As filed with the Securities and Exchange Commission on August 13, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Agouron Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)
California 2830 33-0061928
(State or Other (Primary Standard Industrial Classification (I.R.S.Employer
Jurisdiction of Code Number) Indentification No.)
incorporation or
organization)
10350 North Torrey Pines Road, La Jolla, California 92037
(619) 622-8000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Peter Johnson
President and Chief Executive Officer
AGOURON PHARMACEUTICALS, INC.
10350 North Torrey Pines Road, La Jolla, California 92037
(619) 622-8000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copies to:
John M. Dunn, Esq.
PILLSBURY MADISON & SUTRO LLP
101 West Broadway
Suite 1800
San Diego, California 92101
-----------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after approval by the shareholders.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of each Proposed maximum Proposed maximum Amount of
class of securities Amount to be offering per share maximum aggregate registration
to be registered registered(1)(2) price per share offering price(2)(3) fee(2)(3)
share(2)(3)
Agouron Pharmaceuticals Common -- N/A N/A --
Stock, no par value
Rights to Purchase Series B N/A N/A N/A --
Participating Preferred Stock,
no par value
Agouron Oncology Division -- N/A N/A --
Common Stock, no par value
Rights to Purchase Series C N/A N/A N/A --
Participating Preferred Stock,
no par value
</TABLE>
<PAGE>
(1) If the Divisional Stock Proposal described herein is approved by the
shareholders, each share of the Registrant's existing Common Stock, no par
value (the "Existing Common Stock") will be converted into and reclassified
as one share of Agouron Pharmaceuticals Common Stock, no par value
("Agouron Pharmaceuticals Stock"), and a number of shares (the "Oncology
Division Ratio") of Agouron Oncology Division Common Stock, no par value
("Oncology Division Stock") to be determined prior to the date of mailing
to the Registrant's shareholders of the Proxy Statement/Prospectus included
as part of this Registration Statement. The amount of Agouron
Pharmaceuticals Stock being registered is equal to the number of shares of
Existing Common Stock outstanding at the effectiveness of the Divisional
Stock Proposal and the number of shares of Oncology Division Stock being
registered is equal to the Oncology Division Ratio times the number of
shares of Existing Common Stock outstanding at the effectiveness of the
Divisional Stock Proposal. In accordance with Rule 457(o) under the
Securities Act of 1933, as amended (the "Securities Act"), the number of
shares being registered is not included in the table.
(2) Prior to the occurrence of certain events, the rights to purchase Series B
Participating Preferred Stock, no par value, and the rights to purchase
Series C Participating Preferred Stock, no par value (collectively, the
"Rights"), will not be evidenced separately from the related Agouron
Pharmaceuticals Stock or Oncology Division Stock. Value, if any, of the
Rights is reflected in the market price of the related Agouron
Pharmaceuticals Stock or Oncology Division Stock. Accordingly, no separate
fee is paid.
(3) The shares will be distributed to shareholders without consideration.
Accordingly, pursuant to Section 6(b) of the Securities Act, there is no
registration fee.
-----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
[Agouron Pharmaceuticals Letterhead appears here]
September ___, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Agouron Pharmaceuticals, Inc. which will be held on Wednesday, October 28, 1998,
at 10:00 a.m., San Diego time, at the Sheraton Grande Torrey Pines, 10950 North
Torrey Pines Road, La Jolla, California 92037.
At the Annual Meeting, shareholders will be asked to consider and approve a
proposal (the "Divisional Stock Proposal"), which is being recommended by your
Board of Directors (the "Board"), to increase the number of shares of authorized
Common Stock to 150,000,000 shares and to create two series of Common Stock that
are intended to reflect separately the performances of Agouron's oncology
division (the "Oncology Division") and its other businesses ("Agouron
Pharmaceuticals") and to authorize the issuance of one or more additional series
of Common Stock by the Board from undesignated shares of Common Stock;
75,000,000 shares will be initially designated as Agouron Pharmaceuticals Stock
and 25,000,000 will be initially designated as Oncology Division Stock.
Undesignated shares of Common Stock may be used to issue new series of Common
Stock or to increase or decrease shares of an existing series of Common Stock.
If the Divisional Stock Proposal is approved by the shareholders, the Board will
have the authorization to create a new series of Common Stock intended to
reflect the performance of the Oncology Division (the "Oncology Division
Stock"). Each outstanding share of Agouron's existing Common Stock (the
"Existing Common Stock") will be converted into one share of a series of Common
Stock intended to reflect the performance of the Agouron Pharmaceuticals
Division ("the Agouron Pharmaceuticals Stock"), and ______ share of Oncology
Division Stock, intended to reflect the performance of the Oncology Division.
The transactions contemplated by the Divisional Stock Proposal are expected to
be tax free for both the Company and its shareholders.
The Divisional Stock Proposal is designed to separate the business, cash flows
and reported operating results of the Oncology Division from the rest of the
Company's business, enable better capital allocation decisions, charge the
managers of each Division with the responsibility of maximizing the returns from
their businesses, and provide the opportunity to structure more focused
incentives to management teams and employees. In addition, this new equity
structure should increase the Company's flexibility in raising capital and
responding to acquisitions and other strategic opportunities by enabling the
Company to issue Agouron Pharmaceuticals Stock or Oncology Division Stock as
appropriate under the particular circumstances.
By providing investors with separate classes of Common Stock intended to reflect
the respective performances of Agouron Pharmaceuticals and the Oncology
Division, we believe the Divisional Stock Proposal should allow investors and
analysts to gain a better understanding of each business and enable investors to
invest in either or both securities depending upon their individual investment
objectives. The Board believes that the Divisional Stock Proposal should result
in greater market recognition of the value of each of these businesses, while at
the same time enabling the Company to preserve the operational and financial
benefits it currently enjoys as a single company.
The Divisional Stock Proposal will not result in a distribution or spin-off to
shareholders of any assets or liabilities of Agouron Pharmaceuticals, Inc. or
its subsidiaries. Holders of Agouron Pharmaceuticals Stock and the Oncology
Division Stock will be common shareholders of the Company and, as such, will be
subject to all risks associated with an investment in Agouron Pharmaceuticals,
Inc. and all of its businesses, assets and liabilities. Following implementation
of the Divisional Stock Proposal, there can be no assurance as to whether or to
what extent the market values of the Agouron Pharmaceuticals Stock and the
Oncology Division Stock will reflect the separate performance of Agouron
Pharmaceuticals and the Oncology Division, or that the combined market values of
the Agouron Pharmaceuticals Stock and the Oncology Division Stock will equal or
exceed the market value of the Existing Common Stock. In addition,
implementation of the Divisional Stock Proposal will, to an extent, make the
capital structure of the Company more complex and may give rise to occasions
when the interests of the holders of Agouron Pharmaceuticals Stock and the
holders of the Oncology Division Stock may diverge or conflict.
At the Annual Meeting, shareholders will also be asked to consider and approve
proposals to increase the number of shares available for issuance under the
Company's 1996 Stock Option Plan and to increase the number of shares available
for purchase under the Company's Employee Stock Purchase Plan. Additionally, the
shareholders will be asked to elect nine directors all of whom shall serve until
the 1999 Annual Meeting of Shareholders and until the election and qualification
of their successors and to ratify the selection of independent accountants.
<PAGE>
The Board has carefully considered the Divisional Stock Proposal and each of the
other proposals and believes that the approval of each of the proposals by the
shareholders is in the best interests of the Company and the shareholders.
Accordingly, the Board unanimously recommends that the shareholders approve the
Divisional Stock Proposal and each of the other proposals set forth in the
Notice of Annual Meeting of Shareholders which are described in more detail in
the attached Proxy Statement/Prospectus. The Board also recommends that
shareholders vote for the nine nominees for director listed in the attached
Proxy Statement/Prospectus.
To expedite the admissions process for the Annual Meeting, please indicate if
you will be attending by marking the appropriate box on the enclosed proxy card
and returning it to our transfer agent, ChaseMellon Shareholder Services. Please
also detach the enclosed admission card and bring it with you to the Annual
Meeting.
Regardless of whether you plan to be present at the Annual Meeting, your shares
should be represented and voted. Therefore, please complete, sign and return the
enclosed Proxy Card in the envelope provided at your earliest convenience,
whether or not you plan to attend.
Sincerely,
/s/ Peter Johnson
Peter Johnson
President and Chief Executive Officer
<PAGE>
AGOURON PHARMACEUTICALS, INC.
10350 North Torrey Pines Road
La Jolla, California 92037-1020
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 28, 1998
The Annual Meeting of Shareholders ("Meeting") of Agouron Pharmaceuticals,
Inc., a California corporation (the "Company") will be held at the Sheraton
Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla, California 92037,
on Wednesday, October 28, 1998, at 10:00 a.m., San Diego time, for the following
purposes:
1. To elect nine directors of the Company, all of whom shall serve
until the 1999 Annual Meeting of Shareholders (and until the
election and qualification of their successors).
2. To consider and vote upon a proposal (the "Divisional Stock
Proposal") to amend and restate the Company's Articles of
Incorporation to increase the number of shares of authorized
Common Stock to 150,000,000 shares, of which 75,000,000 shares
would initially be designated as Agouron Pharmaceuticals Stock
and 25,000,000 shares would initially be designated as Oncology
Division Common Stock, to provide authorization to the Board to
designate and issue any undesignated shares in one or more
additional series of Common Stock and to determine the number
of shares, rights, preferences, privileges and
restrictions of any such series, to increase or decrease the
number of shares of any existing series, and to convert each
share of the Company's existing Common Stock into one share of
Agouron Pharmaceuticals Stock and ___ share of Oncology
Division Stock all as described in the attached Proxy
Statement/Prospectus.
3. To consider and vote upon a proposal to amend to the Company's
1996 Stock Option Plan to increase the number of shares available
for issuance under such plan by 1,000,000 shares.
4. To consider and vote upon a proposal to amend the Company's
Employee Stock Purchase Plan to increase the number of shares
available for purchase under such plan by 200,000 shares.
5. To ratify the selection of independent accountants.
6. To consider and act upon such other business as may properly be
presented to the Meeting or any adjournments or postponements
thereof.
Only shareholders of record as of the close of business on September 14,
1998 will be entitled to notice of and to vote at the Meeting or any
adjournments or postponements thereof. A list of shareholders entitled to vote
at the Meeting will be available for inspection at the offices of the Company
for 10 days before the Meeting.
All shareholders are cordially invited to attend the Meeting in person.
Regardless of whether you plan to attend the Meeting, please complete, sign and
date the enclosed Proxy and return it promptly in the accompanying envelope,
postage for which has been provided if mailed in the United States. The prompt
return of Proxies will ensure a quorum and save the Company the expense of
further solicitation. Any shareholder returning the enclosed Proxy may revoke it
prior to its exercise by voting in person at the Meeting or by filing with the
Secretary of the Company a written revocation or a duly executed Proxy bearing a
later date.
By Order of the Board of Directors
/s/ Gary E. Friedman, Secretary
La Jolla, California
September __, 1998
<PAGE>
TABLE OF CONTENTS
Page
Proxy Statement/Prospectus......................................................
Available Information...........................................................
Information Incorporated by Reference...........................................
Safe Harbor Statement...........................................................
Questions and Answers...........................................................
Proxy Statement Summary.........................................................
The Annual Meeting.....................................................
The Divisional Stock Proposal..........................................
Comparison of Existing Common Stock with Agouron Pharmaceuticals
Stock and Oncology Division Stock................................
Agouron Pharmaceuticals, Inc. - Selected Consolidated Financial Data...
Agouron Pharmaceuticals - Selected Financial Data......................
Agouron Oncology Division - Selected Financial Data....................
Price Range of Common Stock and Dividend Policy........................
Risk Factors....................................................................
General.........................................................................
Proposal 1 - Election of Directors..............................................
Proposal 2 - The Divisional Stock Proposal......................................
General................................................................
Background of and Reasons for the Divisional Stock Proposal............
Vote Required..........................................................
Recommendation of the Board............................................
Management and Allocation Policies.....................................
Description of Capital Stock...........................................
Oncology Division Designated Shares....................................
Increase in Authorized Common Stock....................................
Determinations by the Board............................................
Dividend Policy........................................................
Nasdaq National Market Listing.........................................
Exchange Procedures....................................................
Stock Transfer Agent and Registrar.....................................
Financial Advisor......................................................
No Dissenters' Rights..................................................
Certain Federal Income Tax Considerations..............................
Amendment of Stock Plans...............................................
Restatement of Rights Agreement........................................
Anti-Takeover Considerations...........................................
<PAGE>
TABLE OF CONTENTS (cont'd)
Proposal 3 - Amendment of the 1996 Stock Option Plan............................
Proposal 4 - Amendment of the Employee Stock Purchase Plan......................
Proposal 5 - Ratification of Selection of Independent Accountants...............
Security Ownership of Certain Beneficial Owners and Management..................
Executive Compensation..........................................................
Certain Transactions............................................................
Submission of Shareholder Proposals.............................................
Legal Matters...................................................................
Experts.........................................................................
Other Matters...................................................................
Annex I - Index of Defined Terms................................................
Annex II - Proposed Restated Articles of Incorporation (To be filed by
amendment)............................................................
Annex III - Agouron Pharmaceuticals, Inc. .....................................
Management's Discussion and Analysis...................................
Consolidated Financial Statements......................................
Annex IV - Agouron Pharmaceuticals .............................................
Description of Business................................................
Management's Discussion and Analysis...................................
Combined Financial Statements of Agouron Pharmaceuticals...............
Annex V - Agouron Oncology Division.............................................
Description of Business................................................
Management's Discussion and Analysis...................................
Combined Financial Statements of Agouron Oncology Division.............
Annex VI - - Amended and Restated 1996 Stock Option Plan........................
Annex VII - Amended and Restated Employee Stock Purchase Plan...................
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 13, 1998
AGOURON PHARMACEUTICALS, INC.
PROXY STATEMENT/PROSPECTUS
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 28, 1998
This Proxy Statement/Prospectus ("Proxy Statement") is furnished in
connection with the solicitation of Proxies by and on behalf of the Board of
Directors ("Board") of Agouron Pharmaceuticals, Inc., a California corporation
("Agouron" or the "Company"), for use at the Company's Annual Meeting of
Shareholders for the fiscal year ended June 30, 1998 (the "Meeting") to be held
at the Sheraton Grande Torrey Pines, 10950 North Torrey Pines Road, La Jolla,
California 92037, on Wednesday, October 28, 1998 at 10:00Ea.m., San Diego time,
and at any adjournments or postponements thereof. At the Meeting, shareholders
will be asked (i) to elect nine directors of the Company to hold office until
the 1999 Annual Meeting of Shareholders and until their successors are elected
and qualified, (ii) to increase the number of shares of authorized Common Stock
to 150,000,000 shares, of which 75,000,000 shares would initially be designated
as Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock") and
25,000,000 shares would initially be designated as Agouron Oncology Division
Common Stock ("Oncology Division Stock"), to provide authorization to the Board
to designate and issue any undesignated shares in one or more additional series
of Common Stock and to determine the number of shares, rights, preferences,
privileges and restrictions of any such series, to increase or decrease the
number of shares of any existing series, and to convert each share of the
Company's existing Common Stock ("Existing Common Stock") into one share of
Agouron Pharmaceuticals Stock and ___ share of Oncology Division Stock (the
Divisional Stock Proposal"), (iii) to increase the number of shares available
for issuance under the Company's 1996 Stock Option Plan by 1,000,000 shares,
(iv) to increase the number of shares available for purchase under the Company's
Employee Stock Purchase Plan by 200,000 shares, (v) to ratify the selection of
the Company's independent accountants, and (vi) to transact such other business
as may properly be presented to the Meeting or any adjournments or postponements
thereof. This Proxy Statement also constitutes the Prospectus of the Company
with respect to the shares of Agouron Pharmaceuticals Stock and Oncology
Division Stock to be issued pursuant to the Divisional Stock Proposal. It is
anticipated that this Proxy Statement and the accompanying Proxy will be mailed
to the Company's shareholders on or about September __, 1998. An Index of
Defined Terms showing the pages on which certain terms used in this Proxy
Statement are defined is included as Annex I.
See "Risk Factors" beginning on page __ for certain information that should
be considered in connection with an evaluation of the Divisional Stock Proposal.
The Existing Common Stock is traded on the Nasdaq National Market under
the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals
Stock or the Oncology Division Stock. Application has been made to The Nasdaq
Stock Market, Inc. to redesignate the Existing Common Stock as Agouron
Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the
symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq
National Market under the symbol ____.
Shareholders should note that if the Divisional Stock Proposal is
approved, holders will not have to send in their certificates representing
shares of Existing Common Stock to be exchanged for certificates representing
shares of Agouron Pharmaceuticals Stock. DO NOT MAIL YOUR EXISTING COMMON STOCK
CERTIFICATES TO EITHER THE COMPANY OR ITS TRANSFER AGENT IN CONNECTION WITH
THESE TRANSACTIONS.
The Board has carefully considered the Divisional Stock Proposal and each
of the other proposals set forth in the Notice of Annual Meeting of Shareholders
and believes that the approval of these proposals by the shareholders is in the
best interests of the Company and the shareholders. Accordingly, the Board
unanimously recommends that the shareholders approve the Divisional Stock
Proposal and each of the other proposals which are described in more detail in
this Proxy Statement.
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 PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Dated September ____, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Proxy Statement/Prospectus shall not constitute an offer to sell
or the solicitation of any offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
<PAGE>
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 can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates or by accessing the Commission's
World Wide Web site at http://www.sec.gov.
The Company has filed a registration statement on Form S-4 (referred to
herein, together with all amendments and exhibits, as the "Registration
Statement") with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"), covering the shares of Agouron Pharmaceuticals Stock and
Oncology Division Stock issuable in connection with the Divisional Stock
Proposal. This Proxy Statement, which also constitutes the Prospectus of the
Company filed as part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement, which is available for inspection and copying as set
forth above. Statements contained in this Proxy Statement as to the contents of
any contract or other document which is filed as an exhibit to the Registration
Statement are necessarily summaries thereof, and each such statement is
qualified in its entirety by reference to the full text of such contract or
document.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document which has been filed by the Company with the
Commission (File No 0-15609) is incorporated herein by reference: Annual Report
on Form 10-K for the fiscal year ended June 30, 1998. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Proxy Statement and prior to the date of the
Meeting shall be deemed to be incorporated by reference into this Proxy
Statement and to be a part hereof from the date any such document is filed. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement 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 so modified or
superseded, to constitute a part of this Proxy Statement.
This Proxy Statement incorporates documents by reference that are not
presented herein or delivered herewith. A copy of such documents (excluding
exhibits unless such exhibits are specifically incorporated by reference into
the information incorporated herein) will be provided without charge to each
person, including any beneficial owner, to whom a Proxy Statement is delivered,
upon oral or written request of any such person. Requests should be directed to
Agouron Corporate Communications, 10350 North Torrey Pines Road, La Jolla,
California 92037; telephone (619) 622-8000. In order to ensure timely delivery
of the documents, any request should be made by October 21, 1998.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Proxy Statement contains forward-looking statements. Such
statements, including but not limited to those regarding anticipated expenses of
the Oncology Division, sales and revenues attributable to Agouron
Pharmaceuticals, timing and initiation of clinical trials, development and
marketing of future products and the like, are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements" attached
as Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 and "Risk Factors." Important factors which may affect these
projections or expectations include, but are not limited to: the impact of
competitive products, regulatory approvals, changes in the overall economy,
availability of future financing, and other unanticipated events. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
<PAGE>
QUESTIONS AND ANSWERS
RELATING TO THE DIVISIONAL STOCK PROPOSAL AND RELATED TRANSACTIONS
Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: In addition to the standard Annual Meeting business of electing
directors and ratifying accountants, the Board is distributing this
Proxy Statement to shareholders of the Company in connection with a
proposal that would, among other things, create two new series of
Common Stock intended to separately reflect the performance of (i) the
Company's Oncology Division and (ii) the Company's antiviral business
and all of the other businesses of the Company that are not attributed
to the Oncology Division. The Divisional Stock Proposal also authorizes
the Board to establish additional series of Common Stock.
The Board of Directors is seeking your proxy to vote in favor of the
Divisional Stock Proposal at its annual meeting of shareholders
("Meeting").
Q. WHEN AND WHERE WILL THE ANNUAL MEETING BE HELD?
A. The Meeting will be held on Wednesday, October 28, 1998, at 10:00 a.m.,
San Diego time, at the Sheraton Grande Torrey Pines, 10950 North Torrey
Pines Road, La Jolla, California 92037.
Q. WHAT DO I NEED TO DO NOW?
A. Just mail in your completed and signed proxy card in the enclosed
return envelope as soon as possible so that your shares may be
represented at the Meeting.
Q. WHAT DOES THE BOARD OF DIRECTORS RECOMMEND?
A. The Board of Directors has unanimously approved each proposal, believes
that the adoption of each proposal is in the best interests of the
Company and its shareholders and unanimously recommends that you vote
"FOR" the election of the nine nominees for director listed in the
Proxy Statement and "FOR" each of proposals 2 through 5.
Q. WHAT VOTE IS REQUIRED TO APPROVE THE DIVISIONAL STOCK PROPOSAL AND THE
OTHER PROPOSALS?
A. The approval of the Divisional Stock Proposal requires the affirmative
vote of the holders of a majority of the outstanding shares of the
Existing Common Stock. The approval of each of the other proposals
requires the affirmative vote of the holders of a majority of the
shares represented in person or by proxy, provided that those
affirmatively voted shares also constitute at least a majority of the
required quorum.
Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A CHANGE IN CONTROL OF
AGOURON?
A. There will be no change in control of the Company if the Divisional
Stock Proposal is approved.
Q. WILL THE DIVISIONAL STOCK PROPOSAL RESULT IN A SPIN-OFF?
A. No. The Divisional Stock Proposal will not result in a distribution or
spin-off of any assets or liabilities of the Company or its
subsidiaries. Holders of Agouron Pharmaceuticals Stock and Oncology
Division Stock will continue to be common shareholders of the Company
and, as such, will be subject to all risks associated with an
investment in the Company and all of its businesses, assets and
liabilities.
<PAGE>
Q. SHOULD I SEND IN MY STOCK CERTIFICATES?
A. No. If the Divisional Stock Proposal is approved, then upon amendment
and restatement of the Company's Articles of Incorporation, each of
your shares of Existing Common Stock will be automatically converted
into one share of Agouron Pharmaceuticals Stock and ___ share of
Oncology Division Stock.
In connection with this conversion, the stock certificate representing
your shares of Existing Common Stock will represent ownership of the
same number of shares of Agouron Pharmaceuticals Stock. The Company
will send to you your certificates for Oncology Division Stock.
Q. WHAT IS A DIVISIONAL STOCK?
A. Divisional stock, which is also referred to as "tracking stock" or
"letter stock," represents shares of common stock of a corporation, in
this case the Company, which are intended to "track" the performance of
a group of assets or a division of the Company. The Restated Articles
of Incorporation of the Company would, among other things, authorize
two new series of divisional stock, to be designated as Agouron
Pharmaceuticals Stock and Oncology Division Stock.
- The Oncology Division Stock, when issued, is intended to
reflect the separate performance of the Oncology Division of
the Company, which is engaged in research and development of
pharmaceuticals for the treatment of cancer.
- The Agouron Pharmaceuticals Stock, when issued, is intended
to reflect the separate performance of the Company's
anti-viral business and all of the other remaining businesses
of the Company that are not attributed to the Oncology
Division.
Q. WHEN WILL ALL OF THIS TAKE PLACE?
A. If the Divisional Stock Proposal is approved, the Company intends to
file its Restated Articles of Incorporation with the Secretary of State
of California shortly after the Meeting. If all of these events occur
as planned, this event (the "Effective Date") would take place in
November. However, the Board of Directors could choose to effect the
Divisional Stock Proposal at a later time, or not to effect the
Divisional Stock Proposal, depending on the circumstances at the time.
Q. WHAT DO I NEED TO DO TO RECEIVE MY CERTIFICATES FOR THE ONCOLOGY
DIVISION STOCK?
A. You do not need to do anything to receive your certificates for the
Oncology Division Stock. If all of the events take place as planned,
certificates representing whole shares of Oncology Division Stock (and
cash in lieu of fractional shares) will be mailed to all shareholders
after the Effective Date as directed by the Board.
Q. WHAT ARE THE TAX CONSEQUENCES TO ME?
A. The implementation of the Divisional Stock Proposal for federal income
tax purposes is intended to be tax-free to shareholders (except with
respect to any cash received in lieu of fractional shares) based upon
the facts and law at the time of this Proxy Statement. For federal
income tax purposes, cash received for fractional shares will likely
result in recognition of gain or loss. You should consult a tax
advisor.
.
Q. WHAT WILL MY EXISTING COMMON STOCK REPRESENT IF EVERYTHING TAKES PLACE
AS PROPOSED?
A. Upon the completion of all the events as planned, the equity interest
in the Company represented by all the Existing Common Stock will equal
the equity interest of the total of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock. Each share of Existing Common Stock
will be converted into one share of Agouron Pharmaceuticals Stock and
___ share of Oncology Division Stock.
<PAGE>
Q. WILL THE AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION
STOCK BE LISTED ON THE NASDAQ NATIONAL MARKET?
A. The Company has filed an application to list the Agouron
Pharmaceuticals Stock and the Oncology Division Stock on the Nasdaq
National Market. The Agouron Pharmaceuticals Stock will be traded under
the symbol AGPH and the Oncology Division Stock will be traded under
the symbol _______________.
Q. WHAT VOTING RIGHTS WILL I HAVE?
A. After the Effective Date, each share of Agouron Pharmaceuticals Stock
would be entitled to one vote and each share of Oncology Division
Stock will have ___ vote until June 30, 2000. The number of votes per
share of Oncology Division Stock has been determined by the Board,
based on advice from PaineWebber Incorporated ("PaineWebber") as to
the estimated relative market value of the Oncology Division as of the
Effective Date. On July 1, 2000, and on July 1 every two (2) years
thereafter, the number of votes to which holders of
Oncology Division Stock are entitled will be adjusted to reflect the
relative market value of such series as compared to the market value
of Agouron Pharmaceuticals Stock. The Agouron Pharmaceuticals
Stock and the Oncology Division Stock will vote together as a single
class except in certain limited circumstances, under which the
holders of Agouron Pharmaceuticals Stock or Oncology Division Stock
will have rights to vote as a separate class.
Q. DOES THE COMPANY INTEND TO PAY DIVIDENDS?
A. The Company has never paid cash dividends on shares of its Common
Stock. The Board currently intends to retain future earnings, if any,
for the development of the businesses of Agouron Pharmaceuticals and
the Oncology Division and does not anticipate paying dividends on the
Agouron Pharmaceuticals Stock or the Oncology Division Stock in the
foreseeable future.
Q. WHAT DO I DO IF I HAVE ADDITIONAL QUESTIONS?
A. If you have any questions prior to the Meeting, please
call Agouron Investor Relations at
--------------------------.
<PAGE>
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement and the Annexes hereto. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information contained
or incorporated by reference in this Proxy Statement and the Annexes hereto.
Unless otherwise defined herein, capitalized terms used in this Summary have the
respective meanings ascribed to them elsewhere in this Proxy Statement. See
Annex I, "Index of Defined Terms." Shareholders are urged to read carefully this
Proxy Statement and the Annexes hereto in their entirety. Agouron
Pharmaceuticals and the Oncology Division (and any additional divisions created
by the issuance of additional series by the Board) are sometimes referred to
herein collectively as the "Divisions" and individually as a "Division."
THE ANNUAL MEETING
DATE, TIME AND PLACE OF MEETING The Annual Meeting will
be held on October 28,
1998, at 10:00 a.m.,
San Diego time, at the
Sheraton Grande Torrey
Pines, 10950 North Torrey
Pines Road, La Jolla,
California 92037.
RECORD DATE September 14, 1998
PROPOSALS TO BE CONSIDERED The following proposals
AT THE MEETING will be considered and
voted upon at the Annual
Meeting:
PROPOSAL 1 - Election of
Directors. To elect nine
directors of the Company,
all of whom shall serve
until the 1999 Annual
Meeting of Shareholders and
until the election and
qualification of their
successors.
PROPOSAL 2 - The
Divisional Stock Proposal.
To consider and vote upon
the amendment and
restatement of the
Company's Articles of
Incorporation to increase
the number of shares of
authorized Common Stock to
150,000,000 shares, of
which 75,000,000 shares
would initially be
designated as Agouron
Pharmaceuticals Stock and
25,000,000 shares would
initially be designated as
Oncology Division Common
Stock, to provide
authorization to the Board
to designate and issue any
undesignated shares in one
or more additional series
of Common Stock and to
determine the number of
shares, rights,
preferences, privileges and
restrictions of any such
series, to increase or
decrease the number of
shares of any existing
series, including Agouron
Pharmaceuticals Stock and
Oncology Division Stock,
and to convert each share
of the Company's Existing
Common Stock into one share
of Agouron Pharmaceuticals
Stock and ___ share of
Oncology Division Stock all
as described in this Proxy
Statement.
<PAGE>
PROPOSAL 3 -
Amendment to the Company's
1996 Stock Option Plan. To
consider and vote upon an
amendment to the Company's
1996 Stock Option Plan to
increase by 1,000,000
shares the number of shares
available for issuance
under such plan.
PROPOSAL 4 - Amendment to
the Company's Employee
Stock Purchase Plan. To
consider and vote upon an
amendment to increase by
200,000 shares the number
of shares available for
purchase under such plan.
PROPOSAL 5 - Selection of
Independent Accountants. To
ratify the selection of
PricewaterhouseCoopers LLP
as the Company's
independent accountants for
the fiscal year ending June
30, 1999.
<PAGE>
IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS, THE
AGOURON PHARMACEUTICALS STOCK AND THE ONCOLOGY DIVISION STOCK WILL NOT BE
CREATED AND THE EXISTING COMMON STOCK WILL NOT BE RECLASSIFIED AND CONVERTED
INTO AGOURON PHARMACEUTICALS STOCK AND ONCOLOGY DIVISION STOCK.
VOTE REQUIRED Holders of Existing
Common Stock are entitled
to one vote per share on
all matters brought
before the Meeting and to
cumulate votes for the
election of the nine
directors. Therefore, in
voting for directors, each
outstanding share of
Existing Common Stock is
entitled to nine votes
which may be cast for
one candidate or
distributed in any manner
among the nominees for
director. However, the
right to cumulate votes
in favor of one or more
candidates may not be
exercised until the
candidate or candidates
have been nominated and
the shareholder has given
notice at the Meeting
of the intention to
cumulate votes. Assuming
that a quorum is present
at the Meeting, the nine
persons receiving the
highest number of votes
will be elected to the
Board. The required
quorum for the Meeting
shall consist of
a majority of the
outstanding shares of
Existing Common Stock
which are entitled to vote
in person or by proxy at
the Meeting
Proposal 2. The affirmative
vote by the holders of a
majority of the outstanding
shares of the Existing
Common Stock.
Proposals 3, 4 and 5. The
affirmative vote by the
holders of a majority of
the shares of the Existing
Common Stock represented
and voting at the Meeting
(which shares constitute at
least a majority of the
required quorum for the
Meeting).
RECOMMENDATION OF THE BOARD The Board has carefully
considered each Proposal
and believes that the
approval of each of these
Proposals by the
shareholders is in the
best interest of the
Company and the
shareholders. Accordingly,
the Board unanimously
recommends that the
shareholders vote "FOR"
each of the Proposals and
"FOR" the election of the
nine nominees for director
listed herein.
<PAGE>
THE COMPANY
The principal executive offices of the Company are located at 10350
North Torrey Pines Road, La Jolla, California 92037 and its telephone number is
(619) 622-8000.
Agouron Pharmaceuticals
Agouron Pharmaceuticals encompasses all of the activities of the
Company except for those activities related to the research, development and
commercialization of oncology products being pursued by the Oncology Division.
Agouron Pharmaceuticals, through its own sales and marketing
organization, is currently marketing in the United States the first drug
developed by the Company, VIRACEPT (nelfinavir mesylate), for treatment of HIV
infection. In addition, Agouron Pharmaceuticals is expected to initiate a phase
II/III pivotal clinical trial of REMUNE, an immune-based therapeutic agent for
treatment of HIV infection and AIDS being co-developed by Agouron
Pharmaceuticals and The Immune Response Corporation. Further, Agouron
Pharmaceuticals has a number of programs in progress for discovery or
development of other new drugs in the fields of viral disease, inflammatory
disease and other serious diseases. Agouron Pharmaceuticals utilizes the
proprietary core drug discovery technology of Alanex Corporation, a wholly-owned
subsidiary of the Company, to accelerate the steps necessary to discover small
molecule drug candidates. Such steps include the initial identification of
compounds that exhibit activity against selected biological targets to the
progression of these compounds to drug candidates for human clinical trials.
Agouron Pharmaceuticals' long-term goal is increasing profitability
from the sale of drugs generated from its own drug discovery and development
efforts, and from development and commercialization of drugs licensed by Agouron
Pharmaceuticals. To augment its technical capabilities, to enhance the
likelihood of successful commercialization of its products and to offset some of
its operating costs, Agouron Pharmaceuticals has entered into collaborative
research and development arrangements with other companies. Agouron
Pharmaceuticals has generally retained significant commercial rights in drugs
developed in its collaborative research and development programs funded in whole
or in part by other companies. Agouron Pharmaceuticals anticipates that its
successfully developed products will be commercialized both through its own
direct sales and marketing activities in certain pharmaceutical markets and
through manufacturing and marketing relationships with other pharmaceutical
companies.
Agouron Oncology Division
The Oncology Division will be organized as a distinct operating
division of the Company and will continue its commitment to the discovery,
development and marketing of small-molecule drugs engineered to inactivate
proteins which play key roles in cancer. Approximately 25% of the Company's
total anticipated research and development expenditures during the Company's
1999 fiscal year are expected to be incurred by the Oncology Division in
connection with four clinical development programs and four preclinical research
programs. Included are AG3340, an inhibitor of matrix metalloprotease ("MMP")
currently in pivotal phase II/III clinical trials for treatment of lung and
prostate cancer, programs that pursue other inhibitors of MMPs and inhibitors or
antagonists of the following: glycinamide ribonucleotide formyltransferase
("GART"); cyclin dependent kinases ("cdk"); gonadotropin releasing hormone
("GnRH"); poly (ADP ribose) polymerase ("PARP"); and a receptor for vascular
endothelial growth factor ("VEGF"). The Oncology Division is presently pursing
these programs on an independent basis. See Annex V - "Agouron Oncology
Division" for a more complete description of the programs initially allocated to
the Oncology Division.
<PAGE>
THE DIVISIONAL STOCK PROPOSAL
General
If the Divisional Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, the Company's existing Articles of
Incorporation will be amended to increase the number of shares of Common Stock
to 150,000,000 and to designate two new series of Common Stock - 75,000,000
shares of Agouron Pharmaceuticals Common Stock ("Agouron Pharmaceuticals Stock")
and 25,000,000 shares of Agouron Oncology Division Common Stock ("Oncology
Division Stock") and convert each share of the Company's Existing Common Stock
into one share of Agouron Pharmaceuticals Stock and ___ share of Oncology
Division Stock. The amendment would also authorize the Board to establish from
time to time one or more additional series with the number of shares, rights,
preferences, privileges and restrictions as determined by the Board.
Undesignated shares of Common Stock could also be used to increase the
authorized shares of any existing series of Common Stock. The rights,
preferences, privileges and restrictions of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock are described in more detail elsewhere in this
Proxy Statement. See "Proposal 2--The Divisional Stock Proposal--Description of
Capital Stock" and the proposed Restated Articles of Incorporation included as
Annex II.
The ratio of ___ share of Oncology Division Stock for each share of
Existing Common Stock was determined by the Board in consultation with
PaineWebber Incorporated ("PaineWebber"), the Company's financial advisor in
connection with the Divisional Stock Proposal, and is based upon the relative
market value of the Oncology Division, as determined by PaineWebber and the
Board, and the desired initial trading range of the Oncology Division Stock. The
market value of the Oncology Division was based on financial and operating
information of the Oncology Division, prevailing market conditions, the market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Oncology Division.
The Divisional Stock Proposal is designed to separate the Company's
research and development activities in oncology from the balance of the
Company's business by establishing two separate operating divisions, Agouron
Pharmaceuticals and the Oncology Division. The Oncology Division Stock is
intended to reflect the value and track the performance of the Oncology
Division, whereas the Agouron Pharmaceuticals Stock is intended to reflect the
value and track the performance of the Company's anti-viral and other
businesses. See Annex IV - "Agouron Pharmaceuticals" and Annex V - "Agouron
Oncology Division" for a more complete description of each Division.
The Company has established policies designed to separate the business
and operations of Agouron Pharmaceuticals and the Oncology Division, to operate
each on a stand-alone basis, to allocate debt, corporate overhead, interest,
taxes and other charges between the two Divisions on an objective basis and to
ensure that terms of inter-division transactions approximate the terms that
could be obtained from unaffiliated third parties. In addition, these policies
set forth certain allocations in connection with the commercialization of the
Oncology Division's potential products. See "Proposal 2 - The Divisional Stock
Proposal - Management and Allocation Policies."
Risk Factors
When evaluating the Divisional Stock Proposal, shareholders should be
aware of certain risk factors relating thereto. Such risk factors include: (i)
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities; (ii) limited separate shareholder rights
with respect to the two series of Common Stock; (iii) limited separate voting
rights with respect to the two series; (iv) the lack of legal precedent with
respect to the fiduciary duties of the board of directors of a company with two
series of common stock, the rights of which are defined by reference to
specified businesses of the company; (v) the ability of the Board to change
certain management and allocation policies without shareholder approval; (vi)
the potential diverging interests of each series of Common Stock; (vii) the
ability of the Board to transfer funds, services and assets between the
Divisions; (viii) the Company's ability to issue authorized but unissued shares
of Agouron Pharmaceuticals Stock, Oncology Division Stock or other classes of
stock without shareholder approval; (ix) no assurances as to the market price of
the Agouron Pharmaceuticals Stock or the Oncology Division Stock following
effectiveness of the Divisional Stock Proposal; (x) the risk that liquidating
distributions to a Division's Common Stock may not correspond to the value of
that Division's assets at the time of a dissolution of the Company; (xi) the
utilization of tax benefits by the Divisions; (xii) limitations on potential
unsolicited acquisitions of either Division; and (xiii) certain anti-takeover
considerations.
Shareholders should also be aware of certain risks with respect to each
Division's operations, which include (i) the early stage of product development,
the uncertainty of product development and market acceptance and technological
uncertainty; (ii) uncertainty associated with clinical testing; (iii) a limited
history of profitability and uncertainty of
<PAGE>
continued profitability of Agouron Pharmaceuticals; (iv) a history of operating
losses and lack of revenues of the Oncology Division; (v) additional financing
requirements and access to capital; (vi) dependence on others; (vii) limited
manufacturing capability; (viii) limited sales and marketing capabilities; (ix)
patents and proprietary technology; (x) technological change and intense
competition; (xi) government regulation; (xii) uncertainty of third-party
reimbursement and product pricing; (xiii) product liability and limited
insurance coverage; (xiv) use of hazardous materials; (xv) attraction and
retention of personnel; and (xvi) volatility of stock prices. For additional
information with respect to the foregoing considerations, see "Risk Factors."
Reasons for the Divisional Stock Proposal
The Divisional Stock Proposal was adopted by the Board following its
review of various alternatives to enhance shareholder value over the long term.
Creating separate series of Common Stock intended to reflect separately the
performance of Agouron Pharmaceuticals and the Oncology Division could enable
investors to gain a better understanding of the businesses of Agouron
Pharmaceuticals and the Oncology Division, while preserving for the Company the
financial, strategic and operational benefits it currently enjoys as a single
company. The separate reporting of each Division's results would create a
framework for increased and more focused equity research coverage by the
investment community and would separate the Oncology Division's current
operating losses from the results of operations of Agouron Pharmaceuticals. The
Divisional Stock Proposal is intended to increase the Company's ability to focus
the management of the respective Divisions on maximizing the returns from such
businesses and provide the opportunity to structure incentives for employees of
each Division that are tied directly to the operating results and share price
performance of that Division. The Divisional Stock Proposal is also intended to
provide the Company greater flexibility with regard to raising capital and the
choice of stock consideration for acquisitions and investments, including
strategic partnering transactions. In particular, development, clinical testing
and commercialization of the Oncology Division's products will require
substantial funds. A separate equity security for the Oncology Division is
expected to allow the Oncology Division to be self funding without diluting the
interests of holders of Agouron Pharmaceuticals Stock. See "Proposal 2
Divisional Stock Proposal - Background of and Reasons for the Divisional Stock
Proposal."
Increase in Authorized Stock
The Divisional Stock Proposal increases the number of shares of Common
Stock the Company is authorized to issue from 75,000,000 to 150,000,000 in the
aggregate. If the Divisional Stock Proposal is approved, 75,000,000 shares will
be initially designated Agouron Pharmaceuticals Stock, 25,000,000 shares will be
initially designated Oncology Division Stock and 50,000,000 shares will
initially be undesignated shares of Common Stock. The Board would be authorized
to designate and issue shares in one or more additional series of Common Stock
or to increase the number of designated shares of Agouron Pharmaceuticals Stock
or Oncology Division Stock. The authorized but unissued shares of Agouron
Pharmaceuticals Stock and the Oncology Division Stock would be available for
issuance from time to time by the Company at the discretion of the Board for any
proper corporate purpose. The issuance of such additional shares would not be
subject to approval by the shareholders of the Company unless deemed advisable
by the Board or required by applicable law, regulation or stock market listing
requirements. See "Proposal 2 - Divisional Stock Proposal - Description of
Capital Stock."
The Board believes that an increase in the number of authorized shares
of the Common Stock at this time is in the best interest of the Company in order
to have available the number of shares needed to implement aspects of the
Divisional Stock Proposal and provide for share dividends, stock splits or
acquisitions and other strategic opportunities if such transactions are
determined to be in the best interest of the Company. Other than the issuance of
shares to the holders of Existing Common Stock pursuant to the Divisional Stock
Proposal and the issuance of shares pursuant to the Company's employee stock
option and purchase plans, as amended in connection with the Divisional Stock
Proposal, the Company has no present intention or agreement with respect to
issuance of any of the shares of Agouron Pharmaceuticals Stock, the Oncology
Division Stock or any of the undesignated shares of Common Stock. However, the
Board may in the future consider the creation of additional series of common
stock that track the performance of other lines of the Company's business.
<PAGE>
Certain Federal Income Tax Considerations
The Company has received an opinion from its tax counsel, as more
specifically set forth in "Proposal 2--Divisional Stock Proposal --Certain
Federal Income Tax Considerations," that for United States federal income tax
purposes (i) the Agouron Pharmaceuticals Stock and the Oncology Division Stock
will be treated for federal income tax purposes as common stock of the Company
and (ii) except with respect to cash paid in lieu of fractional shares, holders
of the Agouron Pharmaceuticals Stock and the Oncology Division Stock will not
recognize income, gain or loss in and as a result of the reclassification and
conversion of the Existing Common Stock. However, there are no court decisions
or other authorities bearing directly on transactions similar to the Divisional
Stock Proposal. Further, the Internal Revenue Service ("IRS") has announced that
it will not issue advance rulings on the federal income tax consequences of
transactions similar to the Divisional Stock Proposal. It is possible,
therefore, that the IRS could assert that the Oncology Division Stock or the
Agouron Pharmaceuticals Stock or both represent property other than stock of the
Company. Any such determination could have a material adverse effect on the
Company and result in adverse tax consequences for shareholders of the Company.
See "Proposal 2 -- Divisional Stock Proposal -- Certain Federal Income Tax
Considerations." Shareholders are urged to consult their own tax advisors as to
the particular tax consequences of the classification to them under federal,
state, local or foreign law.
Dissenters' Rights
Under the California Corporations Code, holders of the Existing Common
Stock have no dissenters' rights in connection with the Divisional Stock
Proposal.
Fractional Shares
Fractional shares of Oncology Division Stock will not be issued. If the
number of shares of Oncology Division Stock to be issued to any holder of
Existing Common Stock includes a fraction of a whole share, the Company will pay
to such holder, within 60 trading days after the Effective Date, the cash value
of such fractional share based on the average of the daily average of the high
and low sale prices of the Oncology Division Stock reported on the Nasdaq
National Market during the first ten trading days following the Effective Date.
<PAGE>
COMPARISON OF EXISTING COMMON STOCK WITH AGOURON PHARMACEUTICALS
STOCK AND ONCOLOGY DIVISION STOCK
The following is a comparison of the Existing Common Stock and the
proposed Agouron Pharmaceuticals Stock and Oncology Division Stock. This summary
is qualified in its entirety by the more detailed information contained in this
Proxy Statement and the Annexes hereto. See "Risk Factors," "Proposal 2--The
Divisional Stock Proposal-- Description of Capital Stock;" and the Restated
Articles of Incorporation (the "Restated Articles") included in Annex II to this
Proxy Statement.
<TABLE>
<CAPTION>
THE DIVISIONAL STOCK PROPOSAL
<S> <C> <C> <C>
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock
Stock
SHAREHOLDERS
OF ONE Holders of Existing Common Holders of Agouron Holders of Oncology
COMPANY: Stock will continue to be Pharmaceuticals Stock will Division Stock will
subject to the risks continue to be subject to continue to be subject to
associated with an the risks associated with the risks associated with
investment in the Company an investment in the an investment in the
and all of its businesses, Company and all of its Company and all of its
assets and liabilities. businesses, assets and businesses, assets and
liabilities. Financial liabilities. Financial
effects arising from the effects arising from
Oncology Division that Agouron Pharmaceuticals
effect the Company's that affect the Company's
results of operations or results of operations or
financial condition could, financial condition could,
if significant, affect the if significant, affect the
results of operations or results of operations or
financial condition of financial condition of
Agouron Pharmaceuticals or the Oncology Division or
the market price of the the market price of the
Agouron Pharmaceuticals Oncology Division Stock.
Stock.
Any net losses of either Any net losses of either
Division, and dividends or Division, and dividends or
distributions on, or distributions on, or
repurchases of, either repurchases of, either
series of Common Stock or series of Common Stock or
any Preferred Stock, will any Preferred Stock, will
reduce the assets of the reduce the assets of the
Company legally available Company legally available
for payment of future for payment of future
dividends on the other dividends on the other
series of Common Stock. series of Common Stock.
NUMBER OF SHARES 31,053,380 31,053,380 _________
OUTSTANDING (Based upon
number of shares of
Existing Common Stock
outstanding as of July 28,
1998.)
</TABLE>
<PAGE>
THE DIVISIONAL STOCK PROPOSAL
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock
Stock
INCLUSION IN NASDAQ Nasdaq National Market Application has been made Application has been made
NATIONAL MARKET: under the symbol AGPH. to The Nasdaq Stock to The Nasdaq Stock
Market, Inc. for the Market, Inc. for the
redesignation of Existing listing of Oncology
Common Stock as Agouron Division Stock under the
Pharmaceuticals Stock, symbol __________.
which will trade under the
symbol AGPH.
DIVIDENDS: The Company has never paid The Company intends to The Company intends to
any cash dividends on retain earnings to finance retain earnings to finance
shares of its capital stock. future growth and, future growth and,
therefore, does not therefore, does not
anticipate paying any cash anticipate paying any cash
dividends on the Agouron dividends on the Oncology
Pharmaceuticals Stock in Division Stock in the
the foreseeable future. foreseeable future.
Dividends on the Existing Dividends on the Agouron Dividends on the Oncology
Common Stock are limited to Pharmaceuticals Stock will Division Stock will be
assets of the Company be paid at the discretion paid at the discretion of
legally available for the of the Board based the Board based primarily
payment of dividends under primarily upon the upon the financial
the California Corporations financial condition, condition, results of
Code and are payable at the results of operations and operations and business
discretion of the Board business requirements of requirements of the
based primarily upon the Agouron Pharmaceuticals Oncology Division and the
financial condition, and the Company as a Company as a whole.
results of operations and whole. Dividends will be Dividends will be payable
business requirements of payable out of the lesser out of the lesser of (i)
the Company. of (i) the assets of the the assets of the Company
Company legally available legally available for the
for the payment of payment of dividends and
dividends and (ii) the (ii) the Oncology Division
Agouron Pharmaceuticals Available Dividend
Available Dividend Amount. See "Proposal 2 -
Amount. See "Proposal 2 - The Divisional Stock
The Divisional Stock Proposal - Description of
Proposal - Description of Capital Stock - Dividend
Capital Stock - Dividend Rights."
Rights."
</TABLE>
<PAGE>
THE DIVISIONAL STOCK PROPOSAL
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock
Stock
The Board, subject to the The Board, subject to the
limitations set forth limitations set forth
above, may, in its sole above, may, in its sole
discretion, declare and discretion, declare and
pay dividends exclusively pay dividends exclusively
on the Agouron on the Oncology Division
Pharmaceuticals Stock, Stock, exclusively on the
exclusively on the Agouron Pharmaceuticals
Oncology Division Stock, Stock, or on any
or on any combination combination thereof, in
thereof, in equal or equal or unequal amounts,
unequal amounts, notwithstanding the amount
notwithstanding the amount of dividends previously
of dividends previously declared on either series,
declared on either series, the respective voting or
the respective voting or liquidation rights of
liquidation rights of either series or any other
either series or any other factor.
factor.
VOTING RIGHTS: One vote per share. One vote per share. Each share of Oncology
Division Stock will have
____ vote until June 30,
2000, and on July 1, 2000
and on each July 1 every
two years thereafter, the
number of votes to which
each share of Oncology
Division Stock is entitled
will be adjusted to
reflect the ratio of the
weighted average market
capitalization of the
Oncology Division Stock
and the Agouron
Pharmaceuticals Stock on
such date. The market
capitalization of each
series of stock shall be
determined by multiplying
the number of outstanding
shares of each series by
the Fair Market Value of
such shares. Fair Market
Value means the average of
the daily average of high
and low per share sales
prices as reported by the
Nasdaq National Market (or
the appropriate exchange
or stock market on which
such shares are traded)
for the 20 consecutive
trading days commencing on
the 30th trading day prior
to such date. In the
event such selling prices
are unavailable, Fair
Market Value will be
determined by the Board.
</TABLE>
<PAGE>
THE DIVISIONAL STOCK PROPOSAL
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock
Stock
Except as otherwise Except as otherwise
described herein or as described herein, or as
provided under the provided under the
California Corporations California Corporations
Code, the holders of Code, the holders of
Agouron Pharmaceuticals Oncology Division Stock
Stock and the holders of and the holders of Agouron
Oncology Division Stock Pharmaceuticals Stock will
will vote together as a vote together as a single
single voting class. voting class.
CONVERSION AT OPTION OF None. None. The Company may, at any
COMPANY: time, convert each share
of Oncology Division Stock
into cash or a number of
shares of Agouron Pharmaceuticals
Stock at its Fair Market Value
equal to 125% of the Fair
Market Value of one share
of Oncology Division
Stock.
The ratio of the of the
Fair Market Value of one
share of Oncology Division
ratio of the Fair Market
Value of one share of
Oncology Division Stock to
one share of Agouron
Pharmaceuticals Stock could
be affected by many
factors, including the
results of operations and
financial condition of the
Company and each Division,
trading volume, share
issuances and repurchases
and general economic and
market conditions.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RIGHTS ON DISPOSITION OF None. None. If the Company disposes of
ASSETS OF A DIVISION: all or substantially all
of the properties and
assets allocated to the
Oncology Division (i.e.,
80% or more on a fair value
basis), the Company is
required to exchange each
outstanding share of the
Oncology Division Stock for
any combination of cash
and/or Agouron
Pharmaceuticals Stock at
its Fair Market Value equal
to 125% of the Fair Market
Value of one share of
Oncology Division Stock.
</TABLE>
THE DIVISIONAL STOCK PROPOSAL
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Existing Common Stock Agouron Pharmaceuticals Oncology Division Stock
Stock
The proceeds from any
disposition of properties
and assets that do not
comprise all or
substantially all of the
properties and assets
allocated to the Oncology
Division will be assets of
the Oncology Division and
will be used for its
benefit, subject to the
policies described under
"Proposal 2 The Divisional
Stock Proposal Management
and Allocation Policies."
LIQUIDATION: Holders of Existing Common Holders of Agouron Holders of Oncology
Stock are entitled to Pharmaceuticals Stock will Division Stock will be
receive the net assets of be entitled to a portion entitled to a portion of
the Company, if any, of the assets remaining the assets remaining for
remaining for distribution for distribution to distribution to holders of
to holders of Existing holders of Common Stock in Common in proportion to the
Common Stock. proportion to the aggregate aggregate Liquidation Units
Liquidation Units of of Oncology Division Stock.
Agouron Pharmaceuticals Each share of Oncology
Stock. Each share of Division Stock will have
Agouron Pharmaceuticals ________ Liquidation Units.
Stock will have 100 The number of Liquidation
Liquidation Units. Units to which the Oncology
Division Stock is entitled
is subject to adjustment if
shares of either series are
subdivided, combined or
distributed as a dividend
to the shareholders of such
series.
</TABLE>
<PAGE>
AGOURON PHARMACEUTICALS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial data
of the Company for each of the five years in the period ended June 30, 1998. The
information presented should be read in conjunction with the consolidated
financial statements included in Annex III to this Proxy Statement.
<TABLE>
<CAPTION>
(In thousands, except
per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income (Loss) Data:
Years ended June 30,
Total revenues $ 466,505 $ 132,063 $ 55,955 $ 26,722 $ 16,301
Product sales 409,298 56,969 0 0 0
Research and development expenses(1) 150,657 108,137 71,010 36,317 23,957
Net income (loss) (1) and (2) 13,154 (42,806) (19,523) (12,939) (9,462)
Net income (loss) per share $ .40 $ (1.59) $ (.99) $ (.89) $ (.66)
Shares used in computing net income
(loss) per share 33,214 26,946 19,688 14,592 14,482
Balance Sheet Data:
At June 30,
Working capital $ 127,728 $ 115,786 $ 70,381 $ 8,837 $ 21,039
Total assets 363,337 266,914 102,577 27,097 37,178
Long-term liabilities 6,915 7,217 1,734 1,884 2,285
Stockholders' equity(3) 236,169 191,282 75,583 12,591 24,852
</TABLE>
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net
of tax) for commercial rights to three development stage anti-HIV
products.
(2) In 1997, includes the write-off of $57,500,000 of in-process technology
associated with the acquisition of Alanex Corporation, partially offset
by the realization of $43,800,000 of deferred tax assets associated
with the Company's expectation of future taxable income.
(3) The Company has never declared or paid cash dividends on its common
stock.
<PAGE>
AGOURON PHARMACEUTICALS SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of Agouron
Pharmaceuticals for each of the five years in the period ended June 30, 1998.
The information presented should be read in conjunction with the financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations of Agouron Pharmaceuticals, a
division of Agouron Pharmaceuticals, Inc., included in Annex IV to this Proxy
Statement. <TABLE> <CAPTION>
(In thousands, except
per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income (Loss) Data:
Years ended June 30,
Total revenues $ 451,077 $ 116,793 $ 37,942 $ 23,679 $ 12,100
Product sales 409,298 56,969 0 0 0
Research and development expenses(1) 113,132 81,293 53,763 24,394 10,681
Net income (loss) (1) and (2) 29,364 (34,234) (18,349) (2,664) 1,241
Tax benefit allocated from Oncology
Division 8,023 4,290 0 0 0
Net income (loss) attributable to
Agouron Pharmaceuticals stock 37,387 (29,944) (18,349) (2,664) 1,241
Net income (loss) per share(3) $ 1.1 $ (1.11) $ (.93) $ (.18) $ .08
Equivalent shares used in computing
net income (loss) per share(3) 33,214 26,946 19,688 14,592 14,721
Balance Sheet Data:
At June 30,
Working capital $ 125,933 $ 114,368 $ 71,607 $ 10,640 $ 21,543
Total assets 360,654 262,246 102,577 27,097 37,178
Long-term liabilities 6,915 7,217 1,734 1,884 2,285
Division equity(4) 234,374 189,864 76,809 14,394 25,356
</TABLE>
(1) In 1998, includes in-licensing expenses of $26,000,000 ($15,600,000 net
of tax) for commercial rights to three development stage anti-HIV
products.
(2) In 1997, includes the write-off of $57,500,000 of in-process technology
associated with the acquisition of Alanex Corporation, partially offset
by the realization of $43,800,000 of deferred tax assets associated
with Agouron Pharmaceuticals' expectation of future taxable income.
(3) Historical Agouron Pharmaceuticals per share information as of June 30,
1998 and earnings (loss) per share data for the five years ended June
30, 1998 have been presented in the same capital structure as the
Company although Agouron Pharmaceuticals Stock was not part of the
capital structure of the Company for any of these periods.
(4) Agouron Pharmaceuticals has never declared or paid cash dividends on
its equivalent common stock.
<PAGE>
ONCOLOGY DIVISION SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Oncology Division for each of the five years in the period ended June 30, 1998.
The information presented should be read in conjunction with the financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations of Oncology Division, a division
of Agouron Pharmaceuticals, Inc. included in Annex V to this Proxy Statement.
<TABLE>
<CAPTION>
(In thousands, except
per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Statement of Income (Loss) Data:
Years ended June 30,
<S> <C> <C> <C> <C> <C>
Revenues:
Contract and license $ 15,428 $ 15,270 $ 18,013 $ 3,043 $ 4,201
Operating expenses:
Research and development 37,525 26,844 17,247 11,923 13,276
General and administrative 2,136 1,288 1,940 1,394 1,628
Net income (loss) $ (24,233) $ (12,862) $ (1,174) $ (10,274) $ (10,703)
Net income (loss) per share(1) $ (3.17) $ (1.91) $ (.24) $ (2.82) $ (2.91)
Equivalent shares used in computing
net income (loss) per share(1) 7,643 6,737 4,922 3,648 3,680
Balance Sheet Data:
At June 30,
Working capital $ 1,795 $ 1,418 $ (1,226) $ (1,803) $ (504)
Total assets 2,683 4,668 0 0 0
Division equity(2) 1,795 1,418 (1,226) (1,803) (504)
</TABLE>
(1) Historical Oncology Division per share information as of June 30, 1998
and earnings (loss) per share data for the five years ended June 30,
1998 have been presented at one-quarter of the Company's capital
structure although Oncology Division Stock was not part of the capital
structure of the Company for any of these periods.
(2) Oncology Division has never declared or paid cash dividends on its
equivalent common stock.
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Existing Common Stock trades on the Nasdaq National Market under
the symbol AGPH. The following table sets forth the high and low sales prices
for the Existing Common Stock, as reported by Nasdaq, for the fiscal periods
indicated. All prices have been adjusted to reflect a 2-for-1 stock split
effected in the form of a 100% stock dividend in August 1997.
High Low
Fiscal 1997
Quarter ended September 30 $ 23.125 $ 14.500
Quarter ended December 31 35.750 21.125
Quarter ended March 31 50.500 33.500
Quarter ended June 30 45.500 29.187
Fiscal 1998
Quarter ended September 30 $ 56.500 $ 39.250
Quarter ended December 31 56.500 26.750
Quarter ended March 31 40.000 29.250
Quarter ended June 30 40.250 28.750
Fiscal 1999
Quarter ending September 30
(through September ____)
On July 20, 1998, the trading day prior to the Company's announcement of
its proposal to create a separate operating division, the last reported sale
price for Existing Common Stock on the Nasdaq National Market was $29.50 per
share. On August 12, 1998, the trading day prior to the Company's announcement
of the Divisional Stock Proposal, the last reported sale price for Existing
Common Stock on the Nasdaq National Market was $23.50 per share. On _______,
1998, the last reported sale price for the Existing Common Stock on the Nasdaq
National Market was $___ per share. As of July 28, 1998, there were
approximately 30,000 shareholders of the Existing Common Stock.
The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development of
its businesses.
<PAGE>
RISK FACTORS
You should consider the following factors, in addition to the other
information contained elsewhere in this Proxy Statement and the Exhibits and
Annexes hereto, in connection with the Divisional Stock Proposal. For
definitions of certain defined terms, see "Annex I - Index of Defined Terms."
Risks Related to the Divisional Stock Proposal
Shareholders of One Company; Financial Effects of One Division Could
Adversely Affect the Other Divisions. Notwithstanding the attribution of assets
and liabilities (including contingent liabilities) and shareholders' equity
among the Divisions for the purpose of preparing their respective financial
statements, the change in the capital structure of the Company contemplated by
the Divisional Stock Proposal will not affect legal title to such assets or
responsibility for such liabilities of the Company or any of its subsidiaries.
Financial effects arising from a Division that affect the consolidated results
of operations or financial position of the Company could affect the results of
operations or financial position of the other Division(s) and the market price
of the series of Common Stock related to the other Division(s). Moreover, any
net losses of Agouron Pharmaceuticals or the Oncology Division and any
distributions on, or repurchases of, any shares of capital stock will reduce the
funds of the Company legally available for the payment of dividends on all
classes and series of common stock of the Company. Accordingly, Agouron
Pharmaceuticals and the Oncology Division financial information should be read
in conjunction with the Company's consolidated financial information.
The Company will continue to prepare consolidated financial statements
and also provide such consolidated financial statements to the shareholders of
each of Agouron Pharmaceuticals and the Oncology Division. If the Divisional
Stock Proposal is approved, the Company will provide to shareholders of each of
Agouron Pharmaceuticals and the Oncology Division separate financial statements,
management's discussion and analysis of financial condition and results of
operations, descriptions of businesses and other relevant information for the
respective Division, together with the Company's consolidated financial
statements. Upon request, the Company will provide to any shareholder of a
Division a copy of the separate financial statements related to the other
Divisions.
Limited Separate Shareholder Rights. Under the Divisional Stock
Proposal, holders of the Agouron Pharmaceuticals Stock would not have any legal
rights specifically related to the assets attributed to the Oncology Division,
and the shareholders of the Oncology Division would not have any legal rights
specifically related to the assets attributed to Agouron Pharmaceuticals, except
(i) as set forth in the provisions relating to dividend and liquidation rights
and requirements for a mandatory exchange of the Oncology Division Stock upon
the disposition of all or substantially all of the properties and assets
allocated to the Oncology Division, as described under "Divisional Stock
Proposal--Description of Capital Stock--General Redemption and Conversion
Provisions" and (ii) separate voting rights in limited circumstances as required
by the California Corporations Code, as discussed below under "--Limited
Separate Voting Rights; Variable Voting Rights." Separate meetings for the
holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will not be
held.
Holders of Agouron Pharmaceuticals Stock and Oncology Division Stock
will be common shareholders of the Company, and will continue to be subject to
all the risks associated with an investment in the Company and all of its
businesses and liabilities. The Company and its subsidiaries will continue to be
responsible for each of their respective liabilities.
Limited Separate Voting Rights; Variable Voting Rights. Under the
Divisional Stock Proposal, holders of both the Agouron Pharmaceuticals Stock and
of the Oncology Division Stock will vote together as a single voting group,
except in certain limited circumstances provided under the California
Corporations Code. Accordingly, except in limited circumstances, holders of
shares of one series of Common Stock could not bring a proposal to a vote of the
holders of that series of Common Stock only, but would be required to bring any
proposal to a vote of all common shareholders. If a separate vote on a matter by
the holders of either the Agouron Pharmaceuticals Stock or the Oncology Division
Stock is not required under the California Corporations Code, and if the Board
does not require a separate vote, either class of Common Stock that is entitled
to more than the number of votes required to approve such matter will be in a
position to control the outcome of such vote even if the matter involves a
divergence or conflict of the interests of the holders of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock. See "--Potential
Divergence of Interests; No Specific Procedures for Resolution and "--
Allocation of Proceeds of Mergers or Consolidations."
Conversely, if a separate vote on a matter by the holders of either the
Agouron Pharmaceuticals Stock or the Oncology Division Stock is required under
the California Corporations Code, by stock market rules or by the Board, such
holders of either Agouron Pharmaceuticals Stock or Oncology Division Stock could
prevent approval of such matter,
<PAGE>
even if the holders of a majority of the total number of votes cast or entitled
to be cast with respect to both the Agouron Pharmaceuticals Stock and the
Oncology Division Stock voting together as a group were to vote in favor of it.
See "Proposal 2 -- The Divisional Stock Proposal--Description of Capital
Stock--Voting Rights"."
Each share of Agouron Pharmaceuticals Stock will have one vote. Each
share of Oncology Division Stock will have ____ vote until June 30, 2000, and on
July 1, 2000 and on each July 1 every two years thereafter, the number of votes
to which each share of Oncology Division Stock is entitled will be adjusted to
reflect the ratio of the weighted average market capitalization of the Oncology
Division Stock and the Agouron Pharmaceuticals Stock as of such date. The
relative market capitalization of each series of Oncology Division Stock and
Agouron Pharmaceuticals Stock shall be determined by multiplying the number of
outstanding shares of each series by the Fair Market Value of one share of such
series. The formula is intended to equate the proportionate per share voting
rights of each series of Common Stock to their respective market capitalization
from time to time. Accordingly, the relative voting power per share of Agouron
Pharmaceuticals Stock and Oncology Division Stock will fluctuate based on the
respective Fair Market Values of the two series of Common Stock. "Fair Market
Value" as of any date means the average of the daily average of high and low per
share sales prices as reported by the Nasdaq National Market (or the appropriate
exchange or stock market on which such shares are traded) for the 20 consecutive
trading days commencing on the 30th trading day prior to such date. In the event
such sales prices are unavailable, Fair Market Value will be determined by the
Board. Fair Market Value could be affected by many factors, including the
results of operations of the Company and each of the Divisions, trading volume,
share issuances and repurchases, and general economic and market conditions. See
"Proposal 2 -- The Divisional Stock Proposal--Description of Capital Stock
- --Voting Rights." Changes in the aggregate votes or relative voting power of
Agouron Pharmaceuticals Stock or the Oncology Division Stock could result from
the market's reaction to a decision by the Company's management or Board that is
perceived to affect differently one series of Common Stock in comparison to the
other or the issuance or repurchase of shares of Common Stock of either series.
Upon the approval by shareholders and the filing of the Restated Articles with
the California Secretary of State, holders of Agouron Pharmaceuticals Stock and
Oncology Division Stock will have approximately __% and __%, respectively, of
the total voting power of the Company. As a result, on matters submitted to a
vote of the common shareholders as a group, the preferences of the holders of
Agouron Pharmaceuticals Stock are likely to dominate and determine the outcome
of such vote unless and until the relative number of shares outstanding and/or
the market value of each series of the Company's Common Stock materially
changes.
Fiduciary Duties of the Board; No Definitive Precedent Under California
Law. Under the California Corporations Code, each member of the Board must
discharge his or her duties in a manner he or she believes in good faith to be
in the best interests of the corporation and its shareholders with the care,
including reasonable inquiry, an ordinarily prudent person in a like position
would exercise under similar circumstances. Although the Company is not aware of
any precedent concerning the manner in which principles of California law would
be applied in the context of the capital structure contemplated by the
Divisional Stock Proposal, California courts generally apply the statutory
standard described above to determine if a board of directors has satisfied its
fiduciary duties. Courts interpreting California law have held that directors
satisfy their fiduciary duties if they make a good faith business determination
in an informed and deliberate manner with a careful consideration of the action
to be taken. If the Board acts in accordance with the standards described above
with respect to any matter having a disparate impact upon the holders of Agouron
Pharmaceuticals Stock or the holders of Oncology Division Stock, it should have
a defense to any challenge made by or on behalf of either group of holders.
Nevertheless, a California court hearing a case involving such a challenge may
decide to apply principles of California law other than those discussed above,
or, because such a case could be a case of first impression, may fashion new
principles of California law to decide such a case. There may arise
circumstances involving a divergence or conflict of the interests of the holders
of Agouron Pharmaceuticals Stock and holders of Oncology Division Stock in which
the Board is held to have properly discharged its duty to act in accordance with
its good faith business judgment of the best interests of the Company but in
which holders of Agouron Pharmaceuticals Stock or Oncology Division Stock
consider themselves to be disadvantaged relative to the other series. In such a
case, such holders might not have any remedy under California law with respect
to the circumstances giving rise to the divergence or conflict of interests.
Disproportionate ownership interests of members of the Board in Agouron
Pharmaceuticals Stock or Oncology Division Stock or disparity in the respective
market values of the Agouron Pharmaceuticals Stock and the Oncology Division
Stock held by such directors could create potential conflicts of interest when
directors are faced with decisions that could have different implications for
the different series. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution" and "Proposal 2--The Divisional Stock
Proposal--Certain Management and Allocation Policies--Fiduciary and Management
Responsibilities."
<PAGE>
Management and Allocation Policies Subject to Change. The Board has
adopted certain management and allocation policies described herein with respect
to cash management, the allocation of corporate expenses, rights to
commercialize products, inter-Division transactions and other matters, any and
all of which could be modified or rescinded by the Board, in its sole
discretion, without the approval of shareholders, although there is no present
intention to do so. The Board could also adopt additional policies depending
upon the circumstances. The Board could decide to modify or rescind such
policies, or to adopt additional polices, and any such decision could have
disparate effects upon holders of shares of any series of Common Stock. Any
determination of the Board to modify or rescind such policies, or to adopt
additional policies, including any such decision that would have disparate
impacts upon holders of Agouron Pharmaceuticals Stock and holders of Oncology
Division Stock, would be made in accordance with the Board's good faith business
judgment of the best interests of the Company, taking into consideration the
interests of all common shareholders. See "Proposal 2 -- Divisional Stock
Proposal--Management and Allocation Policies."
Potential Divergence of Interests; No Specific Procedures for
Resolution. Occasions may arise when the interest of the holders of Agouron
Pharmaceuticals Stock and the holders of Oncology Division Stock may diverge or
appear to diverge. Examples include, among others, determinations by the Board
to: (i) allocate resources and financial support to or pursue business
opportunities or operational strategies through one Division instead of one or
more of the other Divisions; (ii) exchange each outstanding share of Oncology
Division Stock for cash or shares of Agouron Pharmaceuticals Stock, (iii)
approve the disposition of all or substantially all of the properties and assets
of the Oncology Division, (iv) allocate consideration to be received by holders
of Common Stock in connection with a merger or consolidation involving the
Company among holders of different series of Common Stock, (v) if and to the
extent there are Designated Shares, allocate the proceeds of future issuances of
the Oncology Division Stock either to Agouron Pharmaceuticals as a reduction in
the number of Oncology Division Designated Shares or to the equity of the
Oncology Division, (vi) pay or omit dividends on any series of Common Stock or
(vii) approve transactions involving the transfer of funds or assets from one
Division to the other or make other operational or financial decisions with
respect to one Division that could be considered to be detrimental to the other
Division.
Other than as described under "Proposal 2 - The Divisional Stock
Proposal - Management and Allocation Policies," no specific procedures have been
adopted for consideration of matters involving a divergence of interests among
the holders of the Company's Common Stock. The policies that have been adopted
could be modified or rescinded by the Board, in its sole discretion, without the
approval of shareholders, although there is no present intention to do so. The
Board could also adopt additional policies. The Board intends to exercise its
judgment from time to time, depending on the circumstances, as to how best to
obtain information regarding the divergence (or potential divergence) of
interests, under what circumstances to seek the assistance of outside advisors,
whether a committee of the Board should be appointed to address the matter, and
how to assess which available alternative is in the best interests of the
Company and all of its shareholders. The Board believes the advantages of
retaining flexibility in determining how best to fulfill its responsibilities in
such circumstances as they may arise outweigh any perceived advantages from
attempting to adopt specific procedures in advance to cover all conceivable
circumstances. Each of the foregoing potential diverging or conflicting
interests is discussed below:
Operational and Financial Decisions. The Board could, in its sole
discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of Agouron
Pharmaceuticals and the Oncology Division, such as transfers of services, funds
or assets between Divisions and other inter-Division transactions, the
allocation of financing opportunities in the public markets and the allocation
of business opportunities, resources and personnel that may be suitable for both
Divisions. Any such decision may favor one Division at the expense of the other.
For example, the decision to obtain funds for one Division may adversely affect
the ability of the other Division to obtain funds sufficient to implement its
growth strategies. All such decisions will be made by the Board in its good
faith business judgment or in accordance with procedures and policies adopted by
the Board from time to time, including the policies described under "Proposal
2--The Divisional Stock Proposal--Management and Allocation Policies," to ensure
that such decisions will be made in a manner consistent with the best interests
of the Company, taking into consideration the interests of all common
shareholders. For further discussion of potential divergence of interests, see
"--Fiduciary Duties of the Board; No Definitive Precedent Under California Law,"
"--Transfers of Funds Between Divisions; Equity Contributions," and "Proposal
2--The Divisional Stock Proposal--Management and Allocation Policies."
Optional Exchange of Oncology Division Stock. The Board could, in its
sole discretion and without shareholder approval, determine to exchange shares
of Oncology Division Stock for cash or shares of Agouron Pharmaceuticals Stock
(or any combination thereof) at a 25% premium over Fair Market Value of the
Oncology Division Stock at any time. Any such determination could be made at a
time when either or both of the Oncology Division Stock and the Agouron
Pharmaceuticals Stock may be considered to be overvalued or undervalued. In
addition, any such conversion at any premium would dilute the interests in the
Company of the holders of the Agouron Pharmaceuticals Stock and would
<PAGE>
preclude holders of the Oncology Division Stock from retaining their investment
in a security that is intended to reflect separately the performance of that
Division. If such exchange is perceived as dilutive to the Agouron
Pharmaceuticals Stock, the market price of such stock may be adversely affected.
The Company cannot predict the impact on the market prices of the Agouron
Pharmaceuticals Stock or the Oncology Division Stock of its ability to effect
any such exchange or the effect, if any, that the exercise by the Company of
this exchange right would have on the market price of the Agouron
Pharmaceuticals Stock or the Oncology Division Stock prevailing at such time. In
determining whether to convert the Oncology Division Stock into the Agouron
Pharmaceuticals Stock, the Board will act in accordance with its good faith
business judgment that any such conversion is in the best interests of the
Company as a whole, but not necessarily in the best interests of either Division
individually. See "Proposal 2--The Divisional Stock Proposal--Description of
Capital Stock--General Redemption and Conversion Provisions."
Fair Value Upon Disposition of Division Assets. As long as the assets
attributed to a Division continue to represent less than substantially all of
the properties and assets of the Company, the Board may approve sales and other
dispositions of any amount of the properties and assets of such Division without
shareholder approval. The proceeds from any such sale would be assets attributed
to such Division and used for its benefit, subject to the management and
allocation policies described under "Proposal 2--The Divisional Stock
Proposal--Management and Allocation Policies." The Restated Articles would
contain provisions that, following a disposition of all or substantially all of
the assets of the Oncology Division, the shares of Oncology Division Stock are
subject to mandatory exchange by the Company for cash or shares of Agouron
Pharmaceuticals Stock (or any combination thereof) at a 25% premium over the
Fair Market Value of the Oncology Division Stock as determined by the trading
prices during a specified period prior to consummation of the disposition.
Consequently, holders of Oncology Division Stock may receive a greater or lesser
premium for their shares than any premium that might be paid by a third-party
buyer of all or substantially all of the assets of the Oncology Division. In
addition, any such exchange could be made at a time when the Oncology Division
Stock or the Agouron Pharmaceuticals Stock may be considered to be overvalued or
undervalued. See "--Optional Exchange of Oncology Division Stock." The terms of
the Oncology Division Stock and the Agouron Pharmaceuticals Stock do not require
the Board to select the option that would result in the distribution with the
highest value to the holders of the Oncology Division Stock or with the smallest
effect on the Agouron Pharmaceuticals Stock. The Board would select an option
based upon its good faith business judgment that such option is in the best
interests of the Company, taking into consideration the interests of all common
shareholders. See "--Fiduciary Duties of the Board; No Definitive Precedent
under California Law."
Allocation of Proceeds upon Issuance of Oncology Division Stock. If and
to the extent there are Oncology Division Designated Shares at the time of any
sale of shares of Oncology Division Stock, the Board would determine the
allocation of the proceeds of such sale between Agouron Pharmaceuticals and the
Oncology Division. In such case, the Board could (assuming there are sufficient
Oncology Division Designated Shares) allocate 100% of the net proceeds of the
sale of Oncology Division Stock to Agouron Pharmaceuticals or allocate all such
proceeds to the Oncology Division, and such net proceeds would be reflected
entirely on the financial statements of the Division to which such proceeds were
allocated. Any such allocation of net proceeds to Agouron Pharmaceuticals would
reduce the number of Oncology Division Designated Shares.
No Assurance of Payment of Dividends. The Company has not paid
dividends in the past and does not anticipate paying any dividends in the
foreseeable future. Any dividends on the Agouron Pharmaceuticals Stock or the
Oncology Division Stock that may be declared by the Board will be payable out of
the lesser of: (i) the funds of the Company legally available for such purpose,
which are determined on the basis of the entire Company, and (ii) the Available
Dividend Amount with respect to the relevant Division, which in general is equal
to the amount legally available for such purpose determined in accordance with
California law applied as if such Division were a separate corporation. Such
dividends are further subject to the prior payment of dividends on outstanding
shares of any class or series of capital stock of the Company with preferential
dividend provisions. Any net losses of the Company (without regard to whether
such losses arose from any specific Dividends), and any dividends or
distributions on, or repurchases of, the Agouron Pharmaceuticals Stock or the
Oncology Division Stock, and dividends on, and certain repurchases of, preferred
stock, will reduce the funds of the Company legally available for payment of
dividends on both the Agouron Pharmaceuticals Stock and the Oncology Division
Stock. Subject to limitations of the California Corporations Code and the
Restated Articles, the Board may declare and pay dividends on Agouron
Pharmaceuticals Stock and Oncology Division Stock in equal or unequal amounts,
or may decide not to declare and pay such dividends, notwithstanding the
relationship between the Available Dividend Amounts for the respective
Divisions, the respective amounts of prior dividends paid on, or liquidation
rights of, the Agouron Pharmaceuticals Stock or the Oncology Division Stock or
any other factor. See "Proposal 2--The Divisional Stock Proposal --Description
of Capital Stock --Dividend Policy and--Dividend Rights."
<PAGE>
Allocation of Proceeds of Mergers or Consolidations. The Restated
Articles do not contain any provisions governing how consideration to be
received by the Company's shareholders in connection with a merger or
consolidation involving the Company (in which the Common Stock is to be
converted into other securities, cash or other property) is to be allocated
among holders of the Oncology Division Stock and the Agouron Pharmaceuticals
Stock. In any such merger or consolidation, the allocation of consideration
would be determined by the Board and would be subject to approval by a majority
of the voting power of all shares of Common Stock of the Company, voting
together as one group.
Transfer of Funds Among Divisions; Equity Contributions. If the
Divisional Stock Proposal is approved by shareholders, all debt incurred or
stock issued by the Company and its subsidiaries following the issuance by the
Company of the Agouron Pharmaceuticals Stock and the Oncology Division Stock
would be (unless the Board otherwise provides) specifically attributed to and
reflected in the financial statements of the Division that includes the entity
which incurred the debt or issued the stock or, in the case of debt or stock
that is not specifically attributed to one of the Divisions, Agouron
Pharmaceuticals. The Board could, however, determine from time to time that debt
incurred or stock issued by entities included in a Division should be
specifically attributed to and reflected in the financial statements of one of
the other Divisions to the extent that the debt is incurred or the preferred
stock is issued for the benefit of such other Division.
To the extent cash needs of one Division exceed cash provided by such
Division, one of the other Divisions may transfer funds to such other Division.
The Company has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities included in
the Divisions are remitted to Agouron Pharmaceuticals and certain cash
disbursements of the other Divisions will be funded by Agouron Pharmaceuticals
on a daily basis. Such transfers of funds between the Divisions will be
reflected as borrowings or as the creation of, or at the option of the Board an
increase or reduction in the number of Designated Shares of the relevant
Division. In addition, the Board has approved an allocation of up to $25 million
in cash from Agouron Pharmaceuticals to the Oncology Division (the "Equity
Line"). Amounts drawn on the Equity Line will be exchanged automatically for
Oncology Division Designated Shares based on the Fair Market Value of the
Oncology Division Stock on the date of exchange. See "Proposal 2--The Divisional
Stock Proposal--Management and Allocation Policies."
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as the creation of, or an increase or reduction in
the number of, Oncology Division Designated Shares. The Board expects to make
such determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Divisions, the investment objectives of
the Divisions, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
Loans from one Division to another Division will bear interest at such
rates and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Division,
the capital expenditure plans and investment opportunities available to each
Division and the availability, cost and time associated with alternative
financing sources.
Although the creation of or any increase in the number of Oncology
Division Designated Shares resulting from an equity contribution by Agouron
Pharmaceuticals to the Oncology Division or an exchange of amounts outstanding
under the Equity Line (or any decrease in such number of Oncology Division
Designated Shares) would be determined by reference to the Fair Market Value of
the Oncology Division Stock as of the date of such event, an increase (or
decrease) could occur at a time when the Oncology Division's stock could be
considered undervalued or overvalued. In addition, the creation of or an
increase in the number of Oncology Division Designated Shares may result in
dilution in net tangible book value per share to the existing holders of the
Oncology Division Stock.
Absence of Approval Rights with Respect to Future Issuances of
Authorized Shares. The approval of the shareholders of the Company will not be
sought by the Company for the issuance of authorized but unissued shares of
Agouron Pharmaceuticals Stock, Oncology Division Stock or additional series
established by the Board or securities of the Company that are convertible into
or exchangeable for such shares, unless deemed advisable by the Board or
required by applicable law, regulation or stock market requirements. In
addition, the Board may, without soliciting the vote of shareholders, designate
and issue shares of a new series of Common Stock intended to reflect the
performance of new or additional divisions as otherwise described herein.
<PAGE>
No Assurances as to Market Price. Because there has been no prior
market for the Agouron Pharmaceuticals Stock and the Oncology Division Stock,
there can be no assurance as to their market prices following issuance thereof.
There can be no assurance that the combined market values of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock held by a shareholder
immediately following the effectiveness of the Divisional Stock Proposal will
equal or exceed the market value of the Existing Common Stock held by such
shareholder prior to the announcement or effectiveness of the Company's
Divisional Stock Proposal, and the combined market value could be less than such
market value of the Existing Common Stock. Until an orderly market develops for
the Agouron Pharmaceuticals Stock and the Oncology Division Stock, their
respective trading prices may fluctuate significantly. If an active trading
market does develop, there can be no assurance that it will be maintained. The
prices at which the shares of Agouron Pharmaceuticals Stock or Oncology Division
Stock will trade will be determined in the trading markets and may be influenced
by many factors, including the consolidated results of the Company, as well as
the respective performance of Agouron Pharmaceuticals and the Oncology Division,
investors' expectations for the Company and each Division, trading volume and
general economic and market conditions. There is no assurance that investors
will assign value to the Agouron Pharmaceuticals Stock or the Oncology Division
Stock based on the reported financial results and fundamental operating
prospects of the related Division. Financial results of the Divisions that
impact the Company's consolidated results of operations or financial condition
could affect the market prices of the Agouron Pharmaceuticals Stock and the
Oncology Division Stock. In addition, the Company cannot predict the impact on
the market values of the Agouron Pharmaceuticals Stock or the Oncology Division
Stock, or certain terms of the securities, such as the ability of the Company to
convert shares of the Oncology Division Stock, the discretion of the Board to
make various determinations, or the impact on the market value of each series of
Common Stock of its voting power. See also "--Risks Related to Agouron
Pharmaceuticals and the Oncology Division - Volatility of Stock Price."
No Adjustment to Liquidating Distributions. In the event of a voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company (other than pursuant to a merger, business combination or sale of
substantially all assets), holders of outstanding shares of each series of
Common Stock would receive the assets, if any, remaining for distribution to
common shareholders on a per share basis in proportion to the respective per
share liquidation units of such series. The Restated Articles provide that each
share of Agouron Pharmaceuticals Stock has 100 liquidation units and each share
of Oncology Division Stock has ___ liquidation units. Because the liquidation
units will not be adjusted to reflect changes in the relative market value or
performance of each of the Divisions, the per share liquidating distribution to
a holder of Agouron Pharmaceuticals Stock or Oncology Division Stock is not
likely to correspond to the value of the assets of Agouron Pharmaceuticals or
the Oncology Division, respectively, at the time of a dissolution, liquidation
or winding up of the Company. See "Proposal 2--The Divisional Stock
Proposal--Description of Capital Stock--Liquidation Rights."
Use of Tax Benefits by Other Division. The Company's management and
allocation policies provide that, to the extent any Division is unable to
utilize its operating losses or other projected tax benefits to reduce its
current or deferred income tax expense, such losses or benefits may be
reallocated to the other Division on a quarterly basis for financial reporting
purposes. Accordingly, although the actual payment of taxes is a corporate
liability of the Company as a whole, separate financial statements are prepared
for each Division and any losses that cannot be utilized by a Division will be
allocated to the profitable Division rather than carried forward to reduce the
future tax liability of the Division generating such losses. Since Agouron
Pharmaceuticals is currently profitable and the Oncology Division is expected to
incur losses for at least the next several years, this could result in the
Oncology Division being charged a greater portion of the total corporate tax
liability and reporting lower earnings after taxes in the future than would have
been the case if such Division had retained its losses or other benefits in the
form of a net operating loss carry forward. See "Proposal 2--The Divisional
Stock Proposal--Management and Allocation Policies."
Limitations on Potential Unsolicited Acquisitions. If Agouron
Pharmaceuticals or the Oncology Division were stand-alone corporations, any
person interested in acquiring either of such corporations without negotiation
with management could seek control of the outstanding stock of such corporation
by means of a tender offer or proxy contest. Although the Divisional Stock
Proposal would create two series of Common Stock that are intended to reflect
the separate performance of the Divisions, a person interested in acquiring only
one Division without negotiation with the Company's management would still be
required to seek control of the voting power represented by all of the
outstanding capital stock of the Company entitled to vote on such acquisition,
including the series of Common Stock related to the other Division. See
"--Limited Separate Shareholder Rights," "--Limited Separate Voting Rights;
Variable Voting Rights," and "Proposal 2--The Divisional Stock
Proposal--Description of Capital Stock--Voting Rights."
Anti-Takeover Considerations. The Company has adopted a Shareholder
Rights Plan pursuant to which each share of Common Stock (including, after
implementation of the Divisional Stock Proposal, if approved, shares of Agouron
Pharmaceuticals Stock and Oncology Division Stock) is accompanied by a preferred
stock purchase right. These rights will cause a substantial dilution to a person
or group that attempts to acquire the Company on terms not
<PAGE>
approved by the Board and may have the effect of deterring hostile takeover
attempts. In addition, the existence of two series of Common Stock could present
complexities and could in certain circumstances pose obstacles, financial and
otherwise, to an acquiring person. The Shareholder Rights Plan and the existence
of the two series of Common Stock could, under certain circumstances, prevent
shareholders from profiting from an increase in the market value of their shares
as a result of a change in control of the Company by delaying or preventing such
change in control. Although the Board has no present intention of doing so, it
could issue shares of Preferred Stock or of a new or existing series of Common
Stock that could be used to create voting or other impediments or to discourage
persons seeking to gain control of the Company and could also be privately
placed with purchasers favorable to the Board in opposing such action.
Risks Related to Agouron Pharmaceuticals and the Oncology Division
Early Stage of Product Development; Uncertainty of Product Development
and Market Acceptance; Technological Uncertainty. The Company has completed the
development and commercialization of only one Agouron Pharmaceuticals product
and no Oncology Division products and does not expect to have any additional
products commercially available until calendar 2000, if at all. While the
Company has received regulatory approval to begin human clinical testing for
certain of its compounds (see Annex IV and Annex V), 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 or be accepted and
successful in the marketplace. 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.
Uncertainty Associated with Clinical Testing. Before seeking regulatory
approvals for the commercial sale of any of its products, the Company must
undertake extensive preclinical and clinical testing to demonstrate their safety
and efficacy in humans. Historical results of clinical testing of VIRACEPT and
the Company's other clinical programs are not necessarily predictive of future
results. There can be no assurance that clinical studies of products under
development will demonstrate the safety and efficacy of such products. The
failure to adequately demonstrate the safety and efficacy of a therapeutic
product could delay or prevent regulatory approval of the product. There can be
no assurance that unacceptable toxicities or side effects will not occur at any
time in the course of human clinical trials or commercial use of the Company's
drugs. The appearance of any such unacceptable toxicities or side effects could
interrupt, limit, delay or abort the development of any of the Company's drugs
or, if previously approved, necessitate their withdrawal from the market.
Furthermore, there can be no assurance that disease resistance will not limit
the efficacy of VIRACEPT or other of the Company's drugs, if any. 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. Additionally, the Company has made and may in the
future make changes to the formulation of its drugs and/or the processes for
manufacturing its drugs. Any such changes in formulation or manufacturing
processes could result in delays in conducting further preclinical and clinical
testing. There can be no assurance that any products under development by the
Company will be safe when administered to patients. Delays in planned patient
enrollment in the Company's current clinical trials or future clinical trials
may result in increased costs, program delays or both. There can be no assurance
that if clinical trials are completed the Company will be able to submit a New
Drug Application and/or Product License Application as scheduled or that any
such application will be reviewed and approved by FDA in a timely manner, or at
all. 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
humans.
<PAGE>
History of Operating Losses and Uncertainty of Continued Profitability
of Agouron Pharmaceuticals; Dependence on VIRACEPT. Agouron Pharmaceuticals has
had product sales only since fiscal 1997 and reported net income only for fiscal
1998. Continued profitability of Agouron Pharmaceuticals will be dependent in
the foreseeable future upon the sales of VIRACEPT. There can be no assurance
that commercial sales of VIRACEPT alone will be able to maintain Agouron
Pharmaceuticals' substantial rate of growth in revenues or to either generate or
maintain profitable operating results on a consistent basis. Any disruption in
the supply or manufacturing process for VIRACEPT may have a material adverse
effect on revenues. Operating results will also be impacted by the timing and
amount of Agouron Pharmaceuticals' research, development and clinical trial
programs, the level of its selling and marketing efforts, the efficiency and
cost of its manufacturing activities, the nature of its business development
activities and on the timing and receipt of fees from existing and future
collaborative relationships.
History of Operating Losses; Lack of Revenues of the Oncology Division.
The Oncology Division has recorded operating losses since inception. The
Oncology Division has no product sales and the only source of revenues in the
past has been from payments by collaborative partners. The collaborative
agreements with Hoffmann-LaRoche Inc, and F. Hoffmann-La Roche Ltd that
accounted for substantially all of Oncology Division's contract and license
revenues for fiscal 1998, 1997 and 1996 have been terminated, and the Company
anticipates no contract and license revenues for the Oncology Division for
fiscal 1999. Because all of the Oncology Division's potential therapeutic
products will require substantial additional research, development and
preclinical and clinical testing prior to commercialization, it may be several
years, if ever, before the Oncology Division recognizes revenue from sales and
royalties on these potential products. Accordingly, the Oncology Division is
expected to experience significant operating losses for at least the next
several years. The Oncology Division may never achieve a profitable level of
operations and that profitability, if achieved, may not be sustained on an
ongoing basis. For the immediate future, the Oncology Division intends to rely
entirely on the funding capabilities of Agouron Pharmaceuticals. There can be no
assurance that Agouron Pharmaceuticals will be capable of continuing to fund the
Oncology Division as currently anticipated.
Additional Financing Requirements and Access to Capital. The Company
has expended approximately $449,000,000 on research and development activities
since its inception. Both Agouron Pharmaceuticals and the Oncology Division
intend 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.
The Company believes that its current capital resources and existing
contractual commitments will enable it to maintain its current and planned
operations through at least fiscal 1999. 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 by
either or both Agouron Pharmaceuticals or the Oncology Division before the
commercialization of any additional products. The future capital requirements of
both Agouron Pharmaceuticals and the Oncology Division will depend on many
factors, including the product contribution to Agouron Pharmaceuticals from
commercial sale of VIRACEPT, 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 capital resources of Agouron
Pharmaceuticals are insufficient to meet current or planned operating
requirements of both Agouron Pharmaceuticals and the Oncology Division, Agouron
Pharmaceuticals or the Oncology Division may seek to obtain additional funds
through equity or debt financing, 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 Agouron Pharmaceuticals or the Oncology Division. If adequate
funds are not available, Agouron Pharmaceuticals or the Oncology Division may be
required to delay or eliminate expenditures for certain programs, cancel
licenses from third parties or to license third parties to commercialize
products or technologies that either Agouron Pharmaceuticals or the Oncology
Division would otherwise seek to develop and commercialize itself, any of which
could have a material adverse effect on Agouron Pharmaceuticals, the Oncology
Division or the Company.
<PAGE>
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, licensors, 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.
Manufacturing Capabilities. The Company is dependent on a number of
contract manufacturers for the commercial manufacture of VIRACEPT under current
Good Manufacturing Practices ("GMP"). Failure to meet GMP standards would have
an adverse impact on the Company's business. No assurance can be given that such
manufacturers can be retained or that such manufacturers will continue to timely
deliver sufficient product quantities at acceptable costs. 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 its collaborators
and with manufacturers to supply significant portions of its clinical trial
material requirements, the current facilities and existing manufacturing
relationships of the Company may not be 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 limited experience in
such commercial manufacturing and related matters and no assurance can be given
that the Company will be able to continue 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.
Sales and Marketing Capabilities. While the Company has established its
capabilities in the sales, marketing and distribution of pharmaceutical products
in the United States and Canada, there can be no assurance that such
capabilities will be sufficient or successfully maintained in the United States
or other markets outside of the United States and Canada. Further, there can be
no assurance that any products, if approved, will gain market acceptance. The
Company's results of operations and cash flows for the next several years will
be highly dependent upon the timing and extent of VIRACEPT sales.
Patents and Proprietary Technology. The Company has been granted
certain patents relating to its inventions in the United States and certain
other countries. The Company also has various pending patent applications
claiming inventions in various fields. The Company expects to continue to
attempt to secure patent protection for its potential products, and that any
such patents will be owned by the Company and licensed or be made available to
the applicable Division. The Company believes that its current and future patent
portfolio is important to its future operations.
Patent protection is recognized as being important to the
pharmaceutical industry in general, e.g., as providing a period of exclusivity
against generic competition, which serves as a return for the great expenditure
of resources incurred in discovering and developing a drug and for advancing the
state of the art. The commercial success of the products of both Agouron
Pharmaceuticals and the Oncology Division may depend, in part, on the Company's
ability to enforce its patents against infringing competitors. Although the
Company's issued patents, pending patent applications, and future patents may be
of importance to the Divisions, there can be no assurance that additional
patents will be granted or that any patents now or hereafter granted will be of
commercial benefit.
The granting of a patent is not conclusive as to the validity or
enforceability of the claims therein, which define the scope of the Company's
exclusive rights. The validity and enforceability of a United States patent, as
well as of a patent from certain other countries, may be challenged by a third
party in a litigation or proceeding before a court or patent office. If the
validity or enforceability of a patent claim is successfully challenged in such
a litigation or proceeding, then third parties may be free to use a claimed
invention, in some cases without payment to the Company. Moreover, there can be
no assurance that patent claims covering a Division's products will not be
infringed or that infringement will be avoided by successfully designing around
a claimed invention.
<PAGE>
There also can be no assurance that the technology or products of the
Divisions, whether patented or not, will not infringe third parties' patents.
The Company is aware of certain patent applications or patents of third parties,
and there may be other patents or patent applications, covering subject matter
related to Agouron Pharmaceuticals or the Oncology Division's technology and
potential products. Research, development or commercialization of the Company's
products may require that the Company obtain licenses under such patent
applications, if granted, or patents of third parties. However, there can be no
assurance that the Company will be able to obtain such licenses on commercially
reasonable terms or at all. If a third party obtains a patent covering a product
of a Division, the Company could be required to defend against an infringement
action, which could be costly and time-consuming. Furthermore, any fees or
royalties required to be paid under a patent license, settlement agreement, or
litigation judgment could be significant.
<PAGE>
The Company seeks to protect certain unpatented proprietary technology
and know-how through the maintenance of trade secrets or confidential
information. Certain technology and know-how of importance to the Company's
drug-discovery and manufacturing operations depend on the skills, knowledge, and
experience of its scientific and technical personnel, for which patent
protection may not be available. To help protect its rights, the Company
generally requires all employees, relevant consultants and advisors, and
collaborators to enter into confidentiality agreements. 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 its unauthorized use or disclosure. Competitors may independently
develop substantially equivalent technology, undermining the value of the
Company's trade secrets. Third parties may even obtain patents covering the
Company's proprietary technology or know-how, which may adversely affect a
Division's ability to use such technology or know-how.
The costs of obtaining and enforcing patents and of protecting
proprietary technology may involve a substantial commitment of either or both
Division's resources. Any such commitment may divert resources from other
operations of the impacted Division.
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 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. The Company also competes
with respect to manufacturing efficiency and sales and marketing capabilities,
areas in which the Company has limited 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, licensors 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,
licensors 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.
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.
<PAGE>
Volatility of Stock Price. The market price of the Existing Common
Stock, like that of the common stock of other biopharmaceutical companies, has
in recent years fluctuated significantly, and it is likely that should the
Divisional Stock Proposal be approved and implemented the market prices of
Agouron Pharmaceuticals Stock and Oncology Division Stock will fluctuate
significantly in the future. Factors such as announcements of technological
innovations or new commercial products by a Division or its competitors,
progress with clinical trials, governmental regulation, changes in reimbursement
policies, developments in patent or other proprietary rights of a Division or
its competitors, including litigation, developments in a Division's
relationships with current or future collaborators and licensees, if any, public
concern as to the safety and efficacy of drugs developed by a Division and its
competitors, changes in estimates of a Division's performance by securities
analysts, and general market conditions may have a significant effect on the
market price of the Agouron Pharmaceuticals Stock and Oncology Division Stock.
Fluctuations in financial performance of the respective Divisions from period to
period also may have a significant impact on the market price of the Agouron
Pharmaceuticals Stock and Oncology Division Stock.
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.
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 for commercial sales. There can be no assurance that the
Company will be able to 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, sales and marketing and
managerial personnel. Competition for such personnel is intense and there can be
no assurance that the Company 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. The loss of or failure to recruit scientific, technical, sales,
marketing, manufacturing and managerial personnel could have a material adverse
effect on the Company.
<PAGE>
GENERAL
This Proxy Statement and the enclosed form of Proxy are furnished in
connection with the solicitation of Proxies by and on behalf of the Board for
use at the Meeting to be held at the Sheraton Grande Torrey Pines, 10950 North
Torrey Pines Road, La Jolla, California 92037, on Wednesday, October 28, 1998 at
10:00 a.m., San Diego time, and at any adjournments or postponements thereof.
Any shareholder returning the enclosed Proxy may revoke it prior to its
exercise by voting in person at the Meeting or by filing with the Secretary of
the Company a written revocation or a duly executed Proxy bearing a later date.
All shares represented by valid Proxies will be voted in accordance
with the directions specified thereon and otherwise in accordance with the
judgment of the proxyholders. Any duly executed Proxy on which no direction is
specified will be voted FOR the election of the nominees named herein to the
Board and FOR Proposals 2, 3, 4 and 5 described in the Notice of Meeting and
this Proxy Statement.
Only shareholders of record as of the close of business on September 14,
1998 (the "Record Date") will be entitled to vote at the Meeting. As of
September 14, 1998, there were outstanding _______ shares of Existing Common
Stock.
Holders of Existing Common Stock are entitled to one vote per share on all
matters brought before the Meeting and to cumulate votes for the election of the
nine directors. Therefore, in voting for directors, each outstanding share of
Existing Common Stock is entitled to nine votes which may be cast for one
candidate or distributed in any manner among the nominees for director. However,
the right to cumulate votes in favor of one or more candidates may not be
exercised until the candidate or candidates have been nominated and the
shareholder has given notice at the Meeting of the intention to cumulate votes.
The persons authorized to vote shares represented by executed Proxies for
Existing Common Stock in the enclosed form (if authority to vote for the
election of directors is not withheld) will have full discretion and authority
to vote cumulatively and to allocate votes among any or all of the nominees as
they may determine or, if authority to vote for a specified candidate or
candidates had been withheld, among those candidates for whom authority to vote
has not been withheld.
The required quorum for the Meeting shall consist of a majority of the
outstanding shares of Existing Common Stock which are entitled to vote in person
or by proxy at the Meeting. Assuming that a quorum is present at the Meeting,
the nine persons receiving the highest number of votes will be elected to the
Board. The approval of Proposal 2 will require the affirmative vote of a
majority of the outstanding shares of Existing Common Stock. Each of Proposals
3, 4 and 5 requires the affirmative vote of a majority of the shares present in
person or represented by proxy at the Meeting, provided that those affirmatively
voted shares also constitute at least a majority of the required quorum.
Abstentions with respect to any matter are treated as shares present or
represented and thus have the same effect as negative votes. If a broker which
is the record holder of certain shares indicates on a proxy that it does not
have discretionary authority to vote on a particular matter as to such shares,
or if shares are not voted in other circumstances in which proxy authority is
defective or has been withheld with respect to a particular matter, these
non-voted shares will be counted for quorum purposes but are not deemed to be
present or represented for purposes of determining whether shareholder approval
of that matter has been obtained (however, they will have the same effect as
negative votes with respect to Proposal 2 and may, depending upon the number of
shares voted, have the same effect as negative votes with respect to Proposals
3, 4 and 5).
The expense of printing and mailing Proxy material will be borne by the
Company. In addition to the solicitation of Proxies by mail, solicitation may be
made by certain directors, officers or other employees of the Company by
telephone, telegraph, facsimile or in person. No additional compensation will be
paid to such persons for such solicitation. However, the Company will request
brokers, nominees, fiduciaries, custodians and others to forward Proxy materials
to the beneficial owners of the Company's shares and the Company will reimburse
such brokers or other persons for their reasonable out-of-pocket expenses
incurred in connection with forwarding such materials. The Company has retained
D.F. King & Co., Inc. to perform various proxy advisory, distribution and
solicitation services at a cost of approximately $_____ plus reimbursement of
out-of-pocket expenses.
<PAGE>
PROPOSAL 1 - ELECTION OF DIRECTORS
Under the bylaws of the Company, the number of directors is to be not less
than six nor more than eleven, with the actual number to be fixed from time to
time by resolution of the Board. The Board has fixed at nine the number of
directors to be elected at the 1998 Annual Meeting of Shareholders.
Nine directors are to be elected at the Meeting, each to serve until the
next Annual Meeting of Shareholders and until their respective successors are
elected or appointed. Unless authority to vote for all directors is withheld, it
is intended that the shares represented by the enclosed Proxy will be voted for
the election of the nominees named. In the event any of them shall become unable
or unwilling to accept nomination or election, the shares represented by the
enclosed Proxy will be voted for the election of such other person as the Board
may recommend in his or her place. The Board has no reason to believe that any
such nominee will be unable or unwilling to serve.
The nine nominees for election as directors, all of whom are members of the
present Board, are Peter Johnson, Gary E. Friedman, John N. Abelson, Patricia M.
Cloherty, A.E. Cohen, Michael E. Herman, Irving S. Johnson, Antonie T. Knoppers
and Melvin I. Simon. Their terms will last until the 1999 Annual Meeting of
Shareholders. Certain information concerning the nominees for directors is set
forth below. The Board recommends that you vote FOR the nominees for directors,
as set forth in Item 1 on the Proxy Card.
Nominees for Election as Directors
Name Age Position
Peter Johnson 53 President, Chief Executive Officer and
Director
Gary E. Friedman 51 Corporate Vice President,
General Counsel, Secretary and Director
John N. Abelson, Ph.D.(1) 59 Director
Patricia M. Cloherty(2) 56 Director
A.E. Cohen(1) 62 Director
Michael E. Herman(1) 57 Director
Irving S. Johnson, Ph.D. 73 Director
Antonie T. Knoppers, M.D.,Ph.D.(2) 83 Director
Melvin I. Simon, Ph.D.(2) 61 Director
(1) Member of Directors Compensation Committee
(2) Member of Audit 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.
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. In June 1997, Mr. Friedman
was promoted to corporate vice president. 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.
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.
<PAGE>
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. From 1993 until 1997 she
was president of Patricof. From 1997 to the present, Ms. Cloherty has been
executive co-chairman as well as a general partner 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.
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
Vasomedical, Inc., and is a member of the board of directors of Akzo Nobel N.v.,
Teva Pharmaceutical Industries Ltd., Smith Barney (Mutual Funds), and
Pharmaceutical Product Development, Inc., all of which are public companies. Mr.
Cohen also serves as trustee to The Population Council and is a consultant to
Chugai Pharmaceutical Co. Ltd., Tokyo ("Chugai"), and serves as chairman of the
board of Chugai's U.S. subsidiary companies. Mr. Cohen also is a member of the
board of directors of Lung Check, Inc.
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 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, a
public company, 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 Eli Lilly and Company, 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. and Ligand Pharmaceuticals
Incorporated, and is on the scientific advisory board of ELAN Corporation, 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 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.
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.
Committees and Meetings of the Board
The Company has a Directors Compensation Committee and an Audit Committee.
The Company does not have a Nominating Committee. During the fiscal year ended
June 30, 1998, the Board held six meetings.
During the fiscal year ended June 30, 1998, members of the Audit Committee
consisted of Ms. Cloherty, Chairperson, Dr. Knoppers and Dr. Simon. The Audit
Committee oversees the Company's accounting and financial reporting policies,
makes recommendations to the Board regarding the appointment of independent
accountants, reviews with the independent accountants the accounting principles
and practices followed by the Company and the adequacy thereof, approves the
Company's annual audit and financial results and any material change in
accounting principles, policies and procedures and makes recommendations to the
Board with regard to any of the preceding. The Audit Committee held two meetings
in the fiscal year ended June 30, 1998.
<PAGE>
During the fiscal year ended June 30, 1998, members of the Directors
Compensation Committee consisted of Mr.EHerman, Chairman, Dr. Abelson, and Mr.
Cohen. The Directors Compensation Committee recommends to the Board the
Company's overall compensation and the individual compensation elements for the
Company's executive officers and directors. The Directors Compensation Committee
does not approve grants of stock options to executive officers and directors
under the Company's stock option plans. The Directors Compensation Committee
held two meetings in the fiscal year ended June 30, 1998. During fiscal 1998,
the full Board was responsible for approving grants of options to executive
officers and directors.
No incumbent director attended fewer than 75% of the aggregate of the Board
and Committee meetings in which such director was entitled to participate.
<PAGE>
PROPOSAL 2 - THE DIVISIONAL STOCK PROPOSAL
General
The shareholders of the Company are being asked to consider and approve
the Divisional Stock Proposal which, if approved, will amend and restate the
Company's Articles of Incorporation to increase the number of shares of
authorized Common Stock to 150,000,000 shares, of which 75,000,000 shares would
initially be designated as Agouron Pharmaceuticals Stock and 25,000,000 shares
would initially be designated as Oncology Division Common Stock, to provide
authorization to the Board to designate and issue any undesignated shares in one
or more additional series of Common Stock and to determine the number of shares,
rights, preferences, privileges and restrictions of any such series, to increase
or decrease the number of shares of any existing series including the Agouron
Pharmaceuticals Stock and the Oncology Division Stock, and to convert each share
of the Company's existing Common Stock into one share of Agouron Pharmaceuticals
Stock and ___ share of Oncology Division Stock.
The reclassification and conversion of the Existing Common Stock into
Agouron Pharmaceuticals Stock and Oncology Division Stock (the
"Reclassification") are intended for United States federal income tax purposes
to be tax free to both the Company and its shareholders except with respect to
cash paid in lieu of fractional shares. See "--Certain Federal Income Tax
Considerations."
The ratio of ___ share of Oncology Division Stock for each share of
Existing Common Stock was determined by the Board in consultation with
PaineWebber, the Company's financial advisor in connection with the Divisional
Stock Proposal, and is based upon the estimated relative market value of the
Oncology Division, as determined by PaineWebber and the Board, and the desired
initial trading range of the Oncology Division Stock. The market value of the
Oncology Division was based on prevailing market conditions, financial and
operating information of the Oncology Division, and the market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Oncology Division.
IF THE DIVISIONAL STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS,
THE ONCOLOGY DIVISION STOCK WILL NOT BE CREATED, AND THE EXISTING COMMON STOCK
WILL NOT BE RECLASSIFIED AND CONVERTED INTO AGOURON PHARMACEUTICALS STOCK AND
ONCOLOGY DIVISION STOCK.
If the Divisional Stock Proposal is approved by the shareholders at the
Annual Meeting, the Company anticipates that the Restated Articles (see Annex
II) will be filed with the California Secretary of State shortly thereafter.
However, the Board could choose to effect the Divisional Stock Proposal at any
time thereafter, or not to effect the Divisional Stock Proposal depending on the
circumstances at the time. The Restated Articles will become effective upon
filing with the California Secretary of State (the "Effective Date").
Certificates formerly representing shares of Existing Common Stock that are held
by shareholders will be deemed to represent an equal number of shares of Agouron
Pharmaceuticals Stock. New certificates representing shares of Agouron
Pharmaceuticals Stock will be issued in replacement of certificates formerly
representing shares of Existing Common Stock as such certificates are received
and canceled by the transfer agent. Shareholders should not mail in their stock
certificates evidencing Existing Common Stock to either the Company or its
transfer agent in connection with the Divisional Stock Proposal. Certificates
representing Oncology Division Stock will be distributed as promptly as
practicable thereafter. At any time prior to filing the Restated Articles with
the California Secretary of State, including after adoption by the shareholders
of the Company, the Board may abandon the Divisional Stock Proposal, or any part
thereof, without further action by the shareholders.
Fractional shares of Oncology Division Stock will not be issued in
connection with the Reclassification. If more than one share of Existing Common
Stock is held by the same holder of record, the Company will aggregate the
number of shares of Oncology Division Stock issuable to such holder upon such
distribution (including any fractions of shares). If the number of shares of
Oncology Division Stock calculated to be issued to any holder of record of
Existing Common Stock includes a fraction of a whole share, the Company will pay
to such record holder the cash value of such fractional share within 60 trading
days of the Effective Date, based upon the average of the daily average of high
and low prices of the Oncology Division Stock on the Nasdaq National Market for
each of the first ten trading days following the Effective Date. Shareholders
who own their stock beneficially through brokers or other nominees listed as
holders of record will have their fractional shares handled according to the
practices of such broker or nominee, which may result in such shareholders
receiving a price that is higher or lower than the price paid by the Company to
holders of record. If the necessary trading of Oncology Division Stock does not
occur within 20 trading days after the Effective Date, the Board
<PAGE>
will determine the cash value of a share of Oncology Division Stock and the
amount to be paid in lieu of fractional shares.
The authorized but unissued shares of the two new series of the
Company's Common Stock and the undesignated shares of Common Stock will be
available for issuance from time to time by the Company at the discretion of the
Board for any proper corporate purpose, which could include raising capital,
payment of stock dividends, providing compensation or benefits to employees or
acquiring companies or businesses. Such Common Stock would provide the Board
with a means to complete acquisitions or to further divide the Company into
additional divisions, through the creation of separate series of Common Stock.
In addition, the Board could use undesignated shares of Common Stock to increase
or decrease the number of shares of an existing series of Common Stock,
including Agouron Pharmaceuticals Stock and Oncology Division Stock, but not
below the number of outstanding shares of that series. The issuance of such
additional shares or series would not be subject to approval by the shareholders
of the Company unless deemed advisable by the Board or required by applicable
law, regulation or the listing requirements of the stock market or stock
exchange upon which the Company's shares are listed.
Background Of And Reasons For The Divisional Stock Proposal
The Divisional Stock Proposal has been approved by the Board with the
goal of creating flexibility for the future growth of the Company, and to
advance the Company's financial and strategic objectives, all in an effort to
enhance the overall return to the holders of Existing Common Stock.
If Agouron shareholders approve the Divisional Stock Proposal, the
resulting amendments to the Company's Articles of Incorporation will create two
series of Common Stock of the Company, namely the Agouron Pharmaceuticals Stock
and the Oncology Division Stock, each having the rights and privileges described
elsewhere in this Proxy Statement. The Divisional Stock Proposal will also
authorize the Board to issue in one or more additional or existing series of
Common Stock with each new series having the rights, preferences, privileges and
restrictions determined by the Board before the issuances of any shares of such
series. See "- Description of Capital Stock" and Annex II.
The Oncology Division Stock is intended to reflect the value and track
the performance of the Oncology Division. Through the Oncology Division, the
Company seeks to create a focused, integrated oncology business which will
develop and commercialize novel products for the diagnosis, treatment and
prevention of cancer. The Oncology Division will, on its own and in combination
with partners and with Agouron Pharmaceuticals (when appropriate) develop,
manufacture and market those oncology related products.
The Board reviewed in detail the financial performance of the Company
since the FDA approved the sale of VIRACEPT in March 1997. Since that date,
revenues from VIRACEPT sales have grown steadily, allowing the Company to
continue its vigorous investment in research and development ("R&D") for new
products. Such R&D expenditures in non-VIRACEPT related programs, however, have
impacted and are expected to continue to impact the overall financial
performance of the Company and overall shareholder return.
Approximately 25% of the Company's total anticipated R&D expenditures
during the Company's 1999 fiscal year are expected to be incurred in oncology
related programs. Currently the Company has four clinical development programs
and four preclinical research and development programs in the oncology field.
The Board believes that tracking the oncology operations separately from the
rest of the Company will help the Company realize what it believes to be the
unappreciated value of the Company's R&D pipeline of products for oncology while
at the same time reducing the impact of those R&D expenditures on the financial
results of the Company's VIRACEPT-driven non-oncology business.
In addition to its review of the financial performance of the Company,
the Board considered the Company's present organizational structure, which does
not completely recognize and resolve the inherent conflict between a profitable
business and a business division still in the development stage. For these and
other reasons, management engaged PaineWebber to discuss with the Company
various alternatives designed to achieve greater overall value in these
respective businesses. PaineWebber advised that the separation of the
development stage oncology division from the VIRACEPT driven non-oncology
business, and the creation of two classes or series of Common Stock to track
those divisions, should result in the market separately evaluating the
performances of Agouron Pharmaceuticals and the Oncology Division.
<PAGE>
At meetings held on February 12, 1998 and August 6, 1998, the Board
considered a variety of structural proposals to increase the overall value of
the Existing Common Stock to its shareholders. The Board evaluated alternatives
available to the Company in view of its strategic objectives, capital
requirements, past financial results and other factors. They had extensive
discussions with senior financial and legal officers of the Company as well as
representatives of PaineWebber. Among the alternatives which the Board
considered were (i) the preservation of the Company's current equity and
operating structure; (ii) the separation of various of the Company's businesses
through a distribution (for example, in a spin-off) of certain programs to the
Company's shareholders or the creation of special purpose financing entities;
(iii) the license to third parties of certain of the Company's technology; and
(iv) the creating of two classes or series of Common Stock to reflect separately
the results of the Company's profitable anti-viral related business and its
development stage oncology division.
The Board determined that the license to third parties of the oncology
assets or other technology would not realize the full value of those development
stage programs. The Board also determined that a spin-off to shareholders of a
separate company owning the Company's other technologies could create
significant tax, credit and control issues. Following deliberation over and
consideration of the advantages and disadvantages of the various alternatives,
the Board concluded that the Divisional Stock Proposal was the best alternative
for the Company and its shareholders.
The Board's adoption of the Divisional Stock Proposal is part of its
ongoing effort to increase the long-term value of the Company.
In reaching its conclusion, the Board identified the following as the
advantages of the Divisional Stock Proposal:
o The creation of two series of Common Stock intended to
reflect separately the performance of Agouron
Pharmaceuticals and the Oncology Division offers the
opportunity to increase shareholder value by more
specifically tracking the financial performance of each
Division. Separate equity securities could enable
investors to gain a better understanding of the businesses
of Agouron Pharmaceuticals and the Oncology Division and
allow shareholders to invest in either or both
securities depending on their investment objectives. The
separate reporting of each Division's results would create
a framework for increased and more focused equity research
coverage by the investment community and would separate the
Oncology Division operating results from the results of
operations of Agouron Pharmaceuticals.
o The Divisional Stock Proposal will provide financial
and strategic flexibility for Agouron Pharmaceuticals and
the Oncology Division to raise capital and to engage in
acquisitions, strategic investments, and other
transactions affecting either Agouron Pharmaceuticals or
the Oncology Division as a result of the availability of
two different equity securities for issuance. In
particular, development, clinical testing and
commercialization of the Oncology Division's products
will require substantial funds. A separate equity security
for the Oncology Division is expected to allow the Company to
raise capital through offerings of Oncology Division Stock
without diluting the interests of holders of Agouron
Pharmaceuticals Stock.
o Creating separate series of Common Stock, each of which is
designed to reflect the operating results of a distinct
division, increases the Company's ability to focus the
management of the respective Divisions on maximizing the
returns from such businesses and provides the opportunity to
structure incentives for employees that are tied directly to
the business results and share price performance of that
Division.
o The Divisional Stock Proposal will retain for the Company
the advantages of doing business as a single company.
Specifically, the Company will retain ownership of all of its
technologies, which the Board considers to be a significant
long-term strategic benefit given what it believes to be
the potential of the products under development. Further,
as part of one company, each Division will be in a position
to benefit from cost savings and synergies with the other
compared to the costs each Division would incur if it
operated separately. These include management and
administrative synergys, a lower overall borrowing cost
as a result of the credit rating of the combined Company and
potential federal, state and local tax benefits that may be
greater for the combined Company than for the two Divisions
operating separately.
<PAGE>
o The ability of the Board to create one or more additional
series of Common Stock or to increase or decrease the number
of shares in existing series without the need to obtain
shareholder approval at the time of creation of each
additional series would provide the Board with a means to act
quickly and definitively in future acquisitions or to further
divide the Common Stock of the Company into additional series.
o Implementation of the Divisional Stock Proposal is
intended to be tax free for United States federal income
tax purposes to the Company and its shareholders except with
respect to cash paid in lieu of fractional shares. See
"--Certain Federal Income Tax Considerations."
o By permitting the Board to redeem the Oncology Division Stock
under certain conditions, the Board retains the flexibility to
consider possible future restructuring options.
The Board also considered the following potential disadvantages of the
Divisional Stock Proposal:
o The Divisional Stock Proposal requires a complex capital
structure which may not be well-understood by investors and
thus could inhibit the efficient valuation of either or both
series of Common Stock.
o There is limited experience with the use of divisional stock
in companies having a business unit with an established
history of earnings and another business unit in the
development stage.
o There are potential diverging or conflicting interests of
the two Divisions and issues that could arise in resolving
any conflicts. See "--Management and Allocation
Policies" and "Risk Factors--Potential Divergence of
Interests; No Specific Procedures for Resolution."
o Investors in the Oncology Division Stock or Agouron
Pharmaceuticals Stock will be exposed to the risks of the
Company's consolidated businesses and liabilities such as tort
or product liability claims and shareholder lawsuits because
both Divisions remain legally a part of the Company. See "Risk
Factors--Risks Related to the Divisional Stock Proposal --
Shareholders of One Company; Financial Effects of One Division
Could Adversely Affect the Other Division" and "--Management
and Allocation Policies."
o Divisional Stock will create a possible inability to use the
pooling method of accounting in connection with future
acquisitions using Agouron Pharmaceuticals Stock or Oncology
Division Stock, and the possible inability or increased
difficulty of receiving a ruling from the Internal Revenue
Service in connection with a proposed acquisition to be
effected using either Oncology Division Stock or Agouron
Pharmaceuticals Stock.
o The costs associated with implementing the Divisional Stock
Proposal and the ongoing cost of operating separate Divisions
will exceed the costs associated with operating the Company as
it currently exists.
The Board determined that on balance the potential advantages of the
Divisional Stock Proposal outweigh the potential disadvantages and concluded
that the Divisional Stock Proposal is in the best interests of the Company and
its shareholders.
Vote Required
The Divisional Stock Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Existing Common Stock.
Recommendation Of The Board
THE BOARD HAS CAREFULLY CONSIDERED THE DIVISIONAL STOCK PROPOSAL AND
BELIEVES THAT ITS APPROVAL BY THE SHAREHOLDERS IS IN THE BEST INTERESTS OF THE
COMPANY AND THE SHAREHOLDERS. ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
THE SHAREHOLDERS APPROVE THE DIVISIONAL STOCK PROPOSAL.
<PAGE>
Management and Allocation Policies
Because Agouron Pharmaceuticals and the Oncology Division will each be
a part of a single company, the Board and management have carefully considered a
number of issues with respect to intracompany business transactions, the
financing of Agouron Pharmaceuticals and the Oncology Division, and the
allocation of debt, corporate overhead, interest, taxes and other charges
between the two Divisions. The Board and management have established policies to
accomplish the fundamental objective of the Divisional Stock Proposal, which is
to separate the business and operations of the Oncology Division from those of
Agouron Pharmaceuticals, to operate the Oncology Division on a stand-alone
basis, and to allocate costs and charges between the two Divisions on an
objective basis.
Except as otherwise provided in the policies, the Board may further
modify or rescind the policies in its sole discretion without approval of the
shareholders, subject only to the Board's fiduciary duty to the Company's
shareholders. The Board has no present plans to change any of such policies. The
Board may also adopt additional policies depending upon the circumstances. Any
determination of the Board to modify or rescind the policies, or to adopt
additional policies, including any such decision that would have disparate
impacts upon holders of the Common Stock representing the two Divisions, would
be governed by the principles of California law discussed under "Risk Factors
Risks Related to the Divisional Stock Proposal -- Management and Allocation
Policies Subject to Change." However, the Board will make any such decision in
accordance with its good faith business judgment of the best interests of the
Company. In addition, generally accepted accounting principles require that any
change in policy be preferable (in accordance with such principles) to the
previous policy.
Financial Statements, Allocation Matters. The Company will prepare
financial statements in accordance with generally accepted accounting principles
for Agouron Pharmaceuticals and the Oncology Division, and these financial
statements, taken together, will comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each of Agouron Pharmaceuticals and the Oncology Division will
reflect the financial condition, results of operations and cash flows of the
businesses included therein. The financial statements of Agouron Pharmaceuticals
will also include any accounts or assets of the Company not specifically
allocated to the Oncology Division.
Division financial statements may include allocated portions of the
Company's debt, interest, corporate overhead and taxes. Notwithstanding such
allocations, for the purpose of preparing each Division's financial statements,
holders of Agouron Pharmaceuticals Stock and Oncology Division Stock will
continue to be subject to all of the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. See Annex
IV--"Agouron Pharmaceuticals -- Financial Statements," Annex V--"Oncology
Division--Financial Statements" and "Risk Factors - Risks Related to the
Divisional Stock Proposal -- Shareholders of One Company; Financial Effects on
One Division Could Affect the Other."
Debt Financing. Each Division's debt will increase or decrease by the
amount of any net cash generated by, or required to fund, the Division's
operating activities, dividend payments, share repurchases and other financing
activities. Interest will be charged to each Division based on the amount of
such Division's debt. Changes in the cost of the Company's debt will be
reflected in adjustments in the weighted average interest cost of such debt.
Funding for the Oncology Division. The development of the Oncology
Division's products will require substantial funds. See "Risk Factors -- Risks
Related to Agouron Pharmaceuticals and the Oncology Division Additional
Financing Requirements and Access to Capital." Agouron Pharmaceuticals intends
to fund the operations of the Oncology Division as necessary. Agouron
Pharmaceuticals may raise funds for the Oncology Division through a public
offering of shares of the Oncology Division Stock as market conditions permit.
The Board has approved the allocation of up to $25 million in cash from Agouron
Pharmaceuticals to the Oncology Division (the "Equity Line"). Amounts drawn on
the Equity Line will be exchanged automatically for Oncology Division Designated
Shares at such time as the maximum amount of the Equity Line is reached or as
the Board otherwise determines.
The Equity Line will be reviewed annually for extension or termination
on or before June 30 of each calendar year. If terminated, all amounts drawn
under the Equity Line as of such termination date will be repaid in cash or, at
the option of the Board, will be exchanged for Oncology Division Designated
Shares in the manner described below. Upon exchange for Oncology Division
Designated Shares, the Equity Line will be re-established.
<PAGE>
The number of Oncology Division Designated Shares to be exchanged for
amounts drawn under the Equity Line will be determined by dividing the amount of
the accumulated Equity Line advances on the date of exchange by the Fair Market
Value of the Oncology Division Common Stock. The Fair Market Value of the
Oncology Division Stock will equal the average of the daily average of high and
low prices of the Oncology Division Stock of the 20 trading days commencing on
the 30th trading day immediately prior to the exchange date.
Any amounts advanced under the Equity Line (or the general
inter-division advances) may be repaid in total or in part at any time prior to
their conversion to the Equity Line or their exchange for Oncology Division
Designated Shares.
Revenue Allocation. Other than revenues received in connection with
transactions subject to the policy regarding Interdivision Transactions,
revenues from the sale of a Division's products and services shall be credited
to that Division.
Expense Allocation. Other than expenses incurred in connection with
transactions subject to the policy regarding Interdivision Transactions, all
direct expenses shall be charged to the Division for the benefit of which they
are incurred. Indirect costs will be allocated to each Division in a reasonable
and consistent manner based on utilization by the Division of the services to
which such costs relate.
Corporate Overhead. A portion of the Company's shared general and
administrative expenses (such as executive management, human resources, legal,
accounting and auditing, tax, treasury, strategic planning, information systems
support, and environmental services) will be allocated to Agouron
Pharmaceuticals and the Oncology Division based upon specific identification of
such services used by such Division. Where determinations based on use alone are
impracticable, other methods and criteria will be used that management believes
are equitable and provide a reasonable estimate of the cost attributable to the
Divisions.
Tax Allocations. Income taxes shall be allocated to each Division based
upon the financial statement income, taxable income, credits and other amounts
properly allocable to such Division under generally accepted accounting
principles as if each Division were a separate taxpayer; provided, however, that
as of the end of any fiscal quarter of the Company, any tax benefit attributable
to any Division that cannot be utilized by such Division to offset or reduce its
current or deferred income tax expense may be allocated to the Divisions in
proportion to their taxable income without any compensating payment or
allocation. The federal income taxes of the Company and the subsidiaries which
own assets allocated between the Divisions are determined on a consolidated
basis. Consolidated federal income tax provisions and related tax payments or
refunds will be allocated between the Divisions based principally on the taxable
income and tax credits directly attributable to each Division. Such allocations
will reflect each Division's contribution (positive or negative) to the
Company's consolidated federal taxable income and the consolidated federal tax
liability and tax credit position. Had the Divisions filed separate tax returns,
the provision for income taxes and net income for each Division (prior to tax
allocations from other divisions) would not have differed from the amounts
reported in the Divisions' statements of income for the years ended June 30,
1998, 1997 and 1996. However, the amounts of current and deferred taxes and
taxes payable or refundable allocated to each Division in these historical
financial statements may differ from those that would have been allocated to
each Division had they filed separate income tax returns.
Depending on the tax laws of the respective jurisdictions, state and
local income taxes are calculated on either a consolidated or combined basis or
on a separate corporation basis. State income tax provisions and related tax
payments or refunds determined on a consolidated or combined basis will be
allocated between the Divisions based on their respective contributions to such
consolidated or combined state taxable incomes. State and local income tax
provisions and related tax payments which are determined on a separate
corporation basis will be allocated between the Divisions in a manner designed
to reflect the respective contributions of the Divisions to the corporation's
separate state or local taxable income.
Acquisition of Programs, Products or Assets. Upon the acquisition by
the Company from a third party of any programs, products or assets (whether by
acquisition of assets or stock, merger, consolidation or otherwise), the
aggregate cost of the acquisition and the programs, products or assets acquired
shall be allocated among the Divisions of the Company. In the case of material
acquisitions, such allocation shall be made in a manner determined by the Board
to be fair and reasonable to each Division and to holders of the Common Stock
representing each Division, taking into account such matters as the Board and
its financial advisors, if any, deem relevant. Any such determination by the
Board will be final and binding on all holders of Common Stock.
<PAGE>
Disposition of Programs, Products or Assets. Upon any sale, transfer,
assignment or other disposition by the Company of any product, program or asset
not consisting of all or substantially all of the assets of a division, all
proceeds from such disposition shall be allocated to the Division to which the
program, product or asset had been allocated. If the program, product or asset
was allocated to more than one Division, the proceeds of the disposition shall
be allocated among such Divisions based on their respective interests in such
program, product or asset. Such allocation shall be made in a manner determined
by the Board to be fair and reasonable to such Division and to holders of the
Common Stock representing such Division, taking into account such matters as the
Board and its financial advisors, if any, deem relevant. Any such determination
by the Board will be final and binding on the holders of Common Stock.
Interdivision Asset Transfers. The Board may at any time and from time
to time reallocate any program, product or other asset from one Division to any
other Division. All such reallocations shall be done at fair market value as
determined by the Board. Such determination shall take into account, in the case
of a program under development, the commercial potential and the phase of the
clinical development of such program, the expenses associated with realizing any
income from such program (and the likelihood and timing of any such realization)
and other matters that the Board and its financial advisors, if any, deem
relevant. The consideration for such reallocation may be paid by one Division to
another in cash or other consideration with a value equal to the fair market
value of the assets being reallocated or, in the case of a reallocation of
assets from Agouron Pharmaceuticals to the Oncology Division, the Board may
elect to account for such reallocation as an increase in the Oncology Division
Designated Shares.
Notwithstanding the foregoing, no Key Oncology Division Program, as
defined below, will be transferred out of the Oncology Division. A "Key Oncology
Division Program" is any of the following: (i) AG3340; or (ii) any additional
oncology program or product being developed from time to time in the Oncology
Division which (a) constituted 20% or more of the research and development
budget of the Oncology Division in any one of the three most recently completed
fiscal years, or (b) has had a cumulative investment of $8 million or more in
research and development expenses by the Oncology Division.
Commercialization of Oncology Products. The Board has determined
certain allocations of rights concerning development-stage oncology products for
which development and registration will be completed by the Oncology Division.
Agouron Pharmaceuticals shall have the world-wide right to commercialize
oncology indications of AG3340, AG3433 (or a substituted product), AG2034 and
AG2037 if successfully developed and registered by the Oncology Division. The
Oncology Division shall have the exclusive, worldwide, royalty-free right to
develop and commercialize for oncology indications any other products
discovered, acquired and/or developed by the Oncology Division or Agouron
Pharmaceuticals. Agouron Pharmaceuticals shall have the exclusive, worldwide,
royalty-free right to develop and commercialize for non-oncology indications any
product discovered, acquired and/or developed by the Oncology Division.
The Oncology Division may elect to co-promote AG3340, AG3433 (or a
substituted product), AG2034 and/or AG2037 in the United States and Canada
through a specialty oncology sales and marketing organization by agreeing to
provide up to fifty percent of the total sales and marketing effort with respect
to the applicable product in the United States and Canada. If the Oncology
Division elects to co-promote a product, it shall be entitled to share in that
percentage of profits from the sale of such product in the United States and
Canada which corresponds to the percentage of the total sales and marketing
efforts for such product contributed by the Oncology Division. Profits in the
United States and Canada shall be computed by deducting from net sales of a
product amounts representing the applicable cost of goods sold, and other
allowable expenses. Notwithstanding the Oncology Division's election to
co-promote a product and to share in profits from such product and in order to
provide the Oncology Division with an adequate minimum return for its
development and registration efforts for a product, the Oncology Division shall
be entitled to receive the greater of: (i) the Oncology Division's share of
profits from the net sales of such product in the United States and Canada plus
royalties based upon Agouron Pharmaceuticals' net sales of such product outside
of the United States and Canada according to the schedule below or (ii)
royalties based upon Agouron Pharmaceuticals' worldwide net sales of such
product according to the schedule below:
AG3340: 16% of first $150 million of net sales; 18% of net sales
above $150 million
AG3433 (or a substituted product): 18% of first $150 million of net sales;
0% of net sales above $150 million
AG2034: 17% of first $150 million of net sales; 19% of net sales
above $150 million
AG2037: 18% of first $150 million of net sales; 20% of net sales
above $150 million
<PAGE>
Agouron Pharmaceuticals and the Oncology Division shall also share
equitably in any license fees and/or royalties received from any third party
licensees of AG3340, AG3433 (or a substituted product), AG2034 or AG2037.
If Agouron Pharmaceuticals is obligated to pay royalties or other
payments to a third party to settle any infringement claim or action arising out
of the development and commercialization of a product, then, fifty percent of
the royalties and other payments paid by Agouron Pharmaceuticals to such third
parties to settle such infringement claim or action shall be creditable against
royalty or other payment obligations payable to the Oncology Division on such
product; provided, however, that in no case shall the royalties and other
payments due to the Oncology Division in a quarterly period be reduced by more
than fifty percent of the amounts otherwise due in such quarterly period. Any
remaining creditable amount may be used in subsequent quarterly periods to
offset royalties and other payments due the Oncology Division. Additionally, the
royalty rates that would otherwise apply for a quarterly period in a country
shall be reduced by fifty percent in such country if no valid Agouron patent
claims exist, or if the parties mutually agree that it is not commercially
reasonable to pursue third-party infringers; royalty rates that would otherwise
apply for a quarterly period may also be adjusted in certain other circumstances
as determined by the Board.
Other Interdivision Transactions. This policy shall cover Interdivision
transactions other than asset transfers, which shall be subject to the policy
regarding Interdivision Asset Transfers. From time to time, a Division may
engage in transactions directly with the other Divisions or jointly with the
other Divisions and one or more third parties. Such transactions may include
agreements by one Division to provide products and services for use by the other
Division and joint ventures or other collaborative arrangements involving more
than one Division to develop new products and services jointly and with third
parties. Such transactions shall be subject to the following conditions:
(i) Research and/or development performed by one Division for the
benefit of another Division will be charged to the Division for
which work is performed on a cost basis. Such costs shall be
allocated in the manner described above under "Expense
Allocation", and the Division performing the research will not
recognize revenue as a result of performing such research.
(ii) Corporate and general and administrative services will be provided
by each Division to the other Division(s) requesting such services
on a cost basis and such costs shall be allocated in the manner
described above under "Expense Allocation."
(iii)Other than research, corporate and general and administrative
services, Interdivision transactions shall be on terms and
conditions that would be obtainable in transactions negotiated at
arm's length with unaffiliated third parties.
(iv) Any Interdivision transaction (a) to be performed on terms and
conditions that deviate from the policies set forth in
subparagraphs (i), (ii) or (iii) above and (b) that is material to
the other participating Divisions will require approval by the
Board, which approval shall include a determination by the Board
that the transaction is fair and reasonable to such participating
Division and to holders of the Common Stock representing such
Division.
(v) If a Division (the "Purchasing Division") requires any product
or service from which another Division (the "Selling Division")
derives revenues from sales to third parties (a "Commercial
Product or Service"), the Purchasing Division may solicit
from the Selling Division a bid to provide such Commercial
Product or Service in addition to any bids solicited by the
Purchasing Division from third parties. Unless the Board
determines that the bid of the Selling Division is fair and
reasonable to the Selling and Purchasing Divisions and to holders
of Common Stock representing the Selling and Purchasing
Divisions and that the Purchasing Division must accept the
Selling Division's bid, the Purchasing Division may accept any
bid deemed to offer the most favorable terms and conditions
for providing the Commercial Product or Service sought by the
Purchasing Division.
(vi) Loans may be made from time to time between the Divisions. Any
such loan of $1 million or less will mature within 18 months and
interest will accrue at the best borrowing rate available to the
Company for a loan of like type and duration. Amounts borrowed in
excess of $1 million will require approval of the Board, which
approval shall include a determination by the Board that the
material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating
Division and to holders of the Common Stock representing each such
Division. Any such loans made by Agouron Pharmaceuticals to the
Oncology Division may be in addition to or in lieu of amounts
available under the Equity Line.
<PAGE>
Access to Technology and Know-How Each Division will have free access
to all technology and know-how of the Company that may be useful in such
Division's business, subject to any obligations or limitations applicable to the
Company.
Disposition of Oncology Division Designated Shares. The Oncology
Division Designated Shares may be (a) issued upon the exercise or conversion of
outstanding stock options, warrants or convertible securities allocated to
Agouron Pharmaceuticals, (b) subject to the restrictions set forth below under
"Issuance and Sale of Additional Shares of Common Stock," sold for any valid
business purpose or (c) distributed as a dividend to the holders of shares of
the Agouron Pharmaceuticals Stock, all as determined from time to time by the
Board.
Any Oncology Division Designated Shares on June 30 of each year will be
distributed to the Agouron Pharmaceuticals shareholders of record on such date
on or before the immediately following August 15. However, in the event that the
number of Oncology Division Designated Shares exceeds more that 15% of the total
outstanding shares of Oncology Division Common Stock, such Oncology Division
Designated Shares will be distributed as soon as practicable to the holders of
the Agouron Pharmaceuticals Stock. See "--Oncology Division Designated Shares."
Issuance and Sale of Additional Shares of Common Stock. When additional
shares of Common Stock are issued and sold by the Company, the Company will
identify (i) the number of such shares issued and sold for the account of the
Division to which they relate, the proceeds of which will be allocated to and
reflected in the financial statements of such Division and (ii) the number of
such shares issued and sold that shall reduce the number of Oncology Division
Designated Shares of such Division. Notwithstanding the foregoing, the Company
will not sell any Oncology Division Designated Shares (except upon exercise or
conversion of options, warrants or convertible securities issued by Agouron
Pharmaceuticals that were adjusted as a result of a dividend of the Oncology
Division Stock paid to holders of the Agouron Pharmaceuticals Stock) unless (i)
the Board determines that the Oncology Division has cash sufficient to fund its
operations for at least the next 12 months or (ii) shares of the Oncology
Division Stock are concurrently being sold for the account of the Oncology
Division in an amount that will produce proceeds sufficient to fund such
Division's cash needs for the next 12 months.
Open Market Purchases of Shares of Common Stock. Agouron
Pharmaceuticals may make open market purchases of any series of its Common Stock
in accordance with applicable securities law requirements; provided, however,
that in no event shall any such purchases be made if as an immediate result
thereof the number of Oncology Division Designated Shares will exceed 60% of the
number of shares of the Oncology Division outstanding plus such number of
Oncology Division Designated Shares. Notwithstanding the foregoing, within 90
days of any open market purchase of the Common Stock representing the Oncology
Division, Agouron Pharmaceuticals may not exercise the right provided under the
Restated Articles to exchange shares representing such Division for cash and/or
shares of the Agouron Pharmaceuticals Stock.
Capital Spending. It is anticipated that the Oncology Division will be
in the development stage for at least several years and therefore will not have
annual cash flows sufficient to finance its normal annual capital spending
program. Any decision by the Board to fund capital expenditures or capital
investments in excess of the cash flows of the respective Divisions would be
made by the Board in the exercise of its good faith business judgment based on
all relevant circumstances, including the financing and investing needs and
objectives of each Division, the availability and cost of alternative financing,
the existence of alternative investment opportunities for Agouron
Pharmaceuticals and the Oncology Division, and the Board's analysis of the
desirability of making such investment or acquisition.
Fiduciary and Management Responsibilities. Because Agouron
Pharmaceuticals and the Oncology Division will continue to be part of a single
company, the Board and management will have the same fiduciary duties to holders
of the Agouron Pharmaceuticals Stock and the Oncology Division Stock that they
currently have to the holders of the Existing Common Stock. Under California
law, a director or a member of management will be deemed to have satisfied his
or her fiduciary duties to the Company and its shareholders if he or she acts in
a manner which he or she believes in good faith to be in the best interests of
the Company and with the care, including reasonable inquiry, that an ordinarily
prudent person in a like position would exercise under similar circumstances.
The Board and the Chief Executive Officer of the Company, in establishing
policies with regard to intracompany matters such as allocations of assets,
liabilities, debt, corporate overhead, taxes, interest and other matters, will
consider various factors and information which could benefit or cause detriment
to the shareholders of the respective Divisions and will make determinations in
the best interests of the Company.
<PAGE>
Because the Divisional Stock Proposal will result in no change in the
corporate structure of the Company, Peter Johnson, the Company's President and
Chief Executive Officer, will have the same duties and responsibilities for the
management of the Company's assets and businesses which comprise Agouron
Pharmaceuticals and the Oncology Division following the Distribution as he did
prior thereto. The Company's senior staff officers will continue to be
responsible for the same designated functions in both Agouron Pharmaceuticals
and the Oncology Division as they were prior to the Effective Date. The costs
attributable to their functions will be allocated as discussed above under "--
Corporate Overhead."
While it is the intent of directors to remain impartial notwithstanding
their equity ownership interests in Agouron Pharmaceuticals and the Oncology
Division, because of the anticipated differences in trading values between the
two securities, the actual value of the shares of Agouron Pharmaceuticals Stock
and Oncology Division Stock held by directors initially will vary significantly.
See "Risk Factors - Risks Related to the Divisional Stock Proposal--Fiduciary
Duties of the Board; No Definitive Precedent Under California Law."
Board Review of Corporate Opportunities and Other Matters. The Board
will also review any matter which involves the allocation of a corporate
opportunity of the Company to either Agouron Pharmaceuticals or the Oncology
Division. In accordance with California law, the Board will make its
determination with regard to the allocation of any such opportunity in
accordance with their good faith business judgment of the best interests of the
Company. Among the factors that the Board may consider in making such allocation
is whether a particular corporate opportunity is principally related to the
business of Agouron Pharmaceuticals or the Oncology Division, whether one
Division, because of its managerial or operational expertise, would be better
positioned to undertake the corporate opportunity, existing contractual
agreements and restrictions, and other matters. The Board will also review
allocations between the Divisions of significant tax benefits or charges, the
write-off of significant assets, the allocation of significant liabilities, and
any actions which would significantly affect the Divisions' access to the
Company's credit.
Competition Between Divisions. Agouron Pharmaceuticals and the Oncology
Division will not compete in each other's principal business. It is currently
contemplated that certain products developed by the Oncology Division will be
marketed by Agouron Pharmaceuticals and co-marketed by the Oncology Division.
The Oncology Division will receive a royalty on the net sales of such product in
certain countries and profits from the sale of such products in the U.S. and
Canada will be shared in proportion to each Divisions co-promotion efforts.
Other products, at the sole discretion of the Oncology Division, may be marketed
exclusively by the Oncology Division or in collaboration with Agouron
Pharmaceuticals or a non-affiliated third party collaborator. See
"--Commercialization of Products" and "--Revenue Allocation." Alternatively,
certain products may be marketed by collaborators of the Company.
Description Of Capital Stock
The following description is qualified in its entirety by reference to
Annex II to this Proxy Statement, which contains the full text of the Restated
Articles.
General
The Company's Articles currently provide that the Company is authorized
to issue two classes of shares, designated common and preferred, respectively.
75,000,000 shares of Common Stock are authorized for issuance, and 2,000,000
shares of Preferred Stock are currently authorized for issuance, of which 2,000
shares have been designated Series B Participating Preferred Stock. As of July
28, 1998, 31,053,380 shares of Existing Common Stock were issued and outstanding
and no shares of Preferred Stock were issued and outstanding.
If the Divisional Stock Proposal is approved by the Company's
shareholders, the authorized Common Stock will consist of 150,000,000 shares of
which 75,000,000 will initially be designated Agouron Pharmaceuticals Stock,
25,000,000 will initially be designated Oncology Division Stock and 50,000,000
will initially be undesignated Common Stock. In the aggregate, the number of
authorized shares of Common Stock would increase from 75,000,00 to 150,000,000.
The Agouron Pharmaceuticals Stock and the Oncology Division Stock will have the
voting powers, qualifications and rights described below. The number of shares,
rights, preferences, privileges and restrictions of any future designated series
of Common Stock will be determined by the Board at the time of their
designation. The Board will also be able to increase or decrease (but not below
the number of shares then outstanding) the number of shares of an existing
series of Common Stock without the approval of shareholders.
<PAGE>
In addition to the amendments to the Articles in connection with the
Divisional Stock Proposal, the Articles will be further amended to designate a
new Series C Participating Preferred Stock as "Series C Participating Preferred
Stock," no par value, consisting of 2,000 shares (the "Series C Participating
Preferred Stock") and to amend certain provisions of the already designated
Series B Participating Preferred Stock. The Series C Participating Preferred
Stock will have substantially the same rights, preferences, privileges and
restrictions as the Series B Participating Preferred Stock. These amendments
relating to the Participating Preferred Stock will be necessary as a result of
the Divisional Stock Proposal and its effect on the Company's Rights Agreement.
See "Proposal 2 - Divisional Stock Proposal -- Restated Rights Agreement."
Voting Rights
Currently, holders of Existing Common Stock have one vote per share on
all matters submitted to shareholders. In addition, holders of any series of
Preferred Stock would have the right to vote as a separate voting group under
the California Corporations Code in certain circumstances. The Restated Articles
will provide that the holders of all series of Common Stock and any series of
Preferred Stock outstanding at the time of such vote and entitled to vote
together with the holders of Common Stock will vote together as a single voting
group on all matters as to which common shareholders generally are entitled to
vote other than a matter with respect to which the Common Stock or a series
thereof or any series of Preferred Stock would be entitled to vote as a separate
voting group. On all matters as to which all series of Common Stock will vote
together as a single voting group: (i) each outstanding share of Agouron
Pharmaceuticals Stock will have one vote, and (ii) each share of Oncology
Division Stock will have ____ vote until June 30, 2000, and on July 1, 2000 and
on each July 1 every two years thereafter, the number of votes to which each
share of Oncology Division Stock is entitled will be adjusted to reflect the
ratio of the weighted average market capitalization of the Oncology Division
Stock and the Agouron Pharmaceuticals Stock, so that the resulting voting
percentage of each Division will be proportionate to its market value. If no
shares of Agouron Pharmaceuticals Stock are outstanding on such date, then all
other series of the Company's Common Stock outstanding on such date will have a
number of votes such that each share of the series of Common Stock that has the
highest market capitalization on such date (the "Base Series") will have one
vote, and each share of each other series of outstanding Common Stock will have
the number of votes determined according to the immediately preceding sentence,
treating, for such purposes the Base Series as the Agouron Pharmaceuticals Stock
in such sentence.
The voting rights of the Oncology Division Stock will be appropriately
adjusted so as to avoid dilution in the aggregate voting rights of any series of
Common Stock in the event the outstanding shares of any series are subdivided
(by stock split, reclassification or otherwise) or combined (by reverse stock
split, reclassification or otherwise), or in the event of the issuance of shares
of any series as a dividend or a distribution to holders of shares of such
series. If shares of only one series of Common Stock are outstanding, or if
shares of any series of Common Stock are entitled to vote separately as a class,
each share of that series would have one vote.
If the Divisional Stock Proposal is approved by the shareholders and
implemented thereafter, the Company will set forth the number of outstanding
shares of each series of Common Stock in its Annual and Quarterly Reports filed
pursuant to the Exchange Act, and will disclose in any proxy statement for a
shareholder meeting the number of outstanding shares and per share voting rights
of each such series of Common Stock.
The relative voting rights of each series of Common Stock are adjusted
from time to time as described above so that a holder's voting rights will more
closely reflect the market value of such holder's equity investment in the
Company. Adjustments in the relative voting rights of each series of Common
Stock could (i) influence an investor interested in acquiring and maintaining a
fixed percentage of the voting power of the Company to acquire such percentage
of all series of Common Stock, and would (ii) limit the ability of investors in
one series to acquire for the same consideration relatively more or less votes
per share than investors in the other series. To the extent the relative market
values of each series of Common Stock change in between any adjustments, an
investor in one series of Common Stock may acquire relatively more or less
voting power for the same consideration when compared with investors in another
series of Common Stock.
<PAGE>
Following implementation of the Divisional Stock Proposal, under the
current California Corporations Code, the holders of Agouron Pharmaceuticals
Stock and Oncology Division Stock will vote together as a single class, except
as to certain amendments to the Restated Articles that adversely affect a
particular series in a different manner than other shares of the same class,
certain mergers and statutory share exchanges, and certain statutory
dissolutions, in which case a separate vote by the holders of the particular
class affected would also be required. Accordingly, if a separate vote on a
matter by the holders of either Agouron Pharmaceuticals Stock or Oncology
Division Stock is not required under the California Corporations Code or by
stock market rules, and if the Board does not require a separate vote, the
series, if any, that is entitled to more than the number of votes required to
approve such matter will be in a position to control the outcome of such vote
even if the matter involves a divergence or conflict of the interests of the
holders of the Agouron Pharmaceuticals Stock and the Oncology Division Stock.
Under the California Corporations Code, approval of actions requiring a separate
series vote will require the approval of the holders of a majority of the
outstanding shares of each series, voting separately. Most other matters (other
than the election of directors whereby directors who receive the highest number
of votes are elected) will be approved if the affirmative votes constitute a
majority of the votes cast by the holders of the Agouron Pharmaceuticals Stock
and the Oncology Division Stock, voting together as a single class, provided
that the affirmatively voted shares also constitute at least a majority of the
required quorum. Because the holders of Agouron Pharmaceuticals Stock will
initially have more than the number of votes required to approve any such
matters requiring only the approval of a majority of the votes cast, such
holders would be in a position to control the outcome of the vote on such a
matter. See "Risk Factors - Risks Related to the Divisional Stock
Proposal--Limited Separate Voting Rights; Variable Voting Rights."
Liquidation Rights
In the event of a voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company, after the Company has satisfied or
made provision for its debts and obligations and for payment to the holders of
shares of any series or class of capital stock having preferential rights to
receive distributions of the net assets of the Company, the holders of the
Common Stock are entitled to receive the net assets, if any, remaining for
distribution to common shareholders on a per share basis in proportion to the
respective per share liquidation units of such class. Shareholders will have no
direct claim against any particular assets of the Company or any of its
subsidiaries. Each share of Agouron Pharmaceuticals Stock has 100 liquidation
units and each share of Oncology Division Stock will have _____ liquidation
units. The liquidation units of the Oncology Division Stock will be
appropriately adjusted so as to avoid dilution in the aggregate liquidation
rights of any series in the event the outstanding shares of any series are
subdivided (by stock split, reclassification or otherwise) or combined (by
reverse stock split, reclassification or otherwise), or in the event of the
issuance of shares of any series as a dividend or a distribution to holders of
shares of that series, but will not otherwise be adjusted. A merger or business
combination involving the Company or a sale of all or substantially all of the
assets of the Company will not be treated as a liquidation.
Dividend Rights
The Company has never paid any cash dividends on shares of its capital
stock. The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividend on any class
of Common Stock in the foreseeable future.
Dividends or other distributions on the Agouron Pharmaceuticals Stock
and the Oncology Division Stock will be subject to the same limitations as
dividends or other distributions on the Existing Common Stock. Under the
California Corporations Code, no dividends or other distributions may be made to
shareholders, unless made from retained earnings or, if after giving effect to
such dividends or other distributions, the Company's assets would be at least
equal to 1 1/4 times its liabilities; and, subject to certain exceptions, the
current assets of the Company would be at least equal to its current
liabilities.
Dividends or other distributions on the Agouron Pharmaceuticals Stock
and the Oncology Division Stock will be further limited by the Restated Articles
to an amount not in excess of Agouron Pharmaceuticals Available Dividend Amount
and the Oncology Division Available Dividend Amount, respectively.
The "Agouron Pharmaceuticals Available Dividend Amount" or the
"Oncology Division Available Dividend Amount," on any date, means any amount in
excess of the amount legally available for payment of dividends determined in
accordance with California law applied if such Division were a separate
corporation (such amount with respect to a Division is referred to as an
"Available Dividend Amount").
<PAGE>
In addition, the amount legally available for payment of dividends will
be determined on the basis of the entire Company, and not just the respective
Divisions. Consequently, dividend or other distribution payments on the Agouron
Pharmaceuticals Stock and the Oncology Division Stock could be precluded because
of the available limits under the California Corporations Code, even though
there may exist an Available Dividend Amount with respect to the relevant
Division. There can be no assurance that an Available Dividend Amount will exist
with respect to either Division. See "Risk Factors - Risks Related to the
Divisional Stock Proposal - Potential Divergence of Interests; No Specific
Procedures for Resolution - No Assurance of Payment of Dividends."
Subject to the prior payment of distributions on any outstanding shares
of Preferred Stock and the foregoing limitations, the Board will be able, in its
sole discretion, to declare and pay dividends or other distributions exclusively
on the Agouron Pharmaceuticals Stock, exclusively on the Oncology Division Stock
or on both, in equal or unequal amounts, notwithstanding the amount of dividends
or other distributions previously declared on each series, the respective voting
or liquidation rights of each series or any other factor.
General Redemption and Conversion Provisions
The Company's Articles currently do not provide, and the Divisional
Stock Proposal does not provide, for either mandatory or optional conversion or
redemption of the Agouron Pharmaceuticals Stock. If the Divisional Stock
Proposal is approved the Restated Articles will provide that the Oncology
Division Stock may be exchanged for any combination of cash and/or Agouron
Pharmaceuticals Stock upon the terms described below. The Company cannot predict
the impact on the market prices for each series of Common Stock of its ability
to effect such exchanges.
Optional Redemption and/or Conversion. The Board may at any time
determine to exchange all or part of the outstanding shares of Oncology Division
Stock for any combination of cash and/or Agouron Pharmaceuticals Stock having a
Fair Market Value equal to 125% of the Fair Market Value of the Oncology
Division Stock, such Fair Market Value being determined by the trading prices
during a specified period prior to the first public announcement by the Company
of such exchange.
The foregoing provision allows the Company the flexibility to redeem
all outstanding shares of the Oncology Division Stock and leave outstanding
classes of Common Stock that would, collectively, represent the residual equity
interest in the Company. The optional exchange could be exercised at any future
time if the Board determined that, under the facts and circumstances then
existing, a particular series of Common Stock was no longer in the best
interests of all of the Company's shareholders. Such exchange may be completed,
however, at a time that is disadvantageous to the holders of the Oncology
Division Stock.
The right of the Board to exchange all outstanding shares of Oncology
Division Stock for any combination of cash and/or Agouron Pharmaceuticals Stock
having a Fair Market Value equal to 125% of the Fair Market Value of the
Oncology Division Stock does not preclude the Board from making an offer to
exchange such shares on terms other than those provided in the Restated
Articles. Although any alternative offer would be subject to acceptance by
holders of the shares to be exchanged, such offer could be made on terms less
favorable than those provided in the Restated Articles. See "Risk Factors Risks
Related to the Divisional Stock Proposal -- Potential Divergence of Interests;
No Specific Procedures for Resolution -- Optional Exchange of Oncology Division
Stock."
In the event Agouron Pharmaceuticals Stock is not publicly traded at
the time of a conversion of the Oncology Division Stock, the Board may convert
the Oncology Division Stock into fully paid and nonassessable shares of such
other publicly traded class or series of common stock as has the largest market
capitalization at the time of the conversion.
Mandatory Conversion and/or Redemption. In the event of the
disposition, in one transaction or a series of related transactions, by the
Company of all or substantially all of the properties and assets allocated to
the Oncology Division (other than in connection with the sale by the Company of
all or substantially all of its properties and assets) to any person, entity or
group, other than (i) a wholly owned subsidiary of the Company or (ii) any
entity formed at the direction of the Company in connection with obtaining
financing for the programs or products of the Oncology Division, as the case may
be, the Company on or prior to the first business day following the 90th day
following consummation of such disposition will be required to exchange each
outstanding share of the Oncology Division Stock for any combination of cash
and/or Agouron Pharmaceuticals Stock having a Fair Market Value equal to 125% of
the Fair Market Value of the Oncology Division Stock as determined by the
trading prices during a specified period prior to the consummation of such
disposition. Consequently, holders of Oncology Division Stock may receive a
greater or lesser premium for their shares than any premium paid by a third
party buyer of the assets of the Oncology Division. In
<PAGE>
addition, any such exchange for shares of Agouron Pharmaceuticals Stock could be
made at a time when the Oncology Division Stock may be considered to be
undervalued and the Agouron Pharmaceuticals Stock is considered to be
overvalued. See "Risk Factors - Risks Related to the Divisional Stock Proposal
- -- Potential Divergence of Interests; No Specific Procedures for Resolution
Disposition of Division Assets."
Oncology Division Designated Shares
Oncology Division Designated Shares are authorized shares of Oncology
Division Stock, which are not issued and outstanding, but which the Board,
pursuant to the Company's management and allocation policies, may from time to
time issue, sell or otherwise distribute without allocating the proceeds or
other benefits of such issuance, sale or distribution to the Oncology Division.
The shares of Oncology Division Stock that are issuable with respect to the
Oncology Division Designated Shares are not outstanding shares of the Oncology
Division Stock, are not eligible to receive dividends and cannot be voted by the
Company.
The number of Oncology Division Designated Shares will initially be
zero but from time to time will be:
(a) increased by
(i) the number of any outstanding shares of Oncology Division
Stock repurchased by the Company, the consideration for which was allocated to
Agouron Pharmaceuticals;
(ii) the number of shares of Oncology Division Stock (rounded,
if necessary, to the nearest whole number) equal to the fair value (as
determined by the Board) of assets or properties (including cash) allocated to
Agouron Pharmaceuticals that are reallocated to the Oncology Division (other
than reallocations that represent sales at fair value between such Divisions)
divided by the Fair Market Value of one share of Oncology Division Stock as of
the date of such reallocation;
(iii) a number equal to the quotient obtained by dividing (a)
the aggregate amount of all advances made under the Equity Line by (b) the Fair
Market Value of the Oncology Division Stock on the date of each exchange;
(b) decreased (but to not less than zero) by (i) the number of any
shares of Oncology Division Stock issued by the Company, the proceeds of which
are allocated to Agouron Pharmaceuticals, (ii) the number of any shares of
Oncology Division Stock issued upon the conversion, exercise or exchange of
Convertible Securities (other than Pre-Effectiveness Convertible Securities) the
proceeds of which are attributed to Agouron Pharmaceuticals (iii) the number of
any shares of Oncology Division Stock issued by the Company as a dividend or
distribution or by reclassification, exchange or otherwise to holders of Agouron
Pharmaceuticals Stock; (iv) the number of any shares of Oncology Division Stock
issued upon the conversion, exercise or exchange of any Convertible Securities
(other than Pre-Effectiveness Convertible Securities) issued by the Company as a
dividend or other distribution (including in connection with any
reclassification or exchange of shares) to holders of Agouron Pharmaceuticals
Stock, and (v) the number of shares of Oncology Division Stock (rounded, if
necessary, to the nearest whole number) equal to the fair value (as determined
by the Board) of assets or properties (including cash) allocated to the Oncology
Division that are reallocated to Agouron Pharmaceuticals in consideration for a
reduction in the number of Oncology Division Designated Shares divided by the
Fair Market Value of one share of Oncology Division Stock as of the date of such
reallocation; and
(c) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Oncology Division Stock and dividends or distributions of shares of Oncology
Division Stock to holders of Oncology Division Stock and other reclassifications
of Oncology Division Stock.
"Convertible Securities" means any securities of the Company, including
preferred stock, warrants, options and other rights (other than Common Stock),
that are convertible into, exchangeable for or evidence the right to purchase
any shares of any series of Common Stock, whether upon conversion, exercise or
exchange, pursuant to anti-dilution provisions of such securities or otherwise.
"Pre-Effectiveness Convertible Securities" means Convertible Securities
of the Company that are outstanding on the Effective Date and are, prior to such
date, convertible into or exercisable or exchangeable for Existing Common Stock.
<PAGE>
Increase In Authorized Common Stock
The Articles currently authorize the issuance of 75,000,000 shares of
Existing Common Stock. In connection with the Divisional Stock Proposal, the
Articles will be amended to designate Agouron Pharmaceuticals Stock initially
consisting of 75,000,000 authorized shares and Oncology Division Stock initially
consisting of 25,000,000 authorized shares. In addition, the Board from time to
time can issue one or more additional series or additional shares of Agouron
Pharmaceuticals Stock or Oncology Division Stock. In the aggregate, if the
Divisional Stock Proposal is implemented, the number of shares of Common Stock
authorized for issuance will increase from 75,000,000 to 150,000,000.
Additionally, the Board would be authorized to determine the number of shares of
each new series and all rights and privileges of each new series, including
dividend rights, conversion or redemption provisions, rights upon liquidation or
merger, and voting rights and to increase or decrease the number of shares in
any existing series. Under the existing Articles, the issuance of a new class or
series of common stock, such as the Oncology Division Stock would require
shareholder approval. The increase in authorized shares provides the Board with
a means to act quickly and definitively to complete strategic transactions such
as acquisitions or to further divide the business of the Company into additional
divisions without the need to obtain shareholder approval unless deemed
advisable by the Board or required by applicable law, regulation or stock market
requirements.
The increase in authorized shares of Common Stock will be used in part
to implement the various aspects of the Divisional Stock Proposal. Further, as
described under "--Description of Capital Stock--General Redemption and
Conversion Provisions," the Board has the right to convert the Oncology Division
Stock into the Agouron Pharmaceuticals Stock at a 25% premium to the Fair Market
Value of the Oncology Division Stock at any time, or in connection with a
disposition of all or substantially all properties and assets of the Oncology
Division. The Board may also pay a share dividend in one series of Common Stock
on such series of Common Stock, or declare a stock split. The number of shares
issuable in a conversion will, therefore, vary based on the relative market
values of the two series of Common Stock and the number of outstanding shares of
the Oncology Division Stock to be converted. The Board believes that an increase
in the number of authorized shares of Common Stock at this time is in the best
interests of the Company in order to have available the number of shares needed
for a future conversion, share dividend or stock split if such a transaction is
determined to be in the best interests of the Company.
Other than the Reclassification of the Existing Common Stock pursuant
to the Divisional Stock Proposal and the issuance of shares of Common Stock
pursuant to the Company's employee benefit plans, the Company has no present
intention or agreement with respect to the issuance for any purpose of any of
the shares of Common Stock that will be authorized for issuance if the
Divisional Stock Proposal is approved by the shareholders. The Board, however,
has considered and may in the future consider the creation of additional series
of stock that would track the performance of the other lines of the Company's
business.
Determinations by the Board
If the Divisional Stock Proposal is approved by the shareholders and
implemented by the Board, any determinations made in good faith by the Board
under any provision described under "-- Description of Capital Stock," and any
determinations with respect to any Division or the rights of holders of shares
of any series of Common Stock, will be final and binding on all shareholders of
the Company.
Dividend Policy
Agouron has never paid any cash dividends on shares of its capital
stock. Agouron currently intends to retain its earnings to finance future growth
and, therefore, does not anticipate paying any cash dividend on any series of
Common Stock in the foreseeable future.
The Board does not currently intend to change the above-described
dividend policy but reserves the right to do so at any time, or from time to
time, based on its review of the financial performance of the respective
Division and of the Company as a whole. Future dividends on the Agouron
Pharmaceuticals Stock and Oncology Division Stock will be payable when, as and
if declared by the Board out of all funds of the Company legally available
therefor. See "--Description of Capital Stock--Dividends."
<PAGE>
Nasdaq National Market Listing
The Existing Common Stock is traded on the Nasdaq National Market under
the symbol AGPH. There has been no prior market for the Agouron Pharmaceuticals
Stock or the Oncology Division Stock. Application has been made to The Nasdaq
Stock Market, Inc. to redesignate the Existing Common Stock as Agouron
Pharmaceuticals Stock, to be quoted on the Nasdaq National Market under the
symbol AGPH, and for the quotation of the Oncology Division Stock on the Nasdaq
National Market under the symbol ____. The Company is unable to predict to what
extent a public market will develop for shares of Oncology Division Stock or the
prices at which the shares of Agouron Pharmaceuticals Stock or Oncology Division
Stock will trade in such market or otherwise.
Exchange Procedures
Upon the implementation of the Divisional Stock Proposal, the Existing
Common Stock share certificates (the "Existing Certificates") will be deemed to
represent shares of Agouron Pharmaceuticals Stock. Following the Effective Date,
at such time as is reasonably determined by the Board, holders of Existing
Common Stock as of the Effective Date will be mailed certificates representing
shares of Oncology Division Stock. Shareholders should not mail their Existing
Certificates to either the Company or its transfer agent in connection with the
Divisional Stock Proposal. New certificates representing shares of Agouron
Pharmaceuticals Stock will be issued in replacement of Existing Certificates as
such certificates are received and canceled by the transfer agent.
Stock Transfer Agent And Registrar
ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon") is the
transfer agent and registrar for the Existing Common Stock. If the Divisional
Stock Proposal is approved by the shareholders and implemented by the Board,
ChaseMellon will be selected as the transfer agent and registrar for the Agouron
Pharmaceuticals Stock and the Oncology Division Stock.
Financial Advisor
PaineWebber is acting as financial advisor to the Company in connection
with the Divisional Stock Proposal. The Company has agreed to pay PaineWebber a
fee for its services. The Company also has agreed to reimburse PaineWebber for
certain of its reasonable out-of-pocket expenses and has agreed to indemnify
PaineWebber against certain liabilities, including liabilities under the
Securities Act.
No Dissenters' Rights
Under the California Corporations Code, holders of Existing Common
Stock do not have dissenters' rights with regard to the Divisional Stock
Proposal.
Certain Federal Income Tax Considerations
The following discussion summarizes the principal United States federal
income tax consequences of the Divisional Stock Proposal. The discussion is
based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Department regulations, published positions of the IRS, and court decisions, all
of which are subject to change. In particular, Congress could enact legislation
affecting the treatment of stock with characteristics similar to the Agouron
Pharmaceuticals Stock and Oncology Division Stock or the Treasury Department
could issue regulations, including regulations issued pursuant to its broad
authority under Section 337(d) of the Code which could change current law or
adversely effect existing interpretations of current law. Any such change, which
may or may not be retroactive, could alter the tax consequences to the Company
or the shareholders of the Company discussed herein.
Tax Implications to Shareholders
This discussion is based on certain assumptions regarding the factual
circumstances that will exist at the time of the Reclassification, including
certain representations made to or to be made by the Company. This discussion
addresses only those shareholders who hold their Existing Common Stock as a
capital asset within the meaning of Section 1221 of the Code, and is included
for general information only. It does not discuss all aspects of United States
federal income taxation that may be relevant to a particular shareholder in
light of such shareholder's personal tax circumstances and may not apply to
certain types of shareholders who may be subject to special treatment under the
federal income tax laws, such as insurance companies, corporations subject to
the alternative minimum tax, banks, dealers in securities or tax-exempt
organizations, persons that hold Existing Common Stock as part of a straddle,
hedging or conversion transaction,
<PAGE>
persons whose functional currency is not the U.S. dollar, shareholders who for
United States federal income tax purposes are foreign corporations, foreign
partnerships, nonresident alien individuals, foreign estates or foreign trusts
or to shareholders who acquired their stocks pursuant to the exercise of
employee stock options or otherwise as compensation. In addition, this
discussion does not address the effect of any applicable state, local or foreign
laws or any federal tax laws other than those pertaining to the income tax. EACH
SHAREHOLDER OF THE COMPANY SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR AS
TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH SHAREHOLDER'S
PARTICULAR SITUATION, AS WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL, OR FOREIGN TAX LAWS TO WHICH THEY MAY BE SUBJECT.
In the opinion of Pillsbury Madison & Sutro LLP, tax counsel to the
Company, for United States federal income tax purposes: (i) the Reclassification
will constitute a recapitalization within the meaning of Section 368(a)(1)(E) of
the Code, (ii) the Agouron Pharmaceuticals Stock and the Oncology Division Stock
will be treated for federal income tax purposes as Common Stock of the Company,
(iii) except with respect to cash paid in lieu of fractional shares, if any, the
holders of the Divisional Stocks will not recognize income, gain or loss in and
as a result of the Reclassification, (iv) the Divisional Stocks received in the
Reclassification will not constitute Section 306 stock within the meaning of
Section 306(c) of the Code, (v) the Divisional Stocks received in the
Reclassification will not constitute nonqualified preferred stock within the
meaning of Section 351(g) of the Code and (vi) the amendment and restatement of
the Rights Agreement will not result in income, gain or loss to the
shareholders. As a result of such treatment, holders of Existing Common Stock
will take a tax basis in the Agouron Pharmaceuticals Stock and Oncology Division
Stock equal to their tax basis prior to the Reclassification in the Existing
Common Stock (reduced by the amount allocable to any fractional share interest
for which cash is received), with such tax basis being allocated among the
Agouron Pharmaceuticals Stock and Oncology Division Stock in proportion to their
relative fair market values at the time of the Reclassification. Cash received
in lieu of fractional shares will result in the recognition of gain or loss
equal to the difference, if any, between the shareholder's basis in the
fractional shares and the amount of cash received. A shareholder's holding
period for shares of Agouron Pharmaceuticals Stock and Oncology Division Stock
received in the Reclassification will include such shareholder's holding period
for the shares of Existing Common Stock surrendered therefor.
The IRS announced in 1987 that it was studying and would not issue
advance rulings on the classification of stock that has certain voting and
liquidation rights in an issuing corporation but the dividend rights of which
are determined by reference to the earnings of a segregated portion of the
issuing corporation's assets. Although in 1995 the IRS withdrew such stock from
its list of matters under consideration, the IRS has reiterated that it will not
issue advance rulings regarding such stock. There are no court decisions or
other authorities that bear directly on transactions similar to the
Reclassification. It is possible, therefore, that the IRS could assert that the
Oncology Division Stock or the Agouron Pharmaceuticals Stock or both represent
property other than stock of Agouron ("Other Property"). If such stocks were
treated as Other Property, the Company would recognize a significant taxable
gain on the Reclassification in an amount equal to the excess of the fair market
value of such Other Property over its federal income tax basis to the Company or
its subsidiaries allocable to such Other Property. In addition, the Company
could lose the ability to file its federal income tax returns on a consolidated
basis. As a result, the tax losses expected to be incurred by the Oncology
Division could not offset the taxable income expected to be earned by Agouron
Pharmaceuticals and any amounts paid or deemed paid to the Company by the
Oncology Division or Agouron Pharmaceuticals could be taxable to the Company.
Furthermore, the receipt of Oncology Division Stock or the Agouron
Pharmaceuticals Stock by a shareholder of the Company might be treated as a
fully taxable dividend to such shareholder in an amount equal to the fair market
value of such stock (subject, in the case of shareholders of the Company that
are corporations, to any applicable dividends received deduction) or might be
treated as a distribution in complete liquidation of the Company, in which case
shareholders of the Company would have gain or loss with respect to the shares
held in the Company immediately before the Reclassification. As indicated above,
however, the Company has received an opinion from tax counsel that the Agouron
Pharmaceuticals Stock and the Oncology Division Stock will be treated for
federal income tax purposes as common stock of the Company.
It is also possible that the IRS could assert, in the alternative, that
the Oncology Division Stock or the Agouron Pharmaceuticals Stock or both
represent preferred stock (rather than Common Stock) of the Company for federal
income tax purposes. In order to support such an assertion the IRS would
generally have to conclude that such stock is limited and preferred as to
dividends and does not participate significantly in corporate growth. As a
result of such a conclusion, the IRS could further assert that the Oncology
Division Stock or the Agouron Pharmaceuticals Stock or both should be
characterized as "nonqualified preferred stock" or Section 306 stock.
Nonqualified preferred stock that is received by a shareholder in connection
with transactions intended to qualify as tax-free reorganizations, such as the
Reclassification, will be treated as taxable Other Property rather than as
tax-free stock consideration and accordingly, gain, but not loss, would be
recognized by the shareholder. If the Divisional Stocks were instead, or in
addition, treated as Section 306 stock, a shareholder could recognize ordinary
income on the taxable sale or exchange of such stock and dividend income
<PAGE>
on the redemption of such stock. As mentioned above, the Company has received an
opinion from tax counsel that the Agouron Pharmaceuticals Stock and the Oncology
Division Stock will not constitute nonqualified preferred stock or Section 306
stock.
Certain non-corporate holders of Oncology Division Stock or Agouron
Pharmaceuticals Stock might be subject to backup withholding at a rate of 31% on
the payment of dividends on such stock. Backup withholding will apply only if
the shareholder (i) fails to furnish his, her or its Taxpayer Identification
Number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that he, she or it has failed properly to report payments of interest or
dividends, or (iv) under certain circumstances, fails to certify, under
penalties of perjury, that he, she or it has furnished a correct TIN and has not
been notified by the IRS that he, she or it is subject to backup withholding for
failure to report payments of interest or dividends. Shareholders should consult
their tax advisors regarding their qualifications for a tax exemption from
backup withholding and the procedure for obtaining such an exemption if
applicable. The amount of any backup withholding from a payment to a holder of
Oncology Division Stock or Agouron Pharmaceuticals Stock will be allowed as a
credit against such shareholder's federal income tax liability and may entitle
such shareholder to a refund, provided that the required information is
furnished to the IRS.
The foregoing is for general information only. Shareholders should
consult their own tax advisors as to the federal, state, local and foreign tax
consequences of the Reclassification and of the holding of Oncology Division
Stock and Agouron Pharmaceuticals Stock.
United States Tax Consequences To Non-U.S. Shareholders
Each Non-U.S. Holder should consult a tax advisor with respect to the
United States federal tax consequences of acquiring, holding and disposing of
Oncology Division Stock, as well as any tax consequences that may arise under
the laws of any foreign, state, local or other taxing jurisdiction.
Amendment of Stock Plans
If the Divisional Stock Proposal is approved and implemented, the Board or
its delegates, pursuant to applicable provisions of the Company's existing stock
option plans and Employee Stock Purchase Plan (collectively the "Stock Plans")
will determine appropriate adjustments to outstanding options granted under the
provisions of such Stock Plans to take into account the implementation of the
Division Stock Proposal. Under these adjustments each outstanding option to
purchase Existing Common Stock will automatically be converted into an option to
purchase the number of shares of Agouron Pharmaceuticals Stock equal to the
number of Existing Common Stock previously covered by the outstanding option
plus an option to purchase the number of shares of Oncology Division Stock
equal to ______ of the number of shares of Existing Common Stock previously
covered by the outstanding option. The aggregate exercise price of the
outstanding option to purchase Existing Common Stock will be allocated between
the option covering Agouron Pharmaceuticals Stock and the option covering
Oncology Division Stock in a ratio to be determined by the Board or its
delegates.
In the event the Divisional Stock Proposal is approved and implemented,
the Stock Plans will be amended as of the Effective Date to clarify that grants
made after the Effective Date may be made with respect to either Agouron
Pharmaceuticals Stock or Oncology Division Stock or both (and/or any other
series of outstanding Common Stock of the Company), in the same manner and to
the same extent as permitted with respect to the Existing Common Stock. Although
the Stock Plan language authorizing adjustments to shares reserved and
outstanding awards and stock purchase rights implicitly permits the use of more
than one series of Common Stock for awards and stock purchase rights under the
Stock Plans, the Board believes that it is desirable to amend the Stock Plans to
explicitly provide that shares of any series of Common Stock are available for
awards. For the text of the 1996 Stock Option Plan and the Employee Stock
Purchase Plan as proposed to be amended, see Annexes VI and VII, respectively.
In determining whether awards of options or stock purchase rights to
purchase Agouron Pharmaceuticals Stock or Oncology Division Stock or a
combination thereof are to be made to specific employees, the Board or its
delegates may consider, among other things, the Division to which the employee
in question provides services. The Company also anticipates, however, that the
Board or its delegates will consider that employees should be rewarded based on
the success of the Company as a whole and that a policy of granting awards
solely in respect of the Common Stock relating to the Division for which the
employee provides services may be counter productive to the overall success of
the Company. In addition, because of the complementary nature of much of the
businesses of Agouron Pharmaceuticals and the Oncology Division, the Company
anticipates that services performed in respect of one Division may have at least
an
<PAGE>
indirect effect upon the operations of the other Division. Therefore, the
Company anticipates that the Board or its delegates could decide that in order
to provide the maximum incentive to employees regarding the overall success of
the Company, it may be appropriate to grant awards consisting of securities in
respect of both Divisions to employees performing services for one Division. If
the Board or its delegates elects to grant awards to individual employees
consisting of stock options to purchase both Agouron Pharmaceuticals Stock and
Oncology Division Stock, the allocation between the two will be at the
discretion of the Board or its delegates.
Restatement Of Rights Agreement
Pursuant to the Rights Agreement (the "Rights Agreement") between the
Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the
"Rights Agent"), the Company issued a dividend on November 7, 1996 of one
preferred stock purchase right on each share of Common Stock (a "Common Stock
Right"). If the shareholders approve the Divisional Stock Proposal and it is
implemented by the Board, the Rights Agreement will be amended and restated to
reflect the change in the capital structure of the Company and the Board will
declare a distribution to the holders of Oncology Division Stock of a right (an
"Oncology Stock Right") for each outstanding share of Oncology Division Stock.
The Rights Agreement, as amended and restated (the "Restated Rights Agreement"),
will provide that each Agouron Pharmaceuticals Stock Right ("Agouron Stock
Right") which will replace the Common Stock Right, and each Oncology Stock
Right, when it becomes exercisable, will entitle the registered holder to
purchase from the Company (i) in the case of an Agouron Pharmaceuticals Stock
Right, one one-ten thousandth of a share of Series B Participating Preferred
Stock, no par value (the "Series B Shares"), at a purchase price of $500,
subject to adjustment (including adjustment for the two-for-one split of Common
Stock in August 1997), and (ii) in the case of an Oncology Stock Right, one
one-ten thousandth of a share of Series C Participating Preferred Stock, no par
value (the "Series C Shares"), at a purchase price of $___, subject to
adjustment. The Agouron Stock Rights and Oncology Stock Rights are sometimes
hereinafter referred to together as the "Rights."
The Restated Rights Agreement will provide that initially, the Agouron
Stock Rights and Oncology Stock Rights will be evidenced by the certificates
representing shares of Agouron Pharmaceuticals Stock and Oncology Division
Stock, respectively, then outstanding, and no separate Rights certificates will
be distributed. The Agouron Pharmaceuticals Stock and the Oncology Division
Stock are sometimes hereinafter referred to together as the "Voting Stock." The
Rights will separate from the Voting Stock and a Distribution Date will occur
upon the earliest of (i) a public announcement that a person or group of
affiliated or associated Persons (an "Acquiring Person") has acquired, or
obtained the right to acquire beneficial ownership of securities having 15% or
more of the voting power of all outstanding voting securities of the Company or
(ii) ten days (unless such date is extended by the Board) following the
commencement of (or a public announcement of an intention to make) a tender
offer or exchange offer which would result in any person or group and related
persons becoming an Acquiring Person. Until the Distribution Date, the Agouron
Stock Rights will be transferred with and only with the Agouron Pharmaceuticals
Stock, and the Oncology Stock Rights will be transferred with and only with the
Oncology Division Stock. For purposes of the Restated Rights Agreement, the
total voting rights of the Voting Stock will be determined based upon the voting
rights of holders of outstanding shares of Agouron Pharmaceuticals Stock and
Oncology Division Stock in effect at the time of any such determination. See
"--Description of Capital Stock--Voting Rights."
The Rights will not be exercisable until the Distribution Date. The
Rights will expire on the earliest of (i) November 21, 2006, (ii) consummation
of a merger transaction with a person or group who acquired Voting Stock
pursuant to a Permitted Offer (as defined below), and is offering in the merger
the same price per share and form of consideration paid in the Permitted Offer,
or (iii) redemption or exchange of the Rights by the Company as described below.
In the event that, after the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, the
Company is involved in a merger or other business combination transaction
(whether or not the Company is the surviving corporation) or 50% or more of the
Company's assets or earning power are sold (in one transaction or a series of
transactions), proper provision will be made so that each holder of a Right
(other than an Acquiring Person) will thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of Agouron Pharmaceuticals Stock, in the case of a Agouron
Stock Right, and Oncology Division Stock, in the case of an Oncology Stock
Right, in the event that the Company is the surviving corporation of a merger or
consolidation, or Common Stock of the acquiring company (or, in the event there
is more than one acquiring company, the acquiring company receiving the greatest
portion of the assets or earning power transferred) which at the time of such
transaction would have a market value of two times the exercise price of the
Right (such right being called the "Merger Right"). In the event that a person
becomes the beneficial owner of securities having 15% or more of the voting
power of all then outstanding voting securities of the Company (unless pursuant
to a tender offer or exchange offer for all outstanding shares of Voting Stock
at a price and on terms determined prior to the date of the first acceptance of
payment for any of such shares by at least a majority of the members of the
Board who are not
<PAGE>
officers of the Company and are not Acquiring Persons or affiliates or
associates thereof to be both adequate and otherwise in the best interests of
the Company and its shareholders (a "Permitted Offer")), then proper provision
will be made so that each holder of an Agouron Stock Right and an Oncology Stock
Right will for a 60-day period (subject to extension under certain
circumstances) thereafter have the right to receive upon exercise that number of
shares of Agouron Pharmaceuticals Stock or Oncology Division Stock, as the case
may be, having a market value of two times the exercise price of the Right, to
the extent available, and then (after all authorized and unreserved shares of
Voting Stock have been issued) a Common Stock equivalent (such as Preferred
Stock or another equity security with at least the same economic value as the
Voting Stock) having a market value of two times the exercise price of the
Right, with Voting Stock to the extent available being issued first (such right
being called the "Subscription Right"). The holder of a Right will continue to
have the Merger Right whether or not such holder exercises the Subscription
Right. Notwithstanding the foregoing, upon the occurrence of any of the events
giving rise to the exercisability of the Merger Right or the Subscription Right,
any Rights that are or were at any time after the Distribution Date owned by an
Acquiring Person will immediately become null and void.
At any time prior to the earlier to occur of a Person becoming an
Acquiring Person or the expiration of the Rights, the Company may redeem the
Rights in whole, but not in part, at a price of $.001 per Right (the "Redemption
Price"), which redemption shall be effective upon the action of the Board.
Additionally, the Company may thereafter redeem the then outstanding Rights in
whole, but not in part, at the Redemption Price (a) if such redemption is
incidental to a merger or other business combination transaction or series of
transactions involving the Company but not involving an Acquiring Person or
certain related persons or (b) following an event giving rise to, and the
expiration of the exercise period for, the Subscription Right if and for as long
as an Acquiring Person beneficially owns securities representing less than 15%
of the voting power of the Company's voting securities. The redemption of Rights
described in the preceding sentence will be effective only as of such time when
the Subscription Right is not exercisable, and in any event, only after 10
Business Days prior notice. Upon the effective date of the redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
The Restated Rights Agreement will provide that, subject to applicable
law, the Board, at its option, may at any time after a person becomes an
Acquiring Person (but not after the acquisition by such person of 50% or more of
the outstanding Voting Stock), exchange all or part of the then outstanding and
exercisable Agouron Stock Rights and Oncology Stock Rights (except for Rights
which have become void) for shares of Agouron Pharmaceuticals Stock or Oncology
Division Stock, as the case may be, equivalent to one share of Agouron
Pharmaceuticals Stock per Agouron Stock Right and one share of Oncology Division
Stock per Oncology Stock Right or, alternatively, for substitute consideration
consisting of cash, securities of the Company or other assets (or any
combination thereof).
Prior to the Distribution Date, the terms of the Restated Rights
Agreement may be amended by the Board without the consent of the holders of the
Rights. After the Distribution Date, the terms of the Restated Rights Agreement
may be amended by the Board in any manner which the Company may deem necessary
or desirable and which will not adversely affect the interests of the Rights
holders.
In addition to the amendment to the Articles in connection with the
Divisional Stock Proposal, the Articles will be further amended to ensure that
the Rights Agreement conforms with provisions of the California Corporations
Code in that the Rights may provide for different or discriminate treatment
among holders of the Rights in accordance with criteria selected by the Board in
connection with the creation of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit B-1 the Form of Rights Certificate for Agouron Pharmaceuticals Stock
Rights and as Exhibit B-2 the Form of Rights Certificate for Oncology Division
Stock Rights) will be filed with the Commission as an exhibit to the
Registration Statement to which this Proxy Statement relates and is incorporated
herein by reference. A copy of the Rights Agreement and the amendments thereto
were filed with the Commission as Exhibit to the Company's Form 8-A and Form
8-A/A on November 8, 1996 and December 20, 1996 and are incorporated herein by
reference. A copy of the Restated Rights Agreement is available free of charge
from the Rights Agent. The foregoing description of the Rights is a summary only
and is qualified in its entirety by reference to the Restated Rights Agreement
and the Rights Agreement.
Anti-Takeover Considerations
The following information is provided with respect to certain matters
that could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
<PAGE>
The Articles provide that the Board has the authority, without further
action by the shareholders, to issue from time to time the Preferred Stock in
one or more series and to fix the number of shares, designations, rights,
preferences, privileges and restrictions thereof. The rights, preferences,
privileges and restrictions of different series of Preferred Stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions, and other
matters.
If the Divisional Stock Proposal is approved, the Restated Articles
will provide that the Board has the authority, without further action by the
shareholders, to issue from time to time shares of a new series of Common Stock
and to fix the number of shares, designations, rights, preferences, privileges
and restrictions thereof or to increase or decrease the number of shares of any
existing series. The rights, preferences, privileges and restrictions of
different series of Common Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, and other matters.
Although the Board has no present intention of doing so, it could
issue shares of Preferred Stock or of a new or existing series of Common Stock
that could, depending on the terms of such stock, make more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or other means. Such shares could be used to create
voting or other impediments or to discourage persons seeking to gain control of
the Company and could also be privately placed with purchasers favorable to the
Board in opposing such action. In addition, the Board could authorize holders of
a series of Common Stock or Preferred Stock to vote either separately as a
class, or with the holders of the Company's currently outstanding Common Stock,
on any merger, sale or exchange of assets by the Company or any other
extraordinary corporate transaction. The mere existence of the additional
authorized shares could have the effect of discouraging unsolicited takeover
attempts. The issuance of new shares also could have a dilutive effect on the
voting power of existing holders of Common Stock and on earnings per share and
could be used to dilute the stock ownership of a person or entity seeking to
obtain control of the Company should the Board consider the action of such
entity or person not to be in the best interests of the shareholders and the
Company. To the extent that potential takeovers are thereby discouraged,
shareholders may not have the opportunity to dispose of all or a part of their
stock at a price that may be higher than that prevailing in the market.
<PAGE>
PROPOSAL 3 - AMENDMENT OF THE
1996 STOCK OPTION PLAN
Description of the 1996 Stock Option Plan
The essential features of the Restated 1996 Stock Option Plan (the "Stock
Option Plan") are outlined below. For a complete understanding of the terms of
the Stock Option Plan, see Annex VI, which reflects amendments that will be made
if the Divisional Stock Proposal and this Proposal 3 are approved by the
shareholders.
The purpose of the Stock Option Plan is to encourage officers, directors,
employees and consultants of the Company to acquire or increase their
proprietary interest in the success of the Company and to continue their
affiliation with the Company. Eligible employees may be granted either
"incentive stock options" or "non-statutory stock options" to purchase Common
Stock under the Stock Option Plan. Subject to certain conditions, officers,
directors and consultants who are not employees may be granted "non-statutory
stock options" under the Stock Option Plan. An incentive stock option is an
option which qualifies for certain favorable income tax treatment under the
Internal Revenue Code. A non-statutory stock option is an option which is not an
incentive stock option for federal income tax purposes.
As of August __, 1998, under the Stock Option Plan, there were outstanding
options to purchase ______ shares of Existing Common Stock under the Stock
Option Plan (of which options to purchase ________ shares were exercisable). The
Company has three additional stock option plans: (1) the 1985 Stock Option Plan
(the "1985 Plan") under which as of August __, 1998 there were outstanding
options to purchase ______ shares of Existing Common Stock (of which options to
purchase ________ shares were exercisable); (2) the 1990 Stock Option Plan (the
"1990 Plan") under which as of August __, 1998 there were outstanding options to
purchase ______ shares of Existing Common Stock (of which options to purchase
________ shares were exercisable); and (3) the 1998 Stock Option Plan (the "1998
Plan") under which as of August __, 1998 there were outstanding options to
purchase ______ shares of Existing Common Stock (of which options to purchase
__________ shares were exercisable). At August __, 1998, stock options to
purchase an aggregate number of _____ shares remained available for issuance
under the Stock Option Plan including 1,000,000 shares approved by its Board on
August 6, 1998, stock options to purchase an aggregate of _____ shares remained
available for issuance under the 1985 Plan, stock options to purchase an
aggregate of _____ shares remained available for issuance under the 1990 Plan,
and stock options purchase an aggregate of _____ shares remained available for
issuance under the 1998 Plan.
The Board believes that the Company's stock option programs have created
significant incentives for its employees, officers, directors and consultants.
The Board considers it important for the future success of the Company to
continue to grant stock options on a basis comparable with those granted by
other companies with which it competes in attracting, retaining and motivating
qualified personnel. On August 6, 1998, the Board adopted an amendment to the
Stock Option Plan, to increase by 1,000,000 shares the aggregate number of
shares of Common Stock available for issuance under the Stock Option Plan. The
Board has also approved, in connection with and subject to approval and
implementation of the Divisional Stock Proposal, the amendment to the Stock
Option Plan to conform the Plan to the changes in the Company's capital
structure being made by the Divisional Stock Proposal. See "Proposal 2--The
Divisional Stock Proposal--Amendment of Stock Plans."
The total number of shares available under the Stock Option Plan, the
number of shares subject to outstanding options and the exercise price per share
of outstanding options will be subject to adjustment upon the occurrence of
stock dividends, recapitalizations, consolidations, stock splits, combinations
or exchanges of shares of stock or other increases or decreases in the number of
shares of the Company's Common Stock effected without receipt of consideration
by the Company, in order to preclude the dilution or enlargement of benefits
under the Stock Option Plan. The Board may also make such equitable adjustments
to the Stock Option Plan and outstanding options as it deems appropriate in
order to preclude the dilution or enlargement of benefits under the Stock Option
Plan upon exchange of all of the outstanding Common Stock of the Company for a
different class or series of capital stock or the separation of assets of the
Company, including a spin-off or other distribution of stock or property by the
Company. If any option under the Stock Option Plan terminates or expires, the
shares allocable to the unexercised portion of the option will again be
available for purposes of the Stock Option Plan. In certain circumstances, where
an optionee uses stock to exercise an option, only the net shares issued to the
optionee are counted against the number of shares issued under the Stock Option
Plan. Certain stock issuances which are later forfeited by the optionee do not
count as grants under the Stock Option Plan.
<PAGE>
A dissolution or liquidation of the Company, a merger or consolidation in
which the Company is not the surviving corporation, a reverse merger in which
the Company is the surviving corporation but the Company's Common Stock
outstanding immediately preceding the merger is converted by virtue of the
merger into other property, or other capital reorganization in which more than
fifty percent (50%) of the Company's Common Stock is exchanged, shall cause each
outstanding option to terminate, provided that each optionee shall have the
right immediately prior to the occurrence of such event to exercise his or her
option in whole or in part; however, the exercise date of outstanding options
shall not be accelerated by such event if and to the extent: (i) the option in
connection with such event is either to be assumed by the successor corporation
or parent thereof or to be replaced with a comparable option to purchase shares
of the capital stock of the successor corporation or parent thereof; or (ii) the
option is to be replaced by a comparable cash incentive program of the successor
corporation based on the value of the option on the date of such event.
Notwithstanding the preceding, if within one year from the date of such event,
an employee's employment is involuntarily terminated, then the employee's
outstanding stock options, if any, shall become immediately exercisable.
Administration of the Stock Option Plan
The Stock Option Plan is administered by the Board, except that the Board
may delegate all or any part of its authority to administer the Stock Option
Plan with respect to any group or groups of persons eligible to receive options
to such persons or committee as the Board may determine. The Board has currently
delegated to a committee, composed of certain of the Company's executive
officers, the authority to administer the Stock Option Plan with respect to
persons who are neither officers nor directors of the Company. Further
references herein to the administration of the Stock Option Plan by the Board
refer to the Board or its delegates, unless the context otherwise indicates.
Whether or not the Board has delegated administrative authority, the Board has
final power to determine all questions of policy or expediency that may arise in
the administration of the Stock Option Plan.
The Board has the power to make all determinations necessary or advisable
for the administration of the Stock Option Plan. The Board also has the final
power to construe and interpret the Plans and the options granted under it. The
Board determines, within the limits of the Stock Option Plan, the persons to
whom and the time or times at which options shall be granted, the type of
options to be granted (whether incentive stock options or non-statutory stock
options), the number of shares to be subject to each option, the duration of
each option, the option price and the time or times within which, during the
term of option, all or any portion of an option becomes exercisable ("vests").
If the Divisional Stock Proposal is approved and implemented, the Board or its
delegates shall be entitled to determine as of the grant date, the series of
Common Stock from which shares will be issued on exercise of a specific option.
The Company's current form of stock option agreement provides that an option
vests over a two, three or four year period. In the event that an employee
terminates his or her employment with the Company, unless the Board otherwise
elects, the then nonvested portion of his or her option is forfeited. Subject to
the terms and conditions of the Stock Option Plan, the Board may modify an
outstanding option (including lowering the option price or changing incentive
stock options into non-statutory stock options), change the vesting schedule,
extend or renew outstanding options granted under the Stock Option Plan or
accept the surrender of outstanding options (to the extent not previously
exercised) and authorize the granting of new options in substitution therefor.
The Board may permit an option to be exercised before it is vested, subject to
repurchase rights which terminate on a vesting schedule identical to the vesting
schedule of the option. The Board may also establish other limitations or
restrictions upon exercise of options.
Grant and Exercise of Incentive Stock Options and Non-statutory Stock Options
All employees of the Company are eligible to receive incentive stock
options and non-statutory stock options under the Stock Option Plan. Subject to
certain conditions, officers, directors and consultants of the Company who are
not employees are eligible to receive non-statutory stock options but not
incentive stock options. To the extent required by Section 162(m) to qualify
future compensation as "performance based," options to purchase more than
750,000 shares may not be granted in a fiscal year to any individual participant
in the Stock Option Plan.
<PAGE>
Incentive stock options under the Stock Option Plan may be granted by the
Board at any time prior to August 6, 2008. Options shall be evidenced by
agreements in such form as the Board shall from time to time determine,
consistent with the terms of the Stock Option Plan. The price per share under
each incentive stock option must be at least 100% of the fair market value of
the Common Stock on the date the option is granted. The Board can set any price
it wishes for shares granted under non-statutory stock options. The price for
shares may be paid in any combination of cash, by cashier's or certified check,
personal check acceptable to the Company, shares of the Company's Common Stock
(including previously owned Common Stock or Common Stock issuable in connection
with the exercise) or "built-in gain" in any options which are terminated as
part of such exercise. The Board may take such steps it deems necessary to
facilitate the payment of the option price. However, payment of the option price
must be in such form as the Board determines and the Board may require
satisfaction of any rules or conditions it deems necessary in connection with
the payment of the option price or on account of any assistance given an
optionee to facilitate such payment. The aggregate fair market value (determined
as of the time the option is granted) of stock with respect to which incentive
stock options are exercisable for the first time by an employee during a
calendar year can not exceed $100,000.
Except as otherwise provided in the option agreement between the Company
and the optionee, each option expires on the date set forth in such agreement.
The term of each incentive stock option cannot be more than ten years from the
date on which the option is granted.
To the extent required by Internal Revenue Code Section 422, options
granted under the Stock Option Plan may not be transferred other than by will or
the laws of descent and distribution and may be exercised during the holder's
lifetime only by the holder. However, non-statutory stock options can be
transferred to a trust for the benefit of the optionee, or members of his
family.
Amendment and Termination
The Board may at any time revise, amend, suspend or terminate the Stock
Option Plan. No amendment shall, without the approval of the shareholders,
change the number of shares for which incentive stock options may be granted
under the Stock Option Plan, reduce the price per share at which incentive stock
options may be offered under the Stock Option Plan below 100% of the fair market
value on the date of grant, or modify the eligibility requirements for the class
of employees eligible to receive incentive stock options.
Tax Withholding
Optionees are required to pay the Company cash for the amount of the tax
liability incurred by the optionee in connection with the exercise of his or her
option. However, the Board may in its sole discretion permit an optionee to
reimburse the Company for such tax liability by the actual or imputed delivery
to the Company of shares of its Common Stock.
Federal Income Tax Consequences
The principal tax consequences of the grant and exercise of incentive stock
options and non-statutory stock options under current provisions of the federal
income tax laws may be summarized as follows:
Incentive Stock Options. The grant of an incentive stock option does not
produce taxable income for the employee or a tax deduction for the Company. Upon
exercise of an incentive stock option, the excess of the fair market value of
the shares acquired over the amount paid by the employee for the shares will be
an item of tax preference to the employee, which may be subject to the
alternative minimum tax for the taxable year of exercise. If no disposition of
the stock is made within two years from the date of grant of the incentive stock
option nor within one year after the transfer of the shares to the employee, the
employee will not realize ordinary income as a result of the exercise and
subsequent sale of the incentive stock option. Any gain or loss realized on the
ultimate sale of the shares must be reported by the employee as long-term
capital gain or loss. The Company is not entitled to any deduction as a result
of the exercise of the incentive stock option.
<PAGE>
If the employee disposes of the shares within the two-year or one-year
periods referred to above, the excess of the fair market value of the shares at
the time of exercise (or the proceeds of disposition, if less) over the amount
paid by the employee for the shares will at that time be taxable to the employee
as ordinary income. The same amount will be deductible by the Company, subject
to the general rules relating to the reasonableness of compensation. The excess
(if any) of the proceeds of disposition over the fair market value of the shares
on the date of exercise must be reported by the employee as a long-term capital
gain if the shares have been held for more than one year, or as a short-term
capital gain if the shares have been held for one year or less. If no gain is
realized, there will be no ordinary income and any loss will be long-term or
short-term capital loss.
Non-Statutory Stock Options. The grant of a non-statutory stock option
under the Stock Option Plan does not produce taxable income for the optionee or
a tax deduction for the Company. Except as described below, upon exercise of a
non-statutory stock option, the excess of the fair market value of the shares
acquired over the amount paid by the optionee will be taxable to the optionee as
ordinary income.
The Company will be entitled to a deduction for income tax purposes in an
amount equal to the ordinary income taxable to the optionee in the year in which
such ordinary income is recognized. Any additional profit or loss realized by an
optionee on disposition of the shares will not result in any additional tax
deduction to the Company.
Similar rules apply if the Company permits the exercise of an "unvested"
option with the issued stock being subject to certain repurchase rights or other
substantial risks of forfeiture.
Using Stock to Exercise Options. Special rules apply if an optionee uses
already owned stock of the Company to pay all or part of the exercise price of
an incentive or non-statutory stock option. The use of already owned stock to
pay all or part of the exercise price of a non-statutory stock option permits an
optionee to defer the date when the gain on the surrendered shares which are
used to pay the exercise price of the option is recognized for tax purposes.
That is, using already owned shares to exercise a non-statutory stock option
permits an optionee to finance the exercise of the option without paying current
tax on the unrealized appreciation in value of the surrendered shares. An option
exercise using already owned stock is treated as a "tax-free exchange" with
respect to that number of shares received on the option exercise which equals
the number of shares surrendered. The optionee's basis in these shares is the
same as his or her basis in the shares surrendered, and the capital gain holding
period on such shares runs without interruption from the date when the
surrendered shares were acquired. Any additional shares received by the optionee
on the exercise will trigger ordinary income taxation equal to the fair market
value of the additional shares over the consideration paid by the optionee in
connection with the exercise. The optionee's basis in the additional shares is
equal to their fair market value on the date the shares were received, and the
capital gain holding period on such shares commences on that date. Similarly,
the use of previously owned stock to pay the exercise price of an incentive
stock option permits an employee to defer tax recognition of gain on the
surrendered shares. However, if an employee pays all or part of the exercise
price of an incentive stock option by surrendering stock previously acquired in
the exercise of any other incentive stock option and such previously acquired
stock has not been held for the statutory holding period, then the surrender of
such stock to exercise the incentive stock option will be treated as a
disqualifying disposition of the prior incentive stock option with the tax
consequences described above. Furthermore, complex tax rules apply concerning
the use of shares to exercise an incentive stock option, especially with regard
to an employee's basis in the shares received on the exercise.
Accounting Treatment
Under the present financial accounting rules, neither the grant nor the
exercise of options issued to employees at fair market value will result in any
charge to the Company's earnings. However, the Company will be required to
calculate the fair value of all option grants at the time of grant and disclose
such value on a pro-forma basis. The grant of options with exercise prices less
than the fair market value of the shares at the time of grant will result in a
compensation expense equal to the discount from market at the time of grant. The
Company will have to report such expense pro rata as the shares underlying the
option become exercisable. Accordingly, the grant of discounted options under
the Stock Option Plan would result in a charge to reported earnings. In all
events, the number of dilutive options outstanding under the Stock Option Plan
will be a factor in determining the Company's reported earnings per share.
Required Vote
Approval by the holders of a majority of the shares of the Existing Common
Stock represented and voting at the Meeting on this matter (which shares
constitute at least a majority of the required quorum for the Meeting) is
required for the adoption of this proposal. For purposes of calculating the vote
necessary for approval, abstentions and non-votes are not counted.
The Board recommends that you vote FOR the approval of this proposal, which
is set forth as Item 3 on the Proxy Card.
<PAGE>
PROPOSAL 4 - AMENDMENT OF THE
AGOURON PHARMACEUTICALS, INC. EMPLOYEE STOCK PURCHASE PLAN
Description of the Employee Stock Purchase Plan
The essential features of the Restated Employee Stock Purchase Plan (the
"ESPP") are outlined below. For a complete understanding of the terms of the
ESPP, see Annex VII, which reflects amendments that will be made if the
Divisional Stock Proposal and this Proposal 4 are approved by the shareholders.
As of August __, 1998, a total of ______ shares of Common Stock remain
available for purchase under the ESPP. Any full-time employee is eligible to
participate in the ESPP after he or she has been continuously employed by the
Company for three consecutive months. Eligible employees may elect to contribute
up to 15% of their total compensation during each offering period, subject to
certain statutory limits. Additionally, each employee is only entitled to
purchase up to a maximum of 3,000 shares of Common Stock during any one year. On
the last day of the offering period or such other date(s) during the offering
period which the Board has chosen prior to the commencement of the offering
period (Purchase Date) the Company will apply the amount contributed by the
participant to purchase whole shares of Common Stock. Shares of Common Stock are
purchased for eighty-five percent (85%) of the lower of the fair market value
per share of Common Stock on (i) the first day of the offering period or (ii)
the Purchase Date. All expenses incurred in connection with the implementation
and administration of the ESPP are paid by the Company. The ESPP is administered
by the Board; provided, however, that the Board may delegate all or any part of
its authority to administer the ESPP. Termination of employment for any reason
shall be treated as an automatic withdrawal by the participant from the ESPP.
The Board has the right to amend, suspend or terminate the ESPP at any
time and without notice; provided, no participant's existing rights are
adversely affected thereby and except that any amendment to increase the
aggregate number of shares available under the ESPP shall be subject to approval
by a vote of the shareholders of the Company.
On August 6, 1998, the Board adopted an amendment to the ESPP subject
to the approval of the Company's shareholders to increase by 200,000 shares the
aggregate number of shares available for purchase under the ESPP. The Board has
also approved, in connection with and subject to approval and implementation of
the Divisional Stock Proposal, the amendment and restatement of the ESPP to
conform the ESPP to the changes in the Company's capital structure being made by
the Divisional Stock Proposal. See "Proposal 2--The Divisional Stock
Proposal--Amendment of Stock Plans."
Certain Federal Income Tax Information
The ESPP, and the right of participants to make purchases thereunder, is
intended to qualify under the provisions of Sections 421 and 423 of the Internal
Revenue Code. Under these provisions, no income will be taxable to a participant
at the time of grant of the option or purchase of shares. Upon disposition of
the shares, the participant will generally be subject to tax. If the shares have
been held by the participant for more than two years after the first day of the
offering period and more than one year after the purchase date of the shares,
the lesser of (a) the excess of the fair market value of the shares at the time
of such disposition over the purchase price of the shares subject to option, or
(b) the excess of the fair market value of the shares on the first day of the
offering period over the deemed purchase price of the shares subject to option,
will be treated as ordinary income, and any further gain upon such disposition
will be treated as capital gain. If the shares are disposed of before the
expiration of the holding periods described above, the excess of the fair market
value of the shares on the date of purchase over the purchase price will be
treated as ordinary income, and any further gain or loss on such disposition
will be capital gain or loss. Different rules may apply with respect to
optionee's subject to Section 16(b) of the Securities Exchange Act of 1934, as
amended. The Company is not entitled to a deduction for amounts taxable to a
participant, except to the extent of ordinary income reported by participants
upon disposition of shares prior to the expiration of the holding periods
described above.
The foregoing is only a summary of the United States federal income tax
consequences of the ESPP to participants and the Company and does not purport to
be complete. Reference should be made to the applicable provisions of the
Internal Revenue Code. In addition, the summary does not discuss the income tax
consequences of a participant's death or the income tax laws of any
municipality, state or foreign country in which the participant may reside.
<PAGE>
Required Vote
Approval by the holders of a majority of the shares of the Company's Common
Stock represented and voting at the Meeting on this matter (which shares
constitute at least a majority of the required quorum for the Meeting) is
required for the adoption of this proposal. For purposes of calculating the vote
necessary for approval, abstentions and non-votes are not counted.
The Board recommends that you vote FOR the approval of this proposal, which
is set forth as Item 4 on the Proxy Card.
<PAGE>
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board has selected the firm of PricewaterhouseCoopers LLP as
independent accountants for the Company for the fiscal year ending June 30,
1999, it being intended that such selection would be proposed for ratification
by the affirmative vote of a majority of the shares of the Existing Common Stock
represented and voting at the Meeting on this matter (which shares constitute at
least a majority of the required quorum for the Meeting). For purposes of
calculating the vote necessary for ratification of the selection of independent
accountants, abstentions and non-votes are not counted. One or more members of
PricewaterhouseCoopers LLP are expected to be present at the Meeting and will be
available to respond to questions and make a statement if they desire to do so.
The Board recommends that you vote FOR the ratification of the selection of
PricewaterhouseCoopers LLP, which is set forth as Item 5 on the Proxy Card.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September __, 1998
relating to the beneficial ownership of the Existing Common Stock by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director, (iii) each of the
executive officers named in the Summary Compensation Table below, and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
Number of Percentage of
Beneficial Owner Shares(9) Total
<S> <C> <C>
Wellington Management Co. 3,500,000 11.25%
75 State Street
Boston, MA 02109
Peter Johnson(2) 706,533 2.23%
Gary E. Friedman(2) Family Trust(8) 294,123 *
John N. Abelson(2)(3)(6) 102,943 *
Patricia M. Cloherty(2) 27,659 *
A. E. Cohen(2) 73,333 *
Michael E. Herman(2)(4) 83,333 *
Irving S. Johnson(2) 41,933 *
Antonie T. Knoppers(2) 51,533 *
Melvin I. Simon(2)(3) and Linda F. Simon Living Trust(5) 122,843 *
Marvin R. Brown 194,995 *
Barry D. Quart 152,481 *
R. Kent Snyder(7) 175,035 *
All executive officers and directors as a group (19 persons) 6,206,671 18.78%
</TABLE>
* less than 1%.
(1) Unless otherwise indicated, the persons named in the above table exercise
sole voting and investment powers with respect to all shares beneficially
owned by them, subject to applicable community property laws. The number of
shares beneficially owned includes the following number of shares issuable
upon exercise of stock options exercisable within 60 days of September 22,
1998: Mr. Johnson, 596,923 shares; Mr. Friedman, 241,599 shares; Dr.
Abelson, 33,333 shares; Ms. Cloherty, 13,333 shares; Mr. Cohen, 43,333
shares; Mr. Herman, 39,333 shares; Dr. Johnson, 15,833 shares; Dr.
Knoppers, 43,333 shares; Dr. Simon, 33,333 shares; Dr. Brown, 23,077
shares; Dr. Quart 117,266 shares; Mr. Snyder,168,932 shares; and all
executive officers and directors as a group, 1,952,280 shares.
(2) Director.
(3) Does not include 1,106,000 shares held by The Agouron Institute, of which
Drs. Abelson and Simon are directors. As directors, they share voting and
investment powers as to the shares held by The Agouron Institute.
(4) Includes 20,000 shares held by the Herman Family Trading Company, a family
partnership of which Mr. Herman is the general partner, 10,000 shares held
by Vail Fishing Partners in which Mr. Herman has a 50% general partner
interest and 2,000 shares held by Mrs. Herman, of which Mr.EHerman
disclaims any beneficial ownership.
(5) Shared voting and investment power.
(6) Includes 2,350 shares held by Dr. Abelson as custodian for his minor
children, of which Dr. Abelson disclaims any beneficial ownership.
(7) Includes 800 shares held by immediate family members, of which Mr. Snyder
disclaims any beneficial ownership.
(8) Includes 5,408 shares held by wife as custodian for minor children of which
Mr. Friedman disclaims any beneficial ownership.
(9) Adjusted to reflect the two-for-one stock split in the form of a stock
dividend in August 1997.
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Directors
Non-employee members of the Board receive cash compensation in the amount of
$250 per Board meeting for their services as Board members, and are eligible for
reimbursement of their expenses incurred to attend each such meeting in
accordance with Company policy. In addition to meeting fees, certain
non-employee directors received consulting fees during fiscal 1998. For
scientific consultation, Dr. Abelson received $30,040; Dr. Knoppers, $6,000; Dr.
Johnson, $18,750 and Dr. Simon, $26,900. For special consultation concerning
corporate development issues, Mr. Cohen received $18,250 and Mr. Herman received
$750.
Compensation of Executive Officers
The following table sets forth the aggregate compensation paid or accrued
by the Company to the Chief Executive Officer and to the four other most highly
compensated executive officers whose annual compensation exceeded $100,000 for
the fiscal year ended June 30, 1998 (collectively the "named executive
officers") for service during the fiscal years ended June 30, 1998, 1997 and
1996:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Name Annual Compensation Awards(2)
Principal Stock All Other
Position Year Salary(1) Bonus Options Compensation(3)
<S> <C> <C> <C> <C> <C>
Peter Johnson 1998 $395,000 $230,000 40,000 $2,998
President and Chief 1997 330,000 165,000 100,000 2,250
Executive Officer 1996 285,000 100,000 180,000 1,647
Marvin R. Brown(4) 1998 230,000 65,000 10,000 2,400
Vice President, 1997 23,523 0 0
President of Alanex 1996 -- -- --
Gary E. Friedman 1998 212,500 100,000 17,000 11,232
Corporate Vice President, 1997 195,000 70,000 26,000 2,250
General Counsel 1996 175,500 50,000 50,000 1,589
Barry D. Quart(5) 1998 230,000 125,000 21,000 2,713
Senior Vice President, 1997 180,000 115,500(5) 44,000 2,953
Regulatory Affairs 1996 165,000 70,500(5) 72,000 16,587
R. Kent Snyder(5) 1998 230,000 150,000 21,000 3,050
Senior Vice President, 1997 200,000 102,000(5) 44,000 2,250
Commercial Affairs 1996 178,500 62,200(5) 64,000 1,777
</TABLE>
(1) Includes amounts deferred out of compensation under the Company's 401(k)
Plan otherwise payable in cash during each fiscal year.
(2) The Company has made no restricted stock awards, has not granted any stock
appreciation rights and has no other long-term incentive plans.
(3) (a) During 1998, the Company made matching contributions to the
Company's 401(k) Plan in the following amounts: Mr. Johnson, $2,998;
Dr. Brown, $2,400; Mr. Friedman, $3,063; Dr. Quart, $2,713; and Mr.
Snyder $3,050.
(b) During 1997, the Company made matching contributions to the Company's
401(k) Plan in the following amounts: Mr. Johnson, $2,250;
Mr. Friedman $2,250; Dr. Quart, $2,953; and Mr. Snyder, $2,250.
(c) During 1996, the Company made matching contributions to the Company's
401(k) Plan in the following amounts: Mr. Johnson, $1,647; Mr.
Friedman, $1,589; Dr. Quart, $1,959; and Mr. Snyder, $1,777.
(d) During 1996, the Company reimbursed Dr. Quart for relocation costs in
the amount of $14,628.
(e) During 1998, Mr. Friedman sold accrued but unused vacation back to the
Company in the amount of $8,169.
(4) Dr. Brown joined the Company as of 5/24/97 with the acquisition of Alanex
Corporation.
(5) For Dr. Quart and Mr. Snyder, a portion of the bonus amount was
subsequently used to partially repay their outstanding relocation loans.
These loans were paid in full on June 30, 1997.
<PAGE>
The following table sets forth certain information with respect to
individual grants of stock options made during the fiscal year ended June 30,
1998, to each of the named executive officers:
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(2)_
% of Total
Options
Granted to
Employees
Options in Fiscal Exercise Expiration
Name Granted(1) Year Price Date 5% 10%
- ------------ ------------------------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter Johnson 30,145# 2.70% $30.4375 6/29/08 $577,035 $1,462,320
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Marvin R. Brown 145# 0.01 30.4375 6/29/08 2,776 7,034
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Gary E. Friedman 7,145# 0.64 30.4375 6/29/08 136,769 346,601
9,855* 0.88 30.4375 6/29/08 188,644 478,061
Barry D. Quart 11,145# 1.00 30.4375 6/29/08 213,337 540,639
9,855* 0.88 30.4375 6/29/08 188,644 478,061
R. Kent Snyder 11,145# 1.00 30.4375 6/29/08 213,337 540,639
9,855* 0.88 30.4375 6/29/08 188,644 478,061
</TABLE>
(1) During fiscal 1998, the Agouron Stock Option Plan ("Plan") for executive
officers and directors was administered by the Board. The Board, based upon
the recommendation of the Directors Compensation Committee, determines the
number of shares to be granted and the term of such grants to each
executive officer and director. The options granted in fiscal 1998 were
either incentive stock options(*) or non-statutory stock options(#), have
exercise prices equal to the fair market values on the date of grant, vest
over a period of three years and have a term of ten years. Upon certain
corporate events as defined in the Plan which result in a change of
control, the exercise date of all outstanding options for all employees,
including executive officers, may be accelerated. The Plan also permits the
Company to assist an employee in using a so-called "cashless" exercise
procedure to pay the option exercise price.
(2) Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth. Any such growth would benefit all
shareholders.
<PAGE>
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended June 30, 1998, by each of
the named executive officers and the number and value of unexercised options
held by such named executive officers as of June 30, 1998:
Option Exercises in Fiscal 1998
And Value of Options at June 30, 1998
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares June 30, 1998(2) June 30, 1998(1)
-------------------------- ---------------------
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Peter Johnson 125,000 $5,692,095 596,923 205,767 $ 11,290,804 $ 1,312,900
Marvin R. Brown 2,500 85,744 17,845 17,325 538,428 221,014
Gary E. Friedman 1,000 24,188 241,599 61,001 4,988,364 348,337
Barry D. Quart 32,000(2) 1,233,037 133,266 89,334 1,982,900 513,000
R. Kent Snyder 12,500 406,045 168,932 81,668 2,983,727 392,673
</TABLE>
(1) Value calculated as market value of Company stock on June 30, 1998, minus
exercise price multiplied by the number of shares
(2) Adjusted to reflect the two-for-one stock split in the form of a stock
dividend in August 1997.
<PAGE>
Compensation Committee Report on Executive Compensation(1)
Overview and Philosophy
The Directors Compensation Committee (the "Committee") is composed entirely
of outside directors and is responsible for developing and making
recommendations to the Board with respect to the Company's executive
compensation policies and practices, including the establishment of the annual
total compensation for the chief executive officer (the "CEO") and all executive
officers. The Committee has available to it an outside compensation consultant
and access to independent compensation data. The Board is responsible for
approving and implementing the compensation recommendations of the Committee.
The recommendations made by the Committee to the Board have generally been
approved without any significant modification.
The objectives of the Company's executive compensation program are to
attract, retain and motivate highly qualified executive personnel. These
objectives are satisfied through the use of three principal compensation
elements: base salary, cash bonus payments and stock options.
Base Salary
Base salary levels for the Company's executive officers are based on the
concept of pay for performance and are competitively set relative to the
compensation of other executives in the biotechnology industry. Extensive salary
survey data is available on the industry (notably, the annual "Biotechnology
Compensation and Benefits Survey" conducted by Radford Associates and Alexander
& Alexander Consulting Group) and is utilized by the Committee in establishing
annual base salaries. In determining base salaries, the Committee also considers
corporate performance and progress in the immediately preceding fiscal year,
individual experience and performance, specific issues which are relevant to the
Company and general economic conditions. The base salary of the CEO and all
other executive officers is reviewed annually. During fiscal year 1998, the base
salaries paid to the executive officers other than the CEO approximated the 75th
percentile of the above-noted industry survey data.
Bonus Payments
Annual cash bonus payments are discretionary. Bonus payments, if any, to
executive officers, including the CEO, are based on two principal factors:
corporate performance as compared to the Company's annual goals and objectives
and individual performance relative to corporate performance and individual
goals and objectives.
Bonus payments in 1998 were generally in recognition of the satisfaction of
several significant corporate objectives during the year, including the
establishment of the Company's first product, VIRACEPT(R) (nelfinavir
mesylate) as the market leader among all HIV protease inhibitors, the
in-licensing of three development stage compounds to supplement the Company's
internal R&D pipeline, the continued preclinical and clinical development of the
Company's cancer and anti-viral agents and the satisfaction of all significant
financial targets for fiscal 1998.
Bonus payment recommendations for executive officers other than the CEO are
initiated by the CEO and submitted to the Committee for review and subsequent
submission to the Board. Bonus payment recommendations for the CEO are initiated
by the Committee and submitted to the Board.
Total base salary and any bonus payments are compared to "total
compensation" of peers as reported by the previously noted industry survey. Such
total compensation for the executive officers of the Company is at or above the
averages of such data, which reflects the Committee's belief that the relative
levels of corporate performance during the period were also above average.
(1) The material in this report is not soliciting material, is not deemed filed
with the SEC, and is not incorporated by reference in any filing of the
Company under the Securities Act of 1933 (the "Securities Act"), as
amended, or the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, whether made before or after the date of this Proxy Statement and
irrespective of any general incorporation language in such filing.
Stock Options
To conserve its cash resources, the Company places special emphasis on
equity-based incentives to attract, retain and motivate executive officers as
well as other employees. Under the Company's stock option plans, grants are
generally priced at the fair market value on the date of grant, vest over a
period of three or four years and have a term of ten years.
<PAGE>
Grants are made to all employees on their date of hire based on salary level and
position. All employees, including executive officers, are eligible for
subsequent, discretionary grants which are generally based on either individual
or corporate performance. It is the Committee's intent that the interests of the
Company's shareholders and the executive officers be closely aligned through the
use of stock options. Option grants recommended by the Committee are submitted
to the Board for approval. Based on recent peer-company proxy data compiled by
the Company, the level of option grants to each executive officer in 1998
remains competitive, and the resultant total option position as a percent of
total shares outstanding represents approximately the 70th to 90th percentile of
such positions.
Chief Executive Officer Compensation
During 1998, Mr. Johnson's base salary of $395,000 was based on individual
and corporate performance, and approximated the average of the updated industry
data for base salaries of CEOs.
During 1998, Mr. Johnson was awarded a bonus of $230,000 in recognition of
the satisfaction of several significant corporate objectives, including the
establishment of VIRACEPT(R) as the number one HIV protease inhibitor in the
United States with product sales in the United States of $358 million for fiscal
1998. The Committee believes that Mr. Johnson has made a significant
contribution during 1998 in enhancing shareholder value and establishing a sound
base for the continued enhancement of shareholder value through his managerial
and entrepreneurial efforts.
The stock options awarded to Mr. Johnson during fiscal 1998 are competitive
and consistent with the purpose of the stock option plans. The resultant total
option position as a percent of total shares outstanding represents
approximately the 75th percentile for peer CEO positions.
Executive Compensation Deduction Limitations
In 1993, Section 162(m) of the Internal Revenue Code ("Section 162(m)") was
enacted which disallows the deductibility by the Company of any compensation
over $1 million per year paid to each of the chief executive officer and the
four other most highly compensated executive officers, unless certain
performance-based compensation criteria are satisfied. While it is the
Committee's firm belief and intent that compensation from base salary and cash
bonus payments will not approach the annual Section 162(m) limitation in the
foreseeable future, additional "compensation" from the exercise of option grants
pursuant to the Company's stock option plans could result in the annual
limitation being exceeded. Accordingly, the Company's 1990 and 1996 Stock Option
Plans contain certain provisions which exempt compensation resulting from such
option exercises from the $1 million limitation. The Committee will continue to
monitor all forms of compensation to its executive officers to ensure that the
Company may maximize the tax benefits of such compensation.
Directors Compensation Committee
Michael E. Herman, Chairman
John N. Abelson, Ph.D.
A. E. Cohen
<PAGE>
Directors Compensation Committee Interlocks and Insider Participation
The Directors Compensation Committee is composed exclusively of three
outside directors: Mr. Herman, Mr. Cohen and Dr. Abelson. The Company is not
aware of any Committee interlocks.
Performance Measurement Comparison(1)
The chart set forth below shows the value of an investment of $100 on June 30,
1993 in the Existing Common Stock, The Nasdaq Stock Market Index (U.S.
Companies) ("Nasdaq Market (US)") and the Nasdaq Pharmaceuticals Index ("Nasdaq
Pharmaceuticals"). The total returns assume the reinvestment of dividends,
although cash dividends have not been declared on the Existing Common Stock. The
Existing Common Stock is traded on The Nasdaq Stock Market and is a component of
both the Nasdaq Market (US) and the Nasdaq Pharmaceuticals Index. The
comparisons in the chart are required by the Securities and Exchange Commission
and are not intended to forecast or be an indicator of possible future
performance of the Company's Common Stock.
[OBJECT OMITTED]
- -------------
(1) This section is not "soliciting material," is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act or the
Exchange Act.
<PAGE>
CERTAIN TRANSACTIONS
All transactions with affiliates have been and will continue to be on
terms no less favorable to the Company than could be obtained from unaffiliated
parties. Furthermore, all transactions with affiliates and any loans to Company
officers, affiliates or shareholders must be approved by a majority of the
disinterested directors.
As permitted by California law, the articles of incorporation and bylaws of
the Company currently provide for the limitation of director liability for
monetary damages for breach of duty to the Company and for indemnification of
agents (including officers and directors) to the full extent permitted under the
California General Corporations Law. The Company has entered into
Indemnification Agreements with all of its directors and officers. Additionally,
the Company has in effect a directors and officers liability insurance policy
which insures directors and officers of the Company against loss arising from
claims made against them due to wrongful acts while acting in their individual
and collective capacities as directors and officers.
SUBMISSION OF SHAREHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement and
form of proxy for its 1999 Annual Meeting of Shareholders, a shareholder
proposal must be received at the principal executive offices of the Company not
later than _______. In order for business, other than a shareholder proposal
included in the Company's proxy statement and form of proxy, to be properly
brought before the 1999 Annual Meeting by a shareholder, the shareholder must
notify the Secretary of the Company in writing at the principal executive
offices of the Company no later than ________. It is recommended that
shareholders submitting proposals direct them to the Secretary of the Company
and utilize Certified Mail-Return Receipt Requested.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Agouron
Pharmaceuticals Stock and the Oncology Division Stock and with respect to the
matters set forth under "Proposal 2--The Divisional Stock Proposal--Certain
Federal Income Tax Considerations" will be passed upon for the Company by
Pillsbury Madison & Sutro LLP, San Diego, California.
EXPERTS
The financial statements as of June 30, 1998 and 1997 and for each of the
three years in the period ended June 30, 1998 included in this Proxy
Statement/Prospectus and the financial statements incorporated in this
Prospectus and Proxy by reference to the Annual Report on Form 10-K for the year
ended June 30, 1998 have been so included and incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
OTHER MATTERS
The Company's Annual Report to Shareholders for the fiscal year ended June
30, 1998 accompanies this Proxy Statement.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market. Executive officers, directors and greater than 10%
shareholders are required by Securities and Exchange Commission regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes
that, during the applicable reporting period ending June 30, 1998, all Section
16(a) filing requirements applicable to its executive officers, directors and
greater than 10% beneficial owners were satisfied.
The Company's Board does not know of any other matters to be presented at
the Meeting. However, if any other business is properly presented at the Meeting
for action, the persons named in the enclosed form of Proxy will vote such Proxy
according to their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
Gary E. Friedman, Secretary
September __, 1998
<PAGE>
ANNEX INDEX
Annex I - Index of Defined Terms...............................................
Annex II - Proposed Restated Articles of Incorporation.........................
(To be filed by amendment)
Annex III - Agouron Pharmaceuticals, Inc.......................................
Management's Discussion and Analysis...............................
Consolidated Financial Statements..................................
Annex IV - Agouron Pharmaceuticals
Description of Business.............................................
Management's Discussion and Analysis................................
Financial Statements of Agouron Pharmaceuticals
Annex V - Agouron Oncology Division............................................
Description of Business..............................................
Management's Discussion and Analysis.................................
Financial Statements of Agouron Oncology Division....................
Annex VI - Amended and Restated 1996 Stock Option Plan.........................
Annex VII - Amended and Restated Employee Stock Purchase Plan..................
<PAGE>
ANNEX I
Index of Defined Terms
1985 Plan......................................................................
1990 Plan......................................................................
1998 Plan......................................................................
Acquiring Person...............................................................
Agouron Pharmaceuticals Stock..................................................
Agouron Pharmaceuticals........................................................
Agouron Pharmaceuticals Available Dividend Amount..............................
Agouron Stock Right............................................................
Articles of Incorporation......................................................
Available Dividend Amount......................................................
Board..........................................................................
California Corporations Code...................................................
ChaseMellon....................................................................
Code...........................................................................
Commercial Product or Service..................................................
Commission.....................................................................
Common Stock...................................................................
Common Stock Right.............................................................
Company........................................................................
Convertible Securities.........................................................
Designated Shares..............................................................
Distribution Date..............................................................
Division.......................................................................
Divisional Stock Proposal......................................................
Effective Date.................................................................
Equity Line....................................................................
ESPP...........................................................................
Exchange Act...................................................................
Existing Certificates..........................................................
Existing Common Stock..........................................................
Fair Market Value..............................................................
FDA............................................................................
GART...........................................................................
GMP............................................................................
GnRH...........................................................................
HMOs...........................................................................
Interdivision Transactions.....................................................
IRS............................................................................
Key Oncology Division Program..................................................
<PAGE>
Meeting........................................................................
Merger Right...................................................................
MMPs...........................................................................
Nasdaq Market (US).............................................................
Nasdaq National Market.........................................................
Nasdaq Pharmaceuticals.........................................................
Oncology Division Stock........................................................
Oncology Division Designated Shares............................................
Oncology Division Available Dividend Amount....................................
Oncology Stock Right...........................................................
Other Property.................................................................
PaineWebber....................................................................
PARP...........................................................................
Participating Preferred Stock..................................................
Permitted Offer................................................................
Plan...........................................................................
Pre-Effectiveness Convertible Securities.......................................
Preferred Stock................................................................
PricewaterhouseCoopers LLP.....................................................
Proxy Statement................................................................
Purchase Date..................................................................
Purchasing Division............................................................
Reclassification...............................................................
Record Date....................................................................
Redemption Price...............................................................
Registration Statement.........................................................
Restated Articles of Incorporation.............................................
Restated Rights Agreement......................................................
Rights.........................................................................
Rights Agent...................................................................
Rights Agreement...............................................................
Securities Act.................................................................
Selling Division...............................................................
Series B Shares................................................................
Series C Shares................................................................
Series B Participating Preferred Stock.........................................
Series C Participating Preferred Stock.........................................
Shareholder Rights Plan........................................................
Stock Option Plan..............................................................
Stock Plans....................................................................
Subscription Right.............................................................
TIN............................................................................
VEGF...........................................................................
Voting Stock...................................................................
<PAGE>
ANNEX III
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Risk Factors - Risks related to
Agouron Pharmaceuticals Division and Oncology Division" in the Proxy
Statement/Prospectus to which this Annex III is attached. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Agouron Pharmaceuticals, Inc. (the "Company") is committed to the
discovery, development, manufacturing and marketing of human pharmaceuticals
targeting cancer, AIDS, and other serious diseases. Operations to date have been
principally funded from the Company's equity-derived working capital, various
collaborative arrangements and, most recently, from the gross margin
contribution of its first product, VIRACEPT(R) (nelfinavir mesylate). The net
income reported in fiscal 1998 is principally due to the commercialization of
VIRACEPT while the Company's prior net operating losses reflect primarily the
result of its independent research and substantial investment in the clinical
and commercial development of VIRACEPT and certain anti-cancer compounds.
In March 1997, the Company received clearance from the United States Food
and Drug Administration ("FDA") to market VIRACEPT in the United States. For the
fiscal year ended June 30, 1998, due principally to the increasing product
contribution from VIRACEPT sales, license fees and royalties, the Company
realized a net income of $13,154,000.
Results of Operations
Product sales
Product sales for the fiscal years ended June 30, 1997 and 1998 were
approximately $57,000,000 and $409,300,000 which included sales in the United
States of $55,559,000 and $358,321,000, respectively. The Company anticipates
that VIRACEPT sales in the United States will approximate $430,000,000 to
$440,000,000 for fiscal 1999.
Contract revenues
Collaborative research and development agreements with Japan Tobacco Inc.
("JT"), Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd (collectively "HLR")
accounted for substantially all of the Company's contract revenues for 1998,
1997 and 1996. Total contract revenues for 1998 decreased approximately 40% from
1997 due principally to decreased VIRACEPT program spending by Agouron, which
was partially funded by JT. Additionally, the amortization to revenue over a 24
month period of JT's $24,000,000 milestone payment, which was received in August
1995, was completed in June 1997. The increase in contract revenues
<PAGE>
from 1996 to 1997 of approximately 59% was due principally to increased program
activity and spending on the JT collaborations.
In December 1997, the Company agreed to end its collaboration with HLR in
the field of cancer. As a result of the termination agreement, Agouron has
regained all rights to its anti-cancer drugs previously within the scope of the
HLR collaboration.
The Company anticipates that contract revenues for fiscal 1999 will
approximate $35,000,000 to $40,000,000.
License fees and royalties
The Company's license fees and royalties for 1998 and 1997 were principally
derived from F. Hoffmann-La Roche Ltd ("Roche"); license fees in 1996 were
earned from HLR. Total revenues for 1998 increased approximately 83% from 1997
due to European marketing approval for VIRACEPT. The 33% decrease from 1996 to
1997 is principally due to $9,000,000 for initial European marketing rights for
VIRACEPT in 1997 versus $15,000,000 for initial world-wide development rights
for two anti-cancer drugs in 1996.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. Upon such approvals, the Company realized as revenue
license fees totaling $12,000,000. In July 1997, the Company and JT granted
Roche certain exclusive rights to VIRACEPT in several Asian countries. For such
rights, the Company received a license fee of $2,000,000.
Royalty revenues of approximately $3,852,000 have been recognized in 1998
based on estimated and actual Roche sales of VIRACEPT in its licensed territory.
The Company anticipates that license fees and royalties for fiscal 1999 will
range from $30,000,000 to $35,000,000.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales was
approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on
United States commercial sales were approximately 57% and 65% during 1997 and
1998, respectively. The Company anticipates that gross margins on United States
commercial sales will improve as product sales volumes increase and certain
manufacturing process and scale efficiencies are realized, and will approximate
71% in 1999. Aggregate gross margins will also be impacted by the size of the
Company's patient assistance program (which provides free goods to indigent
individuals), the Company's manufacturing supply arrangement with Roche (whereby
Roche has the right to either purchase product at Agouron's cost plus
contractually determined mark-ups or manufacture drug product for its own use,
subject to contractually determined fees to be paid to Agouron) and the level of
sales subject to Medicaid and other discounts or rebates in the United States.
<PAGE>
Research and development
Research and development ("R&D") spending increased by approximately 39%
from 1997 to 1998 due to license fees for three development stage HIV products,
increasing average R&D staff levels (approximately 28%) and staff-related
spending (including occupancy and the addition of Alanex since late 1997) and
increased expenditures for human clinical trial activities associated with the
clinical development of certain of the Company's anti-cancer compounds. R&D
spending increased by approximately 52% from 1996 to 1997 due generally to
increasing average R&D staff levels (approximately 39%) and staff-related
expenditures (including occupancy), increased expenditures in support of human
clinical trials, an expanded access program associated with VIRACEPT and
increased expenditures for clinical trial activities associated with AG3340 and
other anti-cancer compounds. The Company anticipates that total R&D expenses in
fiscal 1999, excluding the impact of any license fees or milestone expenses in
either 1998 or 1999, will exceed fiscal 1998 expenses by approximately 40%.
Selling, general and administrative
Selling, general and administrative ("SG&A") expenses represented
approximately 28% of total operating expenses (excluding the cost of product
sales, royalties and write-off of in-process technology purchased) in 1998, 23%
in 1997 and 10% in 1996. SG&A increased by approximately 76% from 1997 to 1998
due principally to a full year of expenses associated with the sales force and
other marketing personnel. Spending increases from 1996 to 1997 were due chiefly
to increasing staff levels (approximately 214%) and staff-related expenditures,
certain premarketing and advertising and promotion costs associated with the
launch of VIRACEPT in March 1997 and other costs associated with a growing sales
and marketing infrastructure. The Company anticipates that total SG&A expenses
will increase by approximately 40% in fiscal 1999 due to increasing sales and
marketing activities and the support of VIRACEPT phase IV marketing studies.
Royalties
The Company's obligation to share VIRACEPT profits with JT is reflected in
royalty expense for 1998 and represents approximately 19% of United States
product sales. Royalties in fiscal 1997 were not significant. It is anticipated
that royalty expense for fiscal 1999 will approximate 24% to 25% of United
States product sales.
Write-off of in-process technology purchased
In 1997, the Company acquired Alanex, a research company engaged in the
discovery of drug leads through the high-speed screening of diverse chemical
libraries designed by computational methods and generated by combinatorial
chemistry. Alanex was acquired in a purchase transaction through the issuance of
approximately 1,992,000 equivalent shares (including 548,000 for options and
warrants) of the Company's common stock valued at approximately $61,000,000,
plus $1,300,000 of related acquisition costs. The purchase price was allocated
to various tangible and intangible assets and either capitalized (approximately
$4,800,000) or expensed (approximately $57,500,000) as in-process technology
based on an
<PAGE>
independent valuation of the Alanex assets, technology and research programs
at the date of acquisition.
Interest and other income
Interest income increased by 1% from 1997 to 1998. Interest income
increased by approximately 23% from 1996 to 1997 due principally to a higher
average investment portfolio balance resulting from the July 1996 public
offering, receipt of $15,000,000 and $9,000,000, respectively, in license fees
from HLR (June 1996) and Roche (January 1997), significantly increased contract
funding from JT and HLR and the exercise of employee stock options. The Company
anticipates that, absent additional revenue sources or a significant change in
interest rates, fiscal 1999 interest income will be less than that of fiscal
1998.
Interest expense
Interest expense increased in 1998 from 1997 due to borrowings under a line
of credit which was used to partially fund quarterly royalties paid to JT
throughout the year. Interest expense decreased in 1997 from 1996 by
approximately 38% due to a decreasing level of debt and capital lease
obligations from year to year.
Income tax provision (benefit)
The income tax provision in 1998 has been computed using an effective,
combined federal and state rate of 40%. The cash obligation of such 1998
provision has been mostly offset by the utilization of its deferred tax assets.
Based on its 1998 pre-tax profit and its estimates for future taxable income,
the Company believes it is more likely than not that its deferred tax assets
(comprised mostly of net operating loss carryforwards, deductions generated by
the exercise of stock options, and research credits) will be realized and has,
therefore, recorded the full tax benefit of its deferred tax assets. The
Company's accumulated net deferred tax assets totaled approximately $55,900,000
and $64,100,000 at June 30, 1997 and 1998. The Company anticipates that its
effective income tax rate for fiscal 1999 will range from 10% to 15%. Such
decrease from fiscal 1998 is attributed to greater expected availability of R&D
tax credits due to the anticipated increase in R&D spending and the anticipated
reduction in R&D contract revenues.
Year 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures. The Company has established a Year 2000
project team that is currently reviewing computer systems and computer
controlled equipment that could be affected by this issue. In this process, the
Company expects to both replace and upgrade certain systems and equipment.
Additionally, the Company is in the process of contacting all of its significant
external business partners to determine the extent to which the Company is
vulnerable to their failure to obtain Year 2000 compliance. While the total cost
of obtaining Year 2000 compliance is not known at this time, the Company
believes such cost will not have a material effect on the Company's business,
financial position, or results
<PAGE>
of operation. However, even though the Company plans to have obtained Year 2000
compliance prior to the year 2000, the inability of the Company or its business
partners to adequately address year 2000 issues could have a significant impact
on the Company's business.
Liquidity and Capital Resources
Prior to fiscal 1998, the Company relied principally on equity financings
and corporate collaborations to fund its operations and capital expenditures. In
fiscal 1998, due primarily to the successful commercialization of VIRACEPT,
operating activities have provided $827,000 of cash compared with using
$73,467,000 in fiscal 1997. Commercial sales of VIRACEPT for 1997 and 1998
resulted in gross margins of approximately $32,370,000 and $236,654,000.
At June 30, 1998, the Company had net working capital of approximately
$127,728,000, an increase of $11,942,000 over June 30, 1997 levels due
principally to the Company's pre-tax profit of $21,924,000. Individual working
capital components significantly impacted by the commercialization of VIRACEPT
include trade accounts receivable (an increase of $18,416,000), inventories (an
increase of $44,906,000), accounts payable (an increase of $15,560,000) and
accrued liabilities (an increase of $26,467,000, primarily due to accrued
royalties payable to JT). It is anticipated that these working capital
components and cash and short-term investments will continue to be significantly
impacted as VIRACEPT sales increase. At June 30, 1998, the Company had cash,
cash equivalents and short-term investments of approximately $87,123,000. The
Company believes that its current capital resources, existing contractual
commitments and anticipated VIRACEPT product sales contribution are sufficient
to maintain its current operations through fiscal 1999. This belief is based on
current research and clinical development plans, anticipated working capital
requirements associated with the expanding commercialization of VIRACEPT, the
current regulatory environment, historical industry experience in the
development of therapeutic drugs and general economic conditions.
The Company believes that additional financing may be required to meet the
planned operating needs after fiscal 1999 if significant and increasing positive
cash flows are not generated from commercial activities. Such needs would
include the expenditure of substantial funds to continue and expand research and
development activities, conduct existing and planned preclinical studies and
human clinical trials and to support the increasing working capital requirements
of a growing commercial infrastructure including 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 securities. If such alternatives are not
available, the Company may be required to defer or restrict certain commercial
activities, delay or eliminate expenditures for certain of its potential
products under development, cancel licenses from third parties or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop or commercialize itself.
During fiscal 1998, capital expenditures totaled $33,086,000 compared with
$14,727,000 and $3,710,000 during 1997 and 1996, of which $1,579,000, $2,355,000
and $457,000 were financed through capital lease obligations. Of the total
capital expenditures during 1998, 1997 and 1996, approximately $14,331,000,
$4,728,000 and $318,000 represented leasehold improvement costs associated with
certain of the Company's facilities. With the exception of the leasehold
improvement costs, virtually all of the capital expenditures during 1998, 1997
and 1996
<PAGE>
represented laboratory and office equipment and scientific instrumentation
necessary to support an expanding research, development, and commercial
infrastructure. Capital expenditures during 1999 are expected to be
approximately $18,000,000 to support continued product commercialization,
development and research activities. Of the total expected capital expenditures
during 1999, approximately $4,000,000 is associated with the leasehold
improvement of existing and anticipated new administrative and laboratory
facilities. The Company may utilize lease or debt financing for certain
expenditures if available on acceptable terms.
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Accountants
Consolidated Balance Sheet as of June 30, 1998 and 1997
Consolidated Statement of Income (Loss) for the years ended
June 30, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the
years ended June 30, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
NOTE: All schedules are omitted because they are not applicable,
or not required, or because the required
information is included in the consolidated
financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income (loss), of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Agouron Pharmaceuticals, Inc. and its subsidiaries at June 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998, 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 an 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.
/s/ PricewaterhouseCoopers, LLP
San Diego, California
July 16, 1998
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,098 $ 52,484
Short-term investments 68,025 38,833
Accounts receivable, net 51,341 31,375
Inventories 103,706 58,800
Current deferred tax assets 564 500
Other current assets 5,247 2,209
---------- -----------
Total current assets 247,981 184,201
Property and equipment, net 47,212 22,613
Deferred tax assets 64,644 56,000
Purchased intangibles 3,500 4,100
---------- -----------
$ 363,337 $ 266,914
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,393 $ 28,833
Accrued liabilities 35,356 8,889
Deferred revenue and advances 23,563 27,567
Current deferred tax liabilities 1,139 600
Loan payable and current portion of long-term debt 15,802 2,526
---------- -----------
Total current liabilities 120,253 68,415
---------- -----------
Long-term liabilities:
Long-term debt, less current portion 5,892 5,940
Accrued rent 1,023 1,277
---------- -----------
Total long-term liabilities 6,915 7,217
---------- -----------
Stockholders' equity:
Common stock, no par value, 75,000,000 shares authorized,
31,053,380 and 29,429,920 shares issued and outstanding 348,482 317,133
Unrealized gains (losses) on short-term investments 384 0
Accumulated deficit (112,697) (125,851)
---------- -----------
Total stockholders' equity 236,169 191,282
---------- -----------
Commitments
$ 363,337 $ 266,914
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF INCOME (LOSS) (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Product sales $ 409,298 $ 56,969 $ 0
Contracts 38,855 65,094 40,955
License fees and royalties 18,352 10,000 15,000
------------- ------------- -------------
466,505 132,063 55,955
------------- ------------- -------------
Operating expenses:
Cost of product sales 172,644 24,599 0
Research and development 150,657 108,137 71,010
Selling, general and administrative 58,012 32,941 8,082
Royalties 68,423 0 0
Write-off of in-process technology purchased 0 57,500 0
------------- ------------- -------------
449,736 223,177 79,092
------------- ------------- -------------
Operating income (loss) 16,769 (91,114) (23,137)
------------- ------------- -------------
Other income (expenses):
Interest and other income 5,907 5,873 4,776
Interest expense (752) (142) (228)
------------- ------------- -------------
5,155 5,731 4,548
------------- ------------- -------------
Income (loss) before income taxes 21,924 (85,383) (18,589)
Income tax provision (benefit) 8,770 (42,577) 934
------------- ------------- -------------
Net income (loss) $ 13,154 $ (42,806) $ (19,523)
============= ============= =============
Earnings per share:
Basic $ .43 $ (1.59) $ (.99)
============= ============= =============
Diluted $ .40 $ (1.59) $ (.99)
============= ============== =============
Shares used in calculation of:
Basic 30,571 26,946 19,688
Diluted 33,214 26,946 19,688
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
Common Stock short-term Accumulated
Shares Amount investments Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 14,718,564 $ 76,113 $ 0 $ (63,522) $ 12,591
Stock issuances:
Public sale 6,000,000 78,579 -- 78,579
Exercise of stock options 586,412 2,990 -- 2,990
Exercise of stock warrants 90,000 283 -- 283
Employee stock purchase plan 68,398 663 -- 663
Net loss -- -- (19,523) (19,523)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 21,463,374 158,628 0 (83,045) 75,583
Stock issuances:
Public sale 5,470,000 77,245 -- 77,245
Acquisition of Alanex 1,444,236 61,051 -- 61,051
Exercise of stock options 980,472 6,720 -- 6,720
Employee stock purchase plan 71,838 1,389 -- 1,389
Tax benefit of stock options exercised -- 12,100 --
12,100
Net loss -- -- (42,806) (42,806)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 29,429,920 317,133 0 (125,851) 191,282
Stock issuances:
Exercise of stock options 1,344,104 11,031 -- 11,031
Exercise of stock warrants 169,522 680 -- 680
Employee stock purchase plan 109,834 2,742 -- 2,742
Tax benefit of stock options exercised -- 16,896 --
16,896
Change in unrealized gains (losses) on
short-term investments 384 384
Net income -- -- 13,154 13,154
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 31,053,380 $ 348,482 $ 384 $ (112,697) $ 236,169
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from product sales, contracts and licenses $ 442,484 $ 116,692 $ 61,376
Cash paid to suppliers, employees and service providers (446,863) (195,890) (73,738)
Interest received 5,958 5,873 4,776
Interest paid (752) (142) (228)
----------- ----------- -----------
Net cash provided (used) by operating activities 827 (73,467) (7,814)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term investments 147,292 127,501 59,686
Purchases of short-term investments (176,100) (91,227) (118,224)
Purchase of property and equipment (31,507) (12,372) (3,252)
Cost to acquire Alanex, net of cash acquired 0 608 0
----------- ----------- -----------
Net cash provided (used) by investing activities (60,315) 24,510 (61,790)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,453 85,354 82,515
Proceeds from credit line 53,600 0 0
Principal payments on credit line, long-term debt,
and capital leases (41,951) (364) (818)
----------- ----------- -----------
Net cash provided (used) by financing activities 26,102 84,990 81,697
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (33,386) 36,033 12,093
Cash and cash equivalents at beginning of year 52,484 16,451 4,358
----------- ----------- -----------
Cash and cash equivalents at end of year $ 19,098 $ 52,484 $ 16,451
=========== =========== ===========
Reconciliation of net income (loss) to net cash provided (used) by operating
activities:
Net income (loss) $ 13,154 $ (42,806) $ (19,523)
Depreciation and amortization 9,087 3,910 2,411
Write-off of in-process technology purchased 0 57,500 0
Provision (benefit) for deferred income taxes 8,727 (43,800) 0
Net (increase) decrease in inventories (44,906) (58,547) 0
Net (increase) decrease in accounts receivable and other
current assets (23,004) (28,209) (1,198)
Net increase (decrease) in accounts payable, accrued
liabilities, deferred revenue and advances, and other liabilities 37,769 38,485 10,496
---------- ---------- -----------
Net cash provided (used) by operating activities $ 827 $ (73,467) $ (7,814)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company and its significant accounting policies
The Company
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company") was organized and
incorporated in California in June 1984. Agouron is an integrated pharmaceutical
company committed to the discovery, development, manufacturing and marketing of
innovative therapeutic products engineered to inactivate proteins which play key
roles in cancer, AIDS and other serious diseases. The Company, through its own
sales and marketing organization, is currently marketing in the United States
its first drug, VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV
infection. The Company is also conducting pivotal phase II/III clinical trials
for AG3340 for treatment of lung and prostate cancer. In addition, Agouron is
expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM)
(AG1661), an immune-based therapeutic agent for treatment of HIV infection and
AIDS being co-developed by Agouron and The Immune Response Corporation ("IRC").
Further, the Company has a number of programs in progress for discovery or
development of other new drugs in the fields of cancer, viral disease and other
serious diseases. The Company is also using the proprietary core drug discovery
technology of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of the
Company, to accelerate the steps necessary to discover small-molecule drug
candidates, from the initial identification of compounds that exhibit activity
against selected biological targets to the progression of these compounds to
drug candidates for human clinical trials.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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.
Cash and cash equivalents
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within 90 days
from date of purchase.
<PAGE>
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, and corporate
equity securities. The Company has classified its short-term investments as
available-for-sale. Included in short-term investments at June 30, 1998 and 1997
is $1,262,000 and $588,000 of accrued interest receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Concentration of credit and market 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
1998, 1997 or 1996.
Financial instruments and risk management
The Company has contract manufacturing operations in Europe and Asia.
Accordingly, the Company from time-to-time enters into forward contracts to
manage its exposure to fluctuations in foreign currency exchange rates. At June
30, 1998, the Company had several forward contracts with maturities of less than
six months to purchase Japanese Yen for approximately $9,426,000. These
contracts are designated and effective as hedges and, accordingly, gains and
losses are recognized in the same period the offsetting gains and losses of
hedged transactions are realized and recognized.
Property and equipment
Property and equipment is recorded at cost. Depreciation is computed using
principally the straight-line method over estimated useful lives of three to
five years. Leasehold improvements are amortized over the life of the lease.
Purchased intangibles
In conjunction with the 1997 acquisition of Alanex, the Company has
recorded purchased intangibles (primarily drug discovery technology and chemical
compound libraries) which are being amortized on a straight-line basis over
their estimated useful lives of seven years.
Deferred revenue and advances
Approximately $22,414,000 of cash received from JT has been classified as
deferred contract revenue and advances. Approximately $21,452,000 of the cash
received from JT represents JT's
<PAGE>
advance of the Company's VIRACEPT development funding obligation which was
completed in March 1998. Such amounts are to be repaid by the Company out of
future profits, if any, generated by sales of VIRACEPT in the United States. The
balance of the payments from JT are non-refundable and are being recognized as
contract revenue on a prospective basis generally as collaborative program
expenses are incurred.
Product sales
The Company ships VIRACEPT to wholesalers throughout the United States and
recognizes sales revenue upon shipment. Sales are reported net of discounts,
rebates, chargebacks and product returns.
Also included in product sales for 1998 and 1997 are approximately
$50,979,000 and $1,441,000 of sales (at cost plus contractually determined
mark-ups) to Roche of clinical and commercial drug supplies to be used by Roche
in its licensed territory. The Company receives a royalty on Roche's subsequent
commercial sales of such drug supplies.
Contract revenues
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
License fees and royalties
License fees are recognized as revenue when earned as generally evidenced
by certain factors including: receipt of such fees, satisfaction of any
performance obligations and the non-refundable nature of such fees.
Royalty revenues are recognized based on estimated and actual sales of
licensed products in licensed territories.
Research and development costs
Research and development costs are expensed in the period incurred.
Income tax provision (benefit)
The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense (benefit) generally is the amount
of income taxes expected to be payable for the current year. Deferred taxes are
recorded by applying applicable tax rates to cumulative temporary differences
based on when and how they are expected to affect the tax return.
<PAGE>
Earnings (loss) per share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". Basic earnings
(loss) per share is based upon the weighted average number of common shares
outstanding during a period. Diluted earnings (loss) per share is based upon the
weighted average number of common shares outstanding and dilutive common stock
equivalents during a period. Common stock equivalents are options under the
Company's stock option plans which are included in the earnings per share
computation under the treasury stock method and common shares expected to be
issued under the Company's employee stock purchase plan.
Common stock equivalents of approximately 2,643,000 shares for 1998 were
used to calculate diluted earnings per share. For 1997 and 1996, common stock
equivalents of approximately 3,168,000 and 2,014,000 shares were not used to
calculate diluted earnings (loss) per share because of their anti-dilutive
effect. There are no reconciling items in calculating the numerator for basic
and diluted earnings (loss) per share for any of the periods presented.
Stock-based compensation plans
The Company measures compensation expense for its stock-based compensation
plans using the intrinsic method and provides pro-forma disclosures of net
income and earnings (loss) per share as if the fair value-based method had been
applied in measuring compensation expense.
Statement of cash flows
For purposes of the Statement of Cash Flows, cash equivalents are highly
liquid investments purchased with an original maturity of ninety days or less.
Non-cash financing and investing activities are comprised primarily of capital
lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996
and the acquisition of Alanex in 1997.
New accounting standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130") "Reporting
Comprehensive Income," which requires additional disclosures to be adopted
beginning with the quarter ending September 30, 1998. Under FAS 130, the Company
will be required to display comprehensive income and its components as part of
the Company's complete set of financial statements.
In June 1997, the FASB also issued FAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires additional disclosures to
be adopted on June 30, 1999. FAS 131 requires that the Company report financial
and descriptive information about its reportable operating segments. The Company
is evaluating the impact on its disclosures, if any.
<PAGE>
Note 2 - Short-term investments
The cost of the Company's investment portfolio by type of security and
contractual maturity in the balance sheet is as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Type of security:
Corporate debt $ 46,023 $ 24,401
U.S. Treasury and agencies 10,766 11,994
Other interest-bearing 9,462 2,438
Corporate equity 1,774 0
------------- --------------
$ 68,025 $ 38,833
============= ==============
Contractual maturity:
Maturing in less than twelve months $ 41,389 $ 35,827
Maturing between twelve and
thirty-two months 26,636 3,006
------------- --------------
$ 68,025 $ 38,833
============= ==============
</TABLE>
The cost of securities sold, if any, is based upon the specific
identification method. The net unrealized holding gain on available-for-sale
securities included as a separate component of stockholders' equity at June 30,
1998 totaled $384,000. There were no material unrealized gains or losses nor any
material differences between the estimated fair values and costs of securities
in the investment portfolio at June 30, 1997. Realized gains and losses on the
disposal of available-for-sale securities during 1998 totaled $20,000 and
$2,000, respectively. During 1997 such gains and losses totaled $12,000 and
$4,000, respectively. During 1996, such gains totaled $22,000.
<PAGE>
Note 3 - Composition of certain financial statement captions
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net:
Trade $ 44,471 $ 26,055
Contract 2,451 4,668
Royalties 2,339 0
Employee 252 269
Other 1,828 383
---------- -----------
$ 51,341 $ 31,375
========== ===========
Inventories:
Raw materials and work in process $ 95,517 $ 57,883
Finished goods 8,189 917
---------- -----------
$ 103,706 $ 58,800
========== ===========
Property and equipment, net:
Scientific instrumentation $ 26,869 $ 16,614
Leasehold improvements 25,135 10,804
Computer equipment 15,619 8,892
Furniture and fixtures 3,910 2,464
---------- -----------
71,533 38,774
Less accumulated depreciation and amortization (24,321) (16,161)
---------- -----------
$ 47,212 $ 22,613
========== ===========
Accrued liabilities:
Royalties $ 21,410 $ 0
License fees 6,000 0
Vacation 2,955 1,932
Clinical studies 2,731 3,578
Other 2,260 3,379
---------- -----------
$ 35,356 $ 8,889
========== ===========
</TABLE>
<PAGE>
Note 4 - Significant contract arrangements
Japan Tobacco Inc.
In February 1994, the Company entered into a strategic alliance with JT in
the field of anti-viral drugs for the treatment of infections caused by
hepatitis C and the herpes family of viruses. In December 1994, the Company
added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of
a world-wide development and licensing agreement. Agouron and JT share equally
the costs of further development of VIRACEPT.
Currently, Agouron has exclusive commercial rights to VIRACEPT (with the
right to sublicense) in North America and JT has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in parts of Japan. The Company and JT
share profits and/or royalties equally from the world-wide commercialization of
VIRACEPT.
Under the combined terms of the JT agreements, the Company has incurred
costs of $51,898,000, $71,825,000 and $46,969,000 and recognized corresponding
contract revenues of $17,359,000, $48,886,000 and $37,197,000 for the years
ended June 30, 1998, 1997 and 1996.
Roche
The Company and JT have granted Roche certain exclusive royalty bearing
marketing rights to VIRACEPT outside of North America and parts of Japan. For
such rights, the Company has received (and recognized as revenue) initial
license fees and additional product approval license fees. The Company also
receives royalties based either on Roche's sales of VIRACEPT or, in certain
circumstances, Invirase(R) and Fortavase(R) (saquinavir), Roche's HIV protease
inhibitors. VIRACEPT license fees and royalties from Roche totaled $17,852,000
and $9,000,000 for the years ended June 30, 1998 and 1997.
HLR
In June 1996, Agouron granted HLR world-wide development rights in two
anti-cancer drugs and agreed to collaborate with HLR on an additional
early-stage anti-cancer drug discovery program. In return for such rights, HLR
paid $15,000,000 in initial license fees and agreed to bear 80% of certain
future development costs and to provide annual research support to the Company
of $3,000,000. In December 1997, Agouron and HLR agreed to end this anti-cancer
research and development collaboration. The Company has regained all commercial
rights to the anti-cancer drugs previously within the scope of the
collaboration.
Under the terms of the anti-cancer agreements with HLR which have been
terminated, the Company incurred costs of $23,486,000 and $17,854,000 and
recognized corresponding contract revenues of $15,428,000 and $14,270,000 for
the years ended June 30, 1998 and 1997.
<PAGE>
The Immune Response Corporation
In June 1998, the Company entered into a binding letter of intent with IRC
to collaborate on final development and commercialization of REMUNE, an
immune-based therapeutic agent discovered by IRC and currently the subject of
several clinical studies including a large phase III clinical trial. The two
companies intend to enter promptly into a definitive agreement and will endeavor
to complete development and registration of REMUNE in 1999. IRC will manufacture
commercial supplies of REMUNE, and Agouron will have exclusive rights to market
REMUNE in North America, Europe and certain other countries. The two companies
will share equally all profits from the commercialization of REMUNE in the
licensed territory. Agouron paid an initial $10,000,000 license fee to IRC in
June 1998 and also purchased 118,256 newly issued common shares of IRC for
$2,000,000. The Company's development funding obligation commences October 15,
1998 and, assuming ongoing successful development, registration and approval of
REMUNE, the Company may pay to IRC up to $53,000,000 in additional development
and milestone payments and $12,000,000 in purchases of additional IRC common
stock.
Shionogi & Co., Ltd.
In June 1998, the Company entered into a binding letter of intent with
Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize AG1549, a
second-generation non-nucleoside reverse transcriptase inhibitor ("NNRTI") for
the treatment of HIV infection. Discovered by Shionogi, AG1549 is currently the
subject of several clinical trials evaluating its dose and its concomitant use
with other antiretroviral treatments.
Agouron has exclusive world-wide rights to the development and
commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
paid an initial $10,000,000 license fee in June 1998. Agouron may pay, assuming
ongoing successful development, registration and approval of AG1549, additional
license fees of up to $30,000,000. In addition, Agouron will pay Shionogi
royalties based on sales, if any, of AG1549.
Japan Energy Corporation
In June 1998, the Company entered into an agreement with Japan Energy
Corporation ("JE") to develop and commercialize AG1776, a novel protease
inhibitor for the treatment of HIV infection. Agouron has exclusive world-wide
rights to the development and commercialization of AG1776 except in Japan, South
Korea, North Korea and Taiwan; JE will manufacture bulk compound for use in
final drug product. Agouron incurred an initial $6,000,000 license fee in June
1998. Agouron may pay, assuming ongoing successful development, registration and
approval of AG1776, additional license fees of up to $20,000,000. In addition,
Agouron will pay JE royalties based on sales, if any, of AG1776.
<PAGE>
Note 5 - Long-term debt
Long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Notes payable, secured with personal property and a certificate of deposit;
interest at CD rate plus 1.5%,
paid off in June 1998. $ 0 $ 142
Capital leases with interest rates between 5.86% and 16.5%,
maturing at various dates through June 2003. 3,214 2,462
Line of credit, $20,000,000 secured; interest at bank reference
rate or LIBOR plus 1.5%, expiring September 30, 1998. 15,000 0
Unsecured, non-interest bearing, term obligation; face value of $4,500,000;
discounted to an 8.95% effective rate, includes imputed interest of
$548,000
due June 28, 2001. 3,480 3,194
Term obligation for tenant improvements, interest
at 11% per annum, payable in monthly installments,
paid off in October 1997. 0 2,668
------------- --------------
Total long-term debt and capital lease obligations 21,694 8,466
Current portion (15,802) (2,526)
------------- --------------
$ 5,892 $ 5,940
============= ==============
</TABLE>
Maturities of long-term debt, excluding capital leases, are as follows:
1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of
$1,020,000.
<PAGE>
Note 6 - Income taxes
(Dollars in thousands)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Year ended June 30,
Current:
Federal $ 0 $ 0 $ 0
State 43 1 1
Foreign 0 1,222 933
--------- --------- --------
43 1,223 934
--------- --------- --------
Deferred:
Federal 8,495 (37,800) 0
State 232 (6,000) 0
Foreign 0 0 0
--------- --------- --------
8,727 (43,800) 0
--------- --------- --------
$ 8,770 $ (42,577) $ 934
========= ========= ========
</TABLE>
The income tax reconciliation from income (loss) before income taxes
computed at the federal statutory rate (34%) to the Company's actual income tax
provision is as follows: <TABLE> <CAPTION>
Year ended June 30, 1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $ 7,454 $ (29,030) $ (6,320)
State taxes, net of federal benefit 181 1 1
Foreign taxes 0 1,222 933
Purchase accounting book/ tax basis
differences 0 19,781 0
Change in valuation allowance 0 (42,449) 6,245
Other 1,135 415 75
Adjustments to carryover amounts 0 7,483 0
--------- --------- --------
$ 8,770 $ (42,577) $ 934
========= ========= ========
</TABLE>
The Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30
1998 1997
-------- ---------
<S> <C> <C>
Book and tax depreciation/amortization
differences $ 5,891 $ 831
Accrued liabilities 1,951 1,363
Net operating loss carryforwards 51,281 49,348
Tax credits 6,956 5,676
Other (2,010) (1,318)
--------- ---------
64,069 55,900
Valuation allowance 0 0
--------- ---------
Deferred taxes, net $ 64,069 $ 55,900
========= =========
</TABLE>
The Company has not recorded current provisions for United States federal
income taxes due to net operating losses for tax reporting purposes. At June 30,
1998, the Company had net operating loss carryforwards for federal tax reporting
purposes of approximately $150,000,000 expiring from 2000 to 2013. The net
operating loss includes the tax benefit related to the exercise of stock
options, which benefit was recorded to common stock. The Company also has
<PAGE>
federal research and development credit carryforwards of approximately
$4,800,000 at June 30, 1998. The future utilization of net operating loss
carryforwards for federal income tax purposes may be impacted by the issuance of
additional equity securities.
Due to California's partial conformity with federal provisions regarding
net operating loss and research and development credit carryforwards, and as a
result of the Company's use of certain state tax planning strategies, for state
tax reporting purposes at June 30, 1998, the Company has no net operating loss
carryforwards and has research and development credit carryforwards of
approximately $2,200,000. Such credits do not expire.
Based on its 1998 operating results and its estimates of future taxable
income, the Company believes that it is more likely than not that its deferred
tax assets (comprised mostly of net operating loss carryforwards and research
credits) will be realized and has therefore recorded the full tax benefit of its
deferred tax assets as of June 30, 1998.
Foreign tax expense represents certain withholding taxes associated with
collaboration payments from JT.
<PAGE>
Note 7 - Stockholders' equity
Stock Options
The Company's stock option 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 others may be at any price determined by the Board of
Directors. The options expire not later than ten years from the date of the
grant and generally become exercisable ratably over a three or four year period
beginning one year from the grant date. In February 1998, the Board of Directors
adopted the most recent plan and reserved 1,000,000 shares for issuance
thereunder. At June 30, 1998, the Company had 1,898,556 shares of common stock
available for future grant under its stock option plans. The following table
summarizes stock option activity for 1996 through 1998: <TABLE> <CAPTION>
Shares Prices
<S> <C> <C> <C>
Outstanding June 30, 1995 5,171,384 $ .24- $12.25
Options granted 2,324,950 11.78- 23.00
Options exercised (586,412) 2.70- 9.19
Options canceled (81,208) 3.94- 19.57
-------------
Outstanding June 30, 1996 6,828,714 2.70- 23.00
Alanex options assumed 378,084 .27- 3.98
Options granted 2,798,500 15.19- 47.13
Options exercised (980,472) .27- 22.19
Options canceled (205,536) 4.32- 36.35
-------------
Outstanding June 30, 1997 8,819,290 .27- 47.13
Options granted 1,115,394 28.00- 55.13
Options exercised (1,344,104) .27- 34.82
Options canceled (169,312) .27- 55.13
-------------
Outstanding June 30, 1998 8,421,268 $ .27- $55.13
=============
</TABLE>
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable
Average
Ranges of Exercise as of Remaining Exercise as of Exercise
Prices June 30, 1998 Life (years) Price June 30, 1998 Price
------------- -------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Less than $20.00 3,601,287 6.14 $ 8.70 2,810,426 $ 7.47
$20.00 to $40.00 3,276,381 8.25 27.18 1,149,617 23.74
Greater than $40.00 1,543,600 8.99 42.56 370,058 41.26
------------- -------------- -------------- ------------- -------------
8,421,268 7.48 $ 22.10 4,330,101 $ 14.68
============= ============== ============== ============= =============
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock option plans. Had compensation expense for the
Company's stock option plans been determined based upon the fair value method
prescribed under FAS 123, the Company's reported results would have been
impacted as follows: <TABLE> <CAPTION>
(In thousands, except per share amounts) 1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss)
As reported $ 13,154 $(42,806) $(19,523)
Compensation expense:
Stock options (19,891) (9,496) (1,133)
Employee stock purchase plan (1,441) (394) (204)
-------- ------- --------
Pro-forma $ (8,178) $(52,696) $(20,860)
======== ======== ========
Pro-forma earnings (loss) per share:
Basic $ (.27) $ (1.96) $ (1.06)
Diluted $ (.27) $ (1.96) $ (1.06)
</TABLE>
The weighted-average fair value of each option grant is estimated on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions used for 1998, 1997 and 1996, respectively:
expected volatility of 50% each year; risk-free interest rate of 5.7%, 6.1% and
6.1%; an average expected life of 3 years, 4 years and 4 years; and no
dividends. The weighted average fair value of stock option grants was $16.57 in
1998, $15.25 per share in 1997 and $8.97 per share in 1996.
In connection with its 1997 acquisition of Alanex, the Company assumed all
of the issued and outstanding options of Alanex which resulted in options to
purchase an aggregate of 378,084 shares of the Company's common stock at
exercise prices ranging from $.27 to $3.98 per share.
Employee Stock Purchase Plan
The Company has a stock purchase plan in which eligible employees may
purchase shares of the Company's common stock through payroll deductions. A
total of 500,000 shares of common stock have been reserved for issuance under
the plan, of which 131,156 shares remain available for purchase at June 30,
1998. Funds deducted from participating employees' salaries are used to purchase
common stock 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 1998, 109,834
shares were issued at a
<PAGE>
price of $24.97 per share. During 1997, 9,730 shares were issued at a price of
$14.29 per share, 47,036 shares were issued at a price of $17.37 per share and
15,072 shares were issued at a price of $28.69 per share. During 1996, 12,262
shares were issued at a price of $4.94 per share, 46,480 shares were issued at a
price of $9.99 per share and 9,656 shares were issued at a price of $14.29 per
share.
Under FAS 123, pro-forma compensation expense equal to the fair value of
the purchase rights granted under the employee stock purchase plan was estimated
using the Black-Scholes model with the following assumptions for 1998, 1997 and
1996: an expected life of one year; expected volatility of 50 percent; a
risk-free interest rate of 5.6 percent; and no dividends. The weighted-average
fair value of purchase rights granted was $13.12 per share in 1998, $5.96 per
share in 1997 and $3.47 per share in 1996.
Warrants
In connection with its 1997 acquisition of Alanex, the Company assumed an
issued and outstanding warrant to purchase Alanex common stock. Accordingly, at
June 30, 1997, a warrant to purchase an aggregate of 169,522 shares of the
Company's common stock at an exercise price of $4.01 per share was outstanding.
In July 1997, the warrant was exercised in its entirety generating net proceeds
to the Company of approximately $679,800.
Stockholder Rights Plan
In November 1996, the Company's Board of Directors declared a dividend
of one preferred stock purchase right ("Right") for each outstanding share of
the Company's common stock held on the date (this dividend now amounts to one
half of a Right per share of common stock now outstanding as a result of the
two-for-one split of common stock in August 1997). The Rights will expire 10
years after issuance, and will be exercisable only if a person or group becomes
the beneficial owner of 15% or more of the common stock (such person or group, a
"15% holder") or commences a tender or exchange offer which would result in the
offeror beneficially owning 15% or more of the common stock. Each Right will
entitle stockholders to buy one one-ten thousandth of a share of Series B
Participating Preferred Stock of the Company at an exercise price of $500.00 per
share subject to certain anti-dilution adjustments.
If a person or group accumulates 15% or more of the common stock, each
Right (other than Rights held by a 15% holder and certain related parties, which
will be voided) will be adjusted so that upon exercise the holder will have the
right to receive that number of shares of common stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price of the Right. In addition, if following the public
announcement of the existence of a 15% holder, the Company is involved in a
merger or business combination or a sale of 50% or more of the Company's assets
or earning power, each Right (other than Rights held by a 15% holder and certain
related parties, which will be voided) will represent the right to purchase, at
the exercise price, common stock of the acquiring entity having a value of twice
the exercise price at the time. The Board of Directors will also have the right,
following the public announcement of the existence of a 15% holder, to cause
Rights (other than Rights held by the 15% holder and certain related parties,
which will be voided) to be exchanged for one share of common stock (presently
at an exchange ratio of two shares of common stock for each Right).
<PAGE>
Note 8 - Commitments
Certain scientific instrumentation, computers and other equipment are
subject to leases which are classified as capital leases. At June 30, 1998 and
1997, $4,331,000 ($3,408,000, net) and $2,895,000 ($2,629,000, net) of such
leased equipment are included in property and equipment.
Rental expenses (principally for leased facilities under long-term
operating lease commitments) were $5,031,000, $3,509,000 and $2,548,000 for
1998, 1997 and 1996. Future minimum payments for capital and operating leases at
June 30, 1998 are as follows: <TABLE> <CAPTION>
Capital Leases Operating Leases
(Dollars in thousands)
<S> <C> <C>
1999 $ 819 $ 7,472
2000 812 5,507
2001 818 5,314
2002 578 3,943
2003 243 2,630
Thereafter 0 2,047
------------ --------------
Total minimum lease payments 3,270 $ 26,913
==============
Less amount representing interest (56)
-------------
Obligations under capital leases $ 3,214
============
</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.
<PAGE>
Note 9 - Alanex acquisition
In April 1997, the Company executed a merger agreement with Alanex, which
now operates as a wholly-owned subsidiary of Agouron. For all outstanding shares
of Alanex common stock and related options and warrants, approximately 2,000,000
shares of Agouron common stock were issued, subject to certain restrictions.
Such shares had an aggregate fair market value on the measurement date of
approximately $61,000,000 and transaction costs were approximately $1,300,000.
Of the total purchase price (including transaction costs), $57,500,000 was
allocated (as more fully described below) to certain intangible assets and
expensed as in-process technology and approximately $4,800,000 was allocated to
certain tangible and intangible assets and capitalized.
The identifiable intangibles of Alanex include several drug research and
discovery programs, a proprietary drug discovery technology, a chemical compound
library and an assembled work force. These intangibles were valued using either
a replacement cost approach (work force, library and proprietary technology) or
an income approach (research programs). Values assigned to the chemical compound
library and proprietary drug discovery technology have been capitalized, as such
intangibles are of a general nature and may have a number of alternative future
uses. Values assigned to the drug discovery programs have been expensed, as such
programs are pursuing specific drug targets or chemical compounds, the
technological feasibility of which having not been demonstrated, and there may
be no alternative future uses for such targets or chemical compounds if the
programs are ultimately less than successful.
The Company's statement of income (loss) includes the results of operations
related to the acquisition since April 1997. The following are unaudited
pro-forma results of operations as if the transaction had been consummated on
July 1, 1995:
(In thousands except for per share amounts.)
<TABLE>
<CAPTION>
Year ended June 30, 1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 138,872 $ 62,392
============= =============
Net income (loss) $ 14,276 $ (19,421)
============= =============
Earnings (loss) per share $ .51 $ (.92)
============= =============
</TABLE>
<PAGE>
Note 10 - Quarterly financial data (unaudited)
(In thousands, except for
per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
September 30 December 31 March 31 June 30
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> >
1997
Product sales $ 0 $ 0 $ 13,401 $ 43,568
Gross margin from product sales 0 0 7,378 24,992
Net loss (14,447) (12,556) (4,999) (10,804)
Earnings (loss) per share:
Basic (.57) (.46) (.18) (.38)(1)
Diluted (.57) (.46) (.18) (.38)(1)
1998
Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046
Gross margin from product sales 45,429 53,858 62,730 74,637
Net income (loss) 3,630 4,922 13,525 (8,923)
Earnings (loss) per share:
Basic .12 .16 .44 (.29)(2)
Diluted .11 .15 .41 (.29)(2)
</TABLE>
(1) During the fourth quarter of 1997, the Company recorded a write-off of
$57,500,000 ($2.03 per share) of in-process technology associated with the
acquisition of Alanex, partially offset by the realization of $43,800,000
($1.54 per share) of deferred tax assets associated with the Company's
expectation of future taxable income.
(2) During the fourth quarter of 1998, the Company incurred in-licensing costs
of $26,000,000 (tax-effected $.50 per share) for commercial rights to three
development stage anti-HIV products.
<PAGE>
ANNEX IV
AGOURON PHARMACEUTICALS DIVISION
DESCRIPTION OF BUSINESS
General
Agouron Pharmaceuticals ("Agouron Pharmaceuticals") is a division of
Agouron Pharmaceuticals, Inc. ("Agouron" or the "Company"). Agouron
Pharmaceuticals encompasses all of the activities of Agouron except for those
activities related to the research, development and commercialization of
oncology products. Such products are being pursued by the Oncology Division.
Agouron Pharmaceuticals, through its own sales and marketing organization,
is currently marketing in the United States the first drug developed by Agouron,
VIRACEPT(R) (nelfinavir mesylate) for treatment of HIV infection. In addition,
Agouron Pharmaceuticals is expected to initiate a phase II/III pivotal clinical
trial of REMUNE(TM)(AG1661), an immune-based therapeutic agent for treatment of
HIV infection and AIDS being co-developed by Agouron Pharmaceuticals and The
Immune Response Corporation ("IRC"). Further, Agouron Pharmaceuticals has a
number of programs in progress for discovery or development of other new drugs
in the fields of viral disease, inflammatory disease and other serious diseases.
Agouron Pharmaceuticals utilizes the proprietary core drug discovery technology
of Alanex Corporation ("Alanex"), a wholly-owned subsidiary of Agouron, to
accelerate the steps necessary to discover small molecule drug candidates. Such
steps include the initial identification of compounds that exhibit activity
against selected biological targets to the progression of these compounds to
drug candidates for human clinical trials.
Agouron Pharmaceuticals' long-term goal is increasing profitability from
the sale of drugs generated from its own drug discovery and development efforts,
and from development and commercialization of drugs originated outside of
Agouron Pharmaceuticals. To augment its technical capabilities, to enhance the
likelihood of successful commercialization of its products and to offset some of
its operating costs, Agouron Pharmaceuticals has entered into collaborative
research and development arrangements with other companies. Agouron
Pharmaceuticals has generally retained significant commercial rights in drugs
developed in its collaborative research and development programs funded in whole
or in part by other companies. Agouron Pharmaceuticals anticipates that its
successfully developed products will be commercialized both through its own
direct sales and marketing activities in certain pharmaceutical markets and
through manufacturing and marketing relationships with other pharmaceutical
companies.
Narrative Description of Business
Agouron Pharmaceuticals is developing innovative drugs for treatment of HIV
infection and other serious diseases and has expended approximately $449,000,000
on research and development since its inception, excluding a $57,500,000
write-off for in-process technology purchased in 1997 in the acquisition of
Alanex.
<PAGE>
VIRACEPT
In March 1997, Agouron Pharmaceuticals received clearance from the Food and
Drug Administration ("FDA") to market its first drug, VIRACEPT, a potent HIV
protease inhibitor that substantially decreases viral load and increases CD4+T
cell counts when used in combination antiretroviral drug therapy. An orally
administered product, VIRACEPT is available in adult and pediatric formulations.
VIRACEPT sales in the United States totaled $358,321,000 in fiscal 1998.
Agouron Pharmaceuticals estimated that 85,000 patients in the United States
(over 125,000 in the world) were taking VIRACEPT at the end of June 1998. It is
anticipated that continued increasing VIRACEPT sales will make a substantial
contribution toward profitable financial results in the future.
Agouron Pharmaceuticals developed VIRACEPT in collaboration with the
pharmaceutical division of Japan Tobacco Inc. ("JT"). Agouron Pharmaceuticals
and JT granted exclusive commercial rights in Europe, Asia and certain other
countries in the world to Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd
("Roche"). Agouron Pharmaceuticals and JT share profits and/or royalties equally
from the worldwide commercialization of VIRACEPT.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. VIRACEPT license fees and royalties from Roche totaled
$17,852,000 in 1998.
Research and Development Programs
Agouron Pharmaceuticals' research and development programs focus on the
areas of AIDS and other serious diseases. Agouron Pharmaceuticals' drug
discovery programs apply Agouron's core technologies of three-dimensional
structure based drug design and high-throughput screening of chemical libraries
generated by computation-directed combinatorial chemistry.
The following table outlines the status of various programs in Agouron
Pharmaceuticals' research and development portfolio. Agouron Pharmaceuticals is
pursuing some of these programs independently, while others are being undertaken
in collaboration with other companies.
<PAGE>
Research
and
Development
Program Indication Stage
Viral Disease
VIRACEPT(1) HIV Infection Approved
REMUNE (AG1661)(2) HIV Infection Phase II/III
AG1549 (S-1153)(3) HIV Infection Phase I
AG1776 (JE-2147)(4) HIV Infection Preclinical
AG7088 Common Cold Preclinical
Hepatitis C agents(5) Viral Disease Research
HIV Integrase Inhibitors HIV Infection Research
Ophthalmology
AG3340 Macular Degeneration Phase II
Other MMP Inhibitors Macular Degeneration Preclinical
VEGF Inhibitors Macular Degeneration Research
(1) In collaboration with Japan Tobacco Inc. and F. Hoffman-La Roche Ltd.
(2) In collaboration with The Immune Response Corporation.
(3) In collaboration with Shionogi & Co., Ltd.
(4) In collaboration with Japan Energy Corporation.
(5) In collaboration with Japan Tobacco Inc.
Viral Disease
Overview
The development of new drugs for the treatment of certain viral diseases is
an important scientific and commercial focus of Agouron Pharmaceuticals. Agouron
Pharmaceuticals is presently conducting programs aimed at discovery and/or
development of several classes of anti-viral drugs that block viral proteases,
enzymes required by several families of pathogenic viruses to carry out
replication and infection. Agouron Pharmaceuticals ' anti-viral drug programs
include HIV protease inhibitors (VIRACEPT and AG1776), an immune-based
therapeutic (REMUNE), a non-nucleoside reverse transcriptase inhibitor (AG1549),
rhinovirus 3C protease inhibitors, and hepatitis C protease enzymes. Agouron
Pharmaceuticals is developing certain of its anti-viral drugs through
collaboration(s) with JT, Roche, IRC, Shionogi & Co., Ltd. and Japan Energy
Corporation.
<PAGE>
HIV Protease Inhibitor: VIRACEPT
HIV protease is an enzyme that performs an essential role in the infectious
cycle of HIV, and clinical research has demonstrated that inhibition of the
protease enzyme renders HIV unable to form new infectious virus. Today, five
FDA-approved HIV protease inhibitors (including VIRACEPT) are making a
significant contribution in the management of HIV disease.
VIRACEPT was cleared by the FDA for marketing in the United States in March
1997 pursuant to the FDA's guidelines for accelerated approval. VIRACEPT
development activities now include certain additional phase II/III studies to
facilitate the full approval of the drug and certain phase IV studies designed
to expand the utilization of the product.
Immune-based therapeutic agent: REMUNE (AG1661)
An important recent goal in treatment of HIV infection is to combine such
highly active drugs as HIV protease inhibitors, capable of halting replication
of HIV, with agents capable of directly enhancing recovery of the immune system.
REMUNE is an immune-based therapeutic agent, derived from HIV itself, which has
been shown to stimulate the immune system to respond specifically to HIV
infection and to produce the increases in substances such as chemokines that may
provide protection to uninfected cells. Discovered by IRC, REMUNE is
administered as an intramuscular injection every three months, and has been
well-tolerated in clinical trials to date.
In May 1997, enrollment was completed at 74 centers in the United States
for a pivotal phase III, clinical end-point trial in which approximately 2,500
patients were randomized to receive conventional anti-retroviral drug therapy
with or without REMUNE. This study is expected to be completed in March 1999.
More than 250 patients have been enrolled in two other clinical studies which
are evaluating the effect of REMUNE in combination with anti-retroviral drugs on
virologic and immunologic markers in adults. A smaller study of REMUNE for
treatment of HIV infection in children is in progress at the National Institutes
of Health.
In June 1998, Agouron and IRC began a collaboration on the final
development and commercialization of REMUNE. Agouron has exclusive rights to
market REMUNE in North America, Europe and certain other countries; IRC will
manufacture commercial supplies of REMUNE. Agouron and IRC will share equally
all profits from the commercialization of REMUNE in the licensed territory.
Non-nucleoside reverse transcriptase inhibitor (NNRTI): AG1549 (S-1153)
AG1549 is a second-generation NNRTI for the treatment of HIV infection.
Discovered by Shionogi & Co., Ltd. ("Shionogi"), AG1549 is currently the subject
of several clinical trials evaluating its dose and its concomitant use with
other antiretroviral treatments. AG1549 is of high clinical interest because it
is ten times more potent in vitro than currently approved NNRTIs and because
AG1549 is fully active in vitro against HIV containing the most common genetic
mutation (at position 103) associated with resistance to other NNRTIs.
Agouron Pharmaceuticals has exclusive rights to the development and
commercialization of AG1549, except in Japan, South Korea and Taiwan, subject to
the payment of royalties to Shionogi.
HIV Protease Inhibitor: AG1776 (JE-2147)
AG1776 is a protease inhibitor for the treatment of HIV infection.
Preclinical data indicate that AG1776, discovered by Japan Energy Corporation
("JE"), works synergistically in vitro with other protease inhibitors. The
compound has also exhibited activity against HIV mutations commonly associated
with resistance to other protease inhibitors.
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1776 except in Japan, South Korea, North Korea and
Taiwan, subject to the payment of royalties to JE; JE will manufacture bulk
compound for use in final drug product.
<PAGE>
Rhinovirus 3C Protease Inhibitor: AG7088
Rhinoviruses are believed to be the single most frequent cause of the
common cold. While rhinovirus infections are a periodic annoyance to most
individuals, they may produce more severe and prolonged symptoms in people with
chronic obstructive pulmonary disease, such as asthma and emphysema. 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. Agouron has
designed potent, selective rhinovirus 3C protease inhibitors, including AG7088,
that are currently being evaluated in preclinical pharmacological studies.
Agouron Pharmaceuticals retains all commercial rights in compounds resulting
from this program.
HIV Integrase Inhibitors
The drugs currently approved in the United States for treatment of HIV
infection consist of reverse transcriptase inhibitors and protease inhibitors
(including VIRACEPT). Another mechanism of action is inhibition of HIV-1
integrase, a key enzyme in catalyzing the integration of HIV into human cells.
Agouron scientists believe that blocking HIV integrase is a viable
therapeutic strategy that will abort completion of the viral life cycle,
preventing infection of new, uninfected target cells. Scientists also believe
that HIV integrase is an attractive target, because it is extremely unlikely
that an HIV integrase-specific inhibitor will nonspecifically inhibit other
eukaryotic enzymes. This fact may possibly reduce the incidence of side effects
of an integrase inhibitor used to treat HIV infection. Agouron Pharmaceuticals
retains all commercial rights in compounds resulting from this program.
Anti Hepatitis C Drugs
The hepatitis C virus ("HCV") is a virus that causes illnesses ranging from
a mild flu-like disease to progressive liver disease, cirrhosis and primary
liver cancer. The ability to treat infection by HCV represents a significant
unmet clinical need, particularly in Asian countries. HCV depends upon several
key protease enzyme for the production of new infectious virus. Agouron
Pharmaceuticals scientists have initiated programs to design new classes of
anti-viral drugs that block such enzymes and disrupt the HIV life cycle. Agouron
Pharmaceuticals is pursuing this research program in collaboration with JT.
<PAGE>
Ophthalmology
Overview
A hallmark of many serious retinal disorders, such as age-related macular
degeneration, macular edema, retinopathy of prematurity, and proliferative
diabetic retinopathy, is an extensive proliferation of new blood vessels in the
retina and underlying choroid. This process, known as angiogenesis or
neovascularization, often leads to retinal hemorrhage that results in the loss
of ganglion cells, degeneration of the central optic nerve, and eventually loss
of central and/or peripheral vision. The most common neovascular retinal
disorder, namely age-related macular degeneration, has recently become a leading
cause of blindness in the elderly population in the industrialized world.
In common with other tissues, the growth of new blood vessels is mediated
by many factors including various members of the family of MMPs, VEGF and
Fibroblast Growth Factors ("FGF") and their respective receptors and some
members of the integrin family of receptors involved in cell-cell and
cell-matrix interactions. In ocular tissues, the production of these factors,
receptors and MMPs is increased by local hypoxia, the most notable condition
believed to stimulate retinal and subretinal neovascularization. Most
significantly, in the ocular tissue of patients with any of the above mentioned
diseases, elevated levels of growth factors, integrins and MMPs (in particular
MMP-2 and MT-MMP-1) were consistently identified.
Key mediators of angiogenesis have been associated with ophthalmic
disorders. VEGF and basic FGF are strongly implicated as causative angiogenic
agents in a variety of studies. In ocular tissues, the production of these
growth factors is increased by hypoxia, the most notable condition believed to
stimulate retinal angiogenesis. Most significantly, in patients undergoing
surgery, high levels of VEGF in ocular fluid were found associated with macular
degeneration, active diabetic retinopathy, central vein occlusion and other
disorders.
Current studies in the area of ophthalmology involve an assessment of the
impact that inhibitors of MMPs might have on therapeutic practice and in meeting
medical needs in these areas. Agouron Pharmaceuticals is conducting in animal
models a series of proof-of-principle pre-clinical studies of ocular diseases
with the MMP inhibitor AG3340 in preparation for the commencement of human
clinical studies. Agouron Pharmaceuticals has recently demonstrated significant
accumulation of AG3340 in the vitreous humor of rats and monkeys following oral
dosing.
Likewise, it is anticipated that when suitable inhibitors of VEGF become
available, they will be tested in the existing ocular angiogenesis models prior
to selection of a lead compound for clinical development. Agouron
Pharmaceuticals retains all commercial rights in compounds resulting from this
program.
<PAGE>
Business Relationships/Research and Development Agreements
Agouron Pharmaceuticals has funded its research and development primarily
from working capital generated from both private and public sales of Agouron
Pharmaceuticals equity, collaborative arrangements and the financial
contribution resulting from product sales. Agouron Pharmaceuticals 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 February 1994, Agouron Pharmaceuticals entered into a strategic alliance
with JT in the field of anti-viral drugs for the treatment of infections caused
by hepatitis C and the herpes family of viruses. In December 1994, the Company
added its anti-HIV drug, VIRACEPT, to the JT collaboration with the execution of
a world-wide development and licensing agreement. Agouron Pharmaceuticals and JT
share equally the costs of further development of VIRACEPT.
Currently, Agouron Pharmaceuticals has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in North America and JT has exclusive
commercial rights to VIRACEPT (with the right to sublicense) in certain parts of
Japan. Agouron Pharmaceuticals and JT share profits and/or royalties equally
from the world-wide commercialization of VIRACEPT.
Roche
Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty
bearing marketing rights to VIRACEPT outside of North America and parts of
Japan. Further, Agouron Pharmaceuticals receives royalties based either on
Roche's sales of VIRACEPT or, in certain circumstances, Invirase(R) and
Fortavase(R) (saquinavir), Roche's HIV protease inhibitors. Roche has the right
to manufacture VIRACEPT for its own use and is expected to commence such
manufacturing in calendar 1999.
<PAGE>
Immune Response
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with IRC to collaborate on final development and commercialization of
REMUNE, an immune-based therapeutic agent discovered by IRC and currently the
subject of several clinical studies including a large phase III clinical trial.
The two companies intend to enter promptly into a definitive agreement and will
endeavor to complete development and registration of REMUNE in 1999. IRC will
manufacture commercial supplies of REMUNE, and Agouron Pharmaceuticals will have
exclusive rights to market REMUNE in North America, Europe and certain other
countries. The two companies will share equally all profits from
commercialization of REMUNE in the licensed territory. Agouron Pharmaceuticals
paid an initial $10,000,000 license fee to IRC in June 1998 and also purchased
118,256 newly issued common shares of IRC for $2,000,000. Agouron
Pharmaceuticals may pay, assuming ongoing successful development, registration
and approval of REMUNUE, to IRC up to $53,000,000 in additional development and
milestone payments and $12,000,000 in purchases of additional IRC common stock.
Shionogi & Co., Ltd.
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with Shionogi to develop and commercialize AG1549, a second-generation
NNRTI for the treatment of HIV infection. Discovered by Shionogi, AG1549 is
currently the subject of several clinical trials evaluating its dose and its
concomitant use with other antiretroviral treatments. AG1549 is of high clinical
interest because it is ten times more potent in vitro than such other NNRTIs as
nevirapine (Viramune(R)) and delavirdine (Rescriptor(R)) and because AG1549 is
fully active in vitro against HIV containing the most common genetic mutation
(at position 103) associated with resistance to other NNRTIs, including
efavirenz (Sustiva(TM)).
Agouron Pharmaceuticals has exclusive rights to the development and
commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
Pharmaceuticals paid an initial $10,000,000 license fee to Shionogi in June
1998. Agouron Pharmaceuticals may pay, assuming ongoing successful development,
registration and approval of AG1549, additional license fees of up to
$30,000,000. In addition, Agouron Pharmaceuticals will pay Shionogi royalties
based on sales, if any, of AG1549.
Japan Energy Corporation
In June 1998, Agouron Pharmaceuticals entered into a license agreement with
JE to develop and commercialize AG1776, a novel protease inhibitor for the
treatment of HIV infection. Preclinical data indicate that AG1776, discovered by
JE, works synergistically in vitro with other protease inhibitors. The compound
has also exhibited activity against mutations commonly associated with
resistance to other protease inhibitors.
<PAGE>
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1776 except in Japan, South Korea, North Korea and
Taiwan; JE will manufacture bulk compound for use in final drug product. Agouron
Pharmaceuticals incurred an initial $6,000,000 license fee in June 1998. Agouron
Pharmaceuticals may incur, assuming ongoing successful development, registration
and approval of AG1776, additional license fees of up to $20,000,000. In
addition, Agouron Pharmaceuticals will pay JE royalties based on sales, if any,
of AG1776.
Manufacturing
Agouron Pharmaceuticals utilizes worldwide contract manufacturing to
produce VIRACEPT. Agouron Pharmaceuticals procures and transfers raw materials
to contracted bulk drug producers, sends the converted bulk drug to finishing
facilities and moves finished goods into a distribution center. Product supply
and associated raw materials have been available in sufficient quantities to
meet business needs. In order to accommodate anticipated sales volume growth,
capacity expansion efforts are being pursued. Agouron Pharmaceuticals will be
dependent upon its contract manufacturers to comply with good manufacturing
practices and to meet its production requirements. There can be no assurance
that Agouron Pharmaceuticals' contract manufacturers will timely deliver
sufficient quantities of Agouron Pharmaceuticals' products or that Agouron
Pharmaceuticals would be able to find substitute manufacturers, if necessary.
Marketing
Agouron Pharmaceuticals distributes VIRACEPT in the United States through
wholesalers. Sales volumes in the United States are influenced by underlying
demand and wholesale inventory management practices.
VIRACEPT is covered by Medicaid programs in all states and is covered by
virtually all state AIDS Drug Assistance Programs ("ADAPs"). Currently, VIRACEPT
is paid for predominately by Medicaid, private insurance and ADAPs. The Company
offers a patient assistance program based upon medical need for patients who
have no other means of coverage.
Outside of North America and parts of Japan, VIRACEPT is marketed on behalf
of Agouron Pharmaceuticals and JT by Roche. Agouron Pharmaceuticals receives a
royalty on Roche's worldwide sales of VIRACEPT.
Agouron Pharmaceuticals' sales and marketing efforts utilize a field sales
organization which focuses primarily on office- and hospital-based physicians,
including key medical thought leaders. Additionally, Agouron Pharmaceuticals has
obtained 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.
Human Resources
As of July 28, 1998, Agouron Pharmaceuticals had 991 employees. Of these it
is anticipated that approximately 800 of these will be directly engaged in the
conduct of the Agouron Pharmaceuticals business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Important Factors Regarding
Forward-Looking Statements" attached as Exhibit 99 to the Company's annual
report on Form 10-K for the period ended June 30, 1998 and incorporated herein
by reference. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP"), a division of
Agouron Pharmaceuticals, Inc. (the "Company") is committed to the discovery,
development, manufacturing and marketing of human pharmaceuticals targeting AIDS
and other serious diseases. Operations to date have been principally funded from
the Company's equity-derived working capital, various collaborative arrangements
and, most recently, from the gross margin contribution of Agouron
Pharmaceuticals' first product, VIRACEPT(R) (nelfinavir mesylate). The net
income reported in fiscal 1998 is principally due to the commercialization of
VIRACEPT while Agouron Pharmaceuticals' prior net operating losses reflect
primarily the result of its independent research and substantial investment in
the clinical and commercial development of VIRACEPT.
In March 1997, Agouron Pharmaceuticals received clearance from the United
States Food and Drug Administration ("FDA") to market VIRACEPT in the United
States. For the fiscal year ended June 30, 1998, due principally to the
increasing product contribution from VIRACEPT sales, license fees and royalties,
Agouron Pharmaceuticals realized a net income of $37,387,000.
Results of Operations
Product sales
Product sales for the fiscal years ended June 30, 1997 and 1998 were
approximately $57,000,000 and $409,300,000 which included sales in the United
States of $55,559,000 and $358,321,000, respectively. Agouron Pharmaceuticals
anticipates that VIRACEPT sales in the United States will approximate
$430,000,000 to $440,000,000 for fiscal 1999.
Contract revenues
Collaborative research and development agreements with Japan Tobacco Inc.
("JT") accounted for substantially all of Agouron Pharmaceuticals' contract
revenues for 1998, 1997 and 1996. Total contract revenues for 1998 decreased
approximately 53% from 1997 due principally to decreased VIRACEPT program
spending by Agouron Pharmaceuticals, which was partially funded by JT.
Additionally, the amortization to revenue over a 24 month period of JT's
$24,000,000 milestone payment, which
<PAGE>
was received in August 1995, was completed in June 1997. The increase in
contract revenues from 1996 to 1997 of approximately 31% was due principally to
increased program activity and spending on the JT collaborations. Agouron
Pharmaceuticals anticipates that contract revenues for fiscal 1999 will
approximate $35,000,000 to $40,000,000.
License fees and royalties
Agouron Pharmaceuticals' license fees and royalties for 1998 and 1997 were
principally derived from F. Hoffmann-La Roche Ltd ("Roche"). Total revenues for
1998 increased approximately 84% from 1997 due to European marketing approval
for VIRACEPT. The increase from 1996 to 1997 is principally due to the receipt
of $9,000,000 in 1997 for initial European marketing rights for VIRACEPT.
In January and March 1998, VIRACEPT was approved for marketing in Europe
and Japan, respectively. Upon such approvals, Agouron Pharmaceuticals realized
as revenue license fees totaling $12,000,000. In July 1997, Agouron
Pharmaceuticals and JT granted Roche certain exclusive rights to VIRACEPT in
several Asian countries. For such rights, Agouron Pharmaceuticals received a
license fee of $2,000,000.
Royalty revenues of approximately $3,852,000 have been recognized in 1998
based on estimated and actual Roche sales of VIRACEPT in its licensed territory.
Agouron Pharmaceuticals anticipates that license fees and royalties for fiscal
1999 will range from $30,000,000 to $35,000,000.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales was
approximately 43% and 42% for 1997 and 1998, respectively. Gross margins on
United States commercial sales were approximately 57% and 65% during 1997 and
1998, respectively. Agouron Pharmaceuticals anticipates that gross margins on
United States commercial sales will improve as product sales volumes increase
and certain manufacturing process and scale efficiencies are realized, and will
approximate 71% in 1999. Aggregate gross margins will also be impacted by the
size of Agouron Pharmaceuticals' patient assistance program (which provides free
goods to indigent individuals), Agouron Pharmaceuticals' manufacturing supply
agreement with Roche (whereby Roche has the right to either purchase product at
Agouron Pharmaceuticals' cost plus contractually determined mark-ups or
manufacture drug product for its own use, subject to contractually determined
fees to be paid to Agouron Pharmaceuticals) and the level of sales subject to
Medicaid and other discounts or rebates in the United States.
Research and development
Research and development ("R&D") spending increased by approximately 39%
from 1997 to 1998 due to license fees for three development stage HIV products
and the addition of Alanex since late 1997. R&D spending increased by
approximately 51% from 1996 to 1997 due principally to increased expenditures in
support of human clinical trials and an expanded access program associated with
VIRACEPT. Agouron Pharmaceuticals anticipates that total R&D expenses in fiscal
1999, excluding the impact of any license fees or milestone expenses in either
1998 or 1999, will exceed fiscal 1998 expenses by approximately 25%.
<PAGE>
Selling, general and administrative
Selling, general and administrative ("SG&A") expenses represented
approximately 24% of total operating expenses (excluding the cost of product
sales, royalties and write-off of in-process technology purchased) in 1998, 28%
in 1997 and 10% in 1996. SG&A increased by approximately 77% from 1997 to 1998
due principally to a full year of expenses associated with the sales force and
other marketing personnel. Spending increases from 1996 to 1997 were due chiefly
to increasing staff levels (approximately 214%) and staff-related expenditures,
certain premarketing and advertising and promotion costs associated with the
launch of VIRACEPT in March 1997 and other costs associated with a growing sales
and marketing infrastructure. Agouron Pharmaceuticals anticipates that total
SG&A expenses will increase by approximately 40% in fiscal 1999 due to
increasing sales and marketing activities and the support of VIRACEPT phase IV
marketing studies.
Royalties
Agouron Pharmaceuticals' obligation to share VIRACEPT profits with JT is
reflected in royalty expense for 1998 and represents approximately 19% of United
States product sales. Royalties in fiscal 1997 were not significant. It is
anticipated that royalty expense for fiscal 1999 will approximate 24% to 25% of
United States product sales.
Write-off of in-process technology purchased
In 1997, the Company acquired Alanex, a research company engaged in the
discovery of drug leads through the high-speed screening of diverse chemical
libraries designed by computational methods and generated by combinatorial
chemistry. Alanex was acquired in a purchase transaction through the issuance of
approximately 1,992,000 equivalent shares (including 548,000 for options and
warrants) of the Company's common stock valued at approximately $61,000,000,
plus $1,300,000 of related acquisition costs. The purchase price was allocated
to various tangible and intangible assets and either capitalized (approximately
$4,800,000) or expensed (approximately $57,500,000) as in-process technology
based on an independent valuation of the Alanex assets, technology and research
programs at the date of acquisition.
Interest and other income
Interest income increased by 1% from 1997 to 1998. Interest income
increased by approximately 23% from 1996 to 1997 due principally to a higher
average investment portfolio balance resulting from the July 1996 public
offering, receipt of $9,000,000 in license fees from Roche (January 1997),
significantly increased contract funding from JT and the exercise of employee
stock options. Agouron Pharmaceuticals anticipates that, absent additional
revenue sources or a significant change in interest rates, fiscal 1999 interest
income will be less than that of fiscal 1998.
<PAGE>
Interest expense
Interest expense increased in 1998 from 1997 due to borrowings under a line
of credit which was used to partially fund quarterly royalties paid to JT
throughout the year. Interest expense decreased in 1997 from 1996 by
approximately 38% due to a decreasing level of debt and capital lease
obligations from year to year.
Income tax provision (benefit)
The income tax provision in 1998 has been computed using an effective,
combined federal and state rate of 36%. The cash obligation of such 1998
provision has been mostly offset by the utilization of deferred tax assets.
Based on its 1998 pre-tax profit and its estimates for future taxable income,
Agouron Pharmaceuticals believes it is more likely than not that its deferred
tax assets (comprised mostly of net operating loss carryforwards, deductions
generated by the exercise of stock options, and research credits) will be
realized and has, therefore, recorded the full tax benefit of its deferred tax
assets. Agouron Pharmaceuticals' accumulated net deferred tax assets totaled
approximately $55,900,000 and $64,100,000 at June 30, 1997 and 1998. Agouron
Pharmaceuticals anticipates that its effective income tax rate for fiscal 1999
will be less than 10%. Such decrease from fiscal 1998 is attributed to greater
expected availability of R&D tax credits due to the anticipated increase in R&D
spending plus the anticipated reduction in R&D contract revenues and the
utilization of tax losses from Oncology Division ("Oncology Division" or "OD"),
a division of the Company.
Year 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures. The Company has established a Year 2000
project team that is currently reviewing computer systems and computer
controlled equipment that could be affected by this issue. Additionally, the
Company has made initial contact with all of its significant external business
partners to determine the extent to which the Company is vulnerable to their
failures and to ascertain Year 2000 compliance and risk. The Company estimates
that the inventory and assessment of internal systems and material third parties
will be completed by the end of calendar 1998.
The Company is in the process of upgrading its enterprise business system.
Once upgraded, the system will be Year 2000 compliant. The estimated completion
date of this upgrade is by the end of calendar 1998. The Company also expects to
both replace and upgrade other equipment and systems. The Company expects to
complete such changes by the end of fiscal 1999, and to complete validation by
the end of calendar 1999. While the total cost to upgrade or replace such
systems is not known at this time, the Company believes such cost will not have
a material effect on the Company's business, financial position, or results of
operation.
At this time the Company has not initiated the formulation of contingency
plans. The determination of the necessity for contingency plans will be made by
the end of calendar 1998.
<PAGE>
Liquidity and Capital Resources
Prior to fiscal 1998, Agouron Pharmaceuticals relied principally on the
Company's equity financings and corporate collaborations to fund its operations
and capital expenditures. In fiscal 1998, due primarily to the successful
commercialization of VIRACEPT, operating activities have provided $25,437,000 of
cash compared with using $57,961,000 in fiscal 1997. Commercial sales of
VIRACEPT for 1997 and 1998 resulted in gross margins of approximately
$32,370,000 and $236,654,000.
At June 30, 1998, Agouron Pharmaceuticals had net working capital of
approximately $125,933,000, an increase of $11,565,000 over June 30, 1997 levels
due principally to Agouron Pharmaceuticals' pre-tax profit of $46,157,000,
partially offset by $24,610,000 of funding for Oncology Division. Individual
working capital components significantly impacted by the commercialization of
VIRACEPT include trade accounts receivable (an increase of $18,416,000),
inventories (an increase of $44,906,000), accounts payable (an increase of
$15,560,000) and accrued liabilities (an increase of $25,829,000, primarily due
to accrued royalties payable to JT and accrued license fees). It is anticipated
that these working capital components and cash and short-term investments will
continue to be significantly impacted as VIRACEPT sales increase. At June 30,
1998, Agouron Pharmaceuticals had cash, cash equivalents and short-term
investments of approximately $87,123,000. Agouron Pharmaceuticals believes that
its current capital resources, existing contractual commitments and anticipated
VIRACEPT product sales contribution are sufficient to maintain its current
operations and to provide for the operating requirements of Oncology Division
through fiscal 1999. This belief is based on current research and clinical
development plans of Agouron Pharmaceuticals and Oncology Division, anticipated
working capital requirements associated with the expanding commercialization of
VIRACEPT, the current regulatory environment, historical industry experience in
the development of therapeutic drugs and general economic conditions.
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Combined Balance Sheet as of June 30, 1998 and 1997
Combined Statement of Income (Loss) for the years ended
June 30, 1998, 1997 and 1996
Combined Statement of Division Equity for the
years ended June 30, 1998, 1997 and 1996
Combined Statement of Cash Flows for the years ended
June 30, 1998, 1997 and 1996
Notes to Combined Financial Statements
NOTE: All schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the combined financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying combined balance sheet and the related combined
statements of income (loss), of division equity and of cash flows present
fairly, in all material respects, the financial position of Agouron
Pharmaceuticals (a division of Agouron Pharmaceuticals, Inc.) at June 30, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the management of Agouron Pharmaceuticals, Inc.; 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.
As described above and more fully described in Note 1 to these financial
statements, Agouron Pharmaceuticals is a division of Agouron Pharmaceuticals,
Inc.; accordingly, the combined financial statements of Agouron Pharmaceuticals
should be read in conjunction with the audited consolidated financial statements
of Agouron Pharmaceuticals, Inc.
/s/ PricewaterhouseCoopers LLP
San Diego, California
August 10, 1998
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
COMBINED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,098 $ 52,484
Short-term investments 68,025 38,833
Accounts receivable, net 49,703 26,707
Inventories 103,706 58,800
Current deferred tax assets 564 500
Other current assets 4,202 2,209
---------- -----------
Total current assets 245,298 179,533
Property and equipment, net 47,212 22,613
Deferred tax assets 64,644 56,000
Purchased intangibles 3,500 4,100
---------- -----------
$ 360,654 $ 262,246
========== ===========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable $ 44,393 $ 28,833
Accrued liabilities 34,468 8,639
Deferred revenue and advances 23,563 24,567
Current deferred tax liabilities 1,139 600
Loan payable and current portion of long-term debt 15,802 2,526
---------- -----------
Total current liabilities 119,365 65,165
---------- -----------
Long-term liabilities:
Long-term debt, less current portion 5,892 5,940
Accrued rent 1,023 1,277
---------- -----------
Total long-term liabilities 6,915 7,217
---------- -----------
Division equity 234,374 189,864
---------- -----------
Commitments
$ 360,654 $ 262,246
========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF INCOME (LOSS) (In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Product sales $ 409,298 $ 56,969 $ 0
Contracts 23,427 49,824 37,942
License fees and royalties 18,352 10,000 0
------------- ------------- -------------
451,077 116,793 37,942
------------- ------------- -------------
Operating expenses:
Cost of product sales 172,644 24,599 0
Research and development 113,132 81,293 53,763
Selling, general and administrative 55,876 31,653 6,142
Royalties 68,423 0 0
Write-off of in-process technology purchased 0 57,500 0
------------- ------------- -------------
410,075 195,045 59,905
------------- ------------- -------------
Operating income (loss) 41,002 (78,252) (21,963)
------------- ------------- -------------
Other income (expenses):
Interest and other income 5,907 5,873 4,776
Interest expense (752) (142) (228)
------------- ------------- -------------
5,155 5,731 4,548
------------- ------------- -------------
Income (loss) before income taxes 46,157 (72,521) (17,415)
Income tax provision (benefit) 16,793 (38,287) 934
------------- ------------- -------------
Net income (loss) 29,364 (34,234) (18,349)
Tax benefit allocated from Oncology Division 8,023 4,290 0
------------- ------------- -------------
Net income (loss) attributable to AP stock $ 37,387 $ (29,944) $ (18,349)
============= ============= =============
Earnings per share:
Basic $ 1.22 $ (1.11) $ (.93)
============= ============= =============
Diluted $ 1.13 $ (1.11) $ (.93)
============= ============== =============
Equivalent shares used in calculation of:
Basic 30,571 26,946 19,688
Diluted 33,214 26,946 19,688
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF DIVISION EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
On
Short-term Accumulated
Other Investments Deficit Total
<S> <C> <C> <C> <C>
Balance at June 30, 1995 $ 16,203 $ -- $ ( 1,809) $ 14,394
Equity contribution from
Agouron Pharmaceuticals, Inc. 82,515 -- -- 82,515
Equity contribution to Oncology
Division (1,751) -- -- (1,751)
Net loss -- (18,349) (18,349)
----------- ---------- ----------- ----------
Balance at June 30, 1996 96,967 -- (20,158) 76,809
Equity contribution from
Agouron Pharmaceuticals, Inc. 146,405 -- -- 146,405
Tax benefit of stock options exercised 12,100 -- -- 12,100
Equity contribution to Oncology
Division (15,506) -- -- (15,506)
Net loss -- -- (34,234) (34,234)
Tax benefit allocated from Oncology Division -- -- 4,290 4,290
----------- ---------- ------------ ----------
Balance at June 30, 1997 239,966 -- (50,102) 189,864
Equity contribution from
Agouron Pharmaceuticals, Inc. 14,453 -- -- 14,453
Tax benefit of stock options exercised 16,896 -- -- 16,896
Change in unrealized gains (losses) on
short-term investments -- 384 -- 384
Equity contribution to Oncology
Division (24,610) -- -- (24,610)
Net income 29,364 -- -- 29,364
Tax benefit allocated from Oncology Division 8,023 8,023
------------ ---------- --------- ---------
Balance at June 30, 1998 $ 246,705 $ 384 $ (12,715) $ 234,374
=========== ========= =========== =========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from product sales, contracts and licenses $ 427,026 $ 103,090 $ 43,911
Cash paid to suppliers, employees and service providers (406,795) (166,782) (54,522)
Interest received 5,958 5,873 4,776
Interest paid (752) (142) (228)
----------- ----------- -----------
Net cash provided (used) by operating activities 25,437 (57,961) (6,063)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities/sales of short-term investments 147,292 127,501 59,686
Purchases of short-term investments (176,100) (91,227) (118,224)
Purchase of property and equipment (31,507) (12,372) (3,252)
Cost to acquire Alanex, net of cash acquired 0 608 0
----------- ----------- -----------
Net cash provided (used) by investing activities (60,315) 24,510 (61,790)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,453 85,354 82,515
Proceeds from credit line 53,600 0 0
Principal payments on credit line, long-term debt,
and capital leases (41,951) (364) (818)
Equity contribution to Oncology Division (24,610) (15,506) (1,751)
----------- ----------- -----------
Net cash provided (used) by financing activities 1,492 69,484 79,946
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (33,386) 36,033 12,093
Cash and cash equivalents at beginning of year 52,484 16,451 4,358
----------- ----------- -----------
Cash and cash equivalents at end of year $ 19,098 $ 52,484 $ 16,451
=========== =========== ===========
Reconciliation of net income (loss) to net cash provided (used) by operating
activities:
Net income (loss) attributable to AP stock $ 37,387 $ (28,944) $ (18,349)
Depreciation and amortization 9,087 3,910 2,411
Write-off of in-process technology purchased 0 57,500 0
Provision (benefit) for deferred income taxes 16,750 (40,510) 0
Tax benefit allocated from Oncology Division (8,023) (4,290) 0
Net (increase) decrease in inventories (44,906) (58,547) 0
Net (increase) decrease in accounts receivable and other
current assets (24,989) (23,541) (1,198)
Net increase (decrease) in accounts payable, accrued
liabilities, deferred revenue and advances, and other liabilities 40,131 36,461 11,073
---------- ---------- -----------
Net cash provided (used) by operating activities $ 25,437 $ (57,961) $ (6,063)
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
AGOURON PHARMACEUTICALS, a division of Agouron Pharmaceuticals, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - The Division and its significant accounting policies
The Division
Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or "AP") is a division
of Agouron Pharmaceuticals, Inc. (the "Company") which was organized and
incorporated in California in June 1984. Agouron Pharmaceuticals is an
integrated pharmaceutical company committed to the discovery, development,
manufacturing and marketing of innovative therapeutic products engineered to
inactivate proteins which play key roles in AIDS and other serious diseases.
Agouron Pharmaceuticals, through its own sales and marketing organization, is
currently marketing in the United States its first drug, VIRACEPT(R) (nelfinavir
mesylate) for treatment of HIV infection. In addition, Agouron Pharmaceuticals
is expected to initiate a phase II/III pivotal clinical trial of REMUNE(TM)
(AG1661), an immune-based therapeutic agent for treatment of HIV infection and
AIDS being co-developed by Agouron Pharmaceuticals and The Immune Response
Corporation ("IRC"). Further, Agouron Pharmaceuticals has a number of programs
in progress for discovery or development of other new drugs in the fields of
viral disease and other serious diseases. Agouron Pharmaceuticals is also using
the proprietary core drug discovery technology of Alanex Corporation ("Alanex"),
a wholly-owned subsidiary of the Company, to accelerate the steps necessary to
discover small molecule drug candidates, from the initial identification of
compounds that exhibit activity against selected biological targets to the
progression of these compounds to drug candidates for human clinical trials.
Financial statements and allocation matters
As a matter of policy, the Company manages the financial activities of
its divisions on a centralized basis. These financial activities include the
investment of surplus cash, the issuance, repayment and repurchase of short-term
and long-term debt and the issuance and repurchase of common stock. During the
three years ended June 30, 1998, the Company attributed all of its short-term
and long-term debt to AP based upon the specific purpose for which the debt was
incurred and the cash flow requirements of AP. Accordingly, all of the Company's
interest expense has been allocated to AP. The Company believes this method of
allocation to be equitable and reasonable.
Agouron Pharmaceuticals' financial statements have been prepared in
accordance with generally accepted accounting principles and, taken together
with the Company's other division, comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each division reflect the financial condition, results of
operations and cash flows of the businesses included therein. The combined
financial statements of Agouron Pharmaceuticals also include any accounts or
assets of the Company not specifically allocated to the Oncology Division
("Oncology Division" or "OD"), a division of the Company.
<PAGE>
Principles of combination
The combined financial statements of AP include the accounts of the Company
and its wholly-owned subsidiaries except for its programs in the area of
oncology, which are reflected separately in Oncology Division's financial
statements. All significant intercompany accounts and transactions have been
eliminated.
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.
Cash and cash equivalents
Agouron Pharmaceuticals considers cash equivalents to be only those
investments which are highly liquid, readily convertible to cash and which
mature within 90 days from date of purchase.
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, and corporate
equity securities. Agouron Pharmaceuticals has classified its short-term
investments as available-for-sale. Included in short-term investments at June
30, 1998 and 1997 is $1,262,000 and $588,000 of accrued interest receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Concentration of credit and market risk
Agouron Pharmaceuticals 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. Agouron Pharmaceuticals has not realized any material
losses from such investments in 1998, 1997 or 1996.
Financial instruments and risk management
Agouron Pharmaceuticals has contract manufacturing operations in Europe and
Asia. Accordingly, Agouron Pharmaceuticals from time-to-time enters into forward
contracts to manage its exposure to fluctuations in foreign currency exchange
rates. At June 30, 1998, Agouron Pharmaceuticals had several forward contracts
with maturities of less than six months to purchase Japanese Yen for
approximately $9,426,000. These contracts are designated and effective as hedges
and, accordingly, gains and losses are
<PAGE>
recognized in the same period the offsetting gains and losses of hedged
transactions are realized and recognized.
Property and equipment
Property and equipment is recorded at cost. Depreciation is computed using
principally the straight-line method over estimated useful lives of three to
five years. Leasehold improvements are amortized over the life of the lease.
Purchased intangibles
In conjunction with the Company's 1997 acquisition of Alanex, Agouron
Pharmaceuticals has recorded purchased intangibles (primarily drug discovery
technology and chemical compound libraries) which are being amortized on a
straight-line basis over their estimated useful lives of seven years.
Deferred revenue and advances
Approximately $22,414,000 of cash received from Japan Tobacco Inc. ("JT")
has been classified as deferred contract revenue and advances. Approximately
$21,452,000 of the cash received from JT represents JT's advance of Agouron
Pharmaceuticals' VIRACEPT development funding obligation which was completed in
March 1998. Such amounts are to be repaid by Agouron Pharmaceuticals out of
future profits, if any, generated by sales of VIRACEPT in the United States. The
balance of the payments from JT are non-refundable and are being recognized as
contract revenue on a prospective basis generally as collaborative program
expenses are incurred.
Product sales
Agouron Pharmaceuticals ships VIRACEPT to wholesalers throughout the United
States and recognizes sales revenue upon shipment. Sales are reported net of
discounts, rebates, chargebacks and product returns.
Also included in product sales for 1998 and 1997 are approximately
$50,979,000 and $1,441,000 of sales (at cost plus contractually determined
mark-ups) to F. Hoffman-La Roche Ltd ("Roche") of clinical and commercial drug
supplies to be used by Roche in its licensed territory. Agouron Pharmaceuticals
receives a royalty on Roche's subsequent commercial sales of such drug supplies.
Contract revenues
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
<PAGE>
License fees and royalties
License fees are recognized as revenue when earned as generally evidenced
by certain factors including: receipt of such fees, satisfaction of any
performance obligations and the non-refundable nature of such fees.
Royalty revenues are recognized based on estimated and actual sales of
licensed products in licensed territories.
Research and development costs
Research and development costs are expensed in the period incurred.
Income tax provision (benefit)
Agouron Pharmaceuticals records a provision (benefit) for income taxes
using the liability method. Current income tax expense (benefit) generally is
the amount of income taxes expected to be payable for the current year. Deferred
taxes are recorded by applying applicable tax rates to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Agouron Pharmaceuticals is included in the consolidated U.S. federal income tax
return filed by the Company. Division management and allocation policies provide
that, as of the end of any fiscal quarter, any projected annual tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to the
other division(s) without any compensating payment or allocation. Accordingly,
all losses of Oncology Division have been utilized by Agouron Pharmaceuticals
and no provision has been recorded by Oncology Division for any fiscal year. As
it is anticipated that all deferred tax assets of the Company at present will be
realized by Agouron Pharmaceuticals, all deferred tax assets of the Company are
currently recorded on the books of Agouron Pharmaceuticals. The realizability of
deferred tax assets is determined at the level of the Company.
Earnings (loss) per share
Historical per share information is presented in the combined statement of
income (loss) based on the anticipated ratio of AP equivalent shares to the
Company's shares although AP Stock was not part of the capital structure of the
Company for the periods presented.
Agouron Pharmaceuticals computes per share data in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic
per share data is based upon the weighted average number of the Company's common
shares outstanding during a period as a result of the expected conversion of
each outstanding share of the Company's common stock into one share of AP Stock.
Diluted per share data is based upon the weighted average number of the
Company's common shares outstanding and dilutive common stock equivalents during
a period. Common stock equivalents are options under the Company's stock option
plans which are included in the earnings per share computation under the
treasury stock method and common shares expected to be issued under the
Company's employee stock purchase plan.
<PAGE>
Common stock equivalents of approximately 2,643,000 shares for 1998 were
used to calculate diluted earnings per share. For 1997 and 1996, common stock
equivalents of approximately 3,168,000 and 2,014,000 shares were not used to
calculate diluted earnings (loss) per share because of their anti-dilutive
effect. There are no reconciling items in calculating the numerator for basic
and diluted earnings (loss) per share for any of the periods presented.
Earnings (loss) attributable to Agouron Pharmaceuticals would generally
equal Agouron Pharmaceuticals' net income or (loss) for the relevant period
determined in accordance with generally accepted accounting principles in effect
at such time, adjusted by the amount of tax benefits allocated to or from
Oncology Division or other divisions pursuant to the management and accounting
policies adopted by the Company's Board.
Statement of cash flows
For purposes of the Statement of Cash Flows, cash equivalents are highly
liquid investments purchased with an original maturity of ninety days or less.
Non-cash financing and investing activities are comprised primarily of capital
lease obligations of $1,579,000, $2,355,000 and $457,000 for 1998, 1997 and 1996
and the Company's acquisition of Alanex in 1997.
<PAGE>
Note 2 - Short-term investments
The cost of Agouron Pharmaceuticals' investment portfolio by type of
security and contractual maturity in the balance sheet is as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Type of security:
Corporate debt $ 46,023 $ 24,401
U.S. Treasury and agencies 10,766 11,994
Other interest-bearing 9,462 2,438
Corporate equity 1,774 0
------------- --------------
$ 68,025 $ 38,833
============= ==============
Contractual maturity:
Maturing in less than twelve months $ 41,389 $ 35,827
Maturing between twelve and
thirty-two months 26,636 3,006
------------- --------------
$ 68,025 $ 38,833
============= ==============
</TABLE>
The cost of securities sold, if any, is based upon the specific
identification method. The net unrealized holding gain on available-for-sale
securities included as a separate component of stockholders' equity at June 30,
1998 totaled $384,000. There were no material unrealized gains or losses nor any
material differences between the estimated fair values and costs of securities
in the investment portfolio at June 30, 1997. Realized gains and losses on the
disposal of available-for-sale securities during 1998 totaled $20,000 and
$2,000, respectively. During 1997 such gains and losses totaled $12,000 and
$4,000, respectively. During 1996, such gains totaled $22,000.
<PAGE>
Note 3 - Composition of certain financial statement captions
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Accounts receivable, net:
Trade $ 44,471 $ 26,055
Contract 813 0
Royalties 2,339 0
Employee 252 269
Other 1,828 383
---------- -----------
$ 49,703 $ 26,707
========== ===========
Inventories:
Raw materials and work in process $ 95,517 $ 57,883
Finished goods 8,189 917
---------- -----------
$ 103,706 $ 58,800
========== ===========
Property and equipment, net:
Scientific instrumentation $ 26,869 $ 16,614
Leasehold improvements 25,135 10,804
Computer equipment 15,619 8,892
Furniture and fixtures 3,910 2,464
---------- -----------
71,533 38,774
Less accumulated depreciation and amortization (24,321) (16,161)
---------- -----------
$ 47,212 $ 22,613
========== ===========
Accrued liabilities:
Royalties $ 21,410 $ 0
License fees 6,000 0
Vacation 2,955 1,932
Clinical studies 1,843 3,328
Other 2,260 3,379
---------- -----------
$ 34,468 $ 8,639
========== ===========
</TABLE>
<PAGE>
Note 4 - Significant contract arrangements
Japan Tobacco Inc.
In February 1994, Agouron Pharmaceuticals entered into a strategic alliance
with JT in the field of anti-viral drugs for the treatment of infections caused
by hepatitis C and the herpes family of viruses. In December 1994, Agouron
Pharmaceuticals added its anti-HIV drug, VIRACEPT, to the JT collaboration with
the execution of a world-wide development and licensing agreement. Agouron
Pharmaceuticals and JT share equally the costs of further development of
VIRACEPT.
Currently, Agouron Pharmaceuticals has exclusive commercial rights to
VIRACEPT (with the right to sublicense) in North America and JT has exclusive
commercial rights to VIRACEPT (with the right to sublicense) in parts of Japan.
Agouron Pharmaceuticals and JT share profits and/or royalties equally from the
world-wide commercialization of VIRACEPT.
Under the combined terms of the JT agreements, Agouron Pharmaceuticals has
incurred costs of $51,898,000, $71,825,000 and $46,969,000 and recognized
corresponding contract revenues of $17,359,000, $48,886,000 and $37,197,000 for
the years ended June 30, 1998, 1997 and 1996.
Roche
Agouron Pharmaceuticals and JT have granted Roche certain exclusive royalty
bearing marketing rights to VIRACEPT outside of North America and parts of
Japan. For such rights, Agouron Pharmaceuticals has received (and recognized as
revenue) initial license fees and additional product approval license fees.
Agouron Pharmaceuticals also receives royalties based either on Roche's sales of
VIRACEPT or, in certain circumstances, Invirase(R) and Fortavase(R)
(saquinavir), Roche's HIV protease inhibitors. VIRACEPT license fees and
royalties from Roche totaled $17,852,000 and $9,000,000 for the years ended June
30, 1998 and 1997.
The Immune Response Corporation
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with The Immune Response Corporation ("IRC") to collaborate on final
development and commercialization of REMUNE, an immune-based therapeutic agent
discovered by IRC and currently the subject of several clinical studies
including a large phase III clinical trial. The two companies intend to enter
promptly into a definitive agreement and will endeavor to complete development
and registration of REMUNE in 1999. IRC will manufacture commercial supplies of
REMUNE, and Agouron Pharmaceuticals will have exclusive rights to market REMUNE
in North America, Europe and certain other countries. The two companies will
share equally all profits from the commercialization of REMUNE in the licensed
territory. Agouron Pharmaceuticals paid an initial $10,000,000 license fee to
IRC in June 1998 and also purchased 118,256 newly issued common shares of IRC
for $2,000,000. Agouron Pharmaceuticals' development funding obligation
commences October 15, 1998 and, assuming ongoing successful development,
registration and approval of REMUNE, Agouron Pharmaceuticals may pay to IRC up
to $53,000,000 in additional development and milestone payments and $12,000,000
in purchases of additional IRC common stock.
<PAGE>
Shionogi & Co., Ltd.
In June 1998, Agouron Pharmaceuticals entered into a binding letter of
intent with Shionogi & Co., Ltd. ("Shionogi") to develop and commercialize
AG1549, a second-generation non-nucleoside reverse transcriptase inhibitor
("NNRTI") for the treatment of HIV infection. Discovered by Shionogi, AG1549 is
currently the subject of several clinical trials evaluating its dose and its
concomitant use with other antiretroviral treatments.
Agouron Pharmaceuticals has exclusive world-wide rights to the development
and commercialization of AG1549 except in Japan, South Korea and Taiwan. Agouron
Pharmaceuticals paid an initial $10,000,000 license fee in June 1998. Agouron
Pharmaceuticals may pay, assuming ongoing successful development, registration
and approval of AG1776, additional license fees of up to $30,000,000. In
addition, Agouron Pharmaceuticals will pay Shionogi royalties based on sales, if
any, of AG1549.
Japan Energy Corporation
In June 1998, Agouron Pharmaceuticals entered into an agreement with Japan
Energy Corporation ("JE") to develop and commercialize AG1776, a novel protease
inhibitor for the treatment of HIV infection. Agouron Pharmaceuticals has
exclusive world-wide rights to the development and commercialization of AG1776
except in Japan, South Korea, North Korea and Taiwan; JE will manufacture bulk
compound for use in final drug product. Agouron Pharmaceuticals incurred an
initial $6,000,000 license fee in June 1998. Agouron Pharmaceuticals may pay,
assuming ongoing successful development, registration and approval of AG1776,
additional license fees of up to $20,000,000. In addition, Agouron
Pharmaceuticals will pay JE royalties based on sales, if any, of AG1776.
<PAGE>
Note 5 - Long-term debt
Long-term debt and capital lease obligations are as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Notes payable, secured with personal property and a certificate of deposit;
interest at CD rate plus 1.5%,
paid off in June 1998. $ 0 $ 142
Capital leases with interest rates between 5.86% and 16.5%,
maturing at various dates through June 2003. 3,214 2,462
Line of credit, $20,000,000 secured; interest at bank reference
rate or LIBOR plus 1.5%, expiring September 30, 1998. 15,000 0
Unsecured, non-interest bearing, term obligation; face value of $4,500,000;
discounted to an 8.95% effective rate, includes imputed interest of
$548,000
due June 28, 2001. 3,480 3,194
Term obligation for tenant improvements, interest
at 11% per annum, payable in monthly installments,
paid off in October 1997. 0 2,668
------------- --------------
Total long-term debt and capital lease obligations 21,694 8,466
Current portion (15,802) (2,526)
------------- --------------
$ 5,892 $ 5,940
============= ==============
</TABLE>
Maturities of long-term debt, excluding capital leases, are as follows:
1999 - $15,000,000; 2000- $0; and 2001 - $4,500,000, less imputed interest of
$1,020,000.
<PAGE>
Note 6 - Income taxes
(Dollars in thousands)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Year ended June 30,
Current:
Federal $ 0 $ 0 $ 0
State 43 1 1
Foreign 0 1,222 933
--------- --------- --------
43 1,223 934
--------- --------- --------
Deferred:
Federal 16,518 (33,510) 0
State 232 (6,000) 0
Foreign 0 0 0
--------- --------- --------
16,750 (39,510) 0
--------- --------- --------
$ 16,793 $ (38,287) $ 934
========= ========= ========
</TABLE>
The income tax reconciliation from income (loss) before income taxes
computed at the federal statutory rate (34%) to Agouron's actual income tax
provision is as follows: <TABLE> <CAPTION>
Year ended June 30, 1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $ 15,693 $ (24,657) $ (5,921)
State taxes, net of federal benefit 181 1 1
Foreign taxes 0 1,222 933
Purchase accounting book/tax basis differences 0 19,781 0
Change in valuation allowance 0 (42,449) 5,864
Other 919 332 57
Adjustments to carryover amounts 0 7,483 0
--------- --------- --------
Subtotal 16,793 (38,287) 934
Tax benefits to/from other division (8,023) (4,290) 0
--------- --------- --------
$ 8,770 $ (42,577) $ 934
========= ========= ========
</TABLE>
Agouron Pharmaceuticals' deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30
1998 1997
<S> <C> <C>
Book and tax depreciation/amortization
differences $ 5,743 $ 710
Accrued liabilities 1,607 1,097
Net operating loss carryforwards 17,494 26,081
Tax credits 3,859 4,113
Allocated tax benefits to/from other
divisions 39,062 25,798
Other (3,696) (1,899)
--------- ---------
64,069 55,900
Valuation allowance 0 0
--------- ---------
Deferred taxes, net $ 64,069 $ 55,900
========= =========
</TABLE>
<PAGE>
Agouron Pharmaceuticals has not recorded current provisions for United
States federal income taxes due to net operating losses for tax reporting
purposes. At June 30, 1998, Agouron Pharmaceuticals had allocated net operating
loss carryforwards for federal tax reporting purposes of approximately
$150,000,000 expiring from 2000 to 2013. The net operating loss includes the tax
benefit related to the exercise of stock options, which benefit was recorded to
common stock. Agouron Pharmaceuticals has federal research and development
credit carryforwards of approximately $4,800,000 at June 30, 1998. The future
utilization of net operating loss carryforwards for federal income tax purposes
may be impacted by the issuance of additional equity securities.
Due to California's partial conformity with federal provisions regarding
net operating loss and research and development credit carryforwards, and as a
result of Agouron Pharmaceuticals' use of certain state tax planning strategies,
for state tax reporting purposes at June 30, 1998, Agouron Pharmaceuticals has
no net operating loss carryforwards and has research and development credit
carryforwards of approximately $2,200,000. Such credits do not expire.
Based on its 1998 operating results and its estimates of future taxable
income, Agouron Pharmaceuticals believes that it is more likely than not that
its deferred tax assets (comprised mostly of net operating loss carryforwards
and research credits) will be realized and has therefore recorded the full tax
benefit of its deferred tax assets as of June 30, 1998.
Foreign tax expense represents certain withholding taxes associated with
collaboration payments from JT.
<PAGE>
Note 7 - Division equity
AP Stock
AP Stock will represent a separate series of the Company Common Stock if
the Company's Divisional Stock Proposal is approved and such series is
designated by the Board. Additional AP Stock may be issued from time to time
upon exercise of stock options or at the discretion of the Company's Board.
Oncology Equity Line
The Company Board has approved a cash equity line from Agouron
Pharmaceuticals to Oncology Division. Amounts drawn under the equity line
automatically convert to Oncology Division Stock on a periodic basis. Such stock
will be distributed to holders of AP Stock on an annual basis. All cash
allocated from Agouron Pharmaceuticals to Oncology Division has been recorded as
an equity contribution.
<PAGE>
Note 8 - Commitments
Certain scientific instrumentation, computers and other equipment are
subject to leases which are classified as capital leases. At June 30, 1998 and
1997, $4,331,000 ($3,408,000, net) and $2,895,000 ($2,629,000, net) of such
leased equipment are included in property and equipment.
Rental expenses (principally for leased facilities under long-term
operating lease commitments) were $5,031,000, $3,509,000 and $2,548,000 for
1998, 1997 and 1996. Future minimum payments for capital and operating leases at
June 30, 1998 are as follows: <TABLE> <CAPTION>
Capital Leases Operating Leases
(Dollars in thousands)
<S> <C> <C>
1999 $ 819 $ 7,472
2000 812 5,507
2001 818 5,314
2002 578 3,943
2003 243 2,630
Thereafter 0 2,047
------------ --------------
Total minimum lease payments 3,270 $ 26,913
==============
Less amount representing interest (56)
------------
Obligations under capital leases $ 3,214
============
</TABLE>
Funding for the Oncology Division
The development of Oncology Division products will require substantial
funds. Agouron Pharmaceuticals intends to fund the operations of Oncology
Division for the foreseeable future. The Company's Board has approved the
allocation of up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology
Division under an equity line which is expected to be exchanged for OD shares.
Other
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.
<PAGE>
Note 9 - Alanex acquisition
In April 1997, the Company executed a merger agreement with Alanex, which
now operates as a wholly-owned subsidiary of the Company. For all outstanding
shares of Alanex common stock and related options and warrants, approximately
2,000,000 shares of the Company's common stock were issued, subject to certain
restrictions. Such shares had an aggregate fair market value on the measurement
date of approximately $61,000,000 and transaction costs were approximately
$1,300,000. Of the total purchase price (including transaction costs),
$57,500,000 was allocated (as more fully described below) to certain intangible
assets and expensed as in-process technology and approximately $4,800,000 was
allocated to certain tangible and intangible assets and capitalized.
The identifiable intangibles of Alanex include several drug research and
discovery programs, a proprietary drug discovery technology, a chemical compound
library and an assembled work force. These intangibles were valued using either
a replacement cost approach (work force, library and proprietary technology) or
an income approach (research programs). Values assigned to the chemical compound
library and proprietary drug discovery technology have been capitalized, as such
intangibles are of a general nature and may have a number of alternative future
uses. Values assigned to the drug discovery programs have been expensed, as such
programs are pursuing specific drug targets or chemical compounds, the
technological feasibility of which having not been demonstrated, and there may
be no alternative future uses for such targets or chemical compounds if the
programs are ultimately less than successful.
Agouron Pharmaceuticals' statement of income (loss) includes the results of
operations related to the acquisition since April 1997. The following are
unaudited pro-forma results of operations as if the transaction had been
consummated on July 1, 1995: <TABLE> <CAPTION>
(In thousands except for per share amounts.)
Year ended June 30, 1997 1996
(unaudited) (unaudited)
<S> <C> <C>
Revenues $ 123,602 $ 44,379
============= =============
Net income (loss) attributable to AP stock $ 27,138 $ (18,247)
============= =============
Earnings (loss) per share $ 1.01 $ (.93)
============= =============
</TABLE>
<PAGE>
Note 10 - Quarterly financial data (unaudited)
(In thousands, except for
per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
September 30 December 31 March 31 June 30
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
1997
Product sales $ 0 $ 0 $ 13,401 $ 43,568
Gross margin from product sales 0 0 7,378 24,992
Net loss attributable to AP stock (12,021) (9,883) (987) (7,053)
Earnings (loss) per share:
Basic(3) (.48) (.37) (.04) (.25)(1)
Diluted(3) (.48) (.37) (.04) (.25)(1)
1998
Product sales $ 79,502 $ 91,800 $ 111,950 $ 126,046
Gross margin from product sales 45,429 53,858 62,730 74,637
Net income attributable to AP stock 8,649 7,758 19,758 1,222
Earnings (loss) per share:
Basic(3) .29 .25 .64 .04(2)
Diluted(3) .26 .23 .60 .04(2)
</TABLE>
(1) During the fourth quarter of 1997, Agouron Pharmaceuticals recorded a
write-off of $57,500,000 ($2.03 per share) of in-process technology
associated with the acquisition of Alanex, partially offset by the
realization of $43,800,000 ($1.54 per share) of deferred tax assets
associated with Agouron Pharmaceuticals' expectation of future taxable
income.
(2) During the fourth quarter of 1998, Agouron Pharmaceuticals incurred
in-licensing costs of $26,000,000 (tax-effected $.50 per share) for
commercial rights to three development stage anti-HIV products.
(3) Historical Agouron Pharmaceuticals per share information is presented as
the same capital structure as the Company although Agouron Pharmaceuticals'
Stock was not part of the Company's capital structure for any of these
periods.
<PAGE>
Note 11 - Related party transactions
Overview
The Company allocates corporate general and administrative and research and
development expenses and income taxes in accordance with certain policies
adopted by the Company's Board of Directors. Such policies may be further
modified or rescinded by action of the Company's Board of Directors who may
adopt additional policies, without approval of the Agouron Pharmaceuticals'
stockholders, subject only to their fiduciary duty to such stockholders.
Shared Services
Agouron Pharmaceuticals operates as a division of the Company with access
to the Company's personnel, financial resources, facilities and extensive
capabilities in research and development, manufacturing, clinical development
and administrative, the costs of which are allocated to each division in a
reasonable and consistent manner based on utilization by the division of the
services to which such costs relate. Management believes that such allocation is
a reasonable estimate of such expenses.
Access to Technology and Know-How
Agouron Pharmaceuticals has free access to all technology and know-how of
the Company that may be useful, subject to any obligations or limitations
applicable to the Company. The costs of developing this technology remain in the
business unit responsible for its development.
<PAGE>
ANNEX V
ONCOLOGY DIVISION
DESCRIPTION OF BUSINESS
General
Since the incorporation of the Company in June 1984, the oncology
department within Agouron, now formed as the Oncology Division, has committed
itself to the discovery, development, manufacturing and marketing of
small-molecule drugs engineered to inactivate proteins which play key roles in
cancer. Oncology Division is currently conducting pivotal phase II/III clinical
trials for AG3340 for treatment of lung and prostate cancer. Further, Oncology
Division has a number of programs in progress for discovery or development of
other new drugs in the field of cancer.
Research and Development Programs
Oncology Division's research and development programs focusing on the area
of cancer applies the Company's core technologies of three-dimensional structure
based drug design and high-throughput screening of chemical libraries generated
by computation-directed combinatorial chemistry.
The following table outlines the status of various programs in the
Company's Oncology Division research and development portfolio. Oncology
Division is pursuing some of these programs independently, while others are
being undertaken in collaboration with other companies.
Research
and
Development
Program Indication Stage
Cancer
AG3340 Solid Tumors Phase II/III
AG3433 Solid Tumors Preclinical
AG2034 Solid Tumors Phase I
AG2037 Solid Tumors Preclinical
cdk Inhibitors Solid Tumors Research
PARP(1) Inhibitors Solid Tumors Research
VEGF Inhibitors Solid Tumors Research
GnRH Antagonist Hormone-Dependent Solid Tumors Research
(1) In collaboration with Cancer Research Campaign Technology Ltd.
<PAGE>
Overview
The development of new drugs for treatment of cancer is a key 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.
The Company's Oncology Division drug discovery and development programs
pursue inhibitors of the following enzymes: matrix metalloproteases ("MMPs");
glycinamide ribonucleotide formyltransferase ("GART"); cyclin dependent kinases
("cdk"); gonadotropin releasing hormone ("GnRH"); poly (ADP ribose) polymerase
("PARP"); and vascular endothelial growth factor ("VEGF") kinase.
MMP Inhibitors: AG3340
AG3340 is an orally delivered antiangiogenesis drug designed to inhibit the
growth, invasion and metastasis of solid tumors by inactivating certain members
of a family of enzymes known as MMPs. AG3340 selectively inhibits those MMPs
believed to be involved in tumor progression. A primary goal of clinical studies
of AG3340 is to determine whether this distinctive selectivity results in a
favorable clinical profile of safety and efficacy.
In fiscal 1998, Oncology Division completed two phase I studies of AG3340.
In one phase I study, AG3340 was administered orally twice daily (BID) in
patients with advanced cancer, including lung, prostate, kidney, and colorectal
cancers as well as sarcoma and melanoma.
A separate phase I study found that AG3340 in combination with chemotherapy
was generally well tolerated among patients with advanced prostate cancer whose
disease was resistant to hormonal therapies.
In preclinical studies, AG3340 has been shown to inhibit angiogenesis.
AG3340 was also found to be a potent inhibitor of the growth of
chemotherapy-resistant human non-small cell lung cancer tumors in mice. Here,
administration of AG3340 resulted in a dose-dependent decrease in tumor growth
by up to 65% as compared to controls.
In May 1998, Oncology Division initiated phase II/III clinical trials in
patients with advanced lung or prostate cancer. Oncology Division presently
retains all rights to AG3340 in the fields of cancer and ophthalmology.
Oncology Division is also conducting preclinical research on a stable of
third-generation MMP inhibitors, including AG3433, which has even greater
selectivity than AG3340 for those MMPs related to cancer.
<PAGE>
GART Inhibitors: AG2034 and AG2037
AG2034 is a potent, selective inhibitor of GART believed to be a key enzyme
in the biochemical pathway through which tumor cells synthesize purines,
essential components of DNA. With the exception of liver cells, all normal human
tissues obtain purines through an alternative pathway (the purine salvage
pathway). Oncology Division 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. Oncology Division is completing dose-ranging
phase I clinical trials that will establish an appropriate dose for AG2034.
AG2037 was designed to have markedly reduced binding to the membrane folate
binding protein ("mFBP") because tight binding to this receptor is one likely
source of the toxicity observed with lometrexol, the first molecule in this
class to be tested clinically by Eli Lilly and Company (assays of mFBP binding
have been routine for compounds generated in this program). AG2037 shows potent
inhibition of GART as a monoglutamate and can be polyglutamylated. Because of
its potent weaker binding to mFBP, AG2037 access is restricted to only those
cells with reduced folate carrier. Preclinical studies have shown that GART
inhibitors are potentially cytotoxic (kills cells) to at least certain cancer
cell types with mutan p53 genes, a common genetic abnormality in human cancer.
Oncology Division retains all commercial rights to any compounds resulting from
its GART inhibitor programs.
cdk4/cdk2 Inhibitors
Cdks are enzymes that play key roles in regulating the cell cycle. Certain
members of this family of enzymes, such as cdk4 and cdk2, have been implicated
as drivers of cells from a normally quiescent state to a highly proliferative
characteristic of human cancer. Oncology Division is engaged in a drug discovery
program aimed at the design of selective small-molecule drugs with the potential
to inhibit the activity of such cdks and therefore block the transition of
cancer cells into their proliferative phase. Oncology Division retains all
commercial rights to compounds resulting from this program.
PARP
PARP is an enzyme which is activated by DNA-strand breaks and is important
in the immediate cellular response to DNA damage. The activity of PARP is
involved in recruiting repair enzymes to the site of DNA damage so that cell
division can proceed faithfully. Inhibition of PARP has profound effects on the
survival of cells following exposure to DNA-damaging agents; thus, PARP
inhibitors may be useful in conjunction with chemo- and radio- therapy to treat
tumors. PARP inhibitors discovered at Oncology Division have been confirmed as
chemopotentiating agents in cells and preliminary testing in tumors in animals
is underway. Oncology Division has exclusive commercial rights in compounds
resulting from this program, which are being pursued in collaboration with
Cancer Research Campaign Technology, Ltd. <PAGE>
VEGF Inhibitors
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
VEGF, which, by binding to a receptor (known as kdr) on the cell surface,
triggers the development of growth factor of endothelial cells. Oncology
Division is engaged in a program to design drugs that block the kdr receptor for
VEGF and, therefore, compromise the ability of tumors to carry out a key process
in angiogenesis. Oncology Division retains all commercial rights to compounds
resulting from this program.
GnRH Antagonist Program
GnRH is a decapeptide that is synthesized in the brain and controls the
pituitary and gonadal hormones that regulate fertility. (In women, this peptide
is required for successful ovulation and, in men, it is necessary for
spermatogenesis.) Oncology Division, through the Company's Alanex subsidiary, is
currently pursuing a program to discover certain orally active small-molecule
drugs to treat two areas of human disease that depend on GnRH action:
endometriosis and sex-hormone dependent tumors. Oncology Division retains all
commercial rights to compounds resulting from this program.
Business Relationships/Research and Development Agreements
Oncology Division has funded its research and development primarily from
working capital generated from both private and public sales of Agouron equity,
collaborative arrangements and the financial contribution resulting from product
sales. Oncology Division has an ongoing program of business development which
may, from time to time, lead to the establishment of the Oncology Division
related corporate collaborations in addition to those noted below.
HLR
In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F.
Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer
drugs and agreed to collaborate with HLR on an additional early-stage
anti-cancer drug discovery program. In return for such rights, HLR paid
$15,000,000 in initial license fees and agreed to bear 80% of certain future
development costs and to provide annual research support to the Company of
$3,000,000. In December 1997, Oncology Division and HLR agreed to end this
anti-cancer research and development collaboration. Oncology Division has
regained all rights to the anti-cancer drugs previously within the scope of the
collaboration.
Human Resources
As of July 28, 1998, the Company had 991 employees. It is anticipated that
approximately 200 of these will be directly engaged in the conduct of the
Oncology Division business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
This discussion contains forward-looking statements. Such statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. See "Important Factors Regarding
Forward-Looking Statements" attached as Exhibit 99 to the Company's annual
report on Form 10-K for the period ended June 30, 1998 and incorporated herein
by reference. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Oncology Division ("Oncology Division" or "OD"), a division of Agouron
Pharmaceuticals, Inc. (the "Company") is committed to the discovery and
development of human pharmaceuticals targeting cancer. Operations to date have
been principally funded from the Company's working capital and OD's various
collaborative arrangements. Net losses for the fiscal years ended June 30, 1998,
1997 and 1996 were $24,233,000, $12,862,000 and $1,174,000. It is anticipated
that net operating losses will continue and will possibly increase through at
least the next two years.
Results of Operations
Contract and license revenues
Collaborative research and development agreements with Hoffman-La Roche
Inc. and F. Hoffman-La Roche Ltd (collectively "HLR") accounted for
substantially all of Oncology Division's contract and license revenues for 1998,
1997 and 1996. Total contract and license revenues for 1998 increased
approximately 1% from 1997. Total contracts and license revenues decreased from
1996 to 1997 approximately 15% due principally to the receipt of $15,000,000 in
1996 for initial development rights for two anti-cancer drugs.
In December 1997, the Company agreed to end its collaboration with HLR in
the field of cancer. As a result of termination, Oncology Division has regained
all rights to its anti-cancer drugs within the scope of the HLR collaboration.
Oncology Division anticipates no contract revenues for fiscal 1999.
Research and development expenses
Research and development ("R&D") spending increased by approximately 40%
from 1997 to 1998 and 56% from 1996 to 1997 due generally to increasing average
R&D staff levels and staff-related expenditures and increased expenditures for
human clinical trial development activities for certain anti-cancer compounds.
Oncology Division anticipates that total R&D expenses in fiscal 1999 will exceed
fiscal 1998 expenses by approximately 21%.
<PAGE>
General and administrative expenses
General and administrative ("G&A") expenses represented approximately 5% of
total operating expenses in 1998, 5% in 1997 and 10% in 1996. G&A increased by
approximately 66% from 1997 to 1998 due principally to increasing development
efforts. Spending decreases from 1996 to 1997 were due chiefly to concentrated
Company efforts to complete development of a major non-oncology program.
Oncology Division anticipates that total G&A expenses for fiscal 1999 will
approximate the amounts recorded in fiscal 1998.
Year 2000
The Year 2000 issue results from computer programs and systems that were
created to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. This could result in
miscalculations and system failures. The Company has established a Year 2000
project team that is currently reviewing computer systems and computer
controlled equipment that could be affected by this issue. Additionally, the
Company has made initial contact with all of its significant external business
partners to determine the extent to which the Company is vulnerable to their
failures and to ascertain Year 2000 compliance and risk. The Company estimates
that the inventory and assessment of internal systems and material third parties
will be completed by the end of calendar 1998.
The Company is in the process of upgrading its enterprise business system.
Once upgraded, the system will be Year 2000 compliant. The estimated completion
date of this upgrade is by the end of calendar 1998. The Company also expects to
both replace and upgrade other equipment and systems. The Company expects to
complete such changes by the end of fiscal 1999, and to complete validation by
the end of calendar 1999. While the total cost to upgrade or replace such
systems is not known at this time, the Company believes such cost will not have
a material effect on the Company's business, financial position, or results of
operation.
At this time the Company has not initiated the formulation of contingency
plans. The determination of the necessity for contingency plans will be made by
the end of calendar 1998.
Liquidity and Capital Resources
Historically, Oncology Division has relied principally on the Company to
fund its operations and capital expenditures. At June 30, 1998, Oncology Divison
had net working capital of approximately $1,795,000, an increase of $377,000
over June 30, 1997 levels. The development of Oncology Division products will
require substantial funds. Agouron Pharmaceuticals ("Agouron Pharmaceuticals" or
"AP"), a division of the Company, intends to fund the operations of Oncology
Division for the foreseeable future. The Company's Board has approved the
allocation of up to $25,000,000 in cash from Agouron Pharmaceuticals to Oncology
Division under an equity line which is expected to be exchanged for Oncology
Division Stock.
<PAGE>
The Company believes that its current capital resources, existing
contractual commitments and anticipated product sales contribution from Agouron
Pharmaceuticals are sufficient to maintain its current operations and to provide
for the operating requirements of Oncology Division through fiscal 1999. This
belief is based on current research and clinical development plans of Oncology
Division and Agouron Pharmaceuticals, anticipated working capital requirements
associated with expanding product commercialization, the current regulatory
environment, historical industry experience in the development of therapeutic
drugs and general economic conditions.
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Combined Balance Sheet as of June 30, 1998 and 1997
Combined Statement of Operations for the years ended
June 30, 1998, 1997 and 1996
Combined Statement of Division Equity for the
years ended June 30, 1998, 1997 and 1996
Combined Statement of Cash Flows for the years ended
June 30, 1998, 1997 and 1996
Notes to Combined Financial Statements
NOTE: All schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the combined financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Agouron Pharmaceuticals, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of division equity and of cash flows present
fairly, in all material respects, the financial position of Oncology Division (a
division of Agouron Pharmaceuticals, Inc.) at June 30, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the management
of Agouron Pharmaceuticals, Inc.; 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.
As described above and more fully described in Note 1 to these financial
statements, Oncology Division is a division of Agouron Pharmaceuticals, Inc.;
accordingly, the combined financial statements of Oncology Division should be
read in conjunction with the audited consolidated financial statements of
Agouron Pharmaceuticals, Inc.
/s/ PricewaterhouseCoopers LLP
San Diego, California
August 10, 1998
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
COMBINED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable $ 1,638 $ 4,668
Other current assets 1,045 0
---------- -----------
$ 2,683 $ 4,668
========== ===========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued liabilities $ 888 $ 250
Deferred revenue 0 3,000
---------- -----------
Total current liabilities 888 3,250
Division equity 1,795 1,418
---------- -----------
Commitments
$ 2,683 $ 4,668
========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Contract and license $ 15,428 $ 15,270 $ 18,013
Operating expenses:
Research and development 37,525 26,844 17,247
General and administrative 2,136 1,288 1,940
------------- ------------- -------------
39,661 28,132 19,187
------------- ------------- -------------
Net loss $ (24,233) $ (12,862) $ (1,174)
============= ============= =============
Net loss per share:
Basic and Diluted $ (3.17) $ (1.91) $ (.24)
============= ============= =============
Equivalent shares used in calculation of:
Basic and Diluted 7,643 6,737 4,922
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF DIVISION EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Deficit Total
<S> <C> <C> <C>
Balance at June 30, 1995 $ 59,910 $ (61,713) $ (1,803)
Equity contribution from Agouron
Pharmaceuticals 1,751 1,751
Net loss -- (1,174) (1,174)
----------- ----------- -----------
Balance at June 30, 1996 61,661 (62,887) (1,226)
Equity contribution from Agouron
Pharmaceuticals 15,506 15,506
Net loss -- (12,862) (12,862)
----------- ----------- -----------
Balance at June 30, 1997 77,167 (75,749) 1,418
Equity contribution from Agouron
Pharmaceuticals 24,610 24,610
Net loss -- (24,233) (24,233)
----------- ----------- -----------
Balance at June 30, 1998 $ 101,777 $ (99,982) $ 1,795
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
COMBINED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from contracts and licenses $ 15,458 $ 13,602 $ 17,465
Cash paid to suppliers and service providers (40,068) (29,108) (19,216)
----------- ------------ -----------
Net cash provided (used) by operating activities (24,610) (15,506) (1,751)
----------- ----------- -----------
Cash flows from investing activities:
Net cash provided (used) by investing activities 0 0 0
----------- ----------- -----------
Cash flows from financing activities:
Equity contribution from Agouron Pharmaceuticals 24,610 15,506 1,751
----------- ----------- -----------
Net cash provided (used) by financing activities 24,610 15,506 1,751
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 0 0 0
Cash and cash equivalents at beginning of year 0 0 0
----------- ----------- -----------
Cash and cash equivalents at end of year $ 0 $ 0 $ 0
=========== =========== ===========
Reconciliation of net loss to net cash provided (used) by operating activities:
Net loss $ (24,233) $ (12,862) $ (1,174)
Net (increase) decrease in accounts receivable and other
current assets 1,985 (4,668) 0
Net increase (decrease) in accrued liabilities and
deferred revenue (2,362) 2,024 (577)
----------- ----------- -----------
Net cash provided (used) by operating activities $ (24,610) $ (15,506) $ (1,751)
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ONCOLOGY DIVISION, a division of Agouron Pharmaceuticals, Inc.
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - The Division and its significant accounting policies
The Division
Oncology Division ("Oncology Division" or "OD") is a division of Agouron
Pharmaceuticals, Inc. (the "Company") which was organized and incorporated in
California in June 1984. Oncology Division is engaged in the discovery and
development of innovative therapeutic products engineered to inactivate proteins
which play key roles in cancer.
Financial statements and allocation matters
As a matter of policy, the Company manages the financial activities of its
divisions on a centralized basis. These financial activities include the
investment of surplus cash, the issuance, repayment and repurchase of short-term
and long-term debt and the issuance and repurchase of common stock. During the
three years ended June 30, 1998, the Company attributed none of its short-term
and long-term debt to OD based upon the specific purpose for which the debt was
incurred and the cash flow requirements of OD. Accordingly, none of the
Company's interest expense has been allocated to OD. The Company believes this
method of allocation to be equitable and reasonable.
Oncology Division's financial statements have been prepared in accordance
with generally accepted accounting principles and, taken together with the
Company's other division, comprise all of the accounts included in the
corresponding consolidated financial statements of the Company. The financial
statements of each division reflect the financial condition, results of
operations and cash flows of the businesses included therein.
Principles of combination
The combined financial statements of Oncology Division include the accounts
for all of the Company's programs in the area of oncology.
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.
<PAGE>
Contract and license revenues
Contract revenues are earned and recognized generally as contract research
costs are incurred according to the provisions of each underlying agreement.
Amounts received in advance of performance are recorded as deferred revenue.
Contract milestone payments are recognized as revenues upon the completion of
the milestone event or requirement.
License fees are recognized as revenue when earned as generally evidenced
by certain factors including: receipt of such fees, satisfaction of any
performance obligations and the non-refundable nature of such fees.
Research and development costs
Research and development costs are expensed in the period incurred.
Income tax provision (benefit)
Oncology Division records a provision (benefit) for income taxes using the
liability method. Current income tax expense (benefit) generally is the amount
of income taxes expected to be payable for the current year. Deferred taxes are
recorded by applying applicable tax rates to cumulative temporary differences
based on when and how they are expected to affect the tax return. Oncology
Division is included in the consolidated U.S. federal income tax return filed by
the Company. Division management and allocation policies provide that, as of the
end of any fiscal quarter, any projected annual tax benefit attributable to any
division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be allocated to the other division(s)
without any compensating payment or allocation. Accordingly, all losses of
Oncology Division have been utilized by Agouron Pharmaceuticals and no provision
has been recorded by Oncology Division for any fiscal year. As it is anticipated
that all deferred tax assets of the Company at present will be realized by
Agouron Pharmaceuticals, all deferred tax assets of the Company are currently
recorded on the books of Agouron Pharmaceuticals and none on the books of
Oncology Division. The realizability of deferred tax assets is determined at the
level of the Company.
Net loss per share
Historical net loss per share information is presented in the combined
statement of operations based on the anticipated ratio of OD equivalent shares
to the Company's shares although OD Stock was not part of the capital structure
of the Company for the periods presented.
Oncology Division computes per share data in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." Basic per share
data is based upon one-quarter of the weighted average number of the Company's
common shares outstanding during a period as a result of the expected conversion
of each outstanding share of the Company's common stock into approximately
one-quarter share of OD Stock. Diluted per share data is based upon one-quarter
of the weighted average number of the Company's common shares outstanding and
dilutive common stock equivalents during a period. Common stock equivalents are
options under the Company's stock option plans which are included in the
earnings per share computation under the treasury stock method and common shares
expected to be issued under the Company's employee stock purchase plan.
<PAGE>
For 1998, 1997 and 1996, common stock equivalents of approximately 661,000,
792,000 and 504,000 shares were not used to calculate diluted earnings (loss)
per share because of their anti-dilutive effect. There are no reconciling items
in calculating the numerator for basic and diluted earnings (loss) per share for
any of the periods presented.
Earnings (loss) attributable to Oncology Division would generally equal
Oncology Division's net income or (loss) for the relevant period determined in
accordance with generally accepted accounting principles in effect at such time,
adjusted by the amount of tax benefits allocated to or from Agouron
Pharmaceuticals pursuant to the management and accounting policies adopted by
the Company's Board.
Commitments
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.
<PAGE>
Note 2 - Significant contract arrangements
HLR
In June 1996, Oncology Division granted Hoffman-La Roche Inc. and F.
Hoffman-La Roche Ltd (collectively "HLR") development rights in two anti-cancer
drugs and agreed to collaborate with HLR on an additional early-stage
anti-cancer drug discovery program. In return for such rights, HLR paid
$15,000,000 in initial license fees and agreed to bear 80% of certain future
development costs and to provide annual research support to Oncology Division of
$3,000,000. In December 1997, Oncology Division and HLR agreed to end this
anti-cancer research and development collaboration. Oncology Division has
regained all commercial rights to the anti-cancer drugs previously within the
scope of the collaboration.
Under the terms of the anti-cancer agreements with HLR which have been
terminated, Oncology Division incurred costs of $23,486,000 and $17,854,000 and
recognized corresponding contract revenues of $15,428,000 and $14,270,000 for
the years ended June 30, 1998 and 1997.
<PAGE>
Note 3 - Related party transactions
Overview
The Company allocates corporate general and administrative and research and
development expenses and income taxes in accordance with certain policies
adopted by the Company's Board of Directors. Such policies may be further
modified or rescinded by action of the Company's Board of Directors who may
adopt additional policies, without approval of Oncology Division's stockholders,
subject only to their fiduciary duty to such stockholders.
Shared Services
Oncology Division operates as a division of the Company with access to the
Company's personnel, financial resources, facilities and extensive capabilities
in research and development, manufacturing, clinical development and
administration, the costs of which are allocated to each division in a
reasonable and consistent manner based on utilization by the division of the
services to which such costs relate. Management believes that such allocation is
a reasonable estimate of such expenses.
Access to Technology and Know-How
Oncology Division has free access to all technology and know-how of the
Company that may be useful, subject to any obligations or limitations applicable
to the Company. The costs of developing this technology remain in the business
unit responsible for its development.
<PAGE>
Note 4 - Division equity
OD Stock
OD Stock will represent a separate series of the Company's Common Stock if
the Company's Divisional Stock Proposal is approved and such series is
designated by the Board. Additional OD Stock may be issued from time to time
upon exercise of stock options or at the discretion of the Company's Board.
Exchange of OD Stock
If OD Stock is issued, Agouron Pharmaceuticals will have the right, and
under certain circumstances, the obligation, to exchange each outstanding share
of OD Stock for cash or shares of AP Stock at a 25% premium over fair market
value of OD Stock on the date of exchange.
Oncology Equity Line
The Company Board has approved a $25,000,000 cash equity line from Agouron
Pharmaceuticals to Oncology Division. Amounts drawn under the equity line are
expected to be exchanged into shares of OD Stock on a periodic basis.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 317 of the California General Corporation Law generally
provides indemnification to officers and directors of the Company against
expenses, judgments, fines and amounts paid in settlement under certain
conditions and subject to certain limitations.
Article VII of the articles of incorporation of the Company provides
that liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law. Further,
Article VIII of the articles of incorporation authorizes the Company to provide
indemnification of agents (as defined in Section 317) for breach of duty to the
Company and its shareholders through bylaw provisions or through agreements with
such agents, or both, in excess of the indemnification otherwise permitted by
Section 317, subject to the limits on such excess indemnification set forth in
Section 317.
Section 3.15 of the bylaws of the Company authorizes the Company to
indemnify any person who was or is a party, or is threatened to be made a party,
to any proceeding (other than actions by or in the right of the Company to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of the Company, against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the Company. Section 3.15
also authorizes the Company to indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action by
or in the right of the Company to procure a judgment in its favor by reason of
the fact that such person is or was an agent of the Company against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith.
Any indemnification under Section 3.15 is to be made by the Company
only if authorized in the specific case upon determination that indemnification
of the agent is proper in the circumstances because the agent has met the
applicable standard of conduct required by Paragraphs 3.15.2 or 3.15.3 of the
bylaws.
Pursuant to authorization provided under the articles of incorporation
and the bylaws, the Company has entered into indemnification agreements with
each of its present directors. The Company has also entered into similar
agreements with certain of the Company's officers who are not directors.
Generally, the indemnification agreements attempt to provide the maximum
protection permitted by California law as it may be amended from time to time.
Moreover, the indemnification agreements provide for certain additional
indemnification. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Company (except to the extent the
court determines he or she is fairly and reasonably entitled to indemnity for
expenses) for settlements not approved by the Company or for settlements and
expenses if the settlement is not approved by the court. The indemnification
agreements provide for the Company to advance to the individual any and all
reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. In order to
receive an advance of expenses, the individual must submit to the Company copies
of invoices presented to him or her for such expenses. Also, the individual must
repay such advances upon a final judicial decision that he or she is not
entitled to indemnification.
Section 3.15 of the bylaws also provides that, in the event of a
determination by the Board of Directors of the Company to purchase insurance for
certain of its agents, the Company shall purchase and maintain insurance on
behalf of any such agent against liability asserted against or incurred by the
agent in such capacity or arising out of the agent's status, whether or not the
Company would have the power to indemnify the agent against such liability under
the provisions of Section 3.15. <PAGE>
The Company has in effect directors and officers liability insurance
policies which insure directors and officers of the Company. The policies expire
on October 13, 1998. Although the Company intends to renew the policies on or
before their expiration date, there can be no assurance that the policies will
be renewed on terms acceptable to the Company. Under the policies, the directors
and officers of the Company are insured against loss arising from claims made
against them due to wrongful acts while acting in their individual and
collective capacities as directors and officers, subject to certain exclusions.
In addition, the policies insure the Company against losses for which its
directors and officers are entitled to indemnification, subject to a retention
of $250,000 payable by the Company. The policies are "claims made" policies and
provide coverage only for losses arising out of claims first made against the
Company and reported to the insurer during the policy period.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Number Description
3.1 Form of Restated Articles of Incorporation (Included as Annex
II to the Proxy Statement/Prospectus contained in Part I of
this Registration Statement).
5.1 Opinion of Pillsbury Madison & Sutro LLP.
(To be filed by amendment)
8.1 Opinion of Pillsbury Madison & Sutro LLP.
(To be filed by amendment)
10.1 Amended and Restated 1996 Stock Option Plan.
(Included as Annex VI to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.) (To be filed by amendment)
10.2 Amended and Restated Employee Stock Purchase Plan.
(Included as Annex VII to the Proxy Statement/Prospectus
contained in Part I of this Registration Statement.)
(To be filed by amendment)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Pillsbury Madison & Sutro LLP.
(Included in their opinions set forth as
Exhibits 5.1 and 8.1)
24.1 Power of Attorney. (Contained on Signature Page of this
Registration Statement.)
99.1 Form of Proxy. (To be filed by amendment)
(b) Financial Statement Schedules (Included in Annex IV, Annex V and Annex VI
to the Proxy Statement and Prospectus contained in Part I of this
Registration Statement).
Item 22. Undertakings
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Securities
Act"), each filing of the registrant's annual report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused to this S-4 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on the 12th day of August, 1998.
AGOURON PHARMACEUTICALS, INC.
By: /s/ Gary E. Friedman
Gary E. Friedman, Esq.
Vice President, General Counsel, and
Secretary
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter Johnson, Steven S. Cowell and Gary E.
Friedman, or any of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments to this registration statement, including post-effective
amendments, and to file the same, with all exhibits thereto, and other documents
in connection therewith with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully and to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Peter Johnson President, Chief Executive August 13, 1998
- ----------------------------- Officer and Director
Peter Johnson
/s/ Steven S.Cowell Corporate Vice President, August 13, 1998
- ----------------------------- Finance and Chief Financial Officer
Steven S. Cowell
/s/ Gary E. Friedman Corporate Vice President, August 13, 1998
- ----------------------------- General Counsel, Secretary and Director
Gary E. Friedman
/s/ John N. Abelson Director August 13, 1998
- -----------------------------
John N. Abelson
/s/ Patricia M. Cloherty Director August 13, 1998
- -----------------------------
Patricia M. Cloherty
/s/ A.E. Cohen Director August 13, 1998
- -----------------------------
A.E. Cohen
/s/ Michael E. Herman Director August 13, 1998
- -----------------------------
Michael E. Herman
/s/ Irving S. Johnson Director August 13, 1998
- -----------------------------
Irving S. Johnson
/s/ Antonie T. Knoppers Director August 13, 1998
- -----------------------------
Antonie T. Knoppers
/s/ Melvin I. Simon Director August 13, 1998
- -----------------------------
Melvin I. Simon
<PAGE>
EXHIBIT INDEX
Number Description
3.1 Form of Restated Articles of Incorporation
(Included as Annex II to the Proxy Statement/
Prospectus contained in Part I of this
Registration Statement.)
(To be filed by amendment)
5.1 Opinion of Pillsbury Madison & Sutro LLP.
(To be filed by amendment)
8.1 Opinion of Pillsbury Madison & Sutro LLP.
(To be filed by amendment)
10.1 Amended and Restated 1996 Stock Option Plan.
(Included as Annex VI to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.)
(To be filed by amendment)
10.2 Amended and Restated Employee Stock Purchase Plan.
(Included as Annex VII to the Proxy
Statement/Prospectus contained in Part I of this
Registration Statement.)
(To be filed by amendment)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Pillsbury Madison & Sutro LLP.
(Included in their opinions set forth as
Exhibits 5.1 and 8.1)
24.1 Power of Attorney
(Contained on Signature Page of this
Registration Statement.)
99.1 Form of Proxy (To be filed by amendment)
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Agouron Pharmaceuticals, Inc., Agouron
Pharmaceuticals and Oncology Division of our report dated July 16, 1998 relating
to the financial statements of Agouron Pharmaceuticals, Inc. and our reports
dated August 10, 1998 relating to the financial statements of Agouron
Pharmaceuticals and Oncology Division, which appear in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
August 12, 1998
