<PAGE>
FILED PURSUANT TO RULE
424(b)(1)
REG. STATEMENT NO. 333-06493
2,500,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby are being sold by Agouron
Pharmaceuticals, Inc. The Common Stock is traded on The Nasdaq Stock Market
under the symbol AGPH. On July 25, 1996, the closing sale price of the Common
Stock as reported by Nasdaq was $31.81 per share. See "Price Range of Common
Stock and Dividend Policy."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE
5.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share......................... $30.00 $1.65 $28.35
Total............................. $75,000,000 $4,125,000 $70,875,000
Total Assuming Full Exercise of $86,250,000 $4,743,750 $81,506,250
Over-Allotment Option(3).........
</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $350,000, which are payable by the
Company.
(3) Assuming exercise in full of the 45-day option granted by the Company to the
Underwriters to purchase up to 375,000 additional shares, on the same terms,
solely to cover over-allotments. See "Underwriting."
-------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock offered hereby will be made in New York City on or
about July 31, 1996.
-------------------
PAINEWEBBER INCORPORATED ALEX. BROWN & SONS
INCORPORATED
-------------------
<PAGE>
THE DATE OF THIS PROSPECTUS IS JULY 26, 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
-------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's regional offices: Chicago Regional Office, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Room
1400, 75 Park Place, New York, New York 10007. Copies of such materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Common Stock of the Company is quoted on The Nasdaq Stock Market, and such
material may also be inspected at the offices of Nasdaq Operations, 1735 "K"
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits thereto, which may be inspected without charge at, and copies thereof
may be obtained at prescribed rates from, the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Agouron's Annual Report on Form 10-K for the fiscal year ended June 30,
1995, the Company's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1995, December 31, 1995 and March 31, 1996, and Current Report on
Form 8-K filed June 21, 1996 as amended by Form 8-K/A filed July 12, 1996, and
the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A having an effective date of June 16, 1987
(file number 0-15609), are hereby incorporated by reference in this Prospectus,
except as superseded or modified herein. All documents filed with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering, shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in any
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus. Agouron will provide without charge to each person,
including any beneficial owner, to whom this Prospectus is delivered, upon
written or oral request of such person, a copy of any and all of the documents
that have been or may be incorporated by reference herein (other than exhibits
to such documents which are not specifically incorporated by reference into such
documents). Such requests should be directed to the Chief Financial Officer at
Agouron's executive offices at 10350 North Torrey Pines Road, La Jolla,
California 92037; (619) 622-8000.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED
HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES, INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS."
THE COMPANY
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") is a pioneer and
leader in technologies for the atom by atom design of novel synthetic drugs
based upon the molecular structures of target proteins which play key roles in
human disease. The Company is conducting phase II/III clinical trials of two
drugs generated by these design technologies: VIRACEPT-TM- (nelfinavir mesylate)
for treatment of HIV infection and THYMITAQ-TM- (formerly AG337) for treatment
of malignant solid tumors. In addition, eight preclinical programs are in
progress for discovery or development of other new drugs in the fields of
cancer, viral disease and inflammatory disease.
Viracept, an orally administered inhibitor of the enzyme HIV protease, is
the subject of pivotal phase II/ III clinical studies evaluating the anti-HIV
activity and safety of two alternative doses of the drug for six months
principally in combination with approved anti-HIV drugs in more than 700
HIV-infected subjects in the United States. If successful, these studies could
lead to the submission of a New Drug Application ("NDA") to the U.S. Food and
Drug Administration ("FDA") for Viracept in the first quarter of calendar 1997.
In a series of shorter, smaller, pilot phase II studies, comparable doses of
Viracept taken alone or in combination with other anti-HIV drugs produced
profound reductions in the amount of HIV detectable in the blood of patients and
significant increases in their CD4+ T cell counts. Viracept was reported to be
safe and well tolerated in the pilot studies. Agouron is presently preparing to
market and sell Viracept in North America if and when approved by FDA.
Agouron is developing Viracept in collaboration with the pharmaceutical
division of Japan Tobacco, Inc. ("JT"). In collaboration with JT, Agouron is
also engaged in the discovery of drugs for treatment of infections caused by
hepatitis C and by herpes viruses. Under agreements with JT, Agouron retains
exclusive commercial rights to these anti-viral products in the United States,
Canada and Mexico, generally subject to the payment either of royalties or a
share of profits to JT.
Thymitaq, an inhibitor of the enzyme thymidylate synthase ("TS"), is
presently the subject of phase II/ III clinical studies evaluating the drug as a
chemotherapeutic agent for treatment of malignant solid tumors associated with
cancer of the liver (hepatocellular carcinoma) and cancer of the head/neck.
Previously, six small phase II clinical studies evaluated 5-day courses of
treatment with Thymitaq administered intravenously in patients with malignant
solid tumors associated with cancer of the colon, lung, liver, pancreas,
prostate or head/neck. Tumor reductions of greater than 50% were observed in
patients with head/neck cancer, liver cancer, lung cancer and colon cancer.
Stabilization of disease was observed in a majority of the remaining evaluable
patients in all groups studied. An oral formulation of Thymitaq is also being
developed by the Company. If successful, the phase II/III pivotal clinical
trials could lead to submission of a NDA for Thymitaq in calendar 1998. Agouron
intends to engage in the sales and marketing of Thymitaq in North America if and
when approved by FDA.
In June 1996, Agouron signed a binding letter of intent with
Hoffmann-LaRoche Inc. and F. Hoffmann-La Roche Ltd, subsidiaries of Roche
Holding Ltd ("Roche"), providing for the collaborative development and
commercialization of Thymitaq and of the Agouron anti-cancer compound designated
AG3340 currently under preclinical development. Under provisions of this letter
of intent, Agouron is to receive initial license fees and additional development
milestone payments from Roche. Roche has agreed to bear 80% of future costs of
developing these drugs. Agouron and Roche will cooperatively market the two
compounds for cancer indications and share profits in North America, while Roche
has exclusive marketing rights for cancer indications to these compounds outside
North America, subject to the payment of royalties to Agouron. Roche also is to
provide annual research funding support and subsequent milestone payments to
Agouron for similar commercial rights for all indications in compounds which are
generated in a collaborative research program focused on cell cycle control.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company.......................... 2,500,000 shares of Common Stock, no par value ("Common
Stock")
Common Stock to be Outstanding
after the Offering............... 13,231,700 shares (1)
Use of Proceeds................... To fund the manufacturing, marketing and working capital
requirements associated with the anticipated commercial
launch of Viracept; for preclinical and clinical product
development activities; and for working capital and
other corporate purposes. See "Use of Proceeds."
Nasdaq Stock Market Symbol........ AGPH
</TABLE>
- ------------------------
(1) Based on the shares outstanding at June 30, 1996. Excludes (i) approximately
3,414,400 shares of Common Stock issuable upon the exercise of options
outstanding at June 30, 1996 under the Company's stock option plans (ii)
218,801 shares of Common Stock available for future grants under such plans
and (iii) 156,414 shares available for purchase under the Company's Employee
Stock Purchase Plan.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------------------------------ ---------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 4,795 $ 6,847 $ 9,970 $ 17,651 $ 27,961 $ 20,263 $ 30,985
Research and development costs and expenses... 9,353 13,142 17,404 23,957 36,317 24,352 43,780
Net loss...................................... (6,621) (9,132) (9,829) (9,462) (12,939) (7,285) (17,661)
Net loss per common share..................... (1.42) (1.47) (1.40) (1.31) (1.77) (1.00) (1.84)
Shares used in computing net loss per common
share........................................ 4,674 6,199 6,997 7,241 7,296 7,286 9,574
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 104,656 $ 175,181
Working capital....................................................................... 72,116 142,641
Total assets.......................................................................... 113,191 183,716
Long-term liabilities................................................................. 1,863 1,863
Stockholders' equity (2).............................................................. 76,196 146,721
</TABLE>
- ------------------------
(1) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
in this offering at the public offering price of $30.00 per share and net
proceeds of approximately $70,525,000.
(2) The Company has never declared or paid dividends on its Common Stock.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING
"RISK FACTORS" SECTION AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
EARLY STAGE OF PRODUCT DEVELOPMENT; UNCERTAINTY OF PRODUCT DEVELOPMENT AND
MARKET ACCEPTANCE; TECHNOLOGICAL UNCERTAINTY
The Company has not yet completed the development of any products. While the
Company has received regulatory approval to begin human clinical testing for
certain of its compounds, these and other compounds currently being developed by
the Company will require further research and development, including extensive
additional preclinical and human clinical testing, prior to submission of any
regulatory application for commercial sale of such compounds. There can be no
assurance that further research and development will be successful or will
result in drugs that will qualify for approval by regulatory authorities for
commercial sale. In addition, clinical testing of a pharmaceutical product is
itself subject to approvals by various governmental regulatory authorities. No
assurance can be given that the Company will be permitted by regulatory
authorities to conduct planned additional clinical testing of the Company's
compounds in any particular country of the world, including the United States,
or that, if permitted, such additional clinical testing will prove that such
drugs are safe and efficacious to the extent necessary to permit the Company to
obtain marketing approvals for them from regulatory authorities. The Company may
encounter problems or delays relating to research and development, regulatory
approval and manufacturing and the failure to address such problems or delays
could have a material adverse effect on the Company's business and prospects.
Even if FDA and foreign regulatory approvals for the marketing of any products
being developed by the Company are obtained, there can be no assurance that such
products will be accepted and successful in the marketplace.
While the Company believes it has demonstrated the utility of certain of its
potential products in preclinical testing and in phase I and phase II human
clinical trials, extensive further clinical testing of these potential products
is required before the Company can seek marketing approval from regulatory
authorities. Furthermore, results obtained in preclinical studies or in phase I
and phase II human clinical trials are not necessarily indicative of results
that will be obtained in subsequent or more extensive preclinical or clinical
testing. Furthermore, one of the Company's potential products, Viracept, is an
HIV protease inhibitor which is currently being tested in large-scale clinical
trials. Technological uncertainty exists regarding the development of resistance
to HIV protease inhibitors by human subjects. There can be no assurance that
disease resistance will not limit the efficacy of the Company's HIV protease
inhibitor. Within the pharmaceutical industry, treatment of the disease
indications being pursued by the Company, especially HIV infection, AIDS and
cancer, has proven difficult. There can be no assurance that drugs resulting
from the approach of protein structure-based drug design employed by the Company
will overcome the difficulties of drug discovery and development in these or
other fields or result in commercially successful products. No drug discovered
by use of structure-based drug design has yet been successfully developed,
approved by FDA or marketed.
UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING
Before seeking regulatory approvals for the commercial sale of any of its
products, Agouron must undertake extensive preclinical and clinical testing to
demonstrate their safety and efficacy in humans. To date, the Company has
conducted preclinical testing of certain of its drugs including AG3340 and
AG2034 and has tested Viracept and Thymitaq in phase I and phase II clinical
studies in Europe and the United States. The results of such testing of these
and other products under development by the Company are not necessarily
predictive of results that will be obtained from subsequent or more extensive
preclinical and clinical testing. Additionally, the Company has made and may in
the future make changes to the formulation of its drugs and/or to the processes
for manufacturing its drugs. Any such changes in formulation or
5
<PAGE>
manufacturing processes could result in delays in conducting further preclinical
and clinical testing, in unexpected adverse results in further preclinical and
clinical testing, and/or in additional development expenses. Furthermore, there
can be no assurance that clinical studies of products under development will
demonstrate the safety and efficacy of such products at all or to the extent
necessary to obtain regulatory approvals of such products. Companies in the
industry have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. The failure to adequately demonstrate
the safety and efficacy of a therapeutic product under development could delay
or prevent regulatory approval of the product, and would have a material adverse
effect on the Company.
Any drug is likely to produce some toxicities or undesirable side effects in
animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. In an attempt to evaluate the potential
toxicities or side effects of Viracept and Thymitaq, the Company has conducted
toxicology studies of these compounds in animals. On the basis of results to
date from such toxicological studies, the Company has selected for human
clinical testing dose levels of its drugs and periods of exposure to its drugs
which, in the Company's judgment, are unlikely to produce unacceptable
toxicities or side effects in humans. However, there can be no assurance that
unacceptable toxicities or side effects will not occur at any dose level at any
time in the course of toxicological studies or of human clinical trials of the
Company's drugs. The appearance of any such unacceptable toxicities or side
effects in toxicology studies or in human clinical trials could cause the
Company or regulatory authorities to interrupt, limit, delay or abort the
development of any of the Company's drugs and could ultimately prevent their
being approved by FDA or foreign regulatory authorities for any or all targeted
indications. Even after being approved by FDA or foreign regulatory authorities,
products may later exhibit adverse effects that prevent their widespread use or
necessitate their withdrawal from the market. There can be no assurance that any
products under development by the Company will be safe when administered to
patients.
The rate of completion of clinical trials is dependent upon, among other
factors, the rate of enrollment of patients. Patient accrual is a function of
many factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. Delays in planned patient enrollment
in the Company's current trials or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company. There can be no assurance that if clinical trials are
completed the Company will be able to submit a NDA as scheduled or that any such
application will be reviewed and approved by FDA in a timely manner, or at all.
HISTORY OF OPERATING LOSSES
To date, most of the Company's revenues have consisted of funds received
pursuant to collaborative research and development arrangements, grants from the
National Institutes of Health ("NIH") and interest income. The Company has not
generated revenues from the commercialization of any products. The Company has
had net operating losses since its inception and, as of March 31, 1996, had an
accumulated deficit of $81,183,000. The Company expects to continue to incur
substantial and increasing net operating losses for at least the next two years.
Such losses may fluctuate from quarter to quarter depending on several factors
including the status of the Company's research, development and clinical trial
programs and on the timing and receipt of fees from collaborative relationships.
Such losses will continue unless and until such time as product approvals are
obtained and product sales generate sufficient revenue to offset expenses and
generate sufficient cash flow to fund continuing operations. The Company's
ability to achieve a profitable level of operations is dependent on successfully
completing the development of certain of its products. There can be no assurance
that any or all of these events will occur or that the Company will ever achieve
product revenues or profitable operations.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL
The Company has expended more than $160,000,000 on research and development
activities and intends in the future to expend substantial additional funds to
continue research and development activities, conduct preclinical studies and
tests, conduct human clinical trials, establish manufacturing, sales and
marketing capabilities and market any approved products. Additional funds may be
required in connection with collaborative arrangements with others and for
working capital and other general corporate needs.
6
<PAGE>
The Company believes that its current capital resources, existing
contractual commitments and the net proceeds of this offering will enable it to
maintain its current and planned operations through at least fiscal 1998. No
assurance can be given that there will be no change in the Company's operations
that would consume available resources more rapidly than anticipated. Additional
funding may be required before the commercialization of any products. The
Company's future capital requirements will depend on many factors, including the
progress of research and development, the scope and results of preclinical
studies and clinical trials, the cost, timing and outcome of regulatory reviews,
the rate of technological advances, the market acceptance of any approved
Company products, administrative and legal expenses and competitive factors. To
the extent the Company's capital resources are insufficient to meet current or
planned operating requirements, the Company will seek to obtain additional funds
through equity or debt financings, collaborative or other arrangements with
corporate partners, licensees and others, and from other sources, which may have
the effect of diluting the holdings of existing shareholders. No assurance can
be given that additional financing will be available when needed or on terms
acceptable to the Company. If adequate funds are not available, the Company may
be required to delay or eliminate expenditures for certain of its programs or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop and commercialize itself, any of which would
have a material adverse effect on the Company. See "Use of Proceeds."
DEPENDENCE ON OTHERS
The Company's strategy for development and commercialization of certain of
its products entails entering into various arrangements with corporate partners,
licensees and others, and upon the subsequent success of these partners,
licensees and others in performing preclinical and clinical testing, obtaining
regulatory approvals, manufacturing and marketing. These arrangements may
require the Company to transfer certain material rights to such corporate
partners, licensees and others. In the event the Company determines to license
or sublicense certain of its commercial rights, there can be no assurance such
arrangements will not result in reduced product revenue to the Company. While
the Company believes its partners, licensees and others will have an economic
motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources to be devoted to these activities will be
controlled by others. Consequently, there can be no assurance that any revenues
or profits will be derived from such arrangements, that any of the Company's
current strategic arrangements will be continued or not terminated early or that
the Company will be able to enter into future collaborations.
Under the provisions of certain agreements entered into between the Company
and JT, JT has agreed to collaborate on the development, commercialization and
marketing of certain novel therapeutic drugs including Viracept, anti-hepatitis
C and anti-herpes drugs and to make certain payments related thereto to the
Company. In the event JT fails to make any of the anticipated payments, or
otherwise delays in the making of any of the payments, such event could have a
material adverse effect on the Company. See "Business -- Research and
Development Agreements -- Japan Tobacco Inc."
Additionally, under the provisions of the binding letter of intent with
Roche, Roche and Agouron have agreed to collaborate on the development and
commercialization of Thymitaq and the Agouron anti-cancer compound designated
AG3340 and in a collaborative research program focused on cell cycle control.
Roche is obligated to make certain payments under the provisions of the binding
letter of intent to the Company. Definitive terms of this collaboration must be
negotiated by the parties. In the event Roche and the Company are unable to
reach agreement on definitive terms of this collaboration or Roche terminates
its rights under a development program or fails to make any of the anticipated
payments, or otherwise delays in the making of any of the payments, such event
could have a material adverse effect on the Company. See "Business -- Research
and Development Agreements -- Roche."
LACK OF MANUFACTURING EXPERIENCE
The Company has not yet manufactured at a commercial scale and currently
does not have the facilities to manufacture its product candidates in commercial
quantities under current good manufacturing practices ("GMP") prescribed by FDA.
However, the Company intends to fulfill its commercial manufacturing
requirements through contract manufacturing relationships. To be successful, if
approved by FDA, the Company's products must be manufactured in commercial
quantities under GMP and at acceptable costs.
7
<PAGE>
Although the Company is producing clinical quantities of certain chemical
compounds in certain of its laboratory facilities that have undergone GMP
inspections and been approved by the State of California, and has business
relationships with manufacturers to supply significant portions of its clinical
trial material requirements, the current facilities and existing manufacturing
relationships of the Company are not adequate to meet anticipated commercial
production needs. Therefore, the Company will be dependent upon its
collaborators and licensees or upon contract manufacturers for the commercial
manufacture of products it may develop. The Company has no experience in such
commercial manufacturing and related matters and no assurance can be given that
the Company will be able to arrange for contract manufacturing or that adequate
supplies of raw materials will be available. In the event the Company is unable
to obtain contract manufacturing on acceptable terms, its ability to
commercialize or timely deliver its products at acceptable cost may be adversely
affected.
LACK OF SALES AND MARKETING CAPABILITIES
While the Company is currently developing a sales and marketing force, it
has no experience in the sales, marketing and distribution of pharmaceutical
products and may have to rely on collaborators and licensees or on arrangements
with others to provide for the sales, marketing and distribution of any products
approved by FDA or foreign regulatory authorities. There can be no assurance
that the Company will be able to establish sales, marketing and distribution
capabilities or make arrangements with its collaborators, licensees or others to
perform such activities or that such efforts will be successful. Further, there
can be no assurance that any products, if approved, will gain market acceptance.
The Company's results of operations and cash flows will be highly dependent upon
the timing and extent of Viracept sales.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company seeks to protect its proprietary technology by means of patents,
trade secrets and unpatented proprietary know-how. The Company has applied for,
and will in the future apply for, United States and foreign patents for certain
of its technology and products. Most of the Company's products are expected to
be synthetic chemical compounds, the patentability of which will be determined
under principles and procedures well established by the United States Patent
Office under United States patent law. No assurance can be given that the
Company's patent applications will issue as patents or that any patents that may
be issued will provide Agouron with adequate protection for the covered products
or technology.
Many of the processes and much of the know-how of importance to the
Company's technology are dependent upon the skills, knowledge and experience of
its scientific and technical personnel; such skills, knowledge and experience
are not patentable. To help protect its rights, the Company requires all
employees, significant consultants and advisors, and collaborators to enter into
confidentiality agreements with Agouron. There can be no assurance, however,
that these agreements will provide adequate protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure. Further, the Company may be exposed to
competitors who independently develop substantially equivalent technology or
otherwise gain access to the Company's trade secrets, know-how or other
proprietary information. The commercial success of the Company will also depend
in part on not infringing patent or proprietary rights of others and not
breaching any licenses granted to the Company. There can be no assurance that
the Company's activities will not infringe on the patents or proprietary rights
of others. Furthermore, there can be no assurance that the Company will be able
to obtain a license to any technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require to commercialize any of its products may have a material adverse effect
on the Company.
The cost of obtaining and enforcing patent protection and of protecting
proprietary technology may involve a substantial commitment of the Company's
resources. Any such commitment may divert resources from other areas of the
Company.
TECHNOLOGICAL CHANGE AND INTENSE COMPETITION
The pharmaceutical and biotechnology industries are subject to intense
competition and rapid technological change. The Company believes that
industry-wide interest in the application of protein structure-based drug design
and related technology will continue and may accelerate as the technology
becomes more
8
<PAGE>
widely understood. Competitors of the Company in the United States and abroad
are numerous and include, among others, pharmaceutical, biotechnology and
chemical companies, universities and other research organizations. For example,
HIV protease inhibitors developed by Abbott Laboratories, Inc., Merck & Co.,
Inc. and Roche are currently being marketed. There can be no assurance that
these and other competitors will not have products or succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive.
Many of the Company's competitors have substantially greater financial and
technical resources and production and marketing capabilities and experience
than the Company. In addition, many of the Company's competitors have
significantly greater experience than the Company in conducting preclinical
testing and human clinical trials of new pharmaceutical products and in
obtaining FDA and other regulatory approvals of products. Accordingly, certain
of the Company's competitors may succeed in obtaining regulatory approval for
products more rapidly or effectively than the Company. If the Company commences
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and sales and marketing capabilities, areas in which it
currently has no experience.
GOVERNMENT REGULATION
Preclinical studies, clinical trials and the production and marketing of the
Company's products and its ongoing research and development activities are
subject to regulation by numerous governmental authorities in the United States
and other countries. Rigorous preclinical and clinical testing and obtaining
regulatory approvals can take many years and require the expenditure of
substantial resources. Failures or delays by the Company or its collaborators or
licensees in obtaining regulatory approvals would adversely affect the marketing
of products developed by the Company and the Company's ability to receive
product revenues or royalties. Further, there can be no assurance that the
Company or its collaborators or licensees will be able to obtain necessary
regulatory approvals. There can be no assurance that clinical data will be
accepted by regulatory agencies or that any approvals will be granted on a
timely basis, if at all. Any significant delays or requests to provide
additional data in the approval process could have a material adverse effect on
the Company. See "Business -- Government Regulation."
If regulatory approval of a drug is obtained, such approval may involve
limitations and restrictions on the drug's use. In addition, any marketed drug
and its manufacturer are subject to continual governmental review and any
subsequent discovery of previously unrecognized problems could result in
restrictions on the product or manufacturer, including, without limitation,
withdrawal of the product from the market. Failure of the Company to comply with
applicable regulatory requirements can, among other things, result in fines,
suspension of regulatory approvals, product recalls, seizure of products,
operating restrictions or criminal prosecution.
Additionally, the Company is or may become subject to various federal, state
and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with Agouron's research and development work. The Company is
unable to predict the extent of restrictions that might arise from any
governmental or administrative action.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT AND PRODUCT PRICING
The Company's ability to commercialize products successfully will depend in
part on the availability of reimbursement of the costs of such products and
related treatments at acceptable levels from government authorities, private
health insurers and other organizations, such as health maintenance
organizations ("HMOs"). There can be no assurance that reimbursement in the
United States or foreign countries will be available for any products the
Company may develop or, if available, will not be decreased in the future, or
that reimbursement amounts will not reduce the demand for, or the price of, the
Company's products, thereby adversely affecting the Company's business.
9
<PAGE>
Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for pharmaceutical
products. The cost containment measures that health care providers are
instituting and the effect of any health care reform could materially adversely
affect the Company's ability to sell its products if successfully developed and
approved. Moreover, the Company is unable to predict what additional legislation
or regulation, if any, relating to the health care industry or third-party
coverage and reimbursement may be enacted in the future or what effect such
legislation or regulation would have on the Company's business.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability and there can be no assurance
that product liability claims will not be asserted against the Company, its
collaborators or its licensees. The Company currently has only limited amounts
of product liability insurance for clinical trials and currently does not have
product liability insurance for commercial sales. There can be no assurance that
the Company will be able to obtain or maintain product liability insurance on
acceptable terms or that such insurance will provide adequate coverage against
any potential claims. Furthermore, there can be no assurance that any
collaborators and licensees of Agouron will agree to indemnify the Company, be
sufficiently insured or have a sufficient net worth to protect the Company from
any product liability claims.
USE OF HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any liability could
have a material adverse effect on the Company.
ATTRACTION AND RETENTION OF PERSONNEL
The future success of the Company will depend in large part on its ability
to continue to attract and retain highly qualified scientific, technical and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that Agouron will be able to attract and retain the personnel
necessary for the development of its business. In addition, much of the know-how
developed by the Company resides in its scientific and technical personnel and
such know-how is not readily transferable to other scientific and technical
personnel. Further, the Company's anticipated growth and expansion into areas
and activities requiring additional expertise, such as manufacturing and
marketing, will require the addition of new technical and management personnel
and the development of additional expertise by existing personnel. The loss of
or failure to recruit scientific, technical and managerial personnel could have
a material adverse effect on the Company.
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. Further dilution will occur upon the exercise of outstanding stock
options, the expiration dates of which do not occur for a number of years. The
Company has never declared or paid dividends on its Common Stock to date and
does not anticipate paying any dividends in the foreseeable future. See
"Dilution."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has in recent years fluctuated
significantly and it is likely that the price of the Common Stock will fluctuate
in the future. Announcements by the Company or others regarding existing and
future collaborations, results of clinical trials, scientific discoveries,
technological innovations, commercial products, patents or proprietary rights or
regulatory actions may have a significant adverse effect on the market price of
the Common Stock. Fluctuations in financial performance from period to period
also may have a significant impact on the market price of the Common Stock.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Agouron from the sale of the Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be $70,525,000 ($81,156,250 if the
Underwriters' over-allotment option is exercised in full) at the public offering
price of $30.00 per share. The Company currently intends to use the net proceeds
in the following approximate amounts: manufacturing and inventory commitments
for the commercial launch of Viracept, $40,000,000; Viracept product development
and clinical testing, $20,000,000; sales and marketing infrastructure,
$10,000,000; and the balance of the net proceeds, if any, will be added to the
Company's working capital and made available for general corporate purposes and
capital equipment and facilities, including scientific equipment and computers.
The amounts actually expended for each purpose may vary significantly depending
upon a number of factors, including the status of competitive products, the
progress of the Company's development programs, timing of regulatory approvals,
technological advances and determinations as to the commercial potential of the
Company's products. The Company reserves the right to reallocate the proceeds of
this offering in response to these and related contingencies. To the extent the
offering proceeds are less than estimated herein, the Company would expect to
reduce the proceeds allocated to the sales and marketing infrastructure. The
Company believes that its current capital resources, existing contractual
commitments and the net proceeds of this offering will enable it to maintain its
current and planned operations through at least fiscal 1998. Additional funding
may be required before the Company generates significant positive cash flows
from commercial activities. See "Risk Factors -- Additional Financing
Requirements and Access to Capital."
Until applied to any of the foregoing uses, the net proceeds of the offering
will be invested by the Company in interest-bearing deposit accounts,
certificates of deposit or similar financial instruments. The Company will
invest its liquid assets in a manner that will not subject it to regulation
under the Investment Company Act of 1940.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to reflect the issuance and sale of the shares of
Common Stock offered hereby. See "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term liabilities.......................................................... $ 1,863 $ 1,863
Stockholders' equity:
Common Stock, no par value, 75,000,000 shares authorized; 10,622,800 shares
issued and outstanding, actual; and 13,122,800 shares issued and
outstanding, as adjusted (1)................................................ 157,379 227,904
Accumulated deficit.......................................................... (81,183) (81,183)
---------- -----------
Total stockholders' equity............................................... 76,196 146,721
---------- -----------
Total capitalization................................................. $ 78,059 $ 148,584
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Excludes 3,680,670 shares reserved for issuance under the Company's Stock
Option Plans (of which 2,622,107 shares were subject to outstanding
options), 172,789 shares available for purchase under the Company's Employee
Stock Purchase Plan and 45,000 shares reserved for issuance under an
outstanding warrant (subsequently exercised in June 1996).
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock trades on The Nasdaq Stock Market under the symbol AGPH.
The following table sets forth the high and low sale prices as reported by
Nasdaq for the fiscal periods indicated.
<TABLE>
<S> <C> <C>
FISCAL 1994
Quarter ended September 30......................................... $ 101/4 $ 73/4
Quarter ended December 31.......................................... 121/2 83/4
Quarter ended March 31............................................. 163/4 91/2
Quarter ended June 30.............................................. 141/4 93/4
FISCAL 1995
Quarter ended September 30......................................... 133/4 93/4
Quarter ended December 31.......................................... 131/4 10
Quarter ended March 31............................................. 19 107/8
Quarter ended June 30.............................................. 271/4 15
FISCAL 1996
Quarter ended September 30......................................... 391/4 223/4
Quarter ended December 31.......................................... 357/8 221/2
Quarter ended March 31............................................. 475/8 323/4
Quarter ended June 30.............................................. 47 32
</TABLE>
On July 25, 1996, the last sale price of the Common Stock as reported by The
Nasdaq Stock Market was $31.81 per share. There were approximately 5,000
beneficial owners of the Common Stock as of such date.
The Company has not declared any dividends on the Common Stock and does not
intend to declare any cash dividends on the Common Stock in the foreseeable
future.
DILUTION
As of March 31, 1996, the net tangible book value of the Company was
$76,196,000, or $7.17 per share. Net tangible book value per share is equal to
net tangible assets (tangible assets of the Company less total liabilities)
divided by the 10,622,800 shares of Common Stock outstanding. After giving
effect to the sale of the 2,500,000 shares of Common Stock by the Company in
this offering and the receipt of the estimated net proceeds therefrom (at the
public offering price of $30.00 per share), the pro forma net tangible book
value of the Company as of March 31, 1996 would have been $146,721,000, or
$11.18 per share. This represents an immediate increase in net tangible book
value of $4.01 per share to existing shareholders and an immediate dilution of
$18.82 per share to new investors. The following table illustrates the pro forma
dilution of a new investor's equity in a share of Common Stock as of March 31,
1996:
<TABLE>
<S> <C> <C>
Public offering price........................................ $ 30.00
Net tangible book value before offering.................... $ 7.17
Increase attributable to new investors..................... 4.01
---------
Pro forma net tangible book value after offering............. 11.18
---------
Dilution of net tangible book value to new investors......... $ 18.82
---------
---------
</TABLE>
12
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following data for the years ended June 30, 1991, 1992, 1993, 1994 and
1995 have been derived from financial statements audited by Price Waterhouse
LLP, independent accountants. The data as of March 31, 1995 and 1996 have been
derived from unaudited financial statements which, in the opinion of management,
include all adjustments which the Company considers necessary for a fair
presentation of such data. Interim operating results are not necessarily
indicators of operating results for the full year. The information presented for
the fiscal year ended June 30, 1995 should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended June 30, 1995 and the
information presented for the nine months ended March 31, 1995 and 1996 should
be read in conjunction with the quarterly reports on Form 10-Q for the periods
ended March 31, 1995 and 1996. See "Incorporation of Certain Information by
Reference."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------ ---------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract........................ $ 3,781 $ 5,307 $ 8,266 $ 16,301 $ 26,722 $ 19,285 $ 27,465
Interest........................ 1,014 1,540 1,704 1,350 1,239 978 3,520
--------- --------- --------- --------- ---------- --------- ----------
Total revenues................ 4,795 6,847 9,970 17,651 27,961 20,263 30,985
--------- --------- --------- --------- ---------- --------- ----------
Costs and Expenses:
Research and development........ 9,353 13,142 17,404 23,957 36,317 24,352 43,780
General and administrative...... 1,880 2,519 2,127 2,961 4,358 3,027 4,679
Interest........................ 183 318 268 195 225 169 187
--------- --------- --------- --------- ---------- --------- ----------
Total expenses................ 11,416 15,979 19,799 27,113 40,900 27,548 48,646
--------- --------- --------- --------- ---------- --------- ----------
Net loss.......................... $ (6,621) $ (9,132) $ (9,829) $ (9,462) $ (12,939) $ (7,285) $ (17,661)
--------- --------- --------- --------- ---------- --------- ----------
--------- --------- --------- --------- ---------- --------- ----------
Net loss per common share......... $ (1.42) $ (1.47) $ (1.40) $ (1.31) $ (1.77) $ (1.00) $ (1.84)
--------- --------- --------- --------- ---------- --------- ----------
--------- --------- --------- --------- ---------- --------- ----------
Shares used in computing net loss
per common share................. 4,674 6,199 6,997 7,241 7,296 7,286 9,574
BALANCE SHEET DATA:
Working capital................... $ 8,978 $ 35,115 $ 29,933 $ 21,039 $ 8,837 $ 13,821 $ 72,116
Total assets...................... 15,672 45,625 41,721 37,178 27,097 34,529 113,191
Long-term liabilities............. 1,179 3,050 2,613 2,285 1,884 2,015 1,863
Stockholders' equity.............. 10,620 37,517 33,757 24,852 12,591 17,812 76,196
Dividends per common share (1).... -- -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The Company has never declared or paid dividends on the Common Stock.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "BUSINESS" AND "RISK
FACTORS."
OVERVIEW
The Company has been primarily engaged in the research and development of
human pharmaceuticals utilizing protein structure-based drug design since its
inception in 1984. Such research and development has been funded from the
Company's equity-derived working capital, through collaborative arrangements
with other companies and through grants from the National Institutes of Health.
The Company's net operating losses incurred since inception are primarily a
result of the Company's independent research and development activities and
continued increasing investment in clinical development activities concentrated
on the Company's lead compounds in cancer and AIDS. Net losses for the fiscal
years ended June 30, 1993, 1994 and 1995 and the nine months ended March 31,
1996 were $9,829,000, $9,462,000, $12,939,000 and $17,661,000. It is anticipated
that substantial net operating losses will continue and will possibly increase
through at least the next two years.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1995 AND 1996
The increase in the net loss for the nine months ended March 31, 1996
compared to the year-earlier period is due principally to the Company's
commitment to support expanding clinical activities and establish a commercial
infrastructure associated with the Company's two leading product candidates.
These spending increases were only partially offset by increased revenues.
Contract revenues in the current nine-month period have increased compared
to the year-earlier period due mainly to the anti-HIV collaboration with JT.
Interest income has increased significantly from the prior-year nine-month
period due to a higher average investment portfolio balance resulting from the
receipt of a milestone payment from JT in August 1995 and a public offering of
common stock in September 1995.
Research and development costs and expenses increased from the prior-year
nine-month period due generally to increasing average research and development
staff levels (approximately 20%) and staff-related expenditures, including
occupancy, and significantly increased expenditures for human clinical trial
activities associated with Thymitaq and Viracept.
The increase in general and administrative costs and expenses in the current
nine-month period is due chiefly to increasing average staff levels
(approximately 25%) and staff related expenditures and certain costs associated
with a growing sales and marketing infrastructure.
Interest expense in the current-year period is generally decreasing as the
level of debt and capital lease obligations declines. However, these general
decreases were offset by the exercise costs associated with certain lease
buy-out options.
FISCAL YEARS ENDED JUNE 30, 1993, 1994 AND 1995
Collaborative research and development agreements with Japan Tobacco Inc.
("JT"), Syntex (U.S.A.) Inc. (now a subsidiary of Roche Holding Ltd) ("Roche"),
Schering-Plough Corporation ("Schering") and Eli Lilly and Company ("Lilly")
accounted for approximately 94%, 94% and 97% of the Company's total contract
revenue for 1993, 1994 and 1995. Total contract revenue for 1994 increased
approximately 97% over 1993 due principally to the effect of a full year of
activities on the collaborative programs covered by the 1992 agreement with JT
("JT 1992"), the June 1993 collaborative agreement with Roche and the initiation
of work on additional collaborative programs with JT under expanded research
arrangements established in February 1994 ("JT 1994"). Partially offsetting
these increases was the absence of any funding in 1994 from Lilly due to the
completion of a collaborative research program in April 1993. Total contract
revenues for 1995
14
<PAGE>
increased approximately 64% over 1994 due principally to an anti-HIV
collaboration with JT initiated in December 1994 ("JT HIV"), the effect of a
full year of program activities associated with JT 1994 and increased activities
for the research program with Roche. These increases were partially offset by
the absence of funding in 1995 from Schering due to the completion of a
collaborative research program in April 1994. The Company anticipates that its
contract revenues for 1996 will exceed the level of such revenues recognized in
1995.
Interest income decreased by approximately 21% from 1993 to 1994 and 8% from
1994 to 1995, primarily due to a generally declining portfolio of cash, cash
equivalents and short-term investments which were utilized to fund operations.
The Company anticipates that interest income will increase in 1996.
Research and development spending increased by approximately 38% from 1993
to 1994 and by approximately 52% from 1994 to 1995, due principally to
staff-related expenses and third-party costs associated with increasing
preclinical and clinical development activities associated with the Company's
leading product candidates: Thymitaq for the treatment of cancer and Viracept
for the treatment of HIV infections and AIDS. Collaborator-funded program
expenditures representing 55%, 45% and 65% of total research and development
costs and expenses in 1993, 1994 and 1995 generated a significant majority of
the increases in research and development costs and expenses. The Company's
self-funded research and development programs generated approximately 45%, 55%
and 35% of total research and development costs and expenses in 1993, 1994 and
1995. Of such self-funded costs during 1993, 1994 and 1995, approximately 60%,
44% and 49% was dedicated to the preclinical and clinical development of
anti-proliferative drugs in the Company's most advanced programs. The Company
anticipates that total research and development costs and expenses will increase
in 1996 in response to expanding drug design efforts on various projects and
increasing preclinical and clinical studies associated with several of the
Company's product development programs.
General and administrative costs and expenses represented approximately 11%
of total costs and expenses in each of 1993, 1994 and 1995. The increase in
absolute dollar spending for such costs from 1993 to 1994 was due mainly to
certain administrative costs associated with the JT collaborations and increased
occupancy costs related to additional leased facilities. The increase from 1994
to 1995 was due to increasing average staff levels (approximately 36%) and
staff-related expenditures and certain administrative costs associated with the
JT collaborations. The Company anticipates that total general and administrative
costs and expenses will increase in 1996 due to additional staff, costs
associated with planned facility expansion and increasing commercial development
and sales and marketing activities.
Interest expense declined by approximately 27% from 1993 to 1994 and
increased by approximately 15% from 1994 to 1995 due to fluctuations in interest
rates and the level of debt and capital lease obligations from year to year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's cash expenditures have substantially
exceeded its revenues and the Company has relied primarily on equity, lease and
debt financing and various collaborative arrangements to fund its operations and
capital expenditures. To date, the Company has raised net equity proceeds of
approximately $157,400,000, principally from corporate and venture capital
investors and through its public offerings in calendar 1987, 1989, 1991 and
1995. The Company believes that its current capital resources, existing
contractual commitments and the net proceeds of this offering, will enable it to
maintain its current and planned operations through at least fiscal 1998. This
belief is based on current research and clinical development plans, anticipated
working capital requirements associated with the commercial launch of Viracept,
the current regulatory environment, historical industry experience in the
development of therapeutic drugs and general economic conditions. The Company
believes that additional funding may be required before significant positive
cash flows are generated from commercial activities. As a result, the Company
anticipates pursuing various financing alternatives such as collaborative
arrangements and additional public offerings or private placements of the
Company's securities. If such alternatives are not
15
<PAGE>
available, the Company may be required to delay or eliminate expenditures for
certain of its potential products under development or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop or commercialize itself.
During 1995, capital expenditures totaled $2,032,000 compared with
$1,829,000 and $3,186,000 during 1994 and 1993, of which $17,000, $58,000 and
$85,000 were financed through capital lease obligations. Of the total capital
expenditures during 1993, 1994 and 1995, approximately $1,202,000, $119,000 and
$130,000 represented leasehold improvement costs associated with certain of the
Company's scientific and administrative facilities. With the exception of the
leasehold improvement costs incurred during 1993, 1994 and 1995, virtually all
of the capital expenditures during 1993, 1994 and 1995 represented laboratory
equipment and scientific instrumentation necessary to support an expanding
research and development effort.
Capital expenditures during 1996 are expected to be approximately $2,500,000
to support product manufacturing, development and research activities. The
Company may utilize lease or debt financing for certain expenditures if
available on acceptable terms.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This Statement defines a fair value method of accounting for an
employee stock option or similar equity instrument and encourages adoption of
that method. The Statement also requires that an employer's financial statements
include certain disclosures about stock-based compensation arrangements
regardless of the method used to account for them. The Statement is effective
for financial statements for fiscal years that begin after December 15, 1995.
The Company is currently evaluating the financial impact and disclosure
requirements associated with the adoption of SFAS No. 123.
16
<PAGE>
BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
"BUSINESS" SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES,
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS "BUSINESS" SECTION AND
IN "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
OVERVIEW
Agouron is a pioneer and leader in technologies for the atom by atom design
of novel synthetic drugs based upon the molecular structures of target proteins
which play key roles in human disease. The Company is conducting phase II/III
clinical trials of two drugs generated by these design technologies:
VIRACEPT-TM- (nelfinavir mesylate) for treatment of HIV infection and
THYMITAQ-TM- (formerly AG337) for treatment of malignant solid tumors. In
addition, eight preclinical programs are in progress for discovery or
development of other new drugs in the fields of cancer, viral disease and
inflammatory disease.
Viracept, an orally administered inhibitor of the enzyme HIV protease, is
the subject of pivotal phase II/ III clinical studies evaluating the anti-HIV
activity and safety of two alternative doses of the drug for six months
principally in combination with approved anti-HIV drugs in more than 700
HIV-infected subjects in the United States. If successful, these studies could
lead to the submission of a NDA to FDA for Viracept in the first quarter of
calendar 1997. In a series of shorter, smaller, pilot phase II studies,
comparable doses of Viracept taken alone or in combination with other anti-HIV
drugs produced profound reductions in the amount of HIV detectable in the blood
of patients and significant increases in their CD4+ T cell counts. Viracept was
reported to be safe and well tolerated in the pilot studies. Agouron is
presently preparing to market and sell Viracept in North America upon its
approval by FDA.
Agouron is developing Viracept in collaboration with the pharmaceutical
division of JT. In collaboration with JT, Agouron is also engaged in the
discovery of drugs for treatment of infections caused by hepatitis C and by
herpes viruses. Under agreements with JT, Agouron retains exclusive commercial
rights to these anti-viral products in the United States, Canada and Mexico,
generally subject to the payment either of royalties or a share of profits to
JT.
Thymitaq, an inhibitor of the enzyme TS, is presently the subject of phase
II/III clinical studies evaluating the drug as a chemotherapeutic agent for
treatment of malignant solid tumors associated with cancer of the liver
(hepatocellular carcinoma) and cancer of the head/neck. Previously, six small
phase II clinical studies evaluated 5-day courses of treatment with Thymitaq
administered intravenously in patients with malignant solid tumors associated
with cancer of the colon, lung, liver, pancreas, prostate or head/neck. Tumor
reductions of greater than 50% were observed in patients with head/neck cancer,
liver cancer, lung cancer and colon cancer. Stabilization of disease was
observed in a majority of the remaining evaluable patients in all groups
studied. An oral formulation of Thymitaq is also being developed by the Company.
If successful, the phase II/III pivotal clinical trials could lead to submission
of a NDA for Thymitaq in calendar 1998. Agouron intends to engage in the sales
and marketing of Thymitaq in North America upon its approval by FDA.
In June 1996, Agouron signed a binding letter of intent with
Hoffmann-LaRoche Inc. and F. Hoffmann-La Roche Ltd, subsidiaries of Roche,
providing for the collaborative development and commercialization of Thymitaq
and of the Agouron anti-cancer compound designated AG3340 currently under
preclinical development. Under provisions of this letter of intent, Agouron is
to receive initial license fees and additional development milestone payments
from Roche. Roche has agreed to bear 80% of future costs of developing these
drugs. Agouron and Roche will cooperatively market the two compounds for cancer
indications and share profits in North America, while Roche has exclusive
marketing rights for cancer indications to these compounds outside North
America, subject to the payment of royalties to Agouron. Roche also is to
provide annual research funding support and subsequent milestone payments to
Agouron for similar commercial rights for all indications in compounds which are
generated in a collaborative research program focused on cell cycle control.
17
<PAGE>
RESEARCH AND DEVELOPMENT PROGRAMS
Agouron's research and development programs concentrate in three areas of
human disease: cancer, viral disease and inflammatory disease. All of Agouron's
drug discovery programs apply the Company's core technologies for the atom by
atom design of small synthetic drug molecules based upon the three dimensional
molecular architecture of proteins that play key roles in human disease. See
"Drug Design Technology."
The following table outlines Agouron's preclinical and clinical research and
development programs. Some of these programs are being pursued by Agouron
independently while others are being undertaken in collaboration with other
companies.
<TABLE>
<CAPTION>
DEVELOPMENT
PROGRAM INDICATION PROTEIN TARGET STAGE PARTNER
- --------------------- ------------------- ----------------------- ---------------- ----------
<S> <C> <C> <C> <C>
CANCER
Thymitaq- i.v. Solid Tumors TS Phase II/III Roche
Thymitaq- oral Solid Tumors TS Phase I Roche
AG2034 Solid Tumors GART Preclinical None
AG3340 Metastasis MMPs Preclinical Roche
AICART Solid Tumors AICART Research None
cdk4 Solid Tumors cdk4 Research Roche
VEGF Receptor Solid Tumors kdr Research None
VIRAL DISEASE
Viracept HIV Infection HIV Protease Phase II/III JT
Rhinovirus Common Cold RhV 3C Protease Research None
Cytomegalovirus CMV Infection CMV Protease Research JT
Herpes simplex Herpes Infection HSV-1 Protease Research JT
Hepatitis C Viral Diseases Hepatitis C Protease Research JT
INFLAMMATORY DISEASE
MMP Arthritis MMPs Research Roche
AICART Inflammation AICART Research None
</TABLE>
CANCER
OVERVIEW
The development of new drugs for treatment of cancer is a primary scientific
and commercial focus of the Company. Cancer is the second leading cause of death
in the United States and most developed nations. While much progress has been
made in the treatment of certain forms of cancer, most existing anti-cancer
drugs display limited efficacy and significant toxicities that restrict their
clinical usefulness. As a result, there remains a critical need for anti-cancer
drugs which are less toxic and more efficacious either as tumoricidal
(tumor-killing) or tumoristatic (tumor-controlling) agents.
Agouron believes that the next generation of agents for treatment of the
most common human cancers should have a target other than DNA, should be more
capable of evading drug resistance and should retain activity against
non-proliferating tumor cells. The Company's anti-cancer drug discovery and
development programs are aimed at meeting these criteria by focusing on the
discovery and development of inhibitors of the following enzymes: thymidylate
synthase (TS); glycinamide ribotide formyltransferase ("GART"); matrix
metalloproteases (MMPs); aminoimidazole carboxamide ribonucleotide
formyltransferase ("AICART"); cyclin dependent kinase 4 ("cdk4"); and a receptor
for Vascular Endothelial Growth Factor ("VEGF"). Three of these enzyme targets
(TS, GART and AICART) have a common structural motif that permits lead
inhibitors from one program to be useful potentially in others.
TS INHIBITORS: THYMITAQ
The enzyme TS catalyzes a critical step in the synthesis of DNA and is
especially crucial to cancer cells undergoing uncontrolled proliferation.
Independent research has established that the efficacy of the anti-tumor drug
5-fluorouracil derives from its ability to inactivate TS. Inhibition of TS kills
tumor cells by
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inducing programmed cell death -- a form of natural cellular suicide by which
normal cell growth is usually regulated. It has been Agouron's goal to design
highly specific inhibitors of TS that overcome the several limitations of
5-fluorouracil. In particular, Agouron has focused on the design of TS
inhibitors of novel chemical character that it believes may be capable of
penetrating fatty membranes and tissues, circumventing some of the more common
forms of drug resistance and passing into and out of cells by passive diffusion,
allowing for much greater clinical control of toxicity and for a broader
spectrum of anti-tumor activity. Agouron's lead compound in the TS program,
Thymitaq, is in phase II/III clinical testing.
Phase I studies of Thymitaq initially conducted at the medical hospital of
the University of Newcastle upon Tyne in England, under the sponsorship of the
British Cancer Research Campaign, evaluated first an intravenous ("i.v.")
formulation and then an oral formulation of Thymitaq. In these phase I studies,
which were ultimately extended into the United States and involved a total of 45
advanced cancer patients, the maximum tolerated 5-day dose of Thymitaq was
determined through a series of dose escalations. On the basis of these studies,
a dose of 1000mg/m(2)/day was determined to be appropriate for phase II efficacy
studies. The phase I studies demonstrated that Thymitaq i.v. was well tolerated:
at the maximum tolerated dose, the predominant toxicities were determined to be
myelosuppression (suppression of bone marrow activity) of short duration and
mucositis (mouth sores) which could frequently be mitigated with a simple
mouthwash. A subsequent phase I study involving 32 patients in England
demonstrated that oral administration of Thymitaq resulted in a pharmacokinetic
and safety profile similar to that of the i.v. formulation.
The Company has conducted six small phase II trials of the i.v. formulation
of Thymitaq. The six studies have evaluated 5-day courses of treatment with
Thymitaq in patients with malignant solid tumors associated with cancer of the
colon, lung, liver, pancreas, prostate or head/neck. Tumor reductions of greater
than 50% were observed in patients with head/neck cancer, liver cancer, lung
cancer and colon cancer. Stabilization of disease was observed in a majority of
the remaining evaluable patients in all groups studied. Of 19 evaluable patients
with head/neck cancer, four experienced reductions in tumor mass greater than
50%, including two patients with reductions of 100%. Of 18 patients with
hepatocellular (liver) cancer, two experienced tumor reductions greater than
50%; two others experienced tumor reductions sufficient to permit surgical
removal of tumors previously deemed to be inoperable.
Pivotal phase II/III clinical trials have recently been initiated at several
clinical sites in the United States for evaluation of Thymitaq as a single agent
treatment in cancer of the head/neck and in liver cancer. For treatment of
head/neck cancer, Thymitaq is being compared to the chemotherapeutic agent
methotrexate in patients who have failed first-line therapy. For treatment of
liver cancer, Thymitaq is being evaluated in a non-comparative clinical trial,
as no drugs are currently approved for use as single agents in this disease.
Complete enrollment of these studies is expected to require several months. The
Company intends to supplement the U.S. clinical trials of Thymitaq by opening
additional clinical studies in Europe (head/neck cancer) and in Asia (liver
cancer). If enrolled in a timely manner and if successful, the pivotal trials
could permit the Company to file a NDA covering for Thymitaq in calendar 1998.
See "Risk Factors -- Uncertainty Associated with Clinical Trials."
The binding letter of intent signed by Agouron and Roche in June 1996
provides for the collaborative further development and commercialization for
cancer indications of Thymitaq. Under provisions of this letter of intent,
Agouron is to receive license fees and subsequent development milestone payments
from Roche. Roche has agreed to bear 80% of future costs of developing Thymitaq.
Agouron and Roche will cooperatively market Thymitaq for cancer indications and
share profits from sales of the drug in North America. Roche has exclusive
marketing rights to Thymitaq for cancer indications outside North America,
subject to possible co-promotion rights and the payment of royalties to Agouron.
See "Research and Development Agreement -- Roche."
GART INHIBITORS: AG2034
An Agouron research program has resulted in the design of AG2034. AG2034 is
a potent, selective inhibitor of glycinamide ribonucleotide transformylase
(GART) -- a key enzyme in the biochemical pathway through which tumor cells
synthesize purines, essential components of DNA. With the exception of liver
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<PAGE>
cells, all normal human tissues obtain purines through an alternative pathway
(the purine salvage pathway). The Company believes that inhibitors of GART will
show a high degree of selectivity for tumor cells and less significant bone
marrow toxicity than other chemotherapeutic agents.
AG2034 has demonstrated preclinical anti-tumor activity against a broad
panel of tumor types in preclinical models at various dosing schedules. In cell
culture experiments, AG2034 selectively kills tumor cells missing certain cell
cycle checkpoints, but is inactive against cells with normal checkpoint
functions. Because it has become technically possible to determine whether
biopsied tumor cells are deficient in checkpoint functions, the Company believes
that physicians may be able to determine in advance of treatment which tumors
are most likely to respond to AG2034.
Agouron has completed initial chemical scale-up of AG2034 and preclinical
toxicology studies are in progress. The Company plans to initiate phase I
clinical studies of AG2034 in late calendar 1996. The Company presently retains
all commercial rights to any compounds resulting from this program.
MMP INHIBITORS: AG3340
Independent research has shown MMPs to be involved in many disease states.
Certain MMPs have been associated with tumor growth, the metastasis of tumor
cells to secondary sites within the body and the growth of new blood vessels
(angiogenesis) through which tumor cells obtain nutrients and growth factors.
The Company believes that MMPs represent a new opportunity for the discovery of
novel tumoristatic agents. The Company further believes that orally active
inhibitors of certain combinations of MMPs, but not of all MMPs, are most likely
to have the optimal safety and efficacy profiles of superior tumoristatic
agents.
A three-year program of drug discovery undertaken by Agouron in
collaboration with Roche ("Roche 1993") has resulted in the selection of the
compound designated AG3340 for development by the Company as an anti-cancer
agent. AG3340 selectively inhibits the MMPs known as Gelatinase A and B,
Stromelysin-1 and Collagenase-3, but is relatively inactive against Fibroblast
Collagenase. In preclinical tests, AG3340 has demonstrated excellent anti-tumor
in vivo activity following oral administration in both mouse and human tumor
xenograft models. Significant tumor growth delays in all models and significant
reductions of spontaneous metastases in the mouse Lewis lung model have been
reported at recent scientific meetings. Toxicology studies are currently
underway to support initiation of phase I clinical studies of AG3340 in late
calendar 1996.
Other compounds from the Roche 1993 collaboration on MMP inhibitors are the
subjects of preclinical evaluation including certain compounds being evaluated
by Roche as agents for treatment of arthritis. See "Inflammatory Disease -- MMP
Inhibitors."
The binding letter of intent signed by Agouron and Roche in June 1996
provides for the collaborative further development and commercialization for
cancer indications of AG3340 and certain other compounds. Under provisions of
this agreement, Agouron is to receive license fees and subsequent development
milestone payments from Roche. Roche has agreed to bear 80% of future costs of
developing AG3340. Agouron and Roche will cooperatively market AG3340 for cancer
indications and share profits from sales of the drug in North America. Roche has
exclusive marketing rights to AG3340 for cancer indications outside North
America, subject to certain co-promotion rights and the payment of royalties to
Agouron. See "Inflammatory Disease" and "Research and Development Agreements --
Roche."
AICART INHIBITORS
The enzyme AICART catalyzes a rate-determining step in the purine
biosynthetic pathway and represents a second target for anti-cancer drugs which
are active by virtue of their anti-purine effects. Research has shown that
inhibiting the rate-limiting enzyme in such a pathway produces the most
significant effects on the growth of cells dependent on that pathway. The
scientific rationale for GART as a target for new anti-tumor drugs applies
equally to AICART. Agouron scientists believe that two inhibitors of the purine
pathway -- an inhibitor of GART and an inhibitor of AICART -- may be highly
synergistic in producing anti-tumor activity when administered in combination.
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<PAGE>
The Company's scientists have solved the three-dimensional molecular
structure of AICART and are engaged in design, synthesis and evaluation of
AICART inhibitors intended to be efficacious in the treatment of cancer. The
Company presently retains all commercial rights to any compounds resulting from
this program.
CELL CYCLE CONTROL: CDK4
Cyclin dependent kinases are enzymes that play roles in regulating the
transitions between phases in the life cycles of all cells. A member of this
family of enzymes known as cdk4 has been implicated by independent research in
driving cells from a quiescent phase to the highly proliferative phase
characteristic of malignancies -- particularly in familial melanomas, esophageal
carcinomas and pancreatic cancers. Agouron has been engaged in a drug discovery
program aimed at the design of selective small molecule drugs with the potential
to inhibit the activity of cdk4 and therefore block the transition of cancer
cells into their proliferative phase.
Under provisions of the binding letter of intent signed by Agouron and Roche
in June 1996, Roche is to pay to Agouron annual research funding for three years
in support of the cdk4 program. Commercial rights for all indications in
compounds which are generated in the program are similar to those which Roche
has for the MMP inhibitor AG3340. See "Research and Development Agreement --
Roche."
VEGF RECEPTOR
The process known as angiogenesis, the formation of new blood vessels, is a
key factor in the maintenance and progression of several disease states
including the metastasis of malignant tumors. The ability of cancer cells to
carry out angiogenesis depends in part upon the activity of a protein known as
Vascular Endothelial Growth Factor (VEGF) which, by binding to a receptor known
as kdr, triggers the growth of endothelial cells. Agouron is engaged in a drug
discovery program whose objective is the design of drugs that block the kdr
receptor for VEGF and therefore compromise the ability of tumors to carry out a
key process in angiogenesis. The Company presently retains all commercial rights
to any compounds resulting from this program.
VIRAL DISEASE
OVERVIEW
The development of new drugs for the treatment of certain viral diseases is
another scientific and commercial focus of the Company. The Company is presently
conducting programs aimed at discovery and/or development of four classes of
anti-viral drugs which block viral proteases, enzymes required by several
families of pathogenic viruses to carry out replication and infection. Agouron's
anti-viral drug programs include HIV protease inhibitors (Viracept), rhinovirus
3C protease inhibitors, herpes virus protease inhibitors and hepatitis C
protease inhibitors. Agouron is developing certain of its anti-viral drugs in
collaboration with JT. See "Research and Development Agreements -- Japan Tobacco
Inc."
HIV PROTEASE INHIBITOR: VIRACEPT
Research and development of drugs for treatment of HIV infection and AIDS in
the pharmaceutical industry has thus far produced both successes and
disappointments. Initially, scientists were optimistic that blocking the
essential HIV enzyme reverse transcriptase ("RT") would prove sufficient to
defeat the replication of HIV and curb the progression of HIV infection to AIDS.
As a result of research and development efforts by several pharmaceutical
companies, several RT inhibitors are now approved for use in the United States.
However, the clinical usefulness of this first generation of anti-HIV drugs has
generally been limited by their toxicity and by the ability of HIV to mutate
into forms that are resistant to them. For this reason, it has been a high
priority at Agouron, as well as at other pharmaceutical companies, to discover
and develop new anti-HIV drugs that work by a mechanism of action other than
inhibition of RT.
Inhibitors of the enzyme HIV protease are widely regarded as one of the most
promising new classes of anti-HIV drugs. HIV protease is an enzyme that performs
an essential role in the infectious cycle of HIV. Research shows that inhibition
of the protease enzyme renders HIV unable to form new infectious virus. Three
HIV protease inhibitors have been approved by FDA for marketing in the United
States during the
21
<PAGE>
last year. Agouron believes that its HIV protease inhibitor, Viracept, has
properties that will permit it to compete effectively with these approved drugs.
See "Competition" and "Risk Factors -- Technological Change and Competition."
A series of small, short-term pilot phase II clinical studies has been
completed evaluating the safety and acute anti-HIV efficacy of several daily
oral doses of Viracept administered orally to HIV-infected subjects. In these
studies, Viracept taken alone, in a two-day combination with stavudine (d4T) or
in a three-drug combination with zidovudine (AZT) and iamivudine (3TC), produced
profound decreases in the amount of HIV detectable in the blood of patients and
significant increases in their CD4+ T cell counts. Pivotal phase II/III clinical
studies of daily doses of 500 mg and 750 mg of Viracept administered three times
daily in a tablet formulation, principally in combination with other anti-HIV
drugs, are currently in progress at a large number of sites in the United
States. In the pilot phase II studies, such doses of Viracept were safe and well
tolerated, the most common side-effect being loose stool/diarrhea.
If the current phase II/III clinical trials of Viracept are completed on a
timely basis and if results from these trials are satisfactory, Agouron plans to
file a NDA in the first quarter of calendar 1997 and, if the NDA is approved on
a timely basis, to launch Viracept in North America later in calendar 1997.
However, there can be no assurance that any of these events will occur. See
"Risk Factors -- Uncertainty Associated with Clinical Trials," and "Research and
Development Agreements -- Japan Tobacco Inc."
RHINOVIRUS 3C PROTEASE INHIBITORS
Rhinoviruses are believed to be the single most frequent cause of the common
cold. While rhinovirus infections are a periodic annoyance to most normal
individuals, they produce more severe and prolonged symptoms in people with
asthma, emphysema and chronic obstructive pulmonary disease. The family of
rhinoviruses has eluded attempts to develop a useful vaccine because it contains
more than 100 serotypes. However, all known strains of rhinoviruses depend on a
critical enzyme, the 3C protease, at several stages of their life-cycle for
production of new infectious viruses. It has been shown both by independent
research and by Agouron scientists that inactivating this enzyme halts
rhinovirus production IN VITRO. Because there is no known natural counterpart
for the 3C protease enzyme in humans, Agouron scientists believe that the
potential for toxicity from selective inhibitors of the rhinovirus 3C protease
is low.
Agouron's rhinovirus protease research has resulted in the design of potent,
selective rhinovirus 3C protease inhibitors currently being evaluated in
preclinical pharmacological studies of anti-viral activity, cellular toxicity
and oral bioavailability. It is the Company's goal to select one such inhibitor
for development within 12 months. The Company presently retains all commercial
rights to any compounds resulting from this program.
CMV AND HSV-1 PROTEASE INHIBITORS
Among the most clinically significant members of the family of herpes
viruses are herpes simplex virus-1 (HSV-1) and cytomegalovirus (CMV). Like HIV
and rhinoviruses, HSV-1 and CMV each contain a protease enzyme essential for
virus maturation and infection. Agouron believes that these protease enzymes
represent targets for a new class of anti-viral drugs with the potential for low
toxicity. Agouron scientists have recently solved the three-dimensional
molecular structure of the targeted protease enzyme from CMV and are seeking to
solve the HSV-1 protease in preparation for application of Agouron's drug design
technologies. However, no inhibitor of HSV-1 or CMV has yet been selected by
Agouron for development. See "Research and Development Agreements -- Japan
Tobacco Inc."
HEPATITIS C PROTEASE INHIBITORS
The ability to treat infection by hepatitis C virus represents a significant
unmet clinical need, particularly in Asian countries. Hepatitis C virus depends
upon a key protease enzyme for the production of new infectious viruses. As no
human counterpart of the hepatitis C protease enzyme is known, Agouron
scientists believe that the potential for toxicity of selective hepatitis C
protease inhibitors is low. Agouron's anti-hepatitis C project is an early stage
research program in which no inhibitor has been selected for development. See
"Research and Development Agreements -- Japan Tobacco Inc."
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<PAGE>
INFLAMMATORY DISEASE
OVERVIEW
Another scientific and commercial focus of the Company is the development of
drugs for treatment of inflammatory disease. These include MMP inhibitors for
use against degenerative diseases such as rheumatoid arthritis and
osteoarthritis and AICART inhibitors for use as anti-inflammatory agents and
immuno-suppressive agents for treatment of various neuro-degenerative disorders.
MMP INHIBITORS
In addition to their role in the growth and metastasis of solid tumors, MMPs
display high levels of enzymatic activity in such degenerative diseases as
rheumatoid arthritis and osteoarthritis. Certain members of the MMP family are
associated most closely with these disease states and, Agouron believes, offer
targets for orally active drugs with potential for minimal toxicity. The
development of MMP inhibitors associated with these disease states are being
pursued by an affiliate of Roche. If successfully developed by the Roche
affiliate, the Company believes such selective inhibitors of certain MMPs have
the potential to interrupt the progression of arthritic disease itself rather
than just to treat the symptoms. The Company will receive a royalty on sales by
Roche of any anti-inflammatory products resulting from the collaborative
program. See "Research and Development Agreements -- Roche."
AICART INHIBITORS
AICART is being pursued by Agouron scientists as a target for the
development of novel anti-inflammatory drugs. It is widely believed that the
anti-inflammatory effects observed following administration of low doses of the
anti-cancer drug methotrexate result from the drug's indirect inhibition of
AICART. Used for chronic therapy, methotrexate accumulates in the liver and
other tissues and frequently results in serious toxicity. Agouron scientists
believe that inhibitors of AICART designed to avoid accumulation in tissues may
be superior anti-inflammatory drugs for conditions such as arthritis. The
Company's initial lead compounds in this program are being used to validate this
assertion. Having solved the three-dimensional molecular structure of the AICART
enzyme, Agouron scientists believe they are uniquely positioned to initiate
protein structure-based drug design of novel inhibitors of the AICART enzyme
intended to be efficacious in the treatment of inflammatory disease. No
candidate for development has yet been identified in this program. The Company
presently retains all commercial rights to any compounds resulting from this
program.
DRUG DESIGN TECHNOLOGY
Common to all of Agouron's drug discovery programs is the design of novel
drugs based upon the structure of proteins which play key roles in human
disease. It is the centrality of this protein structure-based approach to
rational drug design which distinguishes the Company from most other
pharmaceutical and biotechnology companies.
BACKGROUND: CONVENTIONAL DRUG DISCOVERY
Historically, the pharmaceutical industry has relied upon drug discovery by
screening-sifting through vast inventories of naturally-occurring and man-made
chemicals in search of previously undiscovered substances with therapeutic uses.
While screening has been the basis for the discovery of virtually all drugs
currently in use, the Company believes it has become an increasingly
unsatisfactory approach as it is both costly and inefficient and the rate of
discovery of new therapeutic compounds has declined over the last decade. Most
importantly, there remain many important therapeutic needs for which
screening-based research has failed to yield acceptably safe and effective
drugs.
THE IDEA OF DESIGNING DRUGS
With the ability to synthesize chemical compounds of predetermined
composition, came the desire to overcome the limitations and unpredictability of
screening by building molecules specifically designed to perform therapeutic
tasks. This vision of "rational drug design" was made more plausible by the
discovery that, despite many differences between them, drugs work according to
the same general scheme.
Nearly every drug molecule works through a structural interaction with a
"target" or "receptor" molecule or protein which play key roles in all
biological processes. In the most common model for this
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<PAGE>
interaction, the drug molecule inserts itself into a functionally important
crevice of its target protein like a key in a lock, binds there and either
induces or, more commonly, inhibits the protein's normal function. This
universal drug-target scheme suggested a powerful alternative approach to drug
discovery: if it were possible to identify in advance the appropriate protein
target for a given therapeutic need and if enough were known about the
distinguishing structure of that target protein, it ought to be feasible to
design the structure of an ideal drug to interact with it.
PROTEIN STRUCTURE-BASED DRUG DESIGN
Agouron's scientists have developed an approach for drug discovery which
exploits the three-dimensional structures of molecular targets. At the heart of
the Company's strategy is the analytical technique of protein x-ray
crystallography, which enables Agouron scientists to determine the
three-dimensional atomic structures of target proteins and the drugs which bind
to them. The Company's approach to drug design integrates genetic engineering
techniques, which allow the identification, purification and modification of
appropriate target proteins, with innovations in protein x-ray crystallography
and the use of increasingly sophisticated programs run on high speed computers
which permit chemists to predict and simulate molecular structure, dynamics and
energetics.
GENETIC ENGINEERING
In contrast to the biotechnology industry, Agouron employs genetic
engineering techniques to produce proteins not as products, but as drug targets.
Genetic engineering techniques can assist scientists in identifying appropriate
molecular targets for particular therapeutic objectives, produce target proteins
in sufficient amounts to permit structural studies and modify proteins to probe
the connections between a target protein's structure and function.
PROTEIN X-RAY CRYSTALLOGRAPHY
The only method which has been successful in determining the precise
three-dimensional atomic structure of large proteins is an analytic technique
known as protein x-ray crystallography. Agouron believes it has assembled the
largest and most experienced group of protein crystallographers in the
pharmaceutical industry.
X-ray crystallographic studies require that a target protein be in
crystalline form. Once such crystals are obtained, a single crystal is bombarded
with a powerful x-ray beam. The protein crystal diffracts the x-ray beam and
generates a definitive diffraction pattern. A complex analytical process
involving extensive mathematical computations is then performed on the x-ray
diffraction data. From the results of these calculations, it is possible to
determine the exact three-dimensional structure of the target protein. It is
this elusive information which provides the critical starting point for
three-dimensional drug design.
DRUG DESIGN
Having determined the architecture of the target protein in
three-dimensional atomic detail and having identified its functionally critical
regions, Agouron chemists, crystallographers and molecular biologists are
positioned to begin the process of drug design. The structure of the target
protein along with representations of its chemical and electronic properties
(most of which can be computed accurately if the protein structure is known) are
displayed on an interactive computer graphics system. Ideas for the structure of
a drug molecule which complements the unique structure and electronic
environment of the target protein are developed by members of the design team
and are then simulated and evaluated on the computer with the aid of more than
100 specialized analytical software programs.
The most promising computer designs of drug candidates are chemically
synthesized by the Company's medicinal chemists. As in conventional drug
development strategies, experimental measurements are taken of the ability of
such a newly synthesized drug candidate to produce the intended effect upon the
target protein. Company crystallographers then re-determine the structure of the
protein target, now in combination with the candidate drug molecule, and are
able to see in detail the structural interactions actually achieved by the
candidate drug with its target. Agouron scientists are positioned to relate the
performance of such a compound measured by familiar biochemical techniques to
its structural interactions with the target as revealed crystallographically.
The design team can then incorporate the results of this specialized analysis
into the next generation of its compounds.
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<PAGE>
In summary, Agouron's drug design methodology consists of iterative cycles
of design, simulation, synthesis, structural assessment and redesign. Its power
lies in the ability of Agouron's drug design team to see the primary event in
drug action -- the interaction of the drug with its target -- as it actually
occurs and to be guided in the design and optimization of drugs by the details
of this interaction. This "look" at the heart of drug and target interaction is
provided by Agouron's protein x-ray crystallography research group, which the
Company believes to be unique in the pharmaceutical industry by virtue of its
configuration and experience.
RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has funded its research and development primarily from working
capital generated from both private and public sales of Agouron equity,
corporate collaborative arrangements and federal grants. The Company has an
ongoing program of business development which may, from time-to-time, lead to
the establishment of corporate collaborations in addition to those noted below.
JAPAN TOBACCO INC.
In December 1992, the Company entered into an agreement with JT to
collaborate on the discovery, development and commercialization of novel
therapeutic drugs which act on key proteins related to the human immune system
(JT 1992). In February 1994, the Company expanded its strategic alliance with JT
into the field of anti-viral drugs for the treatment of infections caused by
hepatitis C, the herpes family of viruses and rhinoviruses (JT 1994). In
December 1994, the Company added its anti-HIV drug, Viracept, to the JT
collaboration with the execution of a worldwide development and licensing
agreement (JT HIV). In January 1995, JT 1992 was canceled by mutual agreement
and JT 1992 resources were reallocated to JT 1994 programs. In February 1996,
the portion of the JT 1994 collaboration targeting rhinovirus was ended and
program resources were reallocated to other JT 1994 programs.
Under the provisions of JT 1994, JT has agreed to make certain research
payments of not less than $8,000,000 to the Company over a two-year period
ending December 1996. Such payments could approximate more than $21,000,000 over
a four-year period if certain technical milestones are achieved. In addition, JT
made an up-front payment of $7,778,000, which is being amortized to revenue over
a twenty-four month period. Under the provisions of JT HIV, JT has made payments
of $30,000,000 to Agouron representing an initial payment of $2,500,000, a
milestone payment of $3,500,000 in recognition of the satisfactory completion of
a phase I clinical study and second milestone payment of $24,000,000 in
recognition of the satisfactory completion of a pilot phase II clinical study of
Viracept. Agouron and JT are currently sharing equally the costs of further
development of Viracept.
Under the provisions of JT 1994, the Company will have exclusive rights to
develop, manufacture and market anti-hepatitis C and anti-herpes drugs in the
United States, Canada and Mexico. JT will have exclusive rights to develop,
manufacture and market these drugs in Japan, Taiwan and South Korea. Outside the
countries in which they respectively have exclusive rights, Agouron and JT will
have co-exclusive rights to manufacture and market jointly developed
anti-hepatitis C and anti-herpes drugs. Each company will pay royalties to the
other based upon their respective sales of anti-hepatitis C and anti-herpes
drugs. Under the provisions of JT HIV, Agouron will retain exclusive commercial
rights to Viracept (with the right to sublicense, subject to JT's right of first
refusal) in the United States, Canada and Mexico. JT will have exclusive
commercial rights to Viracept (with the right to sublicense, subject to the
Company's right of first refusal) in Japan and certain other countries of Asia.
Exclusive commercial rights (with the right to sublicense) in Europe and all
remaining countries of the world will be held by a joint venture owned equally
by Agouron and JT. The two companies will share royalties or profits equally
from the worldwide commercialization of Viracept.
Under a separate agreement dated December 1992, JT purchased 155,844 shares
of newly issued Common Stock for an aggregate purchase price of $3,000,000. Such
purchase represented approximately 2% of the then outstanding Common Stock.
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ROCHE
In June 1996, the Company completed a three-year agreement entered into with
Syntex (U.S.A.) Inc. (now a subsidiary of Roche) to collaborate on the discovery
of novel matrix metalloprotease inhibitor drugs. Roche has exclusive worldwide
commercial rights in any MMP inhibitors used to treat arthritis and other
degenerative bone diseases, subject to the payment of royalties to Agouron.
Under the terms of the agreement, the Company will have a royalty position in
certain other agreement products, if any, and other development and commercial
rights in other agreement products, if any.
Under a separate agreement dated June 1993, Syntex Corporation (now a
subsidiary of Roche) purchased 155,844 shares of newly issued Common Stock for
an aggregate purchase price of $3,000,000. Such purchase represented
approximately 2% of the then outstanding Common Stock.
In June 1996, Agouron signed a binding letter of intent with
Hoffmann-LaRoche Inc. and F. Hoffmann-La Roche Ltd, subsidiaries of Roche,
providing for the collaborative development and commercialization of Thymitaq
and of the Agouron anti-cancer compound designated AG3340 currently under
preclinical development. Agouron has received initial license fees of
$15,000,000 and, under the provisions of the binding letter of intent, is to
receive additional development milestone payments of up to $40,000,000 from
Roche. Roche has agreed to bear 80% of future costs of developing these drugs.
Agouron and Roche will cooperatively market the two compounds for cancer
indications and share profits in North America, while Roche has exclusive
marketing rights for cancer indications to these compounds outside North
America, subject to possible co-promotion rights and the payment of royalties to
Agouron. Roche is to provide annual research support of $3,000,000 for three
years as well as subsequent milestone payments of up to $20,000,000 to Agouron
for similar commercial rights for all indications in compounds which are
generated in a collaborative research program focused on cell cycle control.
Roche also has agreed to grant Agouron the right in North America to
commercialize a Roche anti-cancer product to be designated in the future. See
"Research and Development Programs -- Cancer -- Cell Cycle Control: cdk4."
SCHERING-PLOUGH CORPORATION
In April 1994, the Company and Schering completed a three-year collaborative
research agreement providing for the discovery and development of anti-cancer
drugs which target oncogenic RAS proteins. Each company may pursue further
discovery or development efforts in this program area at its sole discretion and
expense with no subsequent obligations to the other company.
ELI LILLY AND COMPANY
In April 1993, the Company and Lilly completed a five-year collaborative
research program in several therapeutic categories. Further development of any
discoveries made in the program will be undertaken at each company's sole
discretion and expense. Agouron has continuing commercial rights and/or
financial interests in certain of these discoveries.
NATIONAL INSTITUTES OF HEALTH
The Company is the grantee organization for two grants from the NIH to
conduct research related to HIV.
COMPETITION
The pharmaceutical and biotechnology industries are subject to intense
competition and rapid and significant technological change. Many companies and
organizations, including major pharmaceutical, biotechnology and chemical
companies, universities and other research organizations, are engaged in
discovery and development of drugs for diseases targeted by the Company. For
example, the Company is aware of several pharmaceutical companies that have HIV
protease inhibitors, some of which are currently being marketed, including those
of Abbott Laboratories, Inc., Merck & Co., Inc. and Roche. Certain companies and
organizations have substantially greater financial and other resources, larger
research and development staffs and more extensive production and marketing
organizations, experience and capabilities than the Company. In addition, many
companies have significantly greater experience than the Company in preclinical
testing and in conducting human clinical trials of potential pharmaceutical
products and in
26
<PAGE>
obtaining FDA and other regulatory approvals. All of these companies and other
research organizations compete with the Company in recruiting and retaining
highly qualified scientific and management personnel.
Agouron was the first company to devote itself to the development and
application of protein structure-based drug design. As such, the Company
believes that it has achieved certain competitive advantages including
developmental lead time, level of commitment to the technology and the
development of certain practical or technical capabilities. However, in recent
years several pharmaceutical companies have undertaken to establish capabilities
in protein x-ray crystallography, either internally or through academic
collaborations, and can be presumed to be engaged in the use of such technology
for the same purposes as is the Company. Certain biotechnology companies and
other companies have also entered into the field of protein structure-based drug
design. For example, Abbott Laboratories, Ciba-Geigy Limited, Glaxo Wellcome
plc, Merck and Roche have developed programs focused on structure-based drug
design. The Company expects that the technology for protein structure-based drug
design will become more widely implemented over time and will ultimately become
more common in the pharmaceutical industry.
The Company believes that its ability to compete successfully will be based
on its ability to create and maintain scientifically advanced technology,
attract and retain scientific personnel with a broad range of expertise, obtain
patent protection or otherwise develop proprietary products or processes,
conduct clinical trials and obtain required government approvals on a timely
basis, select and pursue drug design projects in areas in which significant
market opportunities exist or are likely to develop, manufacture its products on
a cost-effective basis and successfully market its products either alone or in
conjunction with others. Many of the Company's competitors have substantially
greater financial resources, clinical and regulatory experience, manufacturing
capabilities and sales and marketing organizations than Agouron. See "Risk
Factors -- Technological Change and Competition" and "Risk Factors -- Attraction
and Retention of Personnel."
PATENTS AND TRADE SECRETS
The Company seeks patent protection for its proprietary technology and
potential products in the United States and in foreign countries. Most of the
Company's products are expected to be synthetic chemical compounds which may be
afforded patent protection under principles and procedures well established by
the United States Patent and Trademark Office under United States patent law.
The Company's strategy is to pursue a strong patent portfolio and Agouron
holds several patents, including a patent covering the chemical composition of
Viracept. The Company is currently prosecuting a number of patent applications
in the United States and in various other countries seeking protection for
certain series of compounds, including, Thymitaq and Viracept and certain
proprietary technology. The Company will continue to file patent applications on
its evolving technology, processes and products. The Company has recently
received one United States patent covering processes of making Thymitaq and
related compounds and intermediates thereof. The Company's failure to obtain
patent protection for its products could have an adverse impact on the Company.
Many of the processes and much of the know-how of importance to the
Company's technology are dependent upon the skills, knowledge and experience of
its scientific and technical personnel, which skills, knowledge and experience
are not patentable. To protect its rights in these areas, the Company requires
all employees, significant consultants and advisors, and collaborators to enter
into confidentiality agreements with Agouron. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets, know-how or other proprietary information in the event
of any unauthorized use or disclosure of such trade secrets, know-how or
proprietary information. Further, in the absence of patent protection, the
Company may be exposed to competitors who independently develop substantially
equivalent technology or otherwise gain access to the Company's trade secrets,
knowledge or other proprietary information. See "Risk Factors -- Patents and
Proprietary Technology."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation for safety,
efficacy and quality by numerous governmental authorities in
27
<PAGE>
the United States and other countries. Pharmaceutical products intended for
therapeutic use in humans are principally governed by FDA regulations in the
United States and by comparable government regulations in foreign countries.
Various federal, state and local statutes and regulations also govern or
influence the research and development, manufacturing, safety, labeling,
storage, recordkeeping, distribution and marketing of such products. The process
of completing preclinical and clinical testing and obtaining the approval of FDA
and similar health authorities in foreign countries to market a new drug product
requires a significant number of years and the expenditure of substantial
resources. Failures or delays by the Company or its collaborators or licensees
in obtaining regulatory approvals would adversely affect the marketing of
products being developed by the Company and the Company's ability to receive
product revenues or royalties.
The steps required by FDA before a new human pharmaceutical product may be
marketed in the United States include: (a) preclinical laboratory tests, IN VIVO
preclinical studies and formulation studies; (b) the submission to FDA of a
request for authorization to conduct clinical trials on an Investigational New
Drug Application ("IND"), which must become effective before human clinical
trials may commence; (c) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug for its intended use; (d)
submission to FDA of a NDA; and (e) review and approval of the NDA by FDA before
the drug product may be shipped or sold commercially. Prior to obtaining FDA
approval for each product, each manufacturing establishment for new drugs must
be registered with and receive appropriate approval by FDA.
Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the safety and efficacy of the
product. Preclinical test results are submitted to FDA as a part of the IND.
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap. Phase I represents the initial administration of the drug to
a small group of humans, either healthy volunteers or patients, to test for
safety, dosage tolerance, absorption, distribution, metabolism, excretion and
clinical pharmacology and, if possible, early indications of effectiveness.
Phase II involves studies in a small sample of the actual intended patient
population to assess the efficacy of the investigational drug for a specific
clinical indication, to ascertain dose tolerance and the optimal dose range and
to collect additional clinical information relating to safety and potential
adverse effects. Once an investigational drug is found to have some efficacy and
an acceptable clinical safety profile in the targeted patient population, phase
III studies are often initiated to further establish safety and efficacy of the
investigational drug in a broader sample of the target patient population. The
results of the clinical trials together with the results of the preclinical
tests and complete manufacturing information are submitted in a NDA to FDA for
approval. See "Risk Factors -- Uncertainty Associated with Clinical Trials."
If a NDA is submitted to FDA, there can be no assurance that such
application will be reviewed and approved by FDA in a timely manner, if at all.
Even after initial FDA approval has been obtained, further studies, including
post-market studies, may be required to provide additional information. Results
of such post-market programs may limit or expand the further marketing of the
product.
The Company is also subject to foreign regulatory requirements governing
development, manufacturing and sales of pharmaceutical products that vary widely
from country to country. Approval of a drug by applicable regulatory agencies of
foreign countries must be secured prior to the marketing of such drug in those
countries. The regulatory approval process may be more or less rigorous from
country to country and the time required for approval may be longer or shorter
than that required in the United States.
In addition to the regulatory framework for pharmaceutical product
approvals, the Company is and may become subject to various federal, state,
local and foreign laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with Agouron's research and development work. The Company is
unable to predict the extent of restrictions that might arise from any
governmental or administrative action. See "Risk Factors -- Government
Regulation."
28
<PAGE>
MANUFACTURING
The Company currently has no manufacturing facilities for production of
commercial quantities of any compounds under development as pharmaceutical
products. The Company's facilities include scale-up laboratories in which the
Company intends to produce, under GMP, amounts of its drug product candidates
sufficient for use in certain early clinical trials. The Company is and will be
relying upon third parties to manufacture its products in quantities sufficient
to meet both clinical and commercial needs. The Company will be dependent upon
these manufacturers to comply with GMP and to meet its production requirements.
There can be no assurance that these manufacturers will timely deliver
sufficient quantities of the Company's products or that the Company would be
able to find substitute manufacturers, if necessary. See "Risk Factors -- Lack
of Manufacturing Experience."
MARKETING
The Company does not currently market any pharmaceutical products but
intends to market any approved cancer and anti-HIV products in North America
through its own sales and marketing organization. The Company has begun to
establish its sales and marketing organization by hiring key sales and marketing
management personnel who possess significant pharmaceutical industry experience.
Additional sales and marketing personnel will be hired and certain programs will
be implemented upon the achievement of clinical development milestones,
including the successful completion of pivotal clinical trials and the
submission of a NDA. The Company intends to possess the capability to launch
products concurrent with their approval by FDA. The Company's sales and
marketing efforts will utilize a field sales organization focused primarily on
office and hospital based physicians including key medical thought leaders
Additionally, the Company will seek to ensure market access and availability for
its products in part by establishing relationships within key market segments
including health maintenance organizations, third-party payers and governmental
agencies. See "Risk Factors -- Lack of Sales and Marketing Capabilities."
HUMAN RESOURCES
As of June 30, 1996, the Company had 374 employees, 96 of whom hold Ph.D. or
M.D. degrees. Three hundred employees are engaged in, or directly support,
research and product development. The Company's employees are not covered by a
collective bargaining agreement and the Company considers its relations with its
employees to be excellent. The Company has entered into confidentiality
agreements with all of its employees.
FACILITIES
The Company leases space in three facilities located in La Jolla, California
which provide a total of approximately 104,000 square feet of office and
laboratory space. The Company's corporate headquarters are located at 10350
North Torrey Pines Road, Suite 100, La Jolla, California 92037, where the
Company occupies approximately 36,000 square feet under three leases which
expire in April 1997. Research and development activities are conducted at 3565
General Atomics Court, San Diego, California 92121 (where the Company is the
sole tenant and occupies approximately 43,500 square feet under a lease which
expires September 2001) and at 11099 North Torrey Pines Road, La Jolla,
California 92037 (where the Company occupies approximately 24,500 square feet
under a lease which expires in September 2000). These two research and
development buildings provide state-of-the-art facilities designed specifically
to implement and support the Company's innovative approach to drug design.
Included in the facilities are approved scale-up laboratories in which kilogram
quantities of Company-designed drug compounds are manufactured under current GMP
for use in clinical trials. Additionally, the Company leases approximately 1,000
square feet of office space in the United Kingdom which it utilizes for its
European clinical staff. While the Company believes that its facilities are
adequate for its current operations, it is negotiating two further leases for a
total of approximately 70,000 square feet to provide additional laboratory and
administrative space. Additional facilities will be necessary if the Company
undertakes commercial manufacturing.
LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings generally incidental to
its normal business activities. While the outcome of any such proceedings cannot
be accurately predicted, the Company does not believe the ultimate resolution of
any such existing matters should have a material adverse effect on its financial
position or results of operations.
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<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Peter Johnson (2)(4)................................. 51 President, Chief Executive Officer and Director
Neil J. Clendeninn, M.D., Ph.D....................... 47 Vice President, Clinical Affairs
Steven S. Cowell (2)................................. 47 Vice President, Finance and Chief Financial Officer
Gary E. Friedman (2)................................. 49 Vice President, General Counsel, Secretary and
Director
Robert C. Jackson, Ph.D.............................. 53 Vice President, Research and Development
Barry D. Quart, Pharm.D.............................. 39 Vice President, Regulatory Affairs
R. Kent Snyder....................................... 42 Vice President, Commercial Affairs
Glenn R. Zinser...................................... 53 Vice President, Operations
John N. Abelson, Ph.D. (1)........................... 57 Director
Patricia M. Cloherty (3)(4).......................... 54 Director
A.E. Cohen (1)(4).................................... 60 Director
Michael E. Herman (1)(4)............................. 55 Director
Irving S. Johnson, Ph.D. (4)......................... 71 Director
Antonie T. Knoppers, M.D., Ph.D. (3)................. 81 Director
Melvin I. Simon, Ph.D. (3)........................... 59 Director
</TABLE>
- ------------------------
(1) Member of Directors Compensation Committee
(2) Member of Management Compensation Committee
(3) Member of Audit Committee
(4) Member of Executive Committee
PETER JOHNSON, a founder of the Company, has served as a director and as
president and chief executive officer of the Company since its inception in
1984. Through 1989, Mr. Johnson held various positions with The Agouron
Institute, including executive director. Mr. Johnson received a M.A. from the
University of California, San Diego.
NEIL J. CLENDENINN joined the Company in February 1993 as vice president,
clinical affairs. From 1985 until joining the Company, Dr. Clendeninn held
various positions with Burroughs Wellcome Co., including head of the
chemotherapy section from 1988. From 1981 through 1985, Dr. Clendeninn worked
with the clinical oncology and clinical pharmacology groups at the National
Institutes of Health. Dr. Clendeninn received a M.D. and a Ph.D. in pharmacology
from New York University.
STEVEN S. COWELL joined the Company in August 1991 as vice president,
finance and chief financial officer. From 1982 until joining the Company, Mr.
Cowell held various positions, the most recent of which was vice president and
controller at Cetus Corporation, a public biotechnology company primarily
engaged in the development, manufacture and marketing of pharmaceutical
products. Mr. Cowell is a Certified Public Accountant in California and received
a B.S. in business administration from the University of California, Berkeley.
GARY E. FRIEDMAN, a founder of the Company, has served as a director since
its inception, as the secretary of the Company since May 1986 and as vice
president and general counsel since December 1991.
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Previously, from 1982 until December 1991, Mr. Friedman was a principal of the
law firm of Friedman, Jay & Cramer, a Professional Corporation. Mr. Friedman is
a California Certified Specialist in Taxation. Mr. Friedman received a J.D. and
a M.B.A. from the University of California, Berkeley, and a L.L.M. in taxation
from the University of San Diego.
ROBERT C. JACKSON joined the Company in March 1991 as vice president,
research and development. From June 1990 to February 1991, Dr. Jackson was group
director of the anti-cancer drug discovery program at The DuPont Merck
Pharmaceutical Company and, from 1982 to June 1990, held various positions with
the Parke-Davis Pharmaceutical Research Division of the Warner-Lambert Company,
including director of tumor biology and director of the chemotherapy department.
Dr. Jackson received a Ph.D. in biochemistry from the University of London.
BARRY D. QUART joined the Company in June 1993 as vice president, regulatory
affairs. From 1983 until joining the Company, Dr. Quart held various management
positions with the Bristol-Myers Squibb Company, including executive director of
international regulatory affairs from 1992. Dr. Quart received a Pharm.D. in
clinical pharmacy from the University of California, San Francisco.
R. KENT SNYDER joined the Company in July 1991 as vice president, business
development. In June 1995, Mr. Snyder's title was changed to vice president,
commercial affairs. From 1982 until joining the Company, Mr. Snyder held various
positions with Marion Laboratories, Inc. and its successor organization, Marion
Merrell Dow Inc. (now Hoechst Marion Roussel), including director of
U.S./European licensing. Prior to his employment at Marion, from 1978 to 1982,
he held various sales and marketing positions with Hoffmann-La Roche, Inc. Mr.
Snyder received a M.B.A. from Rockhurst College.
GLENN R. ZINSER joined the Company in 1987 and, since July 1995, has served
as vice president, operations. Previously, from 1987 through June 1995, Mr.
Zinser held various management positions with the Company, including senior
director, operations from July 1993 through June 1995. Mr. Zinser received a
M.B.A. from the University of California, Los Angeles.
JOHN N. ABELSON, a founder of the Company, has served as a director since
its inception. Dr. Abelson, a molecular biologist, is a member of the National
Academy of Sciences. Since 1982, Dr. Abelson has been a member of the faculty of
the Division of Biology at the California Institute of Technology where, from
October 1989 until June 1995, he served as chairman. Previously, Dr. Abelson was
a member of the faculty in the Department of Chemistry at the University of
California, San Diego. Dr. Abelson received a Ph.D. in biophysics from The Johns
Hopkins University and was a postdoctoral fellow at the Laboratory of Molecular
Biology in Cambridge, England. Dr. Abelson also serves as a director of The
Agouron Institute.
PATRICIA M. CLOHERTY joined the Board in December 1988. Since 1970, Ms.
Cloherty has been associated with Patricof & Co. Ventures, Inc. (formerly Alan
Patricof Associates, Inc.), a New York venture capital firm ("Patricof"), and
has been a general partner of its funds since 1973. In 1993, she was elected
president of Patricof. Ms. Cloherty also served as deputy administrator for the
U.S. Small Business Administration in 1977 and 1978. Ms. Cloherty also serves on
the board of directors of several private companies and is the chairman of the
National Venture Capital Association.
A.E. COHEN joined the Board in March 1992. Mr. Cohen is an independent
management consultant. From 1957 until his retirement in January 1992, Mr. Cohen
held various positions at Merck & Co., Inc., including senior vice president and
president of the Merck Sharp & Dohme International Division. Currently, Mr.
Cohen is the chairman of the board of Neurobiological Technologies, Inc. and is
a member of the board of directors of Akzo N.V., Immunomedics, Inc., Macrochem
Corporation, Teva Pharmaceutical Industries Ltd. and Vasomedical, Inc., all of
which are public companies. Mr. Cohen also serves on the board of directors of
several private companies.
MICHAEL E. HERMAN joined the Board in October 1992. Mr. Herman is a private
investor, as well as president and chief operating officer of the Kansas City
Royals Baseball Team. From October 1974 until his retirement in 1990, Mr. Herman
held various positions at Marion Laboratories, Inc. (now Hoechst Marion
Roussel), including executive vice president and chief financial officer.
Currently, Mr. Herman serves as chairman of the finance committee of the Ewing
Marion Kauffman Foundation, a private foundation
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<PAGE>
located in Kansas City, where from 1985 through 1990, he was the president and
chief operating officer. Mr. Herman is also a member of the board of directors
of Cerner Corporation and Seafield Capital, both of which are public companies,
and serves on the board of directors of several private companies.
IRVING S. JOHNSON joined the Board in May 1989. Dr. Johnson is an
independent consultant in biomedical research working with numerous private
companies. From 1953 until his retirement in November 1988, Dr. Johnson held
various positions at Lilly, including vice president of research from 1973 until
1988. Dr. Johnson also served on several committees of the National Academy of
Sciences, the Office of Technology Assessment and the National Institutes of
Health. Currently, he is a member of the board of directors of Allelix
Biopharmaceuticals Inc., Athena Neurosciences, Inc. and Ligand Pharmaceuticals
Incorporated, all of which are public companies. Dr. Johnson received a Ph.D. in
developmental biology from the University of Kansas.
ANTONIE T. KNOPPERS joined the Board in July 1991. Dr. Knoppers is an
independent management consultant. From 1952 until his retirement in 1975, Dr.
Knoppers held various positions at Merck & Co., Inc., including vice chairman of
the board and president and chief operating officer. Dr. Knoppers is a member of
the board of directors of Centocor, Inc., a public biotechnology company. In
addition, he is a member of the board of trustees of the Salk Institute, was the
former chairman of the U.S. Council of the International Chamber of Commerce and
a member of the advisory board of PaineWebber Development Corporation, an
affiliate of PaineWebber Incorporated, a representative of the Underwriters in
this offering. Dr. Knoppers received a M.D. from the University of Amsterdam and
a Ph.D. from the University of Leiden, The Netherlands.
MELVIN I. SIMON, a founder of the Company, has served as a director since
its inception. Dr. Simon, a molecular geneticist, is a member of the National
Academy of Sciences. Currently, Dr. Simon is chairman of the Division of Biology
at the California Institute of Technology where he has been a member of the
faculty since 1982. Previously, Dr. Simon was a member of the faculty in the
Department of Biology at the University of California, San Diego. Dr. Simon
received a Ph.D. in biochemistry from Brandeis University. Dr. Simon also serves
as a director of The Agouron Institute.
The Board consists of nine directors elected by the holders of the Common
Stock. All directors of the Company hold office until the next annual meeting of
the shareholders and the election and qualification of their successors.
Non-officer members of the Board of Directors of the Company receive cash
compensation in the amount of $250 per meeting attended for their services as a
director.
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<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, without par value, and 2,000,000 shares of preferred stock,
without par value ("Preferred Stock"). There is no Preferred Stock outstanding.
The Board of Directors is authorized to determine the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption,
liquidation preferences and sinking fund terms on any series of the Preferred
Stock, the number of shares constituting such series and the designation
thereof. The Company has no present plans to issue any shares of Preferred
Stock. The issuance of Preferred Stock could have the effect of aiding the Board
of Directors in opposing takeover attempts and could adversely affect the voting
power of the holders of the Common Stock.
COMMON STOCK
At June 30, 1996, there were approximately 10,731,700 shares of Common Stock
outstanding held by approximately 5,000 beneficial owners. The holders of shares
of Common Stock are entitled to elect all directors. The bylaws of the Company
provide that there are nine directors. Upon giving notice of intent to cumulate,
holders of Common Stock may cumulate votes in the election of directors. In
general, the approval of proposals submitted to shareholders at a meeting
requires a favorable vote of the majority of the holders of the shares of the
Common Stock represented and voting at the meeting on which the matter is to be
adopted. Each share of Common Stock entitles its owner to one vote.
Additionally, under California law, certain fundamental matters affecting the
Company may require a favorable vote of a greater percentage. As an example,
sale or transfer of all Company assets or merger or dissolution of the Company
would each require the affirmative vote of a majority of the outstanding shares.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors. Under the Company's articles of
incorporation, holders of Common Stock have no preemptive, subscription,
redemption or conversion rights and there are no sinking fund provisions with
respect to the Common Stock. All of the outstanding shares of Common Stock are,
and the shares to be issued in this offering will be, validly issued, fully paid
and non-assessable.
As of June 30, 1996, options to purchase a total of 3,414,400 shares of
Common Stock were outstanding. Certain of the Company's current shareholders,
including all directors and executive officers, have agreed not to offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of any of
the Common Stock owned by them for a period of 90 days after the date of this
Prospectus without the prior written consent of the Representatives of the
Underwriters. See "Underwriting."
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,000,000 shares of Preferred Stock in one or more
series, and to fix the rights, preferences, privileges and restrictions thereof,
including, but not limited to, dividend rights, conversion rights, voting
rights, rights and terms of redemption, and liquidation preferences. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without any further action by the
stockholders. The Board of Directors, without stockholder approval, can issue
Preferred Stock, with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. In addition, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock and, as a result, the issuance thereof could have a material adverse
affect on the market value of the Common Stock. The Company has no present plan
to issue any shares of Preferred Stock. However, the Board of Directors is
evaluating the appropriateness of adopting a shareholder rights agreement which
would provide certain protections for the Company and its shareholders from
certain changes in control of the Company not approved by the Board of
Directors. If adopted, such an agreement could result in the issuance of
warrants to acquire shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Wells Fargo Bank
N.A., Los Angeles, California.
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<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the Underwriters named
below (the "Underwriters"), for whom PaineWebber Incorporated and Alex. Brown &
Sons Incorporated are acting as Representatives (the "Representatives"), the
Underwriters severally have agreed to purchase from the Company and the Company
has agreed to sell to the Underwriters, 2,500,000 shares of Common Stock, which
in the aggregate equal the number of shares set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------- ---------
<S> <C>
PaineWebber Incorporated............................... 925,000
Alex. Brown & Sons Incorporated........................ 925,000
Hambrecht & Quist LLC.................................. 100,000
Montgomery Securities.................................. 100,000
Smith Barney Inc....................................... 100,000
Hanifen, Imhoff Inc.................................... 50,000
Ladenburg, Thalmann & Co., Inc......................... 50,000
Pennsylvania Merchant Group, Ltd....................... 50,000
Punk, Ziegel & Knoell.................................. 50,000
Rodman & Renshaw, Inc.................................. 50,000
Unterberg Harris....................................... 50,000
H. C. Wainwright Co., Inc.............................. 50,000
---------
Total.............................................. 2,500,000
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to certain conditions, to purchase all of the shares of Common Stock being sold
pursuant to such Agreement (other than those covered by the over-allotment
option described below), if any are purchased. The Underwriting Agreement
provides that, in the event of a default by an Underwriter, in certain
circumstances, the purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock in part to the public at the price
to the public set forth on the cover page of this Prospectus, and in part to
certain securities dealers (who may include the Underwriters) at such price less
a concession not in excess of $.95 per share; and that the Underwriters and such
dealers may reallow a discount not in excess of $.10 per share to other dealers,
including the Underwriters. After the commencement of the public offering, the
public offering price, the concession to selected dealers and the discount to
other dealers may be changed by the Representatives and the Managers.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, under which the
Underwriters may purchase up to 375,000 additional shares of Common Stock from
the Company at the price to the public, less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. The Underwriters may
exercise the option only to cover over-allotments, if any, made in connection
with the offering of the shares of Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company and certain of the Company's current shareholders, including all
directors and executive officers of the Company, have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock, or rights
to acquire shares of Common Stock, for a period of 90 days after the date of
this Prospectus without the prior written consent of the Representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
34
<PAGE>
PaineWebber Incorporated was a representative of the underwriters in a
public offering by the Company of 3,000,000 shares of Common Stock in September
1995, for which PaineWebber Incorporated received customary underwriting
discounts and commissions.
The rules of the Securities and Exchange Commission (the "Commission")
generally prohibit the Underwriters from making a market in the Common Stock
during the two business day period prior to commencement of sales in this
offering (the "Cooling Off Period"). The Commission has, however, adopted Rule
10b-6A under the Securities Exchange Act of 1934, as amended ("Rule 10b-6A"),
which provides an exemption from such prohibition for certain passive market
making transactions. Such passive market making transactions must comply with
applicable price and volume limits and must be identified as passive market
making transactions. In general, pursuant to Rule 10b-6A, a passive market maker
may display its bid for a security at a price not in excess of the highest
independent bid for the security. If all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded. Further, net purchases by a passive market maker
on each day are generally limited to a specified percentage of the passive
market maker's average daily trading volume in a security during a specified
prior period and must be discontinued when such limit is reached. Pursuant to
the exemption provided by Rule 10b-6A, certain of the Underwriters and selling
group members may engage in passive market making in the Common Stock during the
Cooling Off Period. Passive market makers may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock being offered hereby has been passed upon
for the Company by Ferris, Britton & Proctor, a Professional Corporation, San
Diego, California. A shareholder of Ferris, Britton & Proctor, a Professional
Corporation, owns 1,000 shares of Common Stock of the Company. Morrison &
Foerster LLP, New York, New York, is acting as counsel for the Underwriters in
connection with certain legal matters relating to the sale of the Common Stock
offered hereby.
EXPERTS
The financial statements as of June 30, 1995 and 1994 and for each of the
three years in the period ended June 30, 1995 included in this Prospectus and
the financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K for the year ended June 30, 1995 have been so
included and incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP, Independent
Accountants........................................... F-2
Financial Statements:
Balance Sheet........................................ F-3
Statement of Operations.............................. F-4
Statement of Stockholders' Equity.................... F-5
Statement of Cash Flows.............................. F-6
Notes to Financial Statements........................ F-7
Supplemental Financial Information (unaudited)....... F-15
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Agouron Pharmaceuticals, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Agouron Pharmaceuticals, Inc. at
June 30, 1994 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1995, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
July 25, 1995, except as to Notes 1, 4 and 9
which are as of August 24, 1995
F-2
<PAGE>
AGOURON PHARMACEUTICALS, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
------------------ MARCH 31,
1994 1995 1996
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 2,104 $ 4,358 $14,547
Short-term investments........................................................ 27,757 15,886 90,109
Accounts receivable........................................................... 328 344 350
Other current assets.......................................................... 891 871 2,242
-------- -------- ---------
Total current assets.......................................................... 31,080 21,459 107,248
Property and equipment, net..................................................... 6,098 5,638 5,943
-------- -------- ---------
$ 37,178 $ 27,097 $113,191
-------- -------- ---------
-------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 1,514 $ 5,426 $ 8,752
Accrued liabilities........................................................... 519 683 1,075
Deferred revenue.............................................................. 6,818 5,745 24,763
Current portion of long-term debt............................................. 1,190 768 542
-------- -------- ---------
Total current liabilities..................................................... 10,041 12,622 35,132
-------- -------- ---------
Long-term liabilities:
Long-term debt, less current portion.......................................... 992 580 606
Accrued rent.................................................................. 1,293 1,304 1,257
-------- -------- ---------
Total long-term liabilities................................................... 2,285 1,884 1,863
-------- -------- ---------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized, 7,278,488 and
7,359,282 shares issued and outstanding at June 30, 1994 and 1995 and
10,622,800 shares at March 31, 1996.......................................... 75,435 76,113 157,379
Accumulated deficit........................................................... (50,583) (63,522) (81,183 )
-------- -------- ---------
Total stockholders' equity.................................................... 24,852 12,591 76,196
-------- -------- ---------
Commitments and contingencies (Note 8).......................................... -- -- --
-------- -------- ---------
$ 37,178 $ 27,097 $113,191
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AGOURON PHARMACEUTICALS, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS
------------------------------------------- ENDED MARCH 31,
1993 1994 1995 ----------------------------
------------- ------------- ------------- 1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
Revenues:
<S> <C> <C> <C> <C> <C>
Contract........................................ $ 8,266 $ 16,301 $ 26,722 $ 19,285 $ 27,465
Interest........................................ 1,704 1,350 1,239 978 3,520
------------- ------------- ------------- ------------- -------------
9,970 17,651 27,961 20,263 30,985
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Research and development........................ 17,404 23,957 36,317 24,352 43,780
General and administrative...................... 2,127 2,961 4,358 3,027 4,679
Interest........................................ 268 195 225 169 187
------------- ------------- ------------- ------------- -------------
19,799 27,113 40,900 27,548 48,646
------------- ------------- ------------- ------------- -------------
Net loss.......................................... $ (9,829) $ (9,462) $ (12,939) $ (7,285) $ (17,661)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net loss per common share......................... $ (1.40) $ (1.31) $ (1.77) $ (1.00) $ (1.84)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing net loss per common
share............................................ 6,997,000 7,241,000 7,296,000 7,286,000 9,574,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AGOURON PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1992...................................... 6,903,933 $ 68,809 $ (31,292) $ 37,517
Stock issuances:
Private sales............................................... 311,688 5,940 -- 5,940
Exercise of stock options................................... 2,500 21 -- 21
Employee stock purchase plan................................ 8,425 70 -- 70
Options granted for services provided....................... -- 38 -- 38
Net loss...................................................... -- -- (9,829) (9,829)
------------ ---------- ------------ ----------
Balance at June 30, 1993...................................... 7,226,546 74,878 (41,121) 33,757
Stock issuances:
Exercise of stock options................................... 32,649 352 -- 352
Employee stock purchase plan................................ 19,293 170 -- 170
Options granted for services provided....................... -- 35 -- 35
Net loss...................................................... -- -- (9,462) (9,462)
------------ ---------- ------------ ----------
Balance at June 30, 1994...................................... 7,278,488 75,435 (50,583) 24,852
Stock issuances:
Exercise of stock options................................... 49,125 382 -- 382
Employee stock purchase plan................................ 31,669 296 -- 296
Net loss...................................................... -- -- (12,939) (12,939)
------------ ---------- ------------ ----------
Balance at June 30, 1995...................................... 7,359,282 76,113 (63,522) 12,591
Stock issuances (unaudited):
Public sale................................................. 3,000,000 78,579 -- 78,579
Exercise of stock options................................... 245,694 2,393 -- 2,393
Employee stock purchase plan................................ 17,824 294 -- 294
Net loss (unaudited).......................................... -- -- (17,661) (17,661)
------------ ---------- ------------ ----------
Balance at March 31, 1996 (unaudited)......................... 10,622,800 $ 157,379 $ (81,183) $ 76,196
------------ ---------- ------------ ----------
------------ ---------- ------------ ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AGOURON PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
---------------------------- -------------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from contracts............................................ $ 7,973 $ 20,307 $ 25,633 $ 21,018 $ 46,477
Cash paid to suppliers, employees and service providers................. (16,962) (24,955) (34,113) (22,405) (44,419)
Interest received....................................................... 1,704 1,350 1,239 978 3,520
Interest paid........................................................... (268) (195) (225) (169) (187)
-------- -------- -------- ----------- -----------
Net cash provided (used) by operating activities...................... (7,553) (3,493) (7,466) (578) 5,391
-------- -------- -------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in short-term investments....................... 6,878 (840) 11,871 7,561 (74,223)
Expenditures for property and equipment................................. (2,655) (1,783) (1,978) (1,749) (1,588)
-------- -------- -------- ----------- -----------
Net cash provided (used) by investing activities...................... 4,223 (2,623) 9,893 5,812 (75,811)
-------- -------- -------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock.............................. 6,031 522 678 245 81,266
Principal payments under equipment leases............................... (572) (550) (613) (460) (304)
Increase (decrease) in long-term debt, net.............................. (312) 465 (238) (68) (353)
-------- -------- -------- ----------- -----------
Net cash provided (used) by financing activities...................... 5,147 437 (173) (283) 80,609
-------- -------- -------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...................... 1,817 (5,679) 2,254 4,951 10,189
Cash and cash equivalents at beginning of period.......................... 5,966 7,783 2,104 2,104 4,358
-------- -------- -------- ----------- -----------
Cash and cash equivalents at end of period............................ $ 7,783 $ 2,104 $ 4,358 $ 7,055 $ 14,547
-------- -------- -------- ----------- -----------
-------- -------- -------- ----------- -----------
Reconciliation of net loss to net cash provided (used) by operating
activities:
Net loss................................................................ $ (9,829) $ (9,462) $(12,939) $ (7,285) $(17,661)
Depreciation and amortization........................................... 1,755 2,180 2,455 1,858 1,740
Net (increase) decrease in accounts receivable and other current
assets................................................................. (172) (635) 4 (53) (1,377)
Net increase (decrease) in accounts payable, accrued liabilities,
deferred revenue and other liabilities................................. 655 4,389 3,014 4,902 22,689
Options granted for services provided................................... 38 35 -- -- --
-------- -------- -------- ----------- -----------
Net cash provided (used) by operating activities...................... $ (7,553) $ (3,493) $ (7,466) $ (578) $ 5,391
-------- -------- -------- ----------- -----------
-------- -------- -------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was incorporated
in the state of California on June 22, 1984. The Company is engaged in the
development of human pharmaceuticals utilizing protein structure-based drug
design.
UNAUDITED FINANCIAL INFORMATION
In the opinion of management, the unaudited financial statement information
included in these financial statements contains all adjustments (consisting only
of normal, recurring items) necessary to present fairly the financial position
of the Company as of March 31, 1996 and the results of its operations and cash
flows for the nine month periods ended March 31, 1995 and 1996. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosures as of the date of the financial statements.
Actual results could differ from such estimates.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of government or government
agency securities, corporate notes and bonds, commercial paper and certificates
of deposit with original maturities of three to thirty-six months. Included in
short-term investments at June 30, 1994 and 1995 and March 31, 1996 is $246,000,
$172,000 and $1,544,000 of accrued interest receivable.
The Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115")
for investments held as of or acquired after July 1, 1994. The Company has
classified its short-term investments as available-for-sale. The adoption of FAS
115 did not have a material impact on the Company's financial position or
results of operations.
CONCENTRATION OF CREDIT AND MARKET RISK AND OFF BALANCE SHEET RISK
The Company invests its excess cash principally in marketable securities
from a diversified portfolio of institutions with strong credit ratings and, by
policy, limits the amount of credit exposure at any one institution. These
investments are generally not collateralized and primarily mature within one
year. The Company has not realized any material losses from such investments in
1993, 1994 or 1995 or in the nine months ended March 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized over the life of the lease. Charges to
costs and expenses for repairs and maintenance were $508,000, $534,000, $422,000
and $433,500 for the years ended June 30, 1993, 1994 and 1995 and the nine
months ended March 31, 1996.
REVENUE RECOGNITION
Contract revenues (including profit, if any) are earned and recognized as
work is performed. Contract payments received in advance of performance are
recorded as deferred revenue. Subsequent contract revenues are recognized
according to the provisions of each collaborative agreement, generally on a
percentage-of-completion basis over the life of the contract.
F-7
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, cash equivalents are highly
liquid investments purchased with an original maturity of three months or less.
Non-cash financing activities were not significant in 1993, 1994 or 1995 or in
the nine months ended March 31, 1996.
INCOME TAXES
Effective July 1, 1993, the Company adopted, on a prospective basis,
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("FAS 109"). Under FAS 109, deferred tax is recognized using the
liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
The adoption of FAS 109 did not have a material impact on the Company's
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Company believes that its current capital
resources, existing contractual commitments and the JT milestone payment of
$24,000,000 (see Note 4), will be sufficient to meet its operating needs through
fiscal 1996.
As of March 31, 1996, the Company believes that its current capital
resources and existing contractual commitments will be sufficient to meet its
operating needs through fiscal 1996. This belief is based on current research
and clinical development plans, the current regulatory environment, historical
industry experience in the development of therapeutic drugs and general economic
conditions. However, the Company will need additional financing to meet the
planned operating needs of fiscal 1997 and beyond. Such needs would include the
expenditure of substantial funds to continue research and development
activities, conduct existing and planned preclinical studies and tests, conduct
human clinical trials and establish certain manufacturing, sales and marketing
capabilities. As a result, the Company anticipates pursuing various financing
alternatives, such as collaborative arrangements and additional public offerings
or private placements of Company common or preferred stock. If such alternatives
are not available, the Company may be required to delay or eliminate
expenditures for certain of its potential products under development or to
license third parties to commercialize products or technologies that the Company
would otherwise seek to develop itself.
NOTE 2 -- SHORT-TERM INVESTMENTS
At June 30, 1995, the amortized cost and estimated fair value of short-term
investments held as available-for-sale were as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government securities.............................. $10,236 $ 5 $ (60) $10,181
Corporate obligations............................................ 3,037 2 (16) 3,023
Other interest bearing securities................................ 2,613 -- -- 2,613
--
--------- --- -------
$15,886 $ 7 $ (76) $15,817
--
--
--------- --- -------
--------- --- -------
</TABLE>
F-8
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 2 -- SHORT-TERM INVESTMENTS (CONTINUED)
At March 31, 1996, the amortized cost and estimated fair value of short-term
investments held as available-for-sale were as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government securities............ $ 72,770 $ 110 $ (88) $ 72,792
Corporate obligations.......................... 13,945 97 (2) 14,040
Other interest bearing securities.............. 3,394 -- -- 3,394
----------- ----- --- ---------
$ 90,109 $ 207 $ (90) $ 90,226
----------- ----- --- ---------
----------- ----- --- ---------
</TABLE>
Realized gains and losses on the disposal of available-for-sale securities
during 1995 totaled $3,000 and $7,000, respectively. During the nine months
ended such gains totaled $22,000. The cost of securities sold is based upon the
specific identification method. At June 30, 1995, scheduled maturities for
available-for-sale securities were less than one year for $14,720,000 and
between one and two years for $1,166,000. At March 31, 1996 such maturities were
$59,699,000 and $30,410,000, respectively. At June 30, 1995 and March 31, 1996,
short-term investments are carried on the balance sheet at amortized cost. The
difference between amortized cost and fair value has not been reflected in
stockholders' equity as such difference is not material.
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
----------------- -----------
1994 1995 1996
------- -------- -----------
<S> <C> <C> <C>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Accounts receivable:
Employee receivables............................ $ 270 $ 262 $ 148
Other receivables............................... 58 82 202
------- -------- -----------
$ 328 $ 344 $ 350
------- -------- -----------
------- -------- -----------
Property and equipment, net:
Scientific instrumentation...................... $ 6,748 $ 7,787 $ 9,110
Computer equipment.............................. 4,838 5,453 5,704
Leasehold improvements.......................... 2,535 2,798 3,110
Furniture and fixtures.......................... 794 944 1,073
------- -------- -----------
14,915 16,982 18,997
Less accumulated depreciation and amortization.. (8,817) (11,344) (13,054)
------- -------- -----------
$ 6,098 $ 5,638 $ 5,943
------- -------- -----------
------- -------- -----------
Accrued liabilities:
Accrued vacation................................ $ 489 $ 623 $ 789
Other........................................... 30 60 286
------- -------- -----------
$ 519 $ 683 $ 1,075
------- -------- -----------
------- -------- -----------
</TABLE>
F-9
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 4 -- SIGNIFICANT CONTRACT AND GRANT ARRANGEMENTS
JAPAN TOBACCO INC.
In December 1992, the Company entered into an agreement with Japan Tobacco
Inc. ("JT") to collaborate on the discovery, development and commercialization
of novel therapeutic drugs which act on key proteins related to the human immune
system ("JT 1992"). In February 1994, the Company expanded its strategic
alliance with JT into the field of anti-viral drugs for the treatment of
infections caused by hepatitis C, the herpes family of viruses and the
rhinoviruses ("JT 1994"). In December 1994, the Company added its anti-HIV drug,
Viracept (formerly AG1343), to the JT collaboration with the execution of a
worldwide development and licensing agreement ("JT HIV"). In January 1995, JT
1992 was canceled by mutual agreement and JT 1992 resources were reallocated to
JT 1994 programs. In February 1996, JT 1994 was modified to delete rhinoviruses
from the strategic alliance.
Under the provisions of JT 1994, JT has agreed to make certain research
payments to the Company of not less than $8,000,000 over a two-year period
ending December 1996. Such payments could approximate more than $21,000,000 over
a four-year period if certain technical milestones are achieved. In addition, JT
made an up-front payment of $7,778,000, which is being amortized to revenue over
a twenty-four month period. Under the provisions of JT HIV, JT has made
milestone payments of $30,000,000 to Agouron representing an initial payment of
$2,500,000, a milestone payment of $3,500,000 in recognition of the satisfactory
completion of a phase I clinical study and a second milestone payment of
$24,000,000 in recognition of results from a pilot phase II clinical study of
Viracept. Agouron and JT will ultimately share equally the costs of further
development of Viracept.
Under the provisions of JT 1994, the Company will have exclusive rights to
develop, manufacture and market anti-hepatitis C and anti-herpes drugs in the
United States, Canada and Mexico. JT will have exclusive rights to develop,
manufacture and market these drugs in Japan, Taiwan and South Korea. Outside the
countries in which they respectively have exclusive rights, Agouron and JT will
have co-exclusive rights to manufacture and market jointly developed
anti-hepatitis C and anti-herpes drugs. Each company will pay royalties to the
other based upon their respective sales of anti-hepatitis C and anti-herpes
drugs. Under the provisions of JT HIV, Agouron will retain exclusive commercial
rights to Viracept (with the right to sublicense, subject to JT's right of first
refusal) in the United States, Canada and Mexico. JT will have exclusive
commercial rights to Viracept (with the right to sublicense, subject to
Agouron's right of first refusal) in Japan and certain other countries in Asia.
Exclusive commercial rights (with the right to sublicense) in Europe and all
remaining countries of the world will be held by a joint venture owned equally
by Agouron and JT. The two companies will share profits equally from the
worldwide commercialization of Viracept.
Under the combined terms of the agreements, the Company has incurred costs
of $1,144,000, $5,043,000, $19,211,000 and $28,514,000 and recognized
corresponding revenues of $2,156,000, $11,144,000, $22,880,000 and $24,416,000
for the years ended June 30, 1993, 1994 and 1995 and the nine months ended March
31, 1996.
Under a separate agreement dated December 1992, JT purchased 155,844 shares
of newly issued common stock for an aggregate purchase price of $3,000,000. Such
purchase represented approximately 2% of the total outstanding common stock.
SYNTEX (U.S.A.) INC.
In June 1993, the Company entered into an agreement with Syntex (U.S.A.)
Inc. (now a subsidiary of Roche Holding Ltd) ("Roche"), to collaborate on the
discovery of novel matrix metalloprotease inhibitor drugs for use against cancer
and degenerative diseases such as rheumatoid arthritis and osteoarthritis.
F-10
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 4 -- SIGNIFICANT CONTRACT AND GRANT ARRANGEMENTS (CONTINUED)
Under the provisions of the agreement, Roche has agreed to make certain research
payments to the Company over a three-year period ending June 1996 of
approximately $8,500,000. Under the agreement, the Company has incurred costs
and recognized corresponding revenues of $120,000, $2,307,000, $3,043,000 and
$2,465,000 during the years ended June 30, 1993, 1994 and 1995 and the nine
months ended March 31, 1996. The Company is funding a portion of the activities
associated with this collaboration on its own account. Under the terms of the
agreement, the Company will have a royalty position in certain agreement
products, if any, and other development and commercial rights in other agreement
products, if any.
Under a separate agreement dated June 1993, Syntex Corporation (Roche)
purchased 155,844 shares of newly issued common stock for an aggregate purchase
price of $3,000,000. Such purchase represented approximately 2% of the total
outstanding common stock.
SCHERING-PLOUGH CORPORATION
In April 1994, the Company and Schering-Plough Corporation completed a
three-year collaborative research agreement providing for the discovery and
development of anti-cancer drugs which target oncogenic ras proteins. Each
company may pursue further discovery or development efforts in this program area
at its sole discretion and expense with no subsequent obligations to the other
company. Under the agreement, the Company has incurred costs and recognized
corresponding revenues of $2,570,000 and $1,894,000 during the years ended June
30, 1993 and 1994.
ELI LILLY AND COMPANY
In April 1993, the Company and Eli Lilly and Company completed a five year
collaborative research program in several therapeutic categories. Further
development of any discoveries made in the program will be undertaken at each
company's sole discretion and expense. Agouron has continuing commercial rights
and/or financial interests in certain of these discoveries. During the
collaborative research program, the Company has been reimbursed for certain
costs incurred and has recognized revenues of $2,941,000 during 1993.
NATIONAL INSTITUTES OF HEALTH
The Company is currently the grantee organization for two grants from the
National Institutes of Health to conduct research related to the Human
Immunodeficiency Virus. Costs incurred and the corresponding reimbursement
revenues recognized under various grant programs were $479,000, $956,000,
$799,000 and $554,000 for the years ended June 30, 1993, 1994 and 1995 and the
nine months ended March 31, 1996.
F-11
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 5 -- LONG-TERM DEBT
At June 30, 1994 and 1995 and March 31, 1996, long-term debt and capital
lease obligations were as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------- MARCH 31,
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Notes payable, secured with personal property and
a certificate of deposit for $400,000; interest
at prime plus 1.5%; maturing September 1995, June
1997 and November 1998........................... $ 1,169,000 $ 931,000 $ 578,000
Capital leases, with interest rates between 6.00%
and 16.5%, maturing at various dates through
December 2000.................................... 1,013,000 417,000 570,000
----------- ---------- -----------
Total long-term debt and capital lease
obligations...................................... 2,182,000 1,348,000 1,148,000
Current portion of long-term debt................. (1,190,000) (768,000) (542,000)
----------- ---------- -----------
Long-term debt.................................... $ 992,000 $ 580,000 $ 606,000
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
Maturities of long-term debt, excluding capital leases, are as follows: 1996
- -$445,000, 1997 - $344,000, 1998 - $100,000, 1999 - $42,000 and 2000 and
thereafter $0.
NOTE 6 -- INCOME TAXES
At June 30, 1994 and 1995, the Company has total deferred income taxes of
$23,609,000 and $30,299,000, which have been fully reserved as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 JUNE 30, 1995
-------------- --------------
<S> <C> <C>
Deferred revenue.............................................. $ 2,737,000 $ 2,358,000
Book and tax depreciation differences......................... 1,588,000 1,664,000
Accrued liabilities........................................... 715,000 790,000
Net operating loss carryforwards.............................. 14,437,000 19,638,000
Foreign tax credits........................................... 1,237,000 1,913,000
Research and development tax credits.......................... 2,895,000 3,936,000
-------------- --------------
23,609,000 30,299,000
Valuation allowance........................................... (23,609,000) (30,299,000)
-------------- --------------
Deferred taxes, net........................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
The Company has not recorded provisions for any United States income taxes
due to net operating losses for tax reporting purposes. At June 30, 1995, the
Company had net operating loss carryforwards for federal tax reporting purposes
of approximately $53,509,000, expiring from 2000 through 2010. The Company also
has federal research and development credit carryforwards of approximately
$2,721,000 at June 30, 1995, expiring from 2000 through 2010. The future
utilization of, or limitation as to the use of, net operating loss carryforwards
for federal and state income tax purposes may be impacted by the issuance of
additional equity securities.
F-12
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 6 -- INCOME TAXES (CONTINUED)
As a result of California's partial conformity with federal provisions
regarding net operating loss and research and development credit carryforwards,
the Company has net operating loss and research and development credit
carryforwards of approximately $15,055,000 and $1,215,000 for state tax
reporting purposes at June 30, 1995, expiring from 1996 through 2010.
Included in general and administrative costs and expenses at June 30, 1993,
1994, 1995 and the nine months ended March 31, 1996, is approximately $116,000,
$611,000, $863,000 and $628,000 of foreign tax expense associated with the
contract research payments from JT.
NOTE 7 -- STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company has two stock option plans whereby 4,220,000 shares of common
stock have been reserved for issuance to its officers, directors, employees and
consultants. The plans, as amended, are administered by the Board of Directors
or its designees and provide generally that, for incentive stock options, the
exercise price shall not be less than the fair market value of the shares at the
date of grant and, for certain non-qualified stock options, the price shall not
be less than 85% of the fair market value of the shares at the date of grant and
may be at any price determined by the Board of Directors for others. The options
expire not later than ten years from the date of the grant and generally become
exercisable ratably over a four year period beginning one year from the grant
date. As of June 30, 1995, 293,636 of these options had been exercised,
1,107,922 were exercisable and 340,672 shares of common stock remain available
for option grant. At March 31, 1996, 539,330 of these options had been
exercised, 1,144,763 options were exercisable and 1,058,563 shares of common
stock remain available for option grant. The following table summarizes stock
option activity for 1993 through March 31, 1996:
<TABLE>
<CAPTION>
SHARES PRICE
---------- -----------------
<S> <C> <C>
Outstanding June 30, 1992..................................... 803,278
Options granted............................................... 494,239 $ 7.88 - $13.88
Options exercised............................................. (2,500) $ 7.38 - $ 9.15
Options canceled.............................................. (20,550) $ 7.38 - $15.50
----------
Outstanding June 30, 1993..................................... 1,274,467
Options granted............................................... 703,450 $ 8.63 - $16.00
Options exercised............................................. (32,649) $ 5.40 - $12.00
Options canceled.............................................. (39,829) $ 7.88 - $15.50
----------
Outstanding June 30, 1994..................................... 1,905,439
Options granted............................................... 773,275 $ 10.13 - $24.50
Options exercised............................................. (49,125) $ 5.40 - $15.50
Options canceled.............................................. (43,897) $ 7.88 - $16.13
----------
Outstanding June 30, 1995..................................... 2,585,692 $ 5.40 - $24.50
Options granted (unaudited)................................... 314,125 $ 23.56 $44.38
Options exercised (unaudited)................................. (245,694) $ 5.40 $17.38
Options canceled (unaudited).................................. (32,016) $ 7.88 $39.13
----------
Outstanding March 31, 1996 (unaudited)........................ 2,622,107 $ 5.40 $44.38
----------
----------
</TABLE>
F-13
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 7 -- STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In December 1992, the shareholders approved an Employee Stock Purchase Plan
("ESPP") which commenced on January 1, 1993. Under the ESPP, 250,000 shares of
common stock have been reserved for issuance and 190,613 shares were available
for purchase at June 30, 1995 and 172,789 shares remain available for purchase
at March 31, 1996. Eligible employees may purchase shares of the Company's
common stock through payroll deductions at prices equal to 85% of the fair
market value of the common stock on either the first or last day of a purchase
period. During the nine months ended March 31, 1996, 11,693 shares were issued
at a price of $19.98 per share and 6,131 shares were issued at a price of $9.88
per share. During 1995, 25,524 shares were issued at a price of $9.24 per share
and 6,145 shares were issued at a price of $9.88 per share. During 1994, 10,073
shares were issued at a price of $8.2875 per share and 9,220 shares were issued
at a price of $9.35 per share. During 1993, 8,425 shares were issued at a price
of $8.2875 per share.
STOCK WARRANT
As part of certain financing arrangements in 1986, the Company issued a
warrant to purchase 45,000 shares of the Company's common stock at a per share
price of $6.30. This warrant is currently exercisable and expires in July 1996.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Certain scientific instrumentation and computer and other equipment are
subject to leases which are classified as capital leases. At June 30, 1994 and
1995 and March 31, 1996, $2,601,000 ($624,000, net), $2,364,000 ($227,000, net)
and $1,118,000 ($532,000, net) of such leased equipment were included in
property and equipment.
Rental expenses (principally for leased facilities under long-term operating
lease commitments) were $1,502,000, $1,973,000, $2,198,000 and $1,874,000 for
1993, 1994, 1995 and the nine months ended March 31, 1996. Future minimum
payments for capital and operating leases at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996........................................................ $ 350,000 $ 2,579,000
1997........................................................ 56,000 2,565,000
1998........................................................ 37,000 2,244,000
1999........................................................ 8,000 2,295,000
2000........................................................ -- 2,411,000
Thereafter.................................................. -- 2,291,000
------------- ----------------
Total minimum lease payments................................ 451,000 $ 14,385,000
----------------
----------------
Less amount representing interest........................... (34,000)
-------------
Obligation under capital leases............................. $ 417,000
-------------
-------------
</TABLE>
The Company is involved in certain legal proceedings generally incidental to
its normal business activities. While the outcome of any such proceedings cannot
be accurately predicted, the Company does not believe the ultimate resolution of
any such existing matters should have a material adverse effect on its financial
position or results of operations.
F-14
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE FINANCIAL INFORMATION AS OF MARCH 31, 1996 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 9 -- SUBSEQUENT EVENT
On August 24, 1995, the Company received a $24,000,000 milestone payment
from JT along with JT's commitment to continue with the clinical development of
Viracept. JT's actions were taken after their review and evaluation of a number
of factors including certain results from two pilot phase II clinical studies of
Viracept.
SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
ROCHE LETTER OF INTENT
On June 19, 1996, the Company and F. Hoffmann-La Roche Ltd of Basel,
Switzerland, and Hoffmann-La Roche Inc. of Nutley, New Jersey, signed a binding
letter of intent to jointly complete the worldwide development of two
anti-cancer drugs currently being developed by Agouron (Thymitaq, an inhibitor
of the enzyme thymidylate synthase, and AG3340, an inhibitor of certain matrix
metalloprotease enzymes) and to collaborate on an additional early-stage
anti-cancer drug discovery program (initially targeting cdk4, a member of a
family of enzymes (cyclin dependent kinases) that regulate the transitions
between phases in the life cycles of all cells). In connection with the signing
of the letter of intent, the Company has received an initial license fee of $15
million for Thymitaq and AG3340. Additional payments of up to $40 million for
Thymitaq and AG3340 and $20 million for cdk4 will accrue to the Company if
certain development milestones are satisfied in the future. Roche is to fund 80%
of the future development costs of Thymitaq and AG3340. Roche is to pay an
annual research fee of $3 million in support of cdk4 and 80% of any post-
research development costs of cdk4. In North America, Agouron and Roche will
cooperatively market and share the profits from the sales of any approved
products from the three programs. Outside of North America, Roche will lead the
commercialization of any products and will pay Agouron a royalty on net sales
or, in certain circumstances, will share profits with Agouron.
F-15
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
-------------------
TABLE OF CONTENTS
PAGE
----
Available Information................................................... 2
Incorporation of Certain Information By Reference....................... 2
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 11
Capitalization.......................................................... 11
Price Range of Common Stock and Dividend Policy......................... 12
Dilution................................................................ 12
Selected Financial Data................................................. 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 14
Business................................................................ 17
Management.............................................................. 30
Description of Securities............................................... 33
Underwriting............................................................ 34
Legal Matters........................................................... 35
Experts................................................................. 35
Financial Statements.................................................... F-1
2,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
PAINEWEBBER INCORPORATED
ALEX. BROWN & SONS
INCORPORATED
---------------------
JULY 26, 1996
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