<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-3358
PROSPECTUS
MAY 17, 1996
6,000,000 SHARES
[ARONEX PHARMACEUTICALS, INC. LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Aronex
Pharmaceuticals, Inc. The Common Stock is quoted on The Nasdaq National Market
under the symbol "ARNX." On May 16, 1996, the last sale price of the Common
Stock as reported on The Nasdaq National Market was $5 1/2 per share. See "Price
Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $5.00 $0.30 $4.70
Total(3).......................... $30,000,000 $1,800,000 $28,200,000
-------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $300,000, which will be paid by the
Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 900,000 additional shares of Common Stock at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, and Proceeds to the Company will be
$34,500,000, $2,070,000, and $32,430,000, respectively. See "Underwriting."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made in New York, New York,
on or about May 22, 1996.
DONALDSON, LUFKIN & JENRETTE FURMAN SELZ
SECURITIES CORPORATION
<PAGE> 2
[PHOTO] [PHOTO]
[PHOTO] [PHOTO]
There can be no assurance that any of the Company's clinical candidates will
receive FDA approval for commercial development.
------------------------
CERTAIN DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE. SEE "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. The Company is soliciting stockholder approval of
a one-for-two reverse split of its Common Stock. No assurance can be given that
this proposal will be approved. This Prospectus contains estimates on market
size, incidence of disease and medical costs that the Company has developed
based on sources which include medical journals, industry reports and literature
distributed at medical seminars and conferences. Unless otherwise indicated, the
information in this Prospectus assumes no exercise of the Underwriters' option
to purchase up to 900,000 additional shares solely to cover over-allotments, if
any.
THE COMPANY
Aronex Pharmaceuticals, Inc. ("Aronex" or the "Company") is a leading
biopharmaceutical company engaged in the discovery and development of
proprietary innovative medicines to treat cancer and life-threatening infectious
diseases. The Company's strategy is to discover and develop medicines based upon
either refinements of proven therapies or novel mechanisms of action against
specific disease targets. The Company has a portfolio of clinical and
preclinical products that it believes provides a balanced development and
commercialization risk profile. The Company believes its focus on medicines for
cancer and life-threatening infectious diseases for which current therapy is
inadequate will provide synergies in research, development and product
marketing, and will facilitate expedited commercialization of its products.
Aronex currently has four products in various stages of ongoing clinical
development and a number of products in preclinical development. In addition,
the Company has proprietary technologies in drug discovery and drug formulation
that should continue to provide a significant research and development pipeline.
The Company's four products in ongoing clinical development are listed below:
<TABLE>
<CAPTION>
CLINICAL
PRODUCT INDICATIONS STATUS
<S> <C> <C>
Nyotran(TM) Systemic Fungal Infections Phase III
TretinoinLF Acute Promyelocytic Leukemia Phase II
Kaposi's Sarcoma (a skin cancer) Phase II/III
Annamycin Breast Cancer Phase I/II
Zintevir(TM) HIV Infection Phase I
</TABLE>
The Company has strategic alliances and collaboration arrangements with
leading corporations and academic institutions, including Genzyme Corporation
("Genzyme"), Hoechst Marion Roussel Inc. ("Hoechst"), The University of Texas
M.D. Anderson Cancer Center ("MD Anderson") and The Baylor College of Medicine
("Baylor").
NYOTRAN(TM)
Nyotran(TM) is being developed for the treatment of systemic fungal
infections, which are a threat to patients who have suppressed immune systems
due to the adverse effects of chemotherapy, HIV infection or anti-rejection
therapy for organ transplants. Nyotran(TM) is a lipid-based, intravenous
formulation of nystatin, an established, widely-used topical anti-fungal agent.
Although nystatin has proven to be a potent anti-fungal, its toxicity has
previously precluded its intravenous administration as a therapy for systemic
fungal infections. Nyotran(TM) has been formulated to reduce the toxicity of
"free" nystatin and increase the amount of nystatin that reaches the sites of
infection. The Company believes that its preclinical and clinical studies
suggest that Nyotran(TM) can be administered at doses that are effective in
treating Aspergillus (mold based) and Candida (yeast based) fungal infections.
Nyotran(TM) is currently in Phase III clinical trials. The Company expects to
complete these clinical trials in late 1997 and, if successful, to file a New
Drug Application ("NDA") with the United States Food and Drug Administration
(the "FDA") soon thereafter.
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The Company estimates that over 100,000 patients in the United States
develop systemic fungal infections annually. The current wholesale drug cost for
an average ten-day course of treatment for systemic fungal infection with a
recently-introduced drug is estimated to be approximately $3,600. Further, the
incidence of systemic fungal infections continues to increase because of the
aging population, the spread of HIV, the more aggressive use of chemotherapy,
advances in medical therapies and the development of resistant fungal strains.
TRETINOINLF
TretinoinLF, the Company's most advanced anti-cancer agent, is a
lipid-based, intravenous formulation of all-trans retinoic acid ("ATRA"), an
orally active derivative of Vitamin A that is effective in treating certain
leukemias. ATRA inhibits the growth of cancer cells rather than kills them, in
contrast to most conventional chemotherapeutic agents. However, the Company
believes the effectiveness of the existing oral formulation of ATRA may be
reduced by the rate at which it is metabolized, which lowers the amount of drug
that reaches the cancer target. In addition, the oral formulation of ATRA can
cause an adverse effect called ATRA syndrome (fever and pulmonary distress). The
Company has designed TretinoinLF to overcome these limitations. TretinoinLF is
currently in Phase II clinical evaluation for its potential to induce remission
and prevent relapse of acute promyelocytic leukemia in patients who have
experienced a recurrence of the cancer. The Company expects to complete Phase II
clinical trials in late 1997 and, if successful, to file an NDA soon thereafter.
The Company believes that approximately 2,000 new cases worldwide of acute
promyelocytic leukemia are diagnosed annually. The Company has chosen this
indication in order to expedite submission of an NDA. The Company plans to
expand the product's indications beyond acute promyelocytic leukemia.
TretinoinLF is also being assessed in Phase II/III clinical trials in
collaboration with Genzyme for the treatment of Kaposi's sarcoma, a skin cancer
that has been estimated to occur in approximately 15 percent of AIDS cases. The
Company believes that TretinoinLF may also be useful in treating other cancer
indications.
ANNAMYCIN
Aronex has developed a novel anthracycline, Annamycin, initially targeted
for the treatment of breast cancer. Anthracyclines, such as doxorubicin, are
widely-used anti-cancer agents, but their effectiveness can be limited by
acquired tumor resistance and severe cardiotoxicity. The Company believes that
Annamycin may overcome such resistance, which is commonly referred to as
"multi-drug resistance." The Company believes that its preclinical studies
indicate that Annamycin circumvents a mechanism behind multi-drug resistance
that transports most types of anti-cancer drugs out of tumor cells. Annamycin,
which is a liposomal formulation of a novel doxorubicin analogue, may also offer
reduced cardiotoxicity compared to other anthracyclines. Annamycin is currently
in a Phase I/II dose-escalating study to test its safety and pharmacokinetics in
breast cancer patients who have failed treatment with other anthracyclines. This
trial is being conducted in collaboration with MD Anderson. In the United
States, there are approximately 208,000 new cases of breast cancer annually. In
addition to breast cancer, the Company believes Annamycin has the potential to
be used in a wide variety of solid tumors, leukemias and lymphomas.
ZINTEVIR(TM)
Zintevir(TM) is a product under development by Aronex for the treatment of
human immunodeficiency virus ("HIV") infection. The drugs currently approved in
the United States for treatment of HIV infection consist of reverse
transcriptase inhibitors (AZT, ddI, ddC, d4T and 3TC) and protease inhibitors
(saquinavir, ritinovir and indinavir). By contrast, the primary mechanism of
action of Zintevir(TM) is inhibition of HIV-1 integrase, a key enzyme in
catalyzing the integration of HIV into human cells. The Company believes that
Zintevir(TM) is the most potent integrase inhibitor that has been described to
date and is the first integrase inhibitor that has entered a human clinical
trial. A Phase I clinical trial is underway to determine the safety and
pharmacokinetics of Zintevir(TM) at single escalating doses in HIV positive
patients. A separate Phase I clinical trial to determine the safety,
pharmacokinetics and anti-viral activity of Zintevir(TM) at multiple doses began
in May 1996. The Company anticipates completion of these Phase I clinical trials
by the end of 1996.
4
<PAGE> 5
The Company believes that approximately one million people in the United
States and over 15 million people worldwide are infected with HIV. Over 500,000
AIDS cases had been reported in the United States by December 1995. The Company
believes that substantial market potential exists for HIV agents with novel
mechanisms of action, for use in combination with existing therapies.
RESEARCH AND DEVELOPMENT PIPELINE
Aronex has developed a unique pipeline of new product opportunities by
leveraging its own research and development program with broad-based
relationships such as those with MD Anderson and Baylor. Aronex has four
additional products in development: (i) AR102, a product targeted for the
treatment of non-small cell lung cancer; (ii) AR209, an immunotoxin targeted for
breast cancer; (iii) AR726, a novel platinum analogue targeted for the treatment
of mesothelioma, a type of lung cancer; and (iv) AR132, a small molecule active
against cytomegalovirus infection. In addition, the Company has a focused
research effort in nucleic acid chemistry and molecular biology aimed at
discovering highly-specific, novel medicines for treating cancer and
life-threatening infectious diseases.
COMPANY BACKGROUND
Aronex was incorporated in 1986 as Argus Pharmaceuticals, Inc. ("Argus").
Argus acquired Oncologix, Inc. ("Oncologix") and Triplex Pharmaceutical
Corporation ("Triplex") through a three-way merger (the "Mergers") in September
1995, at which time Argus changed its name to Aronex Pharmaceuticals, Inc. The
merger of these three complementary companies established an integrated company
with the following characteristics: (i) a clear therapeutic focus in cancer and
life-threatening infectious diseases; (ii) a well-defined and diverse portfolio
of products at various stages of clinical and preclinical development; (iii) a
broad-based platform of synergistic technologies and scientific expertise; (iv)
a diverse group of corporate partners and academic affiliations; and (v) an
experienced team of scientific and biopharmaceutical personnel who possess the
ability to discover and develop novel products, design and implement complex
clinical trials, manage regulatory issues, develop manufacturing processes and
implement the commercialization of products. Unless the context otherwise
requires, references in this Prospectus to "Aronex" and the "Company" refer to
Aronex and its subsidiaries.
The Company's corporate headquarters is located at 3400 Research Forest
Drive, The Woodlands, Texas 77381, and its telephone number is (713) 367-1666.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 6,000,000 shares(1)
Common Stock to be outstanding after the
offering.............................. 27,955,699 shares(1)(2)
Use of proceeds......................... To fund clinical and preclinical testing of the
Company's products, research and development
programs, capital expenditures and for general
corporate purposes
Nasdaq National Market Symbol........... ARNX
</TABLE>
------------------------------
(1) The Company is soliciting stockholder approval of a one-for-two reverse
split of its Common Stock at a special meeting to be held on May 24, 1996.
No assurance can be given that this proposal will be approved. If the
reverse split becomes effective, holders of Common Stock will receive one
share of Common Stock for each two shares of Common Stock outstanding on the
effective date of the reverse split. In the event that the reverse split
would entitle a holder to receive a fractional share of post-split Common
Stock, the Company will pay to the stockholder, in lieu of the issuance of a
fractional share, a cash amount in United States dollars which will be equal
to the same fraction multiplied by two times the average closing price of
the Common Stock on The Nasdaq National Market for the five trading days
immediately preceding the effective date of the reverse split.
(2) Excludes (i) 2,059,303 shares of Common Stock which may be acquired upon the
exercise of options outstanding under the Company's 1989 Stock Option Plan
and 1993 Non-Employee Director Stock Option Plan at a weighted average
exercise price of $2.24 per share, (ii) 6,638,756 shares of Common Stock
which may be acquired upon the exercise of outstanding warrants at a
weighted average exercise price of $5.15 per share, and (iii) shares of
Common Stock with a fair market value on the date of issuance of up to
approximately $10.1 million which may be issued upon the occurrence of
certain events under outstanding contingent stock rights issued pursuant to
the Mergers. All share information in this table is based on the number of
shares of Common Stock as of May 15, 1996. See "Description of Capital
Stock--Warrants" and "Description of Capital Stock--Contingent Stock
Rights."
RISK FACTORS
Prospective investors should consider carefully the risk factors discussed
under the caption "Risk Factors" commencing on page 8 of this Prospectus, which
include risk factors relating to the Company's early stage of development,
future capital needs, uncertainties related to clinical trial results and other
important matters.
6
<PAGE> 7
SUMMARY FINANCIAL DATA
The summary financial data set forth below (other than as adjusted data)
are derived from the Company's financial statements as of and for each of the
years in the five year period ended December 31, 1995, which have been audited
by Arthur Andersen LLP, independent public accountants. On September 11, 1995,
Aronex, Triplex and Oncologix effected the Mergers, which were accounted for
under the purchase method of accounting. The summary financial data prior to
September 11, 1995 represent the operations of Aronex, while the summary
financial data from and after September 11, 1995 represent the combined
operations and balance sheet data of the merged companies. The summary financial
data set forth below should be read in conjunction with "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development grants and contracts............ $ 40 $ 6 $ 48 $ 197 $ 1,248
Interest income.......................................... 104 193 217 534 452
------- ------- ------- ------- --------
Total revenues..................................... 144 199 265 731 1,700
Expenses:
Research and development................................. 2,017 3,493 4,491 7,637 8,347(1)
Purchase of in-process research and development.......... -- -- -- -- 8,383(2)
General and administrative............................... 875 1,340 1,876 1,950 2,215
Interest expense......................................... 166 74 123 196 184
------- ------- ------- ------- --------
Total expenses..................................... 3,058 4,907 6,490 9,783 19,129
------- ------- ------- ------- --------
Net loss................................................... $(2,914) $(4,708) $(6,225) $(9,052) $(17,429)
======= ======= ======= ======= ========
Loss per share(3).......................................... $ (0.58) $ (0.79) $ (0.86) $ (0.88) $ (1.34)
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------
ACTUAL AS ADJUSTED(4)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term and long-term investments.......................... $ 12,015 $ 39,915
Total assets............................................................................. 15,530 43,430
Total long-term obligations.............................................................. 1,574 1,574
Deficit accumulated during development stage............................................. (44,183) (44,183)
Total stockholders' equity............................................................... 11,994 39,894
</TABLE>
------------------------------
(1) The Company's research and development expenses for the year ended December
31, 1995 do not include the research and development expenses incurred by
Triplex or Oncologix prior to September 11, 1995, the effective date of the
Mergers, and accordingly are not indicative of the research and development
expenses that would have been incurred by the Company for the full year had
such Mergers been effective at the beginning of the year. The Company's
research and development expenses for the three months ended December 31,
1995, the first full quarter following the Mergers, were $2.9 million
(unaudited).
(2) The amount shown as purchase of in-process research and development reflects
a non-cash charge for the excess of the purchase price over the fair value
of the net assets acquired. See Note 4 of Notes to Financial Statements.
(3) See Note 2 of Notes to Financial Statements for a description of the
computation of loss per share.
(4) Adjusted to reflect the sale of 6,000,000 shares of Common Stock offered
hereby at the public offering price of $5.00 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
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<PAGE> 8
RISK FACTORS
In evaluating the Company and its business, prospective investors should
consider carefully the following risk factors, together with the information and
financial data set forth elsewhere in this Prospectus, prior to purchasing any
shares of Common Stock offered hereby.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE
LOSSES
The Company is a development stage company. It has generated no revenues
from product sales, and it does not expect to generate revenue from product
sales for several years. As of December 31, 1995, the Company's accumulated
deficit was $44.2 million. To date, the Company has dedicated most of its
financial resources to the research and development of products, general and
administrative expenses, and the prosecution of patents and patent applications.
The Company expects to incur significant and increasing operating losses for at
least the next several years, primarily due to the expansion of its research and
development programs, including preclinical studies and clinical trials, and
costs associated with the commercialization of its products if regulatory
approvals are received. The Company's ability to achieve profitability will
depend, among other things, on successfully completing development of its
products, obtaining regulatory approvals, establishing manufacturing, sales and
marketing capabilities or collaborative arrangements, and raising sufficient
funds to finance its activities. There can be no assurance that the Company will
be able to achieve profitability or that profitability, if achieved, can be
sustained. See "Selected Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Business."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
FDA and other regulatory approvals are obtained. The Company expects that its
existing capital resources, together with the proceeds of this offering, will be
sufficient to fund its capital requirements through mid-1998. Thereafter, the
Company will need to raise substantial additional capital to fund its
operations. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the Company's ability to
satisfy certain milestones under its current collaborative arrangements with
Genzyme and Hoechst; the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; costs of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions or the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to the Company's products can be conducted at projected
costs. There can be no assurance that changes in the Company's research and
development plans, acquisitions, or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no assurance
that any such funding will be available to the Company on favorable terms or at
all. If adequate funds are not available, the Company may be required to curtail
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock. See
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<PAGE> 9
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
UNCERTAINTIES RELATED TO CLINICAL TRIAL RESULTS
The FDA and other regulatory authorities generally require that the safety
and efficacy of a drug be supported by results from adequate and well-controlled
Phase III clinical trials before approval for commercial sale. The Company has
limited experience in conducting and managing Phase III clinical trials. If the
results of the Company's clinical trials do not demonstrate the safety and
efficacy of its products in the treatment of patients suffering from the
diseases for which such products are being tested, the Company will not be able
to submit an NDA to the FDA. Clinical trials conducted on a fast-track, or
expedited, basis may carry a higher risk that data will not be favorable or that
the FDA will not accept the NDA for submission than do Phase III clinical trials
developed from earlier clinical trials with large populations using similar
protocols. Even if the Company believes the Phase III clinical trials
demonstrate the safety and efficacy of a product in the treatment of disease,
the FDA and other regulatory authorities may not accept the Company's assessment
of the results. In either case, the Company may have to conduct additional
clinical trials in an effort to demonstrate the safety and efficacy of the
product. Without acceptable results and regulatory approval, the Company will
not be able to commercialize its products, which would have a material adverse
effect on the Company. There can be no assurance that the results of any of the
Company's clinical trials will be favorable or that its products will obtain
regulatory approval for commercialization.
The results of preclinical studies and initial clinical trials of the
Company's products are not necessarily predictive of the results from
large-scale clinical trials. The Company must demonstrate through preclinical
studies and clinical trials that its products are safe and effective for use in
each target indication before the Company can obtain regulatory approvals for
the commercial sale of those products. These studies and trials may be very
costly and time-consuming. The speed with which the Company is able to enroll
patients in clinical trials is an important factor in determining how quickly
clinical trials may be completed. Many factors affect patient enrollment,
including the size of the patient population, the proximity of patients to
clinical sites, and the eligibility criteria for the study. A number of the
Company's clinical trial protocols are targeted at indications that have small
patient populations, which may make it difficult for the Company to enroll
enough patients to complete the trials. Delays in patient enrollment in the
trials may result in increased costs, program delays, or both, which could have
a material adverse effect on the Company. Even if the Company establishes the
safety and efficacy of its products and obtains FDA and other regulatory
approvals for its products, physicians may not prescribe the approved product.
The administration of any product the Company develops may produce
undesirable side effects in humans. The occurrence of side effects could
interrupt or delay clinical trials of products and could result in the FDA's or
other regulatory authorities' denying approval of the Company's products for any
or all targeted indications. The Company, the FDA or other regulatory
authorities may suspend or terminate clinical trials at any time. Even if the
Company receives FDA and other regulatory approvals, the Company's products may
later exhibit adverse effects that limit or prevent their widespread use or that
necessitate their withdrawal from the market. There can be no assurance that any
of the Company's products will be safe for human use.
GOVERNMENT REGULATION; NO ASSURANCES OF REGULATORY APPROVAL
The Company's research and development activities, preclinical studies,
clinical trials, and the manufacturing and marketing of its products are subject
to extensive regulation by the FDA and other regulatory authorities in the
United States. These activities are also regulated in other countries where the
Company intends to test and market its products.
Before marketing, any drug developed by the Company must undergo an
extensive regulatory approval process. The regulatory process, which includes
preclinical studies and clinical trials of each compound to establish its safety
and efficacy, takes many years and requires the expenditure of substantial
resources. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations which could delay, limit or prevent FDA
regulatory approval. Although the FDA may have been consulted in developing
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<PAGE> 10
protocols for clinical trials, that consultation provides no assurance that the
FDA will accept the clinical trials as adequate or well-controlled or accept the
results of those trials. Similarly, the FDA may determine that products are not
eligible for or will not receive expedited review, whether or not the FDA has
previously indicated that such products may be eligible for expedited review. In
addition, delays or rejections may be encountered based upon changes in FDA
policy for drug approval during the period of product development and FDA
regulatory review of each submitted NDA. Similar delays and rejections may also
be encountered in foreign countries. There can be no assurance that, even after
such time and expenditures, regulatory approval will be obtained for any drugs
developed by the Company. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Further, even if such regulatory approval is obtained, a marketed
drug, its manufacturer and its manufacturing facilities are subject to continual
review and periodic inspections, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
the product or manufacturers, including a withdrawal of the product from the
market. Failure to comply with the applicable regulatory requirements can, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. Further, additional
government regulation may be established that could prevent or delay regulatory
approval of the Company's products. A bill proposing comprehensive reform of FDA
regulations has been introduced in the United States Senate. This bill addresses
many facets of FDA regulations, including requirements for NDA approval,
requirements for supplemental approval, off-label information dissemination, and
export regulations. A counterpart bill is expected to be introduced into the
United States House of Representatives. It is not certain whether any such
legislation will be enacted into law, what form any law will take, or what
effect any new law would have on the Company.
The Company's business is also subject to regulation under state and
federal laws regarding environmental protection, hazardous substances control,
and exposure to blood-borne pathogens. These laws include the Occupational
Safety and Health Act, the Environmental Protection Act, and the Toxic Substance
Control Act. Any violation of, and the cost of compliance with, these laws and
regulations could adversely affect the Company. There can be no assurance that
statutes or regulations applicable to the Company's business will not be adopted
that impose substantial additional costs or otherwise materially adversely
affect the Company's operations. See "Business--Government Regulation."
UNCERTAINTY OF PROTECTION FOR PATENTS AND PROPRIETARY TECHNOLOGY
The Company's ability to commercialize any products will depend, in part,
upon its or its licensors' ability to obtain patents, enforce those patents,
preserve trade secrets, and operate without infringing upon the proprietary
rights of third parties. The patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. Some of the United States patents and patent applications
owned by or licensed to the Company are method-of-use patents that cover the use
of certain compounds to treat specified conditions, and composition-of-matter
patents are not available for some of the Company's product candidates. The
Company does not have any patents or patent applications with respect to one of
its products, AR102. There can be no assurance that the patent applications
licensed to or owned by the Company will result in issued patents, that patent
protection will be secured for any particular technology, that any patents that
have been or may be issued to the Company or its licensors will be valid or
enforceable, that any patents will provide meaningful protection to the Company,
that others will not be able to design around the patents, or that the Company's
patents will provide a competitive advantage or have commercial application.
There can be no assurance that patents owned by or licensed to the Company
will not be challenged by others. The Company could incur substantial costs in
proceedings before the United States Patent Office and other regulatory
authorities, including interference proceedings. These proceedings could result
in adverse decisions about the patentability of the Company's inventions and
products as well as about the enforceability, validity or scope of protection
afforded by the patents. The Company is currently involved in an interference
proceeding before the United States Patent Office regarding AR726. See
"Business--Cancer."
10
<PAGE> 11
There can be no assurance that the manufacture, use or sale of the
Company's products will not infringe patent rights of others. The Company may be
unable to avoid infringement of those patents and may have to seek a license,
defend an infringement action, or challenge the validity of the patents in
court. There can be no assurance that a license will be available to the
Company, if at all, upon terms and conditions acceptable to the Company or that
the Company will prevail in any patent litigation. Patent litigation is costly
and time consuming, and there can be no assurance that the Company will have
sufficient resources to bring such litigation to a successful conclusion. If the
Company does not obtain a license under such patents, is found liable for
infringement, or is not able to have such patents declared invalid, the Company
may be liable for significant damages, may encounter significant delays in
bringing products to market, or may be precluded from participating in the
manufacture, use or sale of products or methods of treatment requiring such
licenses. There can be no assurance that the Company has identified United
States and foreign patents that pose a risk of infringement.
The Company also relies upon trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on trade secrets and unpatented know-how to maintain its competitive
technological position, there can be no assurance that others may not
independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge, in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become the Company's property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of the Company's proprietary rights. Failure to obtain
or maintain patent and trade secret protection, for any reason, would have a
material adverse effect on the Company. See "Business--Patents, Proprietary
Rights and Licenses."
The Company engages in collaborations, sponsored research agreements,
licensing and other arrangements with academic researchers and institutions that
have received and may receive funding from United States government agencies. As
a result of these arrangements, the United States government or certain third
parties have rights in certain inventions developed during the course of the
performance of such collaborations and agreements as required by law or such
agreements.
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property estate is uncertain.
MANUFACTURING UNCERTAINTIES; RELIANCE ON THIRD-PARTY SUPPLIERS
The Company does not operate and does not currently plan to operate
manufacturing facilities for the production of its products in commercial
quantities, and it intends to contract with third parties for the manufacture
and supply of its products. There can be no assurance that the Company will be
able to obtain supplies of its products from third-party suppliers on terms or
in quantities acceptable to the Company. Also, the Company's dependence on third
parties for the manufacture of its products may adversely affect the Company's
product margins and its ability to develop and deliver products on a timely
basis. Any such third-party suppliers or any manufacturing facility the Company
establishes will be required to meet FDA manufacturing requirements. FDA
certification of manufacturing facilities for a drug is a prerequisite to
approval of an NDA for that drug. The Company may encounter significant delays
in obtaining supplies from third-party manufacturers or experience interruptions
in its supplies. If the Company is unable to obtain adequate supplies, its
business would be materially adversely affected. See "Business--Manufacturing."
11
<PAGE> 12
LACK OF SALES AND MARKETING EXPERIENCE
The Company does not have any experience in sales, marketing or
distribution. To market any of its products, the Company must develop a sales
and marketing force with supporting distribution capability or enter into
marketing and distribution arrangements with a company that has an established
capability. Significant additional expenditures will be required for the Company
to develop such capabilities. The Company has entered into a license agreement
with Genzyme with respect to TretinoinLF, and it plans to enter into marketing
agreements with one or more other pharmaceutical companies to market other
products that it may develop. To the extent the Company relies upon licensing,
marketing or distribution arrangements with others, any revenues the Company
receives will depend upon the efforts of third parties. There can be no
assurance that any third party will market the Company's products successfully
or that any third-party collaboration will be on terms favorable to the Company.
If any marketing partner does not market a product successfully, the Company's
business would be materially adversely affected. There can be no assurance that
the Company will be able to establish sales, marketing and distribution
capabilities or that it or its collaborators will be successful in gaining
market acceptance for any products that the Company may develop. The Company's
failure to establish marketing capabilities or to enter into marketing
arrangements with third parties would have a material adverse effect on the
Company.
RISKS ASSOCIATED WITH COLLABORATIVE ARRANGEMENTS
The Company's product development and commercialization strategy involves
the Company entering into various arrangements with corporate, government and
academic collaborators, licensors, licensees and others. As a consequence, the
Company's success may depend on the success of these other parties in performing
their responsibilities. There can be no assurance that the Company will be able
to establish additional collaborative arrangements or license agreements that
are necessary or desirable for the Company to develop and commercialize its
products or that any such collaborative agreement or license agreement will be
successful. Some of the Company's collaborative agreements and license
agreements provide for milestone payments to the Company, and others require the
Company to pay milestone payments to others. No assurance can be given that the
Company will achieve the milestones that trigger payments to the Company, nor
can assurance be given that payments by the Company will result in the
development of marketable products. No assurance can be given that any current
or future collaborative arrangement will be renewed at the end of its term or
will be renewed on terms as favorable to the Company as its original terms. The
Company's collaboration with Hoechst expires at the end of 1996 unless the
parties agree to renew the arrangement. See "Business--Collaborative
Arrangements."
COMPETITION AND TECHNOLOGICAL CHANGE
The Company is engaged in pharmaceutical product development characterized
by extensive research efforts and rapid technological progress. Many established
biotechnology and pharmaceutical companies, universities and other research
institutions with resources significantly greater than the Company's may develop
products that directly compete with the Company's products. Those entities may
succeed in developing products, including liposomes and lipid-based products,
that are safer, more effective or less costly than the Company's products. Even
if the Company's products should prove to be more effective than those developed
by other companies, other companies may be more successful than the Company
because of greater financial resources, greater experience in conducting
preclinical and clinical trials and obtaining regulatory approval, stronger
sales and marketing efforts, earlier receipt of approval for competing products
and other factors. If the Company commences significant commercial sales of its
products, it or its collaborators will compete in areas in which the Company has
little or no experience such as manufacturing and marketing. There can be no
assurance that the Company's products, if commercialized, will be accepted and
prescribed by healthcare professionals. See "Business--Competition."
Some of the Company's competitors are active in the development of liposome
and lipid-based research and product development to treat cancer and certain
fungal infections. Those competitors include Sequus Pharmaceuticals, Inc.,
NeXstar Pharmaceuticals, Inc., and The Liposome Company. Some of those
companies' products have regulatory approval in the United States and other
countries. Any marketing of
12
<PAGE> 13
these and other products that treat disease indications targeted by the Company
could adversely affect the market acceptance of the Company's products as a
result of the established market recognition and physician familiarity with the
competing product. The presence of directly competitive products could also
result in more intense price competition than might otherwise exist, which could
have a material adverse effect on the Company's financial condition and results
of operations. The Company believes that competition will be intense for all of
its products. See "Business--Competition."
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of the products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize
reimbursement for the Company's products even if they offer advantages in safety
or efficacy. Also, the trend toward managed healthcare and government insurance
programs could significantly influence the purchase of healthcare services and
products, resulting in lower prices and reducing demand for the Company's
products. The cost containment measures that healthcare providers are
instituting and any healthcare reform could affect the Company's ability to sell
its products and may have a material adverse effect on the Company.
There can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, that any
reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payors will not reduce the demand for, or negatively
affect the price of, the Company's products. The unavailability or inadequacy of
third-party reimbursement for the Company's products would have a material
adverse effect on the Company. The Company is unable to forecast what additional
legislation or regulation relating to the healthcare industry or third-party
coverage and reimbursement may be enacted in the future, or what effect the
legislation or regulation would have on the Company's business.
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The Company risks exposure to product liability claims if the use of its
products is alleged to have an adverse effect on subjects or patients. This risk
exists for products tested in human clinical trials as well as products that are
sold commercially. There can be no assurance that product liability claims, if
made, would not result in a recall of the Company's products or a change in the
indications for which they may be used. The Company maintains product liability
insurance coverage for claims arising from the use of its products in clinical
trials. There can be no assurance that this coverage will be adequate to cover
claims. Product liability insurance is becoming increasingly expensive, and no
assurance can be given that the Company will be able to maintain such insurance,
obtain additional insurance, or obtain insurance at a reasonable cost or in
sufficient amounts to protect the Company against losses that could have a
material adverse effect on the Company.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, directors, executive officers, certain
stockholders of the Company who are parties to a stockholders agreement and
their respective affiliates will beneficially own approximately 34.0% of the
Company's outstanding Common Stock (approximately 33.0% if the Underwriters
exercise their over-allotment option in full). Stockholders holding 9,669,614
shares (approximately 34.6%) of the Common Stock to be outstanding upon
completion of this offering (approximately 33.5% if the Underwriters exercise
their over-allotment option) are parties to a stockholders agreement pursuant to
which they have agreed to vote their shares for the election of directors
designated by certain groups among the parties to such agreement. In addition,
the Company has agreed to nominate for election only those directors designated
by parties to that stockholders agreement. The stockholders agreement terminates
on September 11, 1997. Accordingly, these stockholders, individually and as a
group, may be able to determine the composition of the board of directors and
may be able to influence the outcome of other stockholder votes, including votes
concerning the adoption or amendment of provisions in the Company's Amended and
Restated Certificate of
13
<PAGE> 14
Incorporation (the "Certificate of Incorporation") and the approval of mergers
and other significant corporate transactions. The existence of these levels of
ownership concentrated in a few persons makes it unlikely that any other holder
of Common Stock will be able to affect the management or direction of the
Company. These factors, along with the factors described in "--Anti-Takeover
Provisions," may also have the effect of delaying or preventing a change in the
management or voting control of the Company. See "Principal Stockholders" and
"Description of Capital Stock--Stockholders Agreement."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part on the Company's ability
to attract and retain highly qualified scientific and management personnel. The
Company faces competition for such personnel from other companies, research and
academic institutions, government entities and other organizations. There can be
no assurance that the Company will be successful in hiring or retaining key
personnel.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. Of the 27,955,699 shares of Common Stock to be outstanding upon
completion of this offering, 25,995,985 shares will be eligible for sale without
restriction under the Securities Act of 1933, as amended (the "Securities Act")
(except for shares held by affiliates of the Company and certain former
affiliates of Triplex and Oncologix whose shares may be sold subject to the
volume limitations and certain other requirements of Rule 144 under the
Securities Act), and 1,959,714 shares are restricted securities that may not be
resold unless such resale is registered under the Securities Act or it is made
under Rule 144 or another exemption from registration under the Securities Act.
The holders of 11,974,339 shares of Common Stock have agreed not to sell such
shares until March 11, 1997 without the consent of the Company, except under
certain circumstances, and the holders of 8,016,362 shares of Common Stock
(including 6,354,943 shares that are also subject to the lock-up agreements that
expire on March 11, 1997) have agreed not to sell such shares for a period of
180 days following the date of this Prospectus without the consent of Donaldson,
Lufkin & Jenrette Securities Corporation. Some investors have the right to
require the Company to register the public resale of their shares. Any such
sales may have an adverse effect on the price of the Company's Common Stock and
could impair the Company's ability to raise capital through offerings of equity
securities. See "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION; CONTINGENT STOCK RIGHTS; ABSENCE OF
DIVIDENDS
Purchasers of the Common Stock in the offering will experience an immediate
and substantial dilution in net tangible book value per share. These investors
will also experience additional dilution upon the exercise of outstanding
options and warrants. In addition, pursuant to the terms of the Mergers, the
Company is obligated to issue shares of Common Stock to certain former
securityholders of Triplex and Oncologix contingent upon the occurrence of
certain events. These rights may result in the issuance of up to an aggregate of
$10.1 million of Common Stock, valued for such purpose at the current market
value of the Common Stock at the time the event requiring issuance of such
shares occurs. See "Dilution" and "Description of Capital Stock--Contingent
Stock Rights." The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy."
LIMITED TRADING VOLUMES; POSSIBLE STOCK PRICE VOLATILITY
The historical trading volume of the Company's Common Stock has been
limited. There can be no assurance that an active public market for the Common
Stock will develop or be sustained. The trading price of the Common Stock and
the price at which the Company may sell securities in the future could be
subject to large fluctuations in response to announcements of research
activities, technological innovations or new products by the Company or its
competitors, changes in government regulations, developments concerning
proprietary rights, quarterly variations in operating results, litigation,
clinical trials of products, approval or denial of NDAs, general market
conditions, the liquidity of the Company and its ability to raise additional
14
<PAGE> 15
funds and other events. The market price of the Common Stock, and the market
prices for securities of emerging biotechnology companies generally, have
experienced extreme fluctuations in recent years. These fluctuations have
sometimes been unrelated to the operating performance of the affected companies.
These market fluctuations as well as general fluctuations in the stock markets
may also affect the price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (i) provides for staggered terms
of office for directors; (ii) requires certain procedures to be followed and
time periods to be met for any stockholder to propose matters to be considered
at annual meetings of stockholders, including nominating directors for election
at those meetings; (iii) prohibits stockholders from calling special meetings of
stockholders; and (iv) authorizes the Board of Directors of the Company to issue
up to 10,000,000 shares of preferred stock without stockholder approval and to
set the rights, preferences and other designations, including voting rights, of
those shares as the Board of Directors may determine. These provisions, alone or
in combination with each other and with the matters described in "--Control by
Existing Stockholders," may discourage transactions involving actual or
potential changes of control of the Company, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
holders of Common Stock. The Company also is subject to provisions of the
Delaware General Corporation Law that may make some business combinations more
difficult. See "Description of Capital Stock--Certain Provisions of the
Company's Charter and Bylaws and Delaware Law."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and financial performance
and are subject to certain risks, uncertainties and assumptions, including the
risk factors set forth above. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, expected, estimated or
projected.
15
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 6,000,000 shares of
Common Stock offered hereby at the public offering price of $5.00 per share will
be approximately $27.9 million ($32.1 million if the Underwriters'
over-allotment option is exercised in full).
The Company anticipates that the net proceeds of this offering will be used
to fund the continued clinical and preclinical development of the Company's
existing products, the continued research and development of medicines for the
treatment of cancer and life-threatening infectious diseases, capital
expenditures and other general corporate purposes. Exact allocation of the
proceeds for such purposes and timing of the expenditures will vary depending on
numerous factors, including the hiring of additional personnel, the progress of
the Company's research and development programs, the results of clinical and
preclinical trials of its products, the cost and timing of regulatory approvals,
technological advances, the commercial potential of its products, the terms of
any collaborative arrangements entered into by the Company and the status of
competitive products. The Company's Board of Directors has significant
discretion in the application of such funds.
Pending application of the proceeds as described above, the Company intends
to invest the net proceeds in cash equivalents and short-term investments,
including United States government securities and high-grade corporate
investments, commercial paper and bankers acceptances. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Company intends to invest and
use the net proceeds so as not to be considered an investment company under the
Investment Company Act of 1940.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock. The Company
currently intends to retain earnings, if any, to support the development of the
Company's business and does not anticipate paying dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
16
<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on The Nasdaq National Market under the symbol
"ARNX." The following table shows the high and low sale prices per share of
Common Stock, as reported on The Nasdaq National Market, during the periods
presented.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
<S> <C> <C>
Year Ended December 31, 1994:
First Quarter.............................................................. $6 $5
Second Quarter............................................................. 5 3/4 3 3/4
Third Quarter.............................................................. 3 3/4 2 3/8
Fourth Quarter............................................................. 2 7/8 2
Year Ended December 31, 1995:
First Quarter.............................................................. $2 1/2 $1 1/2
Second Quarter............................................................. 2 3/8 1 1/2
Third Quarter.............................................................. 4 3/8 1 3/8
Fourth Quarter............................................................. 4 3/4 2 1/4
Year Ending December 31, 1996:
First Quarter.............................................................. $6 3/4 $3 1/8
Second Quarter (through May 16, 1996)...................................... 6 7/8 3 /16
</TABLE>
The last sale price of the Common Stock as reported on The Nasdaq National
Market on May 16, 1996 was $5 1/2 per share. At May 16, 1996, there were
approximately 520 holders of record of the Common Stock.
17
<PAGE> 18
DILUTION
The net tangible book value of the Company's Common Stock as of December
31, 1995 was $11,994,000 or $0.58 per share. Net tangible book value per share
represents the total tangible assets of the Company reduced by its total
liabilities and divided by the number of shares of Common Stock outstanding as
of December 31, 1995. After giving effect to the sale of the Common Stock
offered hereby at the public offering price of $5.00 per share and the deduction
of the underwriting discounts and commissions and estimated offering expenses
payable by the Company in connection therewith, the net tangible book value of
the Company as of December 31, 1995, as adjusted, would have been $39,894,000 or
$1.49 per share. This represents an immediate increase in the net tangible book
value of $0.91 per share to existing stockholders and an immediate dilution of
$3.51 per share to new investors purchasing shares of Common Stock in this
offering. The following table illustrates the per share dilution to new
investors purchasing Common Stock in this offering:
<TABLE>
<S> <C> <C>
Public offering price per share(1)........................................... $5.00
Net tangible book value per share as of December 31, 1995 (2).............. $0.58
Increase per share attributable to new investors........................... 0.91
Net tangible book value as adjusted for this offering(2)..................... 1.49
----
Dilution per share to new investors(2)....................................... $3.51
====
</TABLE>
------------------------------
(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Assumes no exercise of any outstanding options or warrants to purchase
Common Stock or issuance of Common Stock under outstanding contingent stock
rights. As of December 31, 1995, there were outstanding options to purchase
an aggregate of 1,782,073 shares of Common Stock at a weighted average
exercise price of $2.08 per share, outstanding warrants to purchase an
aggregate of 9,488,431 shares of Common Stock at a weighted average
exercise price of $4.70 per share and outstanding contingent stock rights
pursuant to which the Company may be required to issue shares of Common
Stock with a fair market value on the date of issuance of up to
approximately $10.1 million. See "Description of Capital Stock -- Warrants"
and "Description of Capital Stock -- Contingent Stock Rights."
Assuming that all options and warrants to purchase Common Stock outstanding
on December 31, 1995 (excluding outstanding contingent stock rights) were
exercised on that date, net tangible book value per share as of December 31,
1995 would have been $1.88, increase in net tangible book value per share
attributable to new investors would have been $0.44, and the dilution per share
to new investors would have been $2.68.
18
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995 and as adjusted to give effect to the sale by the Company of
the shares of Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds." This table should be
read in conjunction with "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term and long-term investments....... $ 12,015 $ 39,915
======= ========
Total long-term obligations(1).............................. $ 1,574 $ 1,574
------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized;
none issued and outstanding...................................... $ -- $ --
Common Stock, $0.001 par value; 75,000,000 shares authorized;
20,760,112 shares issued and outstanding; 26,760,112 shares
issued and outstanding as adjusted(2)(3)......................... 21 27
Additional paid-in capital.......................................... 56,331 84,225
Common stock warrants............................................... 1,488 1,488
Treasury stock...................................................... (11) (11)
Deferred compensation............................................... (1,536) (1,536)
Unrealized loss on long-term investments............................ (116) (116)
Deficit accumulated during development stage........................ (44,183) (44,183)
------- --------
Total stockholders' equity.................................. 11,994 39,894
------- --------
Total capitalization........................................ $ 13,568 $ 41,468
======= ========
</TABLE>
------------------------------
(1) See Note 4 of Notes to Financial Statements.
(2) Excludes (i) 1,782,073 shares issuable as of December 31, 1995 upon the
exercise of options outstanding under the Company's 1989 Stock Option Plan
and 1993 Non-Employee Director Option Plan at a weighted average exercise
price of $2.08 per share, (ii) 9,488,431 shares issuable at December 31,
1995 upon the exercise of outstanding warrants at a weighted average
exercise price of $4.70 per share and (iii) shares with a fair market value
on the date of issuance of up to approximately $10.1 million which may be
issued upon the occurrence of certain events under outstanding contingent
stock rights issued pursuant to the Mergers. See "Description of Capital
Stock--Warrants" and "Description of Capital Stock--Contingent Stock
Rights."
(3) The Company is soliciting stockholder approval of a one-for-two reverse
split of its Common Stock at a special meeting to be held on May 24, 1996.
No assurance can be given that this proposal will be approved. If the
reverse split becomes effective, holders of Common Stock will receive one
share of Common Stock for each two shares of Common Stock outstanding on the
effective date of the reverse split. In the event that the reverse split
would entitle the holder to receive a fractional share of post-split Common
Stock, the Company will pay to the stockholder, in lieu of the issuance of a
fractional share, a cash amount in United States dollars which will be equal
to the same fraction multiplied by two times the average closing price of
the Common Stock on The Nasdaq National Market for the five trading days
immediately preceding the effective date of the reverse split.
19
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from the Company's
financial statements as of and for each of the years in the five year period
ended December 31, 1995, which have been audited by Arthur Andersen LLP,
independent public accountants. On September 11, 1995, Aronex, Triplex and
Oncologix effected the Mergers, which were accounted for under the purchase
method of accounting. The selected financial data prior to September 11, 1995
represent the operations and balance sheet data of Aronex, while the selected
financial data from and after September 11, 1995 represent the combined
operations and balance sheet data of the merged companies. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1991 1992 1993 1994 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development grants and contracts... $ 40 $ 6 $ 48 $ 197 $ 1,248
Interest income................................. 104 193 217 534 452
------- -------- -------- -------- --------
Total revenues.......................... 144 199 265 731 1,700
Expenses:
Research and development........................ 2,017 3,493 4,491 7,637 8,347(1)
Purchase of in-process research and
development.................................. -- -- -- -- 8,383(2)
General and administrative...................... 875 1,340 1,876 1,950 2,215
Interest expense................................ 166 74 123 196 184
------- -------- -------- -------- --------
Total expenses.......................... 3,058 4,907 6,490 9,783 19,129
------- -------- -------- -------- --------
Net loss.......................................... $(2,914) $(4,708) $(6,225) $(9,052) $(17,429)
======= ======== ======== ======== ========
Loss per share(3)................................. $ (0.58) $ (0.79) $ (0.86) $ (0.88) $ (1.34)
======= ======== ======== ======== ========
Weighted average shares used in computing loss per
share(3)........................................ 5,020 5,957 7,208 10,306 12,976
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term and
long-term investments........................... $ 2,959 $ 9,265 $ 19,642 $ 10,019 $ 12,015
Total assets...................................... 3,422 10,429 21,187 12,958 15,530
Total long-term obligations....................... 319 598 913 1,218 1,574
Deficit accumulated during development stage...... (6,769) (11,477) (17,702) (26,754) (44,183)
Total stockholders' equity........................ 2,761 9,238 19,471 10,660 11,994
</TABLE>
------------------------------
(1) The Company's research and development expenses for the year ended December
31, 1995 do not include the research and development expenses incurred by
Triplex or Oncologix prior to September 11, 1995, the effective date of the
Mergers, and accordingly are not indicative of the research and development
expenses that would have been incurred by the Company for the full year had
such Mergers been effective at the beginning of the year. The Company's
research and development expenses for the three months ended December 31,
1995, the first full quarter following the Mergers, were $2.9 million
(unaudited).
(2) The amount shown as purchase of in-process research and development reflects
a non-cash charge for the excess of the purchase price over the fair value
of the net assets acquired. See Note 4 of Notes to Financial Statements.
(3) See Note 2 of Notes to Financial Statements for a description of the
computation of loss per share.
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1986, Aronex has primarily devoted its resources to
fund research, drug discovery and development. The Company has been unprofitable
to date and expects to incur substantial operating losses for the next several
years as it expends its resources for product research and development,
preclinical and clinical testing and regulatory compliance. The Company has
sustained net losses of approximately $44 million from inception through
December 31, 1995. The Company has primarily financed its research and
development activities and operations through public and private offerings of
securities. The Company's operating results have fluctuated significantly during
each quarter, and the Company anticipates that such fluctuations, largely
attributable to varying commitments and expenditures for clinical trials and
research and development, will continue for the next several years. On September
11, 1995, Aronex, Triplex and Oncologix effected the Mergers, which were
accounted for under the purchase method of accounting. The financial data prior
to September 11, 1995 discussed below represent the operations and balance sheet
data of Aronex, while the financial data from and after September 11, 1995
discussed below represent the combined operations and balance sheet data of the
merged companies.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
Research and development grants and revenues were $1,248,000 in 1995,
$197,000 in 1994, and $48,000 in 1993. Research and development grants and
revenues for 1995 increased by $1,051,000 compared to 1994. This increase was
primarily due to the increase in development revenues from RGene, an affiliate
of the Company, to $668,000 in 1995 from $197,000 in 1994; and revenues of
$350,000 from Hoechst and of $227,000 from SBIR grants recognized after the
September 11, 1995 effective date of the Mergers. Research and development
grants and revenues for 1994 increased by $149,000 compared to 1993 primarily
due to the April 1994 commencement of development revenues from RGene.
Interest income was $452,000 in 1995, $534,000 in 1994, and $217,000 in
1993. Interest income for 1995 decreased by $82,000 compared to 1994 primarily
due to a decrease in funds available for investment. Interest income for 1994
increased by $317,000 compared to 1993, largely because of an increase in the
amount of funds available for investment as a result of the November 1993 public
offering of Common Stock and the September 1993 sale of Common Stock to Genzyme.
Research and development expenses were $8.3 million in 1995, $7.6 million
in 1994, and $4.5 million in 1993. Research and development expenses for 1995
increased by $710,000 compared to 1994 primarily due to the addition of
Triplex's research programs following the Mergers, partially offset by a
reduction in research and development fees paid to MD Anderson. Research and
development expenses for 1994 increased by $3.1 million compared to 1993,
primarily as a result of increased clinical and regulatory expenses associated
with the inclusion of a full year of expenses of the Company's internal clinical
department (established in the second quarter of 1993), expenses of the
Company's regulatory department (established in the second quarter of 1994),
expansion of laboratory and office space to accommodate the clinical and
regulatory departments, and increased direct clinical investigation costs
(including drug costs), partially offset by a reduction in research and
development fees paid to MD Anderson.
General and administrative expenses were $2.2 million in 1995, $2.0 million
in 1994 and $1.9 million in 1993. General and administrative expenses for 1995
increased by $200,000 compared to 1994, primarily due to operating expenses of
Oncologix that the Company agreed to pay until the Mergers were completed.
General and administrative expenses for 1994 increased by $74,000 compared to
1993, primarily as a result of an increase in investor relations, public
relations and the use of business consultants.
The $17.4 million net loss for 1995 increased by $8.4 million compared to
1994. This increase was due primarily to the $8.4 million non-cash charge for
the excess of the purchase price of the Mergers over the fair
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<PAGE> 22
value of the assets acquired. The $9.1 million net loss for 1994 increased by
$2.8 million compared to 1993 as a result of increased expenses associated with
the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's primary source of cash has been from
financing activities, which have consisted primarily of sales of equity
securities. The Company has raised an aggregate of approximately $39 million
from the sale of equity securities from its inception through December 31, 1995.
In July 1992, the Company raised net proceeds of approximately $10.7 million in
the initial public offering of its Common Stock. In September 1993, the Company
entered into a collaborative agreement with Genzyme relating to the development
and commercialization of TretinoinLF, in connection with which the Company
received net proceeds of approximately $4.5 million from the sale of Common
Stock to Genzyme. In November 1993, the Company raised net proceeds of
approximately $11.5 million in a public offering of Common Stock. From October
1995 through December 31, 1995, the Company received aggregate net proceeds of
approximately $3.2 million from the exercise of certain warrants issued in the
Mergers. From its inception until December 31, 1995, the Company also received
an aggregate of $2.0 million cash from collaborative arrangements and SBIR
grants. Prior to the Mergers, Triplex had raised $22.0 million from sales of
equity securities and $7.5 million from collaborative arrangements and SBIR
grants, of which $6.7 million remained as cash, cash-equivalents and investments
at the effective time of the Mergers.
Net cash provided by investing activities in 1995 was $10.2 million. Net
cash used in investing activities in 1994 and 1993 was $3.0 million and
$139,000, respectively. In 1995, the Company recorded net sales of short-term
and long-term investments of $10.1 million, which represented the net conversion
of short-term and long-term investments into cash and cash equivalents, of which
approximately $5.7 million resulted from investments acquired from Triplex in
the Mergers. Cash of $137,000, $1.2 million and $723,000 was used for capital
expenditures during 1995, 1994 and 1993, respectively. Cash of $500,000 was used
to purchase preferred stock of RGene in 1994.
The Company's primary use of cash to date has been in operating activities
to fund research and development, including preclinical studies and clinical
trials, and general and administrative expenses. Cash of $6.8 million, $7.8
million and $5.3 million was used in operating activities during 1995, 1994 and
1993, respectively.
The Company had cash, cash-equivalents and short-term and long-term
investments of $12.0 million, $10.0 million and $19.6 million as of December 31,
1995, 1994, and 1993, consisting primarily of cash in banks and money market
accounts, United States government securities and investment grade corporate
bonds. Assuming completion of this offering, the Company expects to use
approximately $10.1 million of cash for research and development activities in
1996.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
FDA and other regulatory approvals are obtained. The Company expects that its
existing capital resources, together with the proceeds of this offering, will be
sufficient to fund its capital requirements through mid-1998. Thereafter, the
Company will need to raise substantial additional capital to fund its
operations. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the Company's ability to
satisfy certain milestones under its current collaborative arrangements with
Genzyme and Hoechst; the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; costs of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions or the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions,
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<PAGE> 23
including the assumption that testing and regulatory procedures relating to the
Company's products can be conducted at projected costs. There can be no
assurance that changes in the Company's research and development plans,
acquisitions, or other events will not result in accelerated or unexpected
expenditures. To satisfy its capital requirements, the Company may seek to raise
additional funds in the public or private capital markets. The Company's ability
to raise additional funds in the public or private markets will be adversely
affected if the results of its current or future clinical trials are not
favorable. The Company may seek additional funding through corporate
collaborations and other financing vehicles. There can be no assurance that any
such funding will be available to the Company on favorable terms or at all. If
adequate funds are not available, the Company may be required to curtail
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.
23
<PAGE> 24
BUSINESS
GENERAL
Aronex is a leading biopharmaceutical company engaged in the discovery and
development of proprietary innovative medicines to treat cancer and
life-threatening infectious diseases. The Company's strategy is to discover and
develop medicines based upon either refinements of proven therapies or novel
mechanisms of action against specific disease targets. The Company has a
portfolio of clinical and preclinical products that it believes provides a
balanced development and commercialization risk profile. The Company believes
its focus on medicines for cancer and life-threatening infectious diseases, for
which current therapy is inadequate, will provide synergies in research,
development and product marketing, and will facilitate expedited
commercialization of its products.
Aronex currently has four products in various stages of ongoing clinical
development and a number of products in preclinical development. In addition,
the Company has proprietary technologies in drug discovery and drug formulation
that should continue to provide a significant research and development pipeline.
The Company's four products in clinical development are (i) Nyotran(TM) for the
treatment of systemic fungal infections, (ii) TretinoinLF for the treatment of
acute promyelocytic leukemia and Kaposi's sarcoma (a skin cancer), (iii)
Annamycin for the treatment of breast cancer and (iv) Zintevir(TM) for the
treatment of HIV infection.
The Company has strategic alliances and collaboration arrangements with
leading corporations and academic institutions, including an alliance with
Genzyme to develop TretinoinLF and collaborations with Hoechst, MD Anderson and
Baylor.
BUSINESS STRATEGY
The Company has implemented a comprehensive strategy to become a profitable
biopharmaceutical company involved in the discovery, development and
commercialization of novel medicines for treating cancer and life-threatening
infectious diseases. The Company's strategy encompasses four key elements.
Therapeutic Focus. The Company has adopted a clear therapeutic focus aimed
at discovering and developing novel medicines to satisfy clearly defined,
unsatisfied needs in the treatment of cancer and life-threatening infectious
diseases. The Company believes that this focus provides synergies in the
research and clinical development of its products as a result of common patient
populations, and will provide synergies in the marketing and commercialization
of its products as a result of the common hospital-based sales and distribution
channels and concentrated customer base associated with such products. In
addition, the Company believes its focus on medicines for cancer and
life-threatening infectious diseases for which current therapy is inadequate may
facilitate expedited commercialization of its products.
Balanced Product Portfolio. The Company has a portfolio of clinical and
preclinical products that it believes provides a balanced development and
commercialization risk profile. Several of the Company's products are
refinements of proven therapies, belonging to classes of drugs that are already
on the market. The Company believes that this should contribute to a reduction
in the development risks associated with such products. A number of the
Company's other products are new compounds with novel mechanisms of action
against specific disease targets. While these products are associated with a
greater degree of development risk, the Company believes that such products may
have a substantial impact against the diseases they are intended to treat. The
Company believes that this balanced development and commercialization risk
profile limits its dependence on a single product or technology.
Leverage of Research and Technological Resources. The Company's discovery
effort in targeted therapeutics relies on internal research programs, as well as
programs undertaken in collaboration with academic centers and corporate
partners. Such interactions allow the Company to leverage its research
resources, provide a preview of potential opportunities and permit exploration
of a broader range of potential products and technologies.
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<PAGE> 25
Collaborative Development and Marketing. The Company's development
strategy involves entering into selected development and licensing agreements
with corporate partners to provide working capital to the Company as well as
assist in the efficient development and marketing of certain of its products.
The Company's alliances with Genzyme and Hoechst exemplify this strategy. The
Company's commercialization strategy involves the pursuit of license agreements
for its products outside North America and the retention of marketing rights in
North America, although the Company may also pursue co-promotion arrangements
for certain of its products in North America.
CLINICAL AND SCIENTIFIC BACKGROUND
Aronex's research and development programs are aimed at the discovery and
development of innovative medicines to treat cancer and life-threatening
infectious diseases for which current therapy is inadequate. The effectiveness
of the current generation of anti-cancer and anti-infective drugs is limited
because of two significant factors. First, cancer cells and microbes (i.e.,
fungi, viruses and bacteria) frequently become resistant to the killing power of
these drugs. This resistance results in the ultimate progression of many cancers
and some infections, such as HIV. Second, these drugs, particularly cancer
drugs, are generally highly toxic because their lack of selectivity results in
significant side effects on normal cells. The Company is targeting the
development of anti-cancer and anti-viral drugs that are selective in their
actions, with specific mechanisms of action and more favorable safety profiles.
INFECTIOUS DISEASES
The immune system, the major line of defense against infection, may be
weakened by diseases, such as HIV and diabetes, or by drugs or agents used for
the treatment of other medical conditions, such as chemotherapy in cancer
patients or immunosuppressive (anti-rejection) therapy in patients receiving
organ transplants. A weak immune system predisposes patients to opportunistic
life-threatening infections caused by otherwise harmless microbes. These
microbes may be fungi such as Aspergillus and Candida, viruses such as
cytomegalovirus and the Herpes I virus, and bacteria such as Mycobacterium
tuberculosis. Some of these "opportunist" microbes can be or become resistant to
existing therapies. Drugs with new mechanisms of action and/or improved safety
profiles are needed to treat fungal and viral diseases and to overcome the
toxicity limitations associated with certain existing drugs.
CANCER
The American Cancer Society has estimated that approximately 1.4 million
new cases of cancer were diagnosed and over 500,000 people died of cancer in
1995 in the United States. Major classes of cancer include solid tumors, the
most common of which are breast cancer (approximately 208,000 new cases in the
United States annually) and cancers of the lung (approximately 170,000 new cases
in the United States annually), and cancers of the blood, the most common of
which are lymphoma (approximately 60,000 new cases in the United States
annually) and leukemia (approximately 26,000 new cases in the United States
annually). Chemotherapy, surgery and radiation are the major components in the
treatment of cancer. Chemotherapy is usually the primary treatment for cancers,
such as hematologic malignancies, which cannot be excised by surgery. In
addition, chemotherapy is increasingly being used as an adjunct to radiation and
surgery to improve efficacy and address metastases (the spread of cancer), and
as primary therapy for some solid tumors. The standard strategy for chemotherapy
is to destroy the malignant cells by exposing them to as much drug as the
patient can tolerate. Clinicians attempt to design a combination of drugs,
dosing schedule and method of administration that increases the probability that
malignant cells will be destroyed, while minimizing the harm to healthy cells.
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally unrelated
agents through a phenomenon known as "multi-drug resistance." Finally, current
anti-cancer drugs are generally highly toxic,
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<PAGE> 26
with effects including bone marrow suppression and irreversible cardiotoxicity,
which can prevent their administration in therapeutic doses.
ARONEX'S APPROACH TO THE TREATMENT OF CANCER AND INFECTIOUS DISEASES
The Company has a focused research effort in nucleic acid chemistry and
molecular biology aimed at discovering highly-specific, novel medicines for the
treatment of cancer and life-threatening infectious diseases.
Oligonucleotide-mediated inhibition of gene function may provide one means to
specifically attack cancers and infectious diseases at their genetic root.
Oligonucleotides are chains of nucleic acids, which are the building blocks of
DNA. Certain sequences of nucleic acids recognize other sequences of DNA or RNA
in cells and bind tightly to them. This can result in the inhibition of the
production of a certain key protein involved in a disease process. The Company
has research collaborations in this area with Hoechst, which has funded a
substantial portion of the Company's nucleic acid research, and with Baylor. See
"--Collaborative Agreements."
The Company also employs another highly specific ligand-targeting
technology utilizing antibody-toxin complexes that bind to specific proteins on
the surface of tumor cells. Cancer cells often over-express certain proteins on
their surface, the presence of which can be correlated with a poor prognosis.
The over expressed proteins can also be used as targets because the cancer cells
containing them stand out among other noncancerous cells. Aronex, in conjunction
with collaborators, is investigating this approach to deliver a toxin to cancer
cells. The antibody-toxin complexes are designed to bind to the target protein
on the cancer cell surface, and then to be internalized where the toxin kills
the cancer cell.
Aronex also possesses lipid formulation expertise which enables it to
formulate certain medicines to enhance their efficacy through more efficient
distribution and/or to reduce their toxicity. The Company, in collaboration with
MD Anderson, has amassed substantial expertise in this field. Aronex believes
that this approach will continue to provide many opportunities to formulate
medicines for the treatment of cancer and life-threatening infectious diseases.
PRODUCTS IN CLINICAL AND PRECLINICAL DEVELOPMENT
The following table lists the Company's clinical and preclinical products,
along with their initial indications and clinical status:
<TABLE>
<CAPTION>
PRODUCT INDICATIONS CLINICAL STATUS(1)
<S> <C> <C>
INFECTIOUS DISEASES
Nyotran(TM)............... Candidemia Phase II/III
Presumed Fungal Infections Phase III
Zintevir(TM).............. HIV Infection Phase I
CANCER
TretinoinLF............... Acute Promyelocytic Leukemia Phase II
Kaposi's Sarcoma (a skin cancer) Phase II/III
Annamycin................. Breast Cancer Phase I/II
AR102..................... Lung Cancer Phase II(2)
AR209..................... Breast Cancer Preclinical
AR726..................... Lung Cancer Preclinical
</TABLE>
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<PAGE> 27
------------------------------
(1) "Phase I" indicates that the first phase of human clinical studies is being
conducted with a small number of subjects in order to gain evidence of
safety, establish the maximum dose of the drug which may be safely
administered to patients and to characterize the pharmacokinetic profile of
a drug. "Phase I/II" indicates that a product is being tested in humans
primarily for safety and drug distribution, while preliminary measures of
efficacy are also observed. "Phase II" indicates that a product is being
tested in humans for safety and preliminary evidence of efficacy. "Phase
II/III" indicates that a product is being tested in humans for evidence of
efficacy. "Phase III" indicates that a product is being tested in multi-
center studies generally designed to provide evidence of efficacy and
further safety of the product in a large number of patients.
"Preclinical" indicates that Aronex has designed a compound that exhibits in
vitro activity and is conducting efficacy, toxicology and drug distribution
testing of the compound in vitro and in animal models.
(2) Phase II clinical trials have been completed by Boehringer Ingelheim
International GmbH ("Boehringer Ingelheim") and the Veterans'
Administration. Aronex believes that the results of such studies indicate
that Phase III clinical trials could be instituted for AR102. See
"--Cancer--AR102 for Non-Small Cell Lung Cancer (Phase II Completed)."
There can be no assurance that the results of any of the Company's clinical
trials will be favorable or that its products will obtain regulatory approval
for commercialization. See "Risk Factors--Uncertainties Related to Clinical
Trial Results."
INFECTIOUS DISEASES
Aronex's infectious disease program centers on the development of new
agents for the treatment of life-threatening infections, including those that
occur in patients with weakened immune systems. The clinical program presently
focuses on the development of Nyotran(TM) for life-threatening systemic fungal
infections and Zintevir(TM) for the treatment of HIV infection.
NYOTRAN(TM) FOR CANDIDEMIA (PHASE II/III) AND PRESUMED FUNGAL INFECTIONS
(PHASE III)
Systemic fungal infections are generally serious and may result in death.
Most systemic fungal infections are caused by Candida (yeasts) and Aspergillus
(molds) species. These infections occur most often in, and are a major threat
to, patients with impaired immune defense mechanisms as a result of an
underlying disease, such as HIV or diabetes, or the effects of treatments for
other medical conditions, such as chemotherapy in cancer patients or
immunosuppressive (anti-rejection) therapy in patients receiving organ
transplants. The population of patients who become candidates for anti-fungal
treatment is increasing because of a number of factors, including the spread of
HIV, more aggressive use of chemotherapy in cancer patients, increases in organ
and bone marrow transplants and increased use of in-dwelling catheters for
prolonged periods.
Available agents for the treatment of systemic fungal infections include
fluconazole, amphotericin B and liposomal formulations of amphotericin B;
however, the Company believes that these drugs have some limitations.
Fluconazole is relatively safe and is effective in inhibiting fungal growth, but
is generally not effective in treating fungal infections in patients who are
seriously ill and immunocompromised. In addition, resistance to fluconazole can
develop. Amphotericin B is very active against both Candida and Aspergillus but
is highly toxic. Several companies have developed liposomal versions of
amphotericin B that are designed to reduce the potential toxicity of
amphotericin B.
Nyotran(TM) is a lipid-based, intravenous formulation of nystatin, an
established, widely-used topical anti-fungal agent. Although nystatin has proven
to be a potent anti-fungal against a broad spectrum of fungi including Candida,
Cryptococcus, Histoplasma, Blastomyces and Aspergillus, its toxicity has
previously precluded its systemic administration as a therapy for such fungal
infections. Aronex has formulated Nyotran(TM) to reduce the toxicity of "free"
nystatin and increase the amount of nystatin that reaches the site of infection.
The Company believes Nyotran(TM) offers potential advantages over current
systemic antifungal therapies. The Company's in vitro studies indicate that it
is more active against a range of Aspergillus species
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<PAGE> 28
than amphotericin B. While final clinical efficacy trials have not been
completed, the Company believes that its Phase I and Phase II/III clinical
trials suggest that Nyotran(TM) can be administered at doses that are believed
to be effective in treating Aspergillus and Candida infections. Further, the
administration of Nyotran(TM) has been generally well tolerated in over 100
patients to date.
The strategy for the development of Nyotran(TM) has involved a streamlined
approach. The Company has conducted three Phase I clinical studies which
demonstrated a favorable safety profile. The Company is conducting a Phase
II/III open label study in patients with candidemia evaluating Nyotran(TM) at
multiple doses. Initial results from this study indicate that a dose of
one-third the tolerated dose established in Phase I may be efficacious. Based
upon data from this study, the Company initiated a Phase III comparative
multicenter trial of Nyotran(TM) against amphotericin B in patients with
presumed fungal infections. The Company expects to complete these clinical
trials in late 1997. If such trials are successful, the Company expects soon
thereafter to file an NDA for the use of Nyotran(TM) in treating presumed fungal
infections and identified systemic fungal infections caused by Candida and
Aspergillus. See "Risk Factors--Uncertainties Related to Clinical Trial Results"
and "Risk Factors--Government Regulation; No Assurances of Regulatory Approval."
The active ingredient of Nyotran(TM), nystatin, is available from several
large chemical companies. The Company has contracted for the manufacture of its
clinical requirements of Nyotran(TM) by Ben Venue Laboratories, which provides
Good Manufacturing Practices ("GMP") facilities capable of satisfying the
quantities required for clinical trials and anticipated quantities for initial
commercial sales.
The Company believes that, if approved by the FDA, Nyotran(TM) will be
prescribed primarily in large community hospitals and regional medical centers.
As a result, the Company believes that Nyotran(TM) could be marketed
successfully with a small, focused sales force, although the Company may choose
to establish marketing arrangements with corporate partners with broad marketing
capabilities.
The Company estimates that over 100,000 patients in the United States
develop systemic fungal infections annually. The current wholesale drug cost for
an average ten-day course of treatment for systemic fungal infection with a
recently-introduced drug is estimated to be approximately $3,600. Further, the
incidence of systemic fungal infections continues to increase because of the
aging population, the spread of HIV, the more aggressive use of chemotherapy,
advances in medical therapies and the development of resistant fungal strains.
Current treatment for systemic fungal infection is largely limited to
amphotericin B, several liposomal formulations of amphotericin B and
fluconazole. Amphotericin B has been a common choice for the treatment of
systemic fungal infections. The clinical usefulness of amphotericin B is
limited, however, because serious toxicity can occur at doses that are only
marginally effective. Liposomal formulations of amphotericin B have been
developed by several companies, including The Liposome Company, NeXstar
Pharmaceuticals, Inc. and Sequus Pharmaceuticals, Inc. Some of these companies'
products have regulatory approval in the United States and other countries. Each
of these liposomal formulations shows a reduction in toxicity as compared to
amphotericin B. Pfizer Inc.'s fluconazole, the world's largest selling
anti-fungal product, is an oral formulation used for a wide range of less
serious anti-fungal indications. The Company is aware of another anti-fungal
agent currently in Phase II clinical trials.
MD Anderson has granted Aronex the worldwide exclusive license to an issued
patent directed to the use of nystatin in the treatment of systemic fungal
infections. The Company believes this patent covers the field of delivery of
nystatin in a liposomal product for the treatment of fungal infections. A
process which is of primary pharmaceutical utility for making Nyotran(TM) is
protected by another issued patent. Continuation of the parent application of
this process patent is currently being prosecuted with the anticipation of
extending coverage in this area. See "Risk Factors--Uncertainty of Protection
for Patents and Proprietary Technology."
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<PAGE> 29
ZINTEVIR(TM) FOR HIV INFECTION (PHASE I)
Zintevir(TM) is a product under development by Aronex for the treatment of
HIV infection. The drugs currently approved in the United States for treatment
of HIV infection consist of reverse transcriptase inhibitors (AZT, ddI, ddC, d4T
and 3TC) and protease inhibitors (saquinavir, ritinovir and indinavir). By
contrast, the primary mechanism of action of Zintevir(TM) is inhibition of HIV-1
integrase, a key enzyme in catalyzing the integration of HIV within human cells,
promoting virus replication. The Company believes that Zintevir(TM) is the most
potent integrase inhibitor that has been described to date and is the first HIV
integrase inhibitor that has entered a human clinical trial.
The following diagram illustrates the stage in the cycle of HIV replication
where Zintevir(TM) acts, as compared to reverse transcriptase inhibitors (at the
beginning stages of virus replication) and protease inhibitors (at the later
stages of virus replication).
CHART
A Phase I single dose study of Zintevir(TM) was initiated at the San
Francisco General Hospital in October 1995. The primary objectives of this
ongoing Phase I study are to determine the safety and pharmacokinetic profile of
escalating single doses of Zintevir(TM) in patients with HIV infection. A Phase
I multiple dose study of Zintevir(TM) in humans began in May 1996. The primary
objectives of the multiple dose study are to determine the safety and
pharmacokinetic profile of multiple intravenous doses of Zintevir(TM) and to
evaluate the anti-HIV activity in HIV infected patients. The Company expects to
complete these Phase I clinical trials of Zintevir(TM) by the end of 1996. See
"Risk Factors--Uncertainties Related to Clinical Trial Results."
Despite the effectiveness of currently available HIV drugs in reducing the
levels of HIV, progression of the disease continues to occur in treated
patients, with decreases in CD4+T lymphocytes levels, the onset of opportunistic
infections, and ultimate progression to death. Hypotheses for the ultimate
failure of these drugs include: (i) the drugs become overwhelmed by the amount
of HIV present; (ii) the virus develops resistance to the drugs; and (iii) the
inhibition of one or two molecular targets (e.g., reverse transcriptase and/or
29
<PAGE> 30
protease) is insufficient to control the virus. In addition to their ultimate
failure in therapy, certain of these drugs cause severe toxicity in some
patients. AZT may cause anemia as a result of bone marrow toxicity, and ddI,
ddC, and d4T may cause painful neuropathy. Although these toxicities are
sometimes reversible, they are considered serious and dose-limiting, and may
prevent prolonged use. 3TC and saquinavir have been reported to have few serious
side effects. Long-term human toxicity information has not been established for
ritinovir or indinavir. There is a continuing need for improved drugs for the
treatment of HIV infection, particularly for drugs that have novel mechanisms of
action and activity against AZT-resistant HIV strains.
The Company believes that approximately one million people in the United
States and over 15 million people worldwide are infected with HIV. Over 500,000
AIDS cases had been reported in the United States by December 1995. The Company
believes that substantial market potential exists for HIV agents with novel
mechanisms of action, for use in combination with existing therapies.
The use and composition of a group of compounds including Zintevir(TM) are
the subject of seven patent applications. These applications are either assigned
wholly to Aronex, or jointly to Aronex and Baylor, in which latter case Aronex
may have an option to exclusively license Baylor's rights. The Company has
received a notice of allowance on one of its wholly-owned patent applications,
which covers the inhibition of HIV production in cultured cells by a group of
compounds including Zintevir(TM). See "Risk Factors--Uncertainty of Protection
for Patents and Proprietary Technology."
CANCER
Aronex's programs in cancer focus on developing medicines based upon either
refinements of proven therapies or novel mechanisms of action against specific
disease targets. The clinical program currently focuses on development of
TretinoinLF for acute promyelocytic leukemia and Kaposi's sarcoma and Annamycin
for breast cancer.
TRETINOINLF FOR ACUTE PROMYELOCYTIC LEUKEMIA (PHASE II) AND KAPOSI'S SARCOMA
(PHASE II/III)
TretinoinLF, the Company's most advanced anti-cancer agent, is presently in
clinical trials for the treatment of acute promyelocytic leukemia ("APL") and
Kaposi's sarcoma. These indications represent a therapeutic area where new
therapies are needed. Established chemotherapeutic agents have been effective in
treating some cases of APL, but have been associated with serious side effects
and frequent relapse. The oral retinoid formulation all-trans retinoic acid
("ATRA") has been recently approved by the FDA as a treatment for APL. ATRA and
other retinoids (a family of molecules comprising both natural and synthetic
derivatives of retinol, otherwise known as vitamin A) inhibit the growth of
cancer cells rather than kill them, in contrast to most conventional
chemotherapeutic agents. However, the Company believes the effectiveness of the
oral formulation of ATRA may be reduced by the rate at which it is metabolized,
which lowers the amount of drug that reaches the cancer target. In addition, the
oral formulation of ATRA can cause an adverse effect called ATRA syndrome (fever
and pulmonary distress), as well as other effects such as hypertriglyceridemia
(elevated levels of triglycerides in the blood).
Kaposi's sarcoma is a skin cancer that has been estimated to occur in
approximately 15% of AIDS cases. Several products are available to treat
late-stage Kaposi's sarcoma; however, the Company believes that there is no
approved drug therapy for early-stage Kaposi's sarcoma. Aronex believes that
TretinoinLF may be effective against Kaposi's sarcoma.
TretinoinLF is a lipid-based, intravenous formulation of all-trans retinoic
acid which is being studied in patients with APL and Kaposi's sarcoma. The
Company's lipid formulation has been developed to change certain aspects of the
drug's behavior in the body to overcome the known deficiencies of oral
retinoids, such as the oral formulation of ATRA. TretinoinLF has a different
pharmacokinetic and distribution profile, so that there may be a decrease in the
proportion of the drug metabolized and an increase in the proportion that
reaches the cancer target. This may provide more effective delivery of the drug
to the bone marrow, liver and spleen, where most leukemic cells are found, and a
better safety profile.
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Aronex completed a Phase I clinical trial of TretinoinLF in 1995 in
patients with cancers of the blood. Phase I data presented at the 1994 American
Society for Hematology indicated that TretinoinLF may sustain levels in the
blood after prolonged dosing, is well tolerated, and shows evidence of activity
against certain leukemias and lymphomas. TretinoinLF is currently in a Phase II
clinical evaluation for its potential to induce remission and prevent relapse of
APL in patients that have experienced a recurrence of the cancer. This trial is
expected to be completed by the end of 1997. The Company believes that
approximately 2,000 new cases worldwide of APL are diagnosed annually.
TretinoinLF is also being assessed in Phase II/III clinical trials in
collaboration with Genzyme for the treatment of Kaposi's sarcoma. These trials
are expected to be completed in late 1996 or early 1997. If the results of its
current clinical trials are successful, the Company's strategy is to proceed
with an initial NDA for APL, and subsequently to seek approval for the Kaposi's
sarcoma indication. TretinoinLF has been designated an orphan drug for APL by
the FDA. The Company has selected APL and Kaposi's sarcoma as initial
indications for TretinoinLF; however, as with many cancer treatments, a wider
range of potential indications may be possible if efficacy is demonstrated in
the initial indications. See "Risk Factors--Uncertainties Related to Clinical
Trial Results" and "Risk Factors--Government Regulation; No Assurances of
Regulatory Approval."
In 1993, Aronex entered into a collaborative agreement with Genzyme to
develop and commercialize TretinoinLF for the treatment of cancer. See
"--Collaborative Agreements--Collaborative Agreement with Genzyme."
The composition and method of use of TretinoinLF is the subject of a patent
application, jointly assigned to Aronex and MD Anderson, as to which the rights
of MD Anderson are exclusively licensed to the Company. See "Risk
Factors--Uncertainty of Protection for Patents and Proprietary Technology."
ANNAMYCIN FOR BREAST CANCER (PHASE I/II)
Annamycin is a new chemical entity belonging to the class of widely
prescribed anti-cancer agents known as anthracyclines. This class of drug, which
includes doxorubicin, daunorubicin and idarubicin, has been shown to be
effective, either alone or in combination, against proliferating cancer cells.
Anthracyclines currently on the market, however, suffer from two primary
limitations. Cancer cells often develop a resistance to doxorubicin and other
anthracyclines, rendering the treatment ineffective. This resistance, once
developed by cancer cells, generally extends to a variety of other
chemotherapeutic agents, a phenomenon commonly referred to as multi-drug
resistance. The best understood mechanism behind multi-drug resistance involves
an increase in the production of P-glycoprotein, a trans-cell membrane pump.
This pump transports drugs, including most types of anti-cancer drugs, out of
tumor cells. Currently available anthracyclines also frequently result in severe
toxic effects, including irreversible cardiotoxicity.
Annamycin was designed to overcome these two major limitations. In contrast
to conventional chemotherapeutic agents, Annamycin is structured so that it
avoids the mechanism of operation of the trans-cell membrane pump believed to be
responsible for multi-drug resistance. The Company's preclinical studies have
shown that Annamycin may be active against multi-drug resistant tumor cells. The
Company's preclinical studies of Annamycin in animals with human tumors also
indicate that Annamycin, which is a liposomal formulation of a novel doxorubicin
analogue, may be less cardiotoxic than doxorubicin.
A Phase I/II dose-escalating clinical trial is currently in progress in
breast cancer patients who have failed prior doxorubicin therapy. This trial is
being conducted in collaboration with MD Anderson. The objectives of the trial
are to determine the maximum tolerated dose, to assess the quantitative and
qualitative toxicity of Annamycin and to study its pharmacokinetics. The Company
expects to complete this Phase I/II clinical trial in 1996. When the maximum
tolerated dose has been established, the Company intends to conduct a Phase II
study in patients with metastatic breast cancer resistant to doxorubicin. See
"Risk Factors--Uncertainties Related to Clinical Trial Results."
The Company believes that there would be a substantial market for an agent
which is active against multi-drug resistance and exhibits an improved safety
profile over doxorubicin. In the United States, there are approximately 208,000
new cases of breast cancer annually. In addition, Annamycin has the potential to
be used in treating other solid tumors as well as leukemias and lymphomas.
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While there are a range of chemotherapeutic agents used alone and in
combination to treat breast cancer and other solid tumors, including
doxorubicin, daunorubicin, liposomal formulations of doxorubicin and
daunorubicin, taxol, platinum and cyclophosphamide, the Company does not believe
that there are any medicines available that are active against multi-drug
resistant tumors. Aronex is aware of two agents currently in Phase II clinical
trials, a cyclosporin analogue and a castor oil derivative, that are designed to
modulate multi-drug resistance. These agents would potentially be used in
combination with chemotherapeutic agents.
Annamycin is covered by an issued patent, licensed exclusively to the
Company by MD Anderson, that claims the composition of Annamycin and the method
used in treating cancer. In addition, a patent application has been filed with
respect to an improved process for preparing Annamycin. Annamycin itself and
certain related compounds are covered by six patents that have been
non-exclusively sublicensed to Aronex by MD Anderson, which licensed them from
Ohio State University. See "Risk Factors--Uncertainty of Protection for Patents
and Proprietary Technology."
AR102 FOR NON-SMALL CELL LUNG CANCER (PHASE II COMPLETED)
Lung cancer is a leading cause of cancer deaths in the United States.
Approximately 170,000 new cases of lung cancer are diagnosed every year, of
which 75 percent are non-small cell lung cancer. There is no effective,
long-term therapy for non-small cell lung cancer, and only approximately 13
percent of patients survive more than five years after the initial diagnosis of
the disease.
AR102 is an orally-active novel methylxanthine analogue for use in
connection with surgery and/or chemotherapy to increase survival in patients
with non-small cell lung cancer. The Company believes that AR102 acts as a
cytostatic agent, slowing tumor cell growth rather than killing such cells. Two
Phase II clinical trials conducted by Boehringer Ingelheim and the Veterans'
Administration have been completed. The Company believes that the results
suggest that AR102 will enhance survival. The Company plans to progress AR102
into Phase III clinical trials in collaboration with a corporate partner;
however, no such collaboration has been entered into.
Radiation and chemotherapy can have some effect in patients with
non-disseminated, non-small cell lung cancer. Chemotherapeutic agents that are
active against non-small cell lung cancer include cisplatin, ifosfamide,
mitomycin C and possibly vindesine and vinblastine. While chemotherapy programs
produce modest but real improvements in survival, no regimen is completely
effective and none has led conclusively to a cure.
Aronex obtained a worldwide exclusive license for AR102 from Boehringer
Ingelheim, subject to an option retained by Boehringer Ingelheim for Central
Europe. Patent protection for AR102 has expired. See "Risk Factors--Uncertainty
of Protection for Patents and Proprietary Technology." The Company currently
intends to apply for "orphan drug" status for the product which, if granted,
would provide four to seven years of exclusivity. No assurance can be given that
orphan drug status could be obtained for AR102. Although the Company believes
that its unpatented proprietary technology provides it with an advantage in the
development of AR102, orphan drug status could be obtained by any other party if
such party were to obtain approval for AR102 prior to the Company, which would
prevent the Company from commercializing AR102 during the period for which
exclusivity was granted to such party. See "--Government Regulation."
AR209: ERBB-2 TARGETED THERAPY FOR BREAST CANCER (PRECLINICAL)
AR209 is an innovative cancer therapy that is being developed initially for
breast cancer, but which Aronex believes has potential for additional solid
tumor indications including lung, ovarian and stomach cancers. The Company
believes the design of this product improves upon conventional cancer therapy by
targeting specific cancer cells that contain the oncoprotein erbB-2. The erbB-2
protein occurs at high levels only in tumors and not in normal tissues. AR209 is
an antibody-toxin complex composed of a targeting ligand and a fragment of the
Pseudomonas exotoxin. This novel product is designed to bind to cancer cells
that contain the erbB-2 oncoprotein and to be transported inside (internalized)
where it kills the cancer cell.
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Preclinical studies indicate that AR209 causes regression of solid human tumors
and is well tolerated. The product is currently in preclinical development.
Aronex intends to seek a corporate partner to develop and commercialize
AR209. Aronex has a worldwide license from the National Institutes of Health
("NIH") to the Pseudomonas exotoxin used in the design of AR209. Aronex also has
an exclusive license to a United States government patent application covering
antibodies targeting the erbB-2 oncoprotein. Patent applications covering the
sequences of the e23 antibody used in the formulation of AR209 have also been
filed. See "Risk Factors--Uncertainty of Protection for Patents and Proprietary
Rights."
AR726 FOR LUNG CANCER (PRECLINICAL)
The Company, in conjunction with MD Anderson, is developing a novel
platinum analogue, AR726, which has been designed to overcome the toxicity and
resistance that currently limits the usefulness of platinum, a chemotherapeutic
agent widely used in the treatment of solid tumors. AR726 was selected as the
Company's lead candidate from a series of platinum anti-cancer compounds.
AR726 has been evaluated in a Phase I clinical trial under an
investigator's IND at MD Anderson. Currently, AR726 is being reformulated and
evaluated in preclinical studies. The Company believes that AR726 has potential
as a treatment of a lung cancer known as mesothelioma.
AR726 is covered by a series of patents, licensed exclusively to the
Company by MD Anderson, relating to hydrophobic cis-platinum complexes and to
stable liposomal formulations of the lipophilic platinum compounds. The claims
of these patents are drawn to novel cis-platinum complexes having hydrophobic
properties and possessing branched or unbranched-chain hydrocarbon substituents.
Formulations containing the novel platinum complexes entrapped in liposomes and
exhibiting improved drug stability are included. Anti-tumor compositions
containing these stable cis-platinum containing liposomes and methods of using
them to treat tumors are also covered. A patent application filed in the United
States that may overlap claims included in the United States patents licensed to
the Company are the subject of an ongoing interference proceeding in the United
States Patent and Trademark Office. The Company cannot currently predict the
outcome of this matter. See "Risk Factors--Uncertainty of Protection for Patents
and Proprietary Technology."
RESEARCH PIPELINE
Aronex's research programs have been established to provide new preclinical
candidates to follow the Company's current products into clinical development
for the treatment of cancer and life-threatening infectious diseases. The common
element of Aronex's research programs is the rational design of new drugs that
are target-specific. This approach to drug discovery uses several complementary
technologies to identify compounds that can act selectively on a specific target
within or on the surface of cancer cells, or to attack a specific viral target
within an infected cell. Another important expertise is the Company's ability to
deliver active drugs to specific sites of disease. Aronex leverages its in-house
research expertise with close collaborations with scientists in academic and
government laboratories and in other pharmaceutical companies. This strategy of
integrating multiple expertises allows Aronex to enhance its potential to
identify new entities to proceed into preclinical development.
Aronex's research programs have identified a number of active compounds
that are being evaluated for serious infections and cancer and
hyper-proliferative disorders. Several such compounds are discussed below.
AR132 FOR CYTOMEGALOVIRUS (CMV) INFECTIONS
Cytomegalovirus ("CMV") is the cause of a variety of serious disorders in
individuals with underdeveloped or compromised immune systems and infects both
infants and adults. CMV, which may cause fever, hepatitis, pneumonitis, colitis
and retinitis, is believed to be the most important viral pathogen that
complicates organ transplants. In AIDS patients, CMV is a common opportunistic
infection in the later stages
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of AIDS and causes retinitis, colitis and encephalitis. Some approved drugs are
effective in reducing levels of CMV, but often only delay the progression of CMV
infection and suffer from toxicity disadvantages.
Aronex has discovered a series of small molecules that have activity
against CMV in vitro. Of these, AR132 has been shown to have potent activity and
low cytotoxicity in in vitro studies. In addition, the Company believes that
AR132 is likely to have a different mechanism of action than current therapies.
AR132 is currently undergoing in vivo animal efficacy evaluation for CMV
infection.
AR132 is covered by one patent and a pending patent application relating to
anti-viral guanine analogues to which all rights are assigned to Aronex. The
patent claims are drawn to a unique anti-viral guanosine analogue and
therapeutic compositions containing the analogue with and without a second
therapeutic compound. The pending application discloses and claims additional
analogues and methods of preparation and therapeutic use. See "Risk
Factors--Uncertainty of Protection for Patents and Proprietary Rights."
AR639 FOR RENAL CELL CARCINOMA
When tumors are growing, they need an increasing supply of oxygen. To
satisfy this need, tumor cells produce vascular endothelial growth factor
("VEGF"), a potent protein that causes the increased development of blood
vessels to supply the tumor with blood and therefore oxygen and nutrients for
growth. Renal cell carcinoma is a highly vascularized cancer in which VEGF is
over-expressed. Few treatment options are available for renal cell carcinoma,
which has a very poor prognosis. The Company believes that compounds that
inhibit the production of VEGF may have a role in the therapy of cancers such as
renal cell carcinoma.
Aronex scientists have discovered oligonucleotides that selectively inhibit
the production of VEGF in cells at very low doses in vitro. Of these, AR639 has
been shown to have the most activity and to produce very little cell toxicity.
In addition to renal cell carcinoma, the Company intends to explore the
potential of AR639 as a treatment for hepatoma, another highly vascularized
cancer.
AR797 FOR HYPERPROLIFERATIVE DISORDERS
Tumor necrosis factor ("TNF") is a protein produced by the body that has a
role in several physiological processes. Apart from its potential use as an
anti-tumor factor, TNF is known to be involved as a key factor in inflammation.
Rheumatoid arthritis is among the inflammatory diseases thought to be associated
with an overproduction of TNF. The Company believes that selective inhibitors of
the production of TNF may have a role in the therapy of inflammatory diseases
such as rheumatoid arthritis.
AR797 is an oligonucleotide that selectively inhibits the production of TNF
in cells in vitro. Such in vitro studies have shown activity at low
concentrations and a relatively long duration of activity. This compound has
also produced beneficial effects in a preliminary study of one form of
inflammation in an animal model.
AR797 is being developed under the Company's collaborative agreement with
Hoechst. Hoechst has the right, at its option, to pursue the preclinical
development of AR797 for rheumatoid arthritis under that agreement. In the event
such right is exercised, the Company would be entitled to a milestone payment
from Hoechst, and could receive further milestone payments depending upon the
continued development of AR797. See "--Collaborative Agreements--Relationship
with Hoechst."
SBIR GRANTS
Aronex was awarded four Phase I Small Business Innovation Research ("SBIR")
grants in 1995 of approximately $100,000 each. These grants were awarded
competitively by the NIH in support of research leading to the development of
technology with potential for ultimate commercialization. Aronex intends to
complete the research funded by the Phase I SBIR grants and apply for Phase II
SBIR grants. Phase II SBIR grants are generally awarded in the amount of
$750,000 for a term of 12 to 24 months. Aronex has applied for three additional
Phase I and Phase II SBIR grants and it intends to continue to apply for
additional grants.
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COLLABORATIVE AGREEMENTS
The Company's development strategy involves entering into selected
development and licensing agreements with corporate partners to provide working
capital to the Company as well as assist in the efficient development and
marketing of certain of its products. See "Risk Factors--Risks Associated with
Collaborative Arrangements."
COLLABORATIVE AGREEMENT WITH GENZYME
In 1993, Aronex entered into a license and development agreement with
Genzyme to develop and commercialize TretinoinLF. The initial focus of the
collaboration is the development of TretinoinLF for the treatment of myelogenous
leukemias and certain non-hematologic cancers. Aronex and Genzyme share clinical
development responsibilities and research program funding. Under the agreement
Aronex is responsible for funding leukemia research within the United States,
Genzyme is responsible for funding leukemia research outside of the United
States, and Aronex and Genzyme share the responsibility for funding most solid
tumor research worldwide. The agreement grants Genzyme worldwide marketing
rights to TretinoinLF, although Aronex retains certain co-promotion rights in
the United States. Under the agreement, Genzyme is required to make up to $1.5
million in milestone payments to Aronex upon the occurrence of certain events,
and will pay Aronex royalties on sales of the product. Genzyme has the right to
terminate the agreement in the event of a third-party claim of infringement by
products subject to the agreement. The Company has the right to terminate the
agreement if Genzyme fails to satisfy certain milestones. In connection with the
collaborative agreement, Genzyme made a net $4.5 million equity investment in
Aronex and agreed to make an additional $5.0 million equity investment in Aronex
if certain developmental goals are achieved.
RELATIONSHIP WITH MD ANDERSON
Aronex has two license agreements with MD Anderson which grant Aronex
exclusive rights to manufacture, use, market and sell products based upon
certain technology developed at MD Anderson relating to the development of human
monocyte or murine macrophage-derived cytotoxins which inhibit or destroy the
proliferation of tumor cells, liposomal-encapsulated polyene antibiotics (except
amphotericin B), liposomal-encapsulated anthracyclines, liposomal-encapsulated
platinum derivatives and liposomal-encapsulated retinoids. Nyotran(TM),
TretinoinLF , Annamycin and AR726 are products derived from Aronex's
relationship with MD Anderson.
The license agreements with MD Anderson require Aronex to pay royalties to
The University of Texas Board of Regents (the "Board of Regents") for licensed
technology based on specified percentages of cumulative net sales and royalties
from sublicensees. Because it has not sold any products or processes to date,
Aronex has not paid any royalties under the license agreements. MD Anderson is
responsible for the preparation, filing and prosecution of all patent
applications, foreign and domestic, relating to technology developed at MD
Anderson, and Aronex reimburses MD Anderson for expenses incurred in connection
with such activities.
The license agreements generally remain in force until the expiration of
the last patent subject to such agreements. Either party may terminate the
license agreements after 60 days' notice to the other party in the event of a
material breach of the terms of such agreement. The Board of Regents has the
right to terminate either license agreement with 90 days' notice for failure to
convert the licensed subject matter to a commercial form; however, Aronex
believes its ongoing and active research and development efforts directed at
commercial marketing of the licensed products currently satisfies this
obligation.
Aronex and MD Anderson have entered into research and development contracts
in conjunction with the license agreements which obligate Aronex to fund
research and development expenses incurred by the MD Anderson scientists that
relate to the technology licensed by Aronex. Such contracts grant Aronex an
exclusive worldwide license to technology related to the technology licensed
under the license agreements and developed as a result of research funded by
Aronex. Such contracts also grant Aronex a right of first refusal to acquire an
exclusive worldwide license to certain technology developed at MD Anderson which
is not the result of projects funded by Aronex. Aronex and MD Anderson have
agreed to the funding commitments for
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all research projects under such contracts through December 31, 1996. Aronex
intends to continue funding various projects after December 31, 1996; however,
the continuation of such projects is dependent on mutually agreed-to funding
levels. If Aronex defaults in the payment of research and development funding
commitments due MD Anderson under such contracts, MD Anderson may suspend the
related research and development projects or, if Aronex's default continues for
a period of 60 days, MD Anderson may terminate the related contract upon 60
days' notice to Aronex.
RELATIONSHIP WITH HOECHST
Aronex has a collaborative arrangement with Hoechst under a 1992 agreement
between Triplex and Hoechst with respect to collaborative research and
development of oligonucleotide products. Under the agreement, Aronex and Hoechst
collaborate in the design, synthesis and initial evaluation of certain
oligonucleotides, and Hoechst is responsible for the development of such
compounds through in vivo evaluation for safety and efficacy, pharmacokinetics
and toxicology and clinical development. In addition, Hoechst is responsible for
obtaining all regulatory and other approvals to market products licensed to
Hoechst under the agreement. The Hoechst collaboration enables Aronex to combine
its expertise in the design, synthesis and in vitro evaluation of
oligonucleotides with Hoechst's experience in the areas of preclinical and
clinical development. Under this agreement, Hoechst is obligated to pay Aronex
quarterly research fees, milestone payments upon the achievement of certain
goals and royalties on the sales of any products ultimately licensed to Hoechst.
The agreement terminates at the end of 1996 unless the parties agree to renew
it. No assurance can be given that the agreement will be renewed. Hoechst
recently completed a merger with Marion Merrell Dow Pharmaceuticals, Inc., and
has indicated that it is re-evaluating its collaborative arrangements. At
December 31, 1995, Hoechst had paid a total of $7.7 million (including $7.0
million paid to Triplex) of research and development payments under the
agreement.
The agreement provides Hoechst an exclusive right to the application of
certain oligonucleotide technology to defined viral targets. In addition,
Hoechst has the option to obtain rights to additional targets such as AR797 by
paying an annual expansion fee, as well as related milestone payments, to
Aronex. Certain targets have been reserved by Aronex and may not be selected by
Hoechst. In exchange for the funding and royalties, Aronex has granted Hoechst
an option to a worldwide license for the manufacture and marketing of Aronex
compounds related to the targets selected by Hoechst. Aronex has retained
co-marketing and certain manufacturing rights for the United States market.
RELATIONSHIP WITH BAYLOR
Aronex has collaborative arrangements with Baylor and Michael E. Hogan,
Ph.D., a professor at Baylor, under licensing, consulting and research and
development arrangements entered into by Triplex beginning in 1989. Aronex has
an exclusive, worldwide, royalty-free license from Baylor to certain technology
developed by Baylor and Dr. Hogan. The license also provides Aronex with rights
to certain improvements to the technology which are developed at Dr. Hogan's
laboratory prior to the seventh anniversary of the agreement. The license
agreement terminates on the expiration of the last patent to expire that is
licensed thereunder.
Aronex has a consulting agreement with Dr. Hogan to further the development
and commercial exploitation of triple helix technology licensed from Baylor. The
consulting agreement, as amended, expires in June 1996 and may be renewed for
one-year terms at the election of both parties. Dr. Hogan has agreed not to
compete with Aronex during the term of the agreement and for nine months
thereafter.
RELATIONSHIP WITH RGENE
In 1994, Aronex invested in, and participated in the founding of, RGene.
Aronex currently is the beneficial owner of approximately 12.4 percent of the
capital stock of RGene on a fully-diluted basis. Aronex has entered into
assignment, sublicense and development agreements with RGene. Through RGene,
Aronex is participating in the development of novel gene therapy and other
nucleic acid-based drugs using proprietary non-viral vectors as delivery
systems. RGene's two lead products are: RGG-0853, a repression gene complexed
with a lipid vector for the treatment of ovarian cancer and RGA-1512, a nucleic
acid treatment complexed
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with a liposomal vector for chronic myelogenous leukemia. An institutional IND
was obtained for RGG-0853 in 1995, and a Phase I study is planned for 1996 at MD
Anderson. Under the terms of the assignment and sublicense agreements, Aronex
assigned and sublicensed to RGene Aronex's rights to certain technology licensed
from The University of Tennessee Research Center. Aronex also guaranteed RGene's
performance under the sublicense agreement. In this transaction, Aronex received
shares of RGene common stock and also purchased $500,000 of RGene preferred
stock. Aronex is applying its own technology and expertise in liposomal delivery
to RGene's products through a collaborative development agreement. Under the
terms of this agreement, RGene reimburses Aronex for its costs and overhead (as
defined in the agreement). The collaborative development agreement has an
initial term of three years and is subject to certain termination provisions.
RGene has entered into a merger agreement with Targeted Genetics
Corporation, a publicly traded company ("Targeted Genetics"), providing for the
acquisition of RGene by Targeted Genetics for approximately 3.64 million shares
of Targeted Genetics common stock and contingent rights to receive up to $5
million of Targeted Genetics common stock upon the achievement of certain
clinical and business-related milestones prior to December 31, 1998. The shares
issuable in the merger would be subject to certain restrictions on resale under
the Securities Act and certain contractual resale restrictions. The merger is
subject to the approval of stockholders of both companies and other conditions.
There can be no assurance that the merger will be completed or, if completed,
that the Company's collaborative development agreement with RGene will be
continued after the completion of such merger.
MANUFACTURING
The Company does not have the staff or facilities necessary to manufacture
its products, but it does have the capability to develop formulations,
analytical methods, process controls and manufacturing technology for its
products. The Company uses a contract manufacturer to produce larger quantities
of its products for clinical testing. Production is done on a per-purchase-order
basis and no written agreement between Aronex and such manufacturer has been
entered into. The contract manufacturer is closely supervised to ensure
adherence to established production methods and compliance with the Company's
rigorous quality control and quality assurance standards. The Company does not
expect to establish any significant manufacturing capacity in the near future.
Rather, the Company plans to expand its existing relationship with its contract
manufacturer and to establish new third-party manufacturing capacity for certain
products. Aronex has granted Genzyme an option to manufacture pharmaceutical
compositions required to develop and commercialize TretinoinLF. The Company does
not operate and does not currently plan to operate manufacturing facilities for
the production of its products in commercial quantities, and it intends to
contract with third parties for the manufacture and supply of its products.
There can be no assurance that the Company will be able to obtain supplies of
its products from third-party suppliers on terms or in quantities acceptable to
the Company. Also, the Company's dependence on third parties for the manufacture
of its products may adversely affect the Company's product margins and its
ability to develop and deliver products on a timely basis. Any such third-party
suppliers or any manufacturing facility the Company establishes will be required
to meet FDA manufacturing requirements. FDA certification of manufacturing
facilities for a drug is a prerequisite to approval of an NDA for that drug. The
Company may encounter significant delays in obtaining supplies from third-party
manufacturers or experience interruptions in its supplies. If the Company is
unable to obtain adequate supplies, its business would be materially adversely
affected.
The raw materials required for the majority of the Company's products are
currently available in quantities sufficient to conduct the Company's research,
development, preclinical safety and clinical development activities. Certain of
the Company's products, such as Annamycin, are new syntheses and, therefore, are
not yet available in commercial quantities. No assurance can be given that the
raw materials necessary for the manufacture of the Company's products will be
available in sufficient quantities or at a reasonable cost. Complications or
delays in obtaining raw materials or in product manufacturing could delay the
submission of products for regulatory approval and the initiation of new
development programs, which could materially impair the Company's competitive
position and potential profitability. See "Risk Factors--Manufacturing
Uncertainties; Reliance on Third-Party Suppliers."
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SALES AND MARKETING
Although the Company presently intends to market its products if and when
regulatory approvals are obtained, it currently has no sales and marketing
staff. The Company currently plans to market selected products directly to
oncologists, hematologists and infectious disease specialists and may establish
a domestic sales force with experience in marketing pharmaceutical products to
these user groups. For other products, the Company may enter into co-marketing
arrangements with, or license marketing rights to, third parties. The Company's
international strategy is to negotiate marketing agreements with pharmaceutical
manufacturers and distributors which will entitle the Company to receive a
percentage of net product sales.
The Company does not have any experience in sales, marketing or
distribution. To market any of its products, the Company must develop a sales
and marketing force with supporting distribution capability or enter into
marketing and distribution arrangements with a company that has an established
capability. Significant additional expenditures will be required for the Company
to develop such capabilities. The Company has entered into a license agreement
with Genzyme with respect to TretinoinLF, and it plans to enter into marketing
agreements with one or more other pharmaceutical companies to market other
products that it may develop. To the extent the Company relies upon licensing,
marketing or distribution arrangements with others, any revenues the Company
receives will depend upon the efforts of third parties. There can be no
assurance that any third party will market the Company's products successfully
or that any third-party collaboration will be on terms favorable to the Company.
If any marketing partner does not market a product successfully, the Company's
business would be materially adversely affected. There can be no assurance that
the Company will be able to establish sales, marketing and distribution
capabilities or that it or its collaborators will be successful in gaining
market acceptance for any products that the Company may develop. The Company's
failure to establish marketing capabilities or to enter into marketing
arrangements with third parties would have a material adverse effect on the
Company.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company's ability to commercialize any products will depend, in part,
upon its or its licensors' ability to obtain patents, enforce those patents,
preserve trade secrets, and operate without infringing upon the proprietary
rights of third parties. The patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions. Some of the United States patents and patent applications
owned by or licensed to the Company are method-of-use patents that cover the use
of certain compounds to treat specified conditions, and composition-of-matter
patents are not available for some of the Company's product candidates. The
Company does not have any patents or patent applications with respect to one of
its products, AR102. There can be no assurance that the patent applications
licensed to or owned by the Company will result in issued patents, that patent
protection will be secured for any particular technology, that any patents that
have been or may be issued to the Company or its licensors will be valid or
enforceable, that any patents will provide meaningful protection to the Company,
that others will not be able to design around the patents, or that the Company's
patents will provide a competitive advantage or have commercial application.
There can be no assurance that patents owned by or licensed to the Company
will not be challenged by others. The Company could incur substantial costs in
proceedings before the United States Patent Office and other regulatory
authorities, including interference proceedings. These proceedings could result
in adverse decisions about the patentability of the Company's inventions and
products as well as about the enforceability, validity or scope of protection
afforded by the patents. The Company is currently involved in an interference
proceeding before the United States Patent Office regarding AR726. See
"Business--Cancer."
There can be no assurance that the manufacture, use or sale of the
Company's product candidates will not infringe patent rights of others. The
Company may be unable to avoid infringement of those patents and may have to
seek a license, defend an infringement action, or challenge the validity of the
patents in court. There can be no assurance that a license will be available to
the Company, if at all, upon terms and conditions acceptable to the Company or
that the Company will prevail in any patent litigation. Patent litigation is
costly and time consuming, and there can be no assurance that the Company will
have sufficient resources to bring
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<PAGE> 39
such litigation to a successful conclusion. If the Company does not obtain a
license under such patents, is found liable for infringement, or is not able to
have such patents declared invalid, the Company may be liable for significant
money damages, may encounter significant delays in bringing products to market,
or may be precluded from participating in the manufacture, use or sale of
products or methods of treatment requiring such licenses. The Company does not
believe that the commercialization of its products will infringe upon the patent
rights of others. However, there can be no assurance that the Company has
identified United States and foreign patents that pose a risk of infringement.
The Company also relies upon trade secrets and other unpatented proprietary
information in its product development activities. To the extent the Company
relies on trade secrets and unpatented know-how to maintain its competitive
technological position, there can be no assurance that others may not
independently develop the same or similar technologies. The Company seeks to
protect trade secrets and proprietary knowledge, in part through confidentiality
agreements with its employees, consultants, advisors and collaborators.
Nevertheless, these agreements may not effectively prevent disclosure of the
Company's confidential information and may not provide the Company with an
adequate remedy in the event of unauthorized disclosure of such information. If
the Company's employees, scientific consultants or collaborators develop
inventions or processes independently that may be applicable to the Company's
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become the Company's property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of the Company's proprietary rights. Failure to obtain
or maintain patent and trade secret protection, for any reason, would have a
material adverse effect on the Company.
The Company engages in collaborations, sponsored research agreements,
licensing and other arrangements with academic researchers and institutions that
have received and may receive funding from United States government agencies. As
a result of these arrangements, the United States government or certain third
parties have rights in certain inventions developed during the course of the
performance of such collaborations and agreements as required by law or such
agreements. See "Risk Factors--Uncertainty of Protection for Patents and
Proprietary Technology."
Several bills affecting patent rights have been introduced in the United
States Congress. These bills address various aspects of patent law, including
publication, patent term, re-examination, subject matter and enforceability. It
is not certain whether any of these bills will be enacted into law or what form
new laws may take. Accordingly, the effect of legislative change on the
Company's intellectual property estate is uncertain.
GOVERNMENT REGULATION
Aronex's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries. The United States Federal
Food, Drug and Cosmetic Act and the regulations promulgated thereunder and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. Preclinical study
and clinical trial requirements and the regulatory approval process take years
and require the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
the Company's products. Delays or rejections in obtaining regulatory approvals
would adversely affect the Company's ability to commercialize any product the
Company develops and the Company's ability to receive product revenues or
royalties. If regulatory approval of a product is granted, the approval may
include significant limitations on the indicated uses for which the product may
be marketed.
The FDA and other regulatory authorities require that the safety and
efficacy of the Company's therapeutic products must be supported through
adequate and well-controlled Phase III clinical trials. If the results of Phase
III clinical trials do not establish the safety and efficacy of the Company's
products to the satisfaction of the FDA and other regulatory authorities, the
Company will not receive the approvals necessary to market its products, which
would have a material adverse effect on the Company.
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<PAGE> 40
The standard process required by the FDA before a pharmaceutical agent may
be marketed in the United States includes: (i) preclinical tests; (ii)
submission to the FDA of an investigational new drug application ("IND") which
must become effective before human clinical trials may commence; (iii) adequate
and well-controlled human clinical trials to establish the safety and efficacy
of the drug in its intended application; (iv) submission of an NDA to the FDA;
and (v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug. In addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered or licensed by the FDA. Domestic
manufacturing establishments are subject to inspections by the FDA and by other
federal, state and local agencies and must comply with established manufacturing
practices which are appropriate for production.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical tests are submitted to the FDA as part
of an IND and are reviewed by the FDA before the commencement of human clinical
trials. Unless the FDA objects to an IND, the IND will become effective 30 days
following its receipt by the FDA. There can be no assurance that submission of
an IND will result in FDA authorization to commence clinical trials or that the
lack of an objection means that the FDA will ultimately approve an NDA.
Clinical trials involve the administration of the investigational new drug
to humans under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety, and efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Also, each clinical trial must be
approved and conducted under the auspices of an Institutional Review Board
("IRB"). The IRB will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution conducting the
clinical trials.
Clinical trials are typically conducted in three sequential phases which
may overlap. In Phase I, the initial introduction of the drug to humans, the
drug is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks. When
a product has shown evidence of efficacy and has an acceptable safety profile in
a Phase II evaluation, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
geographically dispersed clinical trial sites. There can be no assurance that
any of the Company's clinical trials will be completed successfully or within
any specified time period. The Company or the FDA may suspend clinical trials at
any time.
The Company has designed the protocols for its pivotal clinical trials
based on its analysis of its research, including various parts of its Phase I
and Phase II clinical trials. Although copies of its pivotal clinical trial
protocols have been submitted to the FDA, there can be no assurance that the
FDA, after the results of the pivotal clinical trials have been announced, will
not disagree with the design of the pivotal clinical trial protocols. In
addition, the FDA inspects and reviews clinical trial sites, informed consent
forms, data from the clinical trial sites, including case report forms and
record keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with Good Clinical Practice. The FDA
also looks to determine that there was no bias in the conduct of clinical
trials. The conduct of clinical trials in general and the performance of the
pivotal clinical trial protocols is complex and difficult. There can be no
assurance that the design or the performance of the pivotal clinical trial
protocols will be successful.
The results of preclinical studies and clinical trials, if successful, are
submitted in an NDA to seek FDA approval to market and commercialize the drug
product for a specified use. The testing and approval process will require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. The FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. The FDA may also require additional testing for
safety and efficacy of the drug. Moreover, if regulatory approval of a drug
product is granted, the approval will be limited
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<PAGE> 41
to specific indications. There can be no assurance that any of the Company's
product candidates will receive regulatory approvals for commercialization. See
"Risk Factors--Government Regulation; No Assurances of Regulatory Approval."
The FDA has implemented an accelerated review process for pharmaceutical
agents that treat serious or life-threatening diseases and conditions, subject
to payment of user fees. When appropriate, the Company intends to pursue
opportunities for accelerated review of its products. The Company cannot predict
the ultimate effect of this review process on the timing or likelihood of FDA
review of any of its products.
Even if regulatory approvals for the Company's products are obtained, the
Company, its products, and the facilities manufacturing the Company's products
are subject to continual review and periodic inspection. The FDA will require
post-marketing reporting to monitor the safety of the Company's products. Each
United States drug manufacturing establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with the FDA's Good Manufacturing Practices. To supply drug
products for use in the United States, foreign manufacturing establishments must
comply with the FDA's Good Manufacturing Practices and are subject to periodic
inspection by the FDA or by regulatory authorities in those countries under
reciprocal agreements with the FDA. In complying with Good Manufacturing
Practices, manufacturers must expend funds, time and effort in the area of
production and quality control to ensure full technical compliance. The Company
does not have any drug manufacturing capability and must rely on outside firms
for this capability. See "--Manufacturing." The FDA stringently applies
regulatory standards for manufacturing. Discovery of previously unknown problems
with respect to a product, manufacturer or facility may result in restrictions
on the product, manufacturer or facility, including warning letters, suspensions
of regulatory approvals, operating restrictions, delays in obtaining new product
approvals, withdrawal of the product from the market, product recalls, fines,
injunctions and criminal prosecution.
Before the Company's products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country
to country. No action can be taken to market any drug product in a country until
an appropriate application has been approved by the regulatory authorities in
that country. FDA approval does not assure approval by other regulatory
authorities. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
In some countries, the sale price of a drug product must also be approved. The
pricing review period often begins after market approval is granted. Even if a
foreign regulatory authority approves any of the Company's products, no
assurance can be given that it will approve satisfactory prices for the
products.
The Company's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although the Company believes that its procedures for handling and disposing of
those materials comply with state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. If
such an accident occurs, the Company could be held liable for resulting damages,
which could be material to the Company's financial condition and business. The
Company is also subject to numerous environmental, health and workplace safety
laws and regulations, including those governing laboratory procedures, exposure
to blood-borne pathogens, and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting the Company may be
adopted in the future. Any violation of, and the cost of compliance with, these
laws and regulations could materially and adversely affect the Company.
Under the Orphan Drug Act, the FDA may grant "orphan drug" status to
therapeutic agents intended to treat a "rare disease or condition," defined as a
disease or condition that affects less than 200,000 persons in the United
States. Orphan drug status grants the sponsor tax credits for the amounts
expended on clinical trials, provided that certain conditions are met, as well
as marketing exclusivity for four to seven years following approval of the
pertinent NDA. The Company received orphan drug status for TretinoinLF in 1993
and may request this status for more of its products as part of its overall
regulatory strategy. There is no assurance, however, that any of its other
products will receive orphan drug status or that the benefits of
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<PAGE> 42
protection currently afforded by orphan drug status will remain in effect.
Proposed legislation may affect the scope of the Orphan Drug Act or limit the
benefits available thereunder. In addition, any party may obtain orphan drug
status with respect to products for which patent protection has expired or is
otherwise unavailable. This could prevent other persons from commercializing
that product during the period for which exclusivity was granted to such party
(i.e., four to seven years).
COMPETITION
The Company believes that its products, because of their unique
pharmacologic profiles and novel mechanisms of action, will become useful new
treatments for cancers and life-threatening infectious diseases, either as
alternatives to or in combination with other pharmaceuticals. The Company is
engaged in pharmaceutical product development characterized by extensive
research efforts and rapid technological progress. Many established
biotechnology and pharmaceutical companies, universities and other research
institutions with resources significantly greater than the Company's may develop
products that directly compete with the Company's products. Those entities may
succeed in developing products, including liposomes and lipid-based products,
that are safer, more effective or less costly than the Company's products. Even
if the Company's products should prove to be more effective than those developed
by other companies, other companies may be more successful than the Company
because of greater financial resources, greater experience in conducting
preclinical and clinical trials and obtaining regulatory approval, stronger
sales and marketing efforts, earlier receipt of approval for competing products
and other factors. If the Company commences significant commercial sales of its
products, it or its collaborators will compete in areas in which the Company has
little or no experience such as manufacturing and marketing. There can be no
assurance that the Company's products, if commercialized, will be accepted and
prescribed by healthcare professionals.
Some of the Company's competitors are active in the development of liposome
and lipid-based research and product development to treat cancer and certain
fungal infections. Those competitors include Sequus Pharmaceuticals, Inc.,
NeXstar Pharmaceuticals, Inc., and The Liposome Company. Some of those
companies' products have regulatory approval in the United States and other
countries. Any marketing of these and other products that treat disease
indications targeted by the Company could adversely affect the market acceptance
of the Company's products as a result of the established market recognition and
physician familiarity with the competing product. The presence of directly
competitive products could also result in more intense price competition than
might otherwise exist, which could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that competition will be intense for all of its product candidates.
EMPLOYEES
As of March 31, 1996, the Company had 58 employees, 46 of whom were engaged
in research, development, clinical research and regulatory affairs and 12 of
whom were engaged in administration. The Company plans to significantly expand
its research, development and regulatory affairs staff in the future to address
the demand resulting from the preclinical and clinical development of the
Company's products. Of the Company's employees, 14 hold Ph.D. degrees. The
Company has not experienced any work stoppages and considers relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
FACILITIES
The Company occupies 27,000 square feet of laboratory and office space at
its facility in The Woodlands, Texas. The facilities are occupied subject to
leases which expire in 1997 (12,000 square feet) and 1999 (15,000 square feet).
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Martin P. Sutter................. 41 Chairman of the Board of Directors (Class I)
James M. Chubb, Ph.D. ........... 48 President and Director (Class III)
Gillian Ivers-Read............... 43 Vice President, Pharmaceutical Development
Paul A. Cossum, Ph.D. ........... 43 Vice President, Preclinical Research and Development
Terance A. Murnane............... 45 Controller and Secretary
Gabriel Lopez-Berestein, 47 Director (Class II) and Chief Scientific Advisor
M.D.(2)........................
Ronald J. Brenner(1)............. 62 Director (Class I)
John F. Chappell................. 59 Director (Class II)
Geoffrey F. Cox, Ph.D.(2)........ 52 Director (Class II)
George B. Mackaness, M.D.(1)..... 73 Director (Class III)
Gregory F. Zaic(1)............... 46 Director (Class III)
</TABLE>
------------------------------
(1) Member of the Compensation Committee of the Board of Directors
(2) Member of the Audit Committee of the Board of Directors
Martin P. Sutter, a co-founder of Aronex, has served as Chairman of the
Board of Directors of the Company since June 1986. Since July 1988, Mr. Sutter
has been the Managing General Partner of The Woodlands Venture Partners, L.P., a
venture capital firm based in The Woodlands, Texas and the General Partner of
The Woodlands Venture Fund, L.P., one of the Company's principal stockholders.
In addition, Mr. Sutter has been the General Partner of Woodlands/Essex Venture
Partners, L.P. since September 1994. From January 1985 to July 1988, he served
as President of The Woodlands Venture Capital Company. Mr. Sutter is the
chairman of Zonagen, Inc. and RGene Therapeutics, Inc. and a director of
LifeCell Corporation, all biotechnology companies based in The Woodlands, Texas.
James M. Chubb, Ph.D. has served as President and Director of the Company
since the consummation of the Mergers in September 1995. Dr. Chubb joined
Triplex as President and Chief Executive Officer in 1990. From 1978 to 1990, he
held a number of positions with increasing responsibility at Glaxo, Inc., a
major pharmaceutical company. At Glaxo, Dr. Chubb headed the anti-infective,
respiratory, and dermatological development groups and directed the
cardiovascular and gastrointestinal development groups. He held the position of
adjunct professor at the University of North Carolina College of Pharmacy from
1986 to 1990. Dr. Chubb is a director of RGene Therapeutics, Inc.
Gillian Ivers-Read joined the Company as Vice President of Regulatory
Affairs in April of 1994 and assumed the position of Vice President of
Pharmaceutical Development of the Company in September 1995. Prior to joining
the Company, she worked for Marion Merrell Dow Pharmaceuticals, Inc., where she
most recently concentrated on regulatory affairs in the anti-viral,
anti-infective, and oncology therapeutic areas. She has been in the
pharmaceutical industry for over 20 years, having worked for three major
companies during that time (Marion Merrell Dow, Wyeth and Rhone Poulenc). In
addition, Ms. Ivers-Read is experienced in international drug development,
having worked in the United Kingdom until her transfer to the United States in
1987. She has been responsible for obtaining INDs as well as NDAs
internationally.
Paul A. Cossum, Ph.D. joined Triplex as Vice President of Preclinical
Development in 1993 and assumed the position of Vice President of Preclinical
Research and Development of the Company in September 1995 upon the consummation
of the Mergers. From 1992 to 1993, he was the Director of Preclinical
Development at Isis Pharmaceuticals. While at Isis, he implemented preclinical
programs to support the development of INDs for two anti-viral oligonucleotide
compounds. Prior to his employment at Isis, Dr. Cossum worked in the Department
of Pharmacological Sciences at Genentech, Inc., where he filed several INDs and
obtained an
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NDA for certain endocrine, cardiovascular and neurologic therapeutic proteins.
He has published widely in the fields of metabolism and toxicology of
oligonucleotides, recombinant proteins, and conventional drugs.
Terance A. Murnane joined the Company in May 1990 as its Controller and was
appointed Secretary in January 1992. Mr. Murnane was a self-employed accountant
from February 1988 until April 1990. From October 1987 to February 1988, he
served as the accountant for Eads Company, a wholesale vendor of industrial
products based in Houston, Texas. Prior to that time, he spent ten years in the
Private Business/ Audit Department at KPMG Peat Marwick, an international
accounting firm, serving most recently as Senior Manager. Mr. Murnane is a
Certified Public Accountant.
Gabriel Lopez-Berestein, M.D., a co-founder of Aronex, has served as a
member of the Board of Directors and the Company's Chief Scientific Advisor
since January 1988. Dr. Lopez-Berestein is Professor of Medicine and Chief of
the Immunobiology and Drug Carriers Section at MD Anderson, with which he has
been affiliated since 1979. Dr. Lopez-Berestein is the author of over 125
publications in the areas of macrophage research and drug carrier technology.
Dr. Lopez-Berestein is also the recipient of a number of grants and awards,
including a Scholar Award of the Leukemia Society of America and various NIH
awards.
Ronald J. Brenner, Ph.D. has served as a member of the Board of Directors
since September 1995. Since 1988, Dr. Brenner has been a Vice President of
Hillman Medical Ventures, Inc., a venture capital firm, and a general partner of
several Hillman investment partnerships. From 1984 to 1988, Dr. Brenner was
President and Chief Executive Officer of Cytogen Corporation, a biotechnology
company. Prior to 1984, he was Vice President, Corporate External Research, at
Johnson & Johnson, a major pharmaceutical company, and also served as Chairman
of McNeil Pharmaceutical, Ortho Pharmaceutical Corp. and the Cilag Companies,
all subsidiaries of Johnson & Johnson. Dr. Brenner is a director of Cytogen
Corporation and several privately held healthcare and environmental companies.
John F. Chappell has served as a member of the Board of Directors since
September 1995. Mr. Chappell is President of Plexus Ventures, Inc., an
investment firm which he founded in 1990. Prior to founding Plexus, Mr. Chappell
was employed for 28 years by SmithKline Corporation and SmithKline Beecham plc.
From 1989 to 1990, he served as Chairman of SmithKline Beecham Pharmaceuticals
and as a director of SmithKline Beecham plc. He was President of SmithKline and
French Laboratories from 1988 to 1989 and was President of SmithKline and French
International from 1985 to 1988. Mr. Chappell has notified the Company that he
intends to resign from the Board of Directors effective at the Company's 1996
annual meeting of stockholders.
Geoffrey F. Cox, Ph.D. has served as a member of the Board of Directors
since January 1994. Dr. Cox joined Genzyme Corporation in 1984 and was appointed
Managing Director of Genzyme, Ltd. (U.K.) in 1986 and Senior Vice President of
worldwide manufacturing operations in May 1988. Dr. Cox also has full product
line responsibility for the pharmaceuticals and fine chemicals division of
Genzyme Corporation. Prior to joining Genzyme, Dr. Cox served as production
manager of British Fermentation Products, Ltd., a division of Gist-Brocades
N.V., from April 1979 to October 1981 and as plant manager from October 1981 to
June 1984.
George B. Mackaness, M.D. has served as a member of the Board of Directors
since May 1991. Dr. Mackaness was President of the Squibb Institute for Medical
Research from January 1976 until December 1987. He served as a member of the
Board of Directors of Squibb Corporation from December 1984 until December 1987.
Gregory F. Zaic has served as a member of the Board of Directors since
1995. Mr. Zaic has been an investor primarily focused on medical and life
science investment opportunities since 1983. He currently is a General Partner
with Prince Ventures and has served as acting president and director of many
private and public companies, including GenVec, Inc. and Strategic Medical
Information, Inc. Before his investment career, Mr. Zaic served in several
financial, technical, and operational capacities, including heading the Special
Products Division of Baxter, a manufacturer of custom medical devices for the
cardiopulmonary and intravenous solution administration markets.
Board Committees and Compensation. The Board of Directors has designated
an Audit Committee which reviews the scope and results of the audit and other
services performed by the Company's independent
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<PAGE> 45
accountants, and a Compensation Committee which establishes written objectives
for the Company's senior executive officers, sets the compensation of directors,
executive officers and other employees of the Company and is charged with the
administration of the Company's stock option plan.
The directors do not receive compensation for service on the Board of
Directors or any Committee. The directors are, however, reimbursed for expenses
incurred in connection with attending each Board and Committee meeting. Outside
directors are entitled to participate in the Company's 1993 Non-Employee
Director Stock Option Plan.
CERTAIN SIGNIFICANT EMPLOYEES
Set forth below are the names, ages as of December 31, 1995, positions and
a brief description of the business experience of certain other significant
employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Barbara K. Kennedy................. 43 Senior Director, Clinical Research Operations
Robert F. Rando, Ph.D.............. 38 Associate Director, Biology
Ganapathi R. Revankar, Ph.D........ 59 Vice President, Chemistry
Thomas L. Wallace, Ph.D. .......... 43 Director, Pharmacology
Charles D. Warner, Ph.D............ 51 Director, Pharmaceutical Chemistry
Joseph W. Wyse, Ph.D............... 35 Associate Director, Pharmaceutical Development
</TABLE>
Barbara K. Kennedy joined the Company in May 1994 as Senior Director,
Clinical Research Operations, with the responsibility of conducting clinical
trials of the Company's products in the United States and Europe. With 22 years
experience in the pharmaceutical industry, Ms. Kennedy's most recent prior
appointment was as Director of Administration and Planning, Worldwide, for R. W.
Johnson Pharmaceutical Research Institute (a subsidiary of Johnson & Johnson).
During her 16 year tenure with Johnson & Johnson, she held positions of
increasing responsibility in which she was responsible for clinical trials in
multiple therapeutic areas, including infectious disease, transplantation,
gastrointestinal and anti-inflammatory agents. Prior to joining Johnson &
Johnson, Ms. Kennedy was employed as a laboratory scientist with Carter-Wallace,
Inc.
Robert F. Rando, Ph.D. joined Triplex in September 1992 as a Senior
Research Scientist and was promoted to Assistant Director, Biology in November
1993. He assumed the position of Associate Director, Biology with the Company in
September 1995 upon the consummation of the Mergers. Dr. Rando worked as a
National Research Council fellow at the Centers for Disease Control, where he
established the CDC's first research laboratories dedicated to the study of
human papillomaviruses. Thereafter, he joined the staff of Pennsylvania Hospital
in the department of pathology and obstetrics/gynecology. Prior to joining
Triplex, Dr. Rando spent two years as a Senior Staff Fellow at the NIH.
Ganapathi R. Revankar, Ph.D. joined Triplex in March 1990 as Director,
Nucleic Acid Chemistry and was promoted to Vice President, Chemistry in November
1993. He assumed the position of Vice President, Chemistry with the Company in
September 1995 upon the consummation of the Mergers. He has over 20 years'
experience in teaching and creative research in the synthesis and chemical
modification of nitrogen, oxygen, sulfur and phosphorous heterocycles,
nucleosides and nucleotides. Dr. Revankar was with ICN Nucleic Acid Research
Institute from 1985 to 1990, most recently as Vice President and Director,
Molecular Research, where he directed the development of a large number of
broad-spectrum anti-viral agents. Prior to ICN, he was an Associate Research
Professor of Chemistry at Brigham Young University.
Thomas L. Wallace, Ph.D. joined Triplex in December 1993 as Associate
Director, Pharmacology. He assumed the position of Director, Pharmacology with
the Company in September 1995 upon the consummation of the Mergers. He also
currently holds the position of Adjunct Assistant Professor, Department of
Molecular Biophysics and Physiology, Baylor College of Medicine. Prior to
joining Triplex, Dr. Wallace spent seven years at Houston Biotechnology
Incorporated, where his most recent prior position was as Associate Director,
Neurobiology. Concurrently, Dr. Wallace held the position of instructor and,
most recently, Adjunct
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<PAGE> 46
Assistant Professor at the Center for Biotechnology, Baylor College of Medicine.
Dr. Wallace completed a postdoctoral fellowship in the Department of Molecular
Biology and Pharmacology at the Washington University School of Medicine. Dr.
Wallace has extensive experience in pharmacokinetic and toxicity studies as well
as cardiovascular research and whole animal models of disease.
Charles D. Warner, Ph.D. joined the Company in March 1992. His 25 years'
experience in the industry include teaching, research and pharmaceutical
development. Prior to Aronex, he was at Biopure Corporate, Shriner's Hospital
and M.I.T. Clinical Research Center in Boston.
Joseph W. Wyse, Ph.D. joined the Company in February 1994 as Group Leader,
Product Chemistry. He has over six years experience in the formulation,
development and manufacturing of lyophilized products. Prior to joining the
Company, he was Manager of Blood and Cell Products for LifeCell Corporation.
Before that he was a Group Leader at Cryopharm in California.
SCIENTIFIC ADVISORS
The Company has engaged a number of scientific advisors to provide research
and product development services. Such advisors provide services under written
agreements. In addition to Gabriel Lopez-Berestein, the principal clinicians and
research scientists are:
Erik De Clercq, M.D., Ph.D. is the P. De Somer Chair for Microbiology
Professor at Leuven University in Belgium. His research focus is in the area of
anti-virals and other chemotherapies. Additionally, he is the Chairman of the
Directory Board at Rega Institute at Leuven University. He serves as the
Editor-in-Chief for Antiviral Research and is on the editorial boards for
numerous publications including Antiviral Chemistry and Chemotherapy, Molecular
Pharmacology and International Journal of Oncology. Dr. De Clercq is the founder
and director for the International Society for Antiviral Research. He received
his Ph.D. and M.D. from Leuven University Medical School and is a certified
clinical pathologist. Dr. De Clercq assists the Company with its anti-viral
programs.
Michael E. Hogan, Ph.D. is Professor of Biotechnology and Cell Biology at
Baylor. Dr. Hogan is an expert in biophysics, nucleic acids chemistry and
molecular biology and is internationally recognized for his expertise in triple
helix oligonucleotide research. Dr. Hogan obtained a B.S. in Chemistry from
Dartmouth College and a Ph.D. in Molecular Biology from Yale. He completed a
Walter Winchell Postdoctoral Fellowship in Biophysics at Stanford University
before assuming a faculty position in Molecular Biology at Princeton University.
Dr. Hogan has been at Baylor since 1988. Dr. Hogan assists the Company in its
nucleic acid chemistry research programs.
Gary Felsenfeld, Ph.D. is the Chief Scientist in the Physical Chemistry
Laboratory of Molecular Biology, National Institutes of Health in Bethesda,
Maryland. His current research interest includes the study of the regulation of
gene expression. Dr. Felsenfeld is a member of the National Academy of Sciences.
He obtained an A.B. degree in Biochemical Science from Harvard College and a
Ph.D. in Physical Chemistry from the California Institute of Technology. Dr.
Felsenfeld assists the Company in its nucleic acid chemistry research programs.
C. Richter King, Ph.D. is an Associate Professor in the Department of
Biochemistry, Lombardi Cancer Research Center at Georgetown University Medical
School in Washington, D.C. Dr. King's research interests are in the molecular
genetics of carcinogenesis, gene regulation in cancer and normal development,
and mechanisms of differentiation and malignant transformation. He discovered an
important somatic genetic abnormality in human cancer, gene amplification of
erbB-2 or HER-2/neu in breast cancer. Dr. King received his B.S. in Biochemistry
and Chemistry from The University of St. Andrews in Scotland and his Ph.D. from
The Johns Hopkins University. Dr. King assists the Company with its targeted
ligand therapeutics program.
Roman Perez-Soler, M.D. is an Associate Professor of Medicine in the
Department of Thoracic/Head and Neck Medical Oncology at M.D. Anderson Cancer
Center. Dr. Perez-Soler's main area of laboratory and clinical research is the
development of tumor-targeted anti-cancer therapy. Dr. Perez-Soler is the
recipient of three NIH grants on the development of lipophilic and non
cross-resistant anthracycline and platinum compounds. Dr. Perez-Soler has
written more than 75 laboratory and clinical publications and is Board
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<PAGE> 47
Certified in Internal Medicine and Medical Oncology. Dr. Perez-Soler received
his Medical and Doctorate degrees from the Universidad Autonoma in Barcelona,
Spain and was a Fulbright Scholar from 1983 to 1985. Dr. Perez-Soler assists the
Company with its Annamycin and platinum compounds.
Jack S. Remington, M.D. is Chairman of the Department of Immunology and
Infectious Diseases, Research Institute, Palo Alto Medical Foundation and
Professor, Department of Medicine, Division of Infectious Diseases, Stanford
University School of Medicine, and Chief Consultant in Infectious Diseases, Palo
Alto Medical Clinic. An expert in the area of infectious diseases, Dr. Remington
is a member of the Scientific Advisory Committee for the American Foundation for
AIDS Research, past President and currently an officer of the International
Immunocompromised Host Society and past President of the Infectious Disease
Society of America, among other professional services activities. The author or
co-author of over 500 papers, Dr. Remington earned his M.D. from the University
of Illinois and completed his residency at the University of California Medical
Center. He was a research fellow in the Department of Medicine, Harvard Medical
School and Thorndike Memorial Laboratory, Boston City Hospital and a research
associate at the National Institute of Allergy and Infectious Diseases, NIH. Dr.
Remington assists the Company in the development of Nyotran(TM).
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Dr. Chubb, Ms.
Ivers-Read, Dr. Cossum and Ms. Kennedy. The employment agreements for Drs. Chubb
and Cossum provide for a primary term ending in September 1996 and November
1996, respectively, with automatic annual renewal unless terminated by either
party. The employment agreements for Ms. Kennedy and Ms. Ivers-Read provide for
primary terms of three years ending in April and May 1997, respectively, with
automatic annual renewals unless terminated by either party. All of such
agreements provide for payment equal to their annual base salary and employment
benefits for one year following termination in the event of termination other
than for cause.
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<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of the Company's equity securities at March 31, 1996, and as adjusted
to reflect the sale of the shares offered hereby, by (i) each person who is
known by the Company to own beneficially more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
Company's chief executive officer and each of the other executive officers of
the Company with annual compensation in excess of $100,000 and (iv) all
directors and officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OF COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------
OF COMMON STOCK PRIOR TO AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
<S> <C> <C> <C>
Amerindo Investment Advisors, Inc.(1)..................... 2,015,000 9.3% 7.3%
One Embarcadero Center, Suite 2300
San Francisco, California 94111
Hillman Medical Venture Partnerships(2)................... 1,986,540 9.2% 7.2%
824 Market Street, Suite 900
Wilmington, Delaware 19801
HealthCare Venture Partnerships(3)........................ 1,917,103 8.8% 6.9%
Twin Towers at Metro Bank
379 Thornall Street
Edison, New Jersey 08837
The Allstate Corporation (4).............................. 1,533,928 7.1% 5.5%
2775 Sanders Road
Northbrook, Illinois 60062
Martin P. Sutter(5)....................................... 932,704 4.3% 3.4%
James M. Chubb(6)......................................... 232,381 1.1% *
Gabriel Lopez-Berestein(7)(11)............................ 222,587 1.0% *
George B. Mackaness(11)................................... 80,000 * *
Ronald J. Brenner(8)(11).................................. 2,028,410 9.3% 7.3%
Geoffrey F. Cox(9)(11).................................... 873,611 4.0% 3.2%
Gregory F. Zaic(10)(11)................................... 701,831 3.2% 2.5%
John F. Chappell(11)...................................... 36,809 * *
Paul A. Cossum(12)........................................ 28,140 * *
Gillian Ivers-Read(12).................................... 23,750 * *
All directors and officers as a group (11
persons)(5)-(12)........................................ 5,174,195 23.8% 18.7%
</TABLE>
------------------------------
* Less than one percent.
(1) Consists of 1,917,500 shares owned by Amerindo Investment Advisors, Inc.
("Amerindo"), 77,500 shares owned by Amerindo Advisors (U.K.) Limited
("Amerindo UK.), and 20,000 shares owned by Amerindo Investment Advisors
Inc. Profit Sharing Trust ("Plan"). The sole shareholders and directors of
Amerindo and Amerindo UK are Alberto W. Vilar and Gary A. Tanaka, each of
whom may be deemed to be the beneficial owner of the 1,995,000 shares owned
by Amerindo and Amerindo UK. Mr. Vilar is sole trustee of the Plan and may
be deemed to be the beneficial owner of the 20,000 shares owned by the
Plan. Based on Schedule 13G, Amendment No. 1, dated February 15, 1996, of
Amerindo, Amerindo UK, the Plan, Mr. Vilar and Mr. Tanaka.
(2) Consists of 236,180 shares owned by Hillman Medical Ventures 1989 L.P.,
738,114 owned by Hillman Medical Ventures 1990 L.P. and 1,012,246 shares
owned by Hillman Medical Ventures 1991 L.P. (collectively, the "Hillman
Medical Venture Partnerships"). The general partners of the Hillman Medical
Venture Partnerships are Cashon Biomedical Associates, L.P. and
Hillman/Dover Limited Partnership. The general partner of Hillman/Dover
Limited Partnership is a wholly-owned subsidiary of The Hillman Company, a
firm engaged in diversified investments and operations. The Hillman
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<PAGE> 49
Company is controlled by Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust, which Trustees may be
deemed the beneficial owners of the 1,986,540 shares owned by the Hillman
Medical Venture Partnerships. Dr. Brenner, a director of the Company, is
the managing partner of Cashon Biomedical Associates, L.P., of which the
other general partners are Hal S. Broderson, M.D. and Charles G. Hadley.
Dr. Brenner, Dr. Broderson and Mr. Hadley may be deemed to beneficially own
such shares.
(3) Consists of 489,246 shares owned by HealthCare Ventures I, L.P., 382,356
shares owned by HealthCare Ventures II, L.P., 808,199 shares owned by
HealthCare Ventures III, L.P. and 237,302 shares owned by HealthCare
Ventures IV, L.P. (collectively, the "HealthCare Venture Partnerships").
The general partners of such partnerships are HealthCare Partners I, L.P.,
HealthCare Partners II, L.P., HealthCare Partners III, L.P. and HealthCare
Partners IV, L.P., respectively. James H. Cavanaugh, Harold R. Werner, John
W. Littlechild and William W. Crouse are general partners of each of the
partnerships that are the respective general partners of the HealthCare
Venture Partnerships and may be deemed to beneficially own such shares.
(4) Consists of 1,533,928 shares owned by Allstate Insurance Company, a wholly
owned subsidiary of The Allstate Corporation, based on Schedule 13G,
Amendment No. 3, dated February 9, 1996, of The Allstate Corporation.
(5) Includes 893,704 shares owned by The Woodlands Venture Fund, L.P., and
1,000 shares owned by The Woodlands Venture Partners, L.P. Mr. Sutter is a
general partner of The Woodlands Venture Partners, L.P., which is the
general partner of The Woodlands Venture Fund, L.P. Mr. Sutter disclaims
beneficial ownership of the 893,704 shares owned by The Woodlands Venture
Fund, L.P. Also includes 37,000 shares which may be acquired on the
exercise of the currently vested portion of stock options.
(6) Includes 91,031 shares that may be acquired on the exercise of stock
options.
(7) Includes 91,364 shares that may be acquired on the exercise of stock
options. Includes 55,000 shares that may be acquired on the exercise of
stock options granted subject to stockholder approval prior to issuance.
The Company intends to seek such approval at its 1996 annual meeting of
stockholders. Excludes 39,394 shares held by a relative of Dr.
Lopez-Berestein, but as to which he disclaims beneficial ownership.
(8) Includes 1,986,540 shares owned by the Hillman Medical Venture
Partnerships, of which Dr. Brenner is the managing partner of one of the
general partners.
(9) Includes 846,611 shares owned by Genzyme Corporation. Dr. Cox is Senior
Vice President of Genzyme. Dr. Cox disclaims beneficial ownership of the
shares held by Genzyme.
(10) Includes 674,831 shares owned by Prince Venture Partners III, L.P. Mr. Zaic
is a general partner of Prince Ventures, L.P., which is a general partner
of Prince Venture Partners III, L.P. Mr. Zaic disclaims beneficial
ownership of the shares held by Prince Venture Partners III, L.P.
(11) Includes 25,000 shares that may be acquired on the exercise of stock
options granted subject to stockholder approval prior to issuance. The
Company intends to seek such approval at its 1996 annual meeting of
stockholders.
(12) Represents shares that may be acquired on the exercise of stock options.
The holders of an aggregate of 9,669,616 shares of Common Stock are parties
to the Stockholders Agreement. Those stockholders include the Hillman Medical
Venture Partnerships, the HealthCare Venture Partnership, The Woodlands Venture
Fund, L.P., The Woodlands Venture Partners, L.P., Genzyme Corporation, Prince
Venture Partners III, L.P. and Gabriel Lopez-Berestein. See "Description of
Capital Stock--Stockholders Agreement."
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation provides for authorized capital
stock of 85,000,000 shares, consisting of 75,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the Certificate of
Incorporation, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Company is soliciting
stockholder approval of a one-for-two reverse split of the Common Stock at a
special meeting of stockholders to be held on May 24, 1996. If the reverse split
becomes effective, holders of Common Stock will receive one share of Common
Stock for each two shares of Common Stock outstanding on the effective date of
the reverse split. In the event that the reverse split would entitle the holder
to receive a fractional share of post-split Common Stock, the Company will pay
to the stockholder, in lieu of the issuance of a fractional share, a cash amount
in United States dollars which will be equal to the same fraction multiplied by
two times the average closing price of the Common Stock on The Nasdaq National
Market for the five trading days immediately preceding the effective date of the
reverse split.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters on which stockholders are entitled or
permitted to vote. Holders of Common Stock are not entitled to cumulative voting
rights. Therefore, holders of a majority of the shares voting for the election
of directors can elect all the directors. Subject to the terms of any
outstanding series of Preferred Stock, the holders of Common Stock are entitled
to dividends in such amounts and at such times as may be declared by the
Company's Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon liquidation or dissolution, holders of Common Stock are
entitled to share ratably in all net assets available for distribution to
stockholders after payment of any liquidation preferences to holders of
Preferred Stock. Holders of Common Stock have no redemption, conversion or
preemptive rights.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue up
to the authorized number of shares of Preferred Stock in one or more series, to
designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
voting rights, redemption and conversion rights and liquidation preferences of
such series, without further action by the stockholders. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of the Common Stock. The Company has no present plan
to issue any shares of Preferred Stock.
WARRANTS
As of May 15, 1996, Aronex had outstanding warrants issued in connection
with financing transactions to purchase an aggregate of 121,247 shares of Common
Stock. In addition, as of May 15, 1996, Aronex had outstanding warrants issued
in connection with the September 1995 merger with Oncologix (the "Oncologix
Warrants") to purchase an aggregate of approximately 6,517,509 shares of Common
Stock. The Oncologix Warrants are not transferable except under certain limited
circumstances. Each Oncologix Warrant entitles the holder thereof to purchase a
total of one share of Aronex Common Stock and is subject to a Series A Exercise,
a Series B Exercise and a Series C Exercise. Subject to certain exceptions,
holders of Oncologix Warrants were required to exercise the Series A Exercise,
in whole but not in part, prior to December 28, 1995 (January 2, 1996 after
allowance of a five day grace period).
The holders who exercised the Series A Exercise have the right, prior to
June 11, 1998, to exercise the Series B Exercise, in whole but not in part, at
an effective exercise price of $4.00 per share. In the event the Series B
Exercise has been exercised by a holder, then prior to December 11, 1999, the
Series C Exercise may be exercised, in whole but not in part, at an effective
exercise price of $6.00 per share of Common Stock. The holders of Oncologix
Warrants outstanding as of May 15, 1996 have the right to purchase an aggregate
of
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<PAGE> 51
approximately 2,806,992 shares of Common Stock upon the Series B Exercise, and
an aggregate of approximately 3,710,517 shares of Common Stock upon the Series C
Exercise (assuming the full exercise of the Series B Exercise by the holders of
outstanding Oncologix Warrants).
Aronex has the right, at its option, to convert a Series B or Series C
Exercise into a "cashless" exercise based on the value of a Series B or Series C
Exercise (equal to the fair market value per share of the Common Stock less the
exercise price per share) divided by the market price of the Common Stock at the
time of exercise.
CONTINGENT STOCK RIGHTS
In connection with the Triplex merger, the Company issued contingent rights
(the "Triplex Contingent Stock Rights") to the former holders of Triplex stock
and options entitling them to receive additional shares of Common Stock upon the
occurrence of certain events. The Triplex Contingent Stock Rights entitle the
former Triplex stock and option holders to receive shares of Common Stock with
an aggregate fair market value at the time of issuance of $5.0 million (subject
to certain adjustments) if the Company either (i) enters into an agreement on or
before September 11, 1997 with respect to the licensing of Zintevir(TM) whereby
the Company receives at least $5.0 million in cash or an unconditional binding
commitment for at least $5.0 million or (ii) obtains data from clinical trials
of Zintevir(TM) on or before September 11, 2000 that the Company's Board of
Directors determines to be sufficient to file an NDA. In addition, the Triplex
Contingent Stock Rights entitle the former Triplex stock and option holders to
receive shares of Common Stock with an aggregate fair market value at the time
of issuance of $3.0 million if the Company does not receive a minimum of $5.0
million in equity milestone payments from Genzyme on or before September 11,
1997 with respect to the development of TretinoinLF. In no event, however, shall
more than 7,000,194 shares of Common Stock (subject to adjustments in the event
of stock splits, stock dividends or reclassification of the Common Stock) be
issued pursuant to the Triplex Contingent Stock Rights.
In connection with the Oncologix merger, the Company issued contingent
rights (the "Oncologix Contingent Stock Rights") to certain Oncologix investors
entitling them to receive additional shares of Common Stock upon the occurrence
of certain events. The Oncologix Contingent Stock Rights entitle such former
Oncologix investors to receive shares of Common Stock with a fair market value
at the time of issuance of approximately $2.1 million if the Company receives at
least $5.0 million in cash or an unconditional binding commitment for at least
$5.0 million on or before September 11, 1997 relating to certain products,
including AR102 and AR209. In no event, however, shall more than 4,270,000
shares of Common Stock (subject to certain adjustments) be issued pursuant to
the Oncologix Contingent Stock Rights.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate of Incorporation and Bylaws are
intended to enhance the likelihood of continuity and stability in the Board of
Directors of the Company and in its policies, but might have the effect of
delaying or preventing a change in control of the Company and may make more
difficult the removal of incumbent management even if such transactions could be
beneficial to the interests of stockholders. Set forth below is a summary
description of such provisions:
Authority to Issue Preferred Stock. The Company's Certificate of
Incorporation authorizes the Board of Directors, without stockholder approval,
to establish and to issue shares of one or more series of preferred stock, each
such series having such voting rights, dividend rates, liquidation, redemption,
conversion and other rights as may be fixed by the Board.
Stockholder Actions and Meetings. The Company's Bylaws direct that special
meetings of the stockholders may only be called by a majority of the members of
the Board of Directors, the Chairman of the Board of Directors, the President of
the Company or the holders of not less than 30 percent of the total voting power
of all shares of the Company's capital stock entitled to vote in the election of
directors. The Bylaws further provide that stockholders' nominations to the
Board of Directors and other stockholder business proposed to be transacted at
stockholder meetings must be timely received by the Company in a proper written
form which
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<PAGE> 52
meets the prescribed content requirements. The Certificate of Incorporation and
Bylaws of the Company prohibit stockholders from taking any action by written
consent.
Classification of Directors. The Company's Certificate of Incorporation and
Bylaws provide that the directors of the Company shall be divided into three
classes as equal in number as possible serving three-year terms.
Limitation of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law ("Section 102(b)") authorizes corporations to limit or eliminate
the personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b) does not change directors' duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. The Company's Certificate of Incorporation limits the liability of
directors to the Company or its stockholders (in their capacity as directors but
not in their capacity as officers) to the fullest extent permitted by Section
102(b). Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability: (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Company's
Certificate of Incorporation and Bylaws provide for mandatory indemnification of
directors, and permit indemnification of officers, employees and agents of the
Company against all expense, liability and loss to which they may become subject
or which they may incur as a result of being or having been a director, officer,
employee or agent of the Company. In addition, the Company must advance or
reimburse directors, and may advance or reimburse officers, employees and agents
for expenses incurred by them in connection with indemnifiable claims.
Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15 percent of the
outstanding voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85 percent of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder, or (ii) the Business Combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Under Section 203, these restrictions will
not apply to certain Business Combinations proposed by an Interested Stockholder
following the earlier of the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who was not an
Interested Stockholder during the previous three years or who became an
Interested Stockholder with the approval of the corporation's board of
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
Interested Stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder, or transactions in which the Interested Stockholder receives
certain other benefits.
The provisions of Section 203, together with the ability of the Company's
Board of Directors to issue Preferred Stock without further stockholder action,
could delay or frustrate the removal of incumbent directors or a change in
control of the Company. The provisions also could discourage, impede or prevent
a merger, tender offer or proxy contest, even if such event would be favorable
to the interests of stockholders. The Company's stockholders, by adopting an
amendment to the Company's Certificate of Incorporation or
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<PAGE> 53
Bylaws, may elect not to be governed by Section 203 effective 12 months after
such adoption. Neither the Company's Certificate of Incorporation nor Bylaws
currently exclude the Company from the restrictions imposed by Section 203.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
STOCKHOLDERS AGREEMENT
The Company and certain of its stockholders who hold an aggregate of
approximately 9,669,616 shares of Common Stock are parties to a Stockholders
Agreement which provides that the Board of Directors of Aronex shall consist of
nine members, divided into three classes designated as Class I, Class II and
Class III. The Stockholders Agreement provides that of the nine directors, three
shall be designated by certain former Triplex stockholders, three shall be
designated by certain former Argus stockholders, one shall be designated by
Genzyme, one shall be designated by certain former Oncologix stockholders, and
one shall be the president of the Company elected by the Board of Directors.
Such agreement further provides that the three directors designated by the
former Triplex stockholders shall be equally apportioned among the three
director classes so that one of such directors shall be included in each class.
Any vacancy occurring on the board by reason of death, disability or retirement,
resignation, removal or otherwise shall be filled by a new director designated
by the stockholders who are entitled to designate the director who is no longer
on the board. Of the Company's current directors, Ronald J. Brenner, John F.
Chappell and Gregory F. Zaic are designees of the former Triplex stockholders,
Gabriel Lopez-Berestein, George B. Mackaness and Martin P. Sutter are designees
of the former Argus stockholders and Geoffrey F. Cox is the designee of Genzyme;
and James M. Chubb serves as a member of the board as the Company's President.
The Board of Directors currently has one vacancy, which the former Oncologix
stockholders are entitled to designate. Each stockholder who is a party of the
Stockholders Agreement has agreed to vote all of his shares of Common Stock in
favor of the election as a director of the individuals designated for election
in accordance with the Stockholders Agreement. The Stockholders Agreement shall
continue in effect until the later of (i) the completion of the second annual
meeting of stockholders of the Company after September 11, 1995 and (ii)
September 11, 1997. See "Risk Factors -- Control by Existing Stockholders."
REGISTRATION RIGHTS
The Company entered into registration rights agreements dated September 1,
1986 with Dr. Jim Klostergaard and Dr. Gabriel Lopez-Berestein. Pursuant to such
Agreements, Drs. Klostergaard and Lopez-Berestein have unlimited "piggyback"
registration rights with respect to the shares of Common Stock owned by them.
These rights, which are exercisable in connection with this offering, have been
waived by Drs. Klostergaard and Lopez-Berestein in connection with this
offering. These registration rights are subject to certain conditions and
limitations, including the right of the underwriters to restrict the number of
shares offered in a registration.
Pursuant to a registration rights agreement dated August 2, 1989, holders
of approximately 4,895,000 shares of Common Stock and of warrants to purchase
121,247 shares of Common Stock have the right to demand up to three
registrations of the Registrable Securities (as defined in the agreement) under
the Securities Act and unlimited piggyback registration rights. These demand
registration rights are subject to certain conditions and limitations, including
the right of the underwriters to limit the number of shares offered in such
registration and to require a lock-up of shares not included in such
registration and the right of the Company to refuse a registration under certain
conditions, such as the six-month period immediately following effectiveness of
a registration statement and the ninety-day period preceding an expected filing
of a registration statement. If the Company proposes an offering of Registrable
Securities, either for its own account or for other stockholders exercising such
registration rights, the other holders of these rights are entitled to notice of
the contemplated registration and an opportunity to include their securities in
such registration. The Company must use its best efforts to effect such
registration, with certain limitations. Furthermore, the Company is required to
pay the associated registration expenses, excluding the underwriting discounts
and sales commis-
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<PAGE> 54
sions, for the holders exercising such registration rights. These registration
rights have been waived in connection with this offering.
In addition, Genzyme has one demand registration right, which requires
Aronex to register all shares of Common Stock that Genzyme currently holds or
may acquire in the future. Genzyme has agreed not to sell its shares of Common
Stock prior to March 11, 1997, subject to certain exceptions. See "Shares
Eligible for Future Sale."
In connection with the Triplex merger, the Company granted the former
stockholders of Triplex unlimited piggyback registration rights which provide
that, if Aronex proposes an offering of Common Stock, either for its own account
or for other stockholders exercising registration rights, the holders of the
rights are entitled to notice of the contemplated registration and an
opportunity to include their Common Stock in such registration, subject to
certain limitations. These registration rights have been waived in connection
with this offering by substantially all of the holders of such rights. Such
stockholders have agreed not to sell their shares of Common Stock prior to March
11, 1997, subject to certain exceptions. See "Shares Eligible for Future Sale."
In connection with the Company's settlement of a lawsuit with the
HealthCare Ventures Partnerships, the Company agreed to register the resale of
the 1,063,103 shares issued to the HealthCare Ventures Partnerships in exchange
for Oncologix Warrants in such settlement. The terms of such agreement require
the registration statement covering the resale of such Common Stock to be
effective no later than March 11, 1997. See "Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 27,955,699 shares of Common
Stock outstanding, 25,995,985 of which will be eligible for public sale without
restriction under the Securities Act (except for shares held by affiliates of
the Company, and certain former affiliates of Triplex and Oncologix whose shares
may be sold subject to the volume limitations and certain other provisions of
Rule 144 under the Securities Act). The remaining 1,959,714 shares of Common
Stock are restricted securities that were issued in reliance on exemptions from
the registration requirements of the Securities Act, and may not be resold
unless such resale is registered under the Securities Act or is made under Rule
144 or another exemption from the registration requirements of the Securities
Act.
Certain Aronex stockholders holding approximately 3,176,321 shares of
Common Stock (the "locked-up former Argus stockholders"), and certain of the
former Triplex stockholders who acquired 6,880,915 shares of Common Stock in the
Company's merger with Triplex (the "locked-up former Triplex stockholders"),
have executed lock-up agreements which provide that until March 11, 1997, such
stockholders will not, subject to certain limited exceptions and the exception
discussed below, offer, sell, contract to sell, grant an option to purchase or
otherwise dispose of any of their shares of Common Stock held prior to or
acquired in the merger with Triplex without the written consent of Aronex. The
lock-up agreements provide that, in the event that certain stockholders of
Aronex who held in excess of 5% of the outstanding Common Stock prior to the
merger with Triplex and who did not sign a substantially similar lock-up
agreement as a result of the merger, sell any shares of Common Stock held by
them prior to March 11, 1997 (each a "Selling Stockholder"), the locked-up
former Argus stockholders may sell shares of Common Stock otherwise subject to
the lock-up agreements in an aggregate amount equal to the number of shares sold
by the Selling Stockholder, and the locked-up former Triplex stockholders may
sell shares of Common Stock otherwise subject to the lock-up agreements in the
same amount. One such Aronex stockholder, which owns 2,015,000 shares of Common
Stock, has not signed a lock-up agreement with the Company. Another such Aronex
stockholder, which owns 1,533,928 shares of Common Stock, has executed a 180-day
lock-up agreement with the Company and the Representatives described below. The
Company has agreed not to waive or amend these lock-up agreements for a period
of 180 days after the date of this Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation.
54
<PAGE> 55
Certain Aronex stockholders holding an aggregate of 1,917,103 shares of
Common Stock have executed a lock-up agreement with provides that until March
11, 1997, such stockholders will not offer, sell, contract to sell, grant an
option to purchase or otherwise dispose of any of their shares of Common Stock
without the written consent of Aronex, subject to certain limited exceptions.
The Company has agreed not to waive or amend this lock-up agreement for a period
of 180 days after the date of this Prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation.
The Company's directors, executive officers and certain principal
stockholders holding in the aggregate 8,016,362 shares of Common Stock
(including 6,354,943 shares that are subject to a lock-up agreement that expires
March 11, 1997) have agreed that they will not, with certain limited exceptions,
directly or indirectly offer to sell, sell or otherwise dispose of any shares of
Common Stock of the Company owned by them without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, for a period of 180 days
after the date of this Prospectus. In addition, the Company has agreed that for
a period of 180 days after the date of this Prospectus it will not, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
directly or indirectly offer to sell, issue, distribute or otherwise dispose of
any equity securities or any options, rights or warrants with respect to any
equity securities, except for (i) shares of Common Stock offered hereby, (ii)
shares of Common Stock issued pursuant to the exercise of outstanding options
and warrants disclosed in this Prospectus, (iii) options granted after the date
of this Prospectus under the Company's stock option plans, and (iv) shares of
Common Stock issued in connection with acquisitions of the assets or securities
of other businesses completed before the date of this Prospectus.
The holders of approximately 5,137,672 shares of Common Stock
(approximately 18.4% of the Common Stock to be outstanding after this offering)
have rights to demand the registration of such shares under the Securities Act.
In addition, the Company has agreed to effect the registration of the resale of
an additional 1,063,103 shares of Common Stock under a registration statement to
be effective no later than March 11, 1997. The exercise of registration rights
may adversely affect the market price of the Common Stock or, in the event the
Company is required to include the shares of holders exercising registration
rights in registrations initiated by the Company, may affect the Company's
ability to raise funds in the public market in the future. See "Description of
Capital Stock -- Registration Rights."
55
<PAGE> 56
UNDERWRITING
Subject to certain terms and conditions contained in the Underwriting
Agreement, the syndicate of underwriters named below (the "Underwriters"), for
whom Donaldson, Lufkin & Jenrette Securities Corporation and Furman Selz LLC are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company an aggregate of 6,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase is
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............................... 2,118,750
Furman Selz LLC................................................................... 2,118,750
Bear, Stearns & Co. Inc. ......................................................... 75,000
Alex. Brown & Sons Incorporated................................................... 75,000
Cowen & Company................................................................... 75,000
Dillon, Read & Co. Inc. .......................................................... 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................................ 75,000
Montgomery Securities............................................................. 75,000
Morgan Stanley & Co. Incorporated................................................. 75,000
Oppenheimer & Co., Inc. .......................................................... 75,000
PaineWebber Incorporated.......................................................... 75,000
Robertson, Stephens & Company LLC ................................................ 75,000
Salomon Brothers Inc ............................................................. 75,000
Smith Barney Inc. ................................................................ 75,000
Southcoast Capital Corporation.................................................... 75,000
Equitable Securities Corporation.................................................. 37,500
EVEREN Securities, Inc. .......................................................... 37,500
First of Michigan Corporation..................................................... 37,500
First Southwest Company........................................................... 37,500
Genesis Merchant Group Securities................................................. 37,500
Janney Montgomery Scott Inc. ..................................................... 37,500
Legg Mason Wood Walker, Incorporated.............................................. 37,500
Nutmeg Securities Ltd. ........................................................... 37,500
Pennsylvania Merchant Group Ltd. ................................................. 37,500
Principal Financial Securities, Inc. ............................................. 37,500
Punk, Ziegel & Knoell............................................................. 37,500
Ragen MacKenzie Incorporated...................................................... 37,500
Rauscher Pierce Refsnes, Inc. .................................................... 37,500
Raymond James & Associates, Inc. ................................................. 37,500
Rodman & Renshaw, Inc. ........................................................... 37,500
Sanders Morris Mundy Inc. ........................................................ 37,500
Sands Brothers & Co., Ltd. ....................................................... 37,500
Southwest Securities, Inc. ....................................................... 37,500
Sutro & Co. Incorporated.......................................................... 37,500
Tucker Anthony Incorporated....................................................... 37,500
Vector Securities International, Inc. ............................................ 37,500
--------
Total................................................................... 6,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to the approval of certain legal matters by counsel and to certain other
conditions. If any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares of Common
Stock (other than the shares of Common Stock covered by the over-allotment
option described below) must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$0.18
56
<PAGE> 57
per share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $0.10 per share on sales to any other Underwriter and certain
other dealers.
The Company has granted to the Underwriters an option to purchase up to
900,000 additional shares of Common Stock at the public offering price set forth
on the cover page hereof less underwriting discounts and commissions solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the Underwriters exercise
such option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
In accordance with applicable rules of the NASD, no NASD member
participating in the distribution is permitted to confirm sales to accounts over
which it exercises discretionary authority without prior written consent, and,
accordingly, each Underwriter intends to abide by such rules.
In connection with this offering, certain Underwriters (and selling group
members) may engage in passive market making transactions in the Common Stock on
The Nasdaq National Market in accordance with Rule 10b-6A under the Securities
Exchange Act of 1934 (the "Exchange Act"). Rule 10b-6A permits, upon the
satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A generally prohibits underwriters and selling
group members engaged in passive market making from entering a bid or effecting
a purchase at a price that exceeds the highest bid for those securities
displayed on Nasdaq by a market maker that is not participating in the
distribution. Under Rule 10b-6A, each Underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
registration statement under the Securities Act pertaining to the security to be
distributed.
The Company's directors, executive officers and certain principal
stockholders have agreed that they will not, with certain limited exceptions,
directly or indirectly offer to sell, sell or otherwise dispose of any shares of
Common Stock of the Company owned by them without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, for a period of 180 days
after the date of this Prospectus. In addition, the Company has agreed that for
a period of 180 days after the date of this Prospectus it will not, without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation,
directly or indirectly offer to sell, issue, distribute or otherwise dispose of
any equity securities or any options, rights or warrants with respect to any
equity securities, except for (i) shares of Common Stock offered hereby, (ii)
shares of Common Stock issued pursuant to the exercise of outstanding options
and warrants disclosed in this Prospectus, (iii) options granted after the date
of this Prospectus under the Company's stock option plans, and (iv) shares of
Common Stock issued in connection with acquisitions of the assets or securities
of other businesses completed before the date of this Prospectus. The Company
has also agreed not to waive or amend any lock-up agreements to which it is a
party for a period of 180 days after the date of this Prospectus without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Furman Selz LLC provided investment banking and financial advisory services
to the Company in connection with the Mergers, for which it received customary
compensation.
LEGAL MATTERS
The validity of the shares to be offered hereby will be passed upon for the
Company by Andrews & Kurth L.L.P., Houston, Texas. Certain matters relating to
the offering will be passed upon for the Underwriters by Vinson & Elkins L.L.P.,
Dallas, Texas.
57
<PAGE> 58
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, it files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission") in
Washington, D.C. Such reports, proxy statements and other information may be
inspected, without charge, at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and on request, at the Commission's regional offices at 75 Park
Place, 14th Floor, New York, New York 10007 and the Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Company has filed with the Commission a Registration Statement on Form
S-3 (including any amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock, reference is made to the Registration
Statement and the exhibits and schedules thereto. Statements made in this
Prospectus regarding the contents of any contract or document filed as an
exhibit to the Registration Statement are not necessarily complete and, in each
instance, reference is hereby made to the copy of such contract or document so
filed. Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission by the
Company, are incorporated herein by reference and made a part hereof:
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as amended; and
(ii) Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996; and
(iii) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed April 23, 1992, including any
amendments and reports filed for the purpose of updating such description.
Any statements contained in a document incorporated by reference herein
shall be deemed modified, replaced or superseded for all purposes of this
Prospectus to the extent that a statement contained herein modifies, replaces or
supersedes such statement. Any such statement so modified, replaced or
superseded shall not be deemed, except as so modified, replaced or superseded,
to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated by reference in this Prospectus
(other than exhibits and schedules thereto, unless such exhibits or schedules
are specifically incorporated by reference into the information that this
Prospectus incorporates). Written or telephonic requests for copies should be
directed to the Company's principal office: Aronex Pharmaceuticals, Inc., 3400
Research Forest Drive, The Woodlands, Texas, 77381, Attention: Investor
Relations, telephone: (713) 367-1666.
58
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995....................................... F-3
Statements of Operations for the Years ended December 31, 1993, 1994 and 1995, and for
the Period from Inception (June 13, 1986) through December 31, 1995................. F-4
Statements of Stockholders' Equity for the Period from Inception (June 13, 1986)
through December 31, 1995........................................................... F-5
Statements of Cash Flows for the Years ended December 31, 1993, 1994 and 1995, and for
the Period from Inception (June 13, 1986) through December 31, 1995................. F-7
Notes to Financial Statements......................................................... F-8
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aronex Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Aronex Pharmaceuticals,
Inc. (a Delaware corporation in the development stage), as of December 31, 1994
and 1995, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995 and
for the period from inception (June 13, 1986) through December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aronex Pharmaceuticals,
Inc., as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1995
and for the period from inception (June 13, 1986) through December 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
March 7, 1996
F-2
<PAGE> 61
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 1,426 $ 7,781
Short-term investments............................................... 7,006 2,480
Accounts receivable -- affiliates.................................... 313 345
Prepaid expenses and other assets.................................... 102 288
-------- --------
Total current assets......................................... 8,847 10,894
Long-term investments.................................................. 1,587 1,754
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $1,183 and $1,928, respectively...................... 2,174 2,832
Investment in affiliate................................................ 350 50
-------- --------
Total assets................................................. $ 12,958 $ 15,530
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................ $ 475 $ 1,478
Accrued payroll...................................................... 294 161
Current portion of notes payable -- related party.................... 100 87
Current portion of other notes payable............................... 178 211
Current portion of obligations under capital leases.................. 33 25
-------- --------
Total current liabilities.................................... 1,080 1,962
Long-term obligations:
Notes payable -- related party, net of current portion............... 298 211
Other notes payable, net of current portion.......................... 657 446
Obligations under capital leases, net of current portion............. 12 41
Deferred revenue..................................................... 251 876
-------- --------
Total long-term obligations.................................. 1,218 1,574
Commitments and Contingencies
Stockholders' equity:
Preferred stock $.001 par value, 10,000,000 shares authorized, none
issued............................................................ -- --
Common stock $.001 par value, 75,000,000 shares authorized,
10,404,951 and 20,760,112 shares issued and outstanding,
respectively...................................................... 10 21
Additional paid-in capital........................................... 38,215 56,331
Common stock warrants................................................ -- 1,488
Treasury stock....................................................... -- (11)
Deferred compensation................................................ (496) (1,536)
Unrealized loss on investments....................................... (315) (116)
Deficit accumulated during development stage......................... (26,754) (44,183)
-------- --------
Total stockholders' equity................................... 10,660 11,994
Total liabilities and stockholders' equity................... $ 12,958 $ 15,530
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 62
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD
FROM
INCEPTION
(JUNE 13,
1986)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
1993 1994 1995 1995
<S> <C> <C> <C> <C>
Revenues:
Interest income.................................. $ 217 $ 534 $ 452 $ 1,830
Research and development grants and contracts.... 48 197 1,248 1,539
------- ------- -------- --------
Total revenues........................... 265 731 1,700 3,369
------- ------- -------- --------
Expenses:
Research and development......................... 4,491 7,637 8,347 28,785
Purchase of in-process research and
development................................... -- -- 8,383 8,383
General and administrative....................... 1,876 1,950 2,215 9,543
Interest expense................................. 123 196 184 841
------- ------- -------- --------
Total expenses........................... 6,490 9,783 19,129 47,552
------- ------- -------- --------
Net loss........................................... $(6,225) $(9,052) $(17,429) $(44,183)
======= ======= ======== ========
Loss per share..................................... $ (.86) $ (.88) $ (1.34)
======= ======= ========
Weighted average shares used in computing loss
per share........................................ 7,208 10,306 12,976
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 63
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
COMMON STOCK ADDITIONAL COMMON AVAILABLE DURING TOTAL
------------------- PAID-IN STOCK DEFERRED FOR SALE DEVELOPMENT TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION SECURITIES STAGE STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Common
Stock for
cash, August
through
December 1986
($.8198 per
share)....... 366,667 $ 1 $ 300 $ -- $ -- $ -- $ -- $ -- $ 301
Issuance of
Common Stock
for license
agreement
rights,
October 1986
($.003 per
share)....... 121,212 -- 1 -- -- -- -- -- 1
Net loss....... -- -- -- -- -- -- (40) -- (40)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1986......... 487,879 1 301 -- -- -- (40) -- 262
Issuance of
Common Stock
in exchange
for 8%
convertible
notes, May
1987 ($1.65
per share)... 181,818 -- 300 -- -- -- -- -- 300
Net loss....... -- -- -- -- -- -- (216) -- (216)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1987......... 669,697 1 601 -- -- -- (256) -- 346
Warrants issued
to purchase
22,728 shares
of Common
Stock........ -- -- -- -- -- -- -- -- --
Issuance of
Common Stock
for cash,
September and
December 1988
($.033 per
share)....... 260,606 -- 8 -- -- -- -- -- 8
Net loss....... -- -- -- -- -- -- (832) -- (832)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1988......... 930,303 1 609 -- -- -- (1,088) -- (478)
Issuance of
Common Stock
for cash,
July and
August 1989
($.033 per
share)....... 316,364 -- 10 -- -- -- -- -- 10
Issuance of
Common Stock
for cash,
August 1989
($1.815 per
share)....... 2,440,771 3 4,427 -- -- -- -- -- 4,430
Issuance of
Common Stock
for key man
life
insurance
policies,
December 1989
($1.815)..... 7,724 -- 14 -- -- -- -- -- 14
Net loss....... -- -- -- -- -- -- (942) -- (942)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1989......... 3,695,162 $ 4 $ 5,060 $ -- $ -- $ -- $ (2,030) $ -- $ 3,034
Stock options
exercised,
January 1990
($.33 per
share)....... 61 -- -- -- -- -- -- -- --
Warrants issued
to purchase
19,828 shares
of Common
Stock........ -- -- -- -- -- -- -- -- --
Net loss....... -- -- -- -- -- -- (1,825) -- (1,825)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1990......... 3,695,223 4 5,060 -- -- -- (3,855) -- 1,209
Stock options
exercised,
May 1991
($.33 per
share)....... 151 -- -- -- -- -- -- -- --
Issuance of
Common Stock
for cash and
notes payable
including
accrued
interest of
$96,505,
October 1991
($3.63 per
share)....... 1,192,191 1 4,327 -- -- -- -- -- 4,328
Deferred
compensation
relating to
certain stock
options...... -- -- 326 -- (326) -- -- -- --
Compensation
expense
related to
stock
options...... -- -- -- -- 138 -- -- -- 138
Net loss....... -- -- -- -- -- -- (2,914) -- (2,914)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1991......... 4,887,565 5 9,713 -- (188) -- (6,769) -- 2,761
Stock options
exercised,
January,
April, May,
October and
December 1992
($.33 per
share)....... 74,395 -- 24 -- -- -- -- -- 24
Stock warrants
exercised
April, May
and August
1992 ($1.815
per share)... 22,728 -- 41 -- -- -- -- -- 41
</TABLE>
F-5
<PAGE> 64
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1995
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
COMMON STOCK ADDITIONAL COMMON AVAILABLE DURING TOTAL
------------------ PAID-IN STOCK DEFERRED FOR SALE DEVELOPMENT TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION SECURITIES STAGE STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Common Stock
for cash in
initial public
offering, July
1992 ($7.00
per share).... 1,700,000 2 10,658 -- -- -- -- -- 10,660
Deferred
compensation
relating to
certain stock
options....... -- -- 1,644 -- (1,644) -- -- -- --
Compensation
expense
related to
stock
options....... -- -- -- -- 460 -- -- -- 460
Net loss........ -- -- -- -- -- -- (4,708) -- (4,708)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1992.......... 6,684,688 $ 7 $ 22,080 $ -- $ (1,372) $ -- $ (11,477) $ -- $ 9,238
Issuance of
Common Stock
for
compensation... 10,000 -- 51 -- -- -- -- -- 51
Warrants issued
to purchase
100,344 shares
of Common
Stock......... -- -- -- -- -- -- -- -- --
Stock options
exercised,
February and
November 1993
($.33 per
share)........ 28,930 -- 9 -- -- -- -- -- 9
Issuance of
Common Stock
for cash,
September 1993
($7.00 per
share)........ 714,286 -- 4,538 -- -- -- -- -- 4,538
Issuance of
Common Stock
for cash in
secondary
public
offering
November and
December 1993
($4.50 per
share)........ 2,804,500 3 11,461 -- -- -- -- -- 11,464
Compensation
expense
related to
stock
options....... -- -- -- -- 396 -- -- -- 396
Net loss........ -- -- -- -- -- -- (6,225) -- (6,225)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1993.......... 10,242,404 10 38,139 -- (976) -- (17,702) -- 19,471
Deferred
compensation
relating to
certain stock
options....... -- -- 66 -- (66) -- -- -- --
Stock options
exercised,
January
through
October 1994
($.33 per
share)........ 30,222 -- 10 -- -- -- -- -- 10
Warrants issued
to purchase
1,075 shares
of Common
Stock......... -- -- -- -- -- -- -- -- --
Issuance of
additional
shares of
Common Stock
pursuant to
collaborative
agreement (see
Note 5)....... 132,325 -- -- -- -- -- -- -- --
Compensation
expense
related to
stock
options....... -- -- -- -- 546 -- -- -- 546
Unrealized loss
on
available-for-sale
securities.... -- -- -- -- -- (315) -- -- (315)
Net loss........ -- -- -- -- -- -- (9,052) -- (9,052)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1994.......... 10,404,951 $ 10 $ 38,215 $ -- $ (496) $ (315) $ (26,754) $ -- $ 10,660
Deferred
compensation
relating to
certain stock
options....... -- -- 1,380 -- (1,380) -- -- -- --
Stock options
exercised,
January
through
December 1995
($.33 per
share)........ 73,917 -- 24 -- -- -- -- -- 24
Issuance of
Common Stock
and warrants
pursuant to
merger
agreements
(see Note
4)............ 7,736,872 8 11,107 2,844 -- -- -- -- 13,959
Warrants
exercised
($2.25 per
share)........ 1,411,228 2 3,401 (226 ) -- -- -- -- 3,177
Issuance of
Common Stock
pursuant to
settlement
agreement (see
Note 4)....... 1,063,103 1 2,045 (1,130 ) -- -- -- -- 916
Issuance of
Common Stock
for services
rendered...... 75,000 -- 159 -- -- -- -- -- 159
Treasury stock
purchased
($2.21 per
share)........ (4,959) -- -- -- -- -- -- (11) (11)
Compensation
expense
related to
stock
options....... -- -- -- -- 340 -- -- -- 340
Unrealized gain
on
available-for-sale
securities.... -- -- -- -- -- 199 -- -- 199
Net loss........ -- -- -- -- -- -- (17,429) -- (17,429)
---------- --- ------- ------- ------- ----- -------- ---- --------
Balance at
December 31,
1995.......... 20,760,112 $ 21 $ 56,331 $ 1,488 $ (1,536) $ (116) $ (44,183) $(11) $ 11,994
========== === ======= ======= ======= ===== ======== ==== ========
</TABLE>
F-6
<PAGE> 65
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
YEARS ENDED DECEMBER 31, 1986) THROUGH
------------------------------- DECEMBER 31,
1993 1994 1995 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(6,225) $ (9,052) $(17,429) $ (44,183)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization............... 307 515 749 1,951
Compensation expense related to stock and stock
options..................................... 447 546 499 2,089
Charge for purchase of in-process research and
development................................. -- -- 8,383 8,383
Changes in assets and liabilities --
Decrease (increase) in prepaid expenses and
other assets.............................. 36 (11) (1) (103)
Increase in accounts
receivable -- affiliates.................. -- (313) (32) (345)
Increase in accounts payable and accrued
expenses.................................. 112 235 796 1,566
Increase in deferred revenue................ -- 251 272 523
Accrued interest payable converted to stock.... -- -- -- 97
------- -------- -------- --------
Net cash used in operating
activities........................... (5,323) (7,829) (6,763) (30,022)
Cash flows from investing activities:
Net sales (purchases) of investments........... 584 (1,069) 10,094 1,501
Purchase of furniture, equipment and leasehold
improvements................................ (723) (1,235) (137) (3,513)
Unrealized gain (loss) on investment........... -- (315) 199 (116)
Acquisition costs, net of cash received of
$947,000.................................... -- -- (270) (270)
Loss in affiliate.............................. -- 150 300 450
Investment in affiliate........................ -- (500) -- (500)
------- -------- -------- --------
Net cash provided by (used in)
investing activities................. (139) (2,969) 10,186 (2,448)
Cash flows from financing activities:
Proceeds from notes payable.................... 609 392 64 2,672
Repayment of notes payable and principal
payments under capital lease obligations.... (196) (296) (321) (1,652)
Purchase of treasury stock..................... -- -- (11) (11)
Proceeds from issuance of stock................ 16,011 10 3,200 39,242
------- -------- -------- --------
Net cash provided by financing
activities........................... 16,424 106 2,932 40,251
------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 10,962 (10,692) 6,355 7,781
Cash and cash equivalents at beginning of
period......................................... 1,156 12,118 1,426 --
------- -------- -------- --------
Cash and cash equivalents at end of period....... $12,118 $ 1,426 $ 7,781 $ 7,781
======= ======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest....... $ 123 $ 196 $ 184 $ 728
Supplemental schedule of noncash financing
activities:
Conversion of notes payable and accrued
interest to Common Stock.................... $ -- $ -- $ -- $ 3,043
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 66
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("Aronex" or the "Company") was incorporated
in Delaware on June 13, 1986 and merged with Triplex Pharmaceutical Corporation
and Oncologix, Inc. effective September 11, 1995 (see Note 4). Aronex is a
development stage company which has devoted substantially all of its efforts to
research and product development and has not yet generated any significant
revenues, nor is there any assurance of future revenues. In addition, the
Company expects to continue to incur losses for the foreseeable future and there
can be no assurance that the Company will successfully complete the transition
from a development stage company to successful operations. The research and
development activities engaged in by the Company involve a high degree of risk
and uncertainty. The ability of the Company to successfully develop, manufacture
and market its proprietary products is dependent upon many factors. These
factors include, but are not limited to, the need for additional financing,
attracting and retaining key personnel and consultants, and successfully
developing manufacturing, sales and marketing operations. The Company's ability
to develop these operations may be immensely impacted by uncertainties related
to patents and proprietary technologies, technological change and obsolescence,
product development, competition, government regulations and approvals, health
care reform and product liability exposure. Additionally, the Company is reliant
upon collaborative arrangements for research, contractual agreements with
corporate partners, and its exclusive license agreements with M.D. Anderson
Cancer Center ("MD Anderson"), and an affiliate of the Baylor College of
Medicine ("Baylor"). Further, during the period required to develop these
products, the Company will require additional funds which may not be available
to it. The Company expects that its existing cash resources will be sufficient
to fund its cash requirements through mid-1997. Accordingly, there can be no
assurance of the Company's future success.
2. ACCOUNTING POLICIES
Cash, Cash Equivalents and Short- and Long-Term Investments
The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities." Debt and equity securities that the Company has the intent and
ability to hold to maturity are classified as "held to maturity" and reported at
amortized cost. Debt and equity securities that are held for current resale are
classified as "trading securities" and reported at fair value with unrealized
gains and losses included in earnings. Debt and equity securities not classified
as either "securities held to maturity" or "trading securities" are classified
as "securities available for sale" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity. The adoption of SFAS 115 did not have a material effect on
the Company's financial position or results of operations.
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. At December 31, 1995, all
securities held to maturity consist of high-grade commercial paper and U.S.
Government backed securities with a maturity date of less than one year and have
a carrying value of $2,480,000, which approximates fair market value and cost.
Available for sale securities are U. S. mortgage backed securities with various
maturity dates over the next several years that have an amortized cost of
$1,870,000, a fair market value of $1,754,000 and a gross unrealized loss of
$116,000 at December 31, 1995. The Company currently has no trading securities.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment consists of laboratory and office equipment.
Furniture and equipment are carried at cost and depreciation is calculated on
the straight-line method using a five-year estimated useful life. Leasehold
improvements are amortized on the straight-line method over the shorter of the
life of the lease
F-8
<PAGE> 67
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or a five-year estimated useful life. Maintenance and repairs that do not
improve or extend the life of assets are expensed as incurred. Expenditures
which improve or extend the life of assets are capitalized.
A summary of furniture, equipment and leasehold improvements is as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Office furniture and equipment................................... $ 430 $ 527
Laboratory equipment............................................. 1,573 2,769
Leasehold improvements........................................... 1,354 1,464
------- -------
3,357 4,760
Less accumulated depreciation and amortization................... (1,183) (1,928)
------- -------
Furniture, equipment and leasehold improvements, net........... $ 2,174 $ 2,832
======= =======
</TABLE>
At December 31, 1994 and 1995, the cost of computer and laboratory
equipment held under capital leases aggregated $147,000, and $108,000,
respectively. All furniture, equipment and leasehold improvements have been
pledged as collateral on notes payable and capital leases.
Revenue Recognition
Research and development grant and contract revenues are recognized as
expenses for development activities are incurred and the related work is
performed under the terms of the contracts. Any revenue contingent upon future
performance by the Company is deferred and recognized as the performance is
completed. Any revenues resulting from the achievement of milestones are
recognized when the milestones are achieved.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
Loss Per Share
Loss per share has been computed by dividing net loss by the weighted
average number of shares of Common Stock outstanding during the periods. The
weighted average number of shares of Common Stock used in the computation of
loss per share was 7,208,000, 10,306,000, and 12,976,000 for the years ended
1993, 1994 and 1995, respectively, and 5,707,000 for the period from inception
(June 13, 1986) to December 31, 1995. During the noted periods, all Common Stock
equivalents were antidilutive.
Presentation
In April 1992, the stockholders approved a 1 for 3.3 reverse stock split.
Retroactive effect has been given to the reverse stock split in stockholders'
equity and in all per share data in the accompanying financial statements.
Certain reclassifications have been made to December 31, 1994 balances to
conform to current year presentation.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes a fair value based method of
accounting for stock-based compensation issued to both employees and non-
employees.
F-9
<PAGE> 68
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Adoption of the fair value based method is not required. SFAS 123 allows for
companies to continue to measure cost for such compensation using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). However, companies
that elect to continue with accounting under APB 25 must provide certain pro
forma disclosures, as if SFAS 123 had been applied. The accounting and
disclosure requirements of SFAS 123 are effective for Aronex for the fiscal year
1996. Aronex is currently evaluating its alternatives under SFAS 123; however,
its impact on operating results when initially adopted is expected to be
immaterial.
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant estimates with regard to these financial statements related to the
estimated fair value used in purchase accounting as discussed in Note 4.
3. INVESTMENT IN AFFILIATE
In April 1994, the Company entered into assignment, sublicense, preferred
stock purchase and drug development agreements with RGene Therapeutics, Inc.
("RGene"). RGene is involved in the development of novel gene therapy and other
nucleic acid-based drugs using proprietary non-viral vectors as delivery
systems. Under the terms of the assignment and sublicense agreements, Aronex
assigned its rights to certain technology to RGene in return for common stock in
RGene. Aronex also purchased $500,000 of RGene's preferred stock through a
preferred stock purchase agreement. The common and preferred shares are not
registered or actively traded and no readily available market exists for such
shares.
Under the drug development agreement, Aronex performs research and
development of certain RGene projects and is reimbursed its cost plus overhead
as defined in the agreement. The agreement has an initial term of three years
and is subject to certain termination provisions. During 1994 and 1995, Aronex
recorded $197,000 and $668,000 in revenue related to the drug development
agreement.
4. MERGER AGREEMENTS WITH TRIPLEX PHARMACEUTICAL CORPORATION AND ONCOLOGIX, INC.
On September 11, 1995, Aronex merged with Triplex Pharmaceutical
Corporation and Oncologix, Inc. through two newly formed, wholly-owned
subsidiaries pursuant to Agreements and Plans of Merger (the "Triplex Agreement"
and the "Oncologix Agreement"). These acquisitions were accounted for under the
purchase method of accounting in which the aggregate purchase price was
allocated to the tangible and intangible assets acquired based on their relative
fair values as of the date of the transaction. The excess of the estimated
purchase price over the fair value of the net assets acquired, estimated by
management at approximately $8.3 million, has been assigned to in-process
research and development and recorded as an expense in the December 31, 1995
Statements of Operations.
In connection with the Triplex Agreement, the Company issued the following
to existing Triplex stockholders and option holders: (i) 6,882,872 shares of
Common Stock, (ii) options to purchase 177,824 shares of Common Stock (see Note
6) and (iii) contingent stock issue rights to receive shares of Common Stock
with a fair market value of up to $8.0 million, the conversion of which is
contingent upon the satisfaction of conditions which relate to the licensing or
development of certain products.
In connection with the Triplex merger, the Company issued contingent rights
(the "Triplex Contingent Stock Rights") to the former holders of Triplex stock
and options entitling them to receive additional shares of
F-10
<PAGE> 69
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock upon the occurrence of certain events. The Triplex Contingent Stock
Rights entitle the former Triplex stock and option holders to receive shares of
Common Stock with an aggregate fair market value at the time of issuance of $5.0
million (subject to certain adjustments) if the Company either (i) enters into
an agreement on or before September 11, 1997 with respect to the licensing of a
certain product whereby the Company receives at least $5.0 million in cash or an
unconditional binding commitment for at least $5.0 million or (ii) obtains data
from such clinical trials on or before September 11, 2000 that the Company's
Board of Directors determines to be sufficient to file an NDA. In addition, the
Triplex Contingent Stock Rights entitle the former Triplex stock and option
holders to receive shares of Common Stock with an aggregate fair market value at
the time of issuance of $3.0 million if the Company does not receive a minimum
of $5.0 million in equity milestone payments from Genzyme on or before September
11, 1997 with respect to the development of a certain product. In no event,
however, shall more than 7,000,194 shares of Common Stock (subject to
adjustments in the event of stock splits, stock dividends or reclassification of
the Common Stock) be issued pursuant to the Triplex Contingent Stock Rights.
In connection with the Oncologix Agreement, the Company issued the
following (i) 854,000 shares of Common Stock to certain Oncologix debt holders,
(ii) warrants (the "Warrants") to purchase approximately 18.0 million shares of
Common Stock to Oncologix preferred stockholders, certain former employees and
debt holders and (iii) contingent stock issue rights to receive shares of Common
Stock with a fair market value of approximately $2.1 million, the conversion of
which is contingent upon the satisfaction of conditions which relate to the
licensing or development of certain products.
The Warrants issued in connection with the Oncologix merger consist of
three series of warrant rights to purchase approximately 4.7 million, 5.9
million and 7.4 million shares of Common Stock, respectively designated as
Series A, Series B and Series C. The Series A, Series B and Series C components
are exercisable at $2.25, $4.00 and $6.00 per share, respectively, and had
initial expiration dates of December 1996, June 1998 and December 1999,
respectively. Upon the failure to exercise a series of warrant rights prior to
their expiration, the warrant holder forfeits all remaining rights under the
terms of the Warrant.
The terms of the Series A warrant rights provide that, subject to certain
conditions, the Warrants are redeemable at the option of the Company at the
redemption price of $0.01 per share of Common Stock purchasable. On October 26,
1995, the Company satisfied the requirements of the Warrant and gave notice that
it would redeem the Series A warrant rights on December 29, 1995 (the
"Redemption Date"). Subsequent to the notice of redemption, the Company granted
the holders of warrant rights a five-day grace period with the effect that the
Redemption Date was extended to January 2, 1996.
During the fourth quarter of 1995, the Company issued 1,411,228 shares of
Common Stock related to the exercise of the Series A portion of certain warrants
in exchange for $3,175,263. At December 31, 1995, there were outstanding
Warrants exercisable for approximately 9.4 million shares of Common Stock
(approximately 1.4 million, 3.6 million and 4.4 million shares relating to the
Series A, Series B and Series C exercise, respectively).
In October 1995, the Company was named a defendant in a lawsuit filed by
certain warrant holders challenging the redemption of the Warrants. To resolve
this matter, the Company entered into an agreement in December 1995 which
settled the lawsuit. In accordance with the settlement agreement the plaintiffs
were issued 1,063,103 shares of Common Stock in exchange for 7,153,336 Warrants.
The excess of the fair value of the common stock over the warrant value was
charged to expense.
Subsequent to December 31, 1995, certain Warrant holders exercised the
Series A portion of their Warrants, resulting in the Company issuing 752,358
(unaudited) shares of Common Stock for $1,692,807 (unaudited). Additionally,
certain Warrant holders exercised the Series B portion of their Warrants,
resulting in the Company issuing 132,306 (unaudited) shares of Common Stock for
$529,224 (unaudited). At
F-11
<PAGE> 70
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1996, there were outstanding Warrants exercisable for 0.2 million
(unaudited) shares of Common Stock upon the exercise of the Series A portion of
such Warrants, which are in the process of being exercised. At March 31, 1996,
there were Warrants outstanding for approximately 6.7 million (unaudited) shares
of Common Stock (approximately 0.2 million (unaudited), 2.7 million (unaudited)
and 3.8 million (unaudited) relating to the Series A, Series B and Series C
exercise, respectively). These Warrants have a weighted average exercise price
of $5.07 (unaudited).
In connection with the Oncologix merger, the Company issued contingent
rights (the "Oncologix Contingent Stock Rights") to certain Oncologix investors
entitling them to receive additional shares of Common Stock upon the occurrence
of certain events. The Oncologix Contingent Stock Rights entitle such former
Oncologix investors to receive shares of Common Stock with a fair market value
at the time of issuance of approximately $2.1 million if the Company receives at
least $5.0 million in cash or an unconditional binding commitment for at least
$5.0 million on or before September 11, 1997 relating to certain products. In no
event, however, shall more than 4,270,000 shares of Common Stock (subject to
certain adjustments) be issued pursuant to the Oncologix Contingent Stock
Rights.
The results of operations and the cash flows for Triplex and Oncologix have
been included in the financial statements from the date of the acquisition. In
allocating the purchase price, the assets acquired and liabilities assumed in
connection with the mergers with Triplex and Oncologix have been initially
assigned and recorded based on preliminary estimates of fair value and may be
revised as additional information concerning the valuation of such assets and
liabilities becomes available. As a result, the financial information included
in the Company's financial statements is subject to adjustment as subsequent
revisions in estimates of fair value, if any, are necessary.
The following is an allocation of the purchase price of the tangible and
intangible assets acquired based on their estimated fair value as of the date of
acquisition:
<TABLE>
<CAPTION>
TRIPLEX ONCOLOGIX TOTAL
<S> <C> <C> <C>
Common Stock issued........................... $ 9,706,000 $1,195,000 $10,901,000
Common Stock options issued................... 214,000 -- 214,000
Common Stock Warrants issued.................. -- 2,844,000 2,844,000
Costs and expenses of acquisition............. 570,000 1,564,000 2,134,000
Liabilities assumed........................... 427,000 -- 427,000
----------- ---------- -----------
Total purchase price................ $10,917,000 $5,603,000 $16,520,000
=========== ========== ===========
Current assets................................ $ 6,844,000 $ -- $ 6,844,000
Furniture, equipment and leasehold
improvements................................ 1,270,000 -- 1,270,000
Other assets.................................. 23,000 -- 23,000
In-process research and development........... 2,780,000 5,603,000 8,383,000
----------- ---------- -----------
Total purchase price................ $10,917,000 $5,603,000 $16,520,000
=========== ========== ===========
</TABLE>
F-12
<PAGE> 71
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following summary, prepared on an unaudited pro forma basis, presents
the results of operations for the years ended December 31, 1994 and 1995 as if
the mergers had occurred on January 1, 1994 and January 1, 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
(UNAUDITED)
<S> <C> <C>
Pro forma revenues............................................ $ 3,861 $ 3,190
Pro forma expenses............................................ (23,775) (14,793)
-------- --------
Pro forma net loss............................................ $(19,914) $ (11,603)
======== ========
Pro forma net loss per share.................................. $ (1.23) $ (0.64)
======== ========
</TABLE>
The unaudited summary pro forma results are not necessarily indicative of
what actually would have occurred if the mergers had occurred on the above
dates, nor is it necessarily indicative of future operating results.
5. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
In June 1993, the Company entered into a master loan agreement for the
financing of $1.0 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 48 monthly installments with a final installment at
the end of the loan term not to exceed 20 percent of the purchase price at
inception. During 1993 and 1994, the Company borrowed $607,000 and $392,000,
respectively, through this agreement. In 1993 and 1994, in connection with the
financing, the Company issued to the lender warrants to purchase 10,187 and
5,888 shares, respectively, of the Common Stock at an exercise price of $6.00
per share that expire in March 2000 and March 2001, respectively. No value was
assigned to the warrants as the value of the warrants at the dates of issuance
was de minimus.
In July 1990 and October 1992, the Company borrowed $108,000 and $388,000,
respectively, from a real estate company related to one of its stockholders to
finance the construction of the Company's laboratory and office space. The
Company executed promissory notes bearing interest at 10.5 and 12.5 percent per
annum, respectively. The July 1990 note is payable in monthly installments of
principal and interest over a five-year period ending July 1995. The October
1992 note, as amended, provides for payment of interest only through October
1994 and monthly payment of principal and interest from November 1994 through
January 1999.
Future principal payments under the master loan agreement and notes
payable -- related party follows:
<TABLE>
<CAPTION>
NOTE PAYABLE
YEAR ENDING MASTER LOAN NOTES PAYABLE
DECEMBER 31, AGREEMENT RELATED PARTY
<S> <C> <C>
1996....................................................... $211,000 $ 87,000
1997....................................................... 325,000 99,000
1998....................................................... 121,000 112,000
-------- ---------
Total...................................................... $657,000 $ 298,000
======== =========
</TABLE>
F-13
<PAGE> 72
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain office and laboratory equipment under capital
leases. The leases have effective interest rates ranging from 13.5 to 18 percent
and mature at various dates through March 1999. Future payments under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
<S> <C>
1996..................................................................... $ 34,000
1997..................................................................... 21,000
1998..................................................................... 21,000
1999..................................................................... 7,000
--------
83,000
Less Interest............................................................ (17,000)
--------
Lease Obligations........................................................ $ 66,000
========
</TABLE>
6. STOCKHOLDERS' EQUITY
Common Stock
In July 1992, the Company, in an initial public offering, issued 1,700,000
shares of Common Stock for $7 a share, with the Company receiving net proceeds
of approximately $10.7 million. In connection with a collaborative agreement
entered into in September 1993 (described in Note 9), Genzyme Corporation
("Genzyme") made a $5 million equity investment in the Company which resulted in
Genzyme's ownership of approximately 9 percent of the Company's outstanding
Common Stock at the time the investment was made. In September 1994, the Company
issued to Genzyme 132,325 additional shares which were contingent on certain
stock performance criteria. Genzyme has agreed to make an additional $5 million
equity investment in the Company if certain developmental goals of the
collaborative agreement are achieved. In November 1993, the Company sold
2,500,000 shares of its Common Stock in a secondary public offering for $4.50 a
share which, together with the over-allotment exercise for 304,500 shares of its
Common Stock, raised net proceeds of approximately $11.5 million.
Common Stock Warrants
At December 31, 1995, the Company had warrants outstanding, relating to
certain financing and leasing transactions, to purchase 121,247 shares of Common
Stock at exercise prices ranging from $1.815 per share to $7.00 per share. The
warrants expire at various dates through March 2001.
The Company issued Warrants to purchase approximately 18.0 million shares
of Common Stock in connection with the Oncologix merger. At December 31, 1995,
Warrants to purchase 9.4 million shares of Common Stock remained outstanding at
exercise prices ranging from $2.25 per share to $6.00 per share, expiring at
various dates through December 1999 (see Note 4).
Contingent Stock Rights
In connection with the Triplex and Oncologix mergers, the Company issued
$10.1 million contingent stock rights. At December 31, 1995, the $10.1 million
contingent stock rights remain outstanding, contingent upon the development and
licensing of certain products (see Note 4).
7. STOCK OPTION PLANS
During 1989, the Company's stockholders approved the 1989 Stock Option Plan
(the "Plan"). The Plan, as amended in 1992, authorized the issuance of options
covering the greater of (i) 750,000 shares of Common Stock or (ii) 10 percent of
the shares of Common Stock outstanding on the last day of the preceding fiscal
F-14
<PAGE> 73
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
quarter. The term of each option ranges from five to seven years from the date
of grant. At December 31, 1995, 256,224 shares were available for future grant.
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
<S> <C> <C>
Balance at December 31, 1992............................. 539,089 $ .33 to $7.44
Granted................................................ 137,000 $4.75 to $5.88
Exercised.............................................. (33,930) $ .33
Forfeited.............................................. (3,924) $ .33 to $7.44
--------- ------------
Balance at December 31, 1993............................. 638,235 $ .33 to $7.44
Granted................................................ 289,500 $2.13 to $5.88
Exercised.............................................. (35,222) $ .33
Forfeited.............................................. (163,303) $ .33 to $7.44
--------- ------------
Balance at December 31, 1994............................. 729,210 $ .33 to $7.44
Granted, including options repriced.................... 1,157,935 $ .02 to $3.50
Options repriced....................................... (21,000) $3.50 to $7.44
Exercised.............................................. (98,917) $ .11 to $ .34
Forfeited.............................................. (190,155) $ .33 to $7.44
--------- ------------
Balance at December 31, 1995............................. 1,577,073 $ .02 to $7.44
========= ============
Exercisable at December 31, 1995......................... 533,352 $ .02 to $7.44
========= ============
</TABLE>
During 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan. This plan authorizes the issuance of up to 250,000 shares of Common
Stock. Options are issued at the fair market value of the Company's stock on the
date of grant, vest 20 percent annually beginning one year from the date of
issuance, and expire 10 years from the date of issuance. In 1995, the Board of
Directors amended the plan, pending shareholder approval, to issue 25,000 shares
to each board member who was not an employee. These options were fully vested
when issued and were issued at less than fair market value at the date of grant.
A summary of stock option activity for the non-employee director plan
follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
<S> <C> <C>
Balance at December 31, 1992............................. -- --
Granted.................................................. 90,000 $ 5.50
------- --------------
Balance at December 31, 1993............................. 90,000 $ 5.50
Forfeited................................................ (30,000) $ 5.50
------- --------------
Balance at December 31, 1994............................. 60,000 $ 5.50
Granted.................................................. 175,000 $ 2.12
Forfeited................................................ (30,000) $ 5.50
------- --------------
Balance at December 31, 1995............................. 205,000 $2.12 to $5.50
======= ==============
</TABLE>
Total stock options outstanding at December 31, 1995 have a weighted
average exercise price of $2.08 per share.
The Company records deferred compensation for the difference between the
grant price and the deemed fair value for financial statement presentation
purposes related to options. Such amount totals $1.5 million, of
F-15
<PAGE> 74
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
which $396,000 and $546,000 and $340,000 were charged to expense in 1993, 1994
and 1995, respectively, and the remainder will be amortized to expense over the
remaining vesting periods of the options.
8. FEDERAL INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided.
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate for the periods ended December 31, 1993, 1994 and
1995, is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Statutory rate................................................ (34.0)% (34.0)% (34.0)%
Purchase of in-process research and development............... -- -- 16.4 %
Stock option compensation not deductible...................... 2.2 % 2.1 % 0.7 %
Adjustment to deferred tax valuation allowance................ 31.8 % 31.9 % 16.9 %
----- ----- -----
0.0 % 0.0 % 0.0 %
===== ====== ======
</TABLE>
Significant components of the Company's net deferred tax asset at December
31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Deferred tax assets relating to --
Federal net operating loss carryforwards............... $ 8,482,200 $ 19,426,600
Book depreciation and amortization in excess of (less
than) amount deductible for income tax purposes..... 139,700 (13,600)
Accrued liabilities not currently deductible for income
tax purposes........................................ -- 40,700
Equity in loss of affiliate not currently deductible
for income tax purposes............................. 51,000 153,000
Other items, net....................................... (37,800) (14,600)
----------- ------------
Total deferred tax assets...................... 8,635,100 19,592,100
Deferred tax valuation reserve........................... (8,635,100) (19,592,100)
----------- ------------
Net deferred tax asset................................... $ -- $ --
=========== ============
</TABLE>
At December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $57.1 million.
The Tax Reform Act of 1986 provided a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. As a result of
the merger (see Note 4) with Triplex and Oncologix a change in control as
defined by federal income tax law occurred, causing the use of these
carryforwards to be limited and possibly eliminated. Additionally, because U.S.
tax laws limit the time during which NOLs and the tax credit carryforwards may
be applied against future taxable income and tax liabilities, the Company may
not be able to take full advantage of its NOLs and tax credit carryforwards for
federal income tax purposes. The carryforwards will begin to expire in 2001 if
not
F-16
<PAGE> 75
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
otherwise used. A valuation allowance has been established to offset the
Company's deferred tax assets as the Company has had losses since inception. The
valuation reserve increased $1,975,000, $2,908,000 and $10,957,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. These increases were
primarily due to the Company's losses from operations for such periods and the
valuation reserves for the net operating loss carryforwards acquired in the 1995
mergers with Triplex and Oncologix (See Note 4). The Company has not made any
income tax payments since inception.
9. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has two exclusive license agreements with MD Anderson which may
be terminated in the event of a material breach of the terms of the agreement or
for failure to convert the licensed subject matter to a commercial form.
However, the Company believes its ongoing research and development efforts
currently satisfies this obligation to commercialize.
The license agreements require the Company to pay royalties for licensed
patent products or processes based on cumulative net sales percentages. The
Company must also pay MD Anderson $200,000 for each FDA-approved product
resulting from certain licensed research tasks. No royalties have been paid to
date since the Company has had no sales.
For the years ended December 31, 1993, 1994 and 1995, the Company paid MD
Anderson $883,000, $765,000, and $392,000, respectively, for research performed
on the behalf of the Company.
The Company entered into a non-exclusive license agreement to use a
patented process in the manufacture, use and sale of certain of Aronex's
products. An initial fee of $30,000 was paid in 1993. Annual royalty payments
are to be computed as a percentage of sales, as defined in the agreement. The
royalty payments shall not exceed $1 million in a calendar year and expire upon
expiration of the licensed patents.
In September 1993, the Company entered into a collaborative agreement with
Genzyme directed at developing and commercializing TretinoinLF. The Company and
Genzyme will share clinical development responsibilities and research program
funding, and Genzyme will make specified milestone payments to the Company
totaling up to $1.5 million upon the occurrence of certain events. None of these
events has occurred through the period ended December 31, 1995. The Company
granted Genzyme worldwide marketing rights and an option to manufacture
pharmaceutical compositions required for the project. Genzyme will pay a royalty
on sales of the product, while the Company has retained co-promotion rights in
the United States. Included on the Company's balance sheets at December 31, 1994
and 1995 are $234,000 and $190,000, respectively, of accounts
receivable-affiliates and $251,000 and $576,000, respectively, of deferred
revenue relating to the collaborative agreement with Genzyme.
Aronex has a collaborative arrangement with Hoechst under a 1992 agreement
between Triplex and Hoechst with respect to collaborative research and
development of oligonucleotide products. Under this agreement, Hoechst is
obligated to pay the Company quarterly research fees, milestone payments upon
the achievement of certain goals and royalties on the sales of any products
ultimately licensed to Hoechst. The agreement is renewable and presently
provides for a term through at least the end of 1996. Subsequent to September
11, 1995, Hoechst had paid a total of approximately $700,000 to the Company
under the agreement.
10. COMMITMENTS AND CONTINGENCIES
The Company leases laboratory and office space under operating leases from
a real estate company which is a related party to a stockholder of Aronex and
certain office equipment on a short-term basis. Rental expense was approximately
$63,000, $173,000 and $208,000 for the years ended December 31, 1993, 1994 and
1995, respectively.
F-17
<PAGE> 76
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum noncancellable payments under operating leases at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
<S> <C>
1996............................................. $288,000
1997............................................. 189,000
1998............................................. 162,000
1999............................................. 28,000
Total............................................ $667,000
</TABLE>
In August 1995, the Company was named as a defendant in a lawsuit filed by
certain common stockholders of Oncologix seeking damages as a result of the
merger with Oncologix. Plaintiffs contend that the provision of the merger
whereby common stockholders obtained no consideration is contrary to law and
damaging to them. Plaintiffs sought injunctive relief prior to prevent
consummation of the merger, but this relief was denied by the District Court.
The Company believes the above lawsuit is without merit and the resolution of
these matters will not have a material adverse effect on the accompanying
financial statements.
The Company is subject to numerous risks and uncertainties because of the
nature of and status of its operations. The Company maintains insurance coverage
for events and in amounts that it deems appropriate. Management believes that
uninsured losses, if any, will not be materially adverse to the Company's
financial position or results of operations.
11. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS
In September 1995, the Company entered into an employment agreement with
James M. Chubb, Ph.D., the current president of the Company, for an initial term
of one year. Pursuant to the employment agreement, the Company issued 50,000
shares of Common Stock and incentive stock options to purchase 250,000 shares of
Common Stock at an exercise price of $2.12 per share. Additionally, Dr. Chubb
was granted a one-time cash bonus equal to his federal income tax liability
resulting from the issuance of the 50,000 shares of Common Stock.
In February 1992, the Company entered into an employment agreement with
David M. Leech, former president and chief executive officer of the Company, for
an initial term of three years. Pursuant to the employment agreement, the
Company granted incentive stock options to purchase 242,424 shares of Common
Stock, at an exercise price of $.33 per share, and paid a signing bonus of
$75,000. Effective upon the closing of the merger (see Note 4), September 11,
1995, Mr. Leech, resigned as an officer and director of Aronex. As a result of
his severance agreement with the Company, Mr. Leech was paid $186,000 and the
expiration date of all his vested stock options was extended to September 11,
1997. Mr. Leech's current benefits, such as medical and disability insurance,
were extended for not more than one year after the closing.
Effective February 1992, a former president and chief executive officer
resigned his position and the Company entered into an agreement with him for
future services. The Company paid $112,500 and $41,000 to the former president
and chief executive officer during the years ended December 31, 1993 and 1994,
respectively.
In March 1994, the Company amended a consulting agreement with Gabriel
Lopez-Berestein, M.D., the Company's chief scientific advisor, for a three-year
period ending December 31, 1997, whereby the Company is committed to pay
consulting fees of $144,000 and $156,000 for 1996 and 1997, respectively. The
Company paid $105,000, $120,000 and $132,000 for the years ended December 31,
1993, 1994 and 1995, respectively, pursuant to this agreement.
F-18
<PAGE> 77
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, the Company entered into three-year employment agreements with
two of its officers and granted 5,000 shares of Common Stock to each of these
officers as a signing bonus which was recorded as compensation expense at fair
market value. Both of these officers resigned in 1994, and the Company paid
$100,000 and issued 25,000 shares of Common Stock during 1995 relating to the
termination of these two officers.
During 1994, the Company entered into two three-year employment agreements
with an officer and a senior clinical director. Aggregate compensation
commitments under current employment agreements total $245,000 and $71,000 for
the years ending December 31, 1996 and 1997, respectively.
During 1995, the Company paid $28,500 in consulting fees to a consulting
firm which is wholly-owned by a member of the Board of Directors.
During 1995, the Company entered into a one-year employment agreement with
an officer who currently has an outstanding loan with the Company with a balance
including interest of $33,713 at December 31, 1995. One half of this balance was
forgiven in January 1996. The remaining balance will be forgiven in the next two
years, depending upon the accomplishment of agreed upon goals.
12. 401(K) PLAN
The Company adopted a 401(k) plan in 1991. Under the plan, employees can
contribute up to 20 percent of their compensation subject to limitations as
defined by the Internal Revenue Service. The Company has the option to match an
employee's contribution up to a maximum of six percent of the employee's annual
compensation. Any employer contributions vest over a three-year period. No
matching contributions had been made through December 31, 1994. The plan was
amended for years after December 31, 1994, whereby the Company will match 25% of
each employee's contributions up to a maximum of $1,000 per employee per year.
The Company contributed $25,838 in matching contributions for the year ended
December 31, 1995.
F-19
<PAGE> 78
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 16
Dividend Policy....................... 16
Price Range of Common Stock........... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 24
Management............................ 43
Principal Stockholders................ 48
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 54
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 58
Available Information................. 58
Incorporation of Certain Documents by
Reference........................... 58
Index to Financial Statements......... F-1
</TABLE>
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6,000,000 SHARES
[ARONEX PHARMACEUTICALS, INC. LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
MAY 17, 1996
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