TANOX INC
10-Q, 2000-08-08
MEDICAL LABORATORIES
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER: 000-30231

                                   TANOX, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                 DELAWARE                                      76-0196733
      (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
      INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

       10301 STELLA LINK, SUITE 110
              HOUSTON, TEXAS                                   77025-5497
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)

                                 (713) 664-2288
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.        Yes [X]     No [ ]

     As of July 31, 2000, the registrant had 42,622,140 shares of Common Stock
issued and outstanding.
================================================================================
<PAGE>
                                  TANOX, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                           JUNE 30,      DECEMBER 31,
                                             2000            1999
                                         ------------    -------------
                                         (UNAUDITED)
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents..........    $ 68,967,000    $ 44,242,000
  Short-term investments.............     138,958,000       3,012,000
  Accounts receivable................         136,000         125,000
  Interest receivable................       3,961,000         414,000
  Income taxes receivable............         132,000         132,000
  Prepaid and deferred expenses......         667,000         114,000
                                         ------------    ------------
          Total current assets.......     212,821,000      48,039,000
LONG-TERM MARKETABLE SECURITIES......      66,617,000         --
PROPERTY AND EQUIPMENT:
  Laboratory and office equipment....       9,508,000       9,369,000
  Leasehold improvements.............       2,095,000       2,102,000
  Furniture and fixtures.............         123,000         119,000
                                         ------------    ------------
                                           11,726,000      11,590,000
  Accumulated depreciation and
     amortization....................      (5,123,000)     (4,577,000)
                                         ------------    ------------
     Net property and equipment......       6,603,000       7,013,000
OTHER ASSETS:
  Other assets, net of accumulated
     amortization of $75,000 and
     $59,000, respectively...........         297,000         276,000
                                         ------------    ------------
          Total Assets...............    $286,338,000    $ 55,328,000
                                         ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable...................    $    432,000    $    874,000
  Accrued liabilities................       2,203,000         947,000
  Accrued arbitration award..........       3,520,000       3,500,000
                                         ------------    ------------
          Total current
          liabilities................       6,155,000       5,321,000
NOTE PAYABLE TO RELATED PARTY........      10,000,000      10,000,000
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value;
     10,000,000 shares authorized;
     none outstanding................         --              --
  Common stock, $.01 par value;
     120,000,000 shares authorized;
     42,622,140 shares in 2000 and
     33,324,402 shares in 1999 issued
     and outstanding, respectively...         426,000         333,000
  Additional paid-in capital.........     300,449,000      71,701,000
  Deferred compensation..............        (824,000)       (651,000)
  Loans receivable from employees....      (2,099,000)     (1,086,000)
  Other comprehensive income,
     cumulative translation
     adjustment......................         210,000         171,000
  Retained earnings (deficit)........     (27,979,000)    (30,461,000)
                                         ------------    ------------
          Total Stockholders'
          Equity.....................     270,183,000      40,007,000
                                         ------------    ------------
          Total Liabilities and
          Stockholders' Equity.......    $286,338,000    $ 55,328,000
                                         ============    ============

     See accompanying notes to condensed consolidated financial statements

                                       1
<PAGE>
                                  TANOX, INC.
              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           COMPREHENSIVE INCOME (LOSS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                          FOR THE THREE MONTHS ENDED         FOR THE SIX MONTHS ENDED
                                        -------------------------------   -------------------------------
                                        JUNE 30, 2000    JUNE 30, 1999    JUNE 30, 2000    JUNE 30, 1999
                                        --------------   --------------   --------------   --------------
<S>                                     <C>              <C>              <C>              <C>
REVENUES:
     Development agreement with
       related party.................    $ 2,007,000      $ 1,012,000      $ 2,008,000      $ 1,046,000
     Other development agreements and
       licensing fees................     10,105,000           36,000       10,253,000          159,000
                                         -----------      -----------      -----------      -----------
          Total Revenues.............     12,112,000        1,048,000       12,261,000        1,205,000
OPERATING COSTS AND EXPENSES:
     Research and development........      4,057,000        4,088,000        9,460,000        6,503,000
     General and administrative......      1,286,000        2,716,000        2,477,000        3,579,000
                                         -----------      -----------      -----------      -----------
          Total operating costs and
             expenses................      5,343,000        6,804,000       11,937,000       10,082,000
                                         -----------      -----------      -----------      -----------
INCOME (LOSS) FROM OPERATIONS........      6,769,000       (5,756,000)         324,000       (8,877,000)
OTHER INCOME (EXPENSE):
     Interest income.................      3,599,000          402,000        4,315,000          796,000
     Interest expense................       (206,000)        (173,000)        (406,000)        (354,000)
     Other...........................        (13,000)          (2,000)         (51,000)         (50,000)
                                         -----------      -----------      -----------      -----------
          Total other income.........      3,380,000          227,000        3,858,000          392,000
                                         -----------      -----------      -----------      -----------
INCOME (LOSS) BEFORE INCOME
  TAXES..............................     10,149,000       (5,529,000)       4,182,000       (8,485,000)
     Provision for income taxes......     (1,700,000)         (42,000)      (1,700,000)         (44,000)
                                         -----------      -----------      -----------      -----------
NET INCOME (LOSS)....................    $ 8,449,000      $(5,571,000)     $ 2,482,000      $(8,529,000)
                                         ===========      ===========      ===========      ===========
EARNINGS (LOSS) PER SHARE:
     Basic...........................    $      0.21      $     (0.18)     $      0.07      $     (0.28)
     Diluted.........................    $      0.20      $     (0.18)     $      0.06      $     (0.28)
SHARES USED IN COMPUTING EARNINGS
  (LOSS) PER SHARE:
     Basic...........................     41,092,000       30,978,000       37,309,000       30,149,000
     Diluted.........................     43,232,000       30,978,000       39,528,000       30,149,000
COMPREHENSIVE NET INCOME (LOSS):
     Net income (loss)...............    $ 8,449,000      $(5,571,000)     $ 2,482,000      $(8,529,000)
     Foreign currency translation
       adjustment....................         13,000           43,000           39,000           84,000
                                         -----------      -----------      -----------      -----------
TOTAL COMPREHENSIVE NET INCOME
  (LOSS).............................    $ 8,462,000      $(5,528,000)     $ 2,521,000      $(8,445,000)
                                         ===========      ===========      ===========      ===========
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       2
<PAGE>
                                  TANOX, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

                                              FOR THE SIX MONTHS ENDED,
                                         -----------------------------------
                                         JUNE 30, 2000        JUNE 30, 1999
                                         --------------       --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)..................     $  2,482,000         $(8,529,000)
  Adjustments to reconcile net loss
     to net cash used in operating
     activities  --
     Depreciation and amortization...          569,000             488,000
     Amortization of deferred
       compensation related to stock
       options.......................          322,000           3,062,000
Changes in operating assets and
  liabilities  --
     (Increase) in accounts and
       interest receivables..........       (3,559,000)           (934,000)
     Change in taxes receivable or
       payable.......................        1,700,000           1,920,000
     (Increase) in prepaid
       expenses......................         (553,000)            (89,000)
     Increase in accounts payable
       and accrued liabilities.......          568,000             226,000
                                          ------------         -----------
          Net cash provided by (used
             for) operating
             activities..............        1,529,000          (3,856,000)
                                          ------------         -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of investments and
     marketable securities...........     (224,997,000)         (8,054,000)
  Maturity of short-term
     investments.....................       22,436,000          10,876,000
  Purchases of property and
     equipment.......................         (143,000)           (242,000)
  Change in other assets.............          (38,000)             37,000
                                          ------------         -----------
          Net cash (used for)
             provided by investing
             activities..............     (202,742,000)          2,617,000
                                          ------------         -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Change in employee loans in
     connection with option
     exercises.......................       (1,013,000)         (1,086,000)
  Proceeds from the issuance of
     stock...........................      226,912,000           1,104,000
                                          ------------         -----------
          Net cash provided by
             financing activities....      225,899,000              18,000
                                          ------------         -----------
IMPACT OF EXCHANGE RATES ON CASH.....           39,000              84,000
                                          ------------         -----------
CHANGE IN CASH AND CASH
  EQUIVALENTS........................       24,725,000          (1,137,000)
CASH AND CASH EQUIVALENTS, BEGINNING
  OF PERIOD..........................       44,242,000          28,352,000
                                          ------------         -----------
CASH AND CASH EQUIVALENTS, END OF
  PERIOD.............................     $ 68,967,000         $27,215,000
                                          ============         ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Cash paid during the period for
     income taxes....................     $    --              $    25,000
  Noncash investing and financing
     activities  --
     Receivable related to income tax
       benefit from stock options
       exercised.....................        1,433,000             --

     See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
                                  TANOX, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2000
                                  (UNAUDITED)

NOTE 1.  BASIS OF CONSOLIDATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for fair presentation have
been included. These condensed consolidated interim financial statements and
notes thereto should be considered in conjunction with the Company's
Consolidated Financial Statements and accompanying Notes for the year ended
December 31, 1999, which were included in the Company's Registration Statement
on Form S-1 (Registration No. 333-96025). Results for the interim period ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000.

NOTE 2.  LICENSE AGREEMENT WITH PROTEIN DESIGN LABS, INC.

     During March 2000, Tanox entered into an agreement with Protein Design
Labs, Inc. ("PDL") to acquire the right to take non-exclusive licenses to
patents and patent applications owned by PDL for up to four of the Company's
antibodies. Under the agreement, Tanox agreed to pay initial license fees to PDL
of $2.5 million, in addition to $1.5 million that was previously paid to PDL in
1998 under a prior licensing agreement. Tanox also agreed to pay up to
$4.0 million ($1.0 million per antibody), plus maintenance fees, to PDL if Tanox
exercises its option to license all four antibodies. In addition, Tanox agreed
to pay royalties on future sales if a product using the PDL technology is
successfully commercialized. During the first quarter of 2000, Tanox recorded a
research and development expense of $2.5 million, representing the cost of the
initial option payment.

NOTE 3.  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.

     The following table reconciles basic and diluted EPS for the three and six
month periods ended June 30, 2000. 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. Since Tanox

                                       4
<PAGE>
                                   TANOX, INC.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                  JUNE 30, 2000
                                   (UNAUDITED)

incurred net losses for the three month and six month periods ended June 30,
1999, basic and diluted EPS are the same for these periods.

                                                                     PER SHARE
                                         NET INCOME      SHARES       AMOUNT
                                         ----------    ----------    ---------
For the three months ended June 30,
2000
     Basic EPS.......................    $8,449,000    41,092,000      $0.21
                                                                       =====
     Effect of dilutive securities --
          Options outstanding........        --         2,140,000
                                         ----------    ----------
     Diluted EPS.....................    $8,449,000    43,232,000      $0.20
                                         ==========    ==========      =====
For the six months ended June 30,
2000
     Basic EPS.......................    $2,482,000    37,309,000      $0.07
                                                                       =====
     Effect of dilutive securities --
          Options outstanding........        --         2,219,000
                                         ----------    ----------
     Diluted EPS.....................    $2,482,000    39,528,000      $0.06
                                         ==========    ==========      =====

NOTE 4.  INITIAL PUBLIC OFFERING

     On April 12, 2000, Tanox concluded the principal part of its initial public
offering of common stock and, on May 11, 2000, completed the offering with the
exercise by the underwriters of their over-allotment option. In the offering,
Tanox sold 8,568,000 shares of common stock at $28.50 per share for gross
proceeds of approximately $244.2 million, including the underwriters'
over-allotment option. The net proceeds from the offering were approximately
$225.8 million. Both the shares issued and the proceeds of the offering are
reflected in Tanox's financial results for the three months ended June 30, 2000.
The proceeds of the IPO have been invested principally in investment grade
commercial paper and corporate bonds with maturities of less than two years and
which are held to maturity.

NOTE 5.  LOANS TO EMPLOYEES

     In April 2000, Tanox loaned certain employees an aggregate of $1,188,000
for payment of their tax obligations pursuant to the exercise of stock options
in 1999. All 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
contra-equity in the accompanying financial statements.

NOTE 6.  LITIGATION

     Tanox is currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented us in a litigation with Genentech
relating to, among other things, the intellectual property rights surrounding
the development of anti-IgE technology. An arbitration panel issued an award in
1999 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 are required to post a
bond or place amounts in escrow to secure payment of the award. In early July
2000, we posted a $3.7 million letter of credit with the Court to continue the
appeals process and to secure payment of the award.


                                       5
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

     Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious diseases
and cancer. E25, our most advanced product in development, is an anti-IgE
antibody that we are developing 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, on June 2, 2000, our collaboration partners filed for marketing
approval in the United States and Europe 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 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
June 30, 2000, of $28.0 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 generate sufficient revenue from royalties on E25 to cover our expenses.

     Historically, we have earned revenues primarily from license fees,
milestone payments and sponsored research under our collaboration agreements. In
the future, we expect our principal revenues will be milestone payments,
royalties and profit-sharing payments from Novartis and Genentech. We may also
receive royalties from Hoffman-La Roche Ltd. should it participate in selling
E25 in Europe. Our revenues will depend particularly 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 depend on achieving development and
commercialization milestones, we anticipate that our results of operations will
vary substantially from year to year and even quarter to quarter.

     The following is a discussion of our results of operations for the three
month and six month periods ended June 30, 2000 and 1999. This discussion should
be read in conjunction with our Condensed Consolidated Financial Statements that
are included in this report and our Consolidated Financial Statements and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations for the year ended December 31, 1999 included in our Registration
Statement on Form S-1 (Registration No. 333-96025).

                                       6
<PAGE>
RESULTS OF OPERATIONS

  THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999

     REVENUES.  Revenues totaled $12,112,000 in the second quarter of 2000,
compared to $1,048,000 in the second quarter of 1999. The increase in revenues
resulted from $12.0 million in milestone revenues earned under the Company's
agreements with Novartis and Genentech upon the submission of the Biologics
Licensing Application (BLA) for the E25 anti-IgE antibody to the United States
Food and Drug Administration (FDA). During the second quarter of 1999, revenues
were principally from an E26 milestone payment earned under our collaborative
agreements with Novartis. The collaborative agreements with Novartis and
Genentech accounted for 99% of our revenues in the second quarter of 2000 and
97% of our revenues in the second quarter of 1999.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses were
$4.1 million in both the second quarter of 2000 and the second quarter of 1999.
Although expenses increased in 2000 for salaries, clinical research and contract
research, the 1999 period included expenses of $1.1 million for stock-based
compensation, primarily related to the extension of certain employee stock
options in 1999. This compared to charges of $0.1 million for stock-based
compensation in the second quarter of 2000.

     GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses
decreased to $1.3 million in the second quarter of 2000 from $2.7 million in the
second quarter of 1999, a decrease of $1.4 million. Expenses in the second
quarter of 1999 were adversely affected by non-cash charges of $1.9 million for
stock-based compensation, primarily related to the extension of certain employee
stock options in the second quarter of 1999. Excluding these charges, the
increase in G&A expenses in the second quarter of 2000 primarily related to
expenses associated with becoming a public company, including salaries,
consulting fees, state franchise taxes and investor relations expenses.

     OTHER INCOME. Other income increased to $3.4 million in the second quarter
of 2000 from $.2 million in the second quarter of 1999. This increase was
principally due to an increase in interest income resulting from higher cash
balances in the current period, as a result of proceeds from private stock
offerings in late 1999 and the Company's initial public offering (IPO) in April
2000, and higher prevailing interest rates in 2000 than in 1999.

     INCOME TAXES.  The provision for income taxes was $1.7 million in the
second quarter of 2000, compared to $42,000 in the second quarter of 1999. This
increase was due to the change in the Company's profitability from a pretax loss
of $(5.5) million in the second quarter of 1999 to a pretax income of
$10.1 million in the second quarter of 2000.

     NET INCOME (LOSS). As a result of the above factors, the net income for the
second quarter of 2000 was $8.4 million or $0.21 per share for basic earnings
and $0.20 per share for diluted earnings, compared to a net loss of $(5.6)
million or $(0.18) per share on both a basic and diluted basis during the second
quarter of 1999. The improved earnings in the second quarter of 2000 primarily
were due to higher revenues from milestone payments, higher interest income
earned on the cash received in the Company's IPO and lower operating costs and
expenses.

                                       7
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999

     REVENUES.  Revenues totaled $12.3 million during the first six months of
2000, compared to $1.2 million during the same period of 1999. As was the case
for the second quarter, the increase in revenues during the first six months of
2000 resulted primarily from the $12.0 million in milestone revenues earned
under the Company's agreements with Novartis and Genentech when the BLA for E25
was submitted to the FDA. During the first six months of 1999, revenues were
principally from an E26 milestone payment earned under our collaborative
agreements with Novartis. The collaborative agreements with Novartis and
Genentech accounted for 98% of our revenues in the first six months of 2000 and
87% of our revenues in the same period of 1999.

     RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses were
$9.5 million in the first six months of 2000, compared to $6.5 million in the
same period of 1999. The increase of $3.0 million was principally due to a
$2.5 million charge in the first quarter of 2000 to acquire the right to
non-exclusive licenses to patents and patent applications owned by Protein
Design Labs, Inc. for up to four of our products in development. The remainder
of the increase was due to increased personnel and expansion of preclinical and
clinical development activities, partially offset by lower expenses of
$0.9 million for stock-based compensation.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $1.1 million to $2.5 million in the first six months of 2000 from $3.6
million in the first six months of 1999. General and administrative expenses in
1999 were adversely affected by non-cash charges of $1.9 million for stock-
based compensation, primarily related to the extension of certain employee stock
options in the second quarter of 1999. This decrease from 1999 was partially
offset by increases in 2000 in expenses associated with becoming a public
company, including salaries, consulting fees, state franchise taxes and expenses
for investor relations activities.

     OTHER INCOME.  Other income increased $3.5 million to $3.9 million in the
first six months of 2000 from $0.4 million in the same period of 1999. This
increase was principally due to an increase in interest income in 2000 resulting
from higher cash balances and higher prevailing interest rates in 2000 than in
1999.

     INCOME TAXES.  The provision for income taxes was $1.7 million in the first
six months of 2000, compared to $44,000 in the same period of 1999. This
increase was due to the change in the Company's profitability from a pretax loss
of $(8.5) million in the first six months of 1999 to a pretax income of
$4.2 million in the first six months of 2000.

     NET INCOME (LOSS).  As a result of the above factors, the net income for
the first six months of 2000 was $2.5 million or $0.07 per share for basic
earnings and $0.06 per share for diluted earnings, compared to a net loss of
$(8.5) million or $(0.28) per share on both a basic and diluted basis during the
first six months of 1999. The improved earnings during 2000 primarily were due
to higher revenues from milestone payments, higher interest income earned on the
cash received in the Company's IPO and a reduction in charges for stock-based
compensation from the level experienced in the 1999 period.

                                       8
<PAGE>
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 June 30, 2000, we
recognized $71.5 million in collaboration, grant and other revenues.
Additionally, we have raised $280.7 million from sales of equity securities and
$2.6 million from the exercise of stock options, and we have earned
$13.8 million of interest income. As of June 30, 2000, we had $274.5 million in
cash, cash equivalents and investments, of which $207.9 million were classified
as current assets.

     During the first six months of 2000, we generated $1.5 million of cash from
operating activities. The primary sources of cash during the period were
$12.0 million in milestone payments received under our collaborative agreements
with Novartis and Genentech and $4.3 million of interest income. The primary
uses of cash for operating purposes were operating expenses and an increase in
accrued interest receivable on our invested cash. Investing activities used
$202.7 million of cash in the first six months of 2000, primarily for the
purchase of short-term and long-term investment securities. Financing activities
generated $225.9 million of cash during the first six months of 2000, including
$225.8 million from the proceeds of the Company's IPO in April and May 2000 and
$1.1 million from the exercise of stock options. These sources of cash were
partially offset by a net increase in loans to employees of $1.0 million. The
combination of the above items resulted in a cash increase of $24.7 million
during the first six months of 2000.

     On April 12, 2000, we sold 7,500,000 shares of common stock in an initial
public offering at a price of $28.50 per share and, on May 11, 2000, sold an
additional 1,068,000 shares pursuant to the exercise by the underwriters of
their over-allotment option. In total, we received gross proceeds of
$244.2 million and net proceeds of $225.8 million. Both the shares issued and
the proceeds of the offering were reflected in our financial results for the
three months and six months ended June 30, 2000.

     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 two percent
(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 Novartis has forgiven 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.

     From inception through June 30, 2000, we have invested approximately
$11.7 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 loaned certain employees an aggregate of $1.2 million in April 2000 to
pay tax obligations resulting from their stock option exercises in 1999.

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     Our current and anticipated development projects will require substantial
additional capital to complete. We anticipate that the amount of cash we need to
fund operations, including research and development, manufacturing and other
costs, and for capital expenditures, will grow substantially in the future as
our projects move from research to pre-clinical and clinical development. We
also expect that we will need to expand our administrative, clinical
development, facilities and business development activities to support the
future development of our programs and to support the ongoing requirements of a
public company. Consequently, we may need to raise substantial additional funds.
We expect that the net proceeds from our initial public offering, together with
cash on hand and revenue from operations, will be sufficient to fund our
operations for the next three years. However, our future capital needs will
depend on many factors, including successfully commercializing E25, receiving
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 pre-clinical 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, establishing additional collaboration
and licensing arrangements, and manufacturing scale-up costs and marketing
activities, if we undertake those activities. 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.

     We are currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented us in a litigation with Genentech
relating to, among other things, the intellectual property rights surrounding
the development of anti-IgE technology. 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 are required to post a
bond or place amounts in escrow to secure payment of the award. In early July
2000, we posted a $3.7 million letter of credit with the Court to continue the
appeals process and to secure payment of the award.

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.

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     FOREIGN CURRENCY EXCHANGE RATES.  During the first six months of 2000, our
operating results reflect foreign exchange losses of $51,000 and our balance
sheet reflects a foreign currency translation adjustment of $210,000. 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 the respective local currencies.

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, fluctuations in exchange rates of the local currencies
versus the U.S. dollar impact our operating results. 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 investments were approximately
$274.5 million at June 30, 2000. These assets were primarily invested in
investment grade commercial paper and corporate bonds with maturities of less
than two years, which we hold 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 we sell the asset. 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.

     FACTORS AFFECTING FORWARD-LOOKING STATEMENTS.  Some of the information in
this Quarterly Report on Form 10-Q contains forward-looking statements. We
typically identify forward-looking statements by using terms such as "may,"
"will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue" or similar words, although we
express some forward-looking statements differently. You should be aware that
actual events could differ materially from those suggested 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;

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      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 other sections of
this Quarterly Report, which address additional factors that could cause our
actual results to differ from those set forth in the forward-looking statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     See "Quantitative and Qualitative Disclosures About Market Risk" under
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations" for quantitative and qualitative disclosures about market risk.

                                       12
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                                    PART II

                               OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     On April 6, 2000, the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1, Commission File No. 333-96025,
registering the sale of 8,568,000 shares of our Common Stock (including the
over-allotment option) for net proceeds of $225,837,680. None of the proceeds
from the initial public offering were used during the three months ended
June 30, 2000; however, we expect that our use of these proceeds will be as
described in the prospectus to our Registration Statement. Pending such use, the
net proceeds are being invested in interest-bearing investment-grade securities.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a)  Exhibits.

           27 -- Financial Data Schedule.

      (b)  Reports on Form 8-K.

           No reports were required to be filed on Form 8-K during the three
           months ended June 30, 2000.

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                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                  TANOX, INC.

Date:  August 8, 2000             By:            /s/ NANCY T. CHANG
     ----------------------------     ------------------------------------------
                                       NANCY T. CHANG, CHIEF EXECUTIVE OFFICER

Date:  August 8, 2000             By:           /s/ DAVID DUNCAN, JR.
     ----------------------------     ------------------------------------------
                                      DAVID DUNCAN, JR., CHIEF FINANCIAL OFFICER

                                       14
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                               INDEX TO EXHIBITS

      EXHIBIT NO.             DESCRIPTION
      -----------             -----------
          27          --  Financial Data Schedule

                                       15



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