<CURRENT-LIABILITIES> 5,321
<BONDS> 0
0
0
<COMMON> 333
<OTHER-SE> 39,674
<TOTAL-LIABILITY-AND-EQUITY> 55,328
<SALES> 0
<TOTAL-REVENUES> 1,405
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,745
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 741
<INCOME-PRETAX> (23,312)
<INCOME-TAX> 34
<INCOME-CONTINUING> (23,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,346)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
