<PAGE>
As filed with the Securities and Exchange Commission on August 7, 2000
Registration No. 333-33868
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TELIK, INC.
(Exact name of registrant as specified in its charter)
Delaware 8731 93-0987903
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Identification No.)
incorporation or Number)
organization)
750 Gateway Boulevard
South San Francisco, California 94080
(650) 244-9303
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Michael M. Wick, MD, PhD
Chairman and Chief Executive Officer
Telik, Inc.
750 Gateway Boulevard
South San Francisco, California 94080
(650) 244-9303
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Deborah A. Marshall, Esq. Edwin D. Williamson, Esq.
Gregory B. Abbott, Esq. Sullivan & Cromwell
Cooley Godward LLP 1701 Pennsylvania Avenue
One Maritime Plaza Washington, D.C. 20006
20th Floor (202) 956-7500
San Francisco, CA 94111-3580
(415) 693-2000
----------------
Approximate date of proposed sale to the public: As soon as practicable
after the 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 of
1933 (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 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,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
-------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Amount Maximum Maximum
Title Of Securities To To Be Offering Price Aggregate Amount Of
Be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee(3)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01.................. 5,750,000 $11.00 $63,250,000 $16,698(4)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 750,000 shares of common stock issuable upon the exercise of the
underwriters' over-allotment option, if any.
(2) Estimated solely for the purposes of calculating the amount of the
registration fee.
(3) Calculated pursuant to Rule 457(a).
(4) Previously paid.
----------------
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.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus
Subject to completion, dated August 7, 2000
5,000,000 Shares
[LOGO OF TELIK, INC. APPEARS HERE]
Telik, Inc.
Common Stock
--------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
5,000,000 shares. No public market currently exists for our common stock.
Our common stock has been approved for listing on the NASDAQ National Market
under the symbol "TELK." We expect the public offering price to be between
$9.00 and $11.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 4.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds, before expenses, to Telik................................. $ $
</TABLE>
We have granted the underwriters a 30 day option to purchase up to 750,000
shares of common stock on the same terms and conditions as set forth above to
cover over-allotments, if any.
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.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 2000.
--------------------------------------------------------------------------------
Lehman Brothers
Chase H & Q
Legg Mason Wood Walker
Incorporated
UBS Warburg LLC
Fidelity Capital Markets
a division of National Financial Services
Corporation
<PAGE>
Inside Front Cover Graphic
Title: Working to discover, develop and commercialize small molecule
therapeutics to treat major diseases including cancer and diabetes.
Legend: Product Pipeline.
Graphic Description: This graphic shows Telik's product pipeline and the
stage of development of Telik's product candidates. In the background is a C-
shaped figure containing the words TRAP technology spanning the graphic from
left to right to indicate that all of our product candidates have been
discovered using TRAP. Extending from lower left to upper right are four
rectangles. The rectangle at the lower left, labeled blockers of disease-
related proteins, is aligned with the label Research to indicate that these
programs are at the research stage. Moving right, the next rectangle, labeled
insulin-like diabetes drug candidate, is aligned with the label Animal Safety
Studies to indicate that these product candidates are being tested in animal
safety studies. The third rectangle in the sequence, labeled TLK199 bone marrow
stimulant, is also aligned with the label Animal Safety Studies to indicate
that the product candidate TLK199 is being tested in animal safety studies. The
final rectangle at the upper right, labeled TLK286 tumor activated cancer drug
candidate, is aligned with the label Initial Human Studies indicate that the
product candidate TLK286 is in phase I clinical trials.
<PAGE>
Gatefold Graphic
Title: TLK286 A drug candidate in Phase I clinical trials designed to bind
to a protein and release a cancer killing drug.
Graphic Description: This is a depiction of a cancer cell, where TLK286
binds to a cancer drug inhibitor and releases an active cancer drug, which is
represented by a pair of scissors. The activated cancer drug is shown moving
into the nucleus of the cell where it causes cell death.
Title: TLK199 A drug candidate in preclinical safety testing designed to
restore white blood cell levels in patients undergoing cancer treatment.
Graphic Description: This is a depiction of a bone marrow cell and shows how
TLK199 interacts with the same pathway as the natural producer of white blood
cells, leading to the growth of white blood cells.
Legend: TLK199 is designed to enter the cell and activate the same pathway
that produces white blood cells naturally.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 4
Special Note Regarding Statements of
Expected Future Performance......... 11
Use of Proceeds...................... 12
Dividend Policy...................... 12
Capitalization....................... 13
Dilution............................. 14
Selected Financial Data.............. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
</TABLE>
<TABLE>
<S> <C>
Business......................... 19
Management....................... 35
Related Party Transactions....... 45
Principal Stockholders........... 46
Description of Capital Stock..... 49
Shares Eligible for Future Sale.. 51
Underwriting..................... 52
Legal Matters.................... 54
Experts.......................... 54
Where You Can Find More
Information..................... 54
Index to financial statements.... F-1
</TABLE>
Until , 2000 (25 days after the date of this prospectus), all dealers
selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
"Telik" and the Telik logo are trademarks of Telik, Inc. Other trademarks
and trade names appearing in this prospectus are the property of their holders.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors." Our principal
executive offices are located at 750 Gateway Boulevard, South San Francisco, CA
94080. Our telephone number is (650) 244-9303.
Telik, Inc.
Telik is a biopharmaceutical company working to discover, develop and
commercialize drugs to treat serious diseases for which there is significant
demand for new therapies. Our most advanced product development programs are
for the treatment of cancer and diabetes. Our first product candidate, TLK286,
is for the treatment of major cancers that have resisted standard treatments.
TLK286 kills cancer cells by being activated by the same mechanism that
normally deactivates chemotherapeutic drugs. We began clinical trials for
TLK286 in January of this year. We expect to advance our second product
candidate, TLK199, into human clinical trials in the first half of 2001. TLK199
is for the treatment of the depletion of infection-fighting white blood cells,
which is a toxic side effect of cancer therapy. TLK199 activates the same
signaling pathway that is activated by granulocyte colony stimulating factor,
or G-CSF, known as Neupogen, causing the stimulation of white blood cell
production. TLK199 accelerates the recovery from chemotherapy-induced low white
blood cell levels in animals, similar to the results observed following
treatment with G-CSF. TLK199 and G-CSF also produce similar increases in the
number of circulating white blood cells in normal animals. We are conducting
preclinical development studies of TLK199 and intend to file an Investigational
New Drug application, or IND, with the FDA, for the initiation of clinical
trials in the first half of 2001. We have retained rights for the worldwide
commercialization of TLK286 and TLK199. We are initiating preclinical safety
studies to support the development of a product candidate from a proprietary
family of orally active insulin receptor activators for the treatment of Type 2
diabetes. All of our product candidates are in early stages of development and
we face the risks of failure inherent in developing drugs based on new
technologies. To date, we have no products that have generated any revenue.
Consequently, we have generated operating losses since we began operations.
All of our product candidates are small molecules. Small molecule drugs
offer advantages in ease of manufacturing and administration, the potential for
oral dosing and applicability to a wider range of disease targets, including
those inside the cell. We discovered all of our product candidates using our
proprietary technology known as Target-Related Affinity Profiling, or TRAP,
which enables the rapid and efficient discovery of small molecule product
candidates. TRAP exploits a fundamental property of all drugs, which is their
interaction with molecules in the body called proteins. By developing a profile
of how a protein disease target interacts with small molecules, we are able to
select product candidates for development much faster than with alternative
technologies, such as ultra high-throughput screening, or UHTS. We continuously
protect the intellectual property surrounding our product candidates and our
technology platform. In the United States, we hold 36 patents protecting our
discoveries, and more than 16 applications are pending. In addition, outside
the United States, we hold 56 patents, and more than 79 patent applications are
pending.
Strategy
Key elements of our strategy are to:
. develop small molecule drugs for major disease areas, such as cancer,
diabetes, inflammatory diseases and stroke;
. retain significant commercialization rights to our product candidates;
. select targets where we believe we can show efficacy early and where we
believe there is a shorter path to regulatory approval;
. use TRAP to sustain a pipeline of product candidates; and
. leverage and expand the use of TRAP by entering into additional
technology collaborations.
1
<PAGE>
The Offering
The following information assumes that the underwriters do not exercise the
over-allotment option we granted to them to purchase additional shares in the
offering.
<TABLE>
<C> <S>
Common stock we are offering............... 5,000,000 shares
Common stock to be outstanding after the
offering................................. 21,583,707 shares
Proposed Nasdaq National Market symbol..... TELK
Use of proceeds............................ Research and development and
general corporate purposes
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares of common stock outstanding as of June 30,
2000, after giving effect to the automatic conversion upon the closing of this
offering of all convertible preferred stock outstanding as of June 30, 2000
into 13,806,702 shares of common stock and the exercise of 433,648 shares
underlying stock options subsequent to June 30, 2000.
Shares to be outstanding excludes:
. 34,559 shares of common stock underlying warrants outstanding as of June
30, 2000 with a weighted average exercise price of $5.28 per share;
. 3,003,418 shares of common stock underlying options outstanding as of
June 30, 2000 with a weighted average exercise price of $1.46 per share,
of which 433,648 shares were exercised subsequent to June 30, 2000; and
. 2,000,000 shares available for issuance or future grant under our 2000
Equity Incentive Plan stock option plan, 250,000 shares available for
issuance under our 2000 Employee Stock Purchase Plan and 300,000 shares
available for issuance under our 2000 Non-Employee Directors' Stock
Option Plan.
2
<PAGE>
Summary Financial Data
The pro forma net loss per share amounts and shares used in computing pro
forma net loss per share amounts are calculated as if all of our convertible
preferred stock was converted into shares of common stock on the date of their
issuance. The as adjusted balance sheet data gives effect to the conversion of
preferred stock, and to the sale of 5,000,000 shares of our common stock at an
assumed initial public offering price of $10.00 per share, after deducting the
estimated underwriting discount and offering expenses.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Contract revenues from
collaborations................. $ 1,652 $ 3,194 $ 4,237 $ 2,489 $ 1,330
Total operating expenses........ 10,560 10,101 11,699 5,970 9,708
Net loss........................ (8,618) (6,579) (7,064) (3,255) (8,127)
Deemed dividend to preferred
stockholders................... -- -- -- -- (4,667)
------- ------- ------- -------- --------
Net loss allocable to common
stock holders.................. (8,618) (6,579) (7,064) (3,255) (12,794)
======= ======= ======= ======== ========
Net loss per common share, basic
and diluted.................... $ (3.95) $ (3.00) $ (3.21) $ (1.48) $ (5.75)
======= ======= ======= ======== ========
Weighted average shares used in
computing net loss per common
share, basic and diluted....... 2,184 2,194 2,204 2,200 2,225
Pro forma net loss per common
share, basic and diluted....... $ (0.47) $ (0.83)
======= ========
Weighted average shares used in
computing pro forma net loss
per common share, basic and
diluted........................ 14,879 15,489
</TABLE>
<TABLE>
<CAPTION>
As of June
30, 2000
------------------
As
Actual adjusted
-------- --------
(In thousands,
unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments........... $ 9,437 $ 54,437
Working capital............................................. 7,347 52,347
Total assets................................................ 11,743 56,743
Capital lease obligations, less current portion............. 20 20
Deferred stock compensation................................. (2,654) (2,654)
Accumulated deficit......................................... (59,511) (59,511)
Total stockholders' equity.................................. $ 8,295 $ 53,295
</TABLE>
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below together with all of
the other information included in this prospectus before making an investment
decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In that case, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Our Business
We have a history of net losses, which we expect to continue for at least
several years. We will never be profitable unless we develop, and obtain
regulatory approval and market acceptance of, our product candidates.
Due to the significant research and development expenditures required to
develop our TRAP technology and identify new product candidates and the lack of
any products to generate revenue, we have not been profitable and have
generated operating losses since we were incorporated in 1988. As of June 30,
2000, we had an accumulated deficit of approximately $59.5 million. We expect
to incur losses for at least the next several years and expect that these
losses will actually increase as we expand our research and development
activities and incur significant clinical testing costs. To date, we have
derived substantially all of our revenue from project initiation fees and
research reimbursement paid pursuant to existing collaborative agreements with
third parties and achievement of milestones under current collaborations. We
expect that this trend will continue until we develop, and obtain regulatory
approval and market acceptance of, our product candidates. We cannot assure you
when, if ever, we will receive product revenue, if any, sufficient to become
profitable.
All of our product candidates are in research and development. If clinical
trials of TLK286 are delayed or unsuccessful, if the IND for TLK199 is not
accepted, or if we are unable to complete the preclinical development of our
diabetes product candidate, our business may be adversely effected.
Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us or our collaborators several years to
complete this testing, and failure can occur at any stage of the process.
Success in preclinical testing and early clinical trials does not ensure that
later clinical trials will be successful. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials.
Only one of our product candidates, TLK286, has advanced to the stage of
human testing designed to determine safety, known as phase I clinical trials
and, to date, we have only limited data on safety and efficacy in humans. We
are in the process of conducting the necessary work to support the filing of an
IND application for TLK199, our second cancer product candidate. The FDA may
require us to run more preclinical tests, which could delay commencing clinical
trials of TLK199. Finally, our success depends, in part, on our ability to
complete preclinical development of our diabetes product candidates and take
them through early clinical trials. We do not anticipate that any of our
products will reach the market for at least several years.
If we are unable to continue to identify new product candidates using TRAP, our
proprietary drug discovery technology, we may not be able to maintain our
product pipeline and develop commercially viable drugs.
We believe that our ability to compete depends, in part, on our ability to
use our proprietary TRAP technology to discover, develop and commercialize new
pharmaceutical products. TRAP technology is a relatively new drug discovery
method that uses a protein panel of approximately 20 proteins selected for
their distinct patterns of interacting with small molecules. This panel may
lack essential types of interactions that we have not yet identified, which may
result in our inability to identify active compounds that have the potential to
be developed into commercially viable drugs.
4
<PAGE>
If our competitors develop and market products that are more effective than
ours, or obtain marketing approval before we do, our commercial opportunity
will be reduced or eliminated.
The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Some of the drugs
that we are attempting to develop, for example TLK199, will be competing with
existing therapies. In addition, a number of companies are pursuing the
development of pharmaceuticals that target the same diseases and conditions
that we are targeting. We face competition from pharmaceutical and
biotechnology companies in the United States and abroad. Our competitors may
develop new screening technologies and may utilize discovery techniques or
partner with collaborators in order to develop products more rapidly or
successfully than we, or our collaborators, are able to do. Many of our
competitors, particularly large pharmaceutical companies, have substantially
greater financial, technical and human resources than we do. In addition,
academic institutions, government agencies and other public and private
organizations conducting research may seek patent protection with respect to
potentially competing products or technologies and may establish exclusive
collaborative or licensing relationships with our competitors.
Our competitors may succeed in developing technologies and drugs that are
more effective or less costly than any which are being developed by us or which
would render our technology and potential drugs obsolete and noncompetitive. In
addition, our competitors may succeed in obtaining FDA or other regulatory
approvals for product candidates more rapidly than we, or our collaborators. We
cannot assure you that drugs resulting from our research and development
efforts, or from our joint efforts with our existing or future collaborative
partners, will be able to compete successfully with competitors' existing
products or products under development or that they will obtain regulatory
approval in the United States or elsewhere.
If we are unable to raise adequate funds in the future, we will not be able to
continue to fund our operations, research programs, preclinical testing and
clinical trials to develop our products.
The process of carrying out the development of our own unpartnered products
to later stages of development and developing other research programs to the
stage that they may be partnered will require significant additional
expenditures, including preclinical testing, clinical trials and obtaining
regulatory approval. As a result, we will require additional financing to fund
our operations. We do not know whether additional financing will be available
when needed, or that, if available, we will obtain financing on terms favorable
to our stockholders. We have expended substantial amounts of cash to date and
expect capital outlays and operating expenditures to increase over the next
several years as we expand our research and development activities.
We believe that the net proceeds from this offering, existing cash and
investment securities and anticipated cash flow from existing and future
collaborations, if any, will be sufficient to support our current operating
plan through at least the next 18 months; however, we have based this estimate
on assumptions that may prove to be wrong. Our future funding requirements will
depend on many factors, including, but not limited to:
. the progress and success of preclinical and clinical trials of our
product candidates;
. the progress and number of research programs in development;
. the costs and timing of obtaining regulatory approvals;
. our ability to establish, and the scope of, new collaborations;
. our ability to meet the milestones identified in our collaborative
agreements which trigger payments; and
. the costs and timing of obtaining, enforcing and defending our patent and
intellectual property rights.
If we do not obtain regulatory approval to market products in the United States
and foreign countries, we or our collaborators will not be permitted to
commercialize our product candidates.
Even if we are able to achieve success in our preclinical testing, we, or
our collaborators, must provide the FDA and foreign regulatory authorities with
clinical data that demonstrate the safety and efficacy of our
5
<PAGE>
products in humans before they can be approved for commercial sale. Failure to
obtain regulatory approval will prevent commercialization of our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be
obtained for any product that we are developing or hope to develop. A
pharmaceutical product cannot be marketed in the United States until it has
completed rigorous preclinical testing and clinical trials and an extensive
regulatory clearance process implemented by the FDA. Satisfaction of regulatory
requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial
resources. Of particular significance are the requirements covering research
and development, testing, manufacturing, quality control, labeling and
promotion of drugs for human use.
Before commencing clinical trials in humans, we, or our collaborators, must
submit and receive approval from the FDA of an IND application. We must comply
with FDA "Good Laboratory Practices" regulations in our preclinical studies.
Clinical trials are subject to oversight by institutional review boards and the
FDA and:
. must be conducted in conformance with the FDA's IND regulations;
. must meet requirements for informed consent;
. must meet requirements for Good Clinical Practices;
. may require large numbers of participants; and
. may be suspended by us, our collaborators or the FDA at any time if it is
believed that the subjects participating in these trials are being
exposed to unacceptable health risks or if the FDA finds deficiencies in
the IND application or the conduct of these trials.
Before receiving FDA clearance to market a product, we or our collaborators
must demonstrate that the product is safe and effective in the patient
population that will be treated. Negative or inconclusive results or adverse
medical events during a clinical trial could cause a clinical trial to be
repeated or a program to be terminated or could delay getting approval. We
typically rely on third party clinical investigators to conduct our clinical
trials and other third party organizations to perform data collection and
analysis and, as a result, we may face additional delaying factors outside our
control. In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy or interpretation during the period of product
development, clinical trials and FDA regulatory review. Failure to comply with
applicable FDA or other applicable regulatory requirements may result in
criminal prosecution, civil penalties, recall or seizure of products, total or
partial suspension of production or injunction, as well as other regulatory
action. We have limited experience in conducting and managing the clinical
trials necessary to obtain regulatory approval.
If regulatory clearance of a product is granted, this clearance will be
limited to those disease states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious. We cannot
ensure that any compound developed by us, alone or with others, will prove to
be safe and efficacious in clinical trials and will meet all of the applicable
regulatory requirements needed to receive marketing clearance.
Outside the United States, the ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process typically includes all of
the risks associated with FDA clearance described above and may include
additional risks.
If physicians and patients do not accept our products, our ability to generate
product revenue in the future will be adversely affected.
Our product candidates may not gain market acceptance among physicians,
patients and the medical community. We believe that market acceptance will
depend on our ability to provide acceptable evidence of
6
<PAGE>
safety, efficacy, convenience and ease of administration and cost
effectiveness. In addition, we believe market acceptance depends on the
effectiveness of our marketing strategy and the pricing of our products.
Physicians may elect not to recommend our products even if we meet the above
criteria. If any of our product candidates fails to achieve market acceptance,
we may not be able to successfully market and sell the product, which would
limit our ability to generate revenue and adversely affect our operations.
If we, or our licensees and licensors, cannot obtain and defend our respective
intellectual property rights, or if our products or technologies are found to
infringe patents of third parties, we could become involved in lengthy and
costly legal proceedings that could adversely affect our success.
Our success will depend in large part on our own, our licensees' and our
licensors' ability to obtain and defend patents for each party's respective
technologies and the compounds and other products, if any, resulting from the
application of these technologies. The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve complex legal and
factual questions. Accordingly, we cannot predict the breadth of claims allowed
in our or other companies' patents.
Our success will also depend, in part, on our ability to operate without
infringing the intellectual property rights of others. We cannot assure you
that our activities will not infringe patents owned by others. If our products
or technologies are found to infringe patents issued to third parties, the
manufacture, use and sale of our products could be enjoined, and we could be
required to pay substantial damages. In addition, we may be required to obtain
licenses to patents or other proprietary rights of third parties. No assurance
can be given that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to us, if at all. Failure to
obtain such licenses could negatively affect our business.
The degree of future protection for our proprietary rights is uncertain and
we cannot assure you that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products, will provide us with any competitive
advantages or will not be challenged by third parties;
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits, and we cannot predict whether we would be able to prevail
in any such suit.
Others may have filed and in the future may file patent applications
covering small molecules or therapeutic products that are similar to ours. We
cannot assure you that any patent application filed by someone else will not
have priority over patent applications filed by us. Any legal action against us
or our collaborators claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition
to subjecting us to potential liability for damages, require us or our
collaborators to obtain a license to continue to manufacture or market the
affected products and processes. We cannot predict whether we, or our
collaborators, would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If we become
7
<PAGE>
involved in litigation, it could consume a substantial portion of our
managerial and financial resources and we may not be successful in any such
litigation.
We also rely on trade secrets to protect technology, including our TRAP
technology, where we believe patent protection is not appropriate or
obtainable. However, trade secrets are difficult to protect. While we require
employees, academic collaborators and consultants to enter into confidentiality
agreements, we may not be able to adequately protect our trade secrets or other
proprietary information in the event of any unauthorized use or disclosure or
the lawful development by others of such information. If the identity of
specific proteins or other elements of our technology become known, our
competitive advantage in drug discovery could be reduced.
We will be dependent upon collaborative arrangements to complete the
development and commercialization of some of our product candidates. These
collaborative arrangements may place the development of our product candidates
outside of our control, may require us to relinquish important rights or may
otherwise not be on terms favorable to us.
We expect to enter into collaborative arrangements with third parties for
clinical trials, manufacturing, regulatory approvals or commercialization of
some of our products, particularly outside North America, or in disease areas
requiring larger and longer clinical trials, such as diabetes. Dependence on
collaborative arrangements will subject us to a number of risks. We may not be
able to control the amount and timing of resources our collaborative partners
may devote to the product candidates. Should a collaborative partner fail to
develop or commercialize a compound or product to which it has rights from us,
we may not receive any future milestone payments and will not receive any
royalties associated with this compound or product. Business combinations or
significant changes in a collaborative partner's business strategy may also
adversely affect a partner's willingness or ability to complete its obligations
under the arrangement. Failure to enter into additional collaborative
agreements on favorable terms could have a material adverse effect on our
business, financial condition and results of operations.
Some of our collaborations are for early stage programs and allow partners
significant discretion in electing whether to pursue any of the planned
activities. We do not anticipate significant revenues to result from these
relationships until the collaborator has advanced products into clinical
testing, which will not occur for several years, if at all. Such arrangements
are subject to numerous risks, including the right of the collaboration partner
to control the timing of the research and development efforts, and discretion
to advance lead candidates to clinical testing and commercialization of the
product. In addition, a collaborative partner could independently move forward
with a competing lead candidate developed either independently or in
collaboration with others, including our competitors.
If we are unable to contract with third parties to manufacture our products in
sufficient quantities and at an acceptable cost, we may be unable to meet
demand for our products and lose potential revenue.
We do not currently operate manufacturing facilities for clinical or
commercial production of our products under development. We currently lack the
resources or capability to manufacture any of our products on a clinical or
commercial scale. As a result, we will be dependent on corporate partners,
licensees or other third parties for the manufacturing of clinical and
commercial scale quantities of our products. Our products may be in competition
with other products for access to these facilities. For this and other reasons,
our collaborators or third parties may not be able to manufacture these
products in a cost effective or timely manner. If not performed in a timely
manner, the clinical trial development of our product candidates or their
submission for regulatory approval could be delayed, and our ability to deliver
products on a timely basis could be impaired or precluded. We are currently
dependent upon a sole source of supply for clinical quantities of TLK286 and
are in the process of identifying alternative suppliers. If our primary
supplier fails to perform, our clinical trials or commercialization of TLK286
would be delayed. We may not be able to enter into any necessary third-party
manufacturing arrangements on acceptable terms, if at all. Our current
dependence upon others for the manufacture of our products may adversely affect
our future profit margin and our ability to commercialize products on a timely
and competitive basis.
8
<PAGE>
If we are unable to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize products.
We currently have no sales, marketing or distribution capabilities. In order
to commercialize any products, we must internally develop sales, marketing and
distribution capabilities, or establish collaborations or other arrangements
with third parties to perform these services. We intend to market some products
directly in North America and rely on relationships with one or more
pharmaceutical companies with established distribution systems and direct sales
forces to market other products and address other markets. We may not be able
to establish in house sales and distribution capabilities or relationships with
third parties. To the extent that we enter into co-promotion or other licensing
arrangements, our product revenues are likely to be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon
the efforts of third parties, whose efforts may not be successful.
As our product programs advance, we will need to hire additional scientific and
management personnel. Our research and development efforts will be seriously
jeopardized if we are unable to attract and retain key personnel.
As a small company with approximately 37 employees, our success depends on
the continued contributions of our principal management and scientific
personnel and on our ability to develop and maintain important relationships
with leading academic institutions, scientists and companies in the face of
intense competition for such personnel. In particular, our research programs
depend on our ability to attract and retain highly skilled chemists and other
scientists. As we progress to advanced phase II and III clinical trials, we
will also need to expand our clinical development personnel. We do not have
employment contracts with our key employees. If we lose the services of Dr.
Michael Wick or any of our other key personnel, our research and development
efforts could be seriously and adversely affected. There is currently a
shortage of skilled executives and employees with technical expertise in the
biotechnology industry, and this shortage is likely to continue. As a result,
competition among numerous companies, academic and other research institutions
for skilled personnel and experienced scientists is intense and turnover rates
are high. In recent years, the cost of living in the San Francisco Bay Area has
increased significantly, which we expect will adversely impact our ability to
compete for qualified personnel. Because of this competitive environment, we
may encounter increasing difficulty in attracting qualified personnel as our
operations expand and the demand for these professionals increases, and this
difficulty could significantly impede the achievement of our research and
development objectives.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
products.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. If we are unable to obtain sufficient
product liability insurance at an acceptable cost, potential product liability
claims could prevent or inhibit the commercialization of pharmaceutical
products we develop, alone or with corporate collaborators.
If we use biological and hazardous materials in a manner that causes injury, we
may be liable for damages.
Our research and development activities involve the controlled use of
potentially harmful biological materials, hazardous materials, chemicals and
various radioactive compounds, and are subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of these
materials and specified waste products. We cannot completely eliminate the risk
of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources.
9
<PAGE>
Risks Related to The Offering
Our stock price may be volatile, and you may not be able to resell your shares
at or above the initial offering price.
The market prices for securities of biotechnology companies in general have
been highly volatile, with recent significant price and volume fluctuations,
and may continue to be highly volatile in the future. The initial public
offering price will be determined by negotiations between us and the
representatives of the underwriters based upon a number of factors and may not
be indicative of prices that will prevail in the trading market. You may not be
able to sell your shares quickly or at the market price if trading in our stock
is not active or the volume is low. The following factors, in addition to other
risk factors described in this section, may have a significant impact on the
market price of our common stock:
. announcements of technological innovations or new commercial products by
our competitors or us;
. developments concerning proprietary rights, including patents;
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disaster or crisis; or
. period-to-period fluctuations in financial results.
If our stockholders sell substantial amounts of our common stock after the
offering, the market price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. Substantially all of our outstanding
shares are subject to a lock up for 180 days after the completion of this
offering. After the lock up expires, at least 4,906,331 shares of our common
stock will become freely tradable and an additional 10,062,873 shares will be
tradable subject to Rules 144 and 701.
We intend to file a registration statement on Form S-8 covering shares
issuable upon exercise of options to purchase common stock and common stock
reserved for issuance under our stock plans.
10
<PAGE>
SPECIAL NOTE REGARDING STATEMENTS OF EXPECTED FUTURE PERFORMANCE
You should not rely on statements in this prospectus indicating expectations
about future performance. These statements reflect our views only as of the
date of this prospectus and you can usually identify them by terminology such
as "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "intend," "potential," or "continue" or the negative of
these terms or other comparable terminology. Examples of these statements
include, but are not limited to, statements regarding the following: the
development of TLK286, TLK199 or insulin receptor activators to treat cancer
and diabetes, our intention to file INDs for clinical testing for our product
candidates, the timing of the advancement of our product candidates into
preclinical and clinical trials, the design, goals and expansion of those
clinical trials, the selection of a product candidate from our proprietary
family of insulin receptor activators, our partnering with third parties to
share the costs of developing product candidates for diabetes and other
diseases that require larger and longer clinical trials, the use of TRAP to
select product candidates much faster than with alternative technologies, the
ability to address the U.S. hospital-based cancer market with a limited sales
and marketing presence, our entry into collaborations to assist in
commercializing our product candidates, our ability to apply our drug discovery
technology to virtually any protein target, our development of product
candidates with a clear path to regulatory approval and the potential to show
early evidence of clinical efficacy, our use of TRAP to provide a stream of
promising future development candidates, our selection of additional partners
for additional TRAP collaborations, the advantages of TLK199 over a therapeutic
protein, the effect of certain members of the TLK17411 family on more sensitive
control of blood sugar and on the delayed need for injected insulin, the
ability of our panel of proteins to simulate most of the significant
interactions between a small molecule and a protein, the use of TRAP to create
a small molecule library with a greater likelihood of containing a compound
that interacts with any specified protein and a higher probability of
generating drug candidates, the impact of our collaborations on our ability to
identify new product development and commercialization opportunities, the
financing sources for our future cash needs, our investment of the proceeds of
this offering, our use of third parties for materials production, the relations
with our employees and the adequacy of our existing facilities. Factors that
may cause actual results to differ materially from the results expressed or
implied by these statements are set forth under "Risk Factors."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,000,000 shares of common stock
in the offering are estimated to be $45,000,000 ($51,750,000 if the
underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $10.00 per share and after deducting the estimated
underwriting discount and offering expenses. We tentatively anticipate the
following allocations of net proceeds for our research and development
programs:
. $15-20 million for the advancement of TLK286 through the completion of
phase II clinical trials; and
. $4-6 million for the advancement of each of the TLK199 and TLK17411
programs, respectively, covering the costs of pre-clinical studies, the
filing of the INDs and phase I clinical trials.
We also intend to use the balance of the net proceeds for other general
research and development activities. We may use a portion of the net proceeds
to acquire or invest in products and technologies that are complementary to our
own, although no acquisitions are planned or being negotiated as of the date of
this prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. The remainder of the proceeds will be used for general
corporate and administrative expenses. Pending these uses, the net proceeds
will be invested in investment-grade interest-bearing securities.
The principal purposes of this offering are to increase our capitalization
and financial flexibility, to provide a public market for our common stock and
to facilitate access to public equity markets. As of the date of this
prospectus, we cannot specify with certainty all of the particular uses for the
net proceeds we will have upon completion of the offering because they will
depend upon numerous factors beyond our control, such as the rate of our
progress in research and development, the results of preclinical studies and
clinical trials, the timing of regulatory approvals, the determination of
commercial potential of our product candidates, the rate at which operating
losses are incurred and various other factors. Accordingly, our management will
have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.
12
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30 , 2000:
. on an actual basis; and
. as adjusted to give effect to the conversion of preferred stock and to
the sale of 5,000,000 shares of our common stock at an assumed initial
public offering price of $10.00 per share, after deducting the estimated
underwriting discount and offering expenses.
This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Actual As Adjusted
-------- -----------
(In thousands)
<S> <C> <C>
Capital lease and equipment loan obligations, including
current portion......................................... $ 48 $ 48
-------- --------
Stockholders' equity:
Convertible preferred stock, $0.01 par value;
authorized--3,023,799 shares actual, 5,000,000 shares
as adjusted; issued and outstanding--2,186,817 shares
actual, none as adjusted.............................. 22 --
Common stock, $0.01 par value; authorized--46,976,201
shares actual, 100,000,000 as adjusted; issued and
outstanding--2,343,357 shares actual, 21,150,059
shares as adjusted.................................... 23 212
Additional paid-in capital............................... 70,568 115,401
Note receivable from employee............................ (153) (153)
Deferred stock compensation.............................. (2,654) (2,654)
Accumulated deficit...................................... (59,511) (59,511)
-------- --------
Total stockholders' equity............................... 8,295 53,295
-------- --------
Total capitalization................................... $ 8,343 $ 53,343
======== ========
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of June 30, 2000 and excludes:
. 34,559 shares of common stock underlying warrants outstanding as of June
30, 2000 with a weighted average exercise price of $5.28 per share;
. 3,003,418 shares of common stock underlying options outstanding as of
June 30, 2000 with a weighted average exercise price of $1.46 per share;
and
. 2,000,000 shares available for issuance or future grant under our 2000
Equity Incentive Plan stock option plan, 250,000 shares available for
issuance under our 2000 Employee Stock Purchase Plan and 300,000 shares
available for issuance under our 2000 Non-Employee Director's Stock
Option Plan.
13
<PAGE>
DILUTION
The historical net tangible book value of our common stock on June 30, 2000
was approximately $8.3 million, or $3.54 per common share, based on the number
of common shares outstanding as of June 30, 2000. Historical net tangible book
value per share is equal to the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding as of
June 30, 2000. The pro forma net tangible book value of our common stock on
June 30, 2000, after giving effect to the automatic conversion upon the closing
of this offering of all convertible preferred stock outstanding as of June 30,
2000 into 13,806,702 shares of common stock, was approximately $8.3 million, or
$0.51 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets less total liabilities divided by the pro
forma number of shares of common stock outstanding. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the net
tangible book value per share of our common stock immediately afterwards. After
giving effect to the sale of 5,000,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $10.00 per share,
assuming the underwriters' over-allotment option is not exercised, and after
deducting the estimated underwriting discount and estimated offering expenses,
our pro forma net tangible book value at June 30, 2000 would have been
approximately $53.3 million or $2.52 per share. This represents an immediate
decrease in net tangible book value of $7.48 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................ $10.00
Historical net tangible book value per share as of June 30,
2000.......................................................... $3.54
Decrease attributable to conversion of preferred stock......... (3.03)
-----
Pro forma net tangible book value per share at June 30, 2000... $0.51
Increase per share attributable to new investors............... 2.01
-----
Pro forma net tangible book value per share after this
offering........................................................ 2.52
------
Dilution per share to new investors.............................. $ 7.48
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the differences between the number of shares purchased from us, the total
consideration paid and the average price per share paid by the existing
stockholders and the new investors. We have assumed an initial public offering
price of $10.00 per share, no exercise of the underwriters' over-allotment
option, and we have not deducted the estimated underwriting discount and
estimated offering expenses in our calculations.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors........ 16,150,059 76.4% $ 71,956,700 59.0% $ 4.46
New investors............. 5,000,000 23.6 50,000,000 41.0 10.00
---------- ----- ------------ ----- ------
Total..................... 21,150,059 100.0% $121,956,700 100.0% $ 5.77
========== ===== ============ ===== ======
</TABLE>
The number of shares of common stock outstanding in the table above is based
on the number of shares outstanding as of June 30, 2000 and excludes:
. 34,559 shares of common stock underlying warrants outstanding as of June
30, 2000 with a weighted average exercise price of $5.28 per share;
. 3,003,418 shares of common stock underlying options outstanding as of
June 30, 2000 with a weighted average exercise price of $1.46 per share;
and
. 2,000,000 shares available for issuance or future grant under our 2000
Equity Incentive Plan stock option plan, 250,000 shares available for
issuance under our 2000 Employee Stock Purchase Plan and 300,000 shares
available for issuance under our 2000 Non-Employee Director's Stock
Option Plan.
14
<PAGE>
SELECTED FINANCIAL DATA
This section presents our historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected data in this
section is not intended to replace the financial statements.
The statement of operations data for the years ended December 31, 1995,
1996, 1997, 1998 and 1999 and the balance sheet data at December 31, 1995,
1996, 1997, 1998 and 1999 have been derived from our financial statements which
have been audited by Ernst & Young LLP, our independent auditors. The financial
statements at December 31, 1998 and 1999 and for each of the three years in the
period ended December 31, 1999 are included elsewhere in this prospectus. The
statement of operations data for the six month periods ended June 30, 1999 and
2000 and the balance sheet data as of June 30, 2000 are derived from our
unaudited financial statements included elsewhere in the prospectus and include
all adjustments, consisting only of normal recurring adjustments, which we
consider necessary for a fair presentation of the data. Historical results are
not necessarily indications of future results. Contract revenue from
collaborations includes $1.3 million, $1.5 million, $1.8 million, $2.0 million,
$1.0 million and $1.125 million from a related party in 1996, 1997, 1998, 1999
and for the six months ended June 30, 1999 and 2000, respectively. The pro
forma net loss per share and shares used in computing pro forma net loss per
share are calculated as if all of our convertible preferred stock was converted
into shares of common stock on the date of issuance.
<TABLE>
<CAPTION>
Six Months Ended
------------------
Year Ended December 31,
------------------------------------------ June 30, June 30,
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Contract revenue from
collaborations......... $ 358 $ 1,350 $ 1,652 $ 3,194 $ 4,237 $ 2,489 $ 1,330
Costs and expenses:
Research and
development............ 5,784 8,688 8,090 7,952 9,547 5,198 5,119
General and
administrative......... 1,428 1,880 2,470 2,149 2,152 772 4,589
------ ------- ------- ------- ------- ------- --------
Loss from operations.... (6,854) (9,218) (8,908) (6,907) (7,462) (3,481) 9,708
Interest income, net.... 164 320 290 328 398 226 251
------ ------- ------- ------- ------- ------- --------
Net loss................ (6,690) (8,898) (8,618) (6,579) (7,064) (3,255) (8,127)
Deemed dividend to
preferred
stockholders........... -- -- -- -- -- -- (4,667)
------ ------- ------- ------- ------- ------- --------
Net loss allocable to
common stockholders.... $6,690 $(8,898) $(8,618) $(6,579) $(7,064) $(3,255) $(12,794)
====== ======= ======= ======= ======= ======= ========
Net loss per common
share, basic and
diluted................ $(3.39) $ (4.41) $ (3.95) $ (3.00) $ (3.21) $ (1.48) $ (5.75)
====== ======= ======= ======= ======= ======= ========
Weighted average shares
used in computing net
loss per common share,
basic and diluted...... 1,974 2,019 2,184 2,194 2,204 2,200 2,225
Pro forma net loss per
common share, basic and
diluted................ $ (0.47) $ (0.83)
======= ========
Weighted average shares
used in computing pro
forma net loss per
common share, basic and
diluted................ 14,879 15,489
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------ June 30,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 13,504 $ 11,179 $ 10,692 $ 14,402 $ 7,556 $ 9,437
Working capital......... 13,072 8,429 7,250 10,915 3,936 7,347
Total assets............ 15,469 14,071 12,902 16,586 9,170 11,743
Total long-term
liabilities............ 594 1,231 797 425 83 77
Deferred compensation... -- -- -- -- (260) (2,654)
Accumulated deficit..... (20,225) (29,123) (37,741) (44,320) (51,384) (59,511)
Total stockholders'
equity................. $ 14,171 $ 9,942 $ 8,438 $ 12,177 $ 5,130 $ 8,295
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read with "Selected
Financial Data" and our financial statements and notes included elsewhere in
this prospectus. The discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this prospectus should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual results could
differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Risk Factors," as
well as those discussed elsewhere.
Overview
Telik is engaged in the discovery, development and commercialization of
small molecule therapeutics. We have incurred net losses since inception and
expect to incur substantial and increasing losses for the next several years as
we expand our research and development activities and move our product
candidates into later stages of development. The process of carrying out the
development of our own unpartnered products to later stages of development and
our research programs for our corporate partners may require significant
additional research and development expenditures including preclinical testing
and clinical trials, as well as for obtaining regulatory approval. To date, we
have funded our operations primarily through the sale of equity securities,
non-equity payments from collaborators and capital asset lease financings. We
received our first funding from our collaborative partners in November 1996.
Including both research funding and the issuance of equity investments, we
received an aggregate of $13.7 million in 1998, of which $10.5 million was
equity and $3.2 million was funded research, an aggregate payment of $4.5
million for funded research in 1999, and no payments were received in the three
months ended June 30, 2000. As of June 30, 2000, our accumulated deficit was
approximately $59.5 million.
Deferred Compensation
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, we recorded deferred stock compensation totaling
$0.3 million, representing the difference between the deemed fair value of our
common stock for financial reporting purposes on the date these options were
granted and the exercise price. This amount is included as a reduction of
stockholders' equity and is being amortized over the vesting period of the
individual options, generally four years, using the straight line method.
Because stock options subject to deferred compensation were primarily granted
in the second half of 1999, the amortization of deferred stock compensation was
not material for the year ended December 31, 1999. We recorded additional
deferred compensation of approximately $2.6 million for stock options granted
from January 1, 2000 to June 30, 2000. We recorded amortization of deferred
compensation of $223,000 for the six months ended June 30, 2000.
Results of Operations
Six months ended June 30, 2000 and 1999
Revenues
Revenues for the six months ended June 30, 2000 and 1999 were $1.3 million
and $2.5 million, respectively. The decrease in revenue is attributable to the
completion of the Taiho collaboration in 1999. Revenue for the first six months
of 2000 results from the recognition of deferred contract revenue from
collaborative agreements with Sanwa and Sankyo.
Research and development expenses
Research and development expenses for the six months ending June 30, 2000
and 1999 were $5.1 million and $5.1 million, respectively. There was a decrease
principally due to the effect of lower headcount in 2000 which was partially
offset by the non-cash charge related to the amortization of deferred stock
compensation and compensation expense incurred during the six months ended June
2000.
16
<PAGE>
General and administrative expenses
General and administrative expenses were $4.6 million for the six months
ended June 30, 2000 and $0.8 million for the six months ended June 30, 1999.
The increase was primarily due to a $3.8 million non-cash charge for
compensation expense relating to stock options granted to a former executive
officer.
Years Ended December 31, 1999, 1998 and 1997
Revenues
Contract revenue from collaborations were $4.2 million in 1999, $3.2 million
in 1998 and $1.7 million in 1997. The increase in 1999 was primarily due to the
initiation of our Sankyo collaboration signed in March 1999. The increase in
1998 revenue was primarily due to the initiation of a development agreement
with Taiho Pharmaceuticals in late 1997, substantially all of which was earned
in 1998. Contract revenue recognized related mainly to collaboration revenues
earned from Sanwa, Sankyo and Taiho in 1999 and Sanwa and Taiho in 1998 and
1997. Contract revenues from Sanwa, a related party, were $1.5 million, $1.8
million and $2.0 million in 1999, 1998 and 1997 respectively. We expect
contract revenue from collaborations to constitute substantially all of our
total revenues for the foreseeable future. For details of the Company's revenue
recognition policy, refer to Note 1 to the financial statements.
Research and development expenses
Research and development expenses were $9.5 million in 1999, $8.0 million in
1998 and $8.1 million in 1997. The 1999 increase was primarily attributable to
increased costs associated with the filing of an IND for TLK286, a small
molecule product candidate being developed for the treatment of chemotherapy-
resistant cancers. We expect research and development expenses to increase with
the advancement of our unpartnered product candidates into later stages of
development.
General and administrative expenses
General and administrative expenses, which consist primarily of salaries,
consulting services and rent, were $2.2 million in 1999, $2.1 million in 1998
and $2.5 million in 1997. This decrease of $0.4 million from 1997 to 1998 was
primarily attributable to a reduction in the number of employees. We expect
that general and administrative expenses will increase in the future to support
the continued growth of our research and development efforts and to accommodate
operating as a public company.
Net interest income
Net interest income was $0.4 million in 1999, $0.3 million in 1998 and $0.3
million in 1997. Interest income results from our interest on short-term
investments, while interest expense is associated with capital lease
obligations and other long-term liabilities.
Liquidity and capital resources
Cash, cash equivalents and short-term investments totaled $9.4 million at
June 30, 2000. We have financed our operations from inception primarily through
the private placement of equity securities, revenue from collaborative
agreements, interest earned on short-term investments and equipment lease line
financings. As of June 30, 2000, we had raised $58.7 million from the sale of
equity securities, including $11.0 million from collaborators, and received
$11.1 million in non-equity payments from collaborators. During the six month
period ended June 30, 2000, the company received net proceeds of $7 million
from the sale of equity securities. In 1998 and 1997, we received net proceeds
of $10.3 million and $7.1 million, respectively, from private financing
activities.
As of June 30, 2000, $0.2 million in equipment loans were secured by our
equipment. The loans bear interest at 8% and are due at various times in 2000.
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We plan to apply the net proceeds from this offering to the phase II
clinical trials for TLK 286 and for preclinical studies, IND filings and phase
I clinical trials for TLK 199 and TLK 17411. We will use the balance of the
proceeds, as available, for other general research and development activities.
We believe our existing cash resources, plus the proceeds of this offering and
anticipated proceeds from corporate collaborations, will be sufficient to
satisfy our anticipated cash requirements through at least 18 months. We expect
to finance our future cash needs through the sale of equity securities,
strategic collaborations and possibly debt financing. Our future capital uses
and requirements depend on numerous factors, including the following:
. the progress and success of preclinical and clinical trials of our
product candidates;
. the progress and number of research programs in development;
. the costs and timing of obtaining regulatory approvals;
. our ability to establish, and the scope of, our new collaborations;
. our ability to meet the milestones identified in our collaborative
agreements which trigger payments; and
. the costs and timing of obtaining, enforcing and defending our patent and
intellectual property rights.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities, or SFAS 133, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and we do not anticipate an impact on our results
of operations or financial condition, as we hold no derivative financial
instruments and do not currently engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 summarizes the SEC's
views on applying generally accepted accounting principles to revenue
recognition. The adoption of SAB 101 had no significant impact on our revenue
recognition policy or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions involving Stock Compensation as Interpretation on APB
25." FIN 44 clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
continuation. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occur after either December 15, 1998, or January
12, 2000. To the extent that FIN 44 covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying FIN 44 are recognized on a prospective
basis from July 1, 2000. The adoption of FIN 44 does not have a material impact
on our financial statements.
Disclosure About Market Risk
The primary objective of our investment activities is to preserve principal
and at the same time maximize income we receive from our investments without
significantly increasing risk. We maintain our portfolio of cash equivalents
and short-term investments in a variety of securities, including commercial
paper, money market funds, government and non-government debt securities. In
1998 and 1999, we maintained an investment portfolio primarily in depository
accounts. Due to the short-term nature of these investments, we have concluded
that there is no material market risk exposure. In the future, we may invest
the proceeds of this offering in financial instruments with longer maturities.
We have operated primarily in the United States and all funding activities
with our collaborators to date have been made in U.S. dollars. Accordingly, we
do not have any exposure to foreign currency rate fluctuations.
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BUSINESS
Overview
Telik is a biopharmaceutical company working to discover, develop and
commercialize small molecule therapeutics to treat diseases for which there is
significant demand for new therapies. Our most advanced product candidates are
for the treatment of cancer and diabetes. All of our product candidates were
discovered using our proprietary technology called Target-Related Affinity
Profiling, or TRAP, which enables us to discover product candidates faster and
more efficiently than with alternative technologies such as ultra high-
throughput screening, or UHTS.
Our most advanced product candidate, TLK286, is a chemotherapeutic drug for
the treatment of cancers, such as breast, colon, ovarian and lung, that have
shown resistance to standard cancer drugs. TLK286 entered clinical trials in
January 2000. Our second cancer product candidate, TLK199, is for the treatment
of the depletion of white blood cells, or neutropenia, which is a toxic side
effect of cancer treatment. TLK199 appears to act by the same cellular
mechanism as G-CSF, the current standard therapy, but has the advantages of
being a small molecule drug. We expect to file an IND for TLK199 in the first
half of 2001. We have retained rights for the worldwide commercialization of
TLK286 and TLK199.
Our third product development program has identified a proprietary class of
orally active insulin receptor activators for the treatment of Type 2, or adult
onset, diabetes. These product candidates activate insulin-signaling and lower
blood sugar by a mechanism that is different from that of currently available
diabetes drugs. The first of our insulin receptor activators, TLK17411, is in
preclinical development. We granted commercialization rights to a partner for
most of Asia and have retained these rights for the rest of the world.
We have also developed a portfolio of preclinical programs in the areas of
cancer, diabetes, inflammatory diseases and stroke. In each of these programs,
we have used our TRAP technology to identify pharmaceutically active small
molecules. The most advanced of the active compounds from these programs have
shown efficacy in animal models of their respective disease targets.
Our success in identifying product candidates has resulted from the use of
TRAP, our proprietary drug discovery technology. We have used TRAP to rapidly
and efficiently identify active small molecules relevant to a variety of
disease states. Since TRAP reduces the need for conventional high-throughput
screening and the associated need for large libraries of compounds, automation,
assay technology and target licensing, TRAP offers a solution to the current
bottleneck in drug discovery caused by the increased number of new targets that
has resulted from advances in genomics and related fields. In addition to using
TRAP for our internal drug discovery programs, we have entered into TRAP
technology collaborations with third parties.
Telik Strategy
Key elements of our strategy are to:
. Develop small molecule drugs for major disease areas. We intend to
develop small molecule drugs to address unmet needs in the areas of
cancer, diabetes, inflammatory disease and stroke. The number of patients
with these diseases has been increasing due primarily to the aging
population. This has led to a growing demand for new drugs that offer
competitive advantages over existing products, such as improved
effectiveness and reduced side effects. The advantages of small molecule
drugs over therapeutic proteins include the ease of manufacturing and
administration, the potential for oral dosing and applicability to a
wider range of disease targets, including those inside the cell. Small
molecule drugs comprise more than 95% of the pharmaceutical market.
. Retain commercial rights to our product candidates. We will seek to
retain significant commercial rights to our product candidates by
conducting clinical development activities at least through initial proof
of efficacy in humans. Since the development process for cancer drugs is
relatively efficient and
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well defined, the cost and time required to bring new drugs to market is
significantly less than that required for other therapeutic categories,
permitting us to retain commercialization rights through completion of
clinical trials. In disease areas that require larger and longer clinical
trials, such as diabetes, we will share the risks and costs of development
by partnering these programs before completion of pivotal trials, which we
expect may require granting commercialization rights to our collaborators.
Our goal is to develop and commercialize our cancer product candidates in
North America. We believe that the hospital-based cancer market in the
United States is readily accessible by a limited sales and marketing
presence due to the concentrated market of prescribing physicians coupled
with the substantial unmet therapeutic needs. As appropriate, we will
establish collaborations with multinational pharmaceutical companies to
assist in the commercialization of our product candidates.
. Select targets strategically. We believe that we can apply our drug
discovery technology to virtually any protein target. We regularly review
the progress of scientific and clinical research in important disease
areas to identify targets with commercial promise. By careful selection
of targets, we intend to develop product candidates with a clear path to
regulatory approval and the potential to show early evidence of clinical
efficacy. This strategy will allow us to reduce the risk inherent in drug
discovery and accelerate the commercialization of our drug candidates.
. Use TRAP to sustain a pipeline of drug candidates. Because our TRAP
platform technology allows us to rapidly and efficiently identify small
molecules active against potential disease targets, we have the capacity
to examine a large number of targets in order to select those with
therapeutic promise. We will seek to use this platform to provide a
stream of promising future development candidates.
. Leverage and expand the use of TRAP. We may seek selected additional
partners for TRAP collaborations. These collaborations will not limit our
internal efforts and may strengthen our TRAP technology by providing
information on the performance of our panel proteins. Any significant
revenues from these collaborations are more likely to be in the form of
milestone and royalty payments, rather than up front payments or funded
research.
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Product Candidates
Our efforts are concentrated in four major diseases: cancer, diabetes,
inflammatory diseases and stroke. Our two most advanced product candidates are
for cancer treatment. TLK286, which entered clinical trials in January 2000, is
being developed for the treatment of chemotherapy-resistant cancers. TLK199, a
small molecule that accelerates recovery from chemotherapy-induced depletion of
white blood cells, or neutropenia, represents a promising new adjunctive
therapy. We have discovered novel insulin receptor activators for the treatment
of Type 2 diabetes.
Application of our TRAP technology has led to a pipeline of both potential
product candidates and earlier stage research programs. The following table
summarizes key information about these programs.
<TABLE>
<CAPTION>
Product Development Commercialization
Candidate Clinical Indication Status Rights
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cancer
TLK286 Chemotherapy-resistant Phase I Worldwide
Targeted cancers, including . phase I clinical
chemotherapeutic drug colon, ovarian, lung, trial commenced
pancreas, 1/00
lymphoma/leukemia and
breast
TLK199 Chemotherapy-induced low Pre-IND Worldwide
Bone marrow stimulant white blood cell count, . IND-enabling
or neutropenia studies initiated
6/99
. clinical grade material
prepared 1/00
IGF-1 inhibitor Prostate cancer Lead optimization Worldwide
. small
molecule
inhibitors
discovered
---------------------------------------------------------------------------------------------------
Diabetes
Insulin-independent Type 2 diabetes Candidate nomination/lead Worldwide except
insulin receptor optimization Japan and most other
Asian countries
activators . oral activity in animal
models
. preclinical and safety
assessment initiated
Insulin-dependent Type 2 diabetes Candidate nomination/lead Worldwide except
insulin receptor optimization Japan and most other
activators Asian countries
. activity in animal models
. preclinical and safety
assessment initiated
---------------------------------------------------------------------------------------------------
Inflammatory disease
MCP-1 antagonist Rheumatoid arthritis, Lead optimization North and South
asthma atherosclerosis, . small America and jointly
multiple sclerosis, molecule in Europe
cancer inhibitors
discovered
. activity in animal models
MIP-1 alpha inhibitor Rheumatoid arthritis, Lead optimization North and South
multiple sclerosis, . small America and jointly
cancer molecule in Europe
inhibitors
discovered
IL-8 inhibitor Rheumatoid arthritis, Lead optimization North and South
nephritis, psoriasis, . small America and jointly
cancer molecule in Europe
inhibitors
discovered
---------------------------------------------------------------------------------------------------
Stroke
Caspase-3 inhibitor Stroke Lead optimization Worldwide
. small
molecule
inhibitors
discovered
</TABLE>
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Product Development Programs
Cancer
Our two most advanced product candidates, TLK286 and TLK199, are being
developed to treat serious cancers for which there is significant demand for
new therapies. Cancer is the second leading cause of death in the United
States. It is estimated that 1.2 million people will be diagnosed with cancer
in the United States this year and more than 555,000 of these people will die
of their disease. The five-year survival rates for patients with cancers that
have spread from their original site are poor. For example, after spread of the
cancer, only 13% of patients with colorectal cancer survive, only 12% with lung
cancer and only 21% with breast cancer. These poor survival rates reflect the
limitations of current treatments and the development of resistance to
available treatments. In addition, current treatments are often associated with
severe toxic side effects.
TLK286, a small molecule product candidate to treat chemotherapy-resistant
cancers, entered phase I clinical trials in January 2000. Our second cancer
product candidate, TLK199, is being developed for the treatment of the
depletion of white blood cells, or neutropenia, a toxic side effect of
chemotherapy. We expect to file an IND for TLK199 in the first half of 2001.
TLK286--tumor-activated cancer drug
Overview
TLK286 is a small molecule product candidate we are developing for the
treatment of cancers that have resisted standard chemotherapeutic drugs. TLK286
binds to glutathione S-transferase, or GST, a protein known to play an
important role in the development of resistance to commonly used
chemotherapeutic drugs. GST initiates a series of events in a cell responsible
for the inactivation of a variety of drugs and toxins and their subsequent
removal from the body. In a person with a cancer, GST also functions to break
down chemotherapeutic drugs administered for treatment. If a person's cancer
has increased GST levels either initially or following exposure to
chemotherapeutic drugs, GST will limit the effectiveness of treatment by
breaking down the chemotherapeutic drug before it can kill cancer cells.
GST P1-1 is a type of GST that is elevated in many cancers and is often
further elevated by treatment with standard chemotherapeutic drugs. When TLK286
binds to GST P1-1, it releases a compound with a proven mechanism of killing
cancer cells. Thus, in contrast to the usual situation where GST is involved in
the destruction of chemotherapeutic drugs, GST activates TLK286 when it reaches
its cellular target. In this way, TLK286 kills cancer cells by utilizing the
same mechanism that normally deactivates chemotherapeutic drugs.
Preclinical Studies
Preclinical studies suggest that TLK286 may have a more favorable safety and
efficacy profile than that of standard chemotherapeutic drugs. We attribute
this to its mechanism of activation. Since GST P1-1 activity is often increased
in tumor tissues compared to normal tissues, TLK286 activation is further
enhanced in tumors than in normal tissues. TLK286 activation is further
enhanced in resistant tumors in which GST P1-1 activity is further elevated.
Thus, activated TLK286 concentrates in parts of the body where cancer is
present.
TLK286 reduced the growth of human cancer cell lines and biopsy specimens
derived from tumors of the breast, colon, lung, ovary and bone marrow and from
melanomas and, in mouse models of human cancer, suppressed tumor growth. The
efficacy of TLK286 against tumor cell lines was enhanced in those cell lines
selected for drug resistance and exhibiting increased levels of human GST P1-1.
For example, TLK286 showed an improved therapeutic effect in mouse models of
human colon cancer cells that had been made resistant to a common
chemotherapeutic drug called doxorubicin and have elevated levels of GST P1-1.
Development Strategy
In December 1999, we filed an IND with the FDA for permission to test TLK286
in advanced cancer patients. In January 2000, we initiated a phase I clinical
trial of TLK286 in 36 patients with advanced solid tumors or non-Hodgkin's
lymphoma which are unresponsive or for which no standard therapy is available.
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The purpose of this phase I clinical trial is to determine the safety of
TLK286 by finding the maximum tolerated dose and principal toxic side effects.
In addition, we will also collect information on the relationship of GST P1-1
activity levels and tumor response. Patients will be assessed for tumor
shrinkage at six weeks, after completing two cycles of treatment. Patients
showing an objective clinical benefit may continue to receive TLK286 until the
cancer progresses or unacceptable toxicity occurs. We intend to complete this
study in the fourth quarter of 2000.
Assuming successful completion of the phase I clinical trial, we intend to
initiate phase II clinical trials to confirm the safety and study the antitumor
activity of several doses and schedules of administration of TLK286 in the
first quarter of 2001. Depending on patient accrual, we estimate completion of
each of these phase II studies within 12 to 18 months. Upon completion of phase
II, and based on the results of these studies, we intend to begin confirmatory
phase III clinical trials which are expected to compare TLK286 to standard
therapies in those chosen cancer types. We estimate that we will not be able to
file a New Drug Application or an NDA, for TLK286 until late 2003.
Cancer types under consideration include those which are not responsive, or
are refractory, to standard therapy. These cancers include colon, ovarian,
lung, pancreas, lymphoma/leukemia and breast. We have chosen these cancer types
because they have high levels of GST P1-1 and generally require smaller and
shorter trials. These cancers may also be candidates for accelerated regulatory
review, because no effective alternative therapies are available. If we obtain
approval in these refractory indications, we will expand the development
program to study TLK286 in earlier stages of these diseases as well as in
additional cancer types.
We have worldwide commercial rights to TLK286 and intend to commercialize
TLK286 in the North American market. At the appropriate time, we will select a
collaborator in other territories with capabilities in manufacturing, sales and
marketing.
TLK199--Bone marrow stimulant as an adjunct for cancer therapy
Overview
TLK199 is a small molecule product candidate that is designed to increase
white blood cell counts in cancer patients undergoing chemotherapy. In addition
to killing cancer cells, chemotherapeutic drugs kill rapidly dividing normal
cells. These include normal cells found in bone marrow that may eventually
become white blood cells capable of fighting infection. Lowered levels of a
type of white blood cells, called neutrophils, cause a condition called
neutropenia. Neutropenia renders the already weakened cancer patient
susceptible to life-threatening infections. Granulocyte colony stimulating
factor, or G-CSF, is the current standard therapy for the treatment of
neutropenia, since it accelerates the recovery of white blood cells to a normal
level.
G-CSF acts by binding to a receptor protein on the surface of the cell and
activating a signaling pathway within the cell. This signal causes white blood
cells in the bone marrow to divide and mature, increasing the number of white
cells in the blood capable of fighting infection. TLK199 acts upon the same
signaling pathway that is activated by G-CSF.
Preclinical Studies
TLK199 reduced the duration of neutropenia in animals treated with a
standard cancer drug. The reduction was similar in degree and duration to that
seen with G-CSF. In normal animals, TLK199 also increased the number of white
cells in the blood to an extent similar to that produced by G-CSF. In
experiments using human bone marrow, TLK199 caused white blood cells to divide
and mature.
Development Strategy
TLK199 is undergoing preclinical testing to support initiation of clinical
trials. Assuming successful completion of these studies, we anticipate filing
an IND in the first half of 2001. Upon completion of FDA
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<PAGE>
review, we will begin phase I clinical testing. In the phase I clinical trial,
we intend to determine the safety and blood levels, or pharmacokinetics, of
TLK199 in healthy volunteers. We will also measure the enhancing effects of
TLK199 on the white blood cell response. We anticipate that the phase I program
will take approximately 12 months to complete.
Our phase II program will be designed to confirm the white blood cell
elevating effects of TLK199 in patients receiving cancer chemotherapeutic drugs
that cause severe neutropenia. In this study, we will look at the ability of
TLK199 to reduce the duration and intensity of neutropenia, which is correlated
with the risk of infectious complications. We expect to conduct this study in
patients undergoing a variety of standard chemotherapy regimens. Phase III
clinical trials will be designed to compare the efficacy of TLK199 with Amgen's
therapeutic protein version of G-CSF, known as Neupogen. We also intend to
study additional diseases that are known to benefit from the stimulation of
white blood cell production.
TLK199 is expected to offer the advantages of a small molecule drug over a
therapeutic protein, including ease of manufacturing and the potential for oral
administration. Although Amgen reported worldwide sales of Neupogen of over
$1.3 billion in 1999, we believe its broader use is limited by its expense and
lack of oral administration. The low cost of production and potential oral
availability of TLK199 may allow us to offer a product that is attractive to
the current market for drugs that stimulate the production of white blood
cells. We have retained worldwide commercial rights to TLK199 and intend to
commercialize TLK199 in the North American market. At the appropriate time, we
will select collaborators in other territories with capabilities in
development, sales and marketing. These partners may participate in the phase
II and phase III clinical development, which may affect the timelines for
completion of the development program.
Diabetes
We have discovered and are developing proprietary orally active small
molecule insulin receptor activators for the treatment of Type 2 diabetes,
which represents 90-95% of all cases of diabetes. Diabetes is a major health
problem with over 170 million people estimated to be afflicted worldwide.
Diabetes is the leading cause of serious coronary disease, adult blindness,
lower limb amputations and serious kidney disease. Diabetes results from the
inability of insulin, a hormone produced by the pancreas, to regulate blood
sugar levels. In Type 2 diabetes, the loss of blood sugar regulation is caused
by a decreased ability of insulin to activate its protein receptor combined
with a relative insulin deficiency.
Two large international clinical studies, the Diabetes Control and
Complications Trial and the United Kingdom Prospective Diabetes Study, have
confirmed that blood sugar control is a key factor in the prevention of the
long-term complications of diabetes, including eye and kidney disease. As a
result of these studies, doctors are aggressively treating patients' blood
sugar levels with a variety of oral drugs. This situation has increased the
demand for more effective drugs to treat diabetes.
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TLK17411--Insulin receptor activators
Overview
Using our TRAP technology, we have discovered a proprietary family of small
molecule product candidates that bind to the insulin receptor and, like
insulin, cause the receptor to activate and initiate a sequence of events
called insulin signaling that lowers sugar levels in the blood by facilitating
the entry of sugar into muscle and liver cells where it is metabolized. Results
from animal models of diabetes suggest that these compounds may allow more
sensitive control of blood sugar levels and may delay the need for insulin
treatment. Our leading product candidate in this group is TLK17411.
[GRAPHIC]
Preclinical Studies
Preclinical studies have provided evidence that TLK17411 can initiate or
facilitate insulin signaling. In laboratory experiments and in four animal
models of diabetes, we have shown that TLK17411 enhances insulin signaling. In
one animal model, treatment with a single oral dose of TLK17411 lowered blood
sugar by more than 25% and kept it suppressed for 24 hours. Its effectiveness
was maintained for a longer period of time with single daily doses. We have
shown that TLK17411 does not activate similar receptors or other signaling
pathways in these cells, a positive property that suggests that TLK17411 may
not have significant side effects.
Some members of the TLK17411 family of compounds show activity only in the
presence of insulin while others activate the glucose receptor in the absence
of insulin. Each profile has potential advantages for the treatment of Type 2
diabetes. The insulin-dependent profile could produce more sensitive control of
blood sugar levels, since the drug would be most active when blood sugar
levels, and therefore insulin levels, are increased. The second profile may be
more advantageous in later stage Type 2 diabetes, when insulin release is more
severely impaired and insulin injections are required. A drug with this profile
of activity could delay the need for injected insulin.
We have shown that members of the TLK17411 group are sufficiently potent to
allow oral administration. Furthermore, they do not cause genetic mutations in
standard tests, which is a prerequisite for a product candidate to proceed for
further development.
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Development Strategy
We have commenced the necessary preclinical testing to support the
initiation of clinical trials. Assuming successful completion of preclinical
testing, we anticipate filing an IND in the second half of 2001 . Upon
completion of FDA review, we will begin phase I clinical testing.
In the phase I clinical trial, we intend to evaluate the safety,
pharmacokinetics and blood sugar lowering effects of the product candidate in
healthy volunteers. In a second phase I clinical trial, we intend to evaluate
the effects of multiple doses of the drug in patients with Type 2 diabetes. We
anticipate that the phase I clinical program will take approximately 12 months
to complete.
Our collaborator, Sanwa, has commercialization rights in Japan and most
other Asian countries. We have retained those rights in the rest of the world.
In many types of cancer, there are no available effective therapies, the
treatments are acute and administered over a few months. In contrast, diabetes
is a chronic disease, often seen in younger, healthier individuals, requiring
administration of daily medication for many years. As a result, new treatments
being developed for diabetes require longer and larger preclinical and clinical
safety and efficacy studies to establish long-term side effects and benefits.
Because the development of diabetes drugs is longer and more expensive than for
cancer drugs, we intend to share the risks and costs of development by
partnering these programs before completion of pivotal trials, which we expect
will require granting commercialization rights to our collaborators.
Research Discovery Programs
In addition to generating our current product portfolio, TRAP has allowed us
to build our research pipeline with product candidates against targets in
cancer, diabetes, inflammatory diseases and stroke. We have chosen to pursue
those protein targets that have engendered a high level of interest in the drug
discovery community, address important unmet clinical needs and whose
modulation will have a beneficial effect in treating a given disease.
IGF-1 receptor inhibitor for cancer
Insulin-like growth factor-1, or IGF-1, is an important protein target for
cancer therapy. Blood levels of IGF-1 are increased in prostate cancer patients
and represent a significant risk factor for the development of prostate cancer
in healthy males. Increases in the amount of the IGF-1 receptor predict a poor
prognosis in breast cancer. Using TRAP technology, we have identified two
families of small molecules that inhibit the interaction of IGF-1 with its
receptor. Compounds from each family have been shown to inhibit the growth of
cancer cells.
Chemokine antagonists for inflammatory diseases
Inflammation is an important response of the body to injury and infection.
If inflammation becomes excessive or prolonged, it can lead to pathological
conditions, including asthma, inflammatory bowel disease, multiple sclerosis,
psoriasis, rheumatoid arthritis and septic shock. An early step in the
inflammatory response is the attraction of white blood cells, or leukocytes,
from the circulatory system to damaged or infected tissue by messenger
molecules called chemokines.
Our research has identified inhibitors selective for three important
chemokine mediators of the inflammatory response: MCP-1, MIP-1 and IL-8. These
inhibitors block the interaction of each chemokine with its protein receptor
and, in the most advanced of these programs, are active in an animal model of
inflammatory disease. We retain commercialization rights in North and South
America, while sharing rights in Europe.
Caspase-3 inhibitors for stroke
The major cause of stroke is lack of blood flow, or ischemia, in a region of
the brain. Loss of blood flow is directly responsible for the loss of brain
cells. An additional loss of cells occurs over the next few hours to days,
through a process initiated by the cells themselves, called apoptosis. This
secondary loss of cells increases the disability produced by the stroke.
Apoptosis is carried out by specialized proteins in the cell, called caspases,
and particularly, caspase-3. We have identified small molecules that
selectively inhibit caspase-3 and prevent apoptosis in cells and have retained
worldwide commercialization rights.
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TRAP Technology
Our TRAP technology is designed to rapidly and efficiently identify small
molecule drug candidates that act on disease related protein targets.
Background
Small Molecule Drugs, Protein Targets and Disease. All drugs interact with
molecules in the body called proteins. Disease results from the abnormal
production and function of proteins. Drugs restore normal protein production or
function, either by acting directly on disease-related proteins or by acting on
other proteins in a compensatory manner. Small molecule drugs are a class of
drugs that remain the preferred treatment for most diseases, because they may
be administered orally and, unlike the protein class of drugs, act on targets
both external and internal to the cell. Small molecule drugs are particularly
appropriate for the treatment of chronic diseases that require the daily
administration of medications over many years. Historically, the opportunity to
commercialize small molecule drugs has been limited by the difficulty in
discovering safe and effective small molecules.
The Explosive Growth of New Protein Targets. The entire content of human
DNA, known as the human genome, contains an estimated 100,000 genes, each of
which contains genetic instructions for producing a unique protein. Because
proteins are drug targets and genes contain the instructions for making
proteins, a massive government and private effort was undertaken in the 1980s
to sequence the human genome with the hope that the comprehensive knowledge of
the human genome would reveal the molecular cause for all diseases. The
sequencing of the human genome is now complete. Since most diseases involve
complex interactions between proteins, we believe the number of potential
protein targets for disease treatment is very large and will overwhelm the
ability of current technologies to identify small molecule drugs.
Drug Discovery Challenges Created by the Explosive Growth of New Protein
Targets. Ultra high-throughput screening, or UHTS, is the dominant technology
used to identify compounds active against protein targets. UHTS allows a large
number of compounds, up to millions, to be screened against tens to hundreds of
targets per year. The rate-limiting step in UHTS is usually developing the
test, or assay, that will provide analytical information about the activity of
compounds against the protein target. The effort and expense required for assay
development, combined with the resource outlay necessary to execute millions of
assays, tend to limit the application of UHTS to targets for which involvement
in disease has been confirmed. The biological systems used in UHTS assays are
highly simplified and may not give an accurate representation of how the target
functions in an animal. Furthermore, the size of the library of compounds
necessary to represent an adequate sampling of the compounds that could be
synthesized for screening might exceed the screening capacity of even UHTS. The
limitations of UHTS potentially create a critical bottleneck, since both
validating a disease related protein target and initiating the process of drug
discovery begins with the identification of a small molecule with an affinity
for the protein target.
The TRAP solution
Our proprietary Target-Related Affinity Profiling, or TRAP, technology
offers solutions to the two major challenges facing drug discovery: the
explosive growth in the number of new protein targets generated by the advances
in genomics and the intrinsic limitations of the UHTS approach. TRAP offers
several competitive advantages over UHTS, because it is able to accommodate
thousands, rather than hundreds, of targets, is cost-effective to screen
unproven targets for the purpose of validation and avoids the use of highly
simplified assays.
We have discovered that there are a limited number of ways that proteins
interact with small molecules and that these interactions can be simulated
using a carefully selected panel of diverse proteins. TRAP takes advantage of
this discovery to profile the interactions of small molecules with proteins
using a panel of less than 20 proteins selected for their distinct patterns of
interacting with small molecules. We believe that our panel of proteins
simulates, either individually or in combination, most of the significant
interactions between a
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small molecule and a protein. Furthermore, TRAP measures the diversity of
compounds in a way that cannot be explained on the basis of chemical structure
alone. Compounds that are structurally similar can have very different
affinities for proteins and other biological properties, and, conversely,
compounds that are structurally diverse may have similar affinities for
proteins and other biological properties.
By comparing the relative strengths of the interaction of a small molecule
with each panel protein, a protein affinity profile, or fingerprint, is
produced for the small molecule. One type of assay we use, called a binding
assay, measures the interaction of a panel protein with a specially designed
binding partner, or ligand, in the presence of a small molecule. If the small
molecule has affinity for the same site on the panel protein as the ligand, the
amount of ligand that binds will be reduced. This decrease in the amount of the
ligand that binds to each panel protein comprises the small molecule's
fingerprint.
Using these fingerprints, we select a small subset of compounds, which we
call the training set, that is sufficiently diverse in its protein recognition
characteristics to represent our entire collection, or library, of small
molecules. We screen this training set against the target of interest and use
the resulting data to predict the type of small molecule-protein interactions
present in the target. A model of small molecule interactions with the target
is generated by mathematically combining the individual interactions of TRAP
panel proteins, where the panel proteins to be included in the model are
determined by the affinities of the initial subset of compounds for the target.
We can then select from the library for assay those compounds that prefer these
types of interactions. We have developed a set of computational tools, in the
form of chemoinformatics algorithms, which are used to scan the library for
patterns of protein affinity, since these patterns appear to correlate best
with biological activity. The majority of active compounds in our library that
are pharmaceutically active against a given target can be identified after
screening as few as 200 compounds.
We have used TRAP to assemble our library of small molecules, which is
enriched by compounds that interact with proteins in a selective fashion and
contains multiple compounds that can undergo each mode of protein interaction.
We believe that this process creates a small molecule library with a greater
likelihood of containing a compound that interacts with any specified protein,
thus having a higher probability of generating drug candidates than a
conventionally or randomly assembled library. As a consequence, TRAP identifies
those small molecules with a higher probability of being drug candidates from
within the universe of possible compounds, allowing their assembly into a
manageable drug discovery library, by using their protein interaction
characteristics. All of the known drugs that we have examined lie within the
bounds of the library defined by TRAP.
The ability of TRAP to identify active compounds after screening only a few
hundred samples overcomes many of the limitations of UHTS. TRAP does not
require assays capable of screening millions of compounds, thereby decreasing
the time and resources necessary for assay development. TRAP permits the
selection of a given target of interest from a much wider universe of targets
by reducing the need to acquire targets and assay technologies and allows more
physiologically relevant assay systems to be used. In addition, TRAP eliminates
the need for large compound collections and sophisticated and expensive
automation to support them, further lowering the financial barrier to screening
and permitting its application to emerging biopharmaceutical companies.
Finally, the overall efficiency and economy of TRAP allow multiple targets to
be pursued simultaneously and permit the screening of higher risk, but
potentially more valuable, targets.
In summary, TRAP technology:
. models protein targets to identify drug candidates faster and more
efficiently;
. creates a more drug-like small molecule library;
. provides a search engine for identifying active compounds;
. permits the use of more complex and physiologically relevant assays;
. operates on numerous targets simultaneously;
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<PAGE>
. gives access to a broader universe of targets;
. allows the pursuit of riskier, but potentially more valuable, targets;
. lowers the financial barrier for screening; and
. accommodates thousands rather than hundreds of targets.
Collaborative Relationships
We have established a number of joint discovery programs with other
pharmaceutical, biotechnology and genomics companies. These collaborations
exploit our TRAP technology platform and have the potential to identify new
product development and commercialization opportunities either independently or
pursuant to expanded collaborations. In addition, these collaborations have
provided funding for our internal research and development programs.
These collaborations include the following:
Sanwa
Diabetes Collaboration Agreement
In December 1996, we entered into a collaboration agreement with Sanwa
establishing a program to discover and commercialize compounds that act on the
insulin signal transduction pathway and are useful for the treatment of
diabetes and insulin resistance. In exchange for Sanwa's payment of an initial
fee and provision of research funding, we are employing our compound library,
TRAP technology, and other drug discovery technologies to identify and optimize
drug development candidates. The research portion of the collaboration will
terminate on December 20, 2000. During the research portion, each party has a
non-exclusive, worldwide license to carry out its responsibilities under the
research program.
Under the collaboration agreement and a related license agreement, Sanwa has
an exclusive, royalty-bearing license to commercialize human therapeutic
products arising from the collaboration in Japan, Korea, Taiwan and China.
Sanwa will make payments to us upon the achievement of specified milestones and
will share its development data with us. We have already received a total of $6
million from Sanwa under the collaboration agreement and we may receive up to
$12.25 million more in the future. In all other countries, we have rights to
commercialize products containing compounds identified in the research
collaboration, subject to obligations to Sanwa to share preclinical and
clinical data. We also have an option to acquire from Sanwa a royalty-bearing
license to develop and commercialize, outside the Sanwa territory, other
products identified by Sanwa arising from the collaboration. Sanwa's obligation
to pay royalties to us will end after the product has been sold in the relevant
country for ten years and the patents in that country covering the product have
expired. The collaboration agreement and related license agreement will
terminate when Sanwa no longer has any payment obligations to us. Either party
may terminate either agreement at any time with notice upon material breach by
the other party of its obligations. Either party may terminate the
collaboration agreement at any time that the other party becomes insolvent or
bankrupt.
Screening Services Agreement
In December 1996, in addition to the diabetes collaboration agreement, we
entered into a screening services agreement with Sanwa in which we agreed to
employ our proprietary TRAP technology to identify compounds that are active
against biological targets identified as disease related by Sanwa. In September
1997, and October 1998, this agreement was amended to increase the number of
targets, extend the term of the agreement and include the optimization of two
lead compounds, each for a period of two years. We are currently conducting the
first optimization of a lead compound identified through the use of our TRAP
technology. We are obligated to continue optimization of this or substitute
active compounds through June
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2001. Under the agreement, Sanwa has exclusive rights in Japan, Korea, Taiwan
and China to commercialize the active compounds and inventions relating to
these compounds. We have equivalent exclusive rights in North and South
America. Elsewhere in the world, we will share with Sanwa all revenues arising
from the active compounds and related inventions. The agreement will terminate
on December 20, 2006. Either party may terminate the agreement at any time with
notice upon material breach by the other party of its obligations.
Equity Investment
In connection with these agreements, Sanwa has invested an aggregate of
$11.0 million in Telik, as more specifically described in the "Related Party
Transactions" section.
Sankyo
In March 1999, we entered into an agreement with Sankyo. In exchange for
Sankyo's payment of a series of upfront fees totalling $2.0 million that have
already been paid, we are using our TRAP technology to identify compounds that
are active against any of up to ten targets selected by Sankyo. Under the
agreement Sankyo has an option to acquire an exclusive, worldwide license to
commercialize products incorporating either compounds from our library with
activity against the disease target or derivatives of these compounds. If
Sankyo exercises the option, we are obligated to negotiate a separate royalty-
bearing license agreement with Sankyo. If Sankyo does not exercise its option
with respect to a particular target or if we are unable to reach agreement on
the license during the specified period, Sankyo's exclusive rights with respect
to such target will terminate and we will be free to pursue research and
development with respect to the target on our own or with third parties. The
agreement will terminate on the later of March 24, 2002, or the end of the
period for entering into license agreements. Either party may terminate the
agreement at any time with notice upon material breach by the other party of
its obligations.
COR Therapeutics
In January 1999, we entered into an agreement with COR to discover active
molecules for up to five disease targets. In January 2000, we extended the term
through at least January 12, 2001, at which time the agreement will terminate
unless COR selects a disease target for continued research and development. If
COR selects a disease target, then the agreement will expire when the final
patent covering a royalty-bearing product expires. Either party may terminate
the agreement at any time with notice upon material breach by the other party
of its obligations. We are using our TRAP technology to identify compounds that
are active against the disease targets selected by COR.
Under the agreement, COR has an exclusive license to develop, make and
commercialize worldwide, other than Japan, China, Taiwan, Korea and certain
other Asian countries, products incorporating compounds derived from our
library that have activity against those disease targets that COR selects for
continued research and development. COR also has a non-exclusive license to use
related compounds from our library to develop these products. We have both an
exclusive license to commercialize products outside the COR territory and an
exclusive, worldwide license to commercialize products incorporating compounds
derived from the Telik library with activity against those disease targets that
COR does not select. We also have a non-exclusive, worldwide license to
develop, make and commercialize products incorporating compounds from our
library that do not have activity against any of the disease targets tested
under the agreement. Each party may develop and commercialize these products
independently or with a third party, and each party will pay the other party
royalties on such products until the patents covering the products expire. In
addition, COR will pay us a license fee and additional fees if and upon
achievement of specified development milestones. The total of these fees will
not exceed $26 million.
Scios
In February 1999, we entered into an agreement with Scios to employ our TRAP
technology to discover small molecules that display activity against a disease
target chosen by Scios.
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Under the agreement, Scios has an option to acquire an exclusive, royalty-
bearing license to commercialize worldwide, other than in Japan, China, Taiwan,
Korea and certain other Asian countries, products incorporating compounds
derived from the Telik library with activity against the disease target. If
Scios does not exercise the option before the end of the option period, the
agreement will terminate. If Scios exercises the option, we will receive a
licensing fee, and potential milestone and royalty payments and an exclusive,
royalty-free license to commercialize these products outside the Scios
territory. The maximum total of the license fees and milestone payments that we
might receive from Scios is $5.25 million. The parties will share data arising
from their development of these products, and we may perform development or
compound optimization work on behalf of Scios. We will retain all rights with
respect to compounds for which Scios does not exercise its option and, in the
event that Scios does not satisfy certain diligence requirements, we will
receive an exclusive, worldwide, royalty-free license to develop, make and
commercialize the relevant products. Scios' obligation to pay royalties to us
will end after the product has been sold in the relevant country for ten years
and Telik's patents in that country covering the product have expired. The
agreement will terminate when Scios no longer has any payment obligations to
us. Either party may terminate the agreement at any time with notice upon
material breach by the other party of its obligations.
Genaissance Pharmaceuticals
In February 1998, we entered into a research agreement with Genaissance
Pharmaceuticals. We amended this agreement in February 1999 to extend the term
of the agreement. Under the terms of the agreement, we are using our TRAP
technology to validate novel variants of the estrogen receptor through the
identification of compounds from our library that exhibit selective
pharmacological activity. We will jointly own the compounds or other
intellectual property rights arising from the collaboration and have agreed to
jointly seek a third party for a corporate partner to continue development of
these compounds. We will share research funding proportionate to our research
commitments and will share equally the other revenues received from any
resulting license agreements. The agreement will terminate if we have not
entered into a third party license agreement or otherwise agreed to a joint
development program by August 11, 2000. Either party may terminate the
agreement at any time with notice upon material breach by the other party of
its material obligations. We are currently in negotiations to amend the
agreement. Upon termination, the parties are obligated to consult with each
other before independently developing the jointly owned compounds and other
intellectual property rights.
Patents and Proprietary Information
Our success depends on our ability and the ability of our collaborators to
obtain patents for compounds, technologies and products resulting from the
application of these technologies, to defend patents once obtained, and to
maintain trade secrets both in the United States and foreign countries.
Accordingly, patents and other proprietary rights are an essential element of
our business. As of March 31, 2000, 36 patents based on our discoveries have
been granted in the United States and 56 abroad. In addition, more than 16
applications are pending in the United States and more than 79 abroad. Our
policy is to aggressively file patent applications to protect new chemical
entities, technology, other inventions and improvements to inventions that are
commercially important to the development of our business. Applications
pertaining to our core technology cover new chemical compounds, uses of
compounds, pharmaceutical compositions, formulations, methods of compound
preparation, methods of chemical classification, protein profiles of compounds
and computational methods to analyze these protein profiles.
We also rely on trade secret information, technical know-how and innovation
to continuously expand our proprietary position. We require our employees and
consultants to execute non-disclosure and assignment of invention agreements on
commencement of their employment or engagement.
Competition
Competition in the pharmaceutical and biotechnology industries is intense.
Many pharmaceutical or biotechnology companies have products on the market and
are actively engaged in the research and development of products that are
competitive with our potential products. Many of these companies and
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institutions, either alone or together with their collaborative partners, have
substantially greater financial, manufacturing, sales, distribution and
technical resources and more experience in research and development, clinical
trials and regulatory matters, than we do.
Regulatory Considerations
The manufacturing and marketing of our potential products and our ongoing
research and development activities are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. In
the United States, pharmaceutical products are subject to rigorous review by
the FDA under the Federal Food, Drug and Cosmetic Act, the Public Health
Service Act and other federal statutes and regulations. Non-compliance with
applicable requirements can result in fines, recall or seizure of products,
total or partial suspension of production, refusal of the government to approve
marketing applications or allow us to enter into supply contracts and criminal
prosecution. The FDA also has the authority to revoke previously granted
marketing authorizations.
Securing FDA approval requires the submission of extensive preclinical and
clinical data and supporting information to the FDA for each indication to
establish a product candidate's safety and efficacy. The approval process takes
many years, requires the expenditure of substantial resources, involves post-
marketing surveillance and may involve ongoing requirements for post-marketing
studies. The FDA may also require post-marketing testing and surveillance to
monitor the effects of approved products or place conditions on any approvals
that could restrict the commercial applications of these products. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. With respect to
patented products or technologies, delays imposed by the governmental approval
process may materially reduce the period during which we will have exclusive
rights to exploit them.
Preclinical studies involve laboratory evaluation of product characteristics
and animal studies to assess the initial efficacy and safety of the product.
The FDA under its Good Laboratory Practices regulations regulates preclinical
studies. Violations of these regulations can, in some cases, lead to
invalidation of the studies, requiring these studies to be replicated. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an Investigational New
Drug application, or an IND, which must be approved by the FDA before we can
commence clinical investigations in humans. Unless the FDA objects to an IND,
the IND will become effective 30 days following its receipt by the FDA.
Clinical trials involve the administration of the investigational product to
humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practice, or GCP,
under protocols submitted to the FDA as part of the IND. In addition, each
clinical trial must be approved and conducted under the auspices of an
Investigational Review Board, or IRB, and with patient informed consent. The
IRB will consider, among other things, ethical factors, the safety of human
subjects and the possibility of liability of the institution conducting the
trial.
Clinical trials are conducted in three sequential phases but the phases may
overlap. Phase I clinical trials may be performed in healthy human subjects or,
depending on the disease, in patients. The goal of the phase I clinical trial
is to establish initial data about the safety and tolerance of the product in
humans. In phase II clinical trials, in addition to safety, the efficacy of the
product is evaluated in limited patients with the target disease. Phase III
trials typically involve additional testing for safety and clinical efficacy in
expanded, large-scale, multi-center studies of patients with the target
disease.
We and all of our contract manufacturers are required to comply with the
applicable FDA current Good Manufacturing Practice regulations. Good
Manufacturing Practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in the
commercial manufacture of our products.
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Outside the United States, our ability to market a product is contingent
upon receiving marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union registration procedures are
available to companies wishing to market a product in more than one EU member
state. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted.
Manufacturing
We are using third party manufacturers to produce clinical supplies of
TLK286 under the FDA's current Good Manufacturing Practices, or cGMP,
regulations. We are evaluating potential drug manufacturers to produce clinical
supplies of TLK199. In the insulin receptor activator program, we have
developed preparative routes to our lead compounds that would be suitable for
their commercial production.
We intend to continue to use third-party contract manufacturers or corporate
collaborators for the production of material for use in preclinical studies,
clinical trials, manufacture of future products and commercialization. The
manufacture of our potential products for preclinical and clinical trials and
commercial purposes is subject to cGMP regulations promulgated by the FDA and
to other applicable domestic and foreign regulations.
Employees
As of June 30, 2000, we had a workforce of 37 full-time employees, 12 of
whom hold PhD or MD degrees, or both, and nine of whom hold other advanced
degrees. Of our total workforce, 27 are engaged in research and development and
10 are engaged in business development, finance and administration. None of our
employees are represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe that our relations with our employees
are good.
Facilities
Our facilities consist of approximately 20,680 square feet of research and
office space located at 750 Gateway Boulevard in South San Francisco,
California, that is leased to us until December 31, 2002. We have the option to
renew this lease for one additional period of five years. We believe our
existing facilities are adequate to meet our requirements through the year
2005.
Scientific and Clinical Advisors
We utilize scientists and physicians to advise us on scientific and medical
matters including medicinal and computational chemistry, biochemistry,
immunology, enzymology, molecular and cell biology, pharmacology and clinical
trials.
The following table lists our Scientific and Clinical Advisors:
<TABLE>
<CAPTION>
Name Title/Affiliation
---- -----------------
<S> <C>
Joseph R. Bertino, MD .. Chairman, Molecular Pharmacology and Therapeutics Program,
Sloan-Kettering Institute for Cancer Research, Memorial
Sloan-Kettering Cancer Center, New York
Perry J. Blackshear, MD, Clinical Director, Office of Clinical Research, National
PhD.................... Institute of Environmental Health Sciences, North Carolina
Ronald H. Blum, MD...... Director, Cancer Center and Programs, Beth Israel Medical
Center, New York
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Title/Affiliation
---- -----------------
<S> <C>
Richard F. Borch, MD,
PhD.................... Eli Lilly Distinguished Professor of Medicine, Head,
Department of Medicinal Chemistry and Molecular
Pharmacology, Lafayette Center for Medical Education, Purdue
University, Indiana
Michael J. Buchmeier,
PhD.................... Professor and Director, Emerging Virus Research Center,
Scripps Research Institute, California
Fritz R. Buhler, Prof.
Dr. Med................ Vice-Chairman, International Biomedicine Management
Partners, Inc., Director, European Center for Pharmaceutical
Medicine, University of Basel, Switzerland
M. Sheila Donnelly, MD.. Instructor of Medicine, Harvard Medical School and Clinical
Associate, Dana Farber Cancer Center, Massachusetts
Jurgen Drews, Prof.
Med. .................. Chairman, International Biomedicine Partners, Inc.,
Switzerland
Peter D. Eisenberg,
MD .................... Medical Director, Marin Cancer Institute, San Rafael,
California
Ira D. Goldfine, MD .... Professor, University of California at San Francisco,
Director, Division of Diabetes and Endocrine Research, Mount
Zion Medical Center of the University of California at San
Francisco
Jordan U. Gutterman,
MD .................... Professor and Chairman, Department of Clinical Immunology
and Biological Therapy, The University of Texas M.D.
Anderson Cancer Center
W. David Henner, MD
PhD.................... Professor of Medicine and Pharmacology, Oregon Health
Sciences University
Lawrence M. Kauvar,
PhD.................... Founder and President, Trellis Bioinformatics, Inc.
Bengt Mannervik, PhD.... Professor, Department of Biochemistry, Uppsala University,
Sweden
Daria Mochly-Rosen,
PhD.................... Associate Professor, Department of Molecular Pharmacology,
Stanford University School of Medicine, California
John W. Sedat, PhD...... Professor of Biochemistry, Department of Biochemistry and
Biophysics, University of California at San Francisco
David Sidransky, MD .... Professor of Otolaryngology, Oncology, Pathology and
Cellular and Molecular Medicine, Director, Head and Neck
Cancer Research Division, Johns Hopkins University, Maryland
John A. Tainer, PhD..... Member and Professor, Department of Molecular Biology,
Scripps Research Institute, California
Kenneth D. Tew, PhD..... Chairman of Pharmacology Department, Fox Chase Cancer
Center, Adjunct Professor Pharmacology, University of
Pennsylvania
Sabina K. Wallach, MD .. Physician, Scripps Memorial Hospital, California
Harel Weinstein, DSc ... Professor and Chairman, Department of Physiology and
Biophysics, Mount Sinai School of Medicine, Director,
Institute for Computational Biomedicine, Mount Sinai School
of Medicine
</TABLE>
Legal Proceedings
We are currently not a party to any legal proceedings.
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MANAGEMENT
Executive Officers, Directors and Key Personnel
The following table sets forth information regarding our executive officers,
directors and key personnel.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers and
Directors
Michael M. Wick, MD, PhD.. 54 President, Chief Executive Officer and Chairman
Cynthia M. Butitta........ 46 Chief Financial Officer
Reinaldo F. Gomez, PhD.... 55 Vice-President, Corporate Alliances
David R. Bethune.......... 59 Director
Jean Deleage, PhD......... 59 Director
Jerrold L. Glick.......... 57 Director
David W. Martin, Jr., MD.. 59 Director
Stefan Ryser, PhD......... 40 Director
Key Personnel
Michael R. Kozlowski,
PhD...................... 46 Vice President, Biology Research
Steven R. Schow, PhD...... 50 Vice President, Chemistry Research
Hugo O. Villar, PhD....... 41 Vice President, Discovery Technologies
</TABLE>
Michael M. Wick, MD, PhD has served as our Chairman of the board of
directors since January 2000, as our Chief Executive Officer since July 1999
and as our President since June 1998. Dr. Wick served as our Chief Operating
Officer from December 1997 until June 1998, and as our Executive Vice
President, Research and Development, from December 1997 until June 1998. He has
been one of our directors since December 1997. Prior to joining us in December
1997, Dr. Wick was Senior Vice President of Research for CV Therapeutics, a
public biotechnology company, from May 1995 until May 1997, and continued as a
consultant until December 1997. Dr. Wick served as Executive Director of
oncology/immunology and clinical research at Lederle Laboratories, a division
of American Cyanamid, a pharmaceutical company, from September 1990 until May
1995, and also directed the Cynamid/Immunex joint oncology research program.
Dr. Wick began his career at Harvard Medical School, where he served as an
Associate Professor from July 1981 until June 1994 and Chief of the Melanoma
Clinic and Laboratory of Molecular Dermatological Oncology at the Dana Farber
Cancer Institute from September 1980 until September 1992. Dr. Wick holds a PhD
degree in chemistry from Harvard University and an MD degree from Harvard
Medical School.
Cynthia M. Butitta has served as our Chief Financial Officer since August
1998. Ms. Butitta also provides financial consulting services as a Partner in
Altair Capital Associates LLC, which she co-founded in November 1998, and
Butitta Consulting Services LLC, which she founded in September 1997. From
December 1995 until September 1997, Ms. Butitta was Vice President of Finance
and Administration and Chief Financial Officer for Connetics, Inc., a
biotechnology company. From June 1994 until December 1995, she was Vice
President of Finance and Administration and Chief Financial Officer for InSite
Vision, Inc., a biotechnology company. Ms. Butitta holds a BS degree in
business and accounting from Edgewood College in Madison, Wisconsin, and an MBA
degree in finance from the University of Wisconsin, Madison.
Reinaldo F. Gomez, PhD has served as our Vice President, Corporate Alliances
since January 1998. He served as our Vice President, Research and Development
from September 1996 until December 1997. From August 1995 to September 1996,
Dr. Gomez served as our Vice President, Project Management. Dr. Gomez served as
our Chief Executive Officer from July 1992 to August 1995. He served as our
President from May 1991 until August 1995, and as one of our directors from May
1991 until January 1997. Over a ten-year period prior to that, Dr. Gomez held
various research positions at Genentech, Inc., a biotechnology company,
including that of Vice President of Discovery Research. During his tenure at
Genentech, Dr. Gomez directed that company's major drug development effort for
tissue plasminogen activator (t-PA), which led to the filing of the application
for FDA marketing approval in 1986. He previously served on the faculty of the
Massachusetts
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Institute of Technology (MIT) as Associate Professor in Nutrition and Food
Science. Dr. Gomez received his BS and MS degrees in food science from the
University of Florida and his PhD in nutrition and food science from MIT.
David R. Bethune has served as one of our directors since December 1999. Mr.
Bethune has 34 years of experience in the pharmaceutical and biopharmaceutical
industries. Since February 2000, he has served as Chairman and Chief Executive
Officer of Atrix Laboratories, a pharmaceutical company, and became acting
Chief Executive Officer of Atrix in August 1999. He has also served as a
director of Atrix since April 1995. From July 1997 until October 1998, Mr.
Bethune was President and Chief Operating Officer of IVAX Corporation, a
pharmaceutical company. From March 1995 until June 1997, he served as President
and Chief Executive Officer for Aesgen, Inc., a pharmaceutical company. Mr.
Bethune has held various positions at American Cyanamid Company, a
pharmaceutical company, from February 1988 until February 1995. Mr. Bethune
also served as President of Operations and Vice President and General Manager
of U.S. Pharmaceuticals for G. D. Searle & Co., a pharmaceutical company, from
June 1984 until January 1988. Mr. Bethune is a director of St. Charles
Pharmaceutical Co., a pharmaceutical company, and the Female Health Company, a
company that sells female health products. Mr. Bethune holds an AB degree in
Accounting and Finance from Lenoir-Rhyne College and a masters degree in
Executive Management from Columbia University.
Jean Deleage, PhD has served as one of our directors since August 1994. Dr.
Deleage is a founder and Managing General Partner of Alta Partners, a venture
capital partnership investing in information technologies and life science
companies. From 1979 to 1996, Dr. Deleage was a Managing Partner of Burr, Egan,
Deleage & Co., a venture capital firm. Dr. Deleage was a founder of Sofinnova,
a venture capital organization in France, and Sofinnova, Inc., a U.S.
subsidiary of Sofinnova. Dr. Deleage is a director of Flamel Technologies S.A.,
a polymer engineering company and Aclara Biosciences, Inc., a biotechnology
company. In 1993, he was awarded the Ordre National du Merite and the Legion of
Honor from the French government. Dr. Deleage received a Baccalaureate in
France, an MS degree in electrical engineering from Ecole Superieure
d'Eletricite and a PhD in economics from the Sorbonne.
Jerrold L. Glick has served as one of our directors since 1988, as our
Chairman of the board from 1988 until November 1995, and as our Secretary from
December 1988 until November 1990. Mr. Glick has been a General Partner of
Columbia Group Limited, LLP, a real estate development company, since 1972. In
1991, Mr. Glick founded QualiCenters, Inc., a multi-state provider of dialysis
services and served as its secretary and director until 1997. He is a director
of Urban Ventures LLC, a real estate development company; director, Secretary
and Vice President of AML/APL, Inc., a clinical laboratory services company;
director and Secretary of RV Management Corp., a multi-state provider of
dialysis services; and director of Republic Financial Corporation, a financial
services company. Mr. Glick received a BS degree in finance from the University
of Southern California.
David W. Martin, Jr., MD has served as one of our directors since August
1997. In July 1997, Dr. Martin co-founded Eos Biotechnology, Inc., a
biotechnology company, and has been its President and Chief Executive Officer
since July 1997. From May 1995 until November 1996, he served as President and
Chief Executive Officer of Lynx Therapeutics, a company that develops
technology for measuring gene activities. From January 1994 until April 1995,
Dr. Martin held various positions at Chiron Therapeutics, a biotechnology
company. He was Executive Vice President of Research and Development at The
DuPont Merck Pharmaceutical Co., a pharmaceutical company, from January 1991
until January 1994. From January 1983 until September 1990, Dr. Martin served
as the first Vice President of Research and Development of Genentech, a
biotechnology company. Dr. Martin is a director of Varian Medical Systems,
Inc., a spin-off of Varian Associates, Inc., a company that develops and
markets radiation equipment and software, and Cubist Pharmaceuticals, Inc., a
company that discovers and develops anti-infective drugs. Dr. Martin holds an
MD degree from Duke University.
Stefan Ryser, PhD has served as one of our directors since September 1998.
Since April 2000, Dr. Ryser has served as a managing director of Bear Stearns
Health Innoventures, a ventrure capital fund. Dr. Ryser
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served as Chief Executive Officer until April 2000, and has served as a member
and delegate of the board, of International Biomedicine Management Partners
Inc., a company that manages investments in biotechnology companies on behalf
of International BM Biomedicine Holdings Inc., since January 1998. From January
1989 until December 1997, Dr. Ryser held various positions at F. Hoffmann-La
Roche Ltd. (Roche), a pharmaceutical company, including Scientific Assistant to
the President of Global Research and Development, and was responsible for
maintaining the scientific liaison between Roche and Genentech. From January
1991 until December 1997, Dr. Ryser served as a member of the Brussels-based
senior advisory group of EuropaBio, a European biotechnology organization.
Dr. Ryser is a director of Genaissance Pharmaceuticals, Inc., a genomics
company; Arena Pharmaceuticals, a biotechnology company; and Cytokinetics,
Inc., a biotechnology company. Dr. Ryser received a PhD degree in molecular
biology from the University of Basel.
Michael R. Kozlowski, PhD has served as our Vice President of Biology
Research since March 2000. He served as our Senior Director of Discovery
Biology from June 1998, and as our Director of Pharmacology since March 1998.
Prior to joining us, Dr. Kozlowski served as a Program Director and Director of
Assay Development and Screening at Geron Corporation, a biotechnology company,
from January 1994 until March 1998. Dr. Kozlowski was a Senior
Scientist/Principle Scientist at Bristol-Myers Squibb Co., a pharmaceutical
company, from June 1987 until December 1993. Dr. Kozlowski earned his BS in
biology from The California Institute of Technology in June 1976 and his PhD in
biology in March 1983 from the University of California at Irvine.
Steven R. Schow, PhD has served as our Vice President of Chemistry Research
since March 2000. He served as our Senior Director of Medicinal Chemistry from
March 1998 until March 2000. Prior to joining us, Dr. Schow served as a
Director of Medicinal Chemistry at CV Therapeutics, a biotechnology company,
from May 1995 to March 1998. He served as a Senior Group Leader at Lederle
Laboratories, a division of American Cyanamid, a pharmaceutical company, from
November 1991 until May 1995. Dr. Schow earned his PhD degree in organic
chemistry in October 1977 from the University of California at San Diego.
Hugo O. Villar, PhD has served as our Vice President, Discovery Technologies
since February 1998. Dr. Villar previously served as our Director of Chemistry
from May 1995 until February 1998, and as a Senior Scientist from October 1992
to May 1995. Prior to joining us, Dr. Villar served as a director of
computational pharmacology at Molecular Research Institute, a not-for-profit
research organization, from July 1989 until October 1992. He was also a
computational chemist at SRI International, a not-for-profit research
organization, from May 1988 until June 1989. Dr. Villar earned an MS degree in
December 1981 and PhD degree in December 1985 in chemistry from the Universidad
Nacional de La Plata, Argentina.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.
Board Committees
Audit Committee. Our audit committee, consisting of Dr. Martin and Messrs.
Bethune and Glick, reviews our internal accounting procedures and the services
provided by our independent auditors.
Compensation Committee. Our compensation committee reviews and recommends to
our board of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
of our employees. Our compensation committee currently consists of Drs. Deleage
and Ryser and Mr. Bethune. Mr. Glick served on our compensation committee from
November 1992 until March 2000. Mr. James Gower served on our compensation
committee from November 1992 until December 1999, when he retired from the
board.
37
<PAGE>
Compensation of Directors
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In consideration
for services as directors, on December 17, 1999, we granted an option to
purchase 5,000 shares of common stock to Mr. Bethune and 2,500 shares of common
stock to each of Drs. Deleage, Martin and Ryser and Mr. Glick at an exercise
price of $1.60 per share. The $1.60 per share exercise price for these options
was equal to the fair market value of the common stock on the date of grant as
determined by our board of directors. Twenty-five percent of these options vest
immediately upon grant and the remaining shares vest in equal installments over
the next forty-eight months.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during 1999 to our Chief Executive Officer and each of the three other
executive officers during 1999. There were no other executive officers during
this period. All option grants were made under our 1996 Stock Option Plan.
Summary Compensation
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
-------------- ------------
Securities
Underlying Other
Name and Principal Position Salary Bonus Options Compensation
--------------------------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Michael M. Wick
President, Chief Executive Officer
and Chairman(1)...................... $270,000 $-- 150,000 --
Clifford Orent
Vice-Chairman(2)..................... 229,450 -- -- --
Reinaldo F. Gomez
Vice-President, Corporate Alliances.. 209,467 -- -- --
Cynthia M. Butitta
Chief Financial Officer.............. 120,000 -- -- --
</TABLE>
--------
(1) Dr. Wick was promoted to Chief Executive Officer in July 1999 and Chairman
in January 2000.
(2) Mr. Orent served as Chairman and Chief Executive Officer through June 1999
and Chairman through December 1999. Mr. Orent retired from Telik in March
2000.
38
<PAGE>
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our three other
executive officers during 1999. Options granted to purchase shares of our
common stock under our 1996 Stock Option Plan generally vest over a four-year
period. Twenty-five percent of the initial option grant vests on the one-year
anniversary of employment and the remainder vests in a series of equal monthly
installments beginning on the one-year anniversary of employment and continuing
over the next three years of service. Subsequent options granted generally vest
according to the same schedule. The exercise price per share is equal to the
fair market value of our common stock on the date of grant, as determined by
our board of directors. The percentage of total options was calculated based on
options to purchase an aggregate of 246,050 shares of common stock granted to
employees under our stock option plan in 1999. The potential realizable value
was calculated based on the ten-year term of the options and assumed rates of
stock appreciation of 5% and 10%, compounded annually from the date the options
were granted to their expiration date based on the fair market value of the
common stock on the date of grant.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------ Value at Assumed
Number of Percentage of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to for Option Term(2)
Options Employees in Exercise Expiration ---------------------
Granted Fiscal Year Price Date 5% ($) 10% ($)
---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Wick.......... 150,000 61.0% $1.60 07/30/09 $2,203,342 $3,650,614
President, Chief
Executive Officer and
Chairman
Clifford Orent........... -- -- -- -- -- --
Vice-Chairman(1)
Reinaldo F. Gomez........ -- -- -- -- -- --
Vice-President,
Corporate Alliances
Cynthia M. Butitta....... -- -- -- -- -- --
Chief Financial Officer
</TABLE>
--------
(1) Mr. Orent served as Chairman and Chief Executive Officer through June 1999
and Chairman through December 1999. Mr. Orent retired from Telik in March
2000.
(2) In order to comply with the rules of the Securities and Exchange
Commission, we are including the gains or "option spreads" that would exist
for the respective options we granted to the named executive officers. We
calculate these gains based upon an assumed initial public offering price
of $10.00 per share appreciating at 5% and 10% compounded annually from the
date of the option grant until the termination date of the option. These
gains do not represent our estimate or projection of the future common
stock price.
39
<PAGE>
The following table sets forth summary information regarding the number and
value of options held as of December 31, 1999 by our Chief Executive Officer
and each of our three executive officers. These executive officers did not
exercise any options in 1999. Amounts shown in the value of unexercised in-the-
money options at December 31, 1999 column are based on an initial public
offering price of $10.00 per share without taking into account any taxes that
may be payable in connection with the transaction, multiplied by the number of
shares underlying the option, less the aggregate exercise price payable for
these shares.
1999 Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options
December 31, 1999 at December 31, 1999(2)
---------------------- ------------------------
Name Vested Unvested Vested Unvested
---- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Michael M. Wick ................ 220,875 478,125 $ 1,855,350 $ 4,016,250
President, Chief Executive
Officer and Chairman
Clifford Orent.................. 403,803 202,447 $3,569,539 $ 1,725,821
Vice-Chairman(1)
Reinaldo F. Gomez............... 142,396 88,021 $ 1,237,502 $ 742,501
Vice President, Corporate
Alliances
Cynthia M. Butitta.............. 96,000 -- $ 806,400 --
Chief Financial Officer
</TABLE>
--------
(1) Mr. Orent served as Chairman and Chief Executive Officer through June 1999
and Chairman through December 1999. Mr. Orent retired from Telik in March
2000.
(2) The amount set forth represents the difference between the fair market
value of the underlying common stock using an assumed initial public
offering price of $10.00 per share and the exercise price of the option,
multiplied by the number of shares underlying the option.
Benefit Plans
2000 Equity Incentive Plan
We adopted our 2000 Equity Incentive Plan in March 2000 to replace our 1988
Stock Option Plan and our 1996 Stock Option Plan.
Share Reserve. We have reserved a total of 2,000,000 shares of our common
stock for issuance under the incentive plan. On each January 1, starting with
January 1, 2001 continuing through and including January 1, 2010, the share
reserve automatically will be increased by a number of shares equal to the
least of:
. 5% of our then outstanding shares of common stock;
. 1,500,000 shares; or
. a number determined by our board.
If the recipient of a stock award does not purchase the shares subject to
such stock award before the stock award expires or otherwise terminates, the
shares that are not purchased will again become available for issuance under
the incentive plan.
Administration. The board administers the incentive plan unless it delegates
administration to a committee. The board has the authority to construe,
interpret and amend the incentive plan as well as to determine:
. who will receive awards under the incentive plan;
40
<PAGE>
. the dates on which such awards will be granted;
. the number of shares subject to the awards;
. the vesting and exercisability of the awards;
. the exercise price of the awards;
. the type of consideration that may be used to satisfy the exercise price;
and
. the other terms of the awards.
Eligibility. The board may grant incentive stock options that qualify under
Section 422 of the Internal Revenue Code to our employees and to the employees
of our affiliates. The board also may grant nonstatutory stock options, stock
bonuses and restricted stock purchase awards to our employees, directors and
consultants as well as to the employees, directors and consultants of our
affiliates.
Limits on Option Grants. There are limits on the number of shares that the
board may grant under an option. No employee may receive incentive stock
options that exceed the $100,000 per year limitation set forth in Section
422(d) of the Internal Revenue Code. For this purpose, the value of incentive
stock options is determined based upon the fair market value of the common
stock underlying such options on the date of grant.
Option Terms. The board may grant incentive stock options with an exercise
price of 100% or more of the fair market value of a share of our common stock
on the grant date. The board may grant nonstatutory stock options with an
exercise price as low as 85% of the fair market value of a share on the grant
date. Options may have a term of up to 10 years. Options may, but need not,
vest in installments according to a schedule established on the grant date. The
board, however, may accelerate the vesting of such options.
Terms of Other Stock Awards. The board determines the purchase price of
other stock awards, which may not be less than 85% of the fair market value of
our common stock on the grant date. However, the board may award stock bonuses
in consideration of past services without a cash purchase price. Shares that we
sell or award under the incentive plan may, but need not be, restricted and
subject to a repurchase option in our favor in accordance with a vesting
schedule that the board determines. The board, however, may accelerate the
vesting of such awards.
Stock Awards Granted. No stock options or other awards have been issued
under the incentive plan.
Plan Termination. The incentive plan will terminate in March 2010 unless the
board terminates it prior to that time.
1988 Stock Option Plan and 1996 Stock Option Plan
Our 1988 and 1996 Stock Option Plans will terminate as of the effective date
of this offering, though the termination will have no effect on the options
that are outstanding under these plans. No new stock options will be granted
under these plans after the completion of this offering. Generally, the
exercise price of the options granted under these plans is equal to the fair
market value on the date of grant as determined by the board.
As of June 30, 2000, we have granted incentive stock options and
nonstatutory stock options to purchase an aggregate of 5,116,830 shares under
the 1988 and 1996 Stock Option Plans and outside the plans. Of these shares, we
issued an aggregate of 404,793 shares upon the exercise of options and options
to purchase 3,003,418 shares at a weighted average exercise price of $1.46 were
outstanding.
2000 Non-Employee Directors' Stock Option Plan
We adopted the 2000 Non-Employee Directors' Stock Option Plan in March 2000.
The Directors' Plan will become effective on the effective date of this
offering. The Directors' Plan provides for the automatic grant to our non-
employee directors of options to purchase shares of our common stock.
41
<PAGE>
Share Reserve. We have reserved a total of 300,000 shares of our common
stock for issuance under the Directors' Plan. If an optionholder does not
purchase the shares subject to such option before the option expires or
otherwise terminates, the shares that are not purchased again become available
for issuance under the Directors' Plan.
Administration. The board administers the Directors' Plan unless it
delegates administration to a committee. The board has the authority to
construe, interpret and amend the Directors' Plan, but the Directors' Plan
specifies the essential terms of the options, including:
. who will receive options under the directors' plan;
. the dates on which such options will be granted;
. the number of shares subject to the options;
. the vesting schedule applicable to the options;
. the exercise price of the options; and
. the type of consideration that may be used to satisfy the exercise price.
Eligibility. Each non-employee director who is serving on the effective date
of this offering will automatically be granted an option to purchase 20,000
shares of common stock. Each person who is elected or appointed to be a non-
employee director for the first time after the effective date of this offering
will be granted an option to purchase 20,000 shares of common stock upon such
election or appointment. In addition, each non-employee director who continues
to serve as a non-employee director automatically will be granted an option to
purchase 5,000 shares of common stock on the day following each annual meeting
of our stockholders. The number of shares subject to the grants to be made
following each annual meeting will be pro-rated for any non-employee director
who has not continuously served as a director for the entire 12-month period
prior to the date of grant. Twenty-five percent of the shares subject to the
options will vest on the first anniversary of the grant date and the remainder
of shares will vest in equal monthly installments over the next three years.
The vesting of each option will cease on the date the non-employee director
holding such option ceases to provide services (whether as a director, employee
or consultant) to us or one of our affiliates.
Option Terms. Options granted under the Directors' Plan will have an
exercise price equal to 100% of the fair market value of the common stock on
the grant date and a term of 10 years. As long as a non-employee director
continues to serve with us or with one of our affiliates, whether in the
capacity of a director, an employee or a consultant, the non-employee
director's option will continue. Options will terminate three months after the
non-employee director's service with the company and its affiliates terminates.
However, if such termination is due to the non-employee director's disability,
the exercise period will be extended to 12 months. If such termination is due
to the non-employee director's death, or if the non-employee director dies
within three months after his or her service terminates, the exercise period
will be extended to 18 months following death.
Options Issued. Each of our directors will receive an option to purchase
20,000 shares of common stock at the initial public offering price.
Plan Termination. The Directors' Plan will terminate in March 2010 unless
the board terminates it prior to that time.
2000 Employee Stock Purchase Plan
We adopted the 2000 Employee Stock Purchase Plan in March 2000.
Share Reserve. We have authorized the issuance of 250,000 shares of our
common stock pursuant to purchase rights granted to eligible employees under
the Purchase Plan. On each January 1, starting with
42
<PAGE>
January 1, 2001 and continuing through January 1, 2010, the share reserve will
automatically be increased by a number of shares equal to the lesser of:
. 1% of our then outstanding shares of common stock;
. 150,000 shares; or
. a number determined by our board of directors.
Eligibility. The Purchase Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
The Purchase Plan provides a means by which eligible employees may purchase our
common stock through payroll deductions. We implement the Purchase Plan by
offerings of purchase rights to eligible employees. Generally, all of our full-
time employees and full-time employees of our affiliates incorporated in the
United States may participate in offerings under the Purchase Plan.
Administration. Under the Purchase Plan, the board may specify offerings of
up to 27 months. Unless the board otherwise determines, common stock will be
purchased for accounts of participating employees at a price per share equal to
the lower of:
. 85% of the fair market value of a share on the first day of the offering;
or
. 85% of the fair market value of a share on the purchase date.
The first offering under this plan will begin on the effective date of this
offering. The fair market value of the shares on the first date of the first
offering under this plan will be the initial public offering price.
The board may provide that employees who become eligible to participate
after the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
. 85% of the fair market value of a share on the day they began
participating in the purchase plan; or
. 85% of the fair market value of a share on the purchase date.
If authorized by the board, participating employees may authorize payroll
deductions of up to 15% of their base compensation for the purchase of stock
under the Purchase Plan.
Other Provisions. The board may grant eligible employees purchase rights
under the Purchase Plan only if the purchase rights, together with any other
purchase rights granted under other employee stock purchase plans established
by us or by our affiliates, if any, do not permit the employee's rights to
purchase our stock to accrue at a rate which exceeds $25,000 of fair market
value of our stock for each calendar year in which the purchase rights are
outstanding.
Description of 401(k) Plan
We maintain a retirement and deferred savings plan for our employees. The
retirement and deferred savings plan is intended to qualify as a tax-qualified
plan under Section 401 of the Internal Revenue Code. The retirement and
deferred savings plan provides that each participant may contribute up to 20%
of his or her pre-tax compensation (up to a statutory limit, which is $10,500
in calendar year 2000). Under the plan, each employee is fully vested in his or
her deferred salary contributions. Employee contributions are held and invested
by the plan's trustee. The retirement and deferred savings plan also permits us
to make discretionary contributions, subject to established limits and a
vesting schedule. To date, we have not made any discretionary contributions to
the retirement and deferred savings plan on behalf of participating employees.
43
<PAGE>
Employment Agreements and Termination of Employment Agreements
We entered into an employment agreement with Michael M. Wick in August 1999
upon his promotion to the position of Chief Executive Officer. In December
1999, Dr. Wick was elected Chairman of the board which became effective in
January 2000. Either Telik or Dr. Wick may terminate his employment at any time
for any reason. In the event that Dr. Wick is terminated without cause, he is
entitled to receive as severance, continued payment of his base salary and
health care benefits for twelve months. The monthly vesting of stock options
will also continue for the same twelve months.
We entered into an employment agreement with Reinaldo F. Gomez in September
1999. His agreement with us terminates on August 31, 2000, unless extended by
mutual agreement. In the event that Dr. Gomez is terminated without cause any
time before August 31, 2000, he will be entitled to severance equal to the
amount of his base salary and continue to receive health care benefits up to a
three-month period. Either Telik or Dr. Gomez may terminate his employment at
any time for any reason.
In July 1998, we entered into an employment agreement with Cynthia M.
Butitta, our Chief Financial Officer. Ms. Butitta serves us in a part-time
capacity. Ms. Butitta is paid an annual base salary of $120,000 and was granted
an option to purchase 96,000 shares of our common stock at an exercise price of
$1.60 per share. As of November 1999, all such options were fully vested.
Either Telik or Ms. Butitta may terminate her employment at any time. There are
no severance provisions.
44
<PAGE>
RELATED PARTY TRANSACTIONS
Sale of Securities
Since January 1997 through June 30, 2000, we have issued and sold the
following securities to related parties in private placement transactions:
. 114,606 shares of Series I preferred stock for an aggregate price of
$5,770,300 in September 1997;
. 210,000 shares of Series J preferred stock for an aggregate price of
$10,500,000 in September 1998 and October 1998; and
. 1,000,000 shares of Series K preferred stock for an aggregate price of
$6,000,000 in March 2000.
The following table sets forth the shares of common stock issuable upon
conversion of preferred stock purchased by the holders of more than 5% of our
outstanding stock and their affiliates. No executive officer or director
purchased any shares, except Drs. Deleage and Ryser, who are affiliated with
Alta V Management Partners, L.P. and Alta BioPharma Partners, L.P., and
International BM Biomedicine Holdings AG, respectively.
<TABLE>
<CAPTION>
Shares of common stock issuable upon
conversion of:
-------------------------------------------
Series I Series J Series K
Executive officers, directors and Preferred Preferred Preferred Total
5% stockholders Stock Stock Stock consideration
--------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Sanwa Kagaku Kenkyusho Co., Ltd... 714,285 1,190,476 $8,000,000
Entities Affiliated with Alta V
Management Partners, L.P......... 149,999 $ 630,000
Entities Affiliated with Alta
BioPharma Partners, L.P.......... 833,333 $5,000,000
Entities Affiliated with Alpha
Venture Partners III............. 23,809 $ 100,000
Entities Affiliated with Delphi
Management Partners II, L.P...... 107,142 $ 450,000
Entities Affiliated with Weiss,
Peck & Greer Venture Partners II,
L.P.............................. 135,714 $ 570,000
Entities Affiliated with Oxford
Bioscience Management Corp....... 114,285 $ 480,000
Entities Affiliated with Advent
International Corporation........ 164,285 $ 690,000
International BM Biomedicine
Holdings AG...................... 1,309,523 166,667 $6,500,000
</TABLE>
We have entered into an amended and restated registration rights agreement
with each of the purchasers of preferred stock set forth above, pursuant to
which these and other stockholders will have registration rights with respect
to their shares of common stock issuable upon conversion of their preferred
stock following this offering.
For a description of our collaboration agreements with Sanwa please refer to
"Business--Collaborative Relationships." In addition to the purchases of
preferred stock noted in the above table, in December 1996, Sanwa purchased
60,000 shares of Series H preferred stock at the purchase price of $50 per
share, convertible into 540,540 shares of common stock.
Since October 1998, Dr. Gail L. Brown has served as a consultant to us on
matters involving the clinical development of our products. Dr. Brown is the
spouse of Dr. Wick, our President, Chief Executive Officer and Chairman. From
January 1, 1999 through December 31, 1999, we have paid Dr. Brown an aggregate
of $107,875 for professional services to Telik and reimbursed her $10,309 for
expenses.
In June 2000, we made a loan to Ms. Butitta in connection with the exercise
of her option to purchase 96,000 shares of our common stock. This full recourse
loan is for the aggregate amount of $153,600, bearing an annual interest rate
of 6.5% and is due in June 2003.
In June 2000, we authorized an extension of the option exercise period for
Mr. Orent for an aggregate of 433,648 previously vested shares of common stock.
This option was exercised in full in July 2000.
We have entered into indemnification agreements with our directors and
certain officers for the indemnification and advancement of expenses to these
persons to the fullest extent permitted by law. We also intend to enter into
those agreements with our future directors and officers.
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 2000:
. each person or group of affiliated persons who is known by us to own
beneficially 5% or more of our common stock;
. each of our directors and executive officers and the former executive
officer named in the Summary Compensation Table; and
. all of our directors and executive officers (and the former executive
officer named in the Summary Compensation Table) as a group.
Unless otherwise indicated, the persons listed below have sole voting and
investment power with respect to shares of our common stock shown as
beneficially owned by them, subject to community property laws where
applicable. Applicable beneficial ownership in the following table is based on
16,150,059 shares of common stock outstanding as of June 30, 2000, after giving
effect to the conversion of all of the preferred stock into common stock upon
the closing of this offering and the issuance of 5,000,000 shares of common
stock pursuant to this offering. In accordance with the rules of the SEC, the
amounts assume the exercise or conversion of all options that are exercisable
within 60 days after June 30, 2000. The percentages of beneficial ownership
assume no exercise of the underwriters' over-allotment option. Except as
otherwise noted, the address of each person listed is c/o Telik, Inc., 750
Gateway Boulevard, South San Francisco, CA 94080.
<TABLE>
<CAPTION>
Percent Beneficially
Number of Owned
Shares -----------------------
Beneficially Before
Name and Address of Beneficial Owner Owned Offering After Offering
------------------------------------ ------------ -------- --------------
<S> <C> <C> <C>
Five percent stockholders
Sanwa Kagaku Kenkyusho Co., Ltd.(1)..... 2,445,301 15.1% 11.6%
International Division
35 Higashi-ku
Nagoya 461
Japan
International BM Biomedicine Holdings
AG(2).................................. 1,480,031 9.2 7.0
Bank Julius Baer & Co., Ltd.
c/o Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
Alta V Limited Partnership(3)........... 1,194,440 7.4 5.7
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Advent International Corporation(4)..... 1,199,555 7.5 5.7
101 Federal Street
Boston, MA 20110
Weiss, Peck & Greer Venture Associates
II, L.P.(5)............................ 1,083,254 6.7 5.1
555 California Street
San Francisco, CA 94104
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Percent Beneficially
Number of Owned
Shares -----------------------
Beneficially Before
Name and Address of Beneficial Owner Owned Offering After Offering
------------------------------------ ------------ -------- --------------
<S> <C> <C> <C>
Delphi Management Partners II, L.P.(6).. 874,996 5.4 4.1
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, CA 94025
Oxford Bioscience Management Corp.(7)... 867,814 5.4% 4.1
650 Town Center Drive
Suite 810
Costa Mesa, CA 92626
Alta BioPharma Partners, L.P. (3)....... 833,333 5.2 3.9
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Directors and executive officers
Michael M. Wick(8)...................... 350,042 2.1 1.6
Stefan Ryser(2)......................... 1,480,461 9.2 7.0
Jean Deleage(3)......................... 2,039,757 12.6 9.6
Jerrold L. Glick(9)..................... 130,330 * *
David W. Martin, Jr.(10)................ 8,803 * *
David Bethune(10)....................... 1,875 * *
Reinaldo Gomez(11)...................... 285,727 1.7 1.3
Clifford Orent(12)...................... 533,648 3.2 2.5
Cynthia M. Butitta...................... 96,000 * *
All directors and officers as a group
(13) (9 persons)....................... 4,926,643 28.7 22.2
</TABLE>
--------
* Represents beneficial ownership of less than 1%.
(1) Mr. Masuo Kato exercises investment and voting power over the shares held
by Sanwa. Mr. Kato disclaims beneficial ownership of these shares.
(2) Shares shown as beneficially owned by International BM Biomedicine
Holdings, which include 4,271 shares issuable upon exercise of options
exercisable within 60 days of June 30, 2000, are also shown as
beneficially owned by Stefan Ryser, PhD, a Telik director, who possesses
voting and investment power with respect to these shares. Dr. Ryser
disclaims beneficial ownership of these shares.
(3) Shares shown as beneficially owned by Alta V Limited Partnership are held
by entities affiliated with it and are also included in the shares shown
as beneficially owned by Dr. Deleage, a Telik director and a general
partner of Alta V Limited Partnership. Shares shown as beneficially owned
by Alta BioPharma Partners, L.P. are held by entities affiliated with it
and are also included in the shares shown as beneficially owned by Dr.
Deleage, a member of the general partner of Alta BioPharma Partners, L.P.
Dr. Deleage has voting and investment power over these shares and
disclaims beneficial ownership of all the shares, except for the portion
of these shares attributable to his partnership interests. Shares shown as
beneficially owned by Dr. Deleage also include 11,984 shares issuable to
him upon exercise of options exercisable within 60 days of June 30, 2000.
(4) Held by entities managed by Advent International Corporation. Includes
7,500 shares issuable upon exercise of options exercisable within 60 days
of June 30, 2000. Dr. Jason S. Fisherman is a partner of Advent
International Corporation and exercises voting and investment power. Dr.
Fisherman disclaims
47
<PAGE>
beneficial ownership of these shares, except to the extent of his
proportionate partnership interest in these shares.
(5) Held by entities of which Weiss, Peck & Greer Venture Partners is the
general partner or adviser. Includes 15,006 shares issuable upon exercise
of options exercisable within 60 days of June 30, 2000. Weiss, Peck &
Greer Venture Fund Advisor is the Fund Investment Advisory Member of WPG
Enterprise Fund, Liquidating Trust and Weiss, Peck & Greer Venture
Associates II, Liquidating Trust, and Weiss, Peck & Greer Venture
Associates II Overseas, Liquidating Trust. Mr. Gill Cogan is the senior
managing member of Weiss, Peck & Greer Fund Advisor and has sole voting
and investment power over the shares held by each of the funds. Mr. Cogan
disclaims beneficial ownership of the shares except to the extent of his
pecuniary interest in these shares.
(6) Held by entities of which Delphi Management Partners is the general
partner. Mr. James J. Bochnowski is a general partner of Delphi
Management Partners II, L.P. and exercises investment and voting power.
Mr. Bochnowski disclaims beneficial ownership of these shares, except to
the extent of his proportionate partnership interest in these shares.
(7) Held by Oxford Bioscience Management or entities of which it is the
general partner. Includes 5,000 shares issuable to it upon exercise of
options exercisable within 60 days of June 30, 2000. Mr. Edmund Olivier
de Vezin is a general partner of Oxford Bioscience Partners and exercises
investment and voting power. Mr. Olivier disclaims beneficial ownership
of these shares, except to the extent of his proportionate partnership
interest in these shares.
(8) Includes 350,042 shares issuable to Dr. Wick pursuant to options
exercisable within 60 days of June 30, 2000.
(9) Held by Mr. Glick, who is a Telik director, entities which he may be
deemed to control and members of his family. Includes 18,252 shares
issuable to Mr. Glick upon exercise of options exercisable within 60 days
of June 30, 2000.
(10) Represents shares issuable upon exercise of options exercisable within 60
days of June 30, 2000.
(11) Held by Dr. Gomez, who is Vice President, Corporate Alliances of Telik,
by him and his spouse as trustees of a family trust and his minor child
who resides with him. Includes 173,645 shares issuable to Dr. Gomez upon
exercise of options exercisable within 60 days of June 30, 2000.
(12) Includes 433,648 shares issuable pursuant to options exercisable within
60 days of June 30, 2000.
(13) Includes 1,002,520 shares issuable pursuant to options exercisable within
60 days of June 30, 2000.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of
100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of
preferred stock, $0.01 par value.
Common Stock
As of June 30, 2000, there were 16,150,059 shares of common stock
outstanding that were held of record by approximately 216 stockholders, after
giving effect to the conversion of our then outstanding preferred stock into
common stock which will occur at the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of our stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets
legally available as our board of directors may from time to time determine.
Upon liquidation, dissolution or winding up of Telik, holders of our common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.
Preferred Stock
Pursuant to our amended and restated certificate of incorporation, our board
of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, in one or
more series. Our board shall determine the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of any series. The issuance of preferred stock could adversely affect the
voting power of holders of common stock, and the likelihood that holders of
preferred stock will receive dividend payments and payments upon liquidation
may have the effect of delaying, deferring or preventing a change in control of
Telik, which could depress the market price of our common stock. We have no
present plan to issue any shares of preferred stock.
Warrants
We have outstanding warrants for the purchase of preferred stock which is
convertible into an aggregate of 34,559 shares of common stock at an effective
weighted average purchase price of $5.28 per share of common stock. These
warrants will expire, unless exercised, prior to the closing of this offering.
Registration Rights of Stockholders
Under the terms of an agreement with some of our stockholders, after the
closing of this offering the holders of 13,305,117 shares of common stock will
be entitled to demand that we register their shares under the Securities Act.
At any time beginning six months after the closing of this offering, and on no
more than two occasions, the holders of at least 50% of these shares can demand
that we file a registration statement covering their shares. Also, if we
propose to register any shares of common stock, these stockholders are entitled
to include their shares in the registration. At any time after we become
eligible to file a registration statement on Form S-3, the holders of these
shares can demand that we file a registration statement on Form S-3 covering
their shares. The agreement contains some limitations, including the right of
the underwriters of an offering to limit the number of shares of these
stockholders to be included in the registration.
49
<PAGE>
Anti-takeover Provisions of Delaware Law and our Charter
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
. prior to the date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to this date, the business combination is approved by
our board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our amended and restated certificate of incorporation requires that upon
completion of the offering, any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by a consent in writing. Additionally, our
certificate of incorporation:
. substantially limits the use of cumulative voting in the election of
directors;
. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed in accordance with our certificate of
incorporation. Our board of directors currently consists of six members who
will be elected at each annual meeting of our stockholders. Our board of
directors may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit who may call a special meeting of
stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Wells Fargo Bank
Minnesota, N.A.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. Furthermore, since no
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, based on the number of shares outstanding
on June 30, 2000, we will have outstanding an aggregate of 21,150,059 shares of
common stock. The 5,000,000 shares sold in this offering will be freely
tradable, unless these shares are purchased by affiliates. Substantially all of
the remaining shares are subject to a lock up agreement prohibiting their sale,
without the consent of Lehman Brothers Inc., until 180 days after completion of
this offering. After the lock up expires, all of these shares will be freely
tradable except for 10,062,873 shares that will be tradable subject to Rules
144 and 701. In addition, there are 1,166,667 shares that will be restricted
and will not be eligible for sale until after March 31, 2001. Under Rule 144 an
affiliate or a holder of restricted shares is entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 211,500 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Stock Options
Under Rule 701 of the Securities Act as currently in effect, any of our
employees, consultants or advisors, other than affiliates, who purchases or
receives shares from us in connection with a compensatory stock purchase plan
or option plan or other written agreement will be eligible to resell their
shares beginning 90 days after the date of this prospectus, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements. Following this offering, we
intend to file a registration statement on Form S-8 under the Securities Act
covering 5,646,518 shares of common stock subject to outstanding options under
our 1988 and 1996 Stock Options Plans and the shares reserved for issuance
under our 2000 Equity Incentive Plan, 2000 Employee Stock Purchase Plan and
2000 Non-Employee Directors' Stock Option Plan that will become effective upon
filing. Accordingly, shares registered under that registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market after the filing, except those shares subject to
the lock up agreements.
51
<PAGE>
UNDERWRITING
Under the underwriting agreement, which was filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
for whom Lehman Brothers Inc., Chase Securities Inc., Legg Mason Wood Walker,
Inc., UBS Warburg LLC and Fidelity Capital Markets, a division of National
Financial Services Corporation, are acting as representatives, have each agreed
to purchase from us the respective number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Lehman Brothers Inc..........................................
Chase Securities Inc.........................................
Legg Mason Wood Walker, Inc. ................................
UBS Warburg LLC..............................................
Fidelity Capital Markets, a division of National Financial
Services Corporation........................................
----
Total......................................................
====
</TABLE>
We have granted the underwriters an option to purchase up to an aggregate of
750,000 additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting discount
shown on the cover page of this prospectus. The underwriters may exercise this
option at any time until 30 days after the date of the underwriting agreement.
If this option is exercised, each underwriter will be committed, so long as the
conditions of the underwriting agreement are satisfied, to purchase a number of
additional shares of common stock proportionate to the underwriter's initial
commitment as indicated in the table above and we will be obligated, under the
over-allotment option, to sell the shares of common stock to the underwriters.
The following table shows the per share and the total underwriting discount
we will pay to the underwriters. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase up to an
additional 750,000 shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................. $ $
----- -----
Total............................................... $ $
===== =====
</TABLE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representative may change the offering price and the
other selling terms.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of our common stock being offered for sale to our
customers and business partners. At the discretion of our management, other
parties, including our employees, may participate in the reserved share
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of common stock or any securities that may be converted into or
52
<PAGE>
exchanged for any shares of common stock for a period of 180 days from the date
of this prospectus. All of our executive officers, directors and substantially
all of our stockholders have agreed under lock-up agreements that, without the
prior written consent of Lehman Brothers Inc., they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock or
any securities that may be converted into or exchanged for any shares of common
stock for the period ending 180 days from the date of this prospectus. See
"Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
. the information set forth in this prospectus and otherwise available to
the representatives;
. the history and the prospects for the industry in which we compete;
. the ability of our management;
. our prospects for future earnings, the present state of our development
and our current financial position;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering and will be
facilitating electronic distribution through the Internet.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are any sales in excess of such option. The underwriters must close out
any naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short sales and stabilizing transactions may have the effect of
raising or maintaining the market price of the common stock or preventing or
retarding a decline in the market price of the common stock. As a result, the
price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of that underwriter in stabilizing or short covering
transactions.
53
<PAGE>
We have agreed to indemnify the several underwriters against some
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments that the underwriters may be required to make in respect
thereof.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered by this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
The underwriters have informed us that they do not intend to confirm the
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
LEGAL MATTERS
The validity of the shares of common stock in this offering will be passed
upon for us by Cooley Godward LLP, San Francisco, California, and for the
underwriters by Sullivan & Cromwell, Washington, D.C.
As of the date of this prospectus, certain partners and associates of Cooley
Godward LLP own an aggregate of 27,777 shares of our common stock through
investment partnerships. Deborah A. Marshall, a partner at Cooley Goodward LLP,
is our Secretary.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999, and for each of the three years in
the period ended December 31, 1999, as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedule to the registration statement. For further information with respect to
us and our common stock, we refer you to the registration statement and to the
exhibits and schedule to registration statement. Statements contained in this
prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance, we refer you to the copy of
the contract or other document filed as an exhibit to the registration
statement. Each of these statements is qualified in all respects by this
reference. You may inspect a copy of the registration statement without charge
at the SEC's principal office in Washington, D.C., and copies of all or any
part of the registration statement may be obtained from the Public Reference
Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of fees prescribed by the SEC. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the SEC. The address of the Internet site is http://www.sec.gov.
Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(650) 244-9303.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Telik, Inc.
We have audited the accompanying balance sheets of Telik, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telik, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 25, 2000
F-2
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
Pro forma
December 31, Stockholders'
------------------ June 30, Equity at
1998 1999 2000 June 30, 2000
-------- -------- -------- -------------
(Unaudited)
(In thousands, except share and per
share data)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........ $ 2,196 $ 1,950 $ 1,728
Short-term investments........... 12,206 5,606 7,709
Prepaid expenses and other
current assets.................. 497 337 263
Deferred offering costs.......... -- -- 1,018
-------- -------- --------
Total current assets........... 14,899 7,893 10,718
Property and equipment, net........ 1,566 1,197 945
Other assets....................... 121 80 80
-------- -------- --------
$ 16,586 $ 9,170 $ 11,743
======== ======== ========
Liabilities and stockholders'
equity
Current liabilities:
Accounts payable................. $548 $780 $ 543
Accrued contracts and other
liabilities..................... 688 680 1,208
Deferred revenue................. 2,118 2,250 1,592
Current portion of capital lease
obligations and equipment
loans........................... 630 247 28
-------- -------- --------
Total current liabilities...... 3,984 3,957 3,371
Noncurrent portion of capital lease
obligations and equipment loans... 272 25 20
Other long-term liabilities........ 153 58 57
Commitments
Stockholders' equity:
Convertible preferred stock,
$0.01 par value, issuable in
series, 1,023,799 shares
authorized in 1998 and 1999,
3,023,799 at June 30, 2000 (and
pro forma) 1,020,150 shares
issued and outstanding at
December 31, 1998 and 1999 and
2,186,817 at June 30, 2000 (none
pro forma) (aggregate
liquidation preference of
$50,408 at December 31, 1999 and
$57,408 at June 30, 2000)....... 10 10 22 $ --
Common stock, $0.01 par value,
23,000,000 shares authorized in
1998 and 1999, 46,976,201 shares
at June 30, 2000 (and pro
forma), 2,196,038, 2,207,281 and
2,343,357 shares issued and
outstanding at December 31,
1998, 1999 and June 30, 2000
respectively (16,150,059
pro forma)...................... 22 22 23 162
Additional paid-in capital....... 56,465 56,742 70,568 70,451
Note receivable from employee.... -- -- (153) (153)
Deferred stock compensation...... -- (260) (2,654) (2,654)
Accumulated deficit.............. (44,320) (51,384) (59,511) (59,511)
-------- -------- -------- --------
Total stockholders' equity..... 12,177 5,130 8,295 $ 8,295
-------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 16,586 $ 9,170 $ 11,743
======== ======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Contract revenue from
collaborations:
With related parties........... $ 1,500 $ 1,750 $ 2,000 $ 1,000 $ 1,125
Other.......................... 152 1,444 2,237 1,489 205
------- ------- ------- ------- --------
1,652 3,194 4,237 2,489 1,330
Costs and expenses:
Research and development....... 8,090 7,952 9,547 5,198 5,119
General and administrative..... 2,470 2,149 2,152 772 4,589
------- ------- ------- ------- --------
10,560 10,101 11,699 5,970 9,708
------- ------- ------- ------- --------
Loss from operations............. (8,908) (6,907) (7,462) (3,481) (8,378)
Interest income, net............. 290 328 398 226 251
------- ------- ------- ------- --------
Net loss......................... (8,618) (6,579) (7,064) (3,255) (8,127)
Deemed dividend to Series K
preferred stockholders.......... -- -- -- -- (4,667)
------- ------- ------- ------- --------
Net loss allocable to common
stockholders.................... $(8,618) $(6,579) $(7,064) $(3,255) $(12,794)
======= ======= ======= ======= ========
Net loss per common share, basic
and diluted..................... $ (3.95) $ (3.00) $ (3.21) $ (1.48) $ (5.75)
======= ======= ======= ======= ========
Weighted average shares used in
computing net loss per common
share, basic and diluted........ 2,184 2,194 2,204 2,200 2,225
Pro forma net loss per common
share, basic and diluted
(unaudited)..................... $ (0.47) $ (0.83)
======= ========
Weighted average shares used in
computing pro forma net loss per
common share, basic and diluted
(unaudited)..................... 14,879 15,489
</TABLE>
See accompanying notes
F-4
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note
Convertible Receivable
Preferred Stock Common Stock Additional Deferred From Total
---------------- ---------------- Paid-In Stock Stockholders Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation and Employee Deficit Equity
--------- ------ --------- ------ ---------- ------------ ------------ ----------- -------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996............. 667,150 $ 7 2,173,462 $22 $39,036 $ -- $ -- $(29,123) $ 9,942
Issuance of Series I
preferred stock in
September and
November 1997 at
$50 per share, net of
issuance costs....... 143,000 1 -- -- 7,092 -- -- -- 7,093
Exercise of options to
purchase common
stock................ -- -- 19,026 -- 21 -- -- -- 21
Net loss and
comprehensive loss... -- -- -- -- -- -- -- (8,618) (8,618)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at December
31, 1997............. 810,150 8 2,192,488 22 46,149 -- -- (37,741) 8,438
Issuance of Series J
preferred stock in
September and October
1998 at $50 per
share, net of
issuance costs....... 210,000 2 -- -- 10,286 -- -- -- 10,288
Exercise of options to
purchase common
stock................ -- -- 3,550 -- 30 -- -- -- 30
Net loss and
comprehensive loss... -- -- -- -- -- -- -- (6,579) (6,579)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at December
31, 1998............. 1,020,150 10 2,196,038 22 56,465 -- -- (44,320) 12,177
Exercise of options to
purchase common
stock................ -- -- 11,243 -- 17 -- -- -- 17
Deferred stock
compensation......... -- -- -- -- 260 (260) -- --
Net loss and
comprehensive loss... -- -- -- -- -- -- -- (7,064) (7,064)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at December
31, 1999............. 1,020,150 10 2,207,281 22 56,742 (260) -- (51,384) 5,130
Issuance of Series K
preferred stock in
March 2000 at $6 per
share, net of
issuance costs
(unaudited).......... 1,166,667 12 -- -- 6,938 -- -- -- 6,950
Note receivable for
Series K preferred
stock (unaudited).... -- -- -- -- -- -- (5,000) -- (5,000)
Payment of note
receivable for Series
K preferred stock
(unaudited).......... -- -- -- -- -- -- 5,000 -- 5,000
Issuance of 96,000
shares of common
stock at $1.60 per
share upon the
exercise of employee
stock options for a
promissory note in
June 2000............ -- -- -- -- -- -- (153) -- (153)
Stock options granted
to consultants....... -- -- -- -- 4,063 4,063
Exercise of options to
purchase common stock
(unaudited).......... -- -- 136,076 1 208 -- -- -- 209
Deferred stock
compensation
(unaudited).......... -- -- -- -- 2,617 (2,617)
Amortization of
deferred stock
compensation
(unaudited).......... -- -- -- -- -- 223 -- -- 223
Net loss and
comprehensive loss
(unaudited).......... -- -- -- -- -- -- -- (8,127) (8,127)
--------- --- --------- --- ------- ------- ------- -------- -------
Balance at June 30,
2000 (unaudited)..... 2,186,817 $22 2,343,357 $23 $70,568 $(2,654) $ (153) $(59,511) $ 8,295
========= === ========= === ======= ======= ======= ======== =======
</TABLE>
See accompanying notes
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(In thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.................... $ (8,618) $ (6,579) $ (7,064) $ (3,254) $ (8,127)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............. 1,175 892 609 314 281
Amortization of deferred
stock compensation....... -- -- -- -- 223
Stock options issued to
consultants.............. -- 4,063
Forgiveness of notes
receivable from related
parties.................. 43 -- -- -- --
Amortization of discount
on investments........... (172) (272) 99 20 47
Short-term lease
deposits................. -- -- (49) -- --
Changes in operating
assets and liabilities:
Prepaid expenses and
other current assets.... (77) (272) 160 86 74
Other assets............. 51 -- 41 -- (1)
Accounts payable......... (197) 435 232 (114) (237)
Accrued contracts and
other liabilities....... 450 (285) (8) (291) 528
Deferred revenue......... 498 120 132 (371) (658)
Other long-term
liabilities............. -- 153 (95) (89) --
-------- -------- -------- -------- --------
Net cash used in
operating activities... (6,847) (5,808) (5,943) (3,699) (3,807)
-------- -------- -------- -------- --------
Investing activities
Maturities of short-term
investments................ 8,500 12,200 11,008 5,932 500
Sales of short-term
investments................ 3,360 2,786 5,880 2,926 --
Purchases of short-term
investments................ (18,262) (17,032) (10,387) (6,250) (2,650)
Purchase of property and
equipment.................. (510) (530) (240) (216) (29)
Proceeds from disposal of
property and equipment..... -- 14 -- -- --
-------- -------- -------- -------- --------
Net cash (used in)
provided by investing
activities............. (6,912) (2,562) 6,261 2,392 (2,179)
-------- -------- -------- -------- --------
Financing activities
Proceeds from equipment
loans...................... 210 -- -- -- --
Principal payments under
capital lease obligations
and equipment loans........ (626) (557) (581) (296) (224)
Deferred offering costs..... -- -- -- -- (1,018)
Net proceeds from issuance
of convertible preferred
stock...................... 7,093 10,288 -- -- 6,950
Net proceeds from issuance
of common stock and
warrants................... 21 30 17 11 56
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............. 6,698 9,761 (564) (285) 5,764
-------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents....... (7,061) 1,391 (246) (1,592) (222)
Cash and cash equivalents at
beginning of period........ 7,866 805 2,196 2,196 1,950
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 805 $ 2,196 $ 1,950 $ 604 $ 1,728
======== ======== ======== ======== ========
Supplemental cash flow
information
Cash paid for interest...... $ 245 $ 122 $ 58 $ 40 $ 158
======== ======== ======== ======== ========
Schedule of non cash
transactions
Deferred stock
compensation............... $ -- $ -- $ 260 -- $ 2,617
======== ======== ======== ======== ========
Note receivable for
preferred stock............ $ -- $ -- $ -- $ -- $ 5,000
======== ======== ======== ======== ========
Note receivable received for
Common Stock............... $ -- $ -- $ -- $ -- $ 153
======== ======== ======== ======== ========
</TABLE>
See accompanying notes
F-6
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
1. Summary of significant accounting policies
Nature of operations and basis of presentation
Telik, Inc. (the "Company") was incorporated in the state of Delaware in
October 1988 as Terrapin Diagnostics, Inc. which changed its name in June 1989
to Terrapin Technologies, Inc. ("Terrapin"). In May 1998, Terrapin changed its
name to Telik, Inc. The Company is engaged in the discovery and development of
small molecule drug candidates.
The Company matured from its development stage to an operating company in
1999. As such, its financial statements are no longer prepared on a development
stage basis. The Company expects continuing losses over the next several years.
The Company plans to obtain its capital requirements through public or private
equity or debt financing, capital lease financing and collaborative
arrangements with corporate partners. If the financing arrangements
contemplated by management are not consummated, the Company may have to seek
other sources of capital or reevaluate its operating plans.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Unaudited pro forma information
In January 2000, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public
offering. If the offering contemplated by this prospectus is consummated, all
the preferred stock outstanding as of the closing date will automatically be
converted into shares of the Company's common stock. Unaudited pro forma
stockholders' equity and the accompanying balance sheet as of June 30, 2000
reflects the conversion of the outstanding preferred stock.
Interim financial data
The financial information at June 30, 2000 and for the six months ended June
30, 1999 and 2000 is unaudited but, in the opinion of management, has been
prepared on the same basis as the annual financial statements and includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flow for such periods. Results for the
interim periods are not necessarily indicative of the results to be expected
for any subsequent period.
Cash equivalents and short-term investments
The Company considers all highly liquid investments with an original
maturity of 90 days or less when purchased, to be cash equivalents. For the
periods presented, cash equivalents consist of money market funds and corporate
debt securities. The Company's short-term investments include obligations of
governmental agencies and corporate debt securities with original maturities
ranging between 3 and 12 months. The Company limits concentration of credit
risk by diversifying its investments among a variety of high credit-quality
issuers.
All cash equivalents and short-term investments are classified as available-
for-sale. Available-for-sale securities are carried at estimated fair value,
based on available market information, with unrealized gains and
F-7
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
losses, if any, reported as a component of stockholders' equity. The cost of
securities sold is based on the specific identification method. As of December
31, 1998 and 1999 and June 30, 2000, there were no material differences between
amortized cost and fair value of available-for-sale securities. Realized gains
and losses on sales of available-for-sale investments are not material.
Fair value of financial instruments
Financial instruments, including cash and cash equivalents, accounts
payable, accrued liabilities and accrued compensation are carried at cost,
which management believes approximates fair value.
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. Furniture and equipment leased under capital
leases are amortized using the straight-line method over the estimated useful
lives of the respective assets or the lease term, whichever is shorter.
Revenue Recognition
Contract revenue consists of revenue from research and development
collaboration agreements. The Company's research and development collaboration
agreements provide for periodic payments in support of the Company's research
activities. The Company recognizes contract revenue from these agreements as
earned based upon the performance requirements of the agreements and payments
for up-front technology access and license fees are recognized ratably over the
period of the related research program. Payments received, which are related to
future performance, are deferred and recognized as revenue when earned over
future performance periods.
Stock-based compensation
As permitted by the Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123"), the Company accounts
for grants of stock options to employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB No. 25"). Accordingly, the Company does not
recognize compensation expense for stock options granted to employees with
exercise prices equal to the fair value of the Company's common stock on the
date of grant. Options granted to consultants are accounted for using the
Black-Scholes method prescribed by FASB 123 and in accordance with Emerging
Issues Task Force Consensus No. 96-18 ("EITF 96-18"), and such options are
subject to periodic revaluation over their vesting term.
Research and development
Research and development expenditures, including direct and allocated
expenses, are charged to expense as incurred. Collaboration agreements
generally specify minimum levels of research effort required to be performed by
the Company.
Segment reporting
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131"), establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas and
major customers.
F-8
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
The Company has determined that it operates in only one segment. Accordingly,
the adoption of SFAS 131 had no impact on the Company's financial statements.
Comprehensive loss
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires components of other comprehensive income,
including gains and losses on available-for-sale investments, to be included as
part of total comprehensive income. For all periods presented, the
comprehensive loss is equal to the net loss and has been disclosed in the
statement of stockholders' equity.
Impairment of long-lived assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews long-
lived assets, including property and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS 121, an impairment loss would
be recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through June 30, 2000, there have been no such losses.
Net loss per common share
Net loss per common share has been computed according to the Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share," which
requires disclosure of basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, shares subject to repurchase,
warrants and convertible securities. Diluted earnings per share includes the
impact of potentially dilutive securities. Following the guidance given by the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and preferred stock that has been issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if these shares had been outstanding for all periods presented.
To date, the Company has not issued or granted shares for nominal
consideration.
Pro forma net loss per share includes shares issuable upon the conversion of
outstanding shares of preferred stock and warrants (using the as-if-converted
method) from the original date of issuance.
A reconciliation of shares used in the calculations is as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December Six Months Ended
31, June 30,
------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net loss allocable to common
stockholders.................... $(8,618) $(6,579) $(7,064) $(3,255) $(12,794)
======= ======= ======= ======= ========
Basic and diluted:
Weighted average shares of
common stock outstanding...... 2,184 2,194 2,204 2,200 2,225
======= ======= =======
Adjustment to reflect weighted
average effect of assumed
conversions of preferred stock
(unaudited)................... 12,675 13,264
------- --------
Weighted average shares used in
pro forma net loss per common
share, basic and diluted
(unaudited)................... 14,879 15,489
======= ========
</TABLE>
F-9
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following (in thousands) common stock equivalents:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 10,140,035 12,640,035 12,640,035 12,640,035 13,806,702
Outstanding options..... 2,135,686 2,996,376 2,991,787 2,875,747 3,003,418
Preferred stock
warrants............... 34,559 34,559 34,559 34,559 34,559
</TABLE>
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on the
Company's results of operations or financial condition when adopted as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
adoption of SAB 101 had no significant impact on the Company's revenue
recognition policy or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock compensation--an
Interpretation of APB 25." This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December
15, 1998, or January 12, 2000, but before the effective date of July 1, 2000,
the effects of applying this Interpretation are recognized on a prospective
basis from July 1, 2000. The adoption of FIN 44 does not have a material impact
on the Company's financial statements.
F-10
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
2. Cash equivalents and short-term investments
The following is a summary of cash equivalents and short-term investments
(in thousands):
<TABLE>
<CAPTION>
Estimated Cost
and Fair Value
December 31,
--------------
1998 1999
------- ------
<S> <C> <C>
Cash equivalents:
Money market fund.......................................... $ 223 $ 107
Corporate notes............................................ 1,973 1,843
------- ------
$ 2,196 $1,950
======= ======
Short-term investments:
U.S. Government notes...................................... $ 5,266 $ 996
Corporate notes............................................ 1,006 4,610
Commercial paper........................................... 4,934 --
Certificate of deposit..................................... 1,000 --
------- ------
$12,206 $5,606
======= ======
</TABLE>
There are no unrealized gains or losses for the years ended December 31,
1998 and 1999.
3. Property and equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Laboratory furniture and equipment......................... $ 3,914 $ 4,137
Office furniture and equipment............................. 383 400
Leasehold improvements..................................... 1,099 1,099
------- -------
5,396 5,636
Less accumulated depreciation and amortization............. (3,830) (4,439)
------- -------
Property and equipment, net.............................. $ 1,566 $ 1,197
======= =======
</TABLE>
Property and equipment includes assets under capitalized leases at December
31, 1998 and 1999 of approximately $525,000 and $53,000, respectively.
Accumulated amortization related to leased assets was approximately $366,000
and $20,000 at December 31, 1998 and 1999, respectively.
4. Lease obligations and equipment loans
In September 1996, the Company entered into an equipment loan agreement with
a finance company under which the Company can borrow up to $1,500,000.
Equipment borrowings under this agreement totaled $688,000 and $237,000 at
December 31, 1998 and 1999, respectively. The borrowings bear interest at 8%
and the remaining principal balance of $237,000 is due in November 2000.
F-11
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
The Company also has acquired certain equipment and furniture pursuant to
capital lease arrangements. At December 31, 1999, the future minimum capital
lease obligations are not significant.
The Company occupies its facilities under an operating lease which expires
in December 2002. Rent expense under operating leases totaled $387,000,
$466,000 and $497,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. The Company has the option to renew the lease upon expiration for
an additional term of five years.
At December 31, 1999, noncancelable future minimum lease payments under the
Company's operating leases are as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31,
2000............................................................ $ 514
2001............................................................ 535
2002............................................................ 557
2003............................................................ 1
------
$1,607
======
</TABLE>
5. Stockholders' equity
Preferred stock
Preferred stock is issuable in series, with rights and preferences
designated by series. The shares designated, issued and outstanding at December
31, 1998, 1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Shares Aggregate
Shares Issued and Liquidation
Authorized Outstanding Preference
---------- ----------- --------------
(In thousands)
<S> <C> <C> <C>
Series B convertible................... 20,000 20,000 $ 400
Series E convertible................... 114,720 114,500 5,725
Series F convertible................... 169,600 169,600 8,480
Series G convertible................... 273,050 273,050 13,653
Series H convertible................... 93,429 90,000 4,500
Series I convertible................... 143,000 143,000 7,150
Series J convertible................... 210,000 210,000 10,500
--------- --------- -------
Balance at December 31, 1999........... 1,023,799 1,020,150 50,408
Series K convertible................... 2,000,000 1,166,667 7,000
--------- --------- -------
Balance at June 30, 2000............. 3,023,799 2,186,817 $57,408
========= ========= =======
</TABLE>
On March 31, 2000, the Company closed a private placement in which it sold
1,166,667 shares of Series K convertible preferred stock at $6.00 per share for
net proceeds of approximately $1,950,000 and a short-term note receivable of
$5,000,000. The note receivable was redeemed on April 10, 2000.
In accordance with the provisions of the respective preferred stock
agreements, Series A, C and D preferred stock were converted into common stock
at the specified conversion price of $6.00 per share for Series A and C and
$3.00 per share for Series D.
F-12
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
Series B, E, F, G, H, I, J and K preferred stock are convertible into common
stock at the option of the holder at conversion prices of $3.56, $3.00, $3.60,
$4.20, $5.55, $4.20, $4.20 and $6.00 per share, respectively. These conversion
prices are subject to price-based antidilution adjustments for future stock
issuances. Series B, E, F, G, H, I, J and K preferred shares will automatically
convert into common stock at the earlier of (i) the closing of the Company's
initial underwritten public offering, or (ii) a vote or written consent of 2/3
of the shares of all series of preferred stock then outstanding, voting
together as a single class or, in the case of Series J preferred stock, a vote
or written consent of 2/3 of the shares of Series J preferred stock then
outstanding. All preferred shares have voting rights equal to common stock on
an as-if-converted basis.
The holders of Series B, E, F, G, H, I, J and K preferred stock are entitled
to receive noncumulative dividends, if declared, prior to and in preference to
the payment of dividends to holders of common stock. No dividends have been
declared through June 30, 2000.
In the event of a liquidation or winding up of the Company, holders of
Series B convertible preferred stock shall have a liquidation preference of $20
and the holders of Series E, F, G, H, I and J convertible preferred stock shall
each have a liquidation preference of $50 per share, together with any declared
but unpaid dividends, over holders of common shares. Holders of Series K
preferred stock shall have a liquidation preference of $6 per share, together
with any declared but unpaid dividends, over holders of common shares.
Deemed Dividend
During March 2000, the Company consummated the sale of 1,166,667 shares of
Series K convertible preferred stock at $6.00 per share for net proceeds of
approximately $1,950,000 and a short term note receivable of $5,000,000. At the
date of issuance, the Company believed the per share price of $6.00 represented
the fair value of the preferred stock. Subsequent to the date of issuance,
Telik re-evaluated the fair value of its common stock. Accordingly, the
increase in fair value has resulted in a beneficial conversion feature of
$4,667,000, that has been recorded as a deemed dividend to preferred
stockholders in 2000. The Company recorded the deemed dividend at the date of
issuance by offsetting charges and credits to additional paid-in capital,
without any effect on total stockholder's equity. The preferred stock dividend
increases the net loss allocable to common stockholders in the calculation of
basic and diluted net loss per common share for the six months ended June 30,
2000.
Preferred stock warrants
In connection with the negotiation of a secured note payable in December
1992, the Company issued warrants to purchase 220 shares of Series E preferred
stock at an exercise price of $50.00 per share. These warrants expire on the
earlier of December 31, 2002, the day preceding the closing date of the
Company's initial public offering or the day preceding the effective date of
any consolidation or merger of the Company, whichever is earlier. The value of
these warrants was determined to be immaterial.
In September 1996, in conjunction with a loan agreement for the purchase of
property and equipment, the Company issued warrants that entitle the holder to
purchase 3,429 shares of Series H preferred stock at an exercise price of
$50.00 per share. These warrants are exercisable through August 31, 2003, the
day preceding the closing date of the Company's initial public offering or the
day preceding the effective date of any consolidation or merger of the Company,
whichever is earlier.
F-13
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
1988 Stock Option Plan
The 1988 Stock Option Plan (the "1988 Plan") was adopted in February 1989.
Options granted under the 1988 Plan may be either incentive stock options
("ISOs") or nonstatutory stock options ("NSOs"). At December 31, 1999 and June
30, 2000, the Company had authorized 905,017 and 569,775 shares of common stock
for issuance under the 1988 Plan, respectively. Options granted under the 1988
Plan expire no later than 10 years from the date of grant. For ISOs and NSOs,
the option price shall be at least 100% and 85%, respectively, of the closing
price of the Company's common stock on the date of the grant, or in the event
there is no public market for the common stock, of the fair value on the date
of the grant, as determined by the board of directors. If, at any time the
Company grants an option, and the optionee directly or by attribution owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, the option price shall be at least 110% of the
fair value and shall not be exercisable more than five years after the date of
grant. Options generally vest over a period of four years from the date of
grant.
1996 Stock Option Plan
The 1996 Stock Option Plan (the "1996 Plan") was adopted in April 1996 with
terms similar to the 1988 Plan. At December 31, 1999 and June 30, 2000, the
Company had authorized 2,238,816 and 2,117,240 shares of common stock for
issuance under the 1996 Plan, respectively. The Company's Board of Directors
has reserved 500,000 shares for issuance or future grant under the 1996 Plan,
pending stockholder approval of such reservation.
Additional options were granted prior to the adoption of the 1988 and 1996
Plans, of which 22,768 and 445,782 are outstanding at December 31, 1999 and
June 30, 2000, respectively and have expiration dates ranging from June 2000 to
June 2001.
F-14
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 2000 and the three month periods ended
March 31, 1999 and 2000 is unaudited)
Stock option plans
A summary of activity under the Company's stock option plans through June
30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------
Exercise Weighted-
Number of Price Per Average
Options Share Exercise Price
--------- ------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996........... 1,967,850 $1.00 - $1.60 $1.10
Options granted...................... 735,505 $1.60 $1.60
Options exercised.................... (19,207) $1.00 - $1.60 $1.40
Options forfeited.................... (548,462) $1.00 - $1.60 $1.13
---------
Balance at December 31, 1997........... 2,135,686 $1.00 - $1.60 $1.27
Options granted...................... 1,070,905 $1.60 $1.60
Options exercised.................... (3,550) $1.60 $1.60
Options forfeited.................... (206,665) $1.00 - $1.60 $1.40
---------
Balance at December 31, 1998........... 2,996,376 $1.00 - $1.60 $1.40
Options granted...................... 281,050 $1.60 $1.60
Options exercised.................... (11,243) $1.00 - $1.60 $1.04
Options forfeited.................... (274,396) $1.00 - $1.60 $1.32
---------
Balance at December 31, 1999........... 2,991,787 $1.40
Options granted (unaudited).......... 760,820 $1.00 - $2.00 $2.00
Options exercised (unaudited)........ (136,076) $1.00 - $1.60 $1.32
Options forfeited (unaudited)........ (613,113) $1.00 - $1.60 $1.50
---------
Balance at June 30, 2000............... 3,003,418 $1.46
Exercisable at December 31, 1997....... 696,250 $1.00 - $1.60 $1.08
Exercisable at December 31, 1998....... 1,143,771 $1.00 - $1.60 $1.19
Exercisable at December 31, 1999....... 1,757,992 $1.00 - $1.60 $1.30
Exercisable at June 30, 2000........... 1,818,331 $1.00 - $1.60 $1.35
</TABLE>
At June 30, 2000, the Company has 129,379 shares available for grant under
its option plans. At June 30, 2000, the remaining outstanding options expire at
various dates through 2010 and have a weighted-average contractual life of 6.4
years.
The weighted average fair value of options granted during 1997, 1998, 1999
and 2000 was $0.44, $0.42, $1.35 and $6.56, respectively.
Pro forma information regarding net loss is required by FASB 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the minimum value method using the
following weighted-average assumptions for years ended December 31, 1997, 1998,
1999 and the six months ended June 30, 2000: risk-free interest rate of 6.23%,
6.23%, 6.53% and 6.50%, respectively; an expected life of 5 years (except for
option grants with abbreviated exercise periods, for which the expected life
assumption is one year); and no dividends.
F-15
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Net loss:
As reported.................................... $(8,618) $(6,579) $(7,064)
Pro forma...................................... $(8,728) $(6,779) $(7,346)
Basic and diluted net loss per share:
As reported.................................... $ (3.95) $ (3.00) $ (3.21)
Pro forma...................................... $ (4.00) $ (3.09) $ (3.33)
</TABLE>
The effects of applying SFAS 123 for pro forma disclosures are not likely to
be representative of the effects as reported net loss for future years.
During 1998 and 1999, the Company issued 41,500 and 20,000 options,
respectively, to consultants in exchange for services performed for the
Company. For these option grants, the Company recognized an expense equal to
the estimated fair market value of the granted options on the date of the
grant. This amount was equal to $26,000 for 1998 and was immaterial for 1999.
In accordance with SFAS 123 and EITF 96-18, options granted to consultants are
periodically revalued as they vest.
During the year ended December 31, 1999 and the six months ended June 30,
2000, in connection with options granted to employees, the Company recorded
deferred stock compensation of $260,000 and $2,617,000, respectively,
representing the difference between the exercise price of the options and the
deemed fair value of the common stock. These amounts are being amortized to
operations over the vesting periods of the options on a straight line basis.
The amortization expense was not material for the year ended December 31, 1999
and was $223,000 for the six months ended June 30, 2000.
In June 2000, we authorized an extension of the option exercise period for a
former officer for an aggregate of 433,648 previously vested shares of common
stock. This option was exercised in full in July 2000.
Common stock reserved
At December 31, 1999 and June 30, 2000, the Company has reserved shares of
common stock for future issuance as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Preferred stock warrants............................. 34,559 34,559
Incentive stock plan................................. 3,166,601 3,132,797
Convertible preferred stock.......................... 12,640,035 13,806,702
---------- ----------
15,841,195 16,974,058
========== ==========
</TABLE>
F-16
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
2000 Employee Stock Purchase Plan
In March 2000, subject to stockholder approval, the Company adopted its 2000
Employee Stock Purchase Plan (the "Purchase Plan"). A total of 250,000 shares
of the Company's common stock have been reserved for issuance under the
Purchase Plan. In addition, the Purchase Plan provides for annual increases in
the number of shares available for issuance under the Purchase Plan on each
anniversary date of the effective date of the offering. The number of shares
reserved automatically is equal to the lesser of 150,000 shares, 1% of the
outstanding shares on the date of the annual increase or such amount as may be
determined by the Board. The Purchase plan permits eligible employees to
purchase common stock at a discount through payroll deductions during defined
offering periods. The price at which the stock is purchased is equal to the
lower of 85% of the fair market value of the common stock on the first day of
the offering or 85% of the fair market value of the Company's common stock on
the purchase date. The initial offering period will commence on the effective
date of the offering.
2000 Non-Employee Directors' Stock Option Plan
In March 2000, subject to stockholder approval, the Company adopted the 2000
Non-Employee Directors' Stock Option Plan and reserved a total of 300,000
shares of common stock for issuance thereunder. Each non-employee director at
the IPO date will automatically be granted an option to purchase 20,000 shares
of common stock, and each non-employee director who subsequently becomes a
director of the Company will be automatically granted a nonstatutory stock
option to purchase 20,000 shares of common stock on the date on which such
person first becomes a director. At each Board meeting immediately following
each annual stockholders meeting, beginning with the first Board meeting after
the 2000 Annual Stockholders Meeting, each non-employee director will
automatically be granted a nonstatutory option to purchase 5,000 shares of
common stock or prorated for the part of the year served as non-employee
director. The exercise price of options under the Directors' Plan will be equal
to the fair market value of the common stock on the date of grant. The maximum
term of the options granted under the Directors' Plan is ten years. All grants
under the Directors' Plan will vest over a period of four years from date of
grant, one fourth vesting one year after the date of the grant and thereafter
the balance vesting monthly. The Directors' Plan will terminate in March 2010
unless terminated earlier in accordance with the provisions of the Directors'
Plan.
2000 Equity Incentive Plan
Subject to stockholder approval, the Company adopted the 2000 Equity
Incentive Plan and reserved 2,000,000 shares of the Company's common stock. In
addition the Incentive Plan provides for annual increases in the number of
shares available for issuance under the Incentive Plan.
6. Collaborative agreements
In December 1996, the Company entered into a collaboration and license
agreement with a Japanese pharmaceutical company focusing on diabetes. Under
the agreement, the Company granted an exclusive license to the Japanese
pharmaceutical company to manufacture, use and sell products based on the
Company's Target Related Affinity Profile (TRAP) technology within certain
countries in Asia. The Company will receive payments for certain research and
development activities, for achievement of specified development milestones and
for royalties on product sales, if any, in Asia. In December 1996, September
1997 and October 1998, the Japanese pharmaceutical company purchased 60,000
shares of Series H preferred stock ($3,000,000), 60,000 shares of Series I
preferred stock ($3,000,000) and 100,000 shares of Series J preferred stock
($5,000,000), respectively.
F-17
<PAGE>
TELIK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 2000 and the six month periods ended
June 30, 1999 and 2000 is unaudited)
7. Income taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $46,100,000 and $3,700,000, respectively.
The Company also had federal research and development tax credit carryforwards
of approximately $1,400,000. The net operating loss and credit carryforwards
will expire at various dates beginning in the year 2005 through 2019,
respectively if not utilized.
Utilization of the net operating loss and credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred income taxes replace the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 14,800 $ 16,000
Capitalized research and development expenses........ 1,700 1,700
Research credit carryforwards........................ 2,100 2,100
Manufacturing and research equipment credit
carryforward........................................ 100 --
Other, net........................................... 400 1,500
-------- --------
Total deferred tax assets.............................. 19,100 21,300
Valuation allowance.................................... (19,100) (21,300)
-------- --------
Net deferred taxes..................................... $ -- $ --
======== ========
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $14,100,000, $5,000,000 and $2,200,000 during the years ended
December 31, 1997, 1998 and 1999, respectively.
8. Related Party Transactions
In June 2000 the Company made a loan to an officer in connection with the
exercise of an option to purchase 96,000 shares of the Company's common stock.
This full recourse loan is for the aggregate amount of $153,600, bearing annual
interest of 6.5%. The loan principal, with accumulated interest, is due and
payable in June 2003.
F-18
<PAGE>
Inside Back Cover Graphic
Title: Our proprietary TRAP technology accelerates drug discovery
Title: TRAP measures the interactions of small molecules with selected
proteins (a fingerprint)
Graphic Description: On the left-hand side is a representation of a chemical
compound. An arrow leads from this to a panel of four proteins indicated by
vertical bars and labeled P1, P2, P3 and P4. A series of three dots to the
right of P4 indicates that the panel actually contains additional proteins.
Each vertical bar has a distinctively shaped notch with a complementary shape
attached, which is labeled L1, L2, L3 and L4, and represents a ligand. An arrow
points right from these proteins to a vertical bar divided horizontally into
many sections, each colored a different shade of gray. Each section of the bar
represents the affinity of the compound for one of the proteins in the panel.
This bar is called the fingerprint of the compound.
Title: TRAP uses these fingerprints to discover drug candidates for disease
targets
Graphic Description: On the left-hand side of the diagram, represented by a
gray colored vertical bar with a notch in the center, is a disease target. An
arrow points from the target to a panel of four representative proteins,
indicated by vertical bars, labeled P1, P2, P3 and P4, whose notches contain
elements of the notch in the disease target protein. A series of three dots to
the right of P4 indicates that the panel actually contains additional proteins.
The fingerprint for the compound, as described in the picture above, is shown
above the arrow. A second arrow points from the panel of four proteins to a
disease target. This disease target is identical to the first disease target.
In the notch of this bar is a complementary shape that is labeled drug
candidate. Above the arrow is another representation of a fingerprint.
Black and White Picture in Text
Title: Insulin Receptor Activators
Legend: Telik's insulin receptor activators work within the cell to promote
the activation of the insulin receptor and initiate the series of events that
leads to the entry of sugar from the blood.
Graphic Description: This is a depiction of a fat, liver or muscle cell and
shows how the Telik insulin receptor activators enter the cell, bind to and
activate the insulin receptor. Insulin acting outside the cell causes a similar
activation. This stimulates a signaling pathway indicated by an arrow and
labeled, Signal. This signaling pathway leads to blood sugar entering the cell.
<PAGE>
5,000,000 Shares
[LOGO OF TELIK, INC. APPEARS HERE]
Telik, Inc.
Common Stock
-------------
Prospectus
, 2000
-------------
Lehman Brothers
Chase H & Q
Legg Mason Wood Walker
Incorporated
UBS Warburg LLC
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us, in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee................................................ $ 19,800
NASD filing fee..................................................... 8,000
Nasdaq National Market listing fee.................................. 95,000
Blue Sky fees and expenses.......................................... 5,000
Transfer agent and registrar fees................................... 5,000
Accounting fees and expenses........................................ 400,000
Legal fees and expenses............................................. 750,000
Printing and engraving costs........................................ 200,000
Miscellaneous expenses.............................................. 17,200
----------
Total............................................................. $1,500,000
==========
</TABLE>
ITEM 14. Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We have entered into indemnification agreements with each of our directors
and certain officers. These agreements, among other things, require us to
indemnify each director and officer for certain expenses including attorneys'
fees, judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Telik,
arising out of the person's services as our director or officer, any subsidiary
of ours or any other company or enterprise to which the person provides
services at our request.
The underwriting agreement (Exhibit 1.1) will provide for indemnification by
our underwriters of Telik, our directors, our officers who sign the
registration statement and our controlling persons for some liabilities,
including liabilities arising under the Securities Act.
II-1
<PAGE>
ITEM 15. Recent Sales of Unregistered Securities
Since January 1, 1997, we have sold and issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that each transaction is exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. We believe that all recipients had adequate access to information
about us, through their relationships with us.
Since January 1, 1997, we have sold and issued the following unregistered
securities:
(1) From January 1, 1988 to June 30, 2000, we granted incentive stock
options and nonstatutory stock options to purchase an aggregate of
5,116,830 shares of our common stock at exercise prices ranging from
$1.00 to $2.00 per share to employees, directors and consultants under
the 1988 and 1996 Stock Option Plans and outside of the plans and
issued an aggregate of 404,793 shares upon the exercise of these
options. Options to purchase 1,708,618 shares of common stock have been
canceled, and 163,390 of these options have lapsed without being
exercised.
(2) From September 24, 1997 to November 13, 1997, we sold an aggregate of
143,000 shares of our Series I preferred stock to 21 purchasers at a
purchase price of $50.00 per share.
(3) From September 30, 1998 to October 29, 1998, we sold an aggregate of
210,000 shares of our Series J preferred stock to two purchasers at a
purchase price of $50.00 per share.
(4) On March 31, 2000 we sold an aggregate of 1,166,667 shares of our
Series K preferred stock to three purchasers at a purchase price of
$6.00 per share.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon the closing of the offering made
pursuant to this Registration Statement.
3.2* Amended and Restated Bylaws of Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement.
3.3* Amended and Restated Certificate of Incorporation, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement, dated March 31,
2000, between Registrant and holders of Registrant's Series B, Series
E, Series F, Series G, Series H, Series I, Series J and Series K
preferred stock.
4.3* Warrant issued to Steven M. Costella, Trustee under the Steven M.
Costella Trust, for purchase of shares of Series E preferred stock.
4.4* Warrant issued to William Kirsch for purchase of shares of Series E
preferred stock.
4.5* Warrant issued to Glen McLaughlin for purchase of shares of Series E
preferred stock.
4.6* Warrant issued to Venture Lending and Leasing, Inc. for purchase of
shares of Series H preferred stock.
5.1* Opinion of Cooley Godward LLP.
10.1* Form of Indemnity Agreement.
10.2* 2000 Equity Incentive Plan and related documents.
10.3 2000 Employee Stock Purchase Plan and Offering.
10.4* 2000 Non-Employee Directors' Stock Option Plan and Agreement.
10.5++ Collaborative Research Agreement between Registrant and Sankyo
Company, Ltd., dated March 24, 1999, as amended.
10.6++ Collaboration Agreement between Registrant and Sanwa Kagaku Kenkyusho
Co., Ltd., dated December 20, 1996, as amended.
10.7++ License Agreement between Registrant and Sanwa Kagaku Kenkyusho Co.,
Ltd., dated September 24, 1997, as amended.
10.8++* Screening Services Agreement between Registrant and Sanwa Kagaku
Kenkyusho Co., Ltd., dated December 20, 1996, as amended.
10.9* Consulting Agreement for Individual Consultants between Gail L. Brown,
MD and Registrant, dated October 20, 1998, as amended.
10.10* Employment Agreement between Cynthia M. Butitta and Registrant, dated
July 1, 1998.
10.11* Employment Agreement between Reinaldo F. Gomez, PhD and Registrant,
dated April 18, 1991, as amended.
10.12* Employment Agreement between Michael M. Wick, MD, PhD and Registrant,
dated December 10, 1997, as amended.
10.13* Lease between Registrant and Chamberlin Associates--Oyster Point Phase
I L.P., dated July 25, 1997, as amended.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
--------
* Previously filed.
++Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
II-3
<PAGE>
ITEM 17. Undertakings
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of Prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of South San Francisco, State of California, on the 4th day of August,
2000.
Telik, Inc.
/s/ Michael M. Wick, MD, PhD
By___________________________________
Michael M. Wick, MD, PhD
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael M. Wick, MD, PhD President, Chief Executive August 4, 2000
____________________________ Officer and Director (Principal
Michael M. Wick, MD, PhD Executive Officer)
* Chief Financial Officer August 4, 2000
____________________________ (Principal Finance and
Cynthia M. Butitta Accounting Officer)
* Director August 4, 2000
____________________________
Jean Deleage, PhD
* Director August 4, 2000
____________________________
David R. Bethune
* Director August 4, 2000
____________________________
David W. Martin, Jr., MD
* Director August 4, 2000
____________________________
Stefan Ryser, PhD
* Director August 4, 2000
____________________________
Jerrold L. Glick
</TABLE>
/s/ Michael M. Wick, MD, PhD
*By:__________________________
Michael M. Wick, MD, PhD
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon the closing of the offering made
pursuant to this Registration Statement.
3.2* Amended and Restated Bylaws of Registrant to be effective upon the
closing of the offering made pursuant to this Registration Statement.
3.3* Amended and Restated Certificate of Incorporation, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Amended and Restated Registration Rights Agreement, dated March 31,
2000, between Registrant and holders of Registrant's Series B, Series
E, Series F, Series G, Series H, Series I, Series J and Series K
preferred stock.
4.3* Warrant issued to Steven M. Costella, Trustee under the Steven M.
Costella Trust, for purchase of shares of Series E preferred stock.
4.4* Warrant issued to William Kirsch for purchase of shares of Series E
preferred stock.
4.5* Warrant issued to Glen McLaughlin for purchase of shares of Series E
preferred stock.
4.6* Warrant issued to Venture Lending and Leasing, Inc. for purchase of
shares of Series H preferred stock.
5.1* Opinion of Cooley Godward LLP.
10.1* Form of Indemnity Agreement.
10.2* 2000 Equity Incentive Plan and related documents.
10.3 2000 Employee Stock Purchase Plan and Offering.
10.4* 2000 Non-Employee Directors' Stock Option Plan and Agreement.
10.5++ Collaborative Research Agreement between Registrant and Sankyo
Company, Ltd., dated March 24, 1999, as amended.
10.6++ Collaboration Agreement between Registrant and Sanwa Kagaku Kenkyusho
Co., Ltd., dated December 20, 1996, as amended.
10.7++ License Agreement between Registrant and Sanwa Kagaku Kenkyusho Co.,
Ltd., dated September 24, 1997, as amended.
10.8++* Screening Services Agreement between Registrant and Sanwa Kagaku
Kenkyusho Co., Ltd., dated December 20, 1996, as amended.
10.9* Consulting Agreement for Individual Consultants between Gail L. Brown,
MD and Registrant, dated October 20, 1998, as amended.
10.10* Employment Agreement between Cynthia M. Butitta and Registrant, dated
July 1, 1998.
10.11* Employment Agreement between Reinaldo F. Gomez, PhD and Registrant,
dated April 18, 1991, as amended.
10.12* Employment Agreement between Michael M. Wick, MD, PhD and Registrant,
dated December 10, 1997, as amended.
10.13* Lease between Registrant and Chamberlin Associates--Oyster Point Phase
I L.P., dated July 25, 1997, as amended.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
--------
* Previously filed.
++Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
