AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 2000
REGISTRATION NO. 333-96025
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
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>
------------------------------------
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:
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
------------------------------------
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
================================================================================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AMOUNT OF
SECURITIES TO BE AGGREGATE REGISTRATION
REGISTERED OFFERING PRICE(1) FEE(2)
- --------------------------------------------------------------------------------
Common Stock, $.01 par value per share..... $241,500,000 $63,756
================================================================================
(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.
(2) The company has previously paid $33,264 of the registration fee.
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 APRIL 6, 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.
7,000,000 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
$27.00 and $30.00 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 1,050,000 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.
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(This page has been intentionally left blank)
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 4
Risk Factors .............................................................. 8
Forward-Looking Statements ................................................ 19
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 .................................................... 56
Certain Transactions ...................................................... 58
Description of Capital Stock .............................................. 59
Shares Eligible for Future Sale ........................................... 62
Underwriting .............................................................. 64
Legal Matters ............................................................. 66
Experts ................................................................... 66
Where You Can Find More Information ....................................... 66
Index to Consolidated Financial
Statements .............................................................. F-1
3
<PAGE>
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.
THE COMPANY
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious diseases
and cancer. Monoclonal antibodies are genetically engineered antibodies that
target a specific foreign substance, or antigen. E25, our most advanced product
in development, is an anti-immunoglobulin E, or anti-IgE, antibody. We are
developing E25 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,
our collaboration partners intend to file for marketing approval in the United
States and Europe in mid-2000. 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 suppressed immune systems of chemotherapy patients.
MONOCLONAL ANTIBODY THERAPEUTICS
Monoclonal antibodies represent an exciting area of novel therapeutic
development. Because of advances in antibody technologies, scientists are now
able to develop antibody products that can be administered to patients on a
chronic basis with reduced concern for adverse responses by the human immune
system. Companies can also manufacture these antibody products more cost-
effectively. As a result, a large number of monoclonal antibodies are now in
clinical and preclinical development. 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 treating allergies and asthma
by using monoclonal antibodies to inhibit IgE. E25, a product based on this
discovery, is a humanized (human-like) anti-IgE monoclonal antibody in
development for 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. A pivotal Phase III clinical
trial and a pivotal Phase IIb clinical trial have demonstrated E25's ability to
prevent or reduce symptoms of seasonal allergic rhinitis. Two Phase III clinical
trials in allergic asthma have demonstrated E25's ability to reduce symptoms
related to asthma. Clinicians who participated in the studies presented the
results of those trials at the American Academy of Allergy Asthma and Immunology
in March 2000. As mentioned above, Novartis and Genentech intend to file for
marketing approval for both indications in the United States and Europe in
mid-2000.
OTHER PRODUCT CANDIDATES. Using our comprehensive understanding of the human
immune system, we are building a diverse pipeline of monoclonal antibody product
candidates. In addition to E25, we have two other products in clinical
development and we are evaluating several product candidates 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 people in the United States. If our clinical trial
indicates that Hu-901 reduces sensitivity
4
<PAGE>
to peanuts, we may also investigate its benefit to patients with 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 to treat
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 intend
to 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
treating HIV.
o 166-32 is a complement factor D inhibiting antibody in research for
treating acute inflammation.
o 163-93 is an anti-G-CSF receptor activating antibody in research for
treating neutropenia, or suppression of the immune system caused by
depletion of white blood cells during 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 expanding our product pipeline through attractive acquisition and
in-licensing opportunities;
o forming strategic collaborations to complement 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 we can effectively sell using a small, targeted
sales force.
OTHER INFORMATION
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(R) and our logo are
our registered service marks.
5
<PAGE>
THE OFFERING
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Common stock offered................. 7,000,000 shares
Common stock to be outstanding after
the offering....................... 40,973,123 shares
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
</TABLE>
The share amounts in the table above are based on the number of shares
outstanding at March 31, 2000 and excludes:
o 2,586,993 shares of common stock issuable on exercise of outstanding
options at a weighted average exercise price of $5.36 per share; and
o 8,172,980 shares of common stock reserved for issuance pursuant to future
grants under our stock option plans.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the underwriters' over-allotment option. 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.
6
<PAGE>
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
--------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................ $ 47,254 $231,704
Working capital...................... 42,718 227,168
Total assets......................... 55,328 239,778
Long term debt....................... 10,000 10,000
Retained earnings (deficit).......... (30,461) (30,461)
Total stockholders' equity........... 40,007 224,457
The as adjusted balance sheet data in the table above reflects the sale of
7,000,000 shares of common stock in this offering at an assumed public offering
price of $28.50 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 depends 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.
IF WE DO NOT RECEIVE REGULATORY APPROVALS FOR E25, WE WOULD BE SIGNIFICANTLY
HARMED AND OUR STOCK PRICE WOULD DROP SHARPLY.
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 E25.
Neither the U.S. Food and Drug Administration, or FDA, nor any European
regulatory agency, has approved E25. Novartis and Genentech intend to file a
biologics license application, or BLA, for E25 in the United States and apply
for registration of E25 in Europe by mid-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.
If our collaborators fail to successfully obtain regulatory approvals for 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.
FAILURE TO RECEIVE MARKET ACCEPTANCE FOR AND SUCCESSFULLY COMMERCIALIZE E25
WOULD HAVE A SIGNIFICANT ADVERSE EFFECT ON US.
Even if the FDA approves E25, we cannot be certain that physicians, patients,
insurers or other third-party payors will accept E25 as a treatment for its
approved indications in the United States or in any foreign markets. A number of
factors may affect the rate and level of E25's market acceptance including:
o regulatory developments related to manufacturing or using E25;
o E25's price relative to other products or competing treatments;
8
<PAGE>
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.
If E25 is not accepted as a safe and effective drug and we are unable to
successfully commercialize it, our business, financial condition and results of
operations will be materially harmed.
FAILURE BY NOVARTHS OR GENENTECH TO DEVELOP, OBTAIN REGULATORY APPROVAL FOR,
MANUFACTURE, MARKET, OR DISTRIBUTE E25 OR OTHER ANTI-IGE PRODUCTS MAY DELAY OR
SIGNIFICANTLY IMPAIR OUR ABILITY TO GENERATE REVENUES.
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 the
collaboration may select for development. We expect for the extended future that
Novartis and Genentech will manufacture, market and distribute E25 and other
selected anti-IgE products, if the FDA approves any of these products. We also
rely on Novartis and Genentech for significant financial and technical
contributions to develop 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.
FAILURE BY OUR FUTURE COLLABORATION PARTNERS TO DEVELOP, MANUFACTURE, MARKET OR
DISTRIBUTE OUR OTHER PRODUCTS MAY DELAY OR SIGNIFICANTLY IMPAIR OUR ABILITY TO
GENERATE REVENUES OR OTHERWISE MATERIALLY HARM OUR PROFITABILITY.
We will rely on other collaboration partners to develop, manufacture,
commercialize, market and distribute our other 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 collaboration agreements will succeed. To the extent that we choose
not to or are unable to enter into future collaboration agreements, 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 absence of these
collaboration agreements adversely affects our ability to develop, manufacture
or sell our product candidates.
Our reliance on collaboration partners poses the following additional risks:
o disputes with our partners may arise, delaying or terminating our product
candidates' research, development or commercialization 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 may not commit enough capital or other resources to
successfully develop our products;
9
<PAGE>
o our partners may not continue to develop and commercialize products
resulting from our collaborations; and
o our partners with marketing and distribution rights to one or more of our
products may not commit enough resources to marketing and distributing
our products.
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.
WE ARE INVOLVED IN LITIGATION AND ARBITRATION PROCEEDINGS WITH NOVARTIS AND
GENENTECH THAT MAY BE VERY COSTLY TO US AND COULD CAUSE US TO LOSE OUR RIGHTS TO
INDEPENDENTLY DEVELOP PRODUCTS.
We are a party to arbitrations and a related federal district court lawsuit with
our collaboration partners 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 are disputing our right to
pursue development of Hu-901 independently and are claiming that we are using
their unspecified confidential and proprietary information that we have no right
to use.
If we do not succeed 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 succeed, 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 disclosure might
compromise some of our confidential information.
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.
Neither the FDA, nor any regulatory authority, has approved any of our products,
including E25. We must receive FDA approval to manufacture and market our
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. The FDA can delay, limit or not
grant approval for many reasons, including:
o a product candidate may not be safe or effective;
o FDA officials may interpret data from preclinical testing and clinical
trials 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 the FDA may approve a product candidate for fewer than 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
any of our products could materially harm our business, financial condition and
results of operations.
Our products other than E25 require significant additional laboratory
development and/or clinical trials prior to commercialization. We may not
successfully develop products in research and development and our products may
not meet applicable regulatory standards or obtain required regulatory
approvals.
Approval of a product candidate could also depend 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 receiving or
failing to receive regulatory approvals, or losing previously received
approvals, would delay or prevent product commercialization, which would
adversely affect
10
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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 that 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.
OUR PRECLINICAL AND CLINICAL TESTING RESULTS ARE UNCERTAIN. IF TRIAL RESULTS ARE
NEGATIVE, WE MAY BE FORCED TO STOP DEVELOPING PRODUCTS IMPORTANT TO OUR FUTURE.
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 to sell our products commercially. These studies and
trials may be very costly and time consuming. The results of preclinical studies
and initial clinical trials of our products do not necessarily predict 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 FDA
or other regulatory approval.
The speed with which we are able to enroll patients in clinical trials is an
important factor in determining how quickly we may complete clinical trials.
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. We may target our clinical trial protocols 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 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.
Administering any product we develop to humans may produce undesirable side
effects. These 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 receive 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 commercialize our products successfully, we and our collaboration partners
must manufacture our products in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. If the manufacturing
facilities used to produce our products cannot pass a pre-approval or periodic
plant inspection, the FDA may not approve our products or it may delay or bar
their sale. Although we expect Novartis and Genentech to manufacture E25 and
other anti-IgE products that our collaboration develops, if the FDA and other
regulatory authorities approve these products, we have reserved the right to
manufacture up to 50% of the worldwide requirements for these
11
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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 DEPEND ON THIRD PARTIES
FOR THEIR EXPERTISE IN THIS AREA.
If 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 to E25 and
other selected anti-IgE products. However, commercialization rights may revert
back to us if either we or our collaborators terminate our relationship. 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 can develop and sell
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.
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 succeed 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 seek to develop. Any product candidate that we develop and that
obtains 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;
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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 DEPEND ON OUR PATENTS AND PROPRIETARY RIGHTS. THE VALIDITY, ENFORCEABILITY
AND COMMERCIAL VALUE OF THESE RIGHTS ARE HIGHLY UNCERTAIN.
Our success depends 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 and have licenses to certain issued patents. The patents we own that are
most material to our business are five U.S. 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
and trademark office in the United States and in courts and patent offices in
foreign countries. Issuance of a patent is not conclusive as to its validity,
enforceability or the scope of its claim. We cannot assure you that our patents
will not be successfully challenged as to enforceability, invalidated or limited
in the scope of their coverage. Moreover, litigation to uphold the validity of
patents and to prevent infringement can be very costly and can result in
diverting 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 technology without paying 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.
Researching, developing and commercializing a biopharmaceutical product often
involves alternative development and optimization routes that 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.
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We are aware that other groups have claimed discoveries similar to those covered
by our patent applications. 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 we can obtain licenses from Protein Design Labs for
our other antibody products.
We must 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. If any of these licenses terminate, we may be 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 if an unauthorized use or disclosure of this confidential information
occurs.
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 succeed, 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 must 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 our
failure to accomplish any of these tasks could materially harm our business,
financial condition and results of operations.
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
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<PAGE>
qualified staff, and we cannot assure you that we will be able to attract and
retain the necessary qualified staff to develop 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 sufficiently fund our
operations for the next three years. However, our future capital needs will
depend on many factors, including successfully commercializing E25, receiving
milestone payments from our collaboration partners, and making progress in our
research and development activities. Our success may also depend on 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
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 pharmaceutical product pricing 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, the proposals may harm
our ability to commercialize the products we develop jointly with them.
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<PAGE>
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS, AND IT IS UNCERTAIN THAT WE CAN
OBTAIN INSURANCE AGAINST THESE CLAIMS AT A REASONABLE RATE IN THE FUTURE.
Our business exposes us to potential product liability risks, which are inherent
in testing, manufacturing, marketing and selling pharmaceutical products. We may
be held liable if any product we develop, or any product that uses or
incorporates 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,
if 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.
Future license and collaboration agreements may also include such a requirement.
We cannot assure you that we can obtain adequate insurance coverage 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 us or our collaborators from
commercializing our products. 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.
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 how we
use, manufacture, store, handle and dispose of these materials. Although we
believe that we comply in all material respects with applicable environmental
laws and regulations, we cannot assure you that we will not 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.
WE COULD BE LIABLE FOR DAMAGES, PENALTIES OR OTHER FORMS OF CENSURE IF WE ARE
INVOLVED IN A HAZARDOUS WASTE SPILL OR OTHER ACCIDENT.
Despite precautionary procedures that we implement for handling and disposing of
hazardous materials, we cannot eliminate the risk of accidental contamination or
discharge or any resultant injury from these materials. If a hazardous waste
spill or other accident occurs, we could 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.
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 we complete this offering, our executive officers and
directors and their affiliates will, in the aggregate, own shares representing
approximately 36% of our outstanding common stock. As a result, these
stockholders, acting together, will significantly influence our general
management and affairs, and all matters submitted to our stockholders for
approval, including electing directors and approving changes in control. Such
control could discourage others from initiating potential merger, takeover or
other change of control transactions, and may adversely affect the market price
of our common stock. For a more detailed description of our management team and
their ownership of common stock, please refer to "Management" on page 47.
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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.
These provisions include:
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 stockholders may act on 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 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 an
active trading market in our common stock or how liquid that market might
become. We will determine the initial public offering price for our shares by
negotiating with representatives of the underwriters. This price may not
indicate 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.
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 do not relate 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 common
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 by selling equity
securities. After this
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offering is completed, 40,973,123 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 33,973,123 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 32,338,553 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 period expires,
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 62 and
"Underwriting" on page 64.
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 $22.93 per
share, or $22.40 per share, if the underwriters exercise their over-allotment
option in full, assuming an initial public offering price of $28.50. 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 their options. For a more detailed discussion of dilution,
please refer to "Dilution" on page 22.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO ALLOCATE THE NET PROCEEDS OF THIS
OFFERING AND MAY NOT USE THE PROCEEDS APPROPRIATELY.
Our management will have broad discretion over how we use the proceeds of this
offering. We estimate the net proceeds from this offering to be approximately
$184.5 million, after deducting underwriting discounts and commissions and
estimated offering expenses, assuming an initial public offering price of
$28.50. We plan to use these proceeds to substantially increase clinical
development of our products, expand our research and development infrastructure
and research facilities in the United States, The Netherlands and Taiwan,
acquire or in-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 successfully
commercializing E25. Our 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 in spending 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.
You can find these statements 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.
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;
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.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common stock in
this offering will be approximately $184,450,000. If the underwriters fully
exercise their over-allotment option, we estimate that our net proceeds from the
offering will be $212,280,250. "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 $28.50 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 that we believe may complement our
business. We currently have no agreements or commitments in this regard. The
amount of proceeds we will actually spend on general corporate purposes will
vary depending on a number of factors, including:
o successfully commercializing E25;
o our progress in and the scope of our research and development activities;
o changes in or termination of existing collaboration and licensing
arrangements;
o costs and magnitude of product or technology acquisitions; and
o our need for manufacturing capacity.
Our management will have broad discretion over how we use 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 our
business growth and development. Therefore, we do not expect to pay cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table shows:
o our actual capitalization on December 31, 1999; and
o our as adjusted capitalization on December 31, 1999, assuming the
completion of the offering as adjusted for the sale of 7,000,000 shares
of common stock by us at an assumed public offering price of $28.50 per
share, net of estimated underwriters' discounts and commissions and
offering expenses.
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; 40,324,402
shares issued and outstanding,
as adjusted..................... 333 403
Additional paid-in capital......... 71,701 256,081
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...... 40,007 224,457
-------- ------------
Total capitalization.......... $ 50,007 $234,457
======== ============
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.
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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 $224,415,000 or $5.57
per share. The adjustments made to determine pro forma net tangible book value
per share are the following:
o increasing total assets to reflect the estimated net proceeds of the
offering as described under "Use of Proceeds" assuming that the public
offering price will be $28.50 per share; and
o adding 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 $4.37 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........................... $ 28.50
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........................ 4.37
---------
Pro forma net tangible book value
per share as of December 31,
1999, after giving effect to the
offering........................ 5.57
---------
Dilution per share to new investors
in the offering................. $ 22.93
=========
The following table shows the difference between existing stockholders as of
December 31, 1999 and new investors with respect to the number of shares
purchased from Tanox, the total consideration paid and the average price paid
per share. We assume that the public offering price will be $28.50 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 82.6% $ 61,924,000 23.7% $ 1.86
New investors........................ 7,000,000 17.4 199,500,000 76.3 28.50
------------ ------- -------------- -------
Total........................... 40,324,402 100.0% $ 261,424,000 100.0%
============ ======= ============== =======
</TABLE>
In the discussion and tables above, we assume no exercise of outstanding options
to purchase shares of our 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 option
holders exercise their outstanding options, new investors will be further
diluted.
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. We do not intend
the selected data in this section 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, which
Arthur Andersen LLP, independent public accountants, audited. 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 our audited
consolidated financial statements that we have 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>
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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 diseases
and cancer. E25, our most advanced product in development, is an anti-IgE
antibody we are developing 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, in
mid-2000, our collaboration partners intend to file 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
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 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.
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 sponsored research revenues earned under 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 extending the exercise periods for stock options to some
research and development employees and consultants. 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 recognizing an arbitration
award of $3.5 million to the attorneys who represented us in our litigation
against
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Genentech, and a $1.9 million non-cash charge for stock-based compensation,
which was due to extending 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
we may need to commercialize 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 million 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 $1.5
million from the exercise of stock options, and we have earned approximately
$8.8 million of 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. In
1999, changes in working capital were our primary source of cash from operating
activities, including a $2.0 million income tax refund and a $3.5 million
increase in accrued liabilities for the arbitration award. 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.
During 1998, we used $6.5 million to finance our operating activities. The
primary use of cash for operating activities was $10.2 million to finance our
net loss, although the net loss included $4.8 million of non-cash items. In
1998, we used $1.2 million of cash for working capital. The primary use of cash
for working capital was a $1.6 million increase in taxes receivable from the
carry back of the 1998 net loss to prior years. Our acquisition of PanGenetics
did not have a material impact on working capital. Investing activities used
$6.2 million of cash in 1998, primarily for the purchase of short-term
investments, purchases of fixed assets and leasehold improvements and the
initial cash purchase payment for PanGenetics.
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<PAGE>
Financing activities generated $4.2 million in 1998, primarily from the sale of
common stock to private investors and $1.0 million from the proceeds of a note
payable to Novartis. As a result of the above items, our cash balance decreased
by $8.5 million during 1998.
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 will grow substantially in the future as our projects move from
research to preclinical 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.
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, because the facility is not yet operational, 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 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 to pay
tax obligations resulting from their stock option exercises in 1999.
At December 31, 1999, we had a net operating loss of approximately $6.6 million
for federal income tax reporting purposes, which begins 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 begins 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 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 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
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.
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<PAGE>
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."
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.
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 we make the final future payment 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, we will allocate the final payment
to acquired in-process research and development and goodwill based on the
appraisal obtained as of the date of the acquisition.
Tanox engaged an independent firm, KPMG LLP, to perform an appraisal of the
assets acquired in the transaction. The appraisal was completed and the report
issued in 1998. We accounted for the costs to acquire PanGenetics under the
purchase method of accounting. At the time of the acquisition, we valued the
total current and future consideration 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 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 short-term investments were approximately $47.3
million at December 31, 1999. These assets were primarily invested in investment
grade commercial paper which we hold to
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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.
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 of this prospectus, we have not
encountered any material Y2K system problems and we have not experienced any
impact on operations or expenses.
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
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 these third parties made accurate
representations 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 cannot replace them with
alternate sources, our business would be harmed.
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BUSINESS
OVERVIEW
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of immunology, infectious diseases
and cancer. In 1987, we discovered a novel approach for treating allergies and
asthma by using monoclonal antibodies capable of inhibiting 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 in allergic
asthma and seasonal allergic rhinitis patients. 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 are building 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, is currently in a Phase I/II trial for treating
severe peanut allergy. 5D12, an anti-CD40 antibody, is currently in a Phase I/II
trial for treating Crohn's disease and in preclinical studies for treating other
autoimmune diseases. We are conducting preclinical and research studies with
5A8, an anti-CD4 antibody for treating HIV, 166-32, a complement factor D
inhibiting antibody for treating acute inflammation and 163-93, an anti-G-CSF
receptor activating antibody for treating neutropenia.
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 intend
to work with our partners, Novartis and Genentech, in establishing market
awareness for E25 in asthma, allergic rhinitis and potential future
indications targeted through the collaboration. Concurrently with this
effort, we are pursuing the independent development of Hu-901 to
demonstrate the efficacy of anti-IgE antibodies for indications our
partners are not currently pursuing.
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 in-licensing.
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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 optimize the
value of our drug development opportunities.
o RETAINING STRATEGIC MARKETING RIGHTS TO OUR PRODUCTS. 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 that we can
market 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 includes 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.
MONOCLONAL ANTIBODIES AS THERAPEUTICS
Monoclonal antibodies represent an exciting area of novel therapeutic product
development. Genetically engineered 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
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scientists to develop humanized (human-like) and fully human antibody products
that can be administered to patients on a chronic basis with reduced concern for
adverse responses by the human immune system. Advances in antibody production
technologies, such as high productivity fermentation and transgenic plants and
animals, have enabled manufacturers to produce antibody products more
cost-effectively. Because of these advances, a large number of monoclonal
antibodies are currently undergoing 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 ability to precisely target 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.
PRODUCT DEVELOPMENT PROGRAMS
We have three products in clinical development and are evaluating several
product candidates in preclinical and research studies. Our drugs target various
elements or malfunctions of the immune system, and all are monoclonal
antibodies. We have designed drugs 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 designed drugs 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 table below summarizes the development status for our principal product
candidates.
ANTIBODY
PRODUCT DESCRIPTION INDICATION STATUS PARTNERS
- -------------------------------------------------------------------------------
E25 Anti-IgE Allergic Asthma Phase III Novartis/Genentech
Completed
Seasonal Allergic Phase III Novartis/Genentech
Rhinitis Completed
Hu-901 Anti-IgE Severe Peanut Phase I/II --
Allergy
5D12 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
Novartis and Genentech are disputing our rights to independently develop Hu-901.
We discuss the dispute in this prospectus in the section entitled
"Business -- Pending Legal Proceedings." In addition, we have the right to
develop and commercialize 5D12 only 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. E25 works by preventing the ability of
allergens to activate the immune system. 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. We expect E25 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 tissue inflammation and asthma and allergy
symptoms, including wheezing, bronchospasm, sneezing, runny nose, watery eyes
and itching. E25 blocks IgE from binding to mast cells and basophils, thereby
inhibiting the allergic response.
The diagram below shows how allergic reactions are triggered (The Allergy
Cascade) and how E25 works to prevent or reduce allergy symptoms (How E25
Works).
[DIAGRAM]
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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 treating health care professional knows the allergen
to which the patient is reacting, hyposensitization can be effective. However,
it is difficult to identify which allergen causes 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.
The American Lung Association estimates 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 sometimes 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
causing asthma.
DEVELOPMENT STATUS AND CLINICAL DATA
SEASONAL ALLERGIC RHINITIS. A Phase III clinical trial of 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. The
statistical significance of clinical results is determined by a widely-used
statistical method that establishes the par value, or p value, of the clinical
results. A par value of less than 0.01 (p<0.01) means that the chance of the
clinical results occurring by accident is less than 1 in 100.
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
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who discontinued treatment because of unsatisfactory treatment effects
were in the placebo group, even though there were twice as many patients
receiving E25.
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
non-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 two percent 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.
The difference between placebo and E25 in all instances was statistically
significant. 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. Two Phase III clinical trials in allergic asthma have been
completed in the United States in adults (12-75 years) and children (6-12
years). The two randomized, placebo-controlled, multicenter clinical trials
included 525 patients in the adult study and 334 patients in the pediatric
study. Clinicians who participated in the Phase III clinical trials presented
the results at the American Academy of Allergy Asthma & Immunology meeting in
San Diego, California in March 2000.
In both trials, patients who were experiencing asthma symptoms, despite taking
inhaled corticosteroid therapy, were given either E25 or placebo via
subcutaneous injection every two or four weeks. Patients were monitored for
asthma exacerbations, which were defined as symptoms requiring a doubling of
inhaled corticosteroids or initiation of oral corticosteroids to maintain
adequate asthma control. These trials were conducted over 28 weeks in two
phases, followed by the following treatment extensions:
o a 16-week stable treatment period that monitored patients taking either
E25 or placebo in addition to ongoing treatment with inhaled
corticosteroids and rescue beta-agonists;
o a 12-week steroid reduction period (immediately following the stable
treatment period), where the dosage of inhaled corticosteroids was
gradually reduced in both the E25 and placebo groups; and
o a treatment extension so that long term safety could be evaluated for a
one year period.
In patients receiving E25 versus placebo, the reduction in steroid dosage was
greater in both adults (p<0.001) and children (p=0.001).
In the 525 patient adult trial, steroid dosage was reduced at least 75% in half
of the patients receiving E25 compared to at least 50% in half of the patients
receiving placebo. The percentage of E25 patients experiencing asthma
exacerbations was reduced in both the stable treatment period and the steroid
reduction period. Additionally, the average daily dose of rescue medication
during this period was less in both treatment phases for the E25 group than for
the placebo group. During the stable treatment period, 14.6% (39 of 268
patients) of patients receiving E25 demonstrated asthma exacerbations compared
to 23.3% (60 of 257) of patients receiving placebo (p=0.009). During the steroid
reduction period, 21.3% (57 of 268) of patients receiving E25 experienced asthma
exacerbations compared to 32.3% (83 of 257) of patients receiving placebo
(p=0.026). Additionally, 40% (107 of 268) of patients receiving E25 completely
withdrew from inhaled corticosteroids during this period compared to 19% (49 of
257) of patients receiving placebo.
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In the 334 patient pediatric trial, steroid dosage was reduced by 100% in more
than half of the patients receiving E25, compared to at least 71% in half of the
patients receiving placebo. The percentage of E25 patients experiencing asthma
exacerbations also was reduced during both the stable treatment period and the
steroid reduction period and the average daily dose of rescue medication was
less in both treatment phases for the E25 group than in the placebo group.
During the stable treatment period, 16% (35 of 225 patients) of patients
receiving E25 demonstrated asthma exacerbations compared to 23% (25 of 109) of
patients receiving placebo (p=0.095). During the steroid reduction period, 18%
(41 of 225) of patients receiving E25 experienced asthma exacerbations compared
to 39% (42 of 109) of patients receiving placebo (p<0.001). 55% (124 of 225) of
patients receiving E25 completely withdrew from inhaled corticosteroids during
this phase compared to 39% (43 of 109) of patients receiving placebo.
Results from the two trials showed that despite decreasing dosages of
conventional therapies, E25 treatment reduced the number of serious asthma
exacerbations. These studies corroborated results from an earlier Phase II
clinical trial in allergic asthma recently reported in THE NEW ENGLAND JOURNAL
OF MEDICINE. Headache and upper respiratory tract infection were the most
frequently reported adverse events. The incidence of adverse events during the
Phase III trials was similar in both the E25 and placebo groups. Safety data
from the five-month follow-up phase of the trials are pending.
Novartis and Genentech intend to file a BLA for E25 in the United States and to
concurrently file for registration in Europe in mid-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, we believe the product
may 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 to
prevent symptoms of peanut induced anaphylaxis, a severe, potentially
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 will encourage our partners to expand the development of
anti-IgE more rapidly into additional indications. If we lose the litigation, we
will 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 symptoms, and may also suffer potentially life-threatening
anaphylaxis in response to ingesting peanuts. According to a recently published
survey, peanut or tree nut (e.g., walnut, almond and cashew) allergy affects
about 3 million people in the United States, 1.1% of the U.S. population.
Current treatment is avoiding peanuts and peanut oil, which is used in preparing
many food products. Complete avoidance requires constant vigilance and is
difficult because prepared food labeling does not always identify peanut-derived
ingredients. 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.
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Approximately 2 to 4% of children and 1 to 2% of adults in the United States
suffer from food allergies. If Hu-901 effectively reduces sensitivity to
peanuts, we may also investigate its use in other food allergies. There is no
approved preventive therapeutic for 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 correlates 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 resist 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 in treating autoimmune diseases, including multiple sclerosis and
lupus, and in preventing grafted organ rejection. 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).
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. We
expect the results of this study to play an important role in determining
clinical indications that we will pursue with 5D12.
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ANTI-CD4 DEVELOPMENT -- 5A8
5A8 is a humanized anti-CD4 monoclonal antibody that is in preclinical
development to treat 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 to treat 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 to treat 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, complement
system activation 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 a
condition known as neutropenia, which often afflicts cancer patients who have
undergone chemotherapy. Neutropenia is a deficiency of a type of granulocyte (a
specialized white blood cell that contains granules filled with potent
chemicals) 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 from human bone marrow as does
G-CSF. In a preliminary study, injecting 163-93 into primates stimulated
granulocyte production 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 developing new products and technologies to
treat immunological diseases and cancer.
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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 to treat
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. Novartis and
Genentech share all development costs relating to E25 and other anti-IgE
products that the collaboration may select for development in the United
States and Europe. We and Novartis equally share development costs
relating to China, Hong Kong, Korea, Singapore and Taiwan. 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 PAYMENTS. We may receive payments of up to $63.5 million based on
completing development and marketing objectives for E25, $6.5 million of
which we have already received. We may also receive payments of up to
$14.0 million based on completing development objectives for E26, $1.0
million of which we have already received. Our next payments totaling $12
million are due on filing the E25 BLA.
o ROYALTIES AND PROFIT SHARING. We may 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 these sales. We also may 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) and 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, royalties and profits 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 partners are not
developing through the collaboration. If 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 regarding our rights to independently develop 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 commercializing E25 and other anti-IgE
products which the collaboration selects for development in Japan and Europe.
Roche may exercise this option if specified events relating to commercializing
the product occur. 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
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the withdrawing partner) revert to us and the remaining collaborator and, if
Genentech is the withdrawing party, to Roche if Roche exercises the option
described above. If 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 developing 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
terminates or if we and Genentech may mutually agree.
OTHER COLLABORATIONS AND LICENSE AGREEMENTS
CHIRON LICENSE. In 1998, our European subsidiary Tanox Pharma, B.V. entered
into an agreement to license from Chiron 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 U.S. patents and has patents pending in Europe, Japan and Canada.
Upon registering 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 a
milestone payment if Tanox Pharma develops and commercializes a product. Chiron
has agreed to pay us royalties based on its sales in the United States and the
rest of the world. We may make a $1.0 million product development milestone
payment, in addition to royalty payments under this agreement. The license
terminates on the later of the expiration of 10 years following the first
commercial product sale or the expiration of the last to expire of licensed
patents. The currently licensed patent expires in 2013.
BIOGEN. In 1998, we entered into an agreement to license from Biogen 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 has pending applications in Australia, Canada and Japan. We paid
Biogen a license fee and agreed to make additional development milestone
payments and royalty payments 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 specified corporate development
events occur. In addition to royalty payments, we may make up to an aggregate of
$10.4 million in product development milestone payments under this agreement.
The license terminates on a country-by-country basis on the later of the
expiration of 12 years following the first commercial product sale or the
expiration or invalidity of applicable patents. The licensed patents expire in
Europe in 2011 and in the United States in 2016.
BIOVATION. We entered into an agreement in 1999 with Biovation Limited of
Aberdeen, United Kingdom, to apply Biovation's proprietary deimmunization
technology to certain of our monoclonal antibodies and protein products.
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, we will pay royalties to Biovation.
Additionally, Tanox Pharma and Biovation have agreed to jointly develop their
respective protein engineering technologies. We paid Biovation a license fee
that will decrease if Biovation products transferred to us under the agreement
do not achieve certain specifications. In addition to royalty payments, we may
make up to an aggregate of $1.3 million in product development milestone
payments under this agreement. The license terminates on the earlier of 10 years
from the first commercial product sale, a formal determination that any licensed
patents are invalid or unenforceable or such patents have expired. Biovation has
filed a patent application for the licensed technology; if a patent issues under
the application, it will expire in 2018.
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PATENTS AND PROPRIETARY RIGHTS
We pursue patent protection for our proprietary technology and products. We
typically file U.S. patent applications, then international treaty applications,
usually followed by filing foreign patent applications on our technology and
products in those regions or countries where business considerations warrant
filings. These countries include Japan, Canada, Australia, countries of the
European Union, other European countries, and certain other Asian countries.
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. We also cross license 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 U.S. and foreign patents covering
certain other proprietary technology and products, with over forty U.S. patents
granted to date. Our issued patents expire between 2008 and 2014. We cannot
assure you that one or more of the patents noted above would not be rescinded,
held invalid, successfully opposed or revoked or narrowed or held unenforceable.
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, circumvented or held unenforceable. 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 or different 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 these patents. We could incur substantial
costs and divert technical and management personnel's time and attention if we
must participate in litigation or if we must 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 paying 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 the type of humanized monoclonal antibodies that we anticipate
developing. Protein Design Labs, Inc. owns certain patents and patent
applications relating to these humanized antibodies. We have recently acquired
the right to take non-exclusive licenses to these patents and patent
applications for up to four of our products. We have agreed to pay license fees
of $2.5 million in addition to $1.5 million that we paid Protein Design Labs
under a previous agreement. In addition, we will pay approximately $4.0 million
if we exercise our option to license all four antibodies. 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 non-exclusive license. Our license permits us to
humanize our murine monoclonal antibodies. In addition to our obligation to pay
royalties on net sales of our products incorporating licensed technology, we
paid a license fee of approximately $.05 million. Our Medical Research Council
license also 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 U.S. Patent
& Trademark Office with the Celltech Boss patent.
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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 claiming that we infringed this patent. We settled the
lawsuit and, pursuant to the settlement, we acquired a non-exclusive license to
the Cabilly Patent, the Cabilly Application and other Genentech patents (or
patents to which Genentech has a license and is free to grant a sublicense)
relating to 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 deimmunized
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 U.S. patents, owned by Immunex Corporation, relating
to the G-CSF receptor. The patents and applications cover certain reagents that
may be involved in making our anti-G-CSF receptor antibodies and other products
we are developing, under which we must pay license execution and maintenance
fees and milestone payments for developed product aggregating up to $2.2 million
in addition to continuing royalties on net sales of the products.
The scope, enforceability and validity of these patents, the extent to which we
must 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. If we elect to manufacture or market these
products without either a license or a favorable result in litigation, damages
could be assessed that 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 if unauthorized use or disclosure of this
information occurs. 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 on commencing an 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
Producing and marketing 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 we may market a pharmaceutical product in the United States, the FDA
requires us to complete the following steps:
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 conforming 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 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 FDA or other
regulatory authority inspection 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. To comply with
FDA regulations, laboratories must conduct these preclinical safety tests
according to Good Laboratory Practices. The results of the preclinical tests are
submitted to the FDA as part of an IND, and the FDA reviews the results 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 we will ship a biological product produced within the United States
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 we will successfully complete clinical testing of our
products 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 possible that
these 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.
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The results of the pharmaceutical development, preclinical studies and clinical
studies are submitted to the FDA in the form of an NDA or BLA to approve
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 this 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 we obtain FDA approval,we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in those countries. The approval process
varies from country to country and the time required for these 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, perform 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
using 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 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
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. These
patents include, among other items, patents relating to humanized monoclonal
antibodies.
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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, we expect 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 to be important
competitive factors. 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 we have
produced our products 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 we may use 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. While the facility is not yet operational, we
are not obligated to repay our $10.0 million loan from Novartis, and Novartis
has agreed to forgive our accrued interest obligations under the loan. If the
facility becomes operational within a five year period, we will make interest
and principal payments on the loan in amounts equal to 75% of net cash flow from
the plant. 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 must
manufacture 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. 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 we successfully develop our products. If we decide to establish
a full-scale manufacturing facility, we will require substantial additional
funds and must 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
Novartis and Genentech will market E25 and the other products selected for
development by the collaboration. 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 can market 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 we may
target 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 laboratory and office space in Houston,
Texas, under a lease which 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 plan to obtain temporary additional space, before the end of 2000, to expand
our research, clinical development and production capabilities. We are exploring
alternatives to meet our longer term facility requirements for our U.S.
operations. We do not foresee any significant difficulties in obtaining
additional facilities.
HUMAN RESOURCES
Including the employees of our subsidiaries, we have 70 full-time employees, 59
of whom are based in the United States, 10 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. Thirty 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 are arbitrating 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. We settled the
litigation 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 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.
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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 our agreement with Novartis. In the arbitration, we
are seeking to confirm our rights to independently develop certain anti-IgE
products, including Hu-901, and to use know-how we received from Novartis.
Novartis has claimed that the dispute does not constitute a dispute which we
must arbitrate 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. In the lawsuit, Novartis
and Genentech seek declarations that we cannot develop Hu-901 independently,
that we cannot use confidential and proprietary information obtained from
Novartis or Genentech for independent product development, and that we cannot
pursue separate arbitrations on these matters against both Novartis and
Genentech. Novartis and Genentech also claim undetermined actual and punitive
damages resulting from our independent development of Hu-901, and they also seek
a permanent injunction stopping our Hu-901 development and preventing us from
continuing with our arbitrations on these matters.
At the time the lawsuit was filed, 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.
In July 1999, we initiated an arbitration proceeding against Genentech. In this
arbitration, we are seeking to confirm that Genentech expressly acknowledged our
independent development rights in our agreement with them and that Genentech
agreed to allow us to use and disclose their confidential and proprietary
information for purposes contemplated by our separate agreement with Novartis.
We also are seeking to confirm that we have not used any of their confidential
and proprietary information and that Genentech's lawsuit claims are
unsupportable and made in bad faith, have impaired our ability to exercise our
rights under our agreements with Novartis, violate our agreed dispute resolution
procedures and violate their agreement not to interfere in our separate disputes
with Novartis. In response, Genentech asserts that their disputes with us are
not subject to arbitration, and should remain in Federal court. Additionally,
Genentech asserts that our arbitration with Novartis should be joined with
Genentech's arbitration.
In September 1999, the United States District Court Judge issued an order
staying 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 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. If we are unsuccessful in these
actions, we may not independently develop Hu-901 and other anti-IgE products
covered by the collaboration with Novartis and Genentech and could be required
to pay damages that could be significant.
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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 March 31, 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. ...... 44 Vice President of Intellectual
Property
Tse Wen Chang, Ph.D.(1)(2)......... 52 Director
Osama I. Mikhail, Ph.D.(1)(2)...... 52 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, from 1994 to March
1998, he served as Chief Financial Officer at Neuromedical Systems, Inc., which
filed a voluntary petition for bankruptcy under Chapter 11 of the U.S.
bankruptcy code on March 26, 1999. From 1988 to 1994, Mr. Duncan served as Chief
Financial Officer at Telios
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Pharmaceuticals, 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
Corporation and MGI Pharmaceuticals, 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 Hsinchu, Taiwan. Dr. Chang is currently a professor there. Dr.
Chang was a 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.
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.
48
<PAGE>
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. We do not
employ our scientific advisors, 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 divide our
board of directors into three classes of equal number: Classes I, II and III.
Our stockholders elected directors comprising Class I to a term of office to
expire at the 2001 annual meeting of stockholders; directors comprising Class II
to a term of office to expire at the 2002 annual meeting of stockholders; and
directors comprising Class III to a term of office to expire at the 2003 annual
meeting of stockholders. At each annual meeting of stockholders beginning in
2001, the stockholders will elect the successors to directors whose terms will
then expire. These directors will serve from the time of election and
qualification until the third annual meeting of stockholders following election
and until a successor is duly elected and qualified.
Our bylaws also 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
four members. The board of directors is considering an increase in the number of
directors. Currently, Osama Mikhail is designated as a Class I director, whose
term expires at the 2001 annual meeting of stockholders; Tse Wen Chang is
designated as a Class II director, whose term expires 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 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 an exercise price per share of $1.04 and are all currently exercisable, 8,000
of which were granted at an exercise price per share of $4.06, none of which are
currently exercisable, and 4,000 of which were granted at an exercise price per
share of $12.50, none of which are currently exercisable. All of his options
vest over a three-year period. On February 17, 2000, we granted Dr. Jenkins
options to acquire 24,000 shares of common stock at an exercise price per share
of $12.50, none of which are currently exercisable, and all of which vest over a
two-year period. Outside directors also receive $1,000 for each board meeting
attended and $500 for each committee meeting attended, except for Dr. Tse Wen
Chang, who is compensated under a consulting agreement with us. Other
49
<PAGE>
than the foregoing, the directors receive 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.
ANNUAL COMPENSATION
---------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ------------------------------------- ----------- ----------- -------------
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
- ---------------------------
(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 potential realizable value is calculated based on the ten-year term of the
option at the time of grant. Stock price appreciation of 5% and 10% is assumed
pursuant to rules promulgated by the Securities and Exchange Commission and does
not represent our prediction of our stock price performance. The potential
realizable values at 5% and 10% appreciation are calculated by:
o multiplying the number of shares of common stock under the option by
$28.50 per share;
o assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table until the
expiration of the options; and
o subtracting from that result the aggregate option exercise price.
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 five
years. We have not granted any stock appreciation rights.
The percentage shown below of options granted is based on an aggregate of
117,120 options we granted to employees during 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUES AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS GRANTED PRICE APPRECIATION FOR
UNDERLYING TO EMPLOYEES OPTION TERM
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED YEAR 1999 PER SHARE DATE 5% 10%
- ------------------------------------- ------------ ---------------- ---------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nancy T. Chang....................... -- -- -- -- -- --
John C. Morris(1).................... 16,000 13.7% $ 8.13 01/25/09 $ 612,696 $ 1,052,667
8,000 6.8 12.50 12/01/09 271,388 491,373
David W. Thomas(2)................... 16,000 13.7 8.13 01/25/09 612,696 1,052,667
16,000 13.7 12.50 12/01/09 542,776 982,747
David Duncan, Jr..................... -- -- -- -- -- --
George Y. Wang(3).................... 4,000 3.4 12.50 12/01/09 135,694 245,687
</TABLE>
- ---------------------------
(1) 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 three years and the remaining 6,400 of these options
vest over a period of five 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 three years and the
remaining 3,200 of these options vest over a period of five years.
(2) 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.
(3) 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. The "Value of Unexercised In-the-Money Options at December 31, 1999"
shown in the table is based on an initial public offering price of $28.50 per
share, less the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Nancy T. Chang....................... 260,800 391,200 $ 5,476,800 $8,215,200
John C. Morris....................... 51,199 100,801 1,075,179 2,066,821
David W. Thomas...................... 80,000 152,000 1,980,000 3,552,000
David Duncan, Jr..................... 38,399 153,601 782,380 3,129,620
George Y. Wang....................... 201,600 4,000 5,523,171 64,000
</TABLE>
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. Our board of directors adopted and our stockholders approved the plan
on June 25, 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 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.
52
<PAGE>
For the year ended December 31, 1999, we granted no options, we cancelled
options to purchase 32,000 shares of common stock and the holders of options to
purchase 1,738,320 shares of common stock exercised those options. 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, no shares were
available for future option grants under the plan. After December 31, 1999,
employees exercised options to purchase 566,740 shares of common stock.
1997 STOCK PLAN
The board of directors adopted our 1997 Stock Plan on September 19, 1997, and
our stockholders approved the plan 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 board of directors or, in the discretion of the board, the compensation
committee or other committee appointed by the board of directors, consisting of
at least two members of the board of directors administers the plan. 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, 39 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. After December 31, 1999 we granted options
to purchase 35,500 shares of common stock, and option holders exercised options
to purchase 15,287 shares of common stock.
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. We
may issue options 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, one director held options to
purchase an aggregate of 108,000 shares of common stock 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, 372,000 shares were available for
future option grants under the plan. After December 31, 1999, we granted options
to purchase 24,000 shares of common stock to one of our directors at an exercise
price per share of $12.50 that vest over a two-year period. No options issued
under the plan have been exercised.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Our board of directors adopted, and our stockholders approved, the 2000
Non-Employee Directors' Stock Option Plan on February 17, 2000. The plan
automatically grants options to purchase shares of our common stock to our
non-employee directors. The board of directors administers the plan. We have
reserved a total of 500,000 shares of our common stock for issuance under the
plan. We have not issued any options under this plan.
After this offering, we will automatically issue options to our non-employee
directors under this plan as follows:
o each person who is elected or appointed to be a non-employee director for
the first time will automatically receive an initial grant to purchase
15,000 shares; and
o each person who is re-elected or re-appointed as a non-employee director
will automatically receive a grant to purchase 5,000 shares.
Directors serving on the board as of February 17, 2000 may not receive any
options under this plan.
The options are exercisable immediately but vest 1/36th per month for each month
after the date of the grant over three years. As long as the option holder
continues to serve with us or with an affiliate of ours, whether in the capacity
of a director, an employee or a consultant, the option will continue to vest and
be exercisable during its term.
The options have an exercise price equal to 100% of the fair market value of our
common stock on the grant date.
The option term is ten years. Options terminate on the earlier of normal option
termination or three months after the option holder's service terminates. If
this termination is due to the option holder's disability, the post-termination
exercise period is extended to the earlier of normal option termination or 12
months. If termination is due to the option holder's death or if the option
holder dies within three months of the date on which his or her service
terminates, the post-termination exercise period is extended to the earlier of
normal option termination or 18 months following death.
The option holder may transfer the option by gift to immediate family members or
for estate planning purposes. The option holder may also designate a beneficiary
to exercise the option if the option holder dies. If the option holder does not
designate a beneficiary, the option exercise rights will pass by the option
holder's will or by the laws of descent and distribution.
If an option holder does not purchase the shares subject to his or her option
before the option expires or otherwise terminates, the shares that are not
purchased will again become available for issuance under the plan.
Transactions that do not involve our receiving consideration, including a
merger, consolidation, reorganization, stock dividend and stock split, may
trigger a change in the class and number of shares subject to this plan and to
outstanding options. If any of these events occurs, the board of directors will
appropriately adjust the plan as to the class and the maximum number of shares
subject to the plan and the
54
<PAGE>
automatic option grants. It will also adjust outstanding options as to the
class, number and price of shares subject to these options.
If we dissolve or liquidate, outstanding options will terminate immediately
before this event. However, we treat outstanding options differently in the
following situations:
o a sale, lease or other disposition of all or substantially all of our
assets;
o a merger or consolidation in which we are not the surviving corporation;
and
o a reverse merger in which we are the surviving corporation but the shares
of our common stock outstanding immediately before the merger are
converted by virtue of the merger into other property.
In these situations, any surviving entity will either assume or replace all
outstanding options under the plan. Otherwise, the vesting of the options will
accelerate.
The board of directors may suspend or terminate the plan at any time.
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. After December 31, 1999,
consultants exercised options to purchase 74,400 shares of common stock.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our
common stock as of March 31, 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. Each director, officer or 5% or more stockholder, as
the case may be, has furnished us information with respect to beneficial
ownership. 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 33,973,123 shares of
common stock outstanding as of March 31, 2000, and also lists applicable
percentage ownership based on 40,973,123 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 March 31, 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).................... 6,977,643 260,800 20.4% 16.9%
Tse Wen Chang(2)..................... 6,564,239 -- 19.3 16.0
George Y. Wang....................... 209,925 142,000 * *
Osama I. Mikhail(3).................. 103,467 103,467 * *
David W. Thomas(4)................... 86,400 83,200 * *
John C. Morris....................... 54,399 54,399 * *
David Duncan, Jr. ................... 38,399 26,092 * *
William J. Jenkins(5)................ -- -- -- --
All directors and officers as a group
(10 persons)(6).................... 15,018,760 791,858 43.2 36.0
5% STOCKHOLDERS
Novartis AG(7)....................... 6,373,732 -- 18.8% 15.6%
Alafi Capital Company(8)............. 2,514,724 -- 7.4 6.1
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
56
<PAGE>
- ---------------------------
* Less than 1%
(1) Includes 6,429,318 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 248,847 shares held in trust by Dr. Chang for her children.
Includes 3,862 shares held by Dr. Chang's minor daughter, with respect to
which Dr. Chang disclaims beneficial ownership.
(2) Includes 247,705 shares held in trust by Dr. Chang for his children. Dr.
Chang's address is College of Life Sciences, National Tsing Hua
University, Hsinchu, Taiwan, Republic of China.
(3) Dr. Mikhail's address is 6720 Bertner Ave., Suite B111, Houston, Texas
77030.
(4) Includes 2,400 shares held by Dr. Thomas' spouse and children, with
respect to which Dr. Thomas disclaims beneficial ownership.
(5) Dr. Jenkins' address is Gelham, Church Road, Waxham, Norfolk NR12 0DY,
United Kingdom.
(6) See footnotes 1, 2 and 4 above. Includes 862,388 shares of common stock
and 121,900 shares subject to options held by officers not shown in the
table above.
(7) The address of Novartis AG is S-202.502, CH-4002, Basel, Switzerland.
(8) Includes 216,000 shares of common stock held by the Alafi Family
Foundation, a non-profit organization, with respect to which Mr. 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.
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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 must 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
18.9% of our common stock. Under the agreement, Novartis loaned us $10.0
million, bearing interest at a rate equal to LIBOR plus two percent (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 Novartis may partially or totally forgive the principal
and future interest payments 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 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 that 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.
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DESCRIPTION OF CAPITAL STOCK
We may 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 March
31, 2000, there were 33,973,123 shares of common stock outstanding held by 196
stockholders of record, and no shares of preferred stock were outstanding.
We do not intend the following summary description of our capital stock to be
complete and we qualify the description by referring 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 March 31, 2000 and giving effect
to the issuance of the 7,000,000 shares of common stock offered pursuant to this
prospectus there will be 40,973,123 shares of common stock outstanding upon the
completion of this offering. In addition, as of March 31, 2000, there were
outstanding stock options to purchase 2,586,993 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 may 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. If any liquidation, dissolution or winding-up of our
affairs occurs, holders of common stock may 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 that 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 may, without action by the stockholders, designate and issue
preferred stock in one or more series and 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 21,539,756 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 must use our best efforts to effect a 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 may 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
generally must bear all of the expenses of all of these registrations, except
underwriting discounts and selling commissions. We also have agreed to indemnify
stockholders who include shares 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 with registration rights would
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result in shares becoming freely tradable without restriction under the
Securities Act immediately upon effectiveness of the 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 board of directors of
the corporation approves the transaction;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or
o the board of directors and at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder approve the
business combination.
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 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 bylaws, which 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 bylaws provide 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 divide our board 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 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 30 nor more than 60
days prior to the annual meeting. If less than 40 days notice has been given to
the stockholders for the meeting, notice by the stockholder, to be timely, must
be 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.
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.
SPECIAL MEETINGS OF STOCKHOLDERS. Our bylaws provide that only a majority of
the board of directors, the chairman of our board of directors or our president
or chief executive officer may call a special meeting of our stockholders.
PREFERRED STOCK. The board of directors may, without action by the
stockholders, designate and issue preferred stock in one or more series and
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
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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 indemnify directors and officers in terms sufficiently
broad to permit 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:
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 that involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
o for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware law, our bylaws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
o we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding, subject to certain limited
exceptions; and
o the rights conferred in the bylaws are not exclusive.
We have entered 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. These
agreements, among other things, require us to indemnify each director and
officer to the fullest extent permitted by Delaware law, including
indemnification for expenses such as attorneys' fees, judgments, fines and
settlement amounts incurred by the director or officer in any action or
proceeding, including any action by or in the right of us, arising out of the
person's services as a director or officer of us, any subsidiary of ours or any
other company or enterprise to which the person provides services at our
request. At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents where
indemnification would be required or permitted. We believe that the provisions
of our amended and restated articles of incorporation, bylaws and these
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
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 have applied for quotation of the common stock on the Nasdaq National Market
under the symbol "TNOX."
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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 we complete this offering, we will have a total of 40,973,123 shares of
common stock outstanding. The 7,000,000 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 32,338,553 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, other than
shares of common stock acquired in this offering, 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,
7,355,466 shares will become eligible for sale pursuant to Rule 144(k),
21,655,760 shares will become eligible for sale under Rule 144 and 2,064,372
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 may 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 March 31, 2000 will equal approximately
339,731 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 pursuant to options granted prior to the effective date of
this offering and who are not an affiliate to sell these shares under Rule 144
without complying with the holding period, public information, volume limitation
or notice requirements of Rule 144. Rule 701 permits these persons who are our
affiliates to sell these shares without complying with the holding period
requirement of Rule 144. All holders of Rule 701 shares may not sell their Rule
701 shares
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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.
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 March 31, 2000, an aggregate of 2,586,993
shares of common stock were subject to outstanding options.
REGISTRATION RIGHTS
As of March 31, 2000, holders of 21,539,756 shares of common stock will be
entitled to certain rights with respect to the registration of those shares
under the Securities Act. After we register these shares, they will be freely
tradeable. For a description of these rights, see "Description of Capital
Stock."
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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.............................. 7,000,000
=================
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 1,050,000 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:
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- ------------------------- ---------------------------
Tanox...... $ $ $
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.
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KBC Bank, N.V., an affiliate of KBC Securities, Inc., one of our underwriters,
has agreed with John Blickenstaff, our Vice President of Administration,
Secretary and Treasurer, and one of our other employees, to purchase, at the
option of Mr. Blickenstaff and our other employee, shares of common stock having
a value of up to $3.7 million at the initial public offering price or, if the
offering is not completed by May 16, 2000, at $28.50 per share, less a discount
of seven percent. KBC will not resell any shares acquired under the agreement in
this offering. KBC has also agreed not to resell these shares except in limited
circumstances where the resale would be registered with the Securities and
Exchange Commission under the Securities Act or subject to an exemption
therefrom.
We and our officers and directors and substantially all other stockholders have
agreed to a 180-day "lock up" with respect to 33,338,553 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.
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.
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LEGAL MATTERS
Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas will pass upon
certain legal matters with respect to the legality of the issuance of the shares
of common stock offered by this prospectus. Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois will pass upon certain legal matters in connection
with this offering for the underwriters.
Wilburn O. McDonald, Jr., and seven other shareholders of Chamberlain, Hrdlicka,
White, Williams & Martin, hold an aggregate of 9,266 shares of our common stock.
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 giving said report.
Certain legal matters with respect to the statements in this prospectus under
the captions "Risk Factors -- We depend 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 must 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 ours, 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.
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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.
ARTHUR ANDERSEN LLP
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
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- -------------- -----------
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 --
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. These events
include originating at least three additional reseach projects within a three
year period, retaining the services of two individuals for 36 months and
maintaining a certain level of government grants and subsidies. Any additional
consideration will be paid to all shareholders in proportion to their ownership
at the acquisition date. 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 the 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.
F-8
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
1997 1998 1999
----------- ----------- ------------
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)
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.
F-9
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues associated with development agreements which include rights to license
or sublicense Tanox's technology or product rights are recognized when payments
are earned. Revenues earned under development agreements include payments for
milestone achievements and payments for sponsored research. Milestone payments
are received under best efforts contracts, and such revenues are not refundable.
Any revenue from milestones is recognized when the milestones are achieved and
there are no remaining performance obligations. Revenues earned in connection
with sponsored research are recognized as Tanox performs its obligations related
to such research. Any revenue contingent upon future performance by Tanox is
deferred and recognized as the performance is completed.
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. The remainder of the revenues
related to sponsored research. 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 for sponsored
research 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.
F-10
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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). 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 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).
F-11
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
TOTAL NET INCOME IDENTIFIABLE
REVENUES (LOSS) ASSETS
--------- ----------- -------------
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
========== ============ ============
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 0.6
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:
WEIGHTED
NUMBER OF EXERCISE AVERAGE
SHARES PRICE EXERCISE PRICE
------------ ------------- --------------
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
============ ============= ==============
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 on the date of grant. 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 compensation expense
representing the fair value of the options as of the remeasurement date. For
employees, compensation expense was recorded for the difference between the fair
value of the underlying stock on the date of the extension and the exercise
price of the option. For consultants, compensation expense was calculated using
the Black-Scholes valuation model on the date of the extension.
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
F-18
<PAGE>
TANOX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
7,000,000 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 DEALERS' 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, NASD filing fee and the Nasdaq National Market listing
fee.
Registration fee..................... $ 63,756
NASD filing fee...................... 24,650
Nasdaq National Market listing fee... 95,000
Printing and engraving expenses...... 170,000*
Legal fees and expenses.............. 300,000*
Accounting fees and expenses......... 200,000*
Blue Sky fees and expenses........... 15,000*
Transfer agent and registrar fees.... 15,500*
Premium for directors and officers
insurance.......................... 150,000*
Miscellaneous........................ 51,094*
----------
Total........................... 1,085,000*
==========
- ---------------------------
* 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 or officer 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 have entered 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.
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<PAGE>
(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.
(e) Between March 12, 1998 and September 12, 1999, the Registrant issued
468,484 shares of its common stock, at a price per share ranging from
$11.25 to $12.50, with an aggregate value of $5,573,039, 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 were exempt from registration under Section 4(2) of the
Securities Act.
(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 March 31, 2000, the Registrant had issued and sold, in the
aggregate, 2,480,987 shares of its common stock for per share exercise
prices ranging from $0.28 to $11.25 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 April 27, 1998 and February 9, 2000, the Registrant issued and
sold 242,400 shares of its common stock for per share exercise prices
ranging from $0.21 to $2.29, 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 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.
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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.
10.23* -- 2000 Non-Employee Directors' Stock
Option Plan.
10.24++* -- Master Agreement, dated March 17,
2000, by and between the Registrant
and Protein Design Labs, Inc.
21.1* -- List of Subsidiaries of the
Registrant.
23.1 -- Consent of Arthur Andersen LLP dated
April 4, 2000.
23.2 -- Consent of Chamberlain, Hrdlicka,
White, Williams & Martin (included in
Exhibit 5.1).
23.3* -- Consent of KPMG LLP, dated March 5,
2000.
24.1* -- Power of Attorney.
27* -- Financial Data Schedule.
- ---------------------------
+ To be filed by amendment.
++ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to
Rule 406 of the Securities Act.
* Previously filed
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(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.
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.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 5 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS ON APRIL 6, 2000.
TANOX, INC.
By: /s/ JOHN BLICKENSTAFF
JOHN BLICKENSTAFF
SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 5 TO THE
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON APRIL 6, 2000.
By: /s/ JOHN BLICKENSTAFF
JOHN BLICKENSTAFF
ATTORNEY-IN-FACT
Chairman of the Board,
NANCY T. CHANG, PH.D. President, and Chief
Executive Officer
Vice President of Finance
DAVID DUNCAN, JR. and Chief Financial Officer
Director
TSE WEN CHANG, PH.D.
Director
OSAMA MIKHAIL, PH.D.
Director
WILLIAM J. JENKINS, M.D.
II-6
EXHIBIT 1.1
7,000,000 Shares
TANOX, INC.
Common Stock
UNDERWRITING AGREEMENT
April 6, 2000
CIBC World Markets Corp.
FleetBoston Robertson Stephens Inc.
Warburg Dillon Read LLC
Adams, Harkness & Hill, Inc.
KBC Securities Inc.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
As Representatives of the
Several Underwriters named on
Schedule I attached hereto
Ladies and Gentlemen:
Tanox, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions contained herein, to sell to you and the
other underwriters named on Schedule I to this Agreement (the "Underwriters"),
for whom you are acting as Representatives (the "Representatives"), an aggregate
of 7,000,000 shares (the "Firm Shares") of the Company's Common Stock, $.01 par
value (the "Common Stock"). The respective amounts of the Firm Shares to be
purchased by each of the several Underwriters are set forth opposite their names
on Schedule I hereto. In addition, the Company proposes to grant to the
Underwriters an option to purchase up to an additional 1,050,000 shares (the
"Option Shares") of Common Stock from it for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. The Firm Shares
and the Option Shares are together called the "Shares."
<PAGE>
1. SALE AND PURCHASE OF THE SHARES.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters,
and each of the Underwriters agrees, severally and not jointly, to purchase from
the Company, at a price of $[o] per share (the "Initial Price"), the number of
Firm Shares set forth opposite the name of such Underwriter under the column
"Number of Firm Shares" on Schedule I to this Agreement, subject to adjustment
in accordance with Section 10 hereof.
(b) The Company grants to the several Underwriters an option
to purchase, severally and not jointly, all or any part of the Option Shares at
the Initial Price. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage (adjusted by the Representatives to
eliminate fractions) of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares. Such option
may be exercised only to cover over-allotments in the sales of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as defined below), and from time to time thereafter within
30 days after the date of this Agreement, in each case upon written, facsimile
or telegraphic notice, or verbal or telephonic notice confirmed by written,
facsimile or telegraphic notice, by the Representatives to the Company no later
than 12:00 noon, New York City time, on the business day before the Firm Shares
Closing Date or at least two business days before the Option Shares Closing Date
(as defined below), as the case may be, setting forth the number of Option
Shares to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares
to the Representatives for the respective accounts of the Underwriters, and
payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (same day) funds drawn to the order of the
Company for the shares purchased from the Company, against delivery of the
certificates therefor to the Representatives, shall take place at the offices of
CIBC World Markets Corp., One World Financial Center, New York, New York 10281,
at 10:00 a.m., New York City time, on the third business day following the date
of this Agreement, or at such time on such other date, not later than 10
business days after the date of this Agreement, as shall
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<PAGE>
be agreed upon by the Company and the Representatives (such time and date of
delivery and payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised in whole or in part on one or more occasions, delivery by the Company
of the Option Shares to the Representatives for the respective accounts of the
Underwriters and payment of the purchase price thereof in immediately available
funds by wire transfer or by certified or official bank check or checks payable
in New York Clearing House (same day) funds to the Company shall take place at
the offices of CIBC World Markets Corp. specified above at the time and on the
date (which may be the same date as, but in no event shall be earlier than, the
Firm Shares Closing Date) specified in the notice referred to in Section 1(b)
(such time and date of delivery and payment are called the "Option Shares
Closing Date"). The Firm Shares Closing Date and the Option Shares Closing Date
are called, individually, a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names
and shall be in such denominations as the Representatives shall request at least
two full business days before the Firm Shares Closing Date or, in the case of
Option Shares, on the day of notice of exercise of the option as described in
Section l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a Registration Statement (as hereinafter
defined) on Form S-1 (No. 333-96025), including a preliminary prospectus
relating to the Shares, and such amendments thereof as may have been required to
the date of this Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related Preliminary Prospectus (as hereinafter
defined) have heretofore been delivered by the Company to the Representatives.
The term "Preliminary Prospectus" means any preliminary prospectus (as described
in Rule 430 of the Rules) included at any time as a part of the Registration
Statement or filed with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules. The term "Registration
Statement" as used in this Agreement means the initial registration statement
(including all exhibits, financial schedules and information deemed to be a part
of the Registration Statement through incorporation by reference or otherwise),
as
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<PAGE>
amended at the time and on the date it becomes effective (the "Effective Date")
including the information (if any) deemed to be part thereof at the time of
effectiveness pursuant to Rule 430A of the Rules. If the Company has filed an
abbreviated registration statement to register additional Shares pursuant to
Rule 462(b) under the Rules (the "462(b) Registration Statement") then any
reference herein to the Registration Statement shall also be deemed to include
such 462(b) Registration Statement. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement at the time of effectiveness or, if Rule 430A of the Rules is relied
on, the term Prospectus shall also include the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules.
The Company understands that the Underwriters propose to make a
public offering of the Shares, as set forth in and pursuant to the Prospectus,
as soon after the Effective Date and the date of this Agreement as the
Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each Preliminary Prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement
complied, and on the date of the Prospectus, the date any post-effective
amendment to the Registration Statement becomes effective, the date any
supplement or amendment to the Prospectus is filed with the Commission and each
Closing Date, the Registration Statement and the Prospectus (and any amendment
thereof or supplement thereto) will comply, in all material respects, with the
applicable provisions of the Securities Act and the Rules and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder. The Registration Statement did not and
will not, as of the Effective Date, and as of the other dates referred to above,
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The Prospectus (and any amendment thereof or
supplement thereto) will not, at the date of the Prospectus, at the date of any
such amendments or supplements thereto or at any Closing Date, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circum stances under which they were made, not misleading. When any
related Preliminary Prospectus was first filed with the Commission (whether
filed as part of the Registration Statement or any amendment
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<PAGE>
thereto or pursuant to Rule 424(a) of the Rules) and when any amendment thereof
or supplement thereto was first filed with the Commission, such Preliminary
Prospectus, as amended or supplemented, complied in all material respects with
the applicable provisions of the Securities Act and the Rules and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. If applicable, each Preliminary Prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
If Rule 434 is used, the Company will comply with the require ments of Rule 434
and the Prospectus shall not be "materially different," as such term is used in
Rule 434, from the Prospectus included in the Registration Statement at the time
it became effective. Notwithstanding the foregoing, none of the representations
and warranties in this paragraph 4(a) shall apply to statements in, or omissions
from, the Registration Statement, any Preliminary Prospectus or the Prospectus
relating to any Underwriter made in reliance upon, and in conformity with,
information herein or otherwise furnished in writing by the Representatives on
behalf of the several Underwriters expressly for use in the Registration
Statement, any Preliminary Prospectus or the Prospectus. With respect to the
preceding sentence, the Company acknowledges that the only information furnished
in writing by the Representatives on behalf of the several Underwriters
expressly for use in the Registration Statement, any Preliminary Prospectus or
the Prospectus is the paragraph with respect to stabilization on the inside
front cover page of the Prospectus and any Preliminary Prospectus and the
statements contained under the caption "Underwriting" in the Prospectus or any
Preliminary Prospectus. The Company has not distributed any offering materials
in connection with the offering or sale of the Shares other than the
Registration Statement, the Preliminary Prospectus or the Prospectus or any
other materials, if any, permitted by the Securities Act or the Rules.
(b) The Registration Statement is effective under the
Securities Act and no stop order preventing or suspending the effectiveness of
the Registration Statement or suspending or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been instituted or are
threatened under the Securities Act. Any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules has been or will be
made in the manner and within the time period required by such Rule 424(b).
(c) The financial statements of the Company (including all
notes and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial position, the results of operations, the
statements of cash
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<PAGE>
flows and the statements of stockholders' equity and the other information
purported to be shown therein of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements and
related schedules and notes have been prepared in conformity with United States
generally accepted accounting principles, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of the
results for such periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown therein as at
the respective dates and for the respective periods specified and the summary
and selected financial data have been presented on a basis consistent with the
consolidated financial statements so set forth in the Prospectus and other
financial information.
(d) Arthur Andersen LLP, whose reports are filed with the
Commission as a part of the Registration Statement, are and, during the periods
covered by their reports, were independent public accountants as required by the
Securities Act and the Rules.
(e) The Company and each of its Subsidiaries (as hereinafter
defined) is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, formation or
organization. Except as described in the Prospectus, the Company has no
subsidiary or subsidiaries and does not control, directly or indirectly, any
corporation, partnership, joint venture, association or other business
organization. The Company and each such Subsidiary or other entity controlled
directly or indirectly by the Company (collectively, "Subsidiaries") is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the nature of the business conducted by it or
location of the assets or properties owned, leased or licensed by it requires
such qualification, except for such jurisdictions where the failure to so
qualify would not have a material adverse effect on the assets or properties,
business, prospects, results of operations or financial condition of the Company
and its Subsidiaries, taken as a whole (a "Material Adverse Effect"). Except as
described in the Prospectus, the Company does not own, lease or license any
asset or property or conduct any business outside the United States of America.
The Company and each of its Subsidiaries has all requisite corporate power and
authority, and all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all governmental or regulatory
bodies or any other person or entity
(collectively, the "Permits"), to own, lease and license its assets and
properties and conduct its business, all of which are valid and in full force
and effect, as described in the Registration Statement and the Prospectus,
except where the lack of such Permits, individually or in the aggregate, would
not have a Material Adverse Effect. The Company and each of its Subsidiaries has
fulfilled and performed in all material respects
6
<PAGE>
all of its material obligations with respect to such Permits and no event has
occurred that allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of the rights
of the Company thereunder. Except as may be required under the Securities Act
and state and foreign Blue Sky laws, no other Permits are required to enter
into, deliver and perform this Agreement and to issue and sell the Shares.
(f) The Company and its Subsidiaries own or are licensed to
use all patents, patent applications, inventions, trademarks, trade names,
applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade
secrets, licenses and rights in any thereof and any other intangible property
and assets (herein called the "Proprietary Rights") which are material to the
businesses of the Company and its Subsidiaries as now conducted and as proposed
to be conducted, in each case as described in the Prospectus. The description of
the Proprietary Rights in the Prospectus is correct in all material respects and
fairly and correctly describes the Company's and its Subsidiaries' rights with
respect thereto. Except for matters specifically described in the Prospectus
under the caption "Business - Pending Legal Proceedings," (i) the Company does
not have any knowledge of, and the Company has not given or received any notice
of, any pending conflicts with or infringement of the rights of others with
respect to any Proprietary Rights or with respect to any license of Proprietary
Rights; (ii) no action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Proprietary Rights; (iii) neither the
Company nor any Subsidiary is subject to any judgment, order, writ, injunction
or decree of any court or any Federal, state, local, foreign or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or any arbitrator, or has entered into or is a party to any
contract which restricts or impairs the use of any such Proprietary Rights in a
manner which would have a Material Adverse Effect on the use of any of the
Proprietary Rights; (iv) to the best knowledge of the Company, no Proprietary
Rights used by the Company or any of its Subsidiaries, and no services or
products sold by the Company or any of its Subsidiaries, conflict with or
infringe upon any Proprietary Rights available to any third party; (v) neither
the Company nor any Subsidiary has received written notice of any pending
conflict with or infringement upon such third party proprietary rights; (vi)
neither the Company nor any Subsidiary has entered into any consent, indemnifica
tion, forbearance to sue or settlement agreement with respect to Proprietary
Rights other than in the ordinary course of business; (vii) no claims have been
asserted by any person with respect to the validity of the Company's or any of
its Subsidiaries' ownership or right to use the Proprietary Rights and, to the
best knowledge of the Company, there is no reasonable basis for any such claim
to be successful; (viii) the Company and its
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Subsidiaries have complied, in all material respects, with their respective
contractual obligations relating to the protection of the Proprietary Rights
used pursuant to licenses; and (ix) to the best knowledge of the Company, no
person is infringing on or violating the Proprietary Rights owned or used by the
Company or any of its Subsidiaries. The Proprietary Rights are valid and
enforceable and no registration relating thereto has lapsed, expired or been
abandoned or canceled or is the subject of cancellation or other adversarial
proceedings, and all applications therefor are pending and are in good standing.
(g) The Company and its Subsidiaries own no real property and
have good and marketable title to all personal property described in the
Prospectus as being owned by it. Any real property and buildings described in
the Prospectus as being held under lease by the Company and each of its
Subsidiaries is held by it under valid, existing and enforceable leases, free
and clear of all liens, encumbrances, claims, security interests and defects,
except such as are described in the Registration Statement and the Prospectus or
would not have a Material Adverse Effect.
(h) Except for matters specifically described in the
Prospectus under the caption "Business - Pending Legal Proceedings," there are
no actions, suits or governmental proceedings to which the Company or its
Subsidiaries is subject or which is pending or, to the knowledge of the Company,
threatened, against or affecting the Company or any of its Subsidiaries, which,
individually or in the aggregate, might have a Material Adverse Effect, affect
the consummation of this Agreement or which are required to be disclosed in the
Registration Statement and the Prospectus that are not so disclosed.
(i) Subsequent to the respective dates as of which informa
tion is given in the Registration Statement and the Prospectus, except as
described therein, (a) there has not been any material adverse change or any
development involving a prospective material adverse change in or affecting the
assets or properties, business, results of operations or financial condition of
the Company; (b) neither the Company nor any of its Subsidiaries has sustained
any loss or interference with its assets, businesses or properties (whether
owned or leased) from fire, explosion, earthquake, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree which would have a
Material Adverse Effect; and (c) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus, except as reflected
therein, neither the Company nor any of its Subsidiaries has (i) issued any
securities or incurred any liability or obligation, direct or contingent, for
borrowed money, except such liabilities or obligations incurred in the ordinary
course of business, (ii) entered into any transaction
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not in the ordinary course of business or (iii) declared or paid any dividend or
made any distribution on any shares of its stock or redeemed, purchased or
otherwise acquired or agreed to redeem, purchase or otherwise acquire any shares
of its stock. Neither the Company nor any of its Subsidiaries has any material
contingent obligations which are not disclosed in the Registration Statement.
(j) There is no document, contract or other agreement of a
character required to be described in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which is not
described or filed as required by the Securities Act or Rules. Each description
of a contract, document or other agreement in the Registration Statement and the
Prospectus accurately reflects in all respects the material terms of the
underlying document, contract or agreement. Each agreement described in the
Registration Statement and Prospectus or listed in the Exhibits to the
Registration Statement is in full force and effect and is valid and enforceable
by and against the Company or any of its Subsidiaries, as the case may be, in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles. Except for matters specifically described in the
Prospectus under the caption "Business - Pending Legal Proceedings," neither the
Company nor any of its Subsidiaries, if a Subsidiary is a party, nor to the
Company's knowledge, any other party is in default in the observance or
performance of any term or obligation to be performed by it under any such
agreement, and no event has occurred which with notice or lapse of time or both
would constitute such a default, in any such case which default or event,
individually or in the aggregate, would have a Material Adverse Effect. Except
for matters specifically described in the Prospectus under the caption "Business
- - Pending Legal Proceedings," no default exists, and no event has occurred which
with notice or lapse of time or both would constitute a default, in the due
performance and observance of any term, covenant or condition, by the Company or
any of its Subsidiaries, if a Subsidiary is a party thereto, of any other
agreement or instrument to which the Company or the Subsidiary is a party or by
which the Company, the Subsidiary or their properties or business may be bound
or affected which default or event, individually or in the aggregate, would have
a Material Adverse Effect.
(k) Neither the Company nor any of its Subsidiaries is in
violation of any term or provision of its charter or by-laws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation, individually or in the
aggregate, would have a Material Adverse Effect.
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(l) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the transactions
contemplated hereby (including, without limitation, the issuance and sale by the
Company of the Shares) will give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result in the breach of
any term or provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require any
consent or waiver under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the Company or its
Subsidiaries pursuant to the terms of, any indenture, mortgage, deed of trust or
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which it either the Company or any of its Subsidiaries or any of
their properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the Company
or any of its Subsidiaries or violate any provision of the charter or by-laws of
the Company or any of its Subsidiaries, except for such consents or waivers
which have already been obtained and are in full force and effect.
(m) The Company has authorized, issued and outstanding capital
stock as set forth under the caption "Capitalization" in the Prospectus. The
certificates evidencing the Shares are in due and proper legal form and have
been duly authorized for issuance by the Company. All of the issued and
outstanding shares of Common Stock have been duly and validly issued and are
fully paid and nonassessable. There are no statutory preemptive or other similar
rights to subscribe for or to purchase or acquire any shares of Common Stock of
the Company or its Subsidiaries or any such rights pursuant to its charter or
by-laws or any agreement or instrument to or by which the Company or any of its
Subsidiaries is a party or bound. The Shares, when issued and sold pursuant to
this Agreement, will be duly and validly issued, fully paid and nonassessable
and none of them will be issued in violation of any preemptive or other similar
right. Except as disclosed in the Registration Statement and the Prospectus,
there is no outstanding option, warrant or other right calling for the issuance
of, and there is no commitment, plan or arrangement to issue, any share of stock
of the Company or its Subsidiaries or any security convertible into, or
exercisable or exchangeable for, such stock. The Common Stock and the Shares
conform in all material respects to all statements in relation thereto contained
in the Registration Statement and the Prospectus. All outstanding shares of
capital stock of each Subsidiary have been duly authorized and validly issued,
and are fully paid and nonassessable and are owned directly by the Company or by
another wholly-owned subsidiary of the Company free and clear of any security
interests, liens, encumbrances, equities or claims, other than those described
in the Prospectus.
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(n) Other than Novartis AG or Novartis Pharma AG, no holder of
any security of the Company has the right to have any security owned by such
holder included in the Registration Statement or to demand registration of any
security owned by such holder during the period ending 180 days after the date
of this Agreement, which rights have not been waived. Each stockholder (except
for certain stockholders that own individually less than 5% and in the aggregate
less than 1% of the Company's Common Stock and the stockholders listed on
Schedule II hereto, and only with respect to the certain transactions or shares
of Common Stock set forth on Schedule II), director and executive officer of the
Company has executed and delivered to the Representatives an enforceable written
lock-up agreement in the form attached to this Agreement ("Lock-Up Agreement").
(o) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and performance of
this Agreement and the issuance and sale of the Shares by the Company. This
Agreement has been duly and validly authorized, executed and delivered by the
Company and constitutes and will constitute legal, valid and binding obligations
of the Company enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
(p) Neither the Company nor any of its Subsidiaries is
involved in any labor dispute nor, to the knowledge of the Company, is any such
dispute threatened, which dispute would have a Material Adverse Effect. The
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers or contractors which would have a
Material Adverse Effect. The Company is not aware of any threatened or pending
litigation between the Company or its Subsidiaries and any of its executive
officers which, if adversely determined, could have a Material Adverse Effect
and has no reason to believe that such officers will not remain in the
employment of the Company.
(q) No transaction has occurred between or among the Company
and any of its officers or directors or five percent shareholders or any
affiliate or affiliates of any such officer or director or five percent
shareholders that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(r) Neither the Company nor, to its knowledge, any of its
officers, directors or affiliates, has taken, or will take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has
11
<PAGE>
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of any of the Shares.
(s) The Company and its Subsidiaries have filed all Federal,
state, local and foreign tax returns which are required to be filed through the
date hereof, which returns are true and correct in all material respects, or
have received extensions thereof, and have paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material and
have become due. There are no tax audits or investigations pending, which if
adversely determined would have a Material Adverse Effect; nor are there any
material proposed additional tax assessments against the Company or any of its
Subsidiaries.
(t) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act. The Shares have been duly authorized for quotation on the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market System. A registration statement has been filed on Form 8-A
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which registration statement complies in all material respects
with the Exchange Act. The Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act or quotation the Common Stock on the Nasdaq National Market, nor
has the Company received any notification that the Commission of the Nasdaq
National Market is contemplating terminating such registration or quotation.
(u) The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results of
operations of, the Company and its Subsidiaries. The Company and each of its
Subsidiaries maintains a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(v) The Company and its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts
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<PAGE>
as are customary in the businesses in which they are engaged or propose to
engage after giving effect to the transactions described in the Prospectus,
including but not limited to, insurance covering clinical trial liability,
product liability and real or personal property owned or leased against theft,
damage, destruction, act of vandalism and all other risks customarily insured
against; all policies of insurance and fidelity or surety bonds insuring the
Company or any of its Subsidiaries or the Company's or its Subsidiaries'
respective businesses, assets, employees, officers and directors are in full
force and effect; the Company and each of its Subsidiaries are in compliance
with the terms of such policies and instruments in all material respects; and
neither the Company nor any Subsidiary of the Company has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not have a Material
Adverse Effect. Neither the Company nor any Subsidiary has been denied any
insurance coverage which it has sought or for which it has applied.
(w) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated required to be obtained or performed by the Company (except such
additional steps as may be required by the National Association of Securities
Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public
offering by the Underwriters under the state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(x) There are no affiliations with the NASD among the
Company's officers, directors or, to the best of the knowledge of the Company,
any five percent or greater stockholder of the Company, except as set forth in
the Registration Statement or otherwise disclosed in writing to the
Representatives.
(y) (i) Each of the Company and its Subsidiaries is in
compliance in all material respects with all rules, laws, ordinances, codes,
policies, rules of common law and regulations and any judicial or administrative
interpretation thereof relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment ("Environmental
Law") which are applicable to its business; (ii) neither the Company nor its
Subsidiaries has received any notice from any governmental authority or third
party of an asserted claim under Environmental Laws; (iii) each of the Company
and its Subsidiaries has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its business and
is in compliance with all terms and conditions of any such permit, license or
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<PAGE>
approval; (iv) to the Company's knowledge, no facts currently exist that will
require the Company or its Subsidiaries to make future material capital
expenditures to comply with Environmental Laws; and (v) no property which is or
has been owned, leased or occupied by the Company or its Subsidiaries has been
designated as a Superfund site pursuant to the Comprehensive Environmental
Response, Compensation of Liability Act of 1980, as amended (42 U.S.C. Section
9601, et. seq.) ("CERCLA") or otherwise designated as a contaminated site under
applicable state or local law. Neither the Company nor any of its Subsidiaries
has been named as a "potentially responsible party" under the CERCLA.
(z) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and its Subsidiaries, in the course of
which the Company identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws, or
any permit, license or approval, any related constraints on operating activities
and any potential liabilities to third parties). On the basis of such review,
the Company has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect.
(aa) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of proceeds thereof as
described in the Prospectus, will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended (the "Investment
Company Act").
(bb) Neither the Company nor its Subsidiaries nor any other
person associated with or acting on behalf of the Company or its Subsidiaries
including, without limitation, any director, officer, agent or employee of the
Company or its Subsidiaries has, directly or indirectly, while acting on behalf
of the Company or its Subsidiaries (i) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful
payment.
(cc) The Company has reviewed its operations and that of its
Subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its Subsidiaries will be affected by the Year 2000 Problem
(that is, any significant risk that computer hardware or software applications
used by the Company
14
<PAGE>
and its Subsidiaries will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000); as a result of such
review, (i) the Company has no reason to believe, and does not believe, that (A)
there are any issues related to the Company's preparedness to address the Year
2000 Problem that are of a character required to be described or referred to in
the Registration Statement or Prospectus which have not been accurately
described in the Registration Statement or Prospectus and (B) the Year 2000
Problem will have a Material Adverse Effect, or result in any material loss or
interference with the business or operations of the Company and its
Subsidiaries, taken as a whole; and (ii) the Company reasonably believes, after
due inquiry, that the suppliers, vendors, customers or other material third
parties used or served by the Company and such Subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the extent that
a failure to address the Year 2000 Problem by a supplier, vendor, customer or
material third party would not have a Material Adverse Effect.
(dd) The Company and each of its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountabil ity for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(ee) Except as described in the Prospectus, to the best of the
Company's knowledge, there are no rulemaking or similar proceedings before the
United States Food and Drug Administration or comparable Federal, state, local
or foreign government bodies which involve or affect the Company or any
Subsidiary, which, if the subject of an action unfavorable to the Company or any
Subsidiary, could result in a Material Adverse Effect.
(ff) Except for matters specifically described in the
Prospectus under the caption "Business - Pending Legal Proceedings," the Company
has not received any communication (whether written or oral) relating to the
termination or threatened termination or modification or threatened modification
of any material, consulting, licensing, marketing, research and development,
cooperative or any similar agreement, including, without limitation, the
collaborative research and license agreements listed under the sections of the
Prospectus entitled, "Business -
15
<PAGE>
Collaboration and Licensing Agreements," " - Other Collaborations and License
Agreements" and "- Patents and Proprietary Rights."
(gg) All offers and sales of capital stock of the Company
prior to the date hereof were at all relevant times duly registered or exempt
from the registration requirements of the Securities Act and were duly
registered or subject to an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws.
(hh) To the Company's knowledge, if any full-time employee
identified in the Prospectus has entered into any non-competition,
non-disclosure, confidentiality or other similar agreement with any party other
than the Company or any Subsidiary, such employee is neither in violation
thereof nor is expected to be in violation thereof as a result of the business
conducted or expected to be conducted by the Company or Subsidiary as described
in the Prospectus or such person's performance of his obligations to the Company
or any Subsidiary; and neither the Company nor any Subsidiary has received
written notice that any consultant or scientific advisor of the Company or any
Subsidiary is in violation of any non-competition, non-disclosure,
confidentiality or similar agreement.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) Notification that the Registration Statement has become
effective shall have been received by the Representatives and the Prospectus
shall have been timely filed with the Commission in accordance with Section 6(a)
of this Agreement.
(b) No order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus shall have been or shall be in effect
and no order suspending the effectiveness of the Registration Statement shall be
in effect and no proceedings for such purpose shall be pending before or
threatened by the Commission, and any requests for additional information on the
part of the Commission (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
the Commission and the Representatives. If the Company has elected to rely upon
Rule 430A, Rule 430A information previously omitted from the effective
Registration Statement pursuant to Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within
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<PAGE>
the prescribed time period and the Company shall have provided evidence
satisfactory to the Underwriters of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A. If the Company has
elected to rely upon Rule 434, a term sheet shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed time period.
(c) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered pursuant to
Section 5(d) shall be true and correct when made and on and as of each Closing
Date as if made on such date. The Company shall have performed all covenants and
agreements and satisfied all the conditions contained in this Agreement required
to be performed or satisfied by them at or before such Closing Date.
(d) The Representatives shall have received on each Closing
Date a certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive or chief operating officer and the chief financial
officer or chief accounting officer of the Company to the effect that (i) the
signers of such certificate have carefully examined the Registration Statement,
the Prospectus and this Agreement and that the representations and warranties of
the Company in this Agreement are true and correct on and as of such Closing
Date with the same effect as if made on such Closing Date and the Company has
performed all covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior to such
Closing Date, and (ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and to the best of their knowledge, no
proceedings for that purpose have been instituted or are pending under the
Securities Act.
(e) The Representatives shall have received, at the time this
Agreement is executed and on each Closing Date a signed letter from Arthur
Andersen LLP addressed to the Representatives and dated, respectively, the date
of this Agreement and each such Closing Date, in form and substance reasonably
satisfactory to the Representatives, confirming that they are independent
accountants within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating in effect that:
(i) In their opinion the audited financial statements
and financial statement schedules included or incorporated by reference in
the Registration Statement and the Prospectus and reported
17
<PAGE>
on by them comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Rules.
(ii) On the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the headings
"Summary Consolidated Financial Information" and "Selected Consolidated
Financial Data," carrying out certain procedures (but not an examination
in accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments
set forth in such letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to the date of the latest audited financial statements, except as
disclosed in the Registration Statement and the Prospectus, nothing came
to their attention which caused them to believe that:
(A) the amounts in "Summary Consolidated Financial
Information," and "Selected Consolidated Financial Data" included in
the Registra tion Statement and the Prospectus do not agree with the
corresponding amounts in the audited financial state ments from
which such amounts were derived; or
(B) with respect to the Com pany, there were, at a
specified date not more than three business days prior to the date
of the letter, any increases in the current liabilities and
long-term liabilities of the Company or any decreases in net assets
or in working capital or the stockholders' equity in the Company, as
compared with the amounts shown on the Company's audited balance
sheet for the fiscal year ended 1999 included in the Registration
Statement.
(iii) They have performed certain other procedures as
may be permitted under Generally Acceptable Auditing Standards as a result
of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general
18
<PAGE>
accounting records of the Company) set forth in the Registration Statement
and the Prospectus and reasonably specified by the Represen tatives agrees
with the accounting records of the Company.
(iv) Based upon the procedures set forth in clauses (ii)
and (iii) above and a reading of the amounts included in the Registration
Statement under the headings "Summary Consolidated Financial Information"
and "Selected Consolidated Financial Data" included in the Registration
Statement and Prospectus and a reading of the financial statements from
which certain of such data were derived, nothing has come to their
attention that gives them reason to believe that the "Summary Consolidated
Financial Information" and "Selected Consolidated Financial Data" included
in the Registration Statement and Prospectus do not comply as to the form
in all material respects with the applicable accounting requirements of
the Securities Act and the Rules or that the information set forth therein
is not fairly stated in relation to the financial statements included in
the Registration Statement or Prospectus from which certain of such data
were derived are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial state ments included in the Registration Statement and
Prospectus.
References to the Registration Statement and the Prospectus in this
paragraph (f) are to such documents as amended and supplemented at the
date of the letter.
(f) The Representatives shall have received on each Closing
Date from Chamberlain, Hrdlicka, White, Williams & Martin, counsel for the
Company, an opinion, addressed to the Representatives and dated such Closing
Date, in form and substance satisfactory to counsel for the Underwriters, and
stating in effect that:
(i) Each of the Company and its Subsidiaries has been
duly organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation or formation or
organization. Except as described in the Prospectus, the Company has no
subsidiary and does not control, directly or indirectly, any corporation,
partnership, joint venture, association or other business organization.
Each of the Company and its Subsidiaries is duly qualified and in good
standing as a foreign corporation in each jurisdic tion in which the
character or location of its assets or properties (owned, leased
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<PAGE>
or licensed) or the nature of its businesses makes such qualifica tion
necessary, except for such jurisdictions where the failure to so qualify,
individually or in the aggregate, would not have a Material Adverse
Effect.
(ii) Each of the Company and its Subsidiaries has all
requisite corporate power and authority to own, lease and license its
assets and properties and conduct its business as now being conducted and
as described in the Registration Statement and the Prospectus and with
respect to the Company to enter into, deliver and perform this Agreement
and to issue and sell the Shares other than those required under the state
and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital
stock as set forth in the Registration Statement and the Prospec tus under
the caption "Capitalization"; the certificates evidencing the Shares are
in due and proper legal form and have been duly authorized for issuance by
the Company; all of the outstanding shares of Common Stock of the Company
have been duly and validly authorized and issued and are fully paid and
nonassessable and none of them was issued in violation of any preemptive
or other similar right. The Shares when issued and sold pursuant to this
Agreement will be duly and validly issued, outstanding, fully paid and
nonassessable and none of them will have been issued in violation of any
preemptive or other similar right. To the best of such counsel's
knowledge, except as disclosed in the Registration Statement and the
Prospectus, there are no preemptive or other rights to subscribe for or to
purchase or any restriction upon the voting or transfer of any securities
of the Company pursuant to the Company's charter or by-laws or other
governing documents or any agreements or other instruments to which the
Company is a party or by which it is bound. To the best of such counsel's
knowledge, except as disclosed in the Registration Statement and the
Prospectus, there is no outstanding option, warrant or other right calling
for the issuance of, and no commitment, plan or arrangement to issue, any
share of stock of the Company or any security convertible into,
exercisable for, or exchange able for stock of the Company. The Common
Stock and the Shares conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. The
issued and outstand ing shares of capital stock of each of the Company's
Subsidiaries have been duly authorized and validly issued, are fully paid
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and nonassessable and are owned by the Company or by another wholly owned
subsidiary of the Company, free and clear of any perfected security
interest or, to the knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims, other than those
contained in the Registration Statement and the Prospectus.
(iv) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares.
This Agreement has been duly and validly authorized, executed and
delivered by the Company and this Agreement constitutes the legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms except as such enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles.
(v) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares will give rise to a right
to terminate or accelerate the due date of any payment due under, or
conflict with or result in the breach of any term or provision of, or
constitute a default (or any event which with notice or lapse of time, or
both, would constitute a default) under, or require consent or waiver
under, or result in the execution or imposition of any lien, charge,
claim, security interest or encumbrance upon any properties or assets of
the Company or its Subsidiaries pursuant to the terms of any indenture,
mortgage, deed of trust, note or other agreement or instru ment of which
such counsel is aware and to which the Company or any of its Subsidiaries
is a party or by which either the Company or any of its Subsidiaries or
any of their properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation of which such
counsel is aware or violate any provision of the charter or by-laws of the
Company or any of its Subsidiaries.
(vi) To the best of such counsel's knowledge, except for
matters specifically described in the Prospectus under the caption
"Business - Pending Legal Proceedings," no default exists, and
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no event has occurred which with notice or lapse of time, or both, would
constitute a default, in the due performance and observance of any term,
covenant or condition by the Company of any indenture, mortgage, deed of
trust, note or any other agreement or instrument to which the Company is a
party or by which it or any of its assets or properties or businesses may
be bound or affected, where the consequences of such default, individually
or in the aggregate, would have a Material Adverse Effect.
(vii) To the best of such counsel's knowledge, except
for matters specifically described in the Prospectus under the caption
"Business - Pending Legal Proceedings," the Company and its Subsidiaries
are not in violation of any term or provision of their respective charters
or by-laws (or similar organization or formation document) or any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation, individually or in
the aggregate, would have a Material Adverse Effect.
(viii) No consent, approval, authorization or order of
any court or governmental agency or regulatory body is required for the
execution, delivery or performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby or thereby, except
such as have been obtained under the Securities Act and such as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the several Underwriters.
(ix) To the best of such counsel's knowledge, except for
matters specifically described in the Prospectus under the caption
"Business - Pending Legal Proceedings," there is no litigation or
governmental or other proceeding or investigation, before any court or
before or by any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the Company which would
have a Material Adverse Effect.
(x) The statements in the Prospectus under the captions
"Business - Collaborations and Licensing Agreements," "- Other
Collaborations and License Agreements," "- Government Regulations" and "-
Pending Legal Proceedings," "Description of Capital Stock," "Management,"
"Certain Transactions," and "Shares
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Eligible for Future Sale," insofar as such statements constitute a summary
of documents referred to therein or matters of law, are fair summaries in
all material respects and accurately present the information called for
with respect to such documents and matters. Accurate copies of all
contracts and other documents required to be filed as exhibits to, or
described in, the Registration Statement have been so filed with the
Commission or are fairly described in the Registration Statement, as the
case may be.
(xi) The Registration Statement, all Prelimi nary
Prospectuses and the Prospectus and each amendment or supple ment thereto
(except for the financial statements and schedules and other financial and
statistical data included therein, as to which such counsel expresses no
opinion) comply as to form in all material respects with the requirements
of the Securities Act and the Rules.
(xii) The Registration Statement is effective under the
Securities Act, and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
threatened, pending or contemplated. Any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) under the Securities
Act has been made in the manner and within the time period required by
such Rule 424(b).
(xiii)The capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus
under the caption "Description of Capital Stock."
(xiv) The Company is not an "investment company" or an
entity controlled by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
(xv) All offers and sales of capital stock of the
Company prior to the date hereof were at all relevant times duly
registered or exempt from the registration requirements of the Securities
Act and were duly registered or subject to an available exemption from the
registration requirements of the applicable state securities or Blue Sky
laws.
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(xvi) Other than Novartis AG, no holder of any security
of the Company has the right to have any security owned by such holder
included in the Registration Statement or to demand registration of any
security owned by such holder during the period ending 180 days after the
date of this Agreement, which rights have not been waived.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus as they related to the matters
set forth in the foregoing opinion were discussed. While such counsel has not
undertaken to independently verify and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing, no facts have come to the attention of
such counsel with respect to the matters set forth in the foregoing opinion
which lead such counsel to believe that the Registration Statement at the time
it became effective (except with respect to the financial statements and notes
and schedules thereto and other financial data, as to which such counsel need
express no belief) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial statements, notes and
schedules thereto and other financial data, as to which such counsel need make
no statement) on the date thereof and the date of such opinion contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. Such counsel shall further state
that the Shares have been approved for quotation on the Nasdaq National Market.
Such opinion shall be limited to the General Corporation Law of the
State of Delaware, the laws of the State of Texas and the federal laws of the
United States of America. In rendering such opinion, counsel for the Company may
rely (i) as to matters of fact upon the representations of officers of the
Company contained in any certificate delivered to such counsel and certificates
of public officials, which certificates shall be attached to or delivered with
such opinion and (ii) as to matters governed by the jurisdiction or laws of
states other than Texas or Delaware or the federal laws of the United States of
America, on local counsel in such jurisdiction.
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(g) The Representatives shall have received on each Closing
Date from Chamberlain, Hrdlicka, White, Williams & Martin, patent counsel for
the Company, an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) To the best of such counsel's knowledge, the
information in the Prospectus under "Risk Factors - We depend on our
patents and proprietary rights. The validity, enforceability and
commercial value of these rights are highly uncertain," "Business -
Collaboration and Licensing Agreements," "Business - Other Collabora tions
and License Agreements," and "Business - Patents and Proprietary Rights,"
to the extent that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions, has been reviewed
by such counsel and is correct in all material respects and fairly and
correctly presents the information called for with respect thereto.
(ii) To the best of such counsel's knowledge, other than
as specifically described in the Prospectus under the caption "Business -
Pending Legal Proceedings," there are no pending or threatened legal or
governmental proceedings, nor allegations on the part of any person of
infringement, relating to patent rights, trade secrets, trademarks,
service marks, copyrights or other proprietary information or know-how of
the Company and its Subsidiaries the unfavorable outcome of which could
reasonably be expected to have a Material Adverse Effect on the Company.
(iii) To the best of such counsel's knowledge, the
Certificate of Patent issued by the United States Patent and Trade mark
Office ("PTO") for each of the patents listed on Schedule "A" to such
opinion (the "Patents") reflect that the Company is the owner of the
Patents, and the Company holds an assignment for each of the applica tions
listed on Schedule "B" to such opinion (the "Applications"), which has
been filed with the PTO, and no other assignments concerning the Patents
or the Applications are reflected in the records of the PTO, except for
those Patents and Applications co-assigned to the Company and Novartis
Pharma, AG. To the best of such counsel's knowledge, there are no asserted
claims of any persons relating to the ownership of any of the Patents or
Applications, and there are no liens that have been filed against any of
the Patents.
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(iv) To the best of such counsel's knowledge, the
Company is listed in the records of the appropriate foreign offices as the
holder of record of the foreign patents listed on Schedule "C" to such
opinion (the "Foreign Patents") and each of the applications listed on
Schedule "D" to such opinion (the "Foreign Applications"), except for
those Foreign Patents and Foreign Applications co-assigned to the Company
and Novartis Pharma, AG. Such counsel knows of no claims of third parties
to any ownership interest or lien with respect to the Foreign Patents or
Foreign Applications.
(v) To the best of such counsel's knowledge and assuming
that the controlling laws are identical to the laws of the State of Texas,
the licenses of the Company and its Subsidiaries to patents and
applications attached hereto as Schedule "E," whether United States or
foreign, are duly executed, validly binding and enforceable in accordance
with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating
to or affecting enforcement of creditors' rights generally or by general
equitable principles, and except to the extent that such unenforceability
would not be reasonably expected to have a Material Adverse Effect on the
Company, and, to such counsel's knowledge, neither the Company nor any
Subsidiary is in default (declared or undeclared) of any material
provision of such licenses that could reasonably be expected to have a
Material Adverse Effect on the Company.
(vi) To the best of such counsel's knowledge, the
Company and its Subsidiaries take security measures reasonably adequate to
assert trade secret protection in its non-patented technology, except to
the extent that such failure would not reasonably be expected to have a
Material Adverse Effect on the Company.
(vii) The form of agreement executed by the Company's
and its Subsidiaries' employees, consultants and other advisors respecting
trade secrets, confidentiality or other intellectual rights is valid,
binding and enforceable in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting
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enforcement of creditors' rights generally or by general equitable
principles.
(viii)Nothing has come to such counsel's attention that
leads such counsel to believe that any of the Company and its
Subsidiaries' trademark applications filed with the PTO will not eventuate
in registered trademarks, or that any trademark registrations issued in
respect of any such applications will not be valid or will not afford the
Company or its Subsidiaries reasonable trademark protection relative to
the subject matter thereof.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus as they related to the matters
set forth in the foregoing opinion were discussed. While such counsel has not
undertaken to independently verify and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing, no facts have come to the attention of
such counsel with respect to the matters set forth in the foregoing opinion
which lead such counsel to believe that the Registration Statement at the time
it became effective (except with respect to the financial statements and notes
and schedules thereto and other financial data, as to which such counsel need
express no belief) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial statements, notes and
schedules thereto and other financial data, as to which such counsel need make
no statement) on the date thereof and the date of such opinion contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(h) The Representatives shall have received on each Closing
Date from Thomason, Moser & Patterson, LLP, special patent counsel for the
Company, an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) To the best of such counsel's knowledge, the Patents
and Foreign Patents are valid and enforceable, and there are
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<PAGE>
no material defects of form in the preparation or filing of any of the
Applications or Foreign Applications. To the best of such counsel's
knowledge, the Applications and Foreign Applications are being diligently
prosecuted. Such counsel has no knowledge of any reason why any patent to
be issued as a result of any Application or Foreign Application would not
be valid and enforceable or would not afford the Company useful patent
protection with respect thereto.
(ii) Such counsel has no actual knowledge that either
the Company or any of its Subsidiaries is infringing or otherwise
violating any patents, trade secrets, trademarks, service marks, copy
rights or other proprietary information or know-how of any person or that
any person is infringing or otherwise violating any of the Com pany's or
its Subsidiaries' patents, trade secrets, trademarks, service marks,
copyrights or other proprietary information or know-how of the Company or
its Subsidiaries in a way in which could materially affect the use thereof
by the Company or its Subsidiaries.
(iii) To the best of such counsel's knowledge, the
Company and its Subsidiaries own or possess sufficient licenses or other
rights to use the technology covered by patents or trade secrets, and to
use the trademarks, service marks or other proprietary informa tion or
know-how necessary to conduct the business now being or proposed to be
conducted by the Company and its Subsidiaries as described in the
Prospectus.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus as they related to the matters
set forth in the foregoing opinion were discussed. While such counsel has not
undertaken to independently verify and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing, no facts have come to the attention of
such counsel with respect to the matters set forth in the foregoing opinion
which lead such counsel to believe that the Registration Statement at the time
it became effective (except with respect to the financial statements and notes
and schedules thereto and other financial data, as to which such counsel need
express not belief) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated
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<PAGE>
therein or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements, notes and schedules thereto and other financial data, as to which
such counsel need make no statement) on the date thereof and the date of such
opinion contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(i) The Representatives shall have received on each Closing
Date from Eric Mirabel, Esq., Vice President of Intellectual Property for the
Company, an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect that:
(i) To the best of such counsel's knowledge, neither the
Company nor any of its Subsidiaries is infringing or otherwise violating
any patents, trade secrets, trademarks, service marks, copyrights or other
proprietary information or know-how of any persons and, to such counsel's
knowledge, no person is infringing or otherwise violating any of the
Company's or its Subsidiaries' patents, trade secrets, trademarks, service
marks, copyrights or other proprietary information or know-how.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus as they related to the matters
set forth in the foregoing opinion were discussed. While such counsel has not
undertaken to independently verify and does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as specified in the foregoing
opinion), on the basis of the foregoing, no facts have come to the attention of
such counsel with respect to the matters set forth in the foregoing opinion
which lead such counsel to believe that the Registration Statement at the time
it became effective (except with respect to the financial statements and notes
and schedules thereto and other financial data, as to which such counsel need
express no belief) contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial statements, notes and
schedules thereto and other financial data, as to which such counsel need make
no statement) on the date thereof and the date of such opinion contained any
29
<PAGE>
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(j) All proceedings taken in connection with the sale of the
Firm Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives, and their counsel and
the Underwriters shall have received from Skadden, Arps, Slate, Meagher & Flom
(Illinois) a favorable opinion, addressed to the Representatives and dated such
Closing Date, with respect to the Shares, the Registration Statement and the
Prospectus, and such other related matters, as the Representatives may
reasonably request, and the Company shall have furnished to Skadden, Arps,
Slate, Meagher & Flom (Illinois) such documents as they may reasonably request
for the purpose of enabling them to pass upon such matters.
(k) The Representatives shall have received copies of the
Lock-up Agreements executed by each entity or person described in Section 4(n).
(l) The Company shall have furnished or caused to be furnished
to the Representatives such further certificates or documents as the
Representatives shall have reasonably requested.
6. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees as follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. The Company shall prepare the Prospectus in a form approved by
the Representatives and file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than the Commission's close of business on
the second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the
Representatives in writing (i) when the Registration Statement and any
amendment thereto shall have become effective, (ii) of the receipt of any
comments from the Commission or of any request by the Commission for any
amendment of the Registration Statement or the Prospectus or for
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any additional information, (iii) of the prevention or suspension of the
use of any Preliminary Prospectus or the Prospectus or of the issuance by
the Commission of any stop order suspending the effective ness of the
Registration Statement or the suspension of qualification of the Shares
for offering or sale in any jurisdiction or the institution or threatening
of any proceeding for that purpose, and (iv) of the receipt by the Company
of any notification with respect to the suspension of the qualification of
the Shares for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose. The Company shall give notice to the
Representatives of its intent to file any amendment of the Registration
Statement or supplement to the Prospectus and the Company shall not file
any such amendment or supplement unless the Company has furnished the
Representatives a copy for its review prior to filing and shall not file
any such proposed amendment or supplement to which the Representatives
reasonably object. The Company shall use its best efforts to prevent the
issuance of any such stop order or order suspending the qualification or
exemption of the Shares under any state securities or Blue Sky laws and,
if issued, to obtain as soon as possible the withdrawal thereof.
(iii) The Company shall promptly advise the
Representatives in writing if, at any time when a prospectus relating to
the Shares is required to be delivered under the Securities Act and the
Rules or the Exchange Act, any change, event, or occurrence which could
result in such a change, in the Company's condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company or the happening of any event occurs as a result of which the
Prospectus as then amended or supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it shall be necessary to amend
or supplement the Prospectus to comply with the Securities Act or the
Rules, the Company promptly shall prepare and file with the Commission,
subject to the second sentence of paragraph (ii) of this Section 6(a), an
amendment or supplement which shall correct such statement or omission or
an amendment which shall effect such compliance.
(iv) The Company shall make generally available to its
security holders and to the Representatives as soon as
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practicable, but not later than 45 days after the end of the 12-month
period beginning at the end of the fiscal quarter of the Company during
which the Effective Date occurs (or 90 days if such 12-month period
coincides with the Company's fiscal year), an earnings statement (which
need not be audited) of the Company, covering such 12-month period, which
shall satisfy the provisions of Section 11(a) of the Securities Act or
Rule 158 of the Rules.
(v) The Company shall furnish to the Representatives and
counsel for the Underwriters, without charge, as many signed copies of the
Registration Statement (including all exhibits thereto and amendments
thereof) as the Representatives may reasonably request and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Securities
Act or the Rules, as many copies of any Preliminary Prospectus and the
Prospectus and any amendments thereof and supplements thereto as the
Representatives may reasonably request. If applicable, the copies of the
Registration Statement and Prospectus and each amendment and supplement
thereto furnished to the Under writers will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(vi) During the period of five years hereafter, the
Company will furnish the Representatives (i) as soon as available, a copy
of each report of the Company mailed to stockholders or filed with the
Commission, and (ii) from time to time such other information concerning
the Company as the Representatives may reasonably request.
(vii) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify the Shares for
offer and sale in connection with the offering under the laws of such
jurisdictions as the Representatives may designate and shall maintain such
qualifications in effect so long as required for the distribution of the
Shares; provided, however, that the Company shall not be required in
connection therewith, as a condition thereof, to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction or subject itself to taxation as doing business in any
jurisdiction.
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(viii) The Company, during the period when the
Prospectus is required to be delivered under the Securities Act and the
Rules or the Exchange Act, will file all documents required to be filed
with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act
within the time periods required by the Exchange Act and the regulations
promulgated thereunder.
(ix) Except as set forth on Schedule II hereto, without
the prior written consent of CIBC World Markets Corp., for a period of 180
days after the date of the Prospectus, the Company and each of its
individual directors and executive officers shall not issue, sell or
register with the Commission (other than on Form S-8 or on any successor
form), or otherwise dispose of, directly or indirectly, any equity
securities of the Company (or any securities convertible into, exercisable
for or exchangeable for equity securities of the Company), except for the
issuance of the Shares pursuant to the Registration Statement and the
issuance of shares pursuant to the Company's existing stock option plans
as described in the Registration Statement and the Prospectus. In the
event that during this period, (i) any shares are issued pursuant to the
Company's existing stock option plans that are exercis able during such
180 day period or (ii) any registration is effected on Form S-8 or on any
successor form relating to shares that are exercisable during such 180
period, the Company shall obtain the written agreement of such grantee or
purchaser or holder of such registered securities that, for a period of
180 days after the date of the Prospectus, such person will not, without
the prior written consent of CIBC World Markets Corp., offer for sale,
sell, distribute, grant any option for the sale of, or otherwise dispose
of, directly or indirectly, or exercise any registration rights with
respect to, any shares of Common Stock (or any securities convertible
into, exercisable for, or exchangeable for any shares of Common Stock)
owned by such person.
(x) On or before completion of this offering, the
Company shall make all filings required under applicable securities laws
and by the Nasdaq National Market (including any required registration
under the Exchange Act).
(xi) The Company has furnished or will furnish to the
Representatives the Lock-up Agreements, in form and substance
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satisfactory to the Representatives, signed by each of its current
officers and directors and each of its stockholders (except for certain
stockholders that own individually less than 1% and in the aggregate less
than 5% of the Company's Common Stock) designated by the Representatives.
(xii) For a period of 180 days from the date hereof, the
Company will not waive, modify or amend or otherwise release Novartis AG
from its obligations under the sale restrictions contained in Section 5 of
the Stock Purchase Agreement, dated as of May 11, 1990, by and between the
Company and Novartis AG, without the prior written consent of CIBC World
Markets Corp.
(xiii) The Company will supply the Underwrit ers with
copies of all correspondence to and from, and all documents issued to and
by, the Commission in connection with the registration of the Shares under
the Securities Act.
(xiv) Prior to the Closing Date, the Company shall
furnish to the Underwriters, as soon as they have been prepared, copies of
any unaudited interim consolidated financial statements of the Company and
its subsidiaries, for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(xv) Prior to the Closing Date, the Company will issue
no press release or other communications directly or indirectly and hold
no press conference with respect to the Company or any of its
Subsidiaries, the condition, financial or otherwise, or the earnings,
business affairs or business prospects of any of them, or the offering of
the Shares without the prior written consent of the Representatives unless
in the judgment of the Company and its counsel, and after notification to
the Representatives, such press release or communication is required by
law.
(xvi) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of Proceeds" in
the Prospectus.
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(xvii) The Company has not taken, nor will it take,
directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipula tion of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(xviii) The Company will use its best efforts to
maintain the quotation of the Common Stock (including the Shares) on the
Nasdaq National Market and will file with the Nasdaq National Market all
documents and notices required by the Nasdaq National Market of companies
that have shares that are traded in the over-the- counter market and
quotations for which are reported by the Nasdaq National Market.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to: (i) the preparation,
printing, filing and distribution of the Registration Statement including all
exhibits thereto, each Preliminary Prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and the
printing, filing and distribution of this Agreement; (ii) the preparation and
delivery of certificates for the Shares to the Underwriters; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
6(a)(vi), if any, including the reasonable fees and disbursements of counsel for
the Underwriters in connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs of
shipping and mailing) to the Representatives and to the Underwriters of copies
of each Preliminary Prospectus, the Prospectus and all amendments or supplements
to the Prospectus, and of the several documents required by this Section to be
so furnished, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom Shares
may be sold; (v) the filing fees of the NASD in connection with its review of
the terms of the public offering and reasonable fees and disbursements of
counsel for the Underwriters in connection with such review; (vi) inclusion of
the Shares for quotation on the Nasdaq National Market; and (vii) all transfer
taxes, if any, with respect to the sale and delivery of the Shares by the
Company to the Underwriters. Subject to the provisions of Section 9, the
Underwriters agree to pay, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and
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expenses incident to the performance of the obligations of the Underwriters
under this Agreement not payable by the Company pursuant to the preceding
sentence, including, without limitation, the fees and disbursements of counsel
for the Underwrit ers.
7. INDEMNIFICATION.
(a) The Company, agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or several
(including any reasonable investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other Federal or state law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment thereof or supplement
thereto, or any omission or alleged omission to state therein or material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; (iii) any
untrue statement or alleged untrue statement of a material fact contained in any
Blue Sky application or other information or other documents executed by the
Company filed in any state or other jurisdiction to qualify any or all of the
Shares under the securities laws thereof (any such application, document or
information being hereinafter referred to as a "Blue Sky Application"); (iv) in
whole or in part, any breach of the representations and warranties set forth in
Section 4 hereof; or (v) in whole or in part upon any failure of the Company to
perform any of its obligations hereunder or under law; provided, however, that
such indemnity shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) on account of any losses, claims, damages or
liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue statement or
omission was made in such Preliminary Prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement thereto, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representa tives on behalf of any Underwriter expressly for use therein. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
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(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act, each director of the Company, and each officer of the
Company who signs the Registration Statement, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only insofar as
such losses, claims, damages or liabilities arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which was
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, contained in (i) the
concession and reallowance figures appearing under the caption "Underwriting"
and (ii) the stabilization information contained under the caption
"Underwriting" in the Prospectus and any Preliminary Prospectus; provided,
however, that the obligation of each Underwriter to indemnify the Company
(including any controlling person, director or officer thereof) shall be limited
to the net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such action,
suit or proceeding, enclosing a copy of all papers served. No indemnification
provided for in Section 7(a) or 7(b) shall be available to any party who shall
fail to give notice as provided in this Section 7(c) if the party to whom notice
was not given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice but the omission
so to notify such indemnifying party of any such action, suit or proceeding
shall not relieve it from any liability that it may have to any indemnified
party for contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent that
it shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnify ing party to such
indemnified party of its election so to assume the defense thereof and the
approval by the indemnified party of such counsel, the indemnifying party shall
not be liable to such indemnified party for any legal or other expenses, except
as provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the defense
thereof. The indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the employment of
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counsel by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have been advised by
counsel that there may be one or more legal defenses available to it which are
different from or in addition to those available to the indemnifying party (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its written
consent, which consent shall not be unreasonably withheld or delayed.
8. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 7(a) or 7(b) is due in accordance with its terms but for any reason is
held to be unavailable to or insufficient to hold harmless an indemnified party
under Section 7(a) or 7(b), then each indemnifying party shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled hereunder
to contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company or
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
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it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter (except
as may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder; and (ii) the Company shall be liable
and responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Underwriter, and each person, if any, who controls the Company within
the meaning of the Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) in the
immediately preceding sentence of this Section 8. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated with respect to the
Shares to be purchased on a Closing Date by the Representatives by notifying the
Company at any time
(a) in the absolute discretion of the Representatives at or
before any Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in the
opinion of the Representa tives will in the future materially disrupt, the
securities markets; (ii) if there has occurred any new outbreak or material
escalation of hostilities or other calamity or crisis the effect of which on the
financial markets of the United States is such as to make
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<PAGE>
it, in the judgment of the Representatives, inadvisable to proceed with the
offering; (iii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to make it,
in the judgment of the Representa tives, inadvisable or impracticable to market
the Shares; (iv) if trading in the Shares has been suspended by the Commission
or trading generally on the New York Stock Exchange, Inc., on the American Stock
Exchange, Inc. or the Nasdaq National Market has been suspended or limited, or
minimum or maximum ranges for prices for securities shall have been fixed, or
maximum ranges for prices for securities have been required, by said exchanges
or by order of the Commission, the NASD, or any other governmen tal or
regulatory authority; or (v) if a banking moratorium has been declared by any
state or Federal authority; or (vi) if, in the judgment of the Representatives,
there has occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as required by
this Agreement.
If this Agreement is terminated pursuant to any of its provisions,
the Company shall not be under any liability to any Underwriter, and no
Underwriter shall be under any liability to the Company, except that (y) if this
Agreement is terminated by the Representatives or the Underwriters because of
any failure, refusal or inability on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, the Company will
reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in contempla
tion of performing their obligations hereunder and (z) no Underwriter who shall
have failed or refused to purchase the Shares agreed to be purchased by it under
this Agreement, without some reason sufficient hereunder to justify cancellation
or termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set
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forth in this Agreement. If no such arrangements have been made by the close of
business on the business day following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then each of
the nondefaulting Underwriters shall be obligated to purchase such Shares on the
terms herein set forth in proportion to their respective obligations hereunder;
provided, that in no event shall the maximum number of Shares that any
Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant
to this Section 10 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, then the Company
shall be entitled to one additional business day within which it may, but is not
obligated to, find one or more substitute underwriters reasonably satisfactory
to the Representatives to purchase such Shares upon the terms set forth in this
Agreement.
In any such case, either the Representatives or the Company shall
have the right to postpone the applicable Closing Date for a period of not more
than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(b),
7, 8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. MISCELLANEOUS. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the
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Underwriters set forth in or made pursuant to this Agreement shall remain in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or the Company or any of the officers, directors or controlling
persons referred to in Sections 7 and 8 hereof, and shall survive delivery of
and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and
mailed or delivered or by telephone or telegraph if subsequently confirmed in
writing, (a) if to the Representatives, c/o CIBC World Markets Corp., One World
Financial Center, New York, New York 10281 Attention: [Mark Kaplan], with a copy
to Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 West Wacker Drive, Suite
2100, Chicago, Illinois 60606, Attention: Rodd M. Schreiber and (b) if to the
Company, to its agent for service as such agent's address appears on the cover
page of the Registration Statement with a copy to Chamberlain, Hrdlicka, White,
Williams & Martin, 1200 Smith Street, Suite 1400, Houston, Texas 77002-4310,
Attention: Wilburn O. McDonald, Jr.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflict of
laws.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
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Please confirm that the foregoing correctly sets forth the agreement
among us.
Very truly yours,
TANOX, INC.
By:___________________________
Title:________________________
Confirmed:
CIBC WORLD MARKETS CORP.
_________________________________
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed
hereto.
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By: CIBC WORLD MARKETS CORP.
By: __________________________
Title: _______________________
By: ROBERTSON STEPHENS INC.
By: __________________________
Title: _______________________
By: WARBURG DILLON READ LLC.
By: __________________________
Title: _______________________
By: ADAMS, HARKNESS & HILL, INC.
By: __________________________
Title: _______________________
By: KBC SECURITIES INC.
By: __________________________
Title: _______________________
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SCHEDULE I
NUMBER OF
FIRM SHARES TO
NAME BE PURCHASED
CIBC World Markets Corp.
Robertson Stephens Inc.
Warburg Dillon Read LLC
Adams, Harkness & Hill, Inc.
KBC Securities Inc.
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SCHEDULE II
Stockholders with Modified Lock-ups
[ADD LANGUAGE EXPLAINING SPECIFIC SHARES OR TRANSACTIONS EXCLUDED FROM LOCK-UP
IN EACH CASE]
David Anderson
Biovest C.V.A.
John Blickenstaff
Credimo N.V.
Mark de Boer
Exinde West N.V.
HBK-Spaarbank N.V.
KBC Pensioenfunds V.Z.W.
KBC Equity Fund N.V. - Biotech
KBC Equity Fund N.V. - New Shares
KBC Equity Fund N.V. - Pharma
Koceram N.V.
Mercator & Noordstar N.V.
Tosalu N.V.
TrustCapital Technology N.V.
Quest for Growth N.V.
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EXHIBIT 5.1
[Chamberlain, Hrdlicka, White, Williams & Martin letterhead]
April 6, 2000
Tanox, Inc.
10301 Stella Link
Houston, Texas 77025
Ladies and Gentlemen:
We are rendering this opinion in connection with the proposed offering of
up to an aggregate 7,000,000 shares of common stock, $0.01 par value (the
"Common Stock"), of Tanox, Inc., a Delaware corporation (the "Company"),
described in the registration statement on Form S-1 (the "Registration
Statement") filed by the Company with the U.S. Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
The Common Stock will be offered and sold under the terms and subject to the
conditions set forth in a written underwriting agreement by and between the
Company and the persons named as underwriters therein (the "Underwriting
Agreement") in the manner described in the Registration Statement.
We have acted as the Company's counsel in connection with preparing the
Registration Statement. We have examined the Registration Statement, the
Company's Certificate of Incorporation and Bylaws, each as amended to date, the
corporate proceedings with respect to offering the Common Stock and such other
documents and instruments as we have deemed relevant or appropriate to express
the opinions stated in this letter.
We have assumed (i) the authenticity and completeness of all records,
certificates and other instruments submitted to us as originals, (ii) the
conformity to original documents of all records, certificates and other
instruments submitted to us as copies, (iii) the authenticity and completeness
of the originals of those records, certificates and other instruments submitted
to us as copies and (iv) the correctness of all statements of fact contained in
all records, certificates and other instruments that we have examined.
Based upon the foregoing, and having regard for such legal considerations
as we have deemed relevant, we are of the opinion that the Common Stock has been
duly authorized and when duly executed by the Company's proper officers and
issued and sold under the terms of the Underwriting Agreement against payment of
the consideration therefor, will be validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to Delaware General Corporation Law and
the federal laws of the United States.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus included as part of the Registration Statement. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
/s/ Chamberlain, Hrdlicka, White,
Williams & Martin
EXHIBIT 10.16
SETTLEMENT AND CROSS-LICENSING AGREEMENT
This Settlement and Cross-Licensing Agreement ("Agreement") is entered into
effective as of July 8, 1996 ("Effective Date") between Tanox Biosystems, Inc.,
a Texas corporation, with its principal offices at 10301 Stella Link, Houston,
Texas 77025 ("Tanox") and Genentech, Inc., a Delaware corporation, with its
principal offices at 460 Point San Bruno Boulevard, South San Francisco,
California 94080-4990 and Genentech International Limited, a Bermuda
corporation, with its principal offices at Reid House, 31 Church Street,
Hamilton HM 12 Bermuda (the term "Genentech" as used herein shall mean
Genentech, Inc., and/or Genentech International Limited, as appropriate).
Tanox and Genentech, Inc. are parties to a lawsuit, Civil Action No.
H-94-0189, in the United States District Court for the Southern District of
Texas, Houston Division, styled TANOX BIOSYSTEMS, INC. V. GENENTECH, INC. ET AL.
resulting from the consolidation of Civil Action No. H-94-0239, styled TANOX
BIOSYSTEMS, INC. V. GENENTECH, INC., ET AL. with Civil Action No. H-94-0189,
styled GENENTECH, INC. V. TANOX BIOSYSTEMS, INC. (the "Lawsuit"), which they
desire to settle.
Tanox and Genentech, together with Ciba-Geigy, Ltd. ("Ciba"), have also
reached an agreement in principle under which Genentech and Tanox and Ciba would
merge their respective anti-IgE antibody projects and such agreement has been
memorialized in an Outline of Terms (a copy of which is attached hereto as
Exhibit 1), which Tanox, Genentech and Ciba are executing to be effective
simultaneously with this Agreement and which provides for the development and
commercialization of one or more anti-IgE products (the "Multiparty
Transaction").
In addition to their execution of the Outline of Terms, Tanox and Genentech
wish to enter into this agreement to: (i) release and indemnify each other from
and settle all claims which each may have against the other in connection with
the Lawsuit; (ii) license certain patent rights which each of the Parties has
and desires to obtain from the other; and (iii) reflect all other agreements
between the Parties relating to the settlement of the Lawsuit, the Multiparty
Transaction, and the licensing of such patents by each Party to the other.
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Therefore, Tanox and Genentech agree as follows:
1.0 DEFINITIONS. In addition to the words otherwise used as defined terms
throughout this Agreement, the words set forth below will have the meanings
indicated when used in this Agreement.
1.1"AFFILIATE" shall mean (i) an organization fifty (50%) percent or more
of the voting stock of which is owned and/or controlled directly or indirectly
by a Party; (ii) an organization which directly or indirectly owns and/or
controls fifty percent (50%) or more of the voting stock of a Party; (iii) an
organization which is directly or indirectly under common control of a Party
through common share holdings; or (iv) an organization as to which a Party can
demonstrate that the operation and management of such organization is under the
control, directly or indirectly, of the Party.
1.2"AGGREGATE ANNUAL NET SALES" shall mean the aggregate of Net Sales
each calendar year for all Genentech Licensed Products.
1.3"ALL CLAIMS" shall mean all existing and future claims, demands, and
causes of action, known or unknown, pending or threatened, for all existing and
future damages and remedies (i) that arise out of or are in any way related to
the Incident and (ii) that were brought, could have been brought, or were sought
to be brought in the Lawsuit. Under this definition, "All Claims" includes but
is not limited to all claims, demands, lawsuits, debts, accounts, covenants,
liens, encumbrances, agreements, actions, counterclaims, cross-actions,
liabilities, obligations, losses, attorney's fees, costs, expenses, remedies,
and causes of action of any nature, whether in contract or in tort, or based
upon fraud or misrepresentation, breach of duty or common law, or arising under
2
<PAGE>
or by virtue of any judicial decision, federal, state or foreign statute or
regulation, for past, present, and future damages, property or economic damage,
and for all other losses and damages of any kind, including BUT NOT LIMITED TO
the following: all actual damages; all exemplary and punitive damages; all
penalties of any kind, including WITHOUT LIMITATION any tax liabilities or
penalties; lost profits or goodwill; consequential damages; damages ensuing from
loss of credit; damages ensuing from breach of the covenant or duty of good
faith and fair dealing; damages ensuing from breach of any federal, state, or
foreign antitrust law; damages ensuing from breaches of confidential and
fiduciary duties; damages ensuing from breach of contract; damages ensuing from
actual or constructive fraud; and prejudgment and postjudgment interest, costs,
and attorney's fees.
1.4"ANTI-IQE ANTIBODY(IES)" shall mean an antibody directed against the
immunoglobulin IgE as an antigen, fragments or conjugates of such antibodies,
and other constructs comprising antibodies which are derived from or contain any
of the above-specified components.
1.5"COMBINATION PRODUCT" shall mean any pharmaceutical formulation or
method or system for use in humans which contains (i) an Anti-IgE Antibody and
(ii) at least one other ingredient or substance which is also Therapeutically
Active or a device that enhances application and use of an Anti-IgE Antibody and
is sold as part of a product or system that contains an Anti-IgE Antibody.
"THERAPEUTICALLY ACTIVE" shall mean biologically active but shall not include
diluent, vehicles or specific adjuvants or any other ingredient or substance
which does not have any, or has only incidental, therapeutic properties when
present alone and is included to aid or enhance the activity of an Anti-IgE
Antibody.
1.6"CONSIDERATION" shall mean the value or benefit to each of the
Parties, respectively, of the licenses, royalties, payments and agreements
contained herein and in the Outline of Terms and all other mutual promises,
covenants, agreements, releases, and representations set forth in this
Agreement.
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1.7"CROSS-LICENSE PROVISIONS" shall mean those provisions of this
Agreement set forth in Sections 4.0, 5.0, 6.0 and 7.0.
1.8"FIRST COMMERCIAL SALE" shall mean the date of the first commercial
sale to an independent third party by a Party or its sublicensee of a Licensed
Product in a country following appropriate regulatory approval to sell such
Licensed Product in such country.
1.9"GENENTECH LICENSED PRODUCT" shall mean any pharmaceutical formulation
or product or method or system which contains an Anti-IgE Antibody (excluding
any Anti-IgE Antibody identified and synthesized by Tanox and/or Ciba) and which
is made, used or sold by Genentech or a sublicensee of Genentech hereunder and
which is not a product made, used or sold by Genentech or a sublicensee of
Genentech under the Outline of Terms or Definitive Agreement.
1.10 "GENENTECH NET SALES" shall mean the gross invoiced sales price
charged by Genentech or its sublicensees hereunder for Genentech Licensed
Products in arm's length sales to third parties (excluding sales for clinical
trial purposes), after deduction of the following items, to the extent that such
items were incurred during such calendar quarter with respect to sales of
Genentech Licensed Products hereunder regardless of the calendar quarter in
which such sales were made, are included in the price charged, and do not exceed
reasonable and customary amounts in the market in which such sale occurred:
(i) trade and quantity discounts or rebates;
(ii) credits or allowances given or made for rejection or return of and for
uncollectible amounts on previously sold Genentech Licensed Products or
for retroactive price reductions to distributors holding existing
product inventories to conform to reductions in the price charged for
new purchases of product;
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(iii) any tax or government charge (other than an income tax) levied on the
sale, transportation or delivery of a Genentech Licensed Product and
borne by the seller thereof; and
(iv) any charges for freight or insurance in a CIF (cost, insurance,
freight) sale.
1.11 "GENENTECH PATENTS" shall mean those patents owned in whole or in
part now or in the future by Genentech and those patents to which Genentech has
a license as of the Effective Date or in the future acquires a license and under
which Genentech is free to grant a sublicense to Tanox for a Tanox Licensed
Product, and which contain a Valid Claim covering the manufacture, use or sale
of an Anti-IgE Antibody or a Tanox Licensed Product; provided, however, with
respect to patents to which Genentech is a licensee, Tanox provides notice to
Genentech that it wishes to receive a sublicense and agrees to pay Genentech
such royalties, fees or similar payments that Genentech is obligated to make to
its licensor for the grant of the license or for the manufacture, use or sale of
a Tanox Licensed Product by Tanox or its sublicensee, adjusted as appropriate
for the scope of the sublicense granted.
1.12 "GENENTECH TERRITORY" shall mean every country in the world and the
territories and possessions of each such country, other than South Korea, North
Korea, People's Republic of China, Taiwan, Singapore and Hong Kong.
1.13 "INCIDENT" shall mean the negotiations, beginning in 1989 and ending
in December 1993, between Tanox and Genentech with regard to a potential
collaboration in the identification and development of anti-immunoglobulin E
("anti-IgE") monoclonal antibodies and anti-IgE therapy; the agreements entered
into pursuant to those negotiations, as well as any supplements or amendments to
those agreements ("the
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Collaboration Agreements"), including but not limited to a Confidentiality
Agreement dated (by Tanox) March 29, 1989 and a Biological Material Transfer and
Confidentiality Agreement dated (by Tanox) July 27, 1989; negotiations
concerning the construction and meaning of the Collaboration Agreements; the
performance of the Collaboration Agreements; any interference in the performance
of the Collaboration Agreements; any statements regarding the performance of the
Collaboration Agreements; any acts or events prior to or subsequent to the
negotiation or execution of the Collaboration Agreements that form the basis of
any cause of action alleged in or that could have been alleged in the Lawsuit;
any other matters arising out of the Collaboration Agreements; the use
heretofore by Genentech of information provided by Tanox to Genentech or to any
of Genentech's employees or agents pursuant to the Collaboration Agreements (or
otherwise during the time period of such negotiations 1989 to December 1993);
the solicitation and obtaining of licensing rights heretofore from third parties
in the area of monoclonal antibody research and technology; the research,
development and commercialization of anti-IgE monoclonal antibodies and/or
anti-IgE therapy heretofore; any infringement heretofore of patents rights held
at any time by the Parties to this Agreement regarding recombinant
immunoglobulin preparations and monoclonal antibody identification and
development; and any statements or representations heretofore made by either
Party regarding research, development, and commercialization of anti-IgE
monoclonal antibodies and/or anti-IgE therapy.
1.14 "LICENSED PRODUCT" shall mean either a Genentech Licensed Product or
Tanox Licensed Product, as appropriate.
1.15 "NET SALES" shall mean either Tanox Net Sales or Genentech Net
Sales, as appropriate.
1.16 "OUTLINE OF TERMS" shall mean the agreement between Tanox, Genentech
and Ciba attached hereto as Exhibit 1 which sets forth the basic terms agreed by
such parties with respect to the joint development and commercialization of
Anti-IgE Antibodies and which is intended to be superseded by a definitive
agreement(s) as contemplated by Section 8.2 of the Outline of Terms, which
agreement(s) is referred to as the ("Definitive Agreement").
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1.17 "PARTY" shall mean, when used in the singular, either Tanox or
Genentech, as appropriate, and "PARTIES" shall mean Tanox and Genentech.
1.18 "PERSON" OR "PERSONS" shall include any natural person, as well as
any entity such as a corporation, partnership, proprietorship, or business
association.
1.19 "PIVOTAL CLINICAL TRIAL" shall mean a controlled study in humans of
the efficacy and safety of a Genentech Licensed Product which is prospectively
designed to demonstrate statistically whether that Genentech Licensed Product is
effective for use in a particular indication and is intended to be sufficient,
if successful, (together with other necessary clinical trials) to obtain
approval from the U.S. Food and Drug Administration to sell that Genentech
Licensed Product in the United States. A Pivotal Clinical Trial could include a
Phase II clinical trial appropriately designed to be within this definition
(sometimes referred to as a Phase II/III trial) and would include a Phase III
clinical trial (as such terms are used generally in connection with
identification of clinical trial protocols).
1.20 "PRODUCT LICENSE APPLICATION" shall mean an application, filed with
the U.S. Food and Drug Administration and accepted by that agency for filing,
for the purpose of seeking approval to sell a Genentech Licensed Product in the
United States.
1.21 "TANOX LICENSED PRODUCT" shall mean any pharmaceutical formulation
or product or method or system (i) which contains an Anti-IgE Antibody
identified and synthesized by Tanox and/or Ciba, or (ii) other IgE inhibiting
antibodies within Tanox's MIGIS(R) program, and which, but for the licenses
granted hereunder, would infringe a Valid Claim of a Genentech Patent in the
country in which such formulation, product, method or system is made, used or
sold by Tanox or a sublicensee of Tanox.
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1.22 "TANOX NET SALES" shall mean the gross invoiced sales price charged
by Tanox or its sublicensees hereunder for Tanox Licensed Products in arm's
length sales to third parties (excluding sales for clinical trial purposes),
after deduction of the following items, to the extent that such items were
incurred during such calendar quarter with respect to sales of Tanox Licensed
Products hereunder regardless of the calendar quarter in which such sales were
made, are included in the price charged, and do not exceed reasonable and
customary amounts in the market in which such sale occurred:
(i) trade and quantity discounts or rebates;
(ii) credits or allowances given or made for rejection or return of and for
uncollectible amounts on previously sold Tanox Licensed Products or for
retroactive price reductions to distributors holding existing product
inventories to conform to reductions in the price charged for new
purchases of product;
(iii) any tax or government charge (other than an income tax) levied on the
sale, transportation or delivery of a Tanox Licensed Product and borne
by the seller thereof; and
(iv) any charges for freight or insurance in a CIF (cost, insurance,
freight) sale.
1.23 "TANOX PATENTS" shall mean those patents owned in whole or in part
now or in the future by Tanox and those patents to which Tanox has a license as
of the Effective Date or in the future acquires a license and under which Tanox
is free to grant a sublicense to Genentech for a Genentech Licensed Product, and
which contain a Valid Claim covering the manufacture, use or sale of an Anti-IgE
Antibody or a Genentech Licensed Product; provided, however, with respect to
patents to which Tanox is a licensee, Genentech provides notice to Tanox that it
wishes to receive a sublicense and agrees to pay Tanox such royalties, fees or
similar payments that Tanox is obligated to make to its licensor for the grant
of the license or for the manufacture, use or sale of a Genentech Licensed
Product by Genentech or its sublicensee, adjusted as appropriate for the scope
of the sublicense granted.
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1.24 "VALID CLAIM" shall mean a subsisting claim of an issued and
unexpired patent that has not been held invalid, unpatentable or unenforceable
by a decision of a governmental body or count of competent jurisdiction, that is
unappealable or unappealed within the time allowed for appeal, and that has not
been rendered unenforceable through disclaimer.
2.0 MUTUAL RELEASE, INDEMNIFICATION AND SETTLEMENT AGREEMENT
2.1 DISMISSAL OF LAWSUIT. Tanox and Genentech agree as follows:
(i) Tanox and Genentech will each file motions to dismiss their
respective claims in the Lawsuit against each other, with
prejudice; and
(ii) each of the Parties shall bear its own costs of court
incurred.
2.2 RELEASE OF GENENTECH. For the Consideration, including the
agreements set forth in this Section 2, Tanox hereby RELEASES, ACQUITS, and
FOREVER DISCHARGES Genentech and (i) all of its present or former agents,
employees, officers, directors, shareholders, partners, joint venturers, and
attorneys; (ii) all companies, partnerships, joint ventures, or firms affiliated
with or subsidiary to, Genentech; (iii) its predecessors, successors, and
assigns; (iv) all other persons, partners, joint venturers, firms, partnerships,
joint ventures, and corporations for whose conduct Genentech may be liable; and
(v) all of its insurers from All Claims that have accrued or that may ever
accrue to Tanox or any person or persons now or hereafter claiming by, through,
or under Tanox.
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2.3 RELEASE OF TANOX. For the Consideration, including the agreements
set forth in this Section 2, Genentech RELEASES, ACQUITS, and FOREVER DISCHARGES
Tanox and (i) all of its present or former agents, employees, officers,
directors, shareholders, partners, joint venturers, and attorneys; (ii) all
companies, partnerships, joint ventures, or firms affiliated with or subsidiary
to Tanox; (iii) its predecessors, successors, and assigns; (iv) all other
persons, partners, joint venturers, firms, partnerships, joint ventures, and
corporations for whose conduct Tanox may be liable; and (v) all of its insurers
from All Claims that have accrued or that may ever accrue to Genentech or any
person or persons now or hereafter claiming by, through, or under Genentech.
2.4 NO ADMISSION OF LIABILITY. The payment of any of the
Consideration is not an admission of liability and may not be so construed.
Genentech vigorously denies the position taken by Tanox in the Lawsuit and Tanox
acknowledges the highly disputed nature of its claims in the Lawsuit. Tanox
vigorously denies the position taken by Genentech in the Lawsuit, and Genentech
acknowledges the highly disputed nature of its claims in the Lawsuit. Each Party
acknowledges that this agreement is made as a compromise to avoid further
expense and to terminate for all time the controversies which were asserted,
could have been asserted, or were sought to be asserted in the Lawsuit.
2.5 INDEMNIFICATION BY TANOX. Tanox agrees to INDEMNIFY and to DEFEND
and to HOLD HARMLESS Genentech and (i) all of its present or former agents,
employees, officers, directors, shareholders, partners, joint venturers, and
attorneys; (ii) all companies, partnerships, joint ventures, or firms affiliated
with or subsidiary to, Genentech; (iii) its predecessors, successors, and
assigns; (iv) all other persons, partners, joint venturers, firms, partnerships,
joint ventures, and corporations for whose conduct Genentech may be liable; and
(v) all of its insurers from All Claims, together with all costs, expenses, and
legal fees, that may be asserted against Genentech by any person, entity, firm,
or corporation claiming by, through, or under Tanox, that arise out of the
incident and/or the Lawsuit.
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2.6 INDEMNIFICATION BY GENENTECH. Genentech agrees to INDEMNIFY and
to DEFEND and to HOLD HARMLESS Tanox and (i) all of its present or former
agents, employee, officers, directors, shareholders, partners, joint venturers,
and attorneys; (ii) all companies, partnerships, joint ventures, or firms
affiliated with or subsidiary to Tanox; (iii) its predecessors, successors, and
assigns; (iv) all other persons, partners, joint venturers, firms, partnerships
joint ventures, and corporations for whose conduct Tanox may be liable; and (v)
all of its insurers from All Claims, together with all costs, expenses, and
legal fees, that may be asserted against Tanox by any person, entity, firm, or
corporation claiming by, through, or under Genentech, that arise out of the
Incident and/or the Lawsuit.
2.7 WITHDRAWAL OF OPPOSITION. Genentech agrees that, simultaneously
with the filing of motions of dismissal under Section 2.1 above, it will file
all documents necessary to withdraw its pending opposition in the European
Patent Office to Tanox's patent No. EP-B-407392 relating to Anti-IgE Antibodies.
2.8 EXEMPTION FROM PROTECTIVE ORDER. Notwithstanding the terms of the
protective order agreed in connection with the Lawsuit, the Parties agree that,
except for any persons reasonably excluded by notice from a Party to the other
prior to the execution of this Agreement, the employees, experts and consultants
of a Party having access to information during the course of the Lawsuit will
not be prohibited from participating in ongoing development and
commercialization activities associated with the Anti-IgE Antibody projects of
such Party and/or development and commercialization activities of the Parties
pursuant to the Outline of Terms or Definitive Agreement.
2.9 REPRESENTATIONS OF TANOX. Tanox makes the representations and
warranties to Genentech set forth in Exhibit 2.
2.10 REPRESENTATIONS OF GENENTECH. Genentech makes the
representations and warranties to Tanox set forth in Exhibit 3.
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3.0 EFFECTIVENESS OF CROSS-LICENSE PROVISIONS.
3.1 OUTLINE OF TERMS. Simultaneously with the execution of this
Agreement, the Parties are executing the Outline of Terms. The Outline of Terms
and Definitive Agreement, together with that certain Development and Licensing
agreement dated May 11, 1990, between Tanox and Ciba (the "D & L Agreement"),
shall among them govern the development and commercialization of one or more
Anti-IgE Antibodies which have been identified and synthesized by Tanox, Ciba,
or Genentech before July 1, 1996. The Parties also acknowledge that, contingent
on the occurrence of certain events as set forth in Paragraphs 3.2 through 3.5
below, the Cross-License Provisions shall become effective in lieu of or in
addition to the Outline of Terms and Definitive Agreement. Notwithstanding any
representations and warranties in this Agreement to the contrary, the Parties
acknowledge that in the event of a conflict between this Agreement and the
Outline of Terms and Definitive Agreement, the Outline of Terms and Definitive
Agreement shall prevail and that the Parties are aware of Ciba's position (and
expressly disagree with and have advised Ciba of such disagreement) that it is
the exclusive licensee of Tanox Patents for Anti-IgE Antibodies. Each Party
agrees that it shall be solely responsible for any claims, damages (including
costs, expenses, and legal fees), or other liabilities of any nature asserted
against it by Ciba or any third party arising out of or in any way resulting
from the grant by Tanox to Genentech of rights hereunder to the Tanox Patents.
Further, Genentech acknowledges that the Outline of Terms does not limit or
prohibit in any way the exercise by Tanox of its rights under the D & L
Agreement with respect to Tanox Licensed Products, except as expressly stated in
the Outline of Terms or Definitive Agreement. Tanox acknowledges that the
Outline of Terms will not extend its independent rights of parallel product
development under the D & L Agreement to Anti-IgE Antibodies identified and
synthesized by Genentech.
3.2 THIRD PARTY ACTIONS. If the Multiparty Transaction requires
approval from any regulatory or governmental authority or agency in the United
States, the European Union or its member countries, any other country in Europe,
or in Japan, or if
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any governmental authority brings any action, formal or informal, against one or
more of the Parties to the Outline of Terms or Definitive Agreement in an effort
to enjoin, preclude, or prevent the Multiparty Transaction in whole or in part
("Government Action"), then the Parties shall meet and consider, in good faith,
how they should lawfully proceed in response to such event. If the Parties have
been unsuccessful either (i) after exhausting all reasonable possibilities which
do not jeopardize the timely commercialization of a Licensed Product or (ii) by
August 1, 1997, whichever is the last to occur, in obtaining any such approval
in any country where such approval is required, or in resolving the Government
Action, as the case may be, then upon notice by one Party to the other, the
Cross-License Provisions shall immediately become effective within any country
or countries in which any such approval has not been or cannot be obtained or
where any Government Action is being pursued.
3.3 TERMINATION OF MULTIPARTY TRANSACTION. If the Outline of
Terms (or the Definitive Agreement if in effect), is terminated at any time,
then upon notice by either Party to the other the Cross-License Provisions shall
immediately become effective.
3.4 ADDITIONAL PRODUCTS. If either Party should at any time
require a license of the type provided by the other Party under the
Cross-License Provisions for a Licensed Product that such Party may lawfully
develop notwithstanding the Multiparty Transaction, then such Party requiring
the license shall provide notice to the other of such requirement and,
immediately upon such notice, the Cross-License Provisions shall become
effective with respect to such Licensed Product.
3.5 MUTUAL AGREEMENT. At any time after the execution of this
Agreement, if the Parties jointly agree in writing that the Cross-License
Provisions should be implemented, then the Cross-License Provisions shall become
effective as provided in such agreement.
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3.6 CROSS-LICENSE DATE. The Cross-License Provisions shall become
effective immediately upon the date the notice required under Sections 3.2, 3.3,
and 3.4, respectively is given in accordance with Section 13.4 ("Cross-License
Date") and shall be effective for the purpose or purposes specified in any such
notice and to the extent set forth in this Agreement.
4.0 LICENSES TO GENENTECH UNDER TANOX PATENTS.
4.1 GRANT OF LICENSE. Effective commencing upon the Cross-License
Date, Tanox grants to Genentech under all Tanox Patents, on a country-by-country
basis in the Genentech Territory, an exclusive, sublicenseable license to the
extent necessary to make, have made, use, sell, have sold and import Genentech
Licensed Products for the treatment, prophylaxis or diagnosis of any disease or
condition in humans; provided, however, that with respect to Genentech Licensed
Products containing an Anti-IgE Antibody identified and synthesized before June
1, 1997, and/or Tanox Patents issued before June 1, 1999, the foregoing
limitation "to the extent necessary" shall not be applicable.
4.2 ROYALTIES. For the Consideration, including the licenses
granted herein, Genentech shall pay Tanox, on a country-by-country basis, the
following royalties on Net Sales of Genentech Licensed Products by Genentech and
its sublicensees:
(a) for sales in the United States:
(i) a royalty of * of Net Sales of Genentech Licensed Products
covered in the United States by a Valid Claim of a Tanox Patent;
or
(ii) a royalty of * of Net Sales of Genentech Licensed Products
not covered in the United States by a Valid Claim of a Tanox
Patent; and
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(b) for sales in each country in the Genentech Territory by Genentech and
its sublicensees, other than the United States, in which a Genentech
Licensed Product is covered in that country by a Valid Claim of a Tanox
Patent:
(i) a royalty of * of Net Sales of all such Genentech Licensed
Products if the Aggregate Annual Net Sales for all such
countries are * or less; and
(ii) a royalty of * of Net Sales of all such Genentech Licensed
Products if the Aggregate Annual Net Sales for all such
countries are between * and *; and
(iii) a royalty of * of Net Sales of all such Genentech Licensed
Products if the Aggregate Annual Net Sales for all such
countries are greater than *; and
(c) in each country in the Genentech Territory, other than the United
States, where there is no Valid Claim of a Tanox Patent covering a
Genentech Licensed Product, a royalty of * of Net Sales of all such
Genentech Licensed Products.
The foregoing royalties shall be payable in each country until the latter
of (i) a period of ten (10) years from First Commercial Sale of a Genentech
Licensed Product in such country or (ii) the expiration of all Valid Claims of
Tanox Patent(s) in such country which a Genentech Licensed Product sold in such
country would infringe but for the licenses granted herein. At such time as
royalties are no longer payable hereunder in a country, the license granted to
Genentech with respect to such country in Section 4.1 shall thereafter be fully
paid up and royalty-free in perpetuity.
Genentech shall be entitled to deduct from the royalties payable with
respect to any country hereunder, * of the aggregate royalties required to be
paid to a third party(s)
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under license(s) entered into after the Effective Date where such royalties are
paid for the manufacture, use or sale of an Anti-IgE Antibody as part of a
Genentech Licensed Product in such country to avoid infringing a Valid Claim of
such third party's patents; provided, that such deduction in any calendar year
shall in no event exceed * of the royalties otherwise payable to
Tanox in such country for that calendar year, except the United States, and, in
the United States, such deduction shall in no event exceed * of
Genentech's Net Sales in a calendar year if a Valid Claim of a Tanox Patent
covers the Genentech Licensed Products in the United States or *
of Genentech's Net Sales in a calendar year if no Valid Claim of a Tanox Patent
covers the Genentech Licensed Products in the United States. For purposes of
computing the deduction permitted hereunder, the percentage royalty payable to
any such third party with respect to which such deduction is permitted shall not
exceed the usual percentage royalty charged by such third party to others or the
royalty charged to Ciba, whichever may be less.
4.3 TANOX EXCLUSIVE TERRITORIES. Genentech agrees that it will not
manufacture or sell a Genentech Licensed Product or provide a Genentech Licensed
Product for sale or knowingly contribute to or assist in the manufacture or sale
of a Genentech Licensed Product in any country outside the Genentech Territory.
5.0 LICENSES TO TANOX.
5.1 GRANT OF LICENSE. As additional consideration for the granting of
the licenses under Section 4.0 by Tanox, effective commencing upon the
Cross-License Date, Genentech grants to Tanox under all Genentech Patents a
nonexclusive, worldwide, sublicensable license to the extent necessary to make,
have made, use, sell, have sold and import Tanox Licensed Products for the
treatment, prophylaxis or diagnosis of any disease or condition in humans and
animals; provided, however, that with respect to Tanox Licensed Products
containing an Anti-IgE Antibody identified and synthesized before *,
and/or Genentech Patents issued before *, the foregoing limitation
"to the extent necessary" shall not be applicable.
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5.2 ROYALTIES. Tanox will pay Genentech such royalties or other
license-related payments as Genentech is obligated to pay to any third party by
virtue of the manufacture, use or sale hereunder of any Tanox Licensed Product
by Tanox or any sublicensee of Tanox in any country pursuant to Section 5.1
above (excluding any royalties due from Ciba to Genentech or any such third
parties under the Outline of Terms or Definitive Agreement); provided, however,
that such royalties or other license-related payments shall be the only payments
required and shall be comprised of, to the extent applicable, (i) * of Net Sales
for Tanox Licensed Products manufactured by or for Tanox and sold or otherwise
transferred by Tanox under a sublicense pursuant to the * Agreement effective as
of * and Genentech, Inc. (for the purposes of this Agreement, Tanox and
Genentech agree that the royalties that Tanox would otherwise pay to Genentech
for a sublicense under * Agreement, but for the provisions of this Section 5.2,
is *; (ii) * of Net Sales under * Patents as those terms are used in the
agreement effective as of * between Genentech, Inc. and *; and (iii) * of Net
Sales under * Patents as those terms are used in the Agreement effective as of *
between Genentech, Inc. and *. To the best of Genentech's knowledge, there are
no other royalty obligations under licenses granted to Genentech existing as the
Effective Date hereof with respect to chimeric or humanized monoclonal Anti-IgE
Antibodies produced in mammalian cell systems which Tanox would be obligated to
pay pursuant to this Section 5.2. and Genentech warrants that it has not
assigned any patent applications it may have pending relating to Anti-IgE
Antibodies to any third party.
6.0 ACCESS TO LICENSES.
6.1 MUTUAL REPRESENTATIONS. Tanox represents to Genentech that it does
not have knowledge of any restrictions existing as of the Effective Date which
would prevent it from granting licenses to the Tanox Patents as provided under
this agreement. Genentech represents to Tanox that it does not have knowledge of
any restrictions existing
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as of the Effective Date which would prevent it from granting licenses to the
Genentech Patents as provided under this agreement. If any Patents of a Party
which would otherwise be included within the licenses granted herein now or in
the future are not licensable or sublicensable under the respective
Cross-License Provisions of this Agreement because of contractual restrictions
to which such Patents are subject, then such Party shall take reasonable actions
in an effort to permit the other Party to secure the benefits of such rights for
the purposes intended herein in light of the restrictions to which it is
subject, including, without limitation, the agreement of each Party not to sue
the other Party for infringement of any such Patents.
6.2 THIRD PARTY LICENSES. If either Party obtains exclusive access for
the allergy field to a patent owned and/or controlled by a third party which is
necessary to make have made, use or sell a Licensed Product, then such Party
will either (i) permit the other Party to obtain co-exclusive rights to such
patent for such field, if possible, or (ii) acquire a license to such patent for
such field free of any restrictions which would limit such Party's right to
sublicense to the other Party as required under this Agreement, including
preservation of such other Party's sublicense rights hereunder.
7.0 ROYALTY PAYMENTS.
7.1 PAYMENT DATES. Royalties payable hereunder shall be paid within 100
days of the end of each calendar quarter for Net Sales for that calendar quarter
(with respect to all uses of "calendar quarter" in this Agreement, the first
calendar quarter in each year ends on March 31, with succeeding calendar
quarters ending each 3 months thereafter). Such payment shall be accompanied by
a statement showing the amount of each Licensed Product sold in each country,
the Net Sales of each Licensed Product in that country's currency in each
country in which Net Sales occurred, the royalties payable in local currency,
the applicable exchange rate as set forth in Section 7.3 below for that
currency, and the royalties payable in U.S. Dollars.
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7.2 RECORDS AND ACCOUNTING. A Party shall keep and require its
sublicensees to keep complete and accurate records of the latest three (3)
calendar years of Net Sales with respect to which a royalty is payable under
this Agreement. The Party receiving royalties shall have the right at its own
expense to have an independent, certified or chartered public accountant,
reasonably acceptable to the Party paying royalties, review the paying Party's
records upon reasonable notice and during reasonable business hours for the
purpose of verifying the payments provided for in this Agreement. This right may
not be exercised more than once for any calendar year with respect to the
records of the paying Party and each of its sublicensees. Should such review
lead to the discovery of an under reporting of royalties due hereunder of
greater than two percent (2%), the Party under reporting such royalties, in
addition to promptly paying the unpaid royalties, shall pay the full cost and
expense of such review, plus interest on such unpaid royalties at the rate of
10% per annum from the date any such under reporting occurred to the day paid.
7.3 CURRENCY OF PAYMENTS. All payments under this Agreement shall be
made in United States Dollars by wire transfer (or such other reasonable means
as the receiving Party may direct) to such bank account as the receiving Party
may designate from time to time. If a wire transfer is to be made, the remitting
Party shall provide notice at least five (5) days prior to the date of transfer
of the amount of payment and the date it is to be received. Such notice should
be given to the Treasurer of the receiving Party at the address set forth at the
beginning of this Agreement or such other address as the receiving Party may
subsequently direct. Any payments due hereunder on sales outside of the United
States shall first be calculated in the currency in which sales took place and
then converted to United States Dollars at the average of the average spot rate
published in the Wall Street Journal for the last business day of each of the
three (3) months of the calendar quarter for which royalties are payable.
If by law, regulation or fiscal policy of a particular country, remittance
of royalties in United States Dollars is restricted or forbidden, notice thereof
will be promptly given to the receiving Party, and payment of the royalty shall
be made by the deposit thereof in local
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currency to the credit of the receiving Party in a recognized banking
institution designated by the receiving Party. When in any country the law or
regulations prohibit both the transmittal and deposit of royalties on sales in
such a country, royalty payments shall be suspended for as long as such a
prohibition is in effect and as soon as such prohibition ceases to be in effect,
all royalties which the paying Party would have been under obligation to
transmit or deposit but for the prohibition, shall forthwith be deposited or
transmitted promptly to the extent allowable. If a Party is required to pay or
withhold any income tax or other tax with respect to royalty payments, such
Party shall first (i) furnish the receiving Party, in writing, with the
satisfactory evidence that such payment or withholding is required, (ii) provide
reasonable assistance in claiming any exemption from any such deduction which
may be available, and (iii) provide satisfactory documentation to confirm the
payment of the tax.
7.4 COMBINATION PRODUCT NET SALES. In determining the Net Sales of
Combination Products, Net Sales shall first be calculated in accordance with the
definition of Net Sales and then multiplied by the percentage value of the
Licensed Product contained in the Combination Product, such percentage value
being the quotient obtained by dividing the current market price of the Licensed
Product by the sum of the separate current market prices of the Licensed Product
and the other ingredients which are Therapeutically Active or the device
contained in the Combination Product. The current market price of each
Therapeutically Active ingredient or the device and of the Licensed Product
shall be for a quantity comparable to that contained in the Combination Product
and of the same class, purity and potency. When no current market price is
available for a Therapeutically Active ingredient or device or a Licensed
Product in a Combination Product, the Party with the Combination Product shall
calculate a commercially reasonable hypothetical market price for such
ingredient or device or Licensed Product, allocating the same proportions of
costs, overhead and profit as are then allocated to all similar substances then
being made and marketed by that Party marketing the Combination Product and
having an ascertainable market price. The current market price shall be
determined with respect to the Licensed Product and other Therapeutically Active
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ingredients or devices in the country in which such sales of Combination
Products occur to the extent practicable. In the event of any dispute regarding
determination of Net Sales for a Combination Product, the Party with such
Combination Product shall pay royalties in accordance with the definition of Net
Sales notwithstanding this Section 7.4 or on such other agreed basis until such
dispute is resolved. Upon resolution of any such dispute, any excess royalties
which may have been paid shall be promptly reimbursed, plus interest on any such
excess royalties at the rate of * per annum from the date any such excess
royalties were paid to the date of reimbursement.
8.0 PAYMENTS TO TANOX. For the Consideration, including settlement of
the Lawsuit, execution of the Outline of Terms, and grant of the licenses by
Tanox herein, Genentech shall pay Tanox the * payment due on execution
of this Agreement and dismissal of the Lawsuit within five (5) days of the
occurrence of such event and the remaining sums set forth on Exhibit 4 hereto
within thirty (30) days of the date upon which each remaining event described on
Exhibit 4 occurs with respect to any Genentech Licensed Product that has been
covered by the claims of a Tanox Patent and/or any anti-IgE Product (as that
term is used in the Outline of Terms) that is subject to the Outline of Terms of
Definitive Agreement. The obligations hereunder are acknowledged to be in
addition to any other obligations of Genentech to Tanox under the Outline of
Terms or Definitive Agreement. With respect to the amounts payable hereunder,
Genentech shall receive a credit of * which shall be applied against
royalties due Tanox hereunder or under the Outline of Terms and Definitive
Agreement at such time as the total annual net sales of Genentech Licensed
Products that have been covered by the claims of a Tanox Patent and anti-IgE
Products sold under the Outline of Terms and Definitive Agreement exceed
*.
9.0 ADDITIONAL LICENSES. In addition to and without limitation of the
license granted to Tanox under Section 5.0, Genentech agrees to grant certain
additional licenses to Tanox as provided herein. Subject to all of Genentech's
existing licenses and existing agreements that restrict Genentech's ability to
grant licenses and subject to the additional
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restrictions set forth below, Genentech agrees to grant to Tanox, upon written
request from Tanox, a worldwide, nonexclusive, nonsublicenseable (except to
Affiliates, but only in conjunction with the license of a specific product)
license under patents owned by Genentech and set forth on Exhibit 5 hereto, to
make, have made, use, sell, have sold and import products for *, except that
such products shall not include those (i) that are the subject of a prior
exclusive license by Genentech to a third party; (ii) that are the subject of an
active research or development program of Genentech or its Affiliates; or (iii)
that compete with, or will compete with, a then current product of Genentech or
its Affiliates or a product in an active research and/or development program of
Genentech or its Affiliates; provided however, that if any such patents desired
by Tanox shall be subject to exclusive rights to a third party which would
prevent the license desired by Tanox, Genentech agrees that Tanox shall have the
right to obtain a sublicense, if possible, from any such third party on terms
agreed between Tanox and such third party. Tanox agrees that to the extent
Genentech would deprive itself of its right to practice the patents thereby,
Genentech shall not be required pursuant hereto to grant sublicense rights to
Tanox under those patents known as the "Boss" and "Cabily" patents for any
antibodies set forth on Exhibit 6 which are the subject of co-exclusive rights
between Genentech and Celltech Limited with respect to such patents. Except for
those patents and patent applications listed on Exhibit 7, Genentech represents
and warrants that it has no existing patents or patent applications and, except
for licenses from The City of Hope and Celltech Limited, is not a licensee of
any patents with claims which cover the composition of the molecules set forth
on Exhibit 6 and agrees that Tanox may rely on this representation and warranty
in pursuing the development and commercialization of such molecules.
Notwithstanding the foregoing restrictions, but expressly subject to certain
agreements between Genentech and F. Hoffmann-La Roche Ltd. and Roche Holdings,
Inc. ("Roche") covering rights to Genentech's patents, Genentech also represents
and warrants that it will grant a worldwide, nonexclusive, nonsublicenseable
(except to Affiliates, but only in conjunction with the license of a specific
product) license to Tanox under all future patents owned by it in whole or in
part with claims which are necessary to make, use, or sell the Tanox molecules
set forth on Exhibit
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6 so long as Genentech does not currently have an active clinical development
program involving any such Tanox molecule for the indication being pursued by
Tanox. To the extent that Genentech is a licensee of patents which are necessary
to make, use or sell any Tanox molecule on Exhibit 6 or which is also covered by
the patents set forth on Exhibit 5, until Genentech has offered a sublicense to
Tanox and Tanox has refused such a sublicense, Genentech agrees that it will not
sue, or provide affirmative assistance in any suit against, Tanox for
infringement of any such patents. Any license granted to Tanox pursuant hereto
for the patents set forth on Exhibit 5 shall be at a royalty rate and on other
terms to be mutually agreed upon but which shall be no less favorable to Tanox
than that granted to any other licensee of the patents set forth on Exhibit 5
where the license is for the patents listed and where there is no other
substantial consideration for the license granted other than the usual
consideration sought by Genentech for such licenses. If any patents subject to
license or sublicense hereunder have no comparable royalty rates or terms, the
Parties agree to negotiate in good faith the royalty rate and terms on which any
such license or sublicense will be granted. Subject to the limitations set forth
above, Tanox may exercise its right to such a license or sublicense, without
threat of suit or penalty from Genentech, with respect to a product subject to
this Section 9.0 at any time prior to the First Commecial Sale of such product
in the first country in which such event occurs and the Parties shall then
negotiate and execute a license agreement for that product and the patents
subject to this Section 9.0. If Tanox should ever have under development a
product which could be subject to the restrictions on receiving a license set
forth herein, then Genentech or Tanox should notify the other of such
possibility prior to taking any other actions. If the Parties are unable to
resolve the issues prior to the time Tanox files for approval to market such
product in any country, which resolution could include a collaboration or
cross-licensing opportunity or Tanox's express agreement not to manufacture or
market for commercial sale (as such term is used in connection with the
definition of ("First Commercial Sale") in a country in which a Valid Claim of
any Genentech patent covering such product may exist, then Genentech shall be
entitled to pursue such legal or other actions as Genentech may determine, in
its sole discretion, to be appropriate under the circumstances.
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10.0 TANOX MANUFACTURING FACILITY. With respect to Tanox's pilot
manufacturing facility in Houston, Texas, if subsequent to the Selection Date,
as defined in the Outline of Terms, such facility is not utilized by Tanox or
Ciba for the manufacture of Anti-IgE Antibodies, Genentech agrees to discuss, in
good faith, a potential arrangement with Tanox for the manufacture of clinical
research material for Genentech in the circumstance where Genentech does not
have sufficient capacity at that time to manufacture its own clinical research
material needs.
11.0 CONFIDENTIALITY. In connection with preparation and during the
term of this Agreement, one Party may disclose to the other or receive from the
other written information relating to the subject matter of this Agreement which
information, if so identified in writing either pursuant to this Section 11.0 or
otherwise upon disclosure, shall be considered to be the disclosing Party's
Confidential Information. Each Party agrees that it will take the same steps to
protect the confidentiality of the other Party's Confidential Information as it
takes to protect its own proprietary and confidential information. Each Party
shall protect and keep confidential and shall not use, publish or otherwise
disclose to any third party, except as permitted by this Agreement (or the
Outline of Terms or Definitive Agreement) or with the other Party's written
consent, the other Party's Confidential Information for a period of five (5)
years from the date of termination of the Cross-Licensing Provisions or for 10
years, whichever is longer. For the purposes of this Agreement, Confidential
Information shall not include such information that (i) was lawfully known to
the receiving Party at the time of disclosure; (ii) was generally available to
the public or was otherwise part of the public domain at the time of disclosure
or became generally available to the public or otherwise part of the public
domain after disclosure other than through any act or omission of the receiving
Party in breach of this Agreement; (iii) became known to the receiving Party
after disclosure from a source that had a lawful right to disclose such
information to others; or (iv) is required to be disclosed by the receiving
Party to comply with applicable laws, to defend or prosecute litigation or to
comply with governmental regulations, provided that the receiving Party provides
prior written notice of such disclosure to the other Party and takes reasonable
and lawful actions to avoid and/or minimize the degree of such disclosure.
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Notwithstanding the above, the Parties may disclose Confidential
Information to their legal representatives, to Affiliates and their legal
representatives, and to consultants (to the extent such disclosure is intended
to further the purposes contemplated under this Agreement) and provided such
legal representatives, Affiliates and consultants have agreed in writing to be
bound to protect the confidentiality of such information in a manner at least as
restrictive as that generally set forth herein.
12.0 TERM: DEFAULT; SURVIVAL.
12.1 TERM. Except as otherwise set forth herein, the
Cross-Licensing Provisions and Sections 9.0 and 10.0 of this Agreement shall
terminate at such time following the First Commercial Sale as royalties are no
longer owed by either Party hereunder in any country in the world.
12.2 TERMINATION. (a) Subject to the simultaneous or prior
termination of its participation in the Outline of Terms and Definitive
Agreement, and all other development and commercialization activities relating
to Anti-IgE Antibodies and Genentech Licensed Products which are subject to this
Agreement and have been covered at any time by a claim of a Tanox Patent,
Genentech may terminate the provisions of Section 4.0, Section 8.0 and Section
9.0 of this Agreement upon thirty days prior written notice to Tanox (but for
Section 9.0, such termination shall be effective only with respect to products
which are not already under development at the time of such termination). Upon
such termination, Roche shall have the option, exercisable for a period of 90
days after Genentech's termination, to assume all of Genentech's rights and
obligations with respect to Anti-IgE Antibodies and Genentech Licensed Products
hereunder. If Roche does not exercise this option by the end of the 90 day
option period, any licenses granted to Genentech by Tanox under Section 4.0 will
immediately terminate, and Genentech shall
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grant Tanox a royalty-free, non-exclusive license under Genentech's Patents,
know how and other technology to make, have made, use, sell, have sold or import
Anti-IgE Antibodies and Genentech Licensed Products existing as of the date of
such termination and which have been covered at any time by a claim of a Tanox
Patent.
In addition, if Genentech terminates this Agreement pursuant to the
foregoing paragraph and Roche does not exercise its option to assume Genentech's
rights and obligations hereunder, Tanox shall have the option for a period of
120 days following the date of termination to acquire from Genentech on mutually
agreeable and commercial reasonably terms Genentech's. Anti-IgE Antibodies and
Genentech Licensed Products existing as of the date of such termination and
which have been covered at any time by a claim of a Tanox Patent, as well as
cell lines producing such materials or substances used in the development and
commercialization of such Antibodies or Products, including data and development
information relating thereto. If Tanox fails to exercise its option and
Genentech thereafter desires to license or sell such Antibodies or Products to a
third party, Genentech shall not license or sell such Antibodies or Products on
terms that are in the aggregate more favorable to such third party than those
terms that Genentech offered to Tanox unless Genentech first offers such
Antibodies or Products to Tanox on such more favorable terms.
Genentech represents and warrants that it does not presently intend to
terminate this Agreement pursuant to this Section 12.2(a) and is not presently
aware of any existing development activities within Genentech or elsewhere which
would give rise to an Anti-IgE Antibody or Genentech Licensed Product which
Genentech would consider developing following a termination pursuant to this
Section 12.2 (a).
(b) Tanox may terminate the provisions of Section 5.0 of this
Agreement upon thirty days prior written notice to Genentech. Upon any such
termination, any licenses granted to Tanox by Genentech thereunder will
immediately terminate.
12.3 DEFAULT. Failure by either Party (the "defaulting Party") to
comply with any of the material obligations contained in this Agreement shall
entitle the other Party (the nondefaulting Party") to give the defaulting Party
notice specifying the nature of the default and requiring it to cure such
default. If such default is not cured within the sixty (60) day period after the
receipt of such notice, the nondefaulting Party shall be entitled, except as
otherwise specifically provided in this Agreement (including, without
limitation, Tanox's right to receive payments under Section 8.0 so long as the
Outline of Terms or Definitive Agreement continue in effect) and subject to any
arbitration award under Section 13.12 (b), to terminate all or any part of this
Agreement or the licenses granted herein and without prejudice to any other
rights conferred on it by this Agreement.
12.4 SURVIVAL OF PROVISIONS. Except to the extent termination is
expressly permitted herein, the agreements and obligations of the Parties shall
survive to the extent and/or for the purposes provided herein.
13.0 GENERAL PROVISIONS.
13.1 ADEQUACY OF CONSIDERATION. By signing this Agreement, each Party
to this Agreement acknowledges the receipt by such Party and the sufficiency to
such Party of the Consideration.
13.2 Disputes with Ciba. In connection with the Multiparty Transaction,
Genentech agrees that without Tanox's express consent, to the extent consistent
with any obligations Genentech may have as a result of any process to which it
is subject, such as subpoena, deposition or the like during the course of such
dispute, it will not voluntarily or at the request of Ciba interfere with,
participate in, or actively attempt to influence the outcome of any dispute
which may arise between Tanox and Ciba in connection with or relating to the D &
L Agreement, unless such dispute is substantially likely to have a material
effect on Genentech.
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13.3 GUARANTY. Genentech, Inc. absolutely and unconditionally
guarantees the prompt and punctual payment and performance when due of the
obligations of Genentech International Limited to Tanox under this Agreement.
This is a continuing guaranty applicable to and guaranteeing any and all
obligations and liabilities of every kind and character of Genentech
International Limited to Tanox and Genentech, Inc. waives any right to require
that any action be brought against Genentech International Limited or any other
person or entity. Genentech, Inc. also expressly waives all rights to which it
may be entitled by virtue of Chapter 34 of the Texas Business and Commerce Code.
13.4 NOTICES. All notices which may be required pursuant to this
Agreement (i) shall be in writing, (ii) shall be addressed, in the case of
Genentech (except as otherwise specified herein), to the Corporate Secretary at
the address set forth at the beginning of this Agreement, and in the case of
Tanox to the President at the address set forth at the beginning of this
Agreement, (or to such other person or address as either Party may so designate
from time to time), (iii) shall be mailed, postage-prepaid, by registered mail
or certified mail, return receipt requested, or transmitted by courier for hand
delivery or sent by express courier service, and (iv) shall be deemed to have
been given on the date of receipt if sent by mail or on the date of delivery if
transmitted by courier or express courier service.
13.5 ENTIRE AGREEMENT. This Agreement, the Outline of Terms, and the
Definitive Agreement to be concluded hereafter are the entire agreements between
the Parties regarding the subject matter hereof, and there are no prior written
or oral promises or representations not incorporated herein or therein. No
amendment or modification of the terms of this Agreement shall be binding on
either Party unless reduced to writing and signed by an authorized officer of
the Party to be bound.
13.6 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Parties hereto and their respective successors and permitted
assigns. This Agreement shall not be assignable by either Party without the
other's prior written consent, except that this Agreement (with the exception of
Section 9.0 which shall not be assignable without Genentech's prior written
consent, which will not be unreasonably withheld) may be assigned in whole or in
part to an Affiliate or a successor to all or substantially all of a Party's
business by merger, sale of assets, sale of stock or otherwise.
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13.7 WAIVER. The waiver by a Party hereto of any breach of or default
under any of the provisions of this Agreement or the failure of a Party to
enforce any of the provisions of this Agreement or to exercise any right
thereunder shall not be construed as a waiver of any other breach or default or
as a waiver of any such rights or provisions hereunder.
13.8 SEVERABILITY. If any part of this Agreement shall be invalid or
unenforceable under applicable law, such part shall be ineffective only to the
extent of such invalidity or unenforceability, without in any way affecting the
remaining parts of this Agreement. In addition, the part that is ineffective
shall be reformed in such a manner as to as nearly approximate the intent of the
Parties as possible.
13.9 PUBLICITY. The Parties acknowledge that certain information
contained in this Agreement will be set forth in a press release with agreed
upon text and release date and time following the execution of this Agreement.
Except for the information in that disclosure, neither Genentech nor Tanox shall
issue any public statement concerning this Agreement or the transactions
contemplated by this Agreement without the other Party's reasonable prior
written consent; provided, however, that either Party may disclose the
transaction or the terms hereof or thereof from time to time without the other
Party's consent (i) if such consent has been requested and not received and such
information is set forth in disclosures to investors and prospective investors
in the securities of a Party in compliance with laws, rules and regulations
covering any such transactions or such Party has a written opinion from outside
counsel that it is otherwise required by law to disclose the transaction or the
terms thereof, or (ii) to the extent that similar disclosure has been previously
approved by the Parties pursuant to this Section 13.9. The foregoing
notwithstanding, Tanox may disclose the terms of this Agreement to its existing
shareholders, investment bankers and other financial consultants, and
prospective investors in Tanox, provided that any such recipient of such
information must agree in writing prior to disclosure to be bound to protect the
confidentiality of that information for a period of at least three (3) years and
in a manner at least as restrictive as that generally set forth in Section 11.0
above.
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13.10 NO PARTNERSHIP. Nothing in this Agreement is intended or shall be
deemed to constitute a partnership, agency, employer-employee or joint venture
relationship between the Parties. No Party shall incur any debts or make any
commitments for the other.
13.11 SURVIVAL OF REPRESENTATIONS. All agreements and representations
made by the parties in this Agreement shall survive the execution and delivery
of this Agreement, the payment and receipt of Consideration, and the execution
and delivery of any other instrument, or the taking of any other actions
required or provided for in this Agreement.
13.12 DISPUTE RESOLUTION. Any dispute, controversy or claim arising out
of or relating to the validity, enforceability or performance of this Agreement,
including disputes relating to alleged breach or termination of this Agreement
but excluding any determination as to the validity of the Parties' patents
(hereinafter, the "Dispute"), shall be settled in accordance with the provisions
of this Section 13.12, and no Party can initiate any litigation in connection
with a Dispute except to enforce an arbitration award under Section 13.12 (b).
If a Party intends to begin mediation or arbitration to resolve a Dispute, such
Party shall provide written notice to the other Party informing such other Party
of such intention and the issues to be resolved. From the date of such request
and until such time as any matter has been finally settled by mediation or
arbitration, the running of the time periods contained in Section 12.3 in which
a Party must cure a breach of this Agreement shall be suspended as to the
subject matter of the Dispute.
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(a) MEDIATION. The Parties have entered into the Agreement in good
faith and in the belief that it is mutually advantageous to them. It is with
that same spirit of cooperation that they pledge to attempt to resolve any
dispute amicably and without the necessity of litigation. Accordingly, they
agree that if any Dispute should arise, prior to the commencement of any legal
action, they will first seek to mediate their Dispute by mediation, with a
mediator mutually agreeable between the Parties. If the Parties are unable to
agree upon a mediator within ten (10) days of the date a Party has requested
mediation, either one of them may thereafter request JAMS/ENDISPUTE to designate
a mediator to preside over the mediation proceeding. The Parties agree to sign a
document agreeing that the mediation and mediator will be governed by the
provisions of Chapter 154 of the Texas Civil Practice and Remedies Code and such
other rules as the mediator prescribes. The Parties commit to participate in the
proceedings in good faith with the intention of resolving the Dispute, if at all
possible. The fees and expenses of the mediator will be shared equally by the
Parties. The mediator is disqualified as a witness, consultant, expert or
counsel for any Party with respect to the Dispute and any related matters.
(b) BINDING ARBITRATION. If the Dispute has not been resolved by
mediation within sixty days after the request for mediation is made, then upon
the request of either party, the Dispute will be settled by binding arbitration
as provided in this Section 13.12 (b).
(1) The arbitration shall be administered by the American
Arbitration Association ("AAA"), pursuant to its then current Commercial
Arbitration Rules, except as otherwise provided in this Section 13.12 (b). The
arbitration shall be conducted by a panel of three arbitrators ("the Panel").
The Panel shall be selected from a pool of arbitrators to be presented to the
Parties by AAA.
(2) If a Party can demonstrate to the Panel that the complexity of
the issues or other reasons warrant the extension of one or more of the time
tables in the AAA rules, the Panel may extend such time tables, but in no event
shall the time tables be extended so that the proceeding extends more than 1
year from its beginning to the award.
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(3) The Parties (i) acknowledge that the issues that may arise in a
Dispute may involve a number of complex matters and (ii) confirm their intention
that each Party will have the opportunity to conduct complete discovery with
respect to all material issues involved in the Dispute in accordance with the
rules of the Federal Rules of Civil Procedure.
(4) The Panel shall, in rendering its decision, apply the
substantive law of the state in which the proceeding takes place, without regard
to its conflict of laws provisions, except that the interpretation of and
enforcement of this Section 13.12 (b) shall be governed by the Federal
Arbitration Act. The Panel shall apply the Federal Rules of Evidence to the
hearing. The proceeding shall take place in San Francisco, California if
arbitration is initiated by Tanox and in Houston, Texas if arbitration is
initiated by Genentech. The fees of the Panel and AAA shall be paid in the
manner designated by the Panel under Section 13.12 (b) (6) below.
(5) The Panel is empowered to award any remedy allowed by law,
including money damages, prejudgment interest and attorney's fees, and to grant
final, complete, interim, or interiocutory relief, including injunctive relief,
but excluding punitive damages and multiple damages. The Parties shall be deemed
to have waived any right to such punitive damages or multiple damages.
(6) Unless the Panel directs otherwise pursuant to Section 13.12 (b)
(5) above, each Party shall bear its own legal fees. The Panel shall assess
costs, fees and expenses of the AAA and the Panel to the Parties in the manner
the Panel deems appropriate under the circumstances.
(7) The arbitration proceeding shall be confidential and the Panel
shall issue appropriate protective orders to safeguard each Party's Confidential
Information. Except as required by law, no Party shall make (or instruct the
Panel to make) any public announcement with respect to the proceedings or
decision of the Panel without prior written consent of each other Party. The
existence of any Dispute submitted to arbitration, and the award, shall be kept
in confidence by the Parties and the Panel, except as required in connection
with the enforcement of such award or as otherwise required by applicable law.
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(c) ENFORCEMENT. For purposes of this Section 13.12, the Parties agree
to accept the jurisdiction of the federal counts located in the Southern
District of Texas with respect to arbitration proceedings initiated by Genentech
and with the Northern District of California with respect to arbitration
proceedings initiated by Tanox for the purposes of enforcing awards entered
pursuant to Section 13.12 (b) and for enforcing the agreements reflected in this
Section 13.12.
13.13 AGREEMENT TO PERFORM NECESSARY ACTS. Each Party agrees to perform
any further acts and execute and deliver any and all further documents,
agreements, and/or instruments which may be reasonably necessary or desirable to
carry out or effect the provisions of this Agreement.
13.14 COUNTERPARTS. This Agreement may be executed in counterparts, and
each such counterpart shall be deemed an original for all purposes.
GENENTECH, INC. TANOX BIOSYSTEMS, INC.
By: By: David Anderson
Title: CEO & President Title: Executive Vice President
GENENTECH INTERNATIONAL LIMITED
By: PETER MARTIN
Title: Director
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EXHIBIT 1
OUTLINE OF TERMS FOR SETTLEMENT OF THE LITIGATIONS
AMONG GENENTECH INC., GENENTECH INTERNATIONAL LIMITED,
TANOX BIOSYSTEMS, INC.
AND CIBA-GEIGY LIMITED
RELATING TO ANTI-IGE
INHIBITING MONOCLONAL ANTIBODIES
In 1993 Tanox sued Genentech for fraud and misappropriation of know-how in the
context of anti-IgE-antibody projects to which both companies are committed.
Genentech then sued Tanox and, later on Ciba for infringement of Genentech's US
"Cabilly" patent by their anti-IgE and anti-HIV monoclonal antibody projects.
Ciba and Tanox filed a counterclaim for invalidation of said patent. Tanox has
further filed certain patent applications on which some patent rights have
already been granted which may extend to Genentech's anti-IgE substance,
although Genentech does not agree that they do. Now the parties are willing to
settle all their pending litigations including potential future disputes
regarding anti-IgE antibodies on the basis of the following principles:
1. MERGER OF ANTI-IGE PROJECTS
The anti-IgE-antibody projects of Genentech on the one side and Ciba/Tanox on
the other side shall be merged, but Genentech and Ciba/Tanox will continue to
take their respective anti-IgE antibodies through Phase II clinical trials
currently in progress or planned to be performed during 1996. Based upon the
results of these trials and other relevant considerations Genentech, Tanox and
Ciba shall jointly discuss and decide by June 1, 1997 at the latest which of the
anti-IgE antibodies shall be taken up in Phase III trials, be developed for
additional indications (if any), be submitted for marketing authorization and be
commercialized as a pharmaceutical product ("anti-IgE Product"). The final
Agreement(s) as referred to in Section 8.2 shall provide for procedures in case
of a disagreement between the parties. All development activities shall be
supervised by a Steering Committee on which each party is represented. The
merging of each party's anti-IgE-antibody projects and the development and
commercialization thereof according to this Outline of Terms shall extend to all
IgE inhibiting antibodies (including fractions or derivatives thereof) which
have been identified and synthesized by either party hereto *
<PAGE>
2. SHARING OF DEVELOPMENT COST
All development activities for the anti-IgE Project/Product including such
things as the manufacture of the clinical material, the conduct of clinical
trials, the development of the process to make anti-IgE antibodies and required
supporting activities/services and fees which are necessary for obtaining the
NDA in the USA and the marketing authorization(s) in Europe shall be pooled
between Genentech and Ciba. This cost pooling shall commence as of the date on
which the selection of the anti-IgE Product for further development has been
made (the "Selection Date").
These pooled costs shall be allocated to the US development cost account on
the one side and the Europe development cost account on the other side on a pro
rata basis to be agreed upon according to the prospective sales potential for
the anti-IgE Product in each of the two territories.
The development cost allocated to the US shall be shared between Ciba and
Genentech in the ratio of *, whereas the development cost for Europe -subject to
Section 11 hereafter- shall be borne as to * by Ciba and as to * by Genentech.
Any additional development cost required for the commercialization of the
anti-IgE Product in territories outside the US and Europe shall be borne
exclusively by Ciba/Tanox according to the Development and Licensing Agreement
between Tanox and Ciba dated May 11, 1990, and the amendment thereto relating to
the territories of Taiwan, Korea, Singapore, China and Hong Kong (the "D&L
Agreement"), subject to additional cost obligations for Japan which may arise
according to Section 11 hereafter.
3. COMMERCIALIZATION
3.1 The anti-IgE Product shall be commercialized in the US under one brand
under a co-promotion scheme by Ciba and Genentech to be further elaborated and
agreed upon. In lieu of Tanox's right under the D&L Agreement to participate in
such co-promotion in the US, Tanox will be entitled to the payments set forth in
Section 5.1 hereafter.
All the cost for the manufacturing/purchase of anti-IgE Product and all the
cost for its marketing and sale in the US including all supporting and auxiliary
activities and royalties to third parties (if any) shall be shared between Ciba
and Genentech on a * basis.
<PAGE>
All the net profits from the commercialization of the anti-IgE Product in the
US shall be shared between Ciba and Genentech on a * basis.
3.2 The anti-IgE Product shall be commercialized in Europe exclusively by
Ciba, subject to Section 11 hereafter. All the cost for the
manufacturing/purchase of the anti-IgE Product and all the cost for its
marketing and sale including all supporting activities and royalties to Tanox on
the one hand and third parties (if any) and all the net profits from the
commercialization of the anti-IgE Product in Europe shall be shared between Ciba
and Genentech on the basis of * (Ciba): * (Genentech).
3.3 In all countries in the world other than US and Europe, Ciba shall have
exclusive rights for the commercialization of the anti-IgE Product, subject to
certain rights which Tanox has in Taiwan, Korea, Singapore, China and Hong Kong
according to a separate agreement and the rights for Japan as set out in Section
11 hereafter. No specific compensation shall be due to Genentech by Ciba for
these rights.
4. MANUFACTURE
Ciba and Genentech together with Tanox (to the extent they are exercising
their rights of co-manufacturing) shall share in the responsibility for assuring
adequate product supply necessary for commercialization of the anti-IgE Product.
Genentech shall, on request of Ciba, manufacture the jointly selected anti-IgE
Product up to a quantity of * of the anti-IgE antibody per year and shall sell
the anti-IgE Product to the appropriate selling organizations in the US, Europe
and the rest of the world at a price equal to the full manufacturing cost as
defined in the Appendix hereto, plus an uplift of *. The parties also shall
consider and, as appropriate, reach agreement on plans to assure adequate
product supply in the event such * quantity is insufficient to meet projections
for product requirements reasonably established by mutual agreement of the
parties. The parties acknowledge that such manufacturing by Genentech and any
manufacturing by Ciba shall be subject to Tanox's co-manufacturing rights under
the D&L Agreement and the terms of a manufacturing and supply agreement to be
negotiated between Tanox and the purchasing party in the manner contemplated by
the D&L Agreement. Tanox agrees to waive its rights to compensation for
relinquishing its rights under the D&L Agreement to manufacture * of such *
which may be manufactured by Genentech, but Tanox does not waive its right
prospectively to exercise its co-manufacturing rights. If Genentech terminates
its cooperation hereunder, it shall continue to be bound by the above supply
obligation for a reasonable period of time to establish an alternative supply
source for the anti-IgE Product, such period to be mutually agreed upon in the
Definitive Agreement.
<PAGE>
The manufacturing price paid to Genentech shall constitute a cost element in
the calculation of the cost/net profit to be shared according to Sec. 3.1
paragraphs 2 and 3 and Sec. 3.2 paragraph 2.
In the event that there should not be enough anti-IgE Products available to
meet the requirements of the different markets the available quantities shall be
allocated pro rata to the respective potential in these markets.
5. ROYALTIES AND MILESTONE PAYMENTS TO TANOX
5.1 Tanox is entitled to a royalty on the net sales of the anti-IgE Product
in the USA, as set out in the D&L Agreement, which amounts to * of such US net
sales (or * if there is no valid Tanox patent), plus (i) * on * of such US net
sales, payable by Genentech, and (ii) * of Ciba's net profits from the
commercialization of the anti-IgE Product in the US, payable by Ciba.
5.2 For the sales of the anti-IgE Product in Europe and the rest of the
world, Tanox shall be paid the royalties specified in the D&L Agreement.
5.3 The milestone payments payable to Tanox specified in the D&L Agreement
shall become due regardless of whether the anti-IgE Product selected originates
from Tanox or Genentech and, except for payments due for NDA/PLA submission and
approval in Japan, shall be included in the cost to be shared according to
Section 2 above.
5.4 Payments made to Tanox in connection with development activities
undertaken by Tanox for the anti-IgE Project/Product after the Selection Date
shall be included in the cost to be shared according to Section 2 above. The
parties acknowledge and agree that for 1996 the already approved Tanox budget
will continue. For 1997 the Tanox budget will be similar to that of 1996, unless
Genentech, Tanox and Ciba conclude that activities at Tanox for 1997 would
result in a significant reduction of Tanox's 1997 budget. In such event Ciba,
Genentech and Tanox will negotiate in good faith an appropriate payment in
addition to such reduced budget covering Tanox's reasonable cost for phaseout of
its activities. Such payment, however, shall not exceed * of the budget
calculated for the last full 12 months prior to the Selection Date. For
subsequent years thereafter, development activities which should be undertaken
by Tanox so as to maintain its active involvement will be agreed by Ciba,
Genentech and Tanox and a Tanox budget will be submitted for approval in
accordance with current procedures.
<PAGE>
6. LICENSES
Each party hereto shall grant to the other party any and all licenses and/or
sublicenses (to the extent possible and subject to payment of the appropriate
royalty or other payment amount due to third parties, such payment to be borne
or shared by the parties as otherwise provided herein, or if not provided
herein, then only if the party sublicensed pays such royalty or amount) under
their respective present and future patent rights, other intellectual property
rights, licenses, know-how, technology, cell lines, materials, etc. they own
and/or control to the extent they are required for or are to be used by the
parties as jointly agreed for the development, manufacture, use and sale of the
anti-IgE Product. No other compensations for these licenses shall be due than
those set out in this outline.
Each party hereto represents that it does not have knowledge of any such
rights that it currently owns and to which it currently has a license which
cannot be made accessible to the other parties hereto.
To the extent any such rights of a party are not licensable or sublicensable
such party shall take reasonable actions to permit the commercialization of the
anti-IgE Product on a reasonable basis in the light of the restrictions to which
it is subject.
7. SETTLEMENT
7.1 The parties hereto shall dismiss all claims filed in the lawsuits against
each Genentech and F. Hoffmann-La Roche Ltd. and its three affiliates concerned
on the one side and Ciba and Tanox on the other side pending and consolidated
with the US District Court for the Southern District of Texas, Houston Division
(the "Litigation").
7.2 Except as may be otherwise agreed between some of the parties hereto,
each party shall bear all cost and expenditure incurred by it under or in
connection with the above lawsuits.
8. CONDITIONS PRECEDENT
8.1 The parties are aware that the envisaged terms of settlement set out
herein might need clearance by the relevant authorities and agree to cooperate
via their internal and external experts in this respect.
<PAGE>
8.2 The parties shall negotiate in good faith and enter into (a) detailed
agreement(s) (the "Detailed Agreement") implementing and completing the terms
outlined herein within 6 months from the execution of this Outline.
9. PUBLICATIONS
Unless otherwise agreed in advance in writing among all parties hereto, none
of the parties hereto shall directly or indirectly make any public statement,
press release or give any information to the public about this Outline of Terms
and the Detailed Agreement to be entered into pursuant hereto. However, this
restriction shall not apply to disclosure of information which the parties
acknowledge will be set forth in press release with agreed upon text and release
date and time, to be prepared following execution of the Outline of Terms, and
to statements, information, or announcements required by law, regulation or
administrative action to be disclosed including disclosure to (prospective)
investors in the securities of a party. In such event, the parties shall
promptly coordinate to the extent possible, the wording of any such disclosures.
This restriction on publication shall not be applicable to disclosures made to
third parties who are subject to non-disclosure or confidentiality obligations.
10. CONFIDENTIALITY
10.1 Any information and data disclosed by a party to another party hereto
(the "Receiving Party") in the context of the selection, development and
commercialization of the anti-IgE Product shall be kept strictly confidential by
the Receiving Party, shall not be disclosed to any third party by the Receiving
Party and shall not be used by the Receiving Party for any purpose other than
those contemplated under this Outline of Terms, the D&L Agreement and the
Detailed Agreement.
10.2 The obligations set out in Section 10.1 above shall not apply to
information and data of which the receiving party can show that it:
(i) is or has become generally available to the public otherwise than
through violation of the obligation set out in Section 10.1 above;
(ii) has been received from a third party who did not acquire it
directly or indirectly from the disclosing party.
Notwithstanding the above, the parties may disclose such information (a) to
the extent as required to be disclosed to comply with applicable laws, to defend
<PAGE>
or prosecute litigation or to comply with governmental regulations including
disclosure to (prospective) investors in the securities of a party, provided
that the receiving party provides prior written notice of such disclosure to the
disclosing party and takes reasonable and lawful actions to avoid and/or
minimize the degree of such disclosure, and (b) to their legal representatives,
to affiliates and their legal representatives, and to consultants to the extent
such disclosure is intended to further the purposes contemplated under this
Outline of Terms, the D&L Agreement, and the Detailed Agreement, provided such
legal representatives, affiliates and consultants are covered by obligations of
confidentiality with respect to such information no less stringent than those
set forth herein, and further (c) in connection with publications, lectures,
seminars or other presentations with respect to which all parties hereto have
agreed in advance in writing.
11. RIGHTS RESERVED TO ROCHE
11.1 The parties acknowledge that Genentech is a party to certain agreements
with F. Hoffman-La Roche Ltd. and certain of its affiliates (collectively,
"Roche") under which Roche has certain rights to products being developed by
Genentech (the "G/R Agreements"). In the event Roche exercises its rights under
the G/R Agreements, Genentech and Roche have requested that certain rights to
participate in the commercialization of the anti-IgE Product be reserved to
Roche. Subject to receipt by Ciba and Tanox of a joint notification by Roche and
Genentech of Roche's exercise of rights under the G/R Agreements and to its
joinder in this Outline of Terms and the Detailed Agreement implementing and
completing the terms outlined herein, the parties agree to reserve for Roche's
benefit certain rights to participate in commercialization of the anti-IgE
Product in Europe and Japan as set forth in this Section 11.
11.2 For Europe and Japan, Roche shall have an option to participate in the
commercialization of the anti-IgE Product according to the following terms:
Roche's option, which shall be established and may be exercised on a
country-by-country basis, will be subject to the anti-IgE Product having a
significant "general practitioner potential" ("GP potential") in each country.
The GP potential of the anti-IgE Product is characterized in particular by the
following (cumulative) criteria: (i) clinical activity in patients with mild to
moderate allergic asthma and/or allergic rhinitis is demonstrated; (ii) a
patient friendly formulation (e.g. inhalation device or pen for autoinjection);
(iii) safety profile of the Product and its application is adequate for
self-administration; (iv) dose level and cost for the galenical formulation
and/or a device, such as to permit pricing accepted for reimbursement by social
security schemes in the respective country with a sufficient gross margin to
support the business case for co-promotion.
<PAGE>
The envisaged commercialization scheme in Europe would be a co-promotion by
Roche of the anti-IgE Product sold by Ciba wherever legally possible and, in
those countries in Europe where no co-promotion is possible, each of Ciba and
Roche may market and sell the anti-IgE Product under different trademarks on its
own. The commercial terms and conditions e.g. modus of exercising of the option
(until submission of marketing authorization to the competent authorities at the
latest), time and manner in which reimbursement/sharing of development costs
will occur, and manner in which co-promotion sales will be attributed to each
party, etc., will be part of the detailed agreement(s) referenced in Section
8.2. It is understood, however, that each Ciba and Roche should be able to make
bookings of sales in the same order of magnitude.
11.3 For each country in Europe in which Roche exercises its option, Ciba
agrees to share profits on a * basis under a co-promotion scheme, subject also
to a * sharing of all development and commercialization costs as provided in
Sections 2 and 3 above, in lieu of the * cost and profit sharing for Europe
otherwise provided in such Sections 2 and 3. For any country in Europe in which
Roche chooses not to exercise its option, the cost and profit sharing ratios
will continue to be * between Ciba and Genentech, as set out in Section 3.2
paragraph 2 above. In case of a co-marketing in a country Ciba and Roche shall
negotiate in good faith the terms and conditions of such co-marketing in that
country on the basis of a * sharing of the pertaining development cost, but,
with respect to that country no sharing of marketing cost nor profit sharing
neither between the co-marketing parties nor according to sections 2 and 3 above
shall apply. If Roche exercises its option hereunder only for a limited number
but not for all countries in Europe, then the costs to be shared in each country
in which Roche exercises its option(s) will be based on a allocation of all
development and commercialization costs attributable to Europe on a pro rata
basis to each such country in a manner to be agreed upon according to the
prospective sales potential for the anti-IgE Product in each of the countries in
Europe. Profits for each such country will be based on total sales revenues for
the anti-IgE Product in each such country.
11.4 At the time Roche exercises its option for any country in Europe, Roche
and Genentech shall notify Ciba of their agreement regarding which of them will
be responsible for the costs to be shared or whether each will share a portion
thereof and regarding the manner in which they will participate in the profits
to be shared. Such notice will be accompanied by payment of an amount sufficient
to reduce Ciba's share in those costs already shared on a * basis to *.
11.5 In Japan, subject to Roche's participation in co-development of the
anti-IgE Product for Japan, Roche shall have an option to market and sell the
approved anti-IgE Product on its own under a different trademark. To maintain
its rights for Japan hereunder, Roche shall have twelve (12) months from the
date of execution of this Outline of Terms in which to notify Ciba and Tanox of
its
<PAGE>
election to participate in the development of the anti-IgE Product for
Japan. At such time as Roche notifies Ciba of such election, Roche shall be
obligated to reimburse Ciba for * of all development costs incurred by Ciba for
development in Japan since the Selection Date and Roche shall be entitled
immediately to participate with Ciba/Tanox in the development activities in
Japan on the basis of a * sharing of development cost including the milestone
payments to Tanox due on filing and grant of NDA/PLA in Japan, as specified in
the D&L Agreement. In the event that it should become evident that the anti-IgE
Product has no GP Potential in Japan, contrary to prior expectations, Ciba
and/or Roche may chose to terminate the joint development in Japan, and Ciba
shall retain all further rights to development and commercialization of the
anti-IgE Product in Japan against reimbursement of Roche's development cost
including mile-stone payment, if any incurred.
11.6 The parties acknowledge that the detailed agreement(s) contemplated
under Section 8.2 will contain provisions which complete and implement the terms
outlined in this Section 11. The parties agree that Roche may participate in
negotiations relating to such provisions whether or not Roche has exercised its
rights under the G/R Agreements so that Roche will have the opportunity to
participate in establishing the detailed terms governing the rights reserved to
Roche hereunder.
12. EARLY TERMINATION
Genentech may terminate the cooperation hereunder at any time during the
development of the Anti-IgE Product by giving 120 days prior notice to Ciba
and Tanox and paying all amounts due hereunder up to such termination date.
If Genentech terminated its cooperation hereunder, Roche shall have the
option exerciseable for a period of 30 days after Genentech's termination,
to assume all of Genentech's rights and obligations hereunder. If Roche
does not exercise such option, all of Genentech's rights under this
cooperation, except for rights with respect to which Roche has exercised
its options under Section 11, shall revert to Ciba, which shall be entitled
to continue the development and to commercialize the Anti-IgE Product on
its own or with Roche, as the case may be, without further compensation to
Genentech, an which shall assume Genentech's obligations hereunder.
Ciba may terminate the cooperation hereunder at any time during the
development of the Anti-IgE Product by giving 120 days prior notice to
Genentech and Tanox and paying all amounts due hereunder up to such
termination date. Such notice also shall act as notice to Tanox of Ciba's
termination of the D&L Agreement. In such even, subject to the right of the
parties hereunder, the termination
<PAGE>
provisions of the D&L Agreement shall govern such termination. Genentech
and, as applicable, Roche shall be entitled to continue development in the
U.S., Europe, and Japan, as the case may be, in Ciba's stead, subject to
assuming Ciba's obligations hereunder, and to reimbursing Tanox for any
compensation which may be payable by Tanox to Ciba as a result of such
termination. Tanox shall have and retain exclusive rights for the
commercialization of the Anti-IgE Product in all other countries in the
world.
13. BINDING NATURE
The contents of this Ouline of Terms represent the bona fide intent of the
parties. The parties hereto shall use all reasonable effort to complete the
final agreement(s) as referred to in Section 8.2 above as soon as
reasonably practicable. It is understood, however, that unless and until
the said formal agreement(s) is/are completed and entered into the parties
(including their legal successors) shall be legally bound by and shall
operate under the terms reflected in the present Outline of Terms, which
shall be governed by the laws of the State of New York without regard to
conflict of law principles.
Tanox Biosystems Inc.: Date____________________
Genentech Inc.: Date____________________
Genentech International Limited: Date____________________
Ciba-Geigy Limited: Date____________________
<PAGE
> APPENDIX TO OUTLINE OF TERMS
DEFINITION OF FULLY BURDENED MANUFACTURING COST
Genentech's Fully Burdened Manufacturing Cost shall mean:
(a) the actual direct cost associated with the manufacture of the Anti-IgE
Product, i.e. direct material cost, direct labor cost, direct equipment
cost, direct facility expense, direct quality control expense, direct
energy cost, direct environmental expense, provided, however, that such
actual direct cost shall not include cost associated with idle plant
capacity, plus
(b) an allocation of Genentech's overhead cost associated with such
manufacture, up to a maximum of fifty percent of the actual price cost,
which allocation for manufacturing overhead shall be made in accordance
with U.S. Generally accepted cost accounting principles consistently
applied by Genentech across all similar pharmaceutical manufacture
operations, plus
(c) Genentech's allocable intellectual property acquisition, licensing and
royalty cost paid to third parties (except Tanox) upon the sale of Anti-IgE
Products to third parties, plus
(d) any other costs borne by Genentech for transport, customs clearance and
storage of Anti-IgE Product, to the extent necessary (i.e. freight, duty,
insurance and warehousing).
<PAGE>
EXHIBIT 2
REPRESENTATIONS AND WARRANTIES BY TANOX
(a) Before executing this Agreement, Tanox became fully informed of the terms,
contents, conditions, and effect of this Agreement.
(b) Tanox is a corporation duly organized, existing, and in good standing under
the laws of the State of Texas.
(c) Tanox possesses all requisite power and authority to enter into and perform
this Agreement and to carry out the transactions contemplated herein.
(d) Tanox has taken all necessary corporate and legal action to authorize the
execution, delivery, and performance of this Agreement.
(e) No consent or authorization of, filing with or any other act by or in
respect of any other person (including any shareholder or creditor) or
court is required in connection with the settlement of All Claims as set
forth in this Agreement or with the execution, delivery, or performance by
Tanox or the validity or enforceability as to Tanox of this Agreement.
(f) This Agreement has been duly executed and delivered by Tanox and
constitutes a legal, valid and binding obligation of Tanox enforceable
against Tanox in accordance with its terms.
(g) No promise or representation of any kind has been made to Tanox or by
anyone acting for Tanox, except as is expressly stated in this Agreement.
(h) Except for certain claims or portions thereof which may have been assigned
to its attorneys, Tanox is the lawful owner of All Claims asserted by Tanox
in the Lawsuit and has not assigned, pledged, or in any other manner sold
or transferred any right, title, interest, or claim that arises out of or
is the subject of the Incident and/or the Lawsuit.
(i) In entering this Agreement, Tanox has had the benefit of the advice of
lawyers of its own choosing; and Tanox enters this Agreement freely, by
Tanox's own choice, and judgment, and without duress or other influence.
(j) Tanox understands that this Agreement is a full, final, and complete
release of the other Party to this Agreement and that the Consideration
includes the ONLY benefits Tanox shall ever receive from such Party as a
result of the Incident and the Lawsuit.
(k) Tanox recognizes that the recitations contained in this Agreement are
contractual and not a mere recital.
<PAGE>
EXHIBIT 3
REPRESENTATIONS AND WARRANTIES BY GENENTECH
(a) Before executing this Agreement, Genentech became fully informed of the
terms, contents, conditions, and effect of this Agreement.
(b) Each of Genentech, Inc. and Genentech International Limited is a
corporation duly organized, existing, and in good standing under the laws
of the respective state, country, or jurisdiction under which they each
have been organized.
(c) Genentech possesses all requisite power and authority to enter into and
perform this Agreement and to carry out the transactions contemplated
herein.
(d) Genentech has taken all necessary corporate and legal action to authorize
the execution, delivery, and performance of this Agreement.
(e) No consent or authorization of, filing with or any other act by or in
respect of any other person (including any shareholder or creditor) or
court is required in connection with the settlement of All Claims as set
forth in this Agreement or with the execution, delivery, or performance by
Genentech or the validity or enforceability as to Genentech of this
Agreement.
(f) This Agreement has been duly executed and delivered by Genentech and
constitutes a legal, valid and binding obligation of Genentech enforceable
against Genentech in accordance with its terms; provided, that this
representation is not intended to apply to Section 2.7 of the Agreement.
(g) No promise or representation of any kind has been made to Genentech or by
anyone acting for Genentech, except as is expressly stated in this
Agreement.
(h) Genentech is the lawful owner of All Claims asserted by Genentech in the
Lawsuit and has not assigned, pledged, or in any other manner sold or
transferred any right, title, interest, or claim that arises out of or is
the subject of the incident and/or the Lawsuit.
(i) In entering this Agreement, Genentech has had the benefit of the advice of
lawyers of its own choosing; and Genentech enters this Agreement freely, by
Genentech's own choice, and judgment, and without duress or other
influence.
(j) Genentech understands that this Agreement is a full, final, and complete
release of the other Party to this Agreement and that the Consideration
includes the ONLY benefits Genentech shall ever receive from such Party as
a result of the incident and the Lawsuit.
(k) Genentech recognizes that the recitations contained in this Agreement are
contractual and not a mere recital.
<PAGE>
EXHIBIT 4
PAYMENT AMOUNTS
EVENT PAYMENT AMOUNT
------------- ----------------
(a) Execution of this Agreement and dismissal of all claims in *
the Lawsuit as described in Paragraph 2.1 of this Agreement.
(b) Initiation of the first Pivotal Clinical Trial *
(c) Filing of the first Product License Application (or *
equivalent in the U.S.)
(d) First approval by the Food and Drug Administration of a *
Product License Application (or equivalent in the U.S.)
(e) At such time as total annual net sales of all Genentech *
Licensed Products and Anti-IgE Antibody products sold
under the Outline of Terms and Definitive Agreement
first exceed *
If the total payment set forth above has been made by Genentech under this
Agreement for an event described above, no additional payment shall be due under
this Agreement for any subsequent occurrence that is covered by the language
describing that event.
<PAGE>
EXHIBIT 5
SECTION 9.0 PATENTS
U. S. Patent Nos. 4,356,270
4,366,246
4,425,437
4,431,739
4,571,421
4,704,362
5,221,619
5,420,020
and any and all patents maturing from applications that are divisionals,
continuations or continuations-in-part of the parent applications of any of the
foregoing; foreign counterparts, if any, of the foregoing; and any and all
reissues or extensions of any of the foregoing.
U. S. Patent No. 4,816,567 and the claims relating to chimeric antibodies
found in patents or patent applications arising from divisionals, continuations
or continuations-in-part of any application from which U.S. Patent No. 4,816,567
claims priority (excluding U.S.S.N. 07/205,419 and foreign counterparts thereof)
as well as the foreign counterparts of the foregoing and any and all reissues,
reexaminations or extensions of the foregoing; and
any patent issuing based on U.S.S.N. 07/205,419 (a continuation of the
application maturing into U. S. Patent No. 4,816,567) relating to the
coexpression of immunoglobulin chains in recombinant host cells, as well as the
divisionals, continuations or continuations-in-part of such application as well
as foreign counterparts, if any, of the foregoing; and any and all reissues,
reexaminations or extensions of the foregoing.
<PAGE>
EXHIBIT 6
TANOX PRODUCT OPPORTUNITIES
o Allergen-specific human IgA antibodies for mucosal administration.
o Anti-HIV-1 neutralizing antibodies.
o MIGIS-mIgA antibodies (against a portion of membrane IgA).
o MIGIS-mIgG antibodies (against a portion of membrane IgG). o MIGIS-mIgM
antibodies (against a portion of membrane IgM).
o Anti-Rh antibodies.
o Antibodies against adipocytes.
o Anti-tissue factor antibodies.
o Anti-complement pathway antibodies.
o Anti-Epstein Barr virus antibodies.
o Anti-mb-1 antibodies.
o Anti-drug resistant bacteria MAbs
o Therapeutic immunogen for treating human IgE-mediated diseases. o Novel
anti-HIV binding protein and related products. o PLATAR (Polyvalent
ligand against T-cell antigen receptors): Polyvalent binding
fragments of T-cell receptors, including anti-CD3).
<PAGE>
EXHIBIT 7
Foreign patents and applications based on U.S. Serial No. 07/110,255 entitled
METHOD AND THERAPEUTIC COMPOSITIONS FOR THE TREATMENT OF BLEEDING DISORDERS
filed October 20, 1987, which is a continuation-in-part of U.S. Serial No.
06/926,977
and
U.S. and foreign patents and applications based on U.S. Serial No. 07/237,585
entitled METHOD AND THERAPEUTIC COMPOSITIONS FOR THE TREATMENT OF MYOCARDIAL
INFARCTION filed August 25, 1988, which is a continuation-in-part of U.S. Serial
No. 07/209,665 filed June 21, 1988, which is a continuation-in-part of U.S.
Serial No. 110,2565 filed October 20, 1987, which is a continuation-in-part of
U.S. Serial No. 06/926,977 filed Nov. 4, 1986.
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.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 2000
