<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 0-20111
ARONEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0196535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ARONEX PHARMACEUTICALS, INC.
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281) 367-1666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 25 , 1998 was $48,612,036, based on the closing sales
price of the registrant's common stock on the Nasdaq National Market on such
date of $3.69 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the common stock are assumed to be affiliates. As of March 25, 1998, 15,467,281
shares of the registrant's common stock were outstanding.
Certain sections of the registrant's definitive proxy statement
relating to the registrant's 1998 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120
days of the end of the registrant's fiscal year ended December 31, 1997, are
incorporated by reference into Part III of this Form 10-K.
================================================================================
<PAGE> 2
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. 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. For additional discussion of such risks, uncertainties
and assumptions, see "Item 1. Business - Manufacturing," "- Sales and
Marketing," "- Patents and Proprietary Rights," "- Government Regulation," "-
Competition" and "- Additional Business Risks" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
PART I
ITEM 1. BUSINESS
GENERAL
Aronex Pharmaceuticals, Inc. ("Aronex Pharmaceuticals" or the
"Company") is an emerging biopharmaceutical company engaged in the
identification and development of proprietary innovative medicines to treat
cancer and infectious diseases. The Company's strategy is to identify 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 products that it believes provides a balanced development
and commercialization risk profile. The Company believes its focus on medicines
for cancer and infectious diseases for which current therapy is inadequate will
provide synergies in development and product marketing and will facilitate
expedited commercialization of its products.
Aronex Pharmaceuticals currently has four products in various stages of
ongoing clinical development. In addition, the Company has proprietary
technologies in drug formulation and drug delivery. The Company's four products
in clinical development are (i) NYOTRAN(TM) for the treatment of systemic fungal
infections, (ii) ATRAGEN(R) for the treatment of cancer, (iii) Annamycin for the
treatment of cancers with multi-drug resistance and (iv) Zintevir(TM) for the
treatment of human immunodeficiency virus ("HIV") infection.
The Company has strategic alliances and collaboration arrangements with
leading corporations and academic institutions, including alliances with
Boehringer Mannheim GmbH ("Boehringer Mannheim"), Genzyme Corporation
("Genzyme") and Grupo Ferrer Internacional, S.A. ("Ferrer") and a collaboration
with The University of Texas M.D. Anderson Cancer Center ("MD Anderson").
Aronex Pharmaceuticals was incorporated in 1986 as Argus
Pharmaceuticals, Inc. ("Argus"), and 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 infectious diseases; (ii) a well-defined
and diverse portfolio of products at various stages of clinical development;
(iii) technologies in drug formulation and delivery; (iv) a diverse group of
corporate partners and academic affiliations; and (v) an experienced team of
biopharmaceutical personnel who possess the ability to identify 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 report to
"Aronex Pharmaceuticals" and the "Company" refer to Aronex Pharmaceuticals and
its subsidiaries.
The Company's corporate headquarters is located at 8707 Technology
Forest Place, The Woodlands, Texas 77381-1191, and its telephone number is (281)
367-1666.
-2-
<PAGE> 3
BUSINESS STRATEGY
Aronex Pharmaceuticals has implemented a comprehensive strategy to
become a commercial biopharmaceutical company involved in the identification,
development and commercialization of novel medicines for treating cancer and
infectious diseases. The Company's strategy encompasses five key elements.
Therapeutic Focus. The Company has adopted a clear therapeutic focus
aimed at identifying and developing novel medicines to satisfy clearly defined,
unsatisfied needs in the treatment of cancer and infectious diseases. The
Company believes that this focus provides synergies in the 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 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
products that it believes provides a balanced development and commercialization
risk profile. Two of the Company's products are liposomal formulations of drugs
that are currently on the market, designed to improve effectiveness and reduce
adverse side effects. The Company believes that this should contribute to a
reduction in the development risks associated with such products. Two of the
Company's products are new compounds with novel mechanisms of action against a
specific disease target. While these products are associated with a greater
degree of development risk, the Company believes that these 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.
Expedited Drug Development Programs. The Company believes that it has
created an effective pharmaceutical development infrastructure. With expertise
in preclinical development, drug formulation and delivery, quality assurance,
quality control and analytical chemistry, drug manufacturing, regulatory and
clinical affairs, the Company believes that it has the ability to effectively
advance preclinical and clinical products through the development pipeline.
Leveraged Research and Technological Resources. The Company relies on
several sources to provide potential opportunities to expand its pipeline of
products for commercialization. Using its academic and corporate collaborations,
the Company seeks late-stage preclinical products for advancement into the
Company's clinical pipeline as well as early-stage clinical products with
prospects for rapid clinical development. Additional opportunities are available
through the Company's existing capabilities in drug formulation and delivery.
Marketing and Commercialization Strategy. The Company's marketing and
commercialization effort is designed to create a revenue stream utilizing two
diverse methods. The Company intends to market products in the United States
through its own sales and marketing efforts and to market products overseas and
those requiring broader marketing and distribution efforts through licensing
arrangements with corporate partners.
CLINICAL AND SCIENTIFIC BACKGROUND
Aronex Pharmaceuticals' development programs are aimed at the
identification and development of innovative medicines to treat cancer and
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 frequently become
resistant to commonly used anti-cancer drugs, and organisms responsible for
infectious diseases may also acquire resistance to anti-infective 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 toxic because their lack of selectivity results in significant side
effects on normal cells. The Company is targeting the development of drugs for
cancer and infectious diseases that are selective in their actions, with
specific mechanisms of action and more favorable safety profiles.
-3-
<PAGE> 4
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
infections caused by otherwise harmless microbes. These microbes may be fungi
such as Aspergillus and Candida, viruses or bacteria. 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, viral and bacterial diseases and to overcome the toxicity
limitations associated with certain existing drugs.
Cancer
The American Cancer Society estimates that more than 1.2 million new
cases of cancer will be diagnosed and more than 500,000 people will die of
cancer in 1998 in the United States. Major classes of cancer include (i) solid
tumors, the most common of which are breast cancer (approximately 179,000 new
cases in the United States annually) and cancers of the lung (approximately
171,000 new cases in the United States annually), (ii) cancers of the lymphoid
system (approximately 62,000 new cases of lymphoma in the United States
annually) and (iii) cancers of the blood (approximately 29,000 new cases of
leukemia 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 reduce the incidence of
metastasis (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, with effects including bone marrow
suppression and irreversible cardiotoxicity, which can prevent their
administration in therapeutic doses.
Aronex Pharmaceuticals' Approach to the Treatment of Cancer and
Infectious Diseases
The Company has a focused effort aimed at identifying highly-specific,
novel medicines for the treatment of cancer and infectious diseases. The
Company's research and development strategy is to augment its pipeline by
partnering with academic centers such as MD Anderson and the National Institutes
of Health ("NIH"). These relationships are intended to permit the Company to
identify opportunities which have already been validated in preclinical and, in
some instances, clinical studies before the Company allocates resources for
further evaluation and development. The Company also anticipates expansion of
its product pipeline through acquisitions, licenses and joint ventures with
corporate partners. This strategy is further intended to allow the Company to
bypass the lengthy and uncertain drug discovery and screening process and to
proceed quickly to product development and clinical evaluation. The Company
believes that utilizing this strategy will allow it to maintain a full pipeline
of innovative products for the treatment of cancer and infectious diseases.
See "-- Collaborative Agreements."
-4-
<PAGE> 5
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) ............... Comparative Presumed Fungal Infections Phase III
Candidemia Phase II completed(2)
Aspergillus Salvage Phase II
Esophageal Candidiasis Phase II
Cryptococcal Meningitis Phase II/III
Zintevir(TM) .............. HIV Infection Phase I/II
CANCER
ATRAGEN(R) ................ Acute Promyelocytic Leukemia Phase II (Pivotal)
Kaposi's Sarcoma Phase II completed
Annamycin ................. Breast Cancer Phase II
AR726 ..................... Lung Cancer Phase II(3)
AR209 ..................... Breast Cancer Preclinical
</TABLE>
(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 pharmacokinetics 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 the compound exhibits in vitro activity and
that the Company is conducting efficacy, toxicology and drug distribution
testing of the compound in vitro and in animal models.
(2) This Phase II clinical trial has been completed. However, the Company will
continue to enroll patients for whom other therapies have not proven
effective on a compassionate basis.
(3) This Phase II clinical trial is being conducted under an institutional
Investigational New Drug application ("IND") at MD Anderson.
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 "-- Additional Business Risks
- --Uncertainties Related to Clinical Trial Results."
-5-
<PAGE> 6
INFECTIOUS DISEASES
Aronex Pharmaceuticals' infectious disease program centers on the
development of new agents for the treatment of infectious diseases, including
those that occur in patients with weakened immune systems. The clinical program
presently focuses on the development of NYOTRAN for life-threatening systemic
fungal infections and Zintevir for the treatment of HIV infection.
NYOTRAN(TM) for Presumed Fungal Infections (Phase III), Candidemia
(Phase II completed), Aspergillus Salvage (Phase II), Esophageal
Candidiasis (Phase II) and Cryptococcal Meningitis (Phase II/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 life-threatening infections occur most often
in 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 more aggressive use of chemotherapy in
cancer patients, increases in organ and bone marrow transplants, increased use
of in-dwelling catheters for prolonged periods, and the spread of HIV.
Available agents for the treatment of systemic fungal infections
include itraconazole, 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 in Candida, but is not effective in inhibiting fungal growth in
Aspergillus and 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 is a liposomal, intravenous formulation of nystatin, an
established, widely-used topical antifungal 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 poor solubility and
toxicity have previously precluded its systemic administration as a therapy for
such fungal infections. Aronex Pharmaceuticals has developed a proprietary
formulation to deliver NYOTRAN to reduce the toxicity of "free" nystatin. The
Company believes NYOTRAN offers potential advantages over current systemic
anti-fungal therapies. The Company's in vitro studies indicate that it is active
against a range of fungal strains, including Candida, Aspergillus, Cryptococcus
and Fusarium species, some of which are resistant to currently available
anti-fungal therapies. While final clinical efficacy trials have not been
completed, the Company believes that its Phase I and Phase II clinical trials
suggest that NYOTRAN can be administered at doses that are effective in treating
Aspergillus, Candida and Cryptococcal infections.
The strategy for the development of NYOTRAN has involved several
stages. The Company has conducted three Phase I clinical studies which
demonstrated a favorable safety profile. The Company completed a Phase II open
label study in patients with Candidemia evaluating NYOTRAN at multiple doses.
Although this Phase II study has been completed, it remains open on a
compassionate basis to enroll patients for whom other therapies have not been
effective. Results from this study indicate that a dose of one-third the
tolerated dose established in Phase I appears to be efficacious. Based upon data
from this study, the Company initiated Phase III comparative multicenter trials
of NYOTRAN against amphotericin B in patients with presumed fungal infections in
the United States and in Europe. In early 1998, to expand the potential
indications for NYOTRAN, the Company also initiated Phase II trials for the
treatment of patients with Candida infections in the esophagus and Phase II/III
trials for patients with Cryptococcal meningitis. If the Phase III trials are
successful, the Company plans to file a New Drug Application (an "NDA") for
NYOTRAN with the United States Food and Drug Administration (the "FDA") and
appropriate marketing applications worldwide. See "-- Government Regulation" and
"-- Additional Business Risks -- Uncertainties Related to Clinical Trial
Results."
The active ingredient of NYOTRAN, nystatin, is available commercially.
The Company has contracted for the manufacture of its clinical requirements of
NYOTRAN by a contract manufacturer which provides Good Manufacturing
-6-
<PAGE> 7
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 will be
prescribed primarily in large community hospitals and regional medical centers.
The Company may choose to establish marketing arrangements with corporate
partners with broad marketing capabilities for the successful marketing of
NYOTRAN.
The Company estimates that over 300,000 patients worldwide develop
systemic fungal infections annually. The current systemic anti-fungal market is
estimated at more than $1.5 billion on an annual basis. Further, the incidence
of systemic fungal infections continues to increase because of the aging
population, 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, Inc., NeXstar
Pharmaceuticals, Inc. and SEQUUS Pharmaceuticals, Inc. Each 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
antifungal product, is an oral formulation used for a wide range of less serious
Candida indications. The Company is aware of other antifungal agents currently
in clinical development.
In 1997, Aronex Pharmaceuticals entered into a collaborative agreement
with Ferrer to commercialize and market NYOTRAN in Spain and Portugal. In
December 1997, the Company, in cooperation with Ferrer, filed national Marketing
Authorization Applications in Spain and Portugal seeking approval for NYOTRAN
for the treatment of systemic fungal infections. See "--Collaborative
Agreements--Relationship with Ferrer."
MD Anderson has granted Aronex Pharmaceuticals the worldwide exclusive
license to an issued patent directed to the use of a liposomal formulation of
nystatin in the treatment of systemic fungal infections. A process which is of
substantial pharmaceutical utility for making NYOTRAN is protected by another
issued patent. A continuation of this process patent is currently being
prosecuted seeking additional claims in this area. See "-- Patents and
Proprietary Rights."
Zintevir(TM) for HIV Infection (Phase I/II)
Zintevir is a product under development by Aronex Pharmaceuticals 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, 3TC, delaviridine and nevirapine) and protease
inhibitors (saquinavir, ritinovir, indinavir and nelfinavir). By contrast, the
Company believes the primary mechanism of action of Zintevir is inhibition of
HIV-1 integrase, a key enzyme in catalyzing the integration of HIV within human
cells.
Two Phase I trials on Zintevir have been completed. A Phase I single
dose study of Zintevir was initiated at San Francisco General Hospital in
October 1995. The primary objectives of this Phase I study were to determine the
safety and pharmacokinetics profile of escalating single doses of Zintevir in
patients with HIV infection. Single doses as high as 6 mg/kg were given. A Phase
I multiple dose study was initiated at Harris Laboratories, Inc., a clinical
research organization, in May 1996. The primary objectives of the multiple dose
study were to determine the safety and pharmacokinetics profile of multiple
intravenous doses of Zintevir and to evaluate the anti-HIV activity in HIV
infected patients. Multiple doses as high as 3 mg/kg were administered every
other day for a total of seven doses with minimal adverse events. Multiple doses
as high as 6 mg/kg given every day for 14 days will be administered in a Phase
I/II clinical trial begun in November 1997. See "-- Additional Business Risks --
Uncertainties Related to Clinical Trial Results."
Although treatment with a combination of reverse transcriptase and
protease inhibitors has been shown to reduce the level of HIV ribonucleic acid
("RNA") in the plasma to undetectable levels in many patients, HIV
deoxyribonucleic
-7-
<PAGE> 8
acid ("DNA") continues to persist in the tissues of these patients. In addition,
25% of patients who have received combination therapy with reverse transcriptase
and protease inhibitors do not respond to the treatment, either because of the
patient's inability to withstand the combination therapy due to side effects or
the failure of the combination therapy to produce an anti-viral effect.
Certain of the currently-approved drugs for treating HIV cause 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. Some of the new protease inhibitors are known to cause kidney
stones and severe diarrhea. 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.
According to the NIH, between 650,000 and 900,000 people in the United
States and over 30 million people worldwide are infected with HIV. In the United
States alone, over 600,000 AIDS cases had been reported by June 1997. 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 are
the subject of one issued patent and four United States patent applications and
six foreign patent applications. These applications are either assigned wholly
to Aronex Pharmaceuticals, or jointly to the Company and Baylor College of
Medicine ("Baylor"), in which latter case the Company has exclusively licensed
Baylor's rights. The issued patent covers the inhibition of HIV production in
cultured cells by a group of compounds including Zintevir. See "-- Patents and
Proprietary Rights."
CANCER
Aronex Pharmaceuticals' 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 ATRAGEN(R) for hematological cancers and Annamycin for
breast cancer.
ATRAGEN(R) for Acute Promyelocytic Leukemia (Pivotal Phase II) and
Kaposi's Sarcoma (Phase II completed)
ATRAGEN, the Company's most advanced anti-cancer agent, is presently in
clinical trials for the treatment of acute promyelocytic leukemia ("APL"). This
indication represents 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 formulation of the retinoid all-trans retinoic acid ("ATRA") has been
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) cause cancer cells to re-enter a normal growth
cycle rather than killing them, as conventional chemotherapeutic agents do.
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.
ATRAGEN is a liposomal, intravenous formulation of all-trans retinoic
acid which has been 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. ATRAGEN has a different
pharmacokinetics 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. Following ATRAGEN treatment, higher plasma
concentrations of the drug are achieved than after oral ATRA therapy. Unlike
oral administration, these drug levels are maintained throughout the course of
therapy. These characteristics 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.
Aronex Pharmaceuticals completed a Phase I clinical trial of ATRAGEN in
1995 in patients with cancers of the blood. Phase I data presented in the
journal Blood during 1996 indicated that ATRAGEN sustains levels in the blood
after prolonged dosing, is well tolerated, and shows evidence of activity
against certain leukemias and lymphomas.
-8-
<PAGE> 9
ATRAGEN is currently in pivotal 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. Interim results from one of these trials, presented
at the American Society for Hematology meeting in December 1997, demonstrated
that ATRAGEN has activity against APL. The Company believes that approximately
2,000 new cases of APL are diagnosed worldwide each year.
ATRAGEN has also been assessed in Phase II clinical trials in
collaboration with Genzyme for the treatment of Kaposi's sarcoma. Kaposi's
sarcoma is a skin cancer that has been estimated to occur in approximately 15%
of AIDS cases. Results from this trial indicated that ATRAGEN was generally well
tolerated, with headaches and dry skin being the primary reported adverse
events.
If the results of its current APL clinical trial are successful, the
Company's strategy is to proceed with an initial NDA for ATRAGEN as a treatment
for APL, and subsequently to seek approval for other indications. ATRAGEN has
been designated an orphan drug for the treatment of acute and chronic leukemia
by the FDA. The Company has selected APL as the initial indication for ATRAGEN;
however, as with many cancer treatments, a wider range of potential indications
may be possible. See "-- Government Regulation" and "-- Additional Business
Risks -- Uncertainties Related to Clinical Trial Results."
The Company believes there is a significant market opportunity for
ATRAGEN. The Company has identified a number of tumor targets for which ATRAGEN
may be an effective therapeutic. Collectively, these targets have an estimated
incidence of 400,000 patients in the United States annually.
In 1993, Aronex Pharmaceuticals entered into a collaborative agreement
with Genzyme to develop and commercialize ATRAGEN for the treatment of cancer.
This agreement has subsequently been modified, with the result that: (i) the
Company retains responsibility for the further clinical development of ATRAGEN;
and (ii) Genzyme has an option to acquire marketing rights to ATRAGEN, subject
to the right of the Company to retain or reacquire such marketing rights and
subject to certain other rights retained by the Company. See "-- Collaborative
Agreements -- Collaborative Agreement with Genzyme."
The composition and method of use of ATRAGEN (liposomal Tretinoin) is
the subject of a patent application, assigned to MD Anderson, as to which the
rights of MD Anderson are exclusively licensed to the Company. These rights are
subject to certain options held by Genzyme related to development of ATRAGEN.
Claims to the ATRAGEN formulation have been allowed in the European Patent
Office. See "-- Patents and Proprietary Rights."
Annamycin for Breast Cancer (Phase 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 taxol, doxorubicin and
related anthracyclines, rendering the treatment ineffective. This resistance,
once developed by cancer cells, generally extends to include resistance 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 one of the mechanisms responsible for multi-drug resistance. The
Company's preclinical studies have shown that Annamycin, which is a liposomal
formulation of a novel anthracycline, may be active against multi-drug resistant
tumor cells. The Company's preclinical studies of Annamycin in animals bearing
human tumors also indicate that Annamycin may be less cardiotoxic than
doxorubicin.
-9-
<PAGE> 10
A Phase I dose-escalating clinical trial of Annamycin was completed in
August 1997. Data from this trial were presented at the American Society of
Clinical Oncology meeting in May 1997. Annamycin is currently being evaluated in
Phase II multi-center clinical trials in breast cancer patients whose tumors are
resistant to conventional therapies. See "-- Additional Business Risks --
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, the American Cancer
Society estimates that there are approximately 179,000 new cases of breast
cancer annually. Annamycin also has the potential to be used in treating other
solid tumors in addition to leukemias and lymphomas. In 1998, the Company plans
to initiate Phase II clinical trials to evaluate the activity of Annamycin in
acute myelocytic leukemia.
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 Pharmaceuticals is aware of some agents currently in
Phase II clinical trials that are designed to modulate multi-drug resistance,
but for which no efficacy data are yet available. These agents would potentially
be used in combination with chemotherapeutic agents.
The Company's liposomal formulation of Annamycin is the subject of an
issued patent, licensed exclusively to the Company by MD Anderson, that claims
liposomal Annamycin and a method using liposomal Annamycin in treating cancer.
In addition, a patent application has been filed with respect to an improved
process for preparing Annamycin. Patent protection is also being sought for a
specific formulation of liposomal Annamycin with improved processing
characteristics. Annamycin itself is the subject of a patent that has been
non-exclusively sublicensed to Aronex Pharmaceuticals by MD Anderson, which was
licensed from Ohio State University. See "-- Patents and Proprietary Rights."
AR726 for Lung Cancer (Institutional Phase II)
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.
Under an institutional IND at MD Anderson, AR726 is currently being
evaluated in a Phase II clinical trial for the treatment of a lung cancer known
as mesothelioma. This trial is sponsored by the Office of Orphan Drug Products
at the FDA. A Phase I clinical trial was previously conducted under a
physician's IND at MD Anderson.
AR726 is covered by a series of patents and a patent application,
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.
Claims to the product have been allowed by the European Patent Office. A patent
application filed in the United States that may overlap claims included in the
United States patents licensed to the Company is 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 "-Patents and
Proprietary Rights."
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 Pharmaceuticals 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
-10-
<PAGE> 11
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. Preclinical
studies indicate that AR209 causes regression of solid human tumors and is well
tolerated. The product is currently in preclinical development.
In 1996, Aronex Pharmaceuticals entered into a collaborative agreement
with Boehringer Mannheim to develop and commercialize AR209 for the treatment of
breast cancer and other solid tumors. See "-- Collaborative Agreements --
Relationship with Boehringer Mannheim."
Aronex Pharmaceuticals has a worldwide license from the NIH to the
Pseudomonas exotoxin used in the design of AR209. The Company 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 "-- Patents and Proprietary Rights."
RESEARCH PIPELINE
The Company's goal is to establish an effective and efficient
pharmaceutical development infrastructure and capability to provide a continuing
pipeline of products for commercialization. The Company's research and
development strategy is to augment its pipeline by partnering with academic
centers such as MD Anderson and the NIH, as well as with private research
foundations. Such partnering will allow the Company to identify opportunities
which have already been validated in preclinical and, in some instances,
clinical studies before allocating resources for further evaluation and
development. This approach will allow the Company to bypass the lengthy and
uncertain drug discovery and screening process and to proceed quickly to product
development and clinical evaluation. The Company believes that utilizing this
strategy will allow it to maintain a full pipeline of innovative products for
the treatment of cancer and infectious diseases. See "-- Collaborative
Agreements."
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 "-- Additional Business Risks -- Risks
Associated with Collaborative Arrangements."
Relationship with Boehringer Mannheim
In 1996, the Company entered into a license agreement with Boehringer
Mannheim to develop and commercialize one of the Company's products, AR209.
Under the agreement, Boehringer Mannheim is responsible for funding the costs of
all remaining preclinical and clinical development of AR209 and for
manufacturing the product. Boehringer Mannheim paid the Company $150,000 in
license fees in connection with this agreement in 1997 and has agreed to pay
minimum annual license fees of $100,000 during the term of the agreement. In
addition, Boehringer Mannheim is required to pay Aronex Pharmaceuticals up to
$2.65 million in milestone payments upon the occurrence of certain events and
will pay Aronex Pharmaceuticals royalties on sales of the product. Aronex
Pharmaceuticals has the option to co-promote the product under terms to be
negotiated by the parties or to co-market the product if the parties are unable
to reach an agreement as to the terms of a co-promotion arrangement. Boehringer
Mannheim has the right to terminate the agreement if the costs of developing
AR209 are materially greater than anticipated and Boehringer Mannheim
determines, in its reasonable discretion, not to proceed with the development of
the product in light of such increased costs. The Company has the right to
terminate the agreement if Boehringer Mannheim fails to achieve certain
milestones.
Relationship with Ferrer
In 1997, the Company entered into a supply and distribution agreement
with Ferrer to commercialize and market NYOTRAN, under which Ferrer received the
exclusive right to distribute and sell NYOTRAN(TM) in Spain and Portugal.
-11-
<PAGE> 12
In December 1997, the Company, in cooperation with Ferrer, filed a Marketing
Authorization Application in Spain and Portugal seeking approval for NYOTRAN for
the treatment of systemic fungal infections.
Collaborative Agreement with Genzyme
In 1993, the Company entered into a license and development agreement
with Genzyme to develop and commercialize ATRAGEN(R). The initial focus of the
collaboration was the development of ATRAGEN for the treatment of myelogenous
leukemias and certain non-hematologic cancers. The Company and Genzyme shared
clinical development responsibilities and research program funding through the
end of 1996. Under the agreement, Genzyme was required to make up to $1.5
million in milestone payments to the Company upon the occurrence of certain
events and to pay the Company royalties on sales of the product. Genzyme had the
right to terminate the agreement in the event of a third party claim of
infringement by products subject to the agreement. The Company had the right to
terminate the agreement if Genzyme failed to satisfy certain milestones. In
connection with the collaborative agreement, Genzyme made a net $4.5 million
equity investment in the Company and agreed to make an additional $5.0 million
equity investment in the Company if certain developmental goals were achieved.
In September 1996, Genzyme advanced Aronex Pharmaceuticals $2.0 million
relating to the $5.0 million equity milestone. Early in 1997, the license and
development agreement was amended and Genzyme was released from any further
obligation to perform development work for ATRAGEN, and the license granted to
Genzyme was converted to an option to acquire the right to market and sell
ATRAGEN worldwide (with the Company retaining co-promotion rights in the United
States). This option expires six months after an NDA is filed for ATRAGEN. To
exercise its option, Genzyme is required to pay the Company $3.0 million and
product royalties. If Genzyme exercises its option, Aronex Pharmaceuticals has
six months during which it can reacquire the marketing rights by returning to
Genzyme the $3.0 million received in connection with Genzyme's exercise of the
option and repaying Genzyme the $2.0 million advance. Additionally, the Company
is required to pay Genzyme product royalties, including $500,000 in minimum
royalties in the first year. If Genzyme does not exercise its option, Aronex
Pharmaceuticals is required to repay Genzyme the $2.0 million advance and to pay
product royalties, including $500,000 in minimum royalties in the first year
following the expiration of the option.
Relationship with MD Anderson
Aronex Pharmaceuticals has two license agreements with MD Anderson
which grant the Company 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), ATRAGEN(R),
Annamycin and AR726 are products derived from the Company's relationship with MD
Anderson.
The license agreements with MD Anderson require Aronex Pharmaceuticals
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 Pharmaceuticals 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 the Company 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, the Company
believes its ongoing and active research and development efforts directed at
commercial marketing of the licensed products currently satisfies this
obligation.
Aronex Pharmaceuticals and MD Anderson have entered into research and
development contracts in conjunction with the license agreements which obligate
the Company to fund research and development expenses incurred by the MD
-12-
<PAGE> 13
Anderson scientists that relate to the technology licensed by the Company. Such
contracts grant the Company an exclusive worldwide license to technology related
to the technology licensed under the license agreements and developed as a
result of research funded by the Company. Such contracts also grant the Company
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 the Company. Aronex Pharmaceuticals and MD Anderson have agreed to the
funding commitments for all research projects under such contracts through
December 31, 1997. Aronex Pharmaceuticals intends to continue funding various
projects after December 31, 1997; however, the continuation of such projects is
dependent on mutually agreed-to funding levels for 1998. The Company and MD
Anderson are currently finalizing the funding arrangements for 1998. If the
Company 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 the Company's default continues for a
period of 60 days, MD Anderson may terminate the related contract upon 60 days
notice to Aronex Pharmaceuticals.
Relationship with Baylor
Aronex Pharmaceuticals had collaborative arrangements with Baylor,
under licensing, consulting and research and development arrangements entered
into by Triplex beginning in 1989. The Company has an exclusive, worldwide,
royalty-free license from Baylor to certain technology developed by Baylor. The
collaboration arrangements terminated in 1996. The license agreement terminates
on the expiration of the last patent to expire that is licensed thereunder.
MANUFACTURING
The Company does not have facilities necessary to manufacture its
products in accordance with FDA GMP, but it does have the capability to develop
formulations, analytical methods, process controls and manufacturing technology
for its products. The Company uses contract manufacturers to produce larger
quantities of its products for clinical testing. Production is done on a
per-purchase order basis, and the Company and the manufacturers of its products
have not entered into any written agreements. Contract manufacturers are 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. 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 GMP
requirements. FDA inspection and approval of manufacturing facilities and
quality procedures for a drug are 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.
SALES AND MARKETING
The Company presently intends to market its products and will build its
sales and marketing infrastructure in accordance with regulatory submissions.
The Company currently plans to market selected products directly to oncologists,
hematologists and infectious disease specialists through a niche sales and
marketing force in the United States. Where large market opportunities require
large sales forces, the Company may enter into co-marketing
-13-
<PAGE> 14
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 agreements with
Ferrer with respect to the marketing and sale of NYOTRAN in certain European
markets and with Boehringer Mannheim with respect to the marketing and sale of
AR209 worldwide. In addition, the Company has entered into an agreement with
Genzyme under which Genzyme may acquire the right to market and sell ATRAGEN,
subject to certain conditions and certain rights of the Company. The Company
plans to enter into additional marketing arrangements with one or more
pharmaceutical companies with respect to NYOTRAN and, to the extent that Genzyme
does not acquire or the Company reacquire marketing rights, with respect to
ATRAGEN. In addition, the Company plans to enter into marketing agreements with
one or more 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 AND PROPRIETARY RIGHTS
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 for 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 and Trademark 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 and
Trademark Office regarding AR726. See "-- Cancer --AR726 for Lung 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 be required
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 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
-14-
<PAGE> 15
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.
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, reexamination, 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
The Company'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 clinical trials. If the results of these 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.
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 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 drug
-15-
<PAGE> 16
manufacturing establishment must be inspected and approved by the FDA. All
manufacturing establishments are subject to inspections by the FDA and by other
federal, state and local agencies and must comply with current GMP requirements.
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 the 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 Practices. 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 to specific indications. There
can be no assurance that any of the Company's product candidates will receive
regulatory approvals for commercialization.
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.
-16-
<PAGE> 17
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 drug manufacturing establishment must be inspected and approved
by the FDA. All manufacturing establishments are subject to biennial inspections
by the FDA and must comply with the FDA's GMP requirements. To supply drug
products for use in the United States, foreign manufacturing establishments must
comply with the FDA's GMP requirements 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 GMP requirements, 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. Identification 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 potential marketing exclusivity for four to seven years following approval of
the pertinent NDA. The Company received orphan drug status for ATRAGEN(R) in
1993 for the treatment of acute and chronic leukemia 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 protection currently afforded by orphan drug
status will remain in effect. In addition, any party may obtain orphan drug
status with respect to products for which patent protection has expired or is
otherwise unavailable. The first party granted marketing approval 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 infectious diseases, either as alternatives to or in
combination with other pharmaceuticals. The Company is engaged in pharmaceutical
product development characterized by rapid technological progress. Many
established biotechnology and pharmaceutical companies, universities and other
research institutions with resources significantly greater than those of the
Company may develop products that directly
-17-
<PAGE> 18
compete with the Company's products. Those entities may succeed in developing
products, including liposomes and liposomal 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 liposomal research and product development to treat cancer and
certain fungal infections. Those competitors include The Liposome Company, Inc.,
NeXstar Pharmaceuticals, Inc., and SEQUUS Pharmaceuticals, Inc. Each of these
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 December 31, 1997, the Company had 72 full time employees, 57 of
whom were engaged in research, development, clinical and regulatory affairs and
15 of whom were engaged in administration. The Company plans to significantly
expand its clinical, development and regulatory affairs staff in the future to
address its needs relating to the preclinical and clinical development of the
Company's products. Of the Company's employees, there are 10 Ph.Ds, 1 Pharm.D.
and 1 M.D. The Company has not experienced any work stoppages and considers
relations with its employees to be good.
ADDITIONAL BUSINESS RISKS
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 in the immediate future. As of December 31, 1997, the Company's
accumulated deficit was $69.2 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 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" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 will be sufficient to fund its capital requirements
through mid-1999. Thereafter, the Company will need to raise substantial
additional capital to fund its operations. The Company's capital requirements
-18-
<PAGE> 19
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 and development and clinical trial programs;
the Company's ability to satisfy 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 of 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
and 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 "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 pivotal clinical trials before approval for commercial sale. 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 pivotal clinical trials
developed with large populations using similar protocols. Even if the Company
believes the pivotal 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 be required 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 would 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. 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 denial of
approval of the Company's products for any or all targeted indications by the
FDA or other regulatory authorities. 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
-19-
<PAGE> 20
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.
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.
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 payers are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third party payers 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 payers 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.
-20-
<PAGE> 21
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.
ITEM 2. PROPERTIES
The Company's corporate offices and laboratories are located in a
30,000 square foot leased building located at 8707 Technology Forest Place in
The Woodlands, a suburb of Houston, Texas. The lease for this facility expires
in 2008, and the Company has renewal options to extend the lease to 2018.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-21-
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (symbol: ARNX) is traded on the Nasdaq
National Market. The following table sets forth the range of high and low sales
prices for each calendar quarterly period in the two years ended December 31,
1997 as reported on the Nasdaq National Market. The information provided in the
table gives effect to a one-for-two reverse split of the Company's Common Stock
effected in July 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996: HIGH LOW
--------- -------
<S> <C> <C>
1st Quarter ................. $ 13 1/2 $ 6 1/2
2nd Quarter ................. 15 7 7/8
3rd Quarter ................. 12 3/4 6 1/2
4th Quarter ................. 10 1/4 7 1/8
YEAR ENDED DECEMBER 31, 1997:
1st Quarter ................. $ 10 1/8 $ 5 1/8
2nd Quarter ................. 6 7/8 3
3rd Quarter ................. 7 5/8 3 5/8
4th Quarter ................. 7 1/4 3 11/16
</TABLE>
The last sale price of the Common Stock as reported on the Nasdaq
National Market on March 25, 1998 was $3.69 per share. At March 25 1998, there
were approximately 200 holders of record and approximately 4,100 beneficial
owners of the Company's Common Stock.
DIVIDENDS
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.
-22-
<PAGE> 23
ITEM 6. 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, 1997, which have been audited by Arthur Andersen LLP,
independent public accountants. On September 11, 1995, Aronex Pharmaceuticals,
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
Pharmaceuticals, 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 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development grants
and contracts .......................... $ 48 $ 197 $ 1,248 $ 2,670 $ 841
Interest income ........................ 217 534 452 1,692 2,059
-------- -------- -------- -------- --------
Total revenues ......................... 265 731 1,700 4,362 2,900
Expenses:
Research and development ............... 4,491 7,637 8,347(1) 10,357 13,993
In-process research
and development ........................ -- -- 8,383(2) 242 3,000(4)
General and administrative ............. 1,876 1,950 2,215 1,620 2,641
Interest expense and other ............. 123 196 184 173 257
-------- -------- -------- -------- --------
Total expenses ......................... 6,490 9,783 19,129 12,392 19,891
-------- -------- -------- -------- --------
Net loss ............................... $ (6,225) $ (9,052) $(17,429) $ (8,030) $(16,991)
======== ======== ======== ======== --------
Basic and diluted loss per share(3) .... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14)
======== ======== ======== ======== ========
Weighted average shares used in
computing basic and diluted loss per
share(3) ............................... 3,602 5,153 6,488 13,048 14,896
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term and long-term investments ......... $ 19,642 $ 10,019 $ 12,015 $ 41,388 $ 29,954
Total assets ........................... 21,187 12,958 15,530 44,281 32,125
Total long-term obligations ............ 913 1,218 1,574 146 6
Deficit accumulated during
development stage ...................... (17,702) (26,754) (44,183) (52,213) (69,204)
Total stockholders' equity ............. 19,471 10,660 11,994 40,477 27,379
</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) Represents the fair market value of Common Stock issued under the
contingent stock rights issued relating to the Mergers. See Note 4 of Notes
to Financial Statements.
-23-
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and related Notes contained elsewhere herein.
OVERVIEW
Since its inception in 1986, Aronex Pharmaceuticals has primarily
devoted its resources to fund research, drug identification and development.
The Company has been unprofitable to date and expects to incur 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 $69.2 million from inception
through December 31, 1997. 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.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1997
Research and development grants and revenues decreased by $1.9 million
to $0.8 million in 1997 from $2.7 million in 1996. The decrease in 1997 research
and development grants and revenues was due primarily to the following factors:
(i) the Company received no revenues from Hoechst Marion Roussel, Inc.
("Hoechst") in 1997 compared with $1.3 million in revenues from Hoechst in 1996,
as a result of the expiration of the Company's research and development
agreement with Hoechst at the end of 1996; (ii) the Company received no revenues
under its collaborative agreement with Genzyme during 1997 as compared with
$576,000 in revenues under the Genzyme agreement in 1996, as a result of the
termination of Genzyme's funding obligations under the agreement; and (iii) the
Company received $166,000 in revenues under a research and development agreement
with Targeted Genetics Corporation ("Targeted Genetics") in 1997 as compared
with $597,000 in revenues from Targeted Genetics in 1996, as a result of the
expiration of the agreement with Targeted Genetics in the second quarter of
1997. The decrease in research and development grants and revenues in 1997 was
partially offset by the Company's receipt in 1997 of $250,000 under the
Company's license agreement with Boehringer Mannheim and an additional $250,000
under a new license agreement with Genzyme relating to gene therapy.
Interest income increased by $367,000 to $2.1 million in 1997 from $1.7
million in 1996, due primarily to an increase of funds available for investment
during the first half of 1997 resulting from cash received from a public
offering of Common Stock completed in May 1996.
Research and development expenses increased by $3.6 million to $14.0
million in 1997 from $10.4 million in 1996. This increase in research and
development expenses was due primarily to: (i) an increase of $1.2 million in
clinical investigation costs relating mostly to NYOTRAN; (ii) an increase of
$1.6 million in salaries and payroll costs, including costs relating to the
hiring of senior pharmaceutical development and medical affairs executives;
(iii) an increase of $687,000 in drug materials and manufacturing costs,
relating mainly to NYOTRAN and Zintevir; and (iv) an increase of $678,000 in
outside pharmacology studies, relating mainly to ATRAGEN. These increases were
partially offset by a decrease of $1.2 million in research expenses resulting
from the elimination of the majority of the Company's internal research efforts
in the second quarter of 1997, relating in part to the termination of research
funding from Hoechst.
In-process research and development costs of $3.0 million incurred in
1997 related to a non-cash research and development charge incurred in
connection with the issuance of 686,472 shares of Common Stock, with an
aggregate fair market value at the time of issuance of $3.0 million, under the
contingent rights issued in the Triplex merger. The issuance of such shares
under the contingent rights was required because equity milestone payments of
$5.0 million were not received from Genzyme relating to ATRAGEN on or before
September 11, 1997. ( See Note 4 of Notes to Financial Statements). In-process
research and development costs of $242,000 in 1996 represent charges incurred
relating to the
-24-
<PAGE> 25
1995 Mergers including the non-cash settlement of a lawsuit filed by certain
stockholders of Oncologix in connection with the Mergers in September 1995.
General and administrative expenses increased by $1.0 million to $2.6
million in 1997 from $1.6 million in 1996. The increase in general and
administrative expenses was primarily due to the following: (i) an increase of
$721,000 in salaries and payroll costs, including costs relating to the hiring
of a new Chief Executive Officer and a Vice President of Business Development;
and (ii) an increase of $195,000 in stock and stock option compensation expense.
The Company's net loss increased by $8.9 million to $16.9 million in
1997 from $8.0 million in 1996. The increase was primarily a result of the
following: (i) an increase of $3.6 million in research and development expenses
due to increased salaries and payroll costs and other expenses relating to
advancing the Company's products; (ii) a $3.0 million charge relating to the
issuance of shares of Common Stock under the contingent stock agreement (see
Note 4 of Notes to the Financial Statements); (iii) an increase of $1.0 million
in general and administrative expenses relating mainly to increased salaries and
payroll costs, including salary and hiring costs for several new positions; and
(iv) a decrease of $1.9 million in research and development grants and revenues,
attributable primarily to the loss of revenues from the Hoechst agreement.
Years Ended December 31, 1995 and 1996
Research and development grants and revenues increased by $1.5 million
to $2.7 million in 1996 from $1.2 million in 1995. The increase in research and
development grants and revenues was due primarily to: (i) the Company's
recognition of $576,000 in revenues during the third and fourth quarters of 1996
relating to pharmaceutical development work performed in connection with the
Company's collaborative agreement with Genzyme; and (ii) the Company's
recognition of revenues of $1.3 million from Hoechst. The Company did not
recognize any revenue relating to the Genzyme agreement in 1995, as all such
amounts were being deferred in accordance with the agreement, and recognized
revenues of $350,000 in 1995 under the Hoechst agreement, representing amounts
received after its assumption of Triplex's rights under that agreement in the
Mergers.
Interest income increased by $1.2 million to $1.7 million in 1996 from
$452,000 in 1995, due primarily to an increase of funds available for investment
resulting from cash received from the exercise of warrants and a public offering
of Common Stock completed in May 1996.
Research and development expenses increased by $2.0 million to $10.4
million in 1996 from $8.3 million in 1995, due primarily to the addition of
Triplex's research department following the Mergers and increased clinical
investigation costs relating to the Company's NYOTRAN and Zintevir products.
In-process research and development costs of $242,000 in 1996 and $8.4
million in 1995 represent charges incurred in connection with the Mergers in
September 1995 representing the excess of the purchase price and other costs of
the Mergers over the fair value of the assets acquired in the Mergers. The
charges in 1996 include the non-cash settlement of a lawsuit filed by certain
stockholders of Oncologix.
General and administrative expenses decreased by $595,000 to $1.6
million in 1996 from $2.2 million in 1995, primarily due to: (i) non-recurring
operating expenses incurred on behalf of Oncologix and paid in 1995 by the
Company pursuant to the terms of the Oncologix merger agreement; and (ii) a
decrease in salary and personnel costs from 1995 due to severance payments made
to the Company's former President in 1995.
The Company's net loss decreased by $9.4 million to $8.0 million in
1996 from $17.4 million in 1995, due primarily to the $8.4 million charge in
1995 for in-process research and development costs in connection with the
Mergers.
-25-
<PAGE> 26
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 $75.0 million
from the sale of equity securities from its inception through December 31, 1997.
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 ATRAGEN, in connection with which the Company received
net proceeds of approximately $4.5 million from the sale of shares of Common
Stock to Genzyme. In November 1993 and May 1996, the Company raised net proceeds
of approximately $11.5 million and $32.1 million, respectively, in public
offerings of Common Stock. From October 1995 through December 31, 1997, the
Company received aggregate net proceeds of approximately $6.5 million from the
exercise of certain warrants issued in the Oncologix merger. 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. From its inception through December 31, 1997, the Company also
received an aggregate of $4.8 million in cash from collaborative arrangements
and SBIR grants.
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 $10.7 million,
$7.6 million and $6.5 million was used in operating activities during 1997, 1996
and 1995, respectively.
The Company had cash, cash-equivalents and short-term and long-term
investments of $30.0 million, $41.4 million and $12.0 million as of December 31,
1997, 1996, and 1995, respectively, consisting primarily of cash, money market
accounts, United States government securities and investment grade corporate
bonds.
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 will be sufficient to fund its capital requirements
through mid-1999. 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 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 in 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.
-26-
<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are incorporated under
Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-27-
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement which involves the election of
directors and is to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997. Notwithstanding the foregoing, in accordance with the
instructions to Item 402 of Regulation S-K, the information contained in the
Company's proxy statement under the sub-heading "Report of the Compensation
Committee of the Board of Directors" and "Performance Graph" shall not be deemed
to be filed as part of or incorporated by reference into this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item as to certain business
relationships and transactions with management and other related parties of the
company is hereby incorporated by reference to such information appearing under
the captions "Certain Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Company's definitive proxy statement which
involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1997.
-28-
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report
FINANCIAL STATEMENTS
See Index to Financial Statements on Page F-1 of this report.
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended. Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (the "June 1997 Form 10-Q") is
incorporated herein by reference.
3.2 Restated Bylaws. Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 33-47418) (the "1992 Registration
Statement"), as declared effective by the Commission on July
10, 1992, is incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock, par value
$.001 per share. Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1996 is
incorporated herein by reference.
10.1 Registration Rights Agreement dated August 2, 1989, by and
among the Company and certain of its stockholders. Exhibit
10.2 to the 1992 Registration Statement is incorporated herein
by reference.
10.2 First Amendment to Registration Rights Agreement dated April
18, 1990, by and among the Company and certain of its
stockholders. Exhibit 10.3 to the 1992 Registration Statement
is incorporated herein by reference.
10.3 Second Amendment to Registration Rights Agreement dated
October 31, 1991, by and among the Company and certain of its
stockholders. Exhibit 10.4 to the 1992 Registration Statement
is incorporated herein by reference.
10.4 Third Amendment to Registration Rights Agreement dated
September 10, 1993, among the Company and certain of its
stockholders. Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (No. 33-71166) (the "1993 Registration
Statement"), as declared effective by the Commission on
November 15, 1993, is incorporated herein by reference.
10.5 Fourth Amendment to Registration Rights Agreement dated
January 20, 1994, among the Company and certain of its
stockholders. Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 (the "1993 Form
10-K") is incorporated herein by reference.
10.6++ Amended and Restated 1989 Stock Option Plan. Exhibit 10.1 to
the June 1997 Form 10-Q is incorporated herein by reference.
10.7++ Amended and Restated 1993 Non-Employee Director Stock Option
Plan. Exhibit 10.2 to the June 1997 Form 10-Q is incorporated
herein by reference.
</TABLE>
-29-
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.8** Exclusive License Agreement dated October 15, 1986, between
the Company, The University of Texas System Board of Regents
and The University of Texas M. D. Anderson Cancer Center.
Exhibit 10.8 to the 1992 Registration Statement is
incorporated herein by reference.
10.9 Research and Development Contract dated October 1, 1986,
between the Company, The University of Texas System Board of
Regents and The University of Texas M. D. Anderson Cancer
Center, together with amendments and extensions thereto.
Exhibit 10.9 to the 1992 Registration Statement is
incorporated herein by reference.
10.10** Exclusive License Agreement dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and
The University of Texas M. D. Anderson Cancer Center, together
with amendments and extensions thereto. Exhibit 10.10 to the
1992 Registration Statement is incorporated herein by
reference.
10.11 Research and Development Contract dated July 1, 1988, between
the Company, The University of Texas System Board of Regents
and The University of Texas M. D. Anderson Cancer Center,
together with amendments and extensions thereto. Exhibit 10.11
to the 1992 Registration Statement is incorporated herein by
reference.
10.12 Amendment No. 2 to Exclusive License Agreement dated July 9,
1993, among the Company, The University of Texas System Board
of Regents and The University of Texas M. D. Anderson Cancer
Center. Exhibit 10.20 to the 1993 Registration Statement is
incorporated herein by reference.
10.13 Sponsored Laboratory Study Agreement dated July 9, 1993,
between the Company and The University of Texas M. D. Anderson
Cancer Center. Exhibit 10.21 to the 1993 Registration
Statement is incorporated herein by reference.
10.14 Technology Transfer Agreement dated July 18, 1989, among
Triplex Pharmaceutical Corporation and Baylor College of
Medicine, BCM Technologies, Inc., Michael Edward Hogan and
Donald Joseph Kessler. Exhibit 10.61 to the Company's
Registration Statement on Form S-4 (No. 33-91584) dated July
24, 1995 (the "Merger Registration Statement) is incorporated
herein by reference.
10.15 Form of Key Management Proprietary Information and Inventions
and Noncompetition Agreement. Exhibit 10.23 to the 1992
Registration Statement is incorporated herein by reference.
10.16 Form of Proprietary Information and Inventions Agreement.
Exhibit 10.24 to the 1992 Registration Statement is
incorporated herein by reference.
10.17 Stock Purchase Warrant dated March 29, 1990, from the Company
in favor of Pacific Venture Finance, Inc. Exhibit 10.28 to the
1992 Registration Statement is incorporated herein by
reference.
10.18 Master Loan and Security Agreement dated March 1, 1993,
between the Company and MMC/GATX Partnership No. 1. Exhibit
10.21 to the Company's Annual Report on Form 10-K for the
fiscal year Ended December 31, 1993 (the "1993 Form 10-K") is
incorporated herein by reference.
</TABLE>
-30-
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.19 Common Stock Purchase Warrant dated June 28, 1993 from the
Company in favor of MMC/GATX Partnership No. 1. Exhibit 10.22
to the 1993 Form 10-K is incorporated herein by reference.
10.20 Common Stock Purchase Warrant dated March 21, 1994 from the
Company in favor of MMC/GATX Partnership No. 1. Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (the "March 1994 Form 10-Q") is
incorporated herein by reference.
10.21 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc.
Exhibit 10.29 to the 1993 Form 10-K is incorporated herein by
reference.
10.22 License and Development Agreement dated September 10, 1993,
between the Company and Genzyme Corporation. Exhibit 10.22 to
the 1993 Registration Statement is incorporated herein by
reference.
10.23** Common Stock Purchase Agreement dated September 10, 1993,
between the Company and Genzyme Corporation. Exhibit 10.23 to
the 1993 Registration Statement is incorporated herein by
reference.
10.24 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between the Company and Genzyme
Corporation. Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1996 (the
"September 1996 Form 10-Q") is incorporated herein by
reference.
10.25 Amendment No. 2 to Stock Purchase Agreement dated September
10, 1996, between the Company and Genzyme Corporation. Exhibit
10.2 to the September 1996 Form 10-Q is incorporated herein by
reference.
10.26** Amendment No. 3 to license and Development Agrement dated
March 25, 1997, between the Company and Genzyme Corporation.
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 1997 (the "March 1997
Form 10-Q") is incorporated herein by reference.
10.27 Amendment No. 3 to Common Stock Purchase Agreement dated March
25, 1997, between the Company and Genzyme Corporation. Exhibit
10.2 to the March 1997 Form 10-Q is incorporated herein by
reference.
10.28 Licensing Agreement dated December 7, 1996, between the
Company and Boehringer Mannheim GmbH. Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
10.29* Plan and Agreement of Merger dated February 22, 1995, among
Triplex Pharmaceutical Corporation, Argus Pharmaceuticals,
Inc. and API Acquisition Company No. 1. Exhibit 1.1 to the
Company's Current Report on Form 8-K dated February 22, 1995
(the "February 1995 Form 8-K") is incorporated herein by
reference.
10.30 Form of Certificate of Contingent Interest. Exhibit 1.2 to the
February 1995 Form 8-K is incorporated herein by reference.
</TABLE>
-31-
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<S> <C>
10.31* Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No.
2. Exhibit 1.7 to the February 1995 Form 8-K is incorporated
herein by reference.
10.32 Form of Warrant. Exhibit 1.8 to the February 1995 Form 8-K is
incorporated herein by reference.
10.33* Agreement between Oncologix and HCV Group. Exhibit 1.9 to the
February 1995 Form 8-K is incorporated herein by reference.
10.34 Exchange Agreement dated December 12, 1995, among the Company,
Health Care Ventures I, L.P., Health Care Ventures II, L.P.,
Health Care Ventures III, L.P. and Health Care Ventures IV,
L.P. Exhibit 1.2 to the Company's Current Report on Form 8-K
dated December 12, 1995 is incorporated herein by reference.
10.35++ Third Amendment to Consulting Agreement dated March 15, 1994,
between the Company and Gabriel Lopez-Berestein. Exhibit 10.3
to the March 1994 Form 10-Q is incorporated herein by
reference.
10.36++ Employment Agreement dated December 5, 1996, between the
Company and Praveen Tyle, Ph.D. Exhibit 10.3 to the March 1997
Form 10-Q is incorporated herein by reference.
10.37++ Employment Agreement dated March 12, 1997, between the
Company and David S. Gordon, M.D. Exhibit 10.4 to the March
1997 Form 10-Q is incorporated herein by reference.
10.38++ Employment Agreement dated July 28, 1997, between the
Company and Janet Walter. Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997 is incorporated herein by reference.
10.39++ Employment Agreement dated November 3, 1997 between the
+ Company and Geoffrey Cox, Ph.D.
10.40++ Form of Employment Agreement with James M. Chubb, Ph.D.
Exhibit 10.46 to the Merger Registration Statement is
incorporated herein by reference.
10.41 Lease Agreement dated April 4, 1997, between the Company and
The Woodlands Corporation. Exhibit 10.3 to the June 1997 Form
10-Q is incorporated herein by reference.
11.1+ Statement regarding computation of loss per share.
23.1+ Consent of Arthur Andersen LLP.
27.1+ Financial Data Schedule.
</TABLE>
- ---------------
+ Filed herewith.
++ Management contract or compensatory plan or arrangement.
* These agreements omit certain exhibits and schedules. The Company will
provide a copy of any omitted exhibit or schedule upon request.
** The Company has omitted certain portions of these agreements in
reliance upon Rule 406 under the Securities Act.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1997
None
-32-
<PAGE> 33
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ARONEX PHARMACEUTICALS, INC.
Dated: March 25, 1998 By: /s/ GEOFFREY F. COX
------------------------------
Geoffrey F. Cox
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
/s/ GEOFFREY F. COX Chairman of the Board of Directors March 25, 1998
- ------------------------------- Chief Executive Officer
Geoffrey F. Cox (Principal executive officer)
/s/ TERANCE A. MURNANE Controller March 25, 1998
- ------------------------------- (Principal financial and accounting officer)
Terance A. Murnane
/s/ RONALD J. BRENNER Director March 25, 1998
- -------------------------------
Ronald J. Brenner
/s/ JAMES R. BUTLER Director March 25, 1998
- -------------------------------
James R. Butler
/s/ GABRIEL LOPEZ-BERESTEIN Director March 25, 1998
- -------------------------------
Gabriel Lopez-Berestein
/s/ MARTIN P. SUTTER Director March 25, 1998
- -------------------------------
Martin P. Sutter
/s/ GREGORY F. ZAIC Director March 25, 1998
- -------------------------------
Gregory F. Zaic
</TABLE>
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1996 and 1997 F-3
Statements of Operations for the Years ended December 31, 1995, 1996 and 1997,
and for the Period from Inception (June 13, 1986) through December 31, 1997 F-4
Statements of Stockholders' Equity for the Period from Inception (June 13, 1986)
through December 31, 1997 F-5
Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997,
and for the Period from Inception (June 13, 1986) through December 31, 1997 F-10
Notes to Financial Statements F-11
</TABLE>
F-1
<PAGE> 35
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, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997 and for the period from inception (June 13, 1986)
through December 31, 1997. 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, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and for the period from inception (June 13, 1986) through
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
February 17, 1998
F-2
<PAGE> 36
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 4,179 $ 2,029
Short-term investments ................................................... 30,414 17,783
Accounts receivable ...................................................... 78 100
Prepaid expenses and other assets ........................................ 663 474
-------- --------
Total current assets ............................................ 35,334 20,386
Long-term investments ............................................................. 6,795 10,142
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,869 and $3,660, respectively ................................... 2,152 1,107
Deposits .......................................................................... -- 490
-------- --------
Total assets .................................................... $ 44,281 $ 32,125
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................... $ 1,191 $ 1,977
Accrued payroll .......................................................... 126 554
Advance from Genzyme ..................................................... -- 2,000
Note Payable to Genzyme .................................................. 2,000 --
Current portion of notes payable ......................................... 325 191
Current portion of obligations under capital leases ...................... 16 18
-------- --------
Total current liabilities ....................................... 3,658 4,740
Long-term liabilities:
Notes payable, net of current portion .................................... 121 --
Obligations under capital leases, net of current portion ................. 25 6
-------- --------
Total long-term obligations ..................................... 146 6
Commitments and Contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding ........................................... -- --
Common stock $.001 par value, 30,000,000 shares authorized, 14,597,247
and 15,459,166 shares issued and outstanding, respectively ............ 15 15
Additional paid-in capital ............................................... 93,742 96,606
Common stock warrants .................................................... 968 967
Treasury stock ........................................................... (11) (11)
Deferred compensation .................................................... (1,949) (907)
Unrealized loss on securities available-for-sale ......................... (75) (87)
Deficit accumulated during development stage ............................. (52,213) (69,204)
-------- --------
Total stockholders' equity ...................................... 40,477 27,379
-------- --------
Total liabilities and stockholders' equity ............................... $ 44,281 $ 32,125
======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE> 37
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, INCEPTION (JUNE 13,
------------------------------------ 1986) THROUGH
1995 1996 1997 DECEMBER 31, 1997
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Interest income ...................... $ 452 $ 1,692 $ 2,059 $ 5,581
Research and development grants
and contracts ..................... 1,248 2,670 841 5,050
-------- -------- -------- --------
Total revenues ............... 1,700 4,362 2,900 10,631
-------- -------- -------- --------
Expenses:
Research and development ............. 8,347 10,357 13,993 53,135
Purchase of in-process research
and development ................... 8,383 242 3,000 11,625
General and administrative ........... 2,215 1,620 2,641 13,804
Interest expense and other ........... 184 173 257 1,271
-------- -------- -------- --------
Total expenses ............... 19,129 12,392 19,891 79,835
-------- -------- -------- --------
Net loss ............................... $(17,429) $ (8,030) $(16,991) $(69,204)
======== ======== ======== ========
Basic and diluted loss per share ....... $ (2.69) $ (0.62) $ (1.14)
======== ======== ========
Weighted average shares used in
computing basic and diluted
loss per share ....................... 6,488 13,048 14,896
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE> 38
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
ADDITIONAL COMMON SECURITIES
COMMON STOCK PAID-IN STOCK DEFERRED AVAILABLE
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION FOR SALE
--------- --------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share) .............................. 183,334 $ -- $ 301 $ -- $ -- $ --
Issuance of Common Stock for license
agreement rights, October 1986
($.006 per share) ................................ 60,606 -- 1 -- -- --
Net loss .............................................. -- -- -- -- -- --
--------- --------- --------- ----- ----- -----
Balance at December 31, 1986 .......................... 243,940 -- 302 -- -- --
Issuance of Common Stock in exchange for
8% convertible notes, May 1987
($3.30 per share) ................................ 90,909 1 299 -- -- --
Net loss .............................................. -- -- -- -- -- --
--------- --------- --------- ----- ----- -----
Balance at December 31, 1987 .......................... 334,849 1 601 -- -- --
Warrants issued to purchase 11,364 shares
of Common Stock .................................. -- -- -- -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share) ................... 130,303 -- 8 -- -- --
Net loss .............................................. -- -- -- -- -- --
--------- --------- --------- ----- ----- -----
Balance at December 31, 1988 .......................... 465,152 1 609 -- -- --
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share) ................ 158,182 -- 10 -- -- --
Issuance of Common Stock for cash, August
1989 ($3.63 per share) ........................... 1,220,386 1 4,429 -- -- --
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63) ........ 3,862 -- 14 -- -- --
Net loss .............................................. -- -- -- -- -- --
--------- --------- --------- ----- ----- -----
Balance at December 31, 1989 .......................... 1,847,582 $ 2 $ 5,062 $ -- $ -- $ --
--------- --------- --------- ----- ----- -----
<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT TREASURY STOCKHOLDERS'
STAGE STOCK EQUITY
--------- ----- ---------
<S> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share) .............................. $ -- $ -- $ 301
Issuance of Common Stock for license
agreement rights, October 1986
($.006 per share) ................................ -- -- 1
Net loss .............................................. (40) -- (40)
--------- ----- ---------
Balance at December 31, 1986 .......................... (40) -- 262
Issuance of Common Stock in exchange for
8% convertible notes, May 1987
($3.30 per share) ................................ -- -- 300
Net loss .............................................. (216) -- (216)
--------- ----- ---------
Balance at December 31, 1987 .......................... (256) -- 346
Warrants issued to purchase 11,364 shares
of Common Stock .................................. -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share) ................... -- -- 8
Net loss .............................................. (832) -- (832)
--------- ----- ---------
Balance at December 31, 1988 .......................... (1,088) -- (478)
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share) ................ -- -- 10
Issuance of Common Stock for cash, August
1989 ($3.63 per share) ........................... -- -- 4,430
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63) ........ -- -- 14
Net loss .............................................. (942) -- (942)
--------- ----- ---------
Balance at December 31, 1989 .......................... $ (2,030) $ -- $ 3,034
--------- ----- ---------
</TABLE>
(continued on next page)
F-5
<PAGE> 39
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1989 .......................... 1,847,582 $ 2 $ 5,062 $ -- $ --
Stock options exercised January 1990 ($.66
per share) .................................. 30 -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock .............................. -- -- -- -- --
Net loss .............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1990 .......................... 1,847,612 2 5,062 -- --
Stock options exercised, May 1991 ($.66
per share) ................................... 75 -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... 596,095 -- 4,328 -- --
Deferred compensation relating to certain
stock options ................................ -- -- 326 -- (326)
Compensation expense related to stock options ......... -- -- -- -- 138
Net loss .............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1991 .......................... 2,443,782 2 9,716 -- (188)
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ................................................ 37,198 -- 24 -- --
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ......................... 11,364 -- 41 -- --
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ................................................ 850,000 1 10,659 -- --
Deferred compensation relating to certain
stock options ................................ -- -- 1,644 -- (1,644)
Compensation expense related to stock options ......... -- -- -- -- 460
Net loss .............................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1992 .......................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1989 .......................... $ -- $ (2,030) $ -- $ 3,034
Stock options exercised January 1990 ($.66
per share) .................................. -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock .............................. -- -- -- --
Net loss .............................................. -- (1,825) -- (1,825)
--------- --------- ------------ ---------
Balance at December 31, 1990 .......................... -- (3,855) -- 1,209
Stock options exercised, May 1991 ($.66
per share) ................................... -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... -- -- -- 4,328
Deferred compensation relating to certain
stock options ................................ -- -- -- --
Compensation expense related to stock options ......... -- -- -- 138
Net loss .............................................. -- (2,914) -- (2,914)
--------- --------- ------------ ---------
Balance at December 31, 1991 .......................... -- (6,769) -- 2,761
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ................................................ -- -- -- 24
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ......................... -- -- -- 41
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ................................................ -- -- -- 10,660
Deferred compensation relating to certain
stock options ................................ -- -- -- --
Compensation expense related to stock options ......... -- -- -- 460
Net loss .............................................. -- (4,708) -- (4,708)
--------- --------- ------------ ---------
Balance at December 31, 1992 .......................... $ -- $ (11,477) $ -- $ 9,238
</TABLE>
(continued on next page)
F-6
<PAGE> 40
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 .......................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372)
Issuance of Common Stock for compensation ............. 5,000 -- 51 -- --
Warrants issued to purchase 50,172 shares
of Common Stock .................................. -- -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................... 14,465 -- 9 -- --
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ................ 357,143 -- 4,538 -- --
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) .................. 1,402,250 2 11,462 -- --
Compensation expense related to stock options ......... -- -- -- -- 396
Net loss .............................................. -- -- -- -- --
--------- --------- --------- ------- ---------
Balance at December 31, 1993 .......................... 5,121,202 5 38,144 -- (976)
Deferred compensation relating to certain
stock options..................................... -- -- 66 -- (66)
Stock options exercised, January through October
1994 ($.66 per share) ............................ 15,111 -- 10 -- --
Warrants issued to purchase 537 shares of common
stock ............................................ -- -- -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6) ........................... 66,163 -- -- -- --
Compensation expense related to stock options ......... -- -- -- -- 546
Unrealized loss on available-for-sale securities ...... -- -- -- -- --
Net loss .............................................. -- -- -- -- --
--------- --------- --------- ------- ---------
Balance at December 31, 1994 ......................... 5,202,476 $ 5 $ 38,220 $ -- $ (496)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 .......................... $ -- $ (11,477) $ -- $ 9,238
Issuance of Common Stock for compensation ............. -- -- -- 51
Warrants issued to purchase 50,172 shares
of Common Stock .................................. -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................... -- -- -- 9
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ................ -- -- -- 4,538
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) .................. -- -- -- 11,464
Compensation expense related to stock options ......... -- -- -- 396
Net loss .............................................. -- (6,225) -- (6,225)
--------- --------- ---------- --------
Balance at December 31, 1993 .......................... -- (17,702) -- 19,471
Deferred compensation relating to certain ............. -- -- -- --
stock options
Stock options exercised, January through October
1994 ($.66 per share) ............................ -- -- -- 10
Warrants issued to purchase 537 shares of common
stock ............................................ -- -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6) ........................... -- -- -- --
Compensation expense related to stock options ......... -- -- -- 546
Unrealized loss on available-for-sale securities ...... (315) -- -- (315)
Net loss .............................................. -- (9,052) -- (9,052)
--------- --------- ---------- --------
Balance at December 31, 1994 ......................... $ (315) $ (26,754) $ -- $ 10,660
</TABLE>
(continued on next page)
F-7
<PAGE> 41
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ................ 5,202,476 $ 5 $ 38,220 $ -- $ (496)
Deferred compensation relating to certain
stock options ..................... -- -- 1,380 -- (1,380)
Stock options exercised, January through
December 1995 ($.66 per share) .... 36,958 -- 24 -- --
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ....................... 3,868,436 4 11,111 2,844 --
Warrants exercised ($4.50 per share) ........ 705,614 1 3,402 (226) --
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ...... 531,552 -- 2,046 (1,130) --
Issuance of Common Stock for services
rendered ............................... 37,500 -- 159 -- --
Treasury stock purchased ($4.42 per share) .. (2,480) -- -- -- --
Compensation expense related to stock
options ................................ -- -- -- -- 340
Unrealized gain on available-for-sale
securities ............................. -- -- -- -- --
Net loss .................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 ................ 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ................ $ (315) $ (26,754) $ -- $ 10,660
Deferred compensation relating to certain
stock options ..................... -- -- -- --
Stock options exercised, January through
December 1995 ($.66 per share) .... -- -- -- 24
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ....................... -- -- -- 13,959
Warrants exercised ($4.50 per share) ........ -- -- -- 3,177
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ...... -- -- -- 916
Issuance of Common Stock for services
rendered ............................... -- -- -- 159
Treasury stock purchased ($4.42 per share) .. -- -- (11) (11)
Compensation expense related to stock
options ................................ -- -- -- 340
Unrealized gain on available-for-sale
securities ............................. 199 -- -- 199
Net loss .................................... -- (17,429) -- (17,429)
----------- ----------- ----------- -----------
Balance at December 31, 1995 ................ $ (116) $ (44,183) $ (11) $ 11,994
</TABLE>
(continued on next page)
F-8
<PAGE> 42
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536)
Warrants redeemed January 1996 ................. -- -- 269 (269) --
Deferred compensation relating to certain
stock options ......................... -- -- 966 -- (966)
Issuance of Common Stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share) ......... 3,450,000 4 32,073 -- --
Stock options exercised, January through
December 1996 ($.04-$9.50 per share) .. 106,041 -- 343 -- --
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ......... 622,574 1 3,528 (194) --
Issuance of Common Stock pursuant to
settlement agreements ................. 38,722 -- 221 (57) --
Compensation expense related to stock options .. -- -- -- -- 553
Unrealized gain on available-for-sale securities -- -- -- -- --
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ................... 14,597,247 15 93,742 968 (1,949)
Warrants exercised February and March 1997
($8.00 per share) ..................... 3,499 -- 28 (1) --
Reversal of deferred compensation relating to
forfeited stock options ............... -- -- (578) -- 578
Issuance of Common Stock for services .......... 22,278 -- 130 -- --
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) .. 128,278 -- 215 -- --
Stock purchased - employee stock purchase
plan, June and December 1997 ($3.31
and $3.19 per share) .................. 21,392 -- 69 -- --
Issuance of Common Stock pursuant to
contingent stock agreement ............ 686,472 -- 3,000 -- --
Compensation expense related to stock options .. -- -- -- -- 464
Unrealized loss on securities available-for-sale -- -- -- -- --
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907)
========== ========== ========== ========== ==========
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ................... (116) $ (44,183) $ (11) $ 11,994
Warrants redeemed January 1996 ................. -- -- --
Deferred compensation relating to certain
stock options ......................... -- -- -- --
Issuance of Common Stock for cash in
secondary public offering March &
April 1996 ($10.00 per share) ......... -- -- -- 32,077
Stock options exercised, January through
December 1996 ($.04-$9.50 per share) .. -- -- -- 343
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ......... -- -- -- 3,335
Issuance of Common Stock pursuant to
settlement agreements ................. -- -- -- 164
Compensation expense related to stock options .. -- -- -- 553
Unrealized gain on available-for-sale securities 41 -- -- 41
Net loss ....................................... -- (8,030) -- (8,030)
------ ---------- ---------- ----------
Balance at December 31, 1996 ................... (75) (52,213) (11) 40,477
Warrants exercised February and March 1997
($8.00 per share) ..................... -- -- -- 27
Reversal of deferred compensation relating to
forfeited stock options ............... -- -- -- --
Issuance of Common Stock for services .......... -- -- -- 130
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) .. -- -- -- 215
Stock purchased-employees Stock purchase
plan June and December 1997 ($3.31
and $3.19 per share) .................. -- -- -- 69
Issuance of Common Stock pursuant to
contingent stock agreement ............ -- -- -- 3,000
Compensation expense related to stock options .. -- -- -- 464
Unrealized loss on securities available-for-sale (12) -- -- (12)
Net loss ....................................... -- (16,991) -- (16,991)
------ ---------- ---------- ----------
Balance at December 31, 1997 ................... (87) $ (69,204) $ (11) $ 27,379
====== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-9
<PAGE> 43
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,
1995 1996 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(17,429) $ (8,030) $(16,991) $(69,204)
Adjustments to reconcile net loss to net cash used
in operating activities--
Depreciation and amortization .......................... 749 936 1,139 4,026
Loss on disposal of assets ............................. -- -- 200 200
Compensation expense related to stock
and stock options ................................. 499 553 594 3,236
Charge for purchase of in-process research
and development ................................... 8,383 164 3,000 11,547
Unrealized gain (loss) on securities available-for-sale 199 41 (12) (87)
Acquisition costs, net of cash received of
$947,000 in 1995 .................................. (270) -- -- (270)
Loss in affiliate ...................................... 300 50 -- 500
Accrued interest payable converted to stock ............ -- -- -- 97
Changes in assets and liabilities--
Decrease (increase) in prepaid expenses and other
assets ....................................... (1) (375) 189 (289)
Decrease (increase) in accounts receivable ........ (32) 267 (22) (100)
Increase (decrease) in accounts payable and accrued
expenses ..................................... 796 (322) 1,214 2,458
Increase (decrease) in deferred revenue ........... 272 (876) -- (353)
-------- -------- -------- --------
Net cash used in operating activities ............. (6,534) (7,592) (10,689) (48,239)
Cash flows from investing activities:
Net sales (purchases) of investments ................... 10,094 (32,975) 9,284 (22,190)
Purchase of furniture, equipment and leasehold
improvements ...................................... (137) (256) (352) (4,121)
Proceeds from sale of assets ........................... -- -- 54 54
Deposits ............................................... -- -- (490) (490)
Investment in affiliate ................................ -- -- -- (500)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities .............................. 9,957 (33,231) 8,496 (27,247)
Cash flows from financing activities:
Proceeds from notes payable ............................ 64 2,000 -- 4,672
Repayment of notes payable and principal payments
under capital lease obligations ................... (321) (534) (272) (2,458)
Purchase of treasury stock ............................. (11) -- -- (11)
Proceeds from issuance of stock ........................ 3,200 35,755 315 75,312
-------- -------- -------- --------
Net cash provided by
financing activities .............................. 2,932 37,221 43 77,515
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ 6,355 (3,602) (2,150) 2,029
Cash and cash equivalents at beginning of period ............ 1,426 7,781 4,179 --
-------- -------- -------- --------
Cash and cash equivalents at end of period .................. $ 7,781 $ 4,179 $ 2,029 $ 2,029
======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 184 $ 120 $ 57 $ 785
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-10
<PAGE> 44
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("Aronex Pharmaceuticals" 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 Pharmaceuticals 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, third-party
reimbursement 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"). 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-1999. 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, 1997, all
short-term investments are held to maturity securities consisting of high-grade
commercial paper and United States Government backed securities with a carrying
value of $17,783,000, which approximates fair market value and cost. Long-term
investments include: (i) held to maturity securities consisting of high grade
commercial paper that mature over the next few years with a carrying value of
$8,446,000, which approximates fair market value and cost; and (ii) available
for sale securities which are United States mortgage backed securities with
various maturity dates over the next several years that have an amortized cost
of $1,783,000, a fair market value of $1,696,000 and a gross unrealized loss of
$87,000 at December 31, 1997. The Company currently has no trading securities.
F-11
<PAGE> 45
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Furniture, Equipment and Leasehold Improvements
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 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>
1996 1997
------- -------
<S> <C> <C>
Office furniture and equipment ............................ $ 571 $ 611
Laboratory equipment ...................................... 2,986 2,802
Leasehold improvements .................................... 1,464 1,354
------- -------
5,021 4,767
Less accumulated depreciation and amortization ............. (2,869) (3,660)
------- -------
Furniture, equipment and leasehold improvements, net ....... $ 2,152 $ 1,107
======= =======
</TABLE>
At December 31, 1996 and 1997, the cost of laboratory equipment held
under capital leases aggregated $64,000. All furniture, equipment and leasehold
improvements have been pledged as collateral on notes payable.
Revenue Recognition
Research and development grant and contract revenues are recognized as
expenses for development activities as they 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
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share", which establishes standards for computing and presenting earnings
per share. The new standard replaces the presentation of primary earnings per
share prescribed by Accounting Principles Board Opinion No. 15 ("APB 15"),
"Earnings per Share", with a presentation of basic earnings per share and also
requires dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all entities with complex capital structures.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully-diluted earnings per share pursuant to APB 15. The Company adopted SFAS
No. 128 in the fourth quarter of fiscal 1997. Because of the loss for the year,
no shares resulting from the assumed exercise of the options or warrants using
the treasury stock method are added to the denominator because the inclusion of
such shares would be antidilutive due to the losses for all periods included in
the statements of operations. Therefore, the Company's basic and diluted
earnings per share are the same.
F-12
<PAGE> 46
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Presentation
In April 1992, the stockholders approved a 1 for 3.3 reverse stock
split and in July 1996, approved a 1 for 2 reverse stock split. Retroactive
effect has been given to the reverse stock splits in stockholders equity and in
all per share data in the accompanying financial statements.
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.
3. INVESTMENT IN AFFILIATE
In April 1994, the Company invested in and entered into a drug
development agreement with RGene Therapeutics, Inc. ("RGene"). RGene was
involved in the development of gene therapy. Aronex Pharmaceuticals purchased
$500,000 of RGene's preferred stock. This $500,000 investment was written off
during 1994, 1995 and 1996. In June 1996, RGene was acquired by Targeted
Genetics Corporation ("Targeted Genetics"), a publicly traded company. The
Company received 440,520 shares of Targeted Genetics common stock in the merger.
These shares are subject to certain contractual resale restrictions. Under the
drug development agreement with RGene, Aronex Pharmaceuticals performed certain
research and development with respect to certain RGene projects for three years.
This agreement expired in April 1997. During 1995, 1996 and 1997, Aronex
Pharmaceuticals recorded $668,000, $597,000 and $166,000, respectively, in
revenue relating to this agreement.
4. MERGER AGREEMENTS WITH TRIPLEX PHARMACEUTICAL CORPORATION AND
ONCOLOGIX, INC.
On September 11, 1995, Aronex Pharmaceuticals 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"). The results of operations
and the cash flow for Triplex and Oncologix have been included in the financial
statements from the date of acquisition.
In connection with the Triplex Agreement, the Company issued the
following to existing Triplex stockholders and option holders: (i) 3,441,436
shares of Common Stock; (ii) options to purchase 88,912 shares of Common Stock;
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 (the "Triplex Contingent Stock Rights").
The Triplex Contingent Stock Rights entitle the former Triplex
stockholders 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) entered into an agreement on or
before September 11, 1997 with respect to the licensing of a certain product
whereby the Company received at least $5.0 million in cash or an unconditional
binding commitment for at least $5.0 million (events which did not occur) or
(ii) obtains data from such clinical trials for such product on or before
September 11, 2000 that the Company's Board of Directors determines to be
sufficient to file a New Drug Application. In addition, the Triplex Contingent
Stock Rights entitled 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 did 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 its ATRAGEN product. As a result of its
failure to receive such payments from Genzyme, the Company issued 686,472 shares
of Common Stock under the Triplex Contingent Stock Rights with
F-13
<PAGE> 47
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
an aggregate fair market value at the time of issuance of $3.0 million and
recorded a corresponding non-cash research and development expense of $3.0
million in 1997.
In connection with the Oncologix Agreement, the Company issued the
following: (i) 427,000 shares of Common Stock to certain Oncologix debt holders;
(ii) warrants (the "Warrants") to purchase approximately 9.0 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 was contingent upon the satisfaction of conditions which
relate to the licensing or development of certain products (the "Oncologix
Contingent Stock Rights").
The Oncologix Contingent Stock Rights entitled such former Oncologix
investors to receive shares of Common Stock if the Company received 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. Neither
such event occurred and, accordingly, the Oncologix Contingent Stock Rights
expired in 1997.
The Warrants issued in connection with the Oncologix merger consisted
of three series of warrant rights to purchase approximately 2.4 million, 2.8
million and 3.7 million shares of Common Stock, respectively designated as
Series A, Series B and Series C. The Series A component of the Warrants has
expired. The Series B and Series C components have exercise prices of $8.00 and
$12.00 per share, respectively, and expiration dates of 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. At December 31, 1997, warrants to purchase
approximately 3.2 million shares of Common Stock were outstanding. At December
31, 1997, approximately 1.4 million of the Series B warrant rights and 1.8
million of the Series C warrant rights were outstanding.
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% 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 5,093 and 2,944 shares of the
Common Stock at an exercise price of $12.00 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 minimis. Principal of $191,000
is due in 1998 under the master loan agreement.
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%
per annum, respectively. The July 1990 note was payable in monthly installments
of principal and interest over a five-year period ending July 1995. The October
1992 note, as amended, provided for payment of interest only through October
1994 and monthly payment of principal and interest from November 1994 through
January 1999. This note was paid in full in 1996.
At December 31, 1996, the Company had a promissory note payable to
Genzyme bearing interest at nine percent per annum. This note was converted to
an advance in 1997 (see Note 9).
F-14
<PAGE> 48
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
approximately 15 to 18% and mature at various dates through March 1999. Future
payments under capital lease obligations are as follows:
<TABLE>
<CAPTION>
Note Payable
Year Ending Master Loan
December 31, Agreement
------------ ------------
<S> <C>
1998 $ 21,000
1999 6,000
--------
27,000
Less Interest (3,000)
--------
Lease Obligations $ 24,000
========
</TABLE>
6. STOCKHOLDERS' EQUITY
Common Stock
In July 1992, the Company, in an initial public offering, issued
850,000 shares of Common Stock for $14 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 66,162 additional shares which were contingent on
certain stock performance criteria. In November 1993, the Company sold 1,250,000
shares of its Common Stock in a secondary public offering for $9.00 per share
which, together with the over-allotment exercise for 152,250 shares of its
Common Stock, raised net proceeds of approximately $11.5 million. In May 1996,
the Company sold 3,000,000 shares of its Common Stock in a secondary public
offering for $10.00 per share which, together with the over-allotment exercise
for 450,000 shares of its Common Stock, raised net proceeds of approximately
$32.1 million.
Common Stock Warrants
At December 31, 1997, the Company had warrants outstanding, relating to
certain financing and leasing transactions, to purchase 60,623 shares of Common
Stock at exercise prices ranging from $3.63 per share to $14.00 per share. The
Warrants expire at various dates through March 2001.
The Company issued Warrants to purchase approximately 9.0 million
shares of Common Stock in connection with the Oncologix merger in 1995 (see Note
4). At December 31, 1997, Warrants to purchase 3.2 million shares of Common
Stock remained outstanding at exercise prices ranging from $8.00 per share to
$12.00 per share, expiring at various dates through December 1999.
Contingent Stock Rights
In connection with the Triplex and Oncologix mergers, the Company
issued $10.1 million contingent stock rights. At December 31, 1997, the $5.0
million contingent stock rights remain outstanding, contingent upon the
development and licensing of a certain product (see Note 4).
F-15
<PAGE> 49
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS
During 1989, the Company's stockholders approved the 1989 Stock Option
Plan (the "Plan"). The Plan, as amended in 1992 and in May 1997, authorizes the
issuance of options covering the greater of (i) 2,490,000 shares of Common Stock
or (ii) 17% of the shares of Common Stock outstanding on the last day of the
preceding fiscal quarter. The term of each option ranges from five to seven
years from the date of grant. At December 31, 1997, 301,907 shares were
available for future grant under the Plan.
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
---------- -------------------
<S> <C> <C>
Balance at December 31, 1994 ...... 364,607 $ .66 to $14.88
Granted, including options repriced 578,968 $ .04 to $ 7.00
Options repriced .................. (10,500) $ 7.00 to $14.88
Exercised ......................... (49,459) $ .22 to $ .68
Forfeited ......................... (95,079) $ .66 to $14.88
---------- -------------------
Balance at December 31, 1995 ...... 788,537 $ .04 to $14.88
Granted ........................... 533,200 $ 5.50 to $12.00
Exercised ......................... (93,541) $ .04 to $ 9.50
Forfeited ......................... (109,047) $ 4.24 to $11.00
---------- -------------------
Balance at December 31, 1996 ...... 1,119,149 $ .04 to $14.88
Granted ........................... 1,232,578 $ 4.06 to $ 8.88
Exercised ......................... (150,556) $ .04 to $ 5.50
Forfeited ......................... (240,454) $ .66 to $10.50
---------- -------------------
Balance at December 31, 1997 ...... 1,960,717 $ .04 to $14.88
========== ===================
Exercisable at December 31, 1997 .. 638,628 $ .04 to $14.88
========== ===================
</TABLE>
During 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "Director Plan"). The Director Plan, as amended effective in
May 1997, authorizes the issuance of options to purchase up to 600,000 shares of
Common Stock. Shares issued under the Director Plan expire 10 years from the
date of issuance. The Director Plan allows for the issuance of two types of
grants: Formula Grants and Discretionary Grants. Formula Grants are fully vested
when issued and are issued at a price equal to the fair market value of the
Company's stock at the date of issuance. Each Non-Employee Director was issued
12,500 Formula Grants on November 14, 1995. In addition, the following Formula
Grants are issued under the Director Plan: (1) options to purchase 25,000 shares
of common stock to each Non-Employee Director upon first being elected to the
Board of Directors and (2) options to purchase 7,500 shares of Common Stock
annually, beginning on December 31, 1997, to each Non-Employee Director who has
served as a director for at least six months. Additionally, under the Director
Plan, as amended in 1997, on March 17, 1997, each Non-Employee Director received
an option to purchase 16,250 shares of Common Stock. These options were fully
vested when issued and were issued at a price equal to the fair market value of
the Company's stock at the date of issuance. Discretionary Grants may be issued
by the Compensation Committee of the Board of Directors and may be issued at
less than the fair market value of the Company's stock. In 1997, grants to
purchase a total of 15,000 shares of Common Stock were issued to one
Non-Employee Director. These options were fully vested when issued and were
issued at a price equal to the fair market value of the Company's stock at the
date of issuance. In 1996, Discretionary Grants to purchase a total of 87,500
shares of Common Stock were issued to two Non-Employee Directors. These options
vest over four years and were issued at less than the fair market value of the
Company's Common Stock at the date of grant.
F-16
<PAGE> 50
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the Director Plan follows:
<TABLE>
<CAPTION>
Options Price
Outstanding Per Share
----------- ---------
<S> <C> <C>
Balance at December 31, 1994 30,000 $ 11.00
Granted 87,500 $ 5.50
Forfeited (15,000) $ 11.00
---------- ---------------
Balance at December 31, 1995 102,500 $5.50 to $11.00
Granted 110,000 $5.50 to $9.38
Exercised (12,500) $5.50
---------- ---------------
Balance at December 31, 1996 200,000 $5.50 to $9.38
Granted 167,500 $4.25 to $11.00
Exercised -- $ --
---------- ---------------
Balance at December 31, 1997 367,500 $4.25 to $11.00
========== ===============
Exercisable at December 31, 1997 276,475 $4.25 to $11.00
========== ===============
</TABLE>
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 $907,000 at December 31, 1997.
In 1995, 1996 and 1997, $340,000, $553,000, and $594,000, respectively, in
related expense was recorded. The balance will be amortized to expense over the
remaining vesting periods of the options.
The Company accounts for these plans under APB Opinion No. 25, under
which compensation expense was recorded. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123 ("SFAS 123"), the
Company's net loss per share would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
Net Loss:
As reported ....................... $ (17,429,000) $ (8,030,000) $ (16,991,000)
============ =========== ============
Pro forma ......................... $ (18,240,000) $ (9,062,000) $ (19,129,000)
============ =========== ============
Loss Per Share (basic and diluted):
As reported ....................... $ (2.69) $ (0.62) $ (1.14)
============ =========== ============
Pro forma ......................... $ (2.81) $ (0.69) $ (1.29)
============ =========== ============
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation may not
be representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black Scholes options
pricing model with the following weighted-average assumptions used for grants in
1995, 1996 and 1997, respectively: risk-free interest rates of 5.5% to 7.7%,
5.4% to 6.4% and 5.7% to 6.9%, with no expected dividends; expected lives of 5
years and expected volatility of 116% in 1995 and 1996 and 114% in 1997.
F-17
<PAGE> 51
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's two fixed stock option plans as
of December 31, 1995, 1996 and 1997 and charges during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year ......... 394,607 $ 5.37 891,037 $ 4.29 1,319,149 $ 5.27
Granted .............................. 666,468 $ 3.61 643,200 $ 6.89 1,400,078 $ 4.99
Options repriced ..................... (10,500) $ 11.48 -- $ -- -- $ --
Exercised ............................ (49,459) $ 0.49 (106,041) $ 3.24 (150,556) $ 1.43
Forfeited ............................ (110,079) $ 7.30 (109,047) $ 6.75 (240,454) $ 5.91
--------- ---------- ----------
Balance at end of year ............... 891,037 $ 4.10 1,319,149 $ 5.27 2,328,217 $ 5.37
========= ========== ==========
Options exercisable at year end ...... 360,657 $ 3.24 437,391 $ 4.10 915,103 $ 5.56
========= ========== ==========
Weighted-average fair value of options
granted during the year .............. $ 6.49 $ 7.99 $ 4.02
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
AMOUNT WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- --------------- ----------------- ---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 3.00 56,894 4.2 $ 0.40 56,894 $ 0.40
$3.01 - $ 7.00 1,863,110 6.3 $ 4.90 612,880 $ 4.92
$7.01 - $14.88 408,213 6.9 $ 8.22 245,329 $ 8.37
------------ ---------
2,328,217 915,103
============ =========
</TABLE>
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, 1995, 1996 and 1997
is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate (34.0)% (34.0)% (34.0)%
Purchase of in-process research and development 16.4% 1.1% 6.6%
Stock option compensation not deductible (deductible) 0.7% (0.3)% (0.2)%
Other nondeductible expenses -- -- (0.7)%
Adjustment to deferred tax valuation allowance 16.9% 33.2% 28.3%
------ ------ ------
0.0% 0.0% 0.0%
====== ====== ======
</TABLE>
F-18
<PAGE> 52
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's net deferred tax asset at December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets relating to:
Federal net operating loss carryforwards ................... $ 22,777,400 $ 27,640,500
Financial statement depreciation and amortization in
excess of (less than) amount deductible for income
tax purposes .......................................... 130,400 132,000
Accrued liabilities not currently deductible
for income tax purposes ............................... 42,900 725,100
Equity in loss of affiliate not currently
deductible for income tax purposes .................... 170,000 170,000
Other items, net ........................................... (24,300) (19,400)
------------ ------------
Total deferred items, net ....................................... 23,096,400 28,648,200
Deferred tax valuation allowance ................................ (23,096,400) (28,648,200)
------------ ------------
Net deferred tax asset .......................................... $ -- $ --
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $79.0 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
United States 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 otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of the Company's
deferred tax assets, a valuation allowance has been established to offset these
tax assets. The valuation allowance increased $10,957,000, $3,504,000, and
$5,551,800 for the years ended December 31, 1995, 1996 and 1997, respectively.
These increases were primarily due to the Company's losses from operations for
such periods and the valuation allowance for the net operating loss
carryforwards acquired in the 1995 mergers with Triplex and Oncologix (See Note
4). The Company has not made any federal 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 satisfy 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, 1995, 1996 and 1997, the Company paid
MD Anderson $392,000, $144,000, and $108,000, respectively, for research
performed on 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
Pharmaceuticals' products in 1993 with an initial fee of $30,000. Annual royalty
payments
F-19
<PAGE> 53
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
by the Company 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 1993, the Company entered into a license and development agreement
with Genzyme to develop and commercialize ATRAGEN(R). The initial focus of the
collaboration was the development of ATRAGEN for the treatment of myelogenous
leukemias and certain non-hematologic cancers. The Company and Genzyme shared
clinical development responsibilities and research program funding through the
end of 1996. Under the agreement, Genzyme was required to make up to $1.5
million in milestone payments to the Company upon the occurrence of certain
events and to pay the Company royalties on sales of the product. Genzyme had the
right to terminate the agreement in the event of a third party claim of
infringement by products subject to the agreement. The Company had the right to
terminate the agreement if Genzyme failed to satisfy certain milestones. In
connection with the collaborative agreement, Genzyme made a net $4.5 million
equity investment in the Company and agreed to make an additional $5.0 million
equity investment in the Company if certain developmental goals were achieved.
In September 1996, Genzyme advanced Aronex Pharmaceuticals $2.0
million relating to the $5.0 million equity milestone. In early 1997, the
license and development agreement was amended and Genzyme was released from any
further obligation to perform development work for ATRAGEN. Under the amendment,
the license granted to Genzyme was converted to an option to acquire the right
to market and sell ATRAGEN worldwide (with the Company retaining co-promotion
rights in the United States). Genzyme is required to pay the Company $3.0
million no more than six months after the filing of an NDA for ATRAGEN to
exercise the option, and would thereafter be required to pay royalties on sales
of ATRAGEN. Aronex Pharmaceuticals has the right to re-acquire the marketing
rights at any time within the six months following Genzyme's exercise of the
option by returning Genzyme's $3.0 million option exercise payment, repaying
Genzyme's $2.0 million advance and paying royalties on sales of ATRAGEN,
including $500,000 in minimum royalties in the first year. If Genzyme does not
exercise its option, Aronex Pharmaceuticals is required to repay Genzyme the
$2.0 million advance and to pay royalties on sales of ATRAGEN, including
$500,000 in minimum royalties in the first year following the expiration of the
option.
In 1996, the Company entered into a license agreement with Boehringer
Mannheim to develop and commercialize one of the Company's products, AR209.
Under the agreement, Boehringer Mannheim is responsible for funding the costs of
all remaining preclinical and clinical development of AR209 and for
manufacturing the product. Boehringer Mannheim paid the Company $150,000 in
license fees in connection with this agreement in 1997 and has agreed to pay
minimum annual license fees of $100,000 during the term of the agreement. In
addition, Boehringer Mannheim is required to pay Aronex Pharmaceuticals up to
$2.65 million in milestone payments upon the occurrence of certain events and
will pay Aronex Pharmaceuticals royalties on sales of the product. Aronex
Pharmaceuticals has the option to co-promote the product under terms to be
negotiated by the parties or to co-market the product if the parties are unable
to reach an agreement as to the terms of a co-promotion arrangement. Boehringer
Mannheim has the right to terminate the agreement if the costs of developing
AR209 are materially greater than anticipated and Boehringer Mannheim
determines, in its reasonable discretion, not to proceed with the development of
the product in light of such increased costs. The Company has the right to
terminate the agreement if Boehringer Mannheim fails to achieve certain
milestones.
10. COMMITMENTS AND CONTINGENCIES
The Company leases laboratory and office space under operating leases
and certain office equipment on a short-term basis. In 1997, the Company entered
into a lease for a building from its current landlord who was a related party
until late in 1997. Under this lease, the Company has committed to lease 30,000
square feet for ten years beginning in January 1998. Rental expense was
approximately $208,000, $268,000, and $236,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
F-20
<PAGE> 54
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum noncancellable payments under operating leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1998 $ 698,000
1999 714,000
2000 714,000
2001 714,000
2002 712,000
Thereafter 3,570,000
-----------
Total $ 7,122,000
===========
</TABLE>
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 an officer of the Company, for an initial term of one year. This officer
terminated his employment on January 15, 1998 and the Company is obligated to
pay his monthly salary of $19,583 and certain benefits for a period of twelve
months after termination.
During 1995, 1996 and 1997, the Company entered into employment
agreements with its chief executive officer and other officers which have
initial termination dates ranging from 1998 to 2000. The agreements are
thereafter automatically renewed for successive periods of twelve to eighteen
months unless terminated by either party. Such agreements provide that in the
case of termination without cause, the officers are entitled to payments ranging
from one hundred to one hundred and fifty percent of their annual salaries.
Under these agreements the Company is committed to pay certain relocation costs
and an amount equal to the federal income tax liability relating to a portion of
the taxable relocation costs. Additionally, one of these officers has an
outstanding loan with the Company with a balance of approximately $18,000 at
December 31, 1997. This loan will be repaid over the next three years. Current
annual salaries relating to these agreements total $1,017,000 at December 31,
1997.
In February 1998, the Company amended a consulting agreement with the
Company's chief scientific advisor for a three-year period ending December 31,
2000, whereby the Company is committed to pay consulting fees of $156,000 per
year through December 31, 2000. One-half of the amount to be paid over the next
three years will be paid in cash and one-half will be paid in Company Common
Stock. The Company paid cash of $132,000, $144,000, and $156,000 for the years
ended December 31, 1995, 1996 and 1997, respectively, pursuant to this
agreement.
During 1995 and 1996, the Company paid $28,500 and $2,500,
respectively, in consulting fees to a consulting firm which is wholly-owned by a
former member of the Board of Directors.
12. 401(K) PLAN
Under a 401(k) plan, employees can contribute up to 20% of their
compensation subject to limitations as defined by the Internal Revenue Service.
The Company matches 25% of each employee's contributions up to a maximum of
$1,000 per employee per year. The Company contributed approximately $25,800,
$40,000 and $45,700 in matching contributions for the years ended December 31,
1995, 1996 and 1997, respectively.
F-21
<PAGE> 55
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Board of Directors adopted the 1997 Employee
Stock Purchase Plan and reserved 250,000 shares of Common Stock for issuance
thereunder. The plan permits employees to purchase Common Stock through payroll
deductions of up to 15% of their compensation subject to limitations as defined
by the Internal Revenue Service. Purchases of Common Stock are made at the lower
of 85% of fair market value at the beginning or end of each six-month offering
period. In 1997, 21,292 shares were purchased by employees at $3.31 and $3.19
per share.
F-22
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended. Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (the "June 1997 Form 10-Q") is
incorporated herein by reference.
3.2 Restated Bylaws. Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (No. 33-47418) (the "1992 Registration
Statement"), as declared effective by the Commission on July
10, 1992, is incorporated herein by reference.
4.1 Specimen certificate for shares of Common Stock, par value
$.001 per share. Exhibit 4.1 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1996 is
incorporated herein by reference.
10.1 Registration Rights Agreement dated August 2, 1989, by and
among the Company and certain of its stockholders. Exhibit
10.2 to the 1992 Registration Statement is incorporated herein
by reference.
10.2 First Amendment to Registration Rights Agreement dated April
18, 1990, by and among the Company and certain of its
stockholders. Exhibit 10.3 to the 1992 Registration Statement
is incorporated herein by reference.
10.3 Second Amendment to Registration Rights Agreement dated
October 31, 1991, by and among the Company and certain of its
stockholders. Exhibit 10.4 to the 1992 Registration Statement
is incorporated herein by reference.
10.4 Third Amendment to Registration Rights Agreement dated
September 10, 1993, among the Company and certain of its
stockholders. Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (No. 33-71166) (the "1993 Registration
Statement"), as declared effective by the Commission on
November 15, 1993, is incorporated herein by reference.
10.5 Fourth Amendment to Registration Rights Agreement dated
January 20, 1994, among the Company and certain of its
stockholders. Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 (the "1993 Form
10-K") is incorporated herein by reference.
10.6++ Amended and Restated 1989 Stock Option Plan. Exhibit 10.1 to
the June 1997 Form 10-Q is incorporated herein by reference.
10.7++ Amended and Restated 1993 Non-Employee Director Stock Option
Plan. Exhibit 10.2 to the June 1997 Form 10-Q is incorporated
herein by reference.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.8** Exclusive License Agreement dated October 15, 1986, between
the Company, The University of Texas System Board of Regents
and The University of Texas M. D. Anderson Cancer Center.
Exhibit 10.8 to the 1992 Registration Statement is
incorporated herein by reference.
10.9 Research and Development Contract dated October 1, 1986,
between the Company, The University of Texas System Board of
Regents and The University of Texas M. D. Anderson Cancer
Center, together with amendments and extensions thereto.
Exhibit 10.9 to the 1992 Registration Statement is
incorporated herein by reference.
10.10** Exclusive License Agreement dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and
The University of Texas M. D. Anderson Cancer Center, together
with amendments and extensions thereto. Exhibit 10.10 to the
1992 Registration Statement is incorporated herein by
reference.
10.11 Research and Development Contract dated July 1, 1988, between
the Company, The University of Texas System Board of Regents
and The University of Texas M. D. Anderson Cancer Center,
together with amendments and extensions thereto. Exhibit 10.11
to the 1992 Registration Statement is incorporated herein by
reference.
10.12 Amendment No. 2 to Exclusive License Agreement dated July 9,
1993, among the Company, The University of Texas System Board
of Regents and The University of Texas M. D. Anderson Cancer
Center. Exhibit 10.20 to the 1993 Registration Statement is
incorporated herein by reference.
10.13 Sponsored Laboratory Study Agreement dated July 9, 1993,
between the Company and The University of Texas M. D. Anderson
Cancer Center. Exhibit 10.21 to the 1993 Registration
Statement is incorporated herein by reference.
10.14 Technology Transfer Agreement dated July 18, 1989, among
Triplex Pharmaceutical Corporation and Baylor College of
Medicine, BCM Technologies, Inc., Michael Edward Hogan and
Donald Joseph Kessler. Exhibit 10.61 to the Company's
Registration Statement on Form S-4 (No. 33-91584) dated July
24, 1995 (the "Merger Registration Statement) is incorporated
herein by reference.
10.15 Form of Key Management Proprietary Information and Inventions
and Noncompetition Agreement. Exhibit 10.23 to the 1992
Registration Statement is incorporated herein by reference.
10.16 Form of Proprietary Information and Inventions Agreement.
Exhibit 10.24 to the 1992 Registration Statement is
incorporated herein by reference.
10.17 Stock Purchase Warrant dated March 29, 1990, from the Company
in favor of Pacific Venture Finance, Inc. Exhibit 10.28 to the
1992 Registration Statement is incorporated herein by
reference.
10.18 Master Loan and Security Agreement dated March 1, 1993,
between the Company and MMC/GATX Partnership No. 1. Exhibit
10.21 to the Company's Annual Report on Form 10-K for the
fiscal year Ended December 31, 1993 (the "1993 Form 10-K") is
incorporated herein by reference.
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.19 Common Stock Purchase Warrant dated June 28, 1993 from the
Company in favor of MMC/GATX Partnership No. 1. Exhibit 10.22
to the 1993 Form 10-K is incorporated herein by reference.
10.20 Common Stock Purchase Warrant dated March 21, 1994 from the
Company in favor of MMC/GATX Partnership No. 1. Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (the "March 1994 Form 10-Q") is
incorporated herein by reference.
10.21 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc.
Exhibit 10.29 to the 1993 Form 10-K is incorporated herein by
reference.
10.22 License and Development Agreement dated September 10, 1993,
between the Company and Genzyme Corporation. Exhibit 10.22 to
the 1993 Registration Statement is incorporated herein by
reference.
10.23** Common Stock Purchase Agreement dated September 10, 1993,
between the Company and Genzyme Corporation. Exhibit 10.23 to
the 1993 Registration Statement is incorporated herein by
reference.
10.24 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between the Company and Genzyme
Corporation. Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1996 (the
"September 1996 Form 10-Q") is incorporated herein by
reference.
10.25 Amendment No. 2 to Stock Purchase Agreement dated September
10, 1996, between the Company and Genzyme Corporation. Exhibit
10.2 to the September 1996 Form 10-Q is incorporated herein by
reference.
10.26** Amendment No. 3 to License and Development Agreement dated
March 25, 1997, between the Company and Genzyme Corporation.
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 1997 (the "March 1997
Form 10-Q") is incorporated herein by reference.
10.27 Amendment No. 3 to Common Stock Purchase Agreement dated March
25, 1997, between the Company and Genzyme Corporation. Exhibit
10.2 to the March 1997 Form 10-Q is incorporated herein by
reference.
10.28 Licensing Agreement dated December 7, 1996, between the
Company and Boehringer Mannheim GmbH. Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 is incorporated herein by reference.
10.29* Plan and Agreement of Merger dated February 22, 1995, among
Triplex Pharmaceutical Corporation, Argus Pharmaceuticals,
Inc. and API Acquisition Company No. 1. Exhibit 1.1 to the
Company's Current Report on Form 8-K dated February 22, 1995
(the "February 1995 Form 8-K") is incorporated herein by
reference.
10.30 Form of Certificate of Contingent Interest. Exhibit 1.2 to the
February 1995 Form 8-K is incorporated herein by reference.
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.31* Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No.
2. Exhibit 1.7 to the February 1995 Form 8-K is incorporated
herein by reference.
10.32 Form of Warrant. Exhibit 1.8 to the February 1995 Form 8-K is
incorporated herein by reference.
10.33* Agreement between Oncologix and HCV Group. Exhibit 1.9 to the
February 1995 Form 8-K is incorporated herein by reference.
10.34 Exchange Agreement dated December 12, 1995, among the Company,
Health Care Ventures I, L.P., Health Care Ventures II, L.P.,
Health Care Ventures III, L.P. and Health Care Ventures IV,
L.P. Exhibit 1.2 to the Company's Current Report on Form 8-K
dated December 12, 1995 is incorporated herein by reference.
10.35++ Third Amendment to Consulting Agreement dated March 15, 1994,
between the Company and Gabriel Lopez-Berestein. Exhibit 10.3
to the March 1994 Form 10-Q is incorporated herein by
reference.
10.36++ Employment Agreement dated December 5, 1996, between the
Company and Praveen Tyle, Ph.D. Exhibit 10.3 to the March
1997 Form 10-Q is incorporated herein by reference.
10.37++ Employment Agreement dated March 12, 1997, between the
Company and David S. Gordon, M.D. Exhibit 10.4 to the March
1997 Form 10-Q is incorporated herein by reference.
10.38++ Employment Agreement dated July 28, 1997, between the
Company and Janet Walter. Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997 is incorporated herein by reference.
10.39++ Employment Agreement dated November 3, 1997 between the
+ Company and Geoffrey Cox, Ph.D.
10.40++ Form of Employment Agreement with James M. Chubb, Ph.D.
Exhibit 10.46 to the Merger Registration Statement is
incorporated herein by reference.
10.41 Lease Agreement dated April 4, 1997, between the Company and
The Woodlands Corporation. Exhibit 10.3 to the June 1997 Form
10-Q is incorporated herein by reference.
11.1+ Statement regarding computation of loss per share.
23.1+ Consent of Arthur Andersen LLP.
27.1+ Financial Data Schedule.
</TABLE>
- ---------------
+ Filed herewith.
++ Management contract or compensatory plan or arrangement.
* These agreements omit certain exhibits and schedules. The Company will
provide a copy of any omitted exhibit or schedule upon request.
** The Company has omitted certain portions of these agreements in
reliance upon Rule 406 under the Securities Act.
<PAGE> 1
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement"), dated as of
November 3, 1997, is entered into by and between Aronex Pharmaceuticals, Inc.,
a Delaware corporation (the "Company"), and Geoffrey F. Cox, Ph.D. (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to enter into the employment of the Company, upon the terms
and conditions and in the capacities set forth herein;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT AND TERM OF EMPLOYMENT. Subject to the
terms and conditions of this Agreement, the Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company, as Chairman of
the Board and Chief Executive Officer for a term (the "Term of Employment")
beginning on November 3, 1997 (the "Effective Date") and ending on the
Expiration Date (defined below). As used in this Agreement, "Expiration Date"
means the third anniversary of the Effective Date, provided that on May 1, 1999
and on the first day of each succeeding month (each such date being referred to
as a "Renewal Date"), the Expiration Date shall be automatically extended one
additional month unless, not less than 10 days prior to the relevant Renewal
Date, (i) either party shall have given written notice to the other that no
such automatic extension shall occur after the date of such notice or (ii)
either party shall have given a Notice of Termination to the other pursuant to
Section 6 hereof. Notwithstanding the foregoing, if either party gives a valid
Notice of Termination pursuant to Section 6 hereof, the Term of Employment
shall not extend beyond the termination date specified in such Notice of
Termination.
2. SCOPE OF EMPLOYMENT. (a) During the Term of
Employment, the Executive agrees to (i) serve as Chairman of the Board and
Chief Executive Officer of the Company and shall have and may exercise all the
powers, duties and functions as are normal and customary to such positions and
that are consistent with the responsibilities set forth with respect to such
positions in the Company's by-laws and (ii) perform such other duties not
inconsistent with his position as are assigned to him, from time to time, by
the Board of Directors of the Company (the "Board"). During the Term of
Employment, the Executive shall devote substantially all of his business time,
attention, skill and efforts to the faithful performance of his duties
hereunder. Subject to the continued discretion of the Board, Executive shall
be appointed to and serve on the Nominating Committee of the Board.
(b) During the Term of Employment, the Executive agrees
to serve, if elected, as an officer or director of any subsidiary or affiliate
of the Company so long as such service is commensurate with the Employee's
duties and responsibilities to the Company.
3. COMPENSATION. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
agreements set
<PAGE> 2
forth in the Proprietary Information and Inventions and Non-Competition
Agreement of even date herewith between the Executive and the Company:
(a) the Executive shall receive a salary at the rate of
$300,000 per year (payable at such regular intervals as other employees of the
Company are compensated in accordance with the Company's employment practices),
shall be subject to review annually by the Board at the end of each fiscal year
and may be adjusted at its discretion and shall be commensurate with the
salaries of other senior executives of the Company, provided that such salary
may not be reduced at any time.
(b) the Executive shall be entitled to receive an annual
cash bonus of up to 33% of the Executive's salary based upon the achievement of
such milestones as may be agreed upon by the Executive and the Board.
(c) the Executive will be entitled to receive a grant of
25,000 shares of Common Stock:
(i) in 1998, if the average closing price of the
Company's Common Stock reported on the Nasdaq Stock Market or any
national securities exchange on which the Common Stock is then listed
(the "Average Closing Price") during any period of 30 consecutive days
exceeds $10.00 per share (subject to appropriate adjustment to reflect
any stock split, dividend, combination or recapitalization) during the
1998 calendar year;
(ii) in 1999, if the Average Closing Price during any
period of 30 consecutive days exceeds $15.00 per share (subject to
appropriate adjustment to reflect any stock split, dividend,
combination or recapitalization) during the 1999 calendar year;
(iii) in 2000, if the Average Closing Price during any
period of 30 consecutive days exceeds $20.00 per share (subject to
appropriate adjustment to reflect any stock split, dividend,
combination or recapitalization) during the 2000 calendar year; and
(iv) in 2001, if the Average Closing Price during any
period of 30 consecutive days exceeds $30.00 per share (subject to
appropriate adjustment to reflect any stock split, dividend,
combination or recapitalization) during the 2001 calendar year.
The shares of Common Stock that may be granted to the Executive pursuant to
this Section 3(c) upon the satisfaction of any of the conditions specified
above shall be issued on the next business day following the date that the
relevant condition is satisfied. Such shares shall be subject to such
conditions on transfer as may be required under the Securities Act of 1933, and
may bear a legend to such effect.
(d) the Executive will be entitled to receive a signing
bonus of $220,000 on the Effective Date, one-half of which ($110,000) shall be
payable in cash and one-half of which ($110,000) shall be payable in the form
of a grant of Common Stock, valued for such purposes at the Average Closing
Price on the date of execution of this Agreement, to be fully vested on the
date of grant.
(e) the Executive will be entitled to receive options to
purchase 500,000 shares of Common Stock under the Company's Amended and
Restated Stock Option Plan (the "Plan") at an exercise price of $4.25 per share
(the closing price of the Common Stock on the date of the letter agreement
pursuant to which the Executive agreed to enter into the employ of the
Company), which options shall be subject to the terms of the Plan and of the
stock option agreement between the Company and the Executive relating
Employment Agreement
Geoffrey F. Cox, Ph.D.
-2-
<PAGE> 3
thereto. Such options shall vest and become exercisable (i) with respect to
100,000 shares of Common Stock on the Effective Date and (ii) with respect to
8,333 additional shares of Common Stock at the end of each month during the
Term of Employment until the earlier to occur of the expiration or termination
of the Term of Employment or the date on which such options are vested with
respect to all of the shares of Common Stock subject thereto. Such options
shall become vested with respect to all remaining unvested shares in the event
the Executive terminates his employment for Good Reason (as defined below). In
the event the Executive's employment is terminated by the Company without Cause
(as defined below) or is terminated on account of the Executive's death or
Disability (as defined below), such options shall become vested with respect to
the portion of the remaining unvested shares that would otherwise have become
vested during the 18 month period following such termination, and shall
terminate with respect to all remaining unvested shares, if any. Such options
shall terminate with respect to all remaining unvested shares in the event the
Executive terminates his employment otherwise than for Good Reason, and shall
terminate with respect to all shares subject to such options (whether or not
vested) in the event the Executive's employment is terminated by the Company
for Cause.
4. ADDITIONAL COMPENSATION AND BENEFITS. (a) As
additional compensation for the Executive's services under this Agreement and
the Executive's agreements set forth in the Proprietary Information and
Inventions and Non-Competition Agreement of even date herewith between the
Executive and the Company, during the Term of Employment, the Company agrees to
provide the Executive with the non-cash benefits provided by the Company to its
other officers and key employees as they may exist from time to time. Such
benefits shall include such leave or vacation time (not less than four weeks),
medical and dental insurance, life insurance and other health care benefits,
and retirement and disability benefits as may hereafter be provided by the
Company in accordance with its policies, as well as any stock option plan or
similar employee benefit program for which key executives are or shall become
eligible. In addition, the Company will provide the Executive with an
automobile allowance in the amount of $500 per month and, subject to approval
by the Board at a reasonable cost to the Company, the Company will provide the
Executive with a term life insurance policy with a benefit of $1,000,000
payable to a beneficiary selected by the Executive.
(b) The Executive is authorized to incur reasonable
business expenses for promoting the business and reputation of the Company,
including (without limitation) reasonable expenditures for travel, lodging,
club membership at The Woodlands Country Club, meals and client, patron,
customer and/or business associate entertainment. The Company shall reimburse
the Executive within 30 days for reasonable expenses incurred by the Executive
in furtherance of the Company's business, provided that such expenses are
incurred in accordance with the Company's policies and upon presentation of
documentation in accordance with expense reimbursement policies of the Company
as they may exist from time to time, and submission to the Company of adequate
documentation in accordance with federal income tax regulations and
administrative pronouncements.
5. RELOCATION AND TRAVEL EXPENSES. In connection with
and subject to the continuation of the Executive's employment by the Company
during the periods in which such expenses are incurred by the Executive:
(a) the Company shall pay 100% of the Executive's
reasonable costs of commuting (including up to one round-trip airfare
per week and associated local transportation expenses) from the
Executive's home in Southborough, Massachusetts to the Company's
offices in The Woodlands, Texas for a period of three months from the
Effective Date;
Employment Agreement
Geoffrey F. Cox, Ph.D.
-3-
<PAGE> 4
(b) the Company shall pay 100% of the reasonable costs
incurred by the Executive for interim housing in the Houston, Texas
metropolitan area for a period of up to three months; and
(c) the Company shall pay the round-trip airfare for up
to two trips to the Houston, Texas metropolitan area from the
Executive's home in Southborough, Massachusetts for the Executive and
the Executive's spouse for the purpose of locating a house in the
Houston, Texas metropolitan area;
(d) the Company shall pay the customary and reasonable
expenses incurred by the Executive in moving household belongings from
the Executive's home in Southborough, Massachusetts to a home in the
Houston, Texas metropolitan area;
(e) the Company shall reimburse the Executive for real
estate commissions and other reasonable closing costs and reasonable
attorneys' fees customarily borne by sellers in connection with the
sale of the Executive's home in Southborough, Massachusetts, provided
that the Company shall have no obligation to pay any costs associated
with the Executive's purchase of a home in the Houston, Texas
metropolitan area;
(f) the Company shall pay the round-trip airfare for up
to three trips to Kennebunkport, Maine from the Houston, Texas
metropolitan area for the Executive and the Executive's spouse during
any calendar year (commencing with 1998) during the Term of
Employment.
To the extent that the Company's payment of any of the amounts specified in
this Section 5 constitute taxable income to the Executive for which the
Executive is not entitled to a corresponding deduction for federal income tax
purposes ("Expense Reimbursement Income"), the Company will pay the Executive
an amount (a "Gross-Up Payment") equal to the amount of federal income tax
payable by the Executive with respect to the Expense Reimbursement Income
(including, for such purposes, the amount of the Gross-Up Payment).
6. TERMINATION.
(a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date.
The Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of
the proviso contained in the penultimate sentence of Section l hereof shall not
be deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 6, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reason for such termination and the facts and circumstances claimed to provide
a basis for such termination.
Employment Agreement
Geoffrey F. Cox, Ph.D.
-4-
<PAGE> 5
(b) Automatic Termination on Expiration Date or Death.
In the event the Executive's employment hereunder shall automatically terminate
on the Expiration Date or as a result of the Executive's death, the Executive
shall only be entitled to receive, to the extent applicable, (i) all unpaid
compensation accrued as of the termination date pursuant to Section 3 hereof,
(ii) all unused vacation time accrued by the Executive as of the termination
date, (iii) all amounts owing to the Executive under Section 4(b) hereof and
(iv) those benefits under Section 4 which are required under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or other laws.
The amounts described in clauses (i), (ii) and (iii) of the foregoing sentence
shall be paid to the Executive in a lump sum payment promptly after the
Expiration Date.
(c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above, such compensation and other payments to be paid as if the
Executive's employment had automatically terminated without the giving of any
Notice of Termination. As used in this Agreement, "Cause" shall mean (i) any
material failure of the Executive to perform his duties specified in Section 2
of this Agreement (other than any such failure resulting from the Executive's
incapacity due to Disability) after written notice of such failure has been
given to the Executive by the Board and such failure shall have continued for
30 days after receipt of such notice, (ii) gross negligence or willful or
intentional wrongdoing or misconduct, (iii) a material breach by the Executive
of the Proprietary Information and Inventions and Non-Competition Agreement of
even date herewith between the Executive and the Company or any subsequent such
agreement between the Executive and the Company, or (iv) conviction of the
Executive of a felony offense or a crime involving moral turpitude.
(d) Termination for Disability. To provide for the event
the Executive's employment is terminated by either the Company or the Executive
on account of Disability (defined below), the Company shall provide the
Executive such disability benefits as may hereafter be provided by the Company
in accordance with its policies, as they may exist from time to time. As used
herein, "Disability" means any physical or mental condition of the Executive
that (i) prevents the Executive from being able to perform the services
required under this Agreement, (ii) has continued for at least 180 consecutive
days during any 12-month period and (iii) is reasonably expected to continue.
(e) Termination by Company Without Cause or by the
Executive with Good Reason. If either the Company terminates the Executive's
employment for any reason other than for Cause or on account of Disability or
the Executive terminates his employment for Good Reason (as hereinafter
defined), the Company shall:
(i) pay to the Executive, within 30 days after the date
of such termination, a lump sum cash payment equal to 1.5 times the
Executive's then current annual salary if the Company terminates the
Executive's employment for any reason other than for Cause or on
account of Disability, or a lump sum cash payment equal to 2.5 times
the Executive's then current annual salary if the Executive terminates
his employment for Good Reason; and
(ii) pay the Executive the compensation and other payments
described in paragraph (b) above during the period commencing on the
date of such termination and ending on the date that is 18 months
after the date of such termination or, if earlier, the Expiration
Date.
As used in this Agreement, "Good Reason" shall mean a material change in the
title, powers, duties, responsibilities or functions of the Executive as
described in Section 2 hereof within one year following the occurrence of a
Change of Control.
Employment Agreement
Geoffrey F. Cox, Ph.D.
-5-
<PAGE> 6
As used in this Agreement, a "Change of Control" shall mean:
(i) the acquisition after the Effective Date by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended) (a
"Person") of beneficial ownership of 50% or more of either (i) the
then outstanding shares of common stock of the Company (the
"Outstanding Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"), provided that for purposes of this subsection (i), the
following acquisitions shall not constitute a Change of Control: (A)
any acquisition directly from the Company, (B) any acquisition by the
Company, (C) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (D) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C)
of subsection (ii) hereof; or
(ii) consummation after the Effective Date of a
reorganization, merger or consolidation or sale or other disposition
of all or substantially all of the assets of the Company (a "Corporate
Transaction") in each case, unless, following such Corporate
Transaction, (A) (1) all or substantially all of the persons who were
the beneficial owners of the Outstanding Common Stock immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 50% of the then outstanding shares of common
stock of the corporation resulting from such Corporate Transaction,
and (2) all or substantially all of the persons who were the
beneficial owners of the Outstanding Voting Securities immediately
prior to such Corporate Transaction beneficially own, directly or
indirectly, more than 50% of the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially
all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership
of the Outstanding Common Stock and the Outstanding Voting Securities
immediately prior to such Corporate Transaction, as the case may be,
(B) no Person (excluding (l) any corporation resulting from such
Corporate Transaction or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Corporate
Transaction and (2) any Person approved by the members of the Board in
office immediately prior to such Corporate Transaction) beneficially
owns, directly or indirectly, 50% or more of the then outstanding
shares of common stock of the corporation resulting from such
Corporate Transaction or the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to such Corporate Transaction and
(C) at least a majority of the members of the board of directors of
the corporation resulting from such Corporate Transaction were members
of the Board at the time of the execution of the initial agreement or
of the action of the Board providing for such Corporate Transaction.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement
shall prevent or limit the Executive's continuing or future participation in
any benefit, bonus, incentive or other plan or program provided by the Company
or any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the date of
termination of the Executive's employment under this Agreement shall be payable
in accordance with such plan or program.
Employment Agreement
Geoffrey F. Cox, Ph.D.
-6-
<PAGE> 7
8. RESOLUTION OF DISPUTES.
(a) Negotiation. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and an executive officer of the Company who
has authority to settle the controversy. Any party may give the other party
written notice of any dispute not resolved in the normal course of business.
Within 10 days after the effective date of such notice, the Executive and an
executive officer of the Company shall meet at a mutually acceptable time and
place within the Houston, Texas metropolitan area, and thereafter as often as
they reasonably deem necessary, to exchange relevant information and to attempt
to resolve the dispute. If the matter has not been resolved within 30 days of
the disputing party's notice, or if the parties fail to meet within 10 days,
either party may initiate arbitration of the controversy or claim as provided
hereinafter. If a negotiator intends to be accompanied at a meeting by an
attorney, the other negotiator shall be given at least three business days'
notice of such intention and may also be accompanied by an attorney. All
negotiations pursuant to this Section 8(a) shall be treated as compromise and
settlement negotiations for the purposes of the federal and state rules of
evidence and procedure.
(b) Arbitration. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by non-binding means as provided in Section 8(a) within 60 days
of the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources,
Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by
three independent and impartial arbitrators, of whom each party shall appoint
one, provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.
9. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Texas.
Venue and jurisdiction of any act on relating to this agreement shall lie in
Harris County, Texas.
10. NOTICE. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally or
if sent by registered or certified mall, return receipt requested, postage
prepaid, addressed to such party at its address set forth below such party's
signature to this Agreement or to such other address as shall have been
furnished in writing by such party for whom the communication is intended. Any
such notice shall be deemed to be given on the date so delivered.
11. SEVERABILITY. In the event any provisions hereof
shall he modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.
12. ENTIRE AGREEMENT. This Agreement constitutes the
sole agreement between the parties with respect to the employment of the
Executive by the Company and supersedes any and all other agreements, oral or
written, between the parties.
Employment Agreement
Geoffrey F. Cox, Ph.D.
-7-
<PAGE> 8
13. AMENDMENT AND WAIVER. This Agreement may not be
modified or amended except by a writing signed by the parties. Any waiver or
breach of any of the terms of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions, or any other terms or conditions,
nor shall any failure to enforce any provisions hereof operate as a waiver of
such provision or any other provision hereof.
14. ASSIGNMENT. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights
under this Agreement to (i) any entity into or with which the Company is merged
or consolidated or to which the Company transfers all or substantially all of
its assets or (ii) any entity, which at the time of such assignment, controls,
is under common control with, or is controlled by the Company, provided that
the Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if not such succession had taken place.
15. SUCCESSORS. This Agreement shall be binding upon and
inure to the benefit of the Executive and his heirs, executors, administrators
and legal representatives. This Agreement shall be binding upon and inure to
the benefit of the Company and its successors and assigns.
16. SECTION HEADINGS. The section headings in this
Agreement have been inserted for convenience and shall not be used for
interpretive purposes or to otherwise construe this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement
have the effect of a sealed instrument.
/s/ GEOFFREY F. COX
--------------------------------------
Geoffrey F. Cox, Ph.D.
ARONEX PHARMACEUTICALS, INC.
By: /s/ MARTIN P. SUTTER
-----------------------------------
Martin P. Sutter
Chairman of the Board of Directors
Employment Agreement
Geoffrey F. Cox, Ph.D.
-8-
<PAGE> 1
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Exhibit 11.1
Statement Regarding Computation of Per Share Earnings
The following reflects the information used in calculating the number of shares
in the computation of net loss per share for each of the periods set forth in
the Statements of Operations.
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997: 14,597,247 8 116,777,976
14,606,972 12 175,283,664
14,612,023 4 58,448,092
14,612,499 21 306,862,479
14,615,983 6 87,695,898
14,616,981 1 14,616,981
14,624,239 5 73,121,195
14,625,111 2 29,250,222
14,627,695 7 102,393,865
14,628,567 6 87,771,402
14,640,311 6 87,841,866
14,643,658 6 87,861,948
14,644,672 1 14,644,672
14,644,816 7 102,513,712
14,644,982 2 29,289,964
14,645,277 4 58,581,108
14,665,277 22 322,636,094
14,665,665 9 131,990,985
14,674,453 19 278,814,607
14,678,042 6 88,068,252
14,680,055 7 102,760,385
14,680,344 19 278,926,536
14,687,394 31 455,309,214
14,710,122 9 132,391,098
14,712,069 5 73,560,345
14,712,575 12 176,550,900
14,712,699 6 88,276,194
14,714,018 2 29,428,036
14,719,923 9 132,479,307
15,406,372 15 231,095,580
15,408,872 3 46,226,616
15,421,809 9 138,796,281
15,423,809 2 30,847,618
15,427,540 24 370,260,960
15,444,824 57 880,354,968
15,459,166 1 15,459,166
365 5,437,188,186 /365 14,896,406 (16,991,000) (1.14)
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996: 10,380,056 1 10,380,056
10,390,003 10 103,900,030
10,409,608 4 41,638,432
10,418,676 2 20,837,352
10,478,786 1 10,478,786
10,046,458 3 30,139,374
10,598,792 1 10,598,792
10,678,561 2 21,357,122
10,680,653 1 10,680,653
10,680,903 3 32,042,709
10,710,132 4 42,840,528
10,718,504 6 64,311,024
10,727,170 4 42,908,680
10,728,565 1 10,728,565
10,729,263 1 10,729,263
10,729,394 7 75,105,758
10,731,487 19 203,898,253
10,742,559 7 75,197,913
10,771,115 2 21,542,230
10,775,477 2 21,550,954
10,776,991 4 43,107,964
10,784,842 1 10,784,842
10,812,921 1 10,812,921
10,832,546 2 21,665,092
10,847,725 3 32,543,175
10,848,023 5 54,240,115
10,849,767 7 75,948,369
10,851,626 3 32,554,878
10,858,605 1 10,858,605
10,862,095 2 21,724,190
10,962,004 1 10,962,004
10,962,593 4 43,850,372
10,965,241 2 21,930,482
10,965,939 1 10,965,939
10,967,993 6 65,807,958
10,927,354 5 54,636,770
10,997,354 2 21,994,708
10,978,310 7 76,848,170
10,983,980 4 43,935,920
10,989,215 1 10,989,215
13,992,587 1 13,992,587
13,996,077 1 13,996,077
13,996,949 6 83,981,694
14,446,949 1 14,446,949
14,453,492 5 72,267,460
14,456,109 5 72,280,545
14,465,806 1 14,465,806
14,472,786 2 28,945,572
14,473,658 1 14,473,658
14,478,658 3 43,435,974
14,481,500 1 14,481,500
14,483,680 3 43,451,040
14,484,059 1 14,484,059
14,485,899 2 28,971,798
14,488,079 3 43,464,237
14,526,802 3 43,580,406
14,526,802 23 334,116,446
14,531,016 1 14,531,016
14,543,516 20 290,870,320
14,543,736 1 14,543,736
14,544,318 18 261,797,724
14,545,238 2 29,090,476
14,545,321 7 101,817,247
14,555,018 14 203,770,252
14,556,217 5 72,781,085
14,557,089 8 116,456,712
14,563,193 17 247,574,281
14,568,375 3 43,705,125
14,569,375 7 101,985,625
14,570,954 3 43,712,862
14,579,548 4 58,318,192
14,582,198 1 14,582,198
14,583,853 3 43,751,559
14,584,853 3 43,754,559
14,586,353 14 204,208,942
14,595,950 10 145,959,500
14,596,513 11 160,561,643
14,597,247 8 116,777,976
365 4,762,415,001 /365 13,047,712 (8,030,000) (0.62)
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995: 5,202,476 2 10,404,952
5,214,976 2 10,429,952
5,221,604 82 428,171,528
5,232,463 57 298,250,391
5,233,599 41 214,577,559
5,233,978 18 94,211,604
5,235,493 51 267,010,143
9,128,929 20 182,578,580
9,136,184 34 310,630,256
9,200,154 3 27,600,462
9,201,669 2 18,403,338
9,202,805 12 110,433,660
9,216,760 1 9,216,760
9,217,843 6 55,307,058
9,260,401 3 27,781,203
9,274,343 5 46,371,715
9,316,912 2 18,633,824
9,857,533 5 49,287,665
9,887,531 5 49,437,655
9,899,311 2 19,798,622
9,900,249 2 19,800,498
9,902,749 4 39,610,996
9,969,021 2 19,938,042
9,981,786 3 29,945,358
10,380,056 1 10,380,056
365 2,368,211,877 /365 6,488,252 (17,429,000) (2.69)
</TABLE>
<PAGE> 1
Exhibit 23.1
ARONEX PHARMACEUTICALS, INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 17, 1998 included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 dated August 18, 1992, June
7, 1994 and December 31, 1997.
ARTHUR ANDERSEN LLP
March 27, 1998
The Woodlands, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
FINANCIAL STATEMENTS OF ARONEX PHARMACEUTICALS, INC. SET FORTH IN THE COMPANY'S
FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,029,000
<SECURITIES> 27,925,000
<RECEIVABLES> 100,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,386,000
<PP&E> 4,768,000
<DEPRECIATION> 3,661,000
<TOTAL-ASSETS> 32,125,000
<CURRENT-LIABILITIES> 4,740,000
<BONDS> 0
0
0
<COMMON> 15,000
<OTHER-SE> 27,364,000
<TOTAL-LIABILITY-AND-EQUITY> 32,125,000
<SALES> 0
<TOTAL-REVENUES> 2,900,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,000
<INCOME-PRETAX> (16,991,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,991,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,991,000)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
