<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1999.
REGISTRATION NO. 333-67599
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ARONEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 76-0196535
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(281) 367-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------
GEOFFREY F. COX
CHIEF EXECUTIVE OFFICER
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(281) 367-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------------
COPY:
JEFFREY R. HARDER
ANDREWS & KURTH L.L.P.
2170 BUCKTHORNE PLACE, SUITE 150
THE WOODLANDS, TEXAS 77380
(713) 220-4801
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
---------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS
4,500,000 SHARES
[ARONEX LOGO]
COMMON STOCK
We are offering our common stock on an all or nothing basis, to
selected investors. The common stock is traded on the Nasdaq National Market
under the symbol "ARNX." On February 9, 1999, the last reported sales price of
our common stock on the Nasdaq National Market was $2.4375 per share. The price
to the public will be determined through negotiations between Aronex
Pharmaceuticals, Inc. and the placement agent based upon the demand for our
common stock and its closing price on the Nasdaq National Market on the
effective date.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price........................... $ $
Commissions and Fees............................ $ $
Proceeds to Aronex Pharmaceuticals ............. $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have retained Paramount Capital, Inc. to act as our agent to arrange
this transaction. The agent will not accept investor funds until indications of
interest have been received for the full amount of the offering. Only after the
registration statement has been declared effective will the agent accept
investor funds, which will be placed in an escrow account. The agent will
distribute confirmation and definitive prospectuses to all investors as soon as
practicable after the price to the public is determined.
PARAMOUNT CAPITAL, INC.
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Table of Contents..................................................................................ii
Prospectus Summary..................................................................................1
Risk Factors........................................................................................3
Caution as to Forward-Looking Statements............................................................9
Use of Proceeds....................................................................................10
Dividend Policy....................................................................................10
Price Range of Common Stock........................................................................11
Dilution...........................................................................................12
Capitalization.....................................................................................13
Selected Financial Data............................................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations..............15
Business...........................................................................................23
Management.........................................................................................40
Certain Transactions...............................................................................44
Principal Stockholders.............................................................................45
Description of Capital Stock.......................................................................47
Plan of Distribution...............................................................................51
Legal Matters......................................................................................52
Experts............................................................................................52
Available Information..............................................................................52
</TABLE>
-ii-
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements.
ARONEX PHARMACEUTICALS, INC.
Aronex Pharmaceuticals, Inc. is a biopharmaceutical company engaged in
the identification and development of proprietary innovative medicines to treat
cancer and infectious diseases. Our strategy is to identify and develop
medicines based upon either refinements of existing therapies or new ways of
treating specific diseases.
We intend to pursue this strategy by using the following strengths:
o a clear focus on cancer and infectious disease;
o a well-defined and diverse group of products at various
stages of clinical development;
o technologies in drug development and delivery;
o a diverse group of corporate partners and academic
affiliations;
o an experienced team of biopharmaceutical personnel able to
identify and develop new products, design and implement
complex clinical trials, manage regulatory issues, develop
manufacturing processes and negotiate distribution and
licensing agreements for our products.
We believe that our clinical products balance the risks of successful
development against the rewards from the practical commercial applications of
our products. See "Risk Factors."
We currently have five products in various stages of ongoing clinical
development, as follows:
o NYOTRAN(R) a lipid-based, intravenous formulation of Nystatin
for the treatment of systemic fungal infections;
o ATRAGEN(R) a lipid-based, intravenous formulation of all-trans
retinoic acid for the treatment of cancer;
o Annamycin for the treatment of cancers with multi-drug
resistance;
o Platar for the treatment of lung cancer; and
o Zintevir(R) for the treatment of human immunodeficiency virus
infection.
In December 1998, we submitted a new drug application to the U.S. Food
and Drug Administration for ATRAGEN(R) for the treatment of patients with acute
promyelocytic leukemia for whom therapy with the drug tretinoin is necessary but
for whom an intravenous administration is required. We have entered into a
license agreement with Genzyme Corporation for ATRAGEN(R), which grants to
Genzyme an option to the worldwide marketing rights.
We are developing NYOTRAN(R) for the treatment of systemic, which
generally means internal, fungal infections that may threaten patients who have
suppressed immune systems. In November 1998, we entered into a license agreement
with Abbott Laboratories for exclusive worldwide rights to market and sell
NYOTRAN(R). To date, Abbott has paid us $8.4 million in up-front and milestone
payments under the license agreement and purchased common stock for $3 million.
These agreements have an aggregate potential of $40 million in stock purchases,
clinical development payments and sales milestone payments. Abbott's payments
provide funding for the continuing clinical development of NYOTRAN(R) and are
due as specified regulatory goals and sales targets are achieved.
Abbott will also pay us royalties on all product sales of NYOTRAN(R).
We are completing a Phase I/II clinical trial for Zintevir(R) for the
treatment of HIV infection, and intend to continue development of such product
only if third party funding is obtained.
Our corporate headquarters are located at 8707 Technology Forest Place,
The Woodlands, Texas 77381- 1191, and our telephone number is (281) 367-1666.
-1-
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Securities offered.......................... 4,500,000 shares of common stock
Shares outstanding after the offering....... 20,915,664
Use of proceeds............................. To fund preclinical and clinical testing of our product candidates,
continued research and development and capital expenditures and for
general corporate purposes
Nasdaq National Market symbol............... ARNX
</TABLE>
SUMMARY FINANCIAL INFORMATION
The following Summary Financial Information is adjusted as follows: (1)
the September 30, 1998 pro forma balance sheet information includes the
completion of the sale of 837,989 shares of common stock to Abbott Laboratories
for $3.0 million on November 30, 1998, and (2) the September 30, 1998 pro forma
as adjusted amounts include the common stock sold to Abbott Laboratories and the
net proceeds of $9.7 million from the sale of 4,500,000 shares of common stock
offered through this prospectus based on an estimated price of $2.4375 per
share. The summary financial data described below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds," "Selected Financial Data" and our financial
statements and related notes included elsewhere in this prospectus.
Aronex Pharmaceuticals' 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 acquisition of Oncologix and Triplex, and accordingly are not indicative
of the research and development expenses that would have been incurred by Aronex
Pharmaceuticals for the full year had such merger, been effective at the
beginning of the year.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) NINE MONTHS ENDED
---------------------------------------------------------- SEPTEMBER 30,
YEARS ENDED DECEMBER 31, ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts .. $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income .......... 217 534 452 1,692 2,059 1,632 1,013
------- ------- -------- -------- -------- -------- --------
Total revenues ... 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development . 4,491 7,637 8,347 10,357 13,993 9,864 15,399
Purchase of in-process
research and
development ........... -- -- 8,383 242 3,000 3,000 --
General and administrative 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other 123 196 184 173 257 160 41
------- ------- -------- -------- -------- -------- --------
Total expenses ... 6,490 9,783 19,129 12,392 19,891 14,501 17,888
------- ------- -------- -------- -------- -------- --------
Net loss ................. $(6,225) $(9,052) $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546)
======= ======= ======== ======== ======== ======== ========
Basic and diluted loss per
share ................. $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
======= ======= ======== ======== ======== ======== ========
Weighted average shares
used in computing basic
and diluted loss per
share ................. 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term and long-term investments ... $ 16,015 $ 19,015 $ 28,681
Total assets ...................................................... 18,522 21,522 31,118
Total long-term obligations ....................................... 1,047 1,047 1,047
Deficit accumulated during development stage ...................... (85,750) (85,750) (85,750)
Total stockholders' equity ........................................ 11,353 14,353 24,019
</TABLE>
-2-
<PAGE> 6
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, TOGETHER WITH ALL OF THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS, IN DECIDING WHETHER TO INVEST IN THE
COMMON STOCK.
WE ARE IN AN EARLY STAGE OF DEVELOPMENT, HAVE A HISTORY OF OPERATING LOSSES,
ANTICIPATE FUTURE LOSSES, MAY NOT GENERATE REVENUES FROM PRODUCT SALES AND MAY
NEVER BECOME PROFITABLE
Our business is at an early stage of development. We have not yet
generated any revenues from the commercial sale of our products. We cannot
assure you that we will ever generate revenues from product sales.
We have incurred losses and have had negative cash flows from
operations since inception. We have funded our activities primarily from sales
of stock and, to a lesser extent, from revenues under research and development
agreements and grants. As of September 30, 1998, our accumulated deficit was
$85.8 million. To date, we have dedicated most of our financial resources to the
research and development of products, general and administrative expenses, and
the prosecution of patents and patent applications.
We expect to incur operating losses for at least the next several
years. This is primarily attributable to our plan to spend substantial amounts
on research and development of products, including preclinical studies and
clinical trials, and, if we obtain necessary regulatory approvals, on sales and
marketing efforts. We cannot assure you that we will ever become profitable or
that we will remain profitable if and when we become profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "-- Liquidity and Capital Resources."
WE WILL REQUIRE FUTURE CAPITAL AND ARE UNCERTAIN OF THE AVAILABILITY OR TERMS OF
ADDITIONAL FUNDING, WHICH MAY LEAD TO BANKRUPTCY IF FUNDING BECOMES UNAVAILABLE
OR DILUTION OR OTHER ADVERSE EFFECTS TO THE VALUE OF YOUR SHARES OR RIGHTS AS A
SHAREHOLDER EVEN IF FUNDING IS AVAILABLE
We will continue to require substantial additional funds for our
operations. Excluding the proceeds of this offering and payments expected from
Abbott Laboratories, existing financial resources should be sufficient to fund
capital requirements into the fourth quarter of 1999. We expect that our
existing financial resources and the estimated proceeds of this offering should
be sufficient to fund capital and operating requirements into the second quarter
of 2000. During this period, we anticipate receiving further payments from
Abbott Laboratories under the license agreement for NYOTRAN(R), however these
payments are dependent upon performance and are not guaranteed. In the future,
we may need to raise substantial additional capital to fund operations. It is
possible that changes in research and development plans, acquisitions or other
events will require us to make unexpected large future expenditures. Our
independent public accountants have informed us that, if at the time of their
audit of the financial statements for the year ending December 31, 1998 our
existing financial resources continue to only be sufficient to fund capital
requirements into the fourth quarter of 1999, their report on those statements
will include an explanatory fourth paragraph expressing substantial doubt about
our ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Additional funding may be available in the public or private capital
markets and through collaboration agreements with partners. If, however, the
results of our clinical trials are not favorable, it will be much more difficult
for us to raise additional funds. We do not know if additional funding will be
available at all or on acceptable terms. If we are not able to obtain funding,
it may be necessary to curtail some or all research and development programs or
to obtain funds through arrangements that require us to relinquish rights to
some or all of our products or to declare bankruptcy. If we raise funds by
selling more stock, your share ownership in Aronex Pharmaceuticals will be
diluted. In addition, we may grant future investors rights which are superior to
those of the common stock that you are purchasing.
-3-
<PAGE> 7
CLINICAL TRIAL RESULTS MAY RESULT IN FAILURE TO OBTAIN FDA APPROVAL AND
INABILITY TO SELL PRODUCTS
Before approving a drug for commercial sale as a treatment for a
disease, the FDA and other regulatory authorities generally require that the
safety and efficacy of a drug be demonstrated in humans. This is provided by
showing results from adequate and well-controlled clinical trials in which the
drug is used to treat patients suffering from the disease. We cannot predict
whether our clinical trials will adequately demonstrate the drug's safety and
efficacy or whether the FDA or other regulatory authority will agree with the
sufficiency of the trial results. If our clinical trials do not demonstrate the
safety or efficacy of our products, or if we otherwise fail to obtain regulatory
approval for our products, we will not be able to generate revenues from the
commercial sale of our products. See "Business -- Government Regulation."
DELAYS IN PATIENT ENROLLMENT MAY RESULT IN INCREASED COSTS, PROGRAM DELAYS, OR
BOTH, TO CLINICAL TRIALS
Pivotal clinical trials are very costly and time-consuming. The speed
with which we are able to enroll patients in clinical trials is affected by
several factors, including the size of the patient population, competing trials,
the proximity of patients to clinical sites, and the eligibility criteria for
the study. These delays and complications can affect the cost of our clinical
trials as well as our ability to complete clinical trials on schedule. See
"Business -- Government Regulation."
THE FDA CAN IMPOSE OTHER RESTRICTIONS ON OUR OPERATIONS THAT INCREASE COSTS OR
DELAY OR PROHIBIT SALES
The FDA and other regulatory authorities will continue to review our
products and periodically inspect the facilities used to manufacture those
products both before and after the grant of regulatory approvals. If the FDA or
other regulatory authorities identify problems with a product, manufacturer of
our products or its facility, they may impose restrictions that may include
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. See
"Business -- Government Regulation."
OUR PRODUCTS MUST OBTAIN REGULATORY APPROVAL IN OTHER COUNTRIES WHICH DELAY OR
PROHIBIT SALES
We and licensees of our products must obtain regulatory approvals in
countries other than the United States before marketing products in those
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. Some
countries require approval of the sale price of a drug before it can be
marketed. In many countries, the pricing review period begins after product
licensing approval is granted. As a result, we or our licensees may obtain
regulatory approval for a product in a particular country, but then be subject
to price regulation that prevents the sale of the product at satisfactory
prices. See "Business -- Government Regulation."
WE EXPERIENCE A SUBSTANTIAL DEGREE OF UNCERTAINTY RELATING TO PATENTS THAT, IF
DETERMINED TO BE UNENFORCEABLE, COULD RESULT IN THE LOSS OF THE PATENT OR CLAIMS
AGAINST US
Our success will depend to a large extent on our ability to (1) obtain
United States and foreign patent protection for drug candidates and processes,
(2) preserve trade secrets and (3) operate without infringing the proprietary
rights of third parties. Legal standards relating to the validity of patents
covering pharmaceutical and biotechnological inventions and the scope of claims
made under these patents are still developing. As a result, our ability to
obtain and enforce patents that protect our products is uncertain and involves
complex legal and factual questions.
We also cannot be completely sure that the inventors of subject matter
covered by our patents and patent applications were the first to invent or the
first to file patent applications for such inventions. Furthermore, we cannot
guarantee that any patents will issue from any pending or future patent
applications owned by or licensed to us. Existing or future patents may be
challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. We cannot assure you that any of our rights under any
issued patents will provide sufficient protection against competitive products
or otherwise cover commercially valuable products or processes. We may not have
identified all United States and foreign patents that pose a risk of
infringement. We are also currently involved in certain interference proceedings
relating to Platar. See "Business -- Patents and Proprietary Rights."
-4-
<PAGE> 8
WE MAY INCUR SUBSTANTIAL COSTS AND DELAYS AS A RESULT OF PROCEEDINGS AND
LITIGATION REGARDING PATENTS AND OTHER PROPRIETARY RIGHTS
Proceedings involving our patents or patent applications could result
in adverse decisions about:
o the patentability of our inventions and products; and/or
o the enforceability, validity or scope of protection offered by
our patents.
The manufacture, use or sale of our products may infringe on the patent rights
of others. If we are unable to avoid infringement of the patent rights of
others, we may be required to seek a license, defend an infringement action or
challenge the validity of the patents in court. Patent litigation is costly and
time consuming. We may not have sufficient resources to bring these actions to a
successful conclusion. In addition, if we do not obtain a license, and fail
successfully to defend an infringement action or to have infringing patents
declared invalid, we may:
o incur substantial money damages;
o encounter significant delays in bringing products to market;
and/or
o be precluded from participating in the manufacture, use or
sale of products or methods of treatment requiring licenses.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER UNPATENTED PROPRIETARY INFORMATION, WHICH,
IF DISCLOSED, COULD MATERIALLY ADVERSELY AFFECT OUR OPERATIONS OR FINANCIAL
CONDITION
Because trade secrets and other unpatented proprietary information are
critical to our business, we seek protection through confidentiality agreements
with employees, consultants, advisors and collaborators. These agreements may
not effectively prevent disclosure of confidential information and may not
provide an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently discover trade
secrets and proprietary information. Costly and time-consuming litigation could
be necessary to enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could have a material
adverse effect on our business, results of operations and financial condition.
See "Business --Patents and Proprietary Rights."
WE DO NOT MANUFACTURE OUR OWN PRODUCTS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE
SUPPLIES, WHICH COULD CAUSE DELAYS OR REDUCE PROFIT MARGINS
We do not have the facilities necessary to manufacture products in
accordance with FDA good manufacturing practices. As a result, we use contract
manufacturers to produce quantities for clinical testing. We have not entered
into any agreement with our manufacturers except for (1) periodic purchase
orders and (2) Abbott Laboratories who holds an option to manufacture
NYOTRAN(R). We do not expect to establish any significant manufacturing capacity
in the near future. Instead, we intend to rely on corporate partners and
contract manufacturers for the manufacture and supply of our products.
Therefore, we may not be able to obtain supplies of products on acceptable terms
or in sufficient quantities, if at all. Our dependence on third parties for the
manufacture of products may also reduce our profit margins and ability to
develop and deliver products with sufficient speed. See "Business --
Manufacturing."
OUR PRODUCTS REQUIRE MATERIALS THAT MAY NOT BE READILY AVAILABLE OR COST
EFFECTIVE, WHICH MAY ADVERSELY AFFECT OUR COMPETITIVE POSITION OR PROFITABILITY
Some of our products, such as Annamycin, are new syntheses and are not
yet available in commercial quantities. Raw materials necessary for the
manufacture of this and other of our products may not be available in sufficient
quantities or at a reasonable cost in the future. 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 our competitive position and potential
profitability. See "Business -- Manufacturing."
-5-
<PAGE> 9
WE HAVE NO EXPERIENCE IN SALES, MARKETING AND DISTRIBUTION AND RELY ON THIRD
PARTIES, WHICH MAY RESULT IN LOWER SALES, HIGHER COSTS OR LOWER PROFIT MARGINS
We anticipate relying on one or more pharmaceutical companies to market
our products to customers, and, wherever possible, to retain co-marketing rights
in certain markets such as the United States and Canada. Agreements have already
been entered into with Abbott Laboratories and Grupo Ferrer Internacional, S.A.
for distribution of NYOTRAN(R), and with Genzyme Corporation for distribution of
ATRAGEN(R). We have retained co-marketing rights under the Abbott and the
Genzyme agreements for a limited period of time. See "Business --Collaborative
Agreements." To the extent that we use distribution arrangements with third
parties to market products, our ability to generate revenues and profits will
depend upon the efforts of these third parties.
We are developing our own sales and marketing capabilities that will
require us to make significant expenditures. We may not be successful in
establishing sales, marketing and distribution capabilities. In addition, our
ability to generate revenues and profits will be reduced or eliminated:
o if we fail to establish sales, marketing and/or distribution
capabilities or enter into arrangements with third parties;
o if we or new marketing partners fail to market a product
successfully;
o if physicians do not prescribe our products; or
o if patients do not accept our products.
OUR ABILITY TO ENTER INTO COLLABORATIVE ARRANGEMENTS IS CRITICAL TO OUR
SUCCESSFUL DEVELOPMENT, SALES AND LICENSING OF PRODUCTS AND POTENTIAL
PROFITABILITY
We are a product development company with limited resources. We do not
conduct research and we are just beginning to create a marketing and sales
department. Therefore, our present strategy involves entering into arrangements
with corporate, government and academic collaborators, licensors, licensees and
others. As a consequence, our success may depend in large part on the success of
these other parties in performing their responsibilities. Also, we may not be
able to establish additional collaborative arrangements or license agreements
that are necessary to develop and commercialize products. Even if established,
these collaborative or license agreements may not be successful. Some of these
collaborative agreements and license agreements provide for milestone payments
to us, and others require us to pay milestone payments to others. We may not be
able to achieve the milestones that trigger payments to us. In addition,
payments by us may not result in the development of marketable products by our
collaborators. See "Business -- Collaborative Agreements."
COMPETITION IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY RESULT IN
COMPETING PRODUCTS, SUPERIOR MARKETING OF OTHER PRODUCTS AND LOWER REVENUES OR
PROFITS FOR US
We believe that competition will be intense for all of our product
candidates. Our competitors include multinational pharmaceutical and chemical
companies, specialized biotechnology firms, and universities and other research
institutions. Many of these competitors have greater financial and other
resources than we do. These competitors may succeed in developing products that
are safer, more effective or less costly than our products. Even if our products
prove to be more effective than those developed by our competitors, our
competitors may be more successful 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.
Some of our competitors are active in the development of proprietary
liposomes and in liposomal research and product development to treat cancer and
certain fungal infections. Some of these companies' products have regulatory
approval in the United States and other countries. Any marketing of these and
other products that treat diseases targeted by us could reduce the market
acceptance of our products. The presence of directly competitive products could
also result in intense price competition, which could reduce our revenues and
profits. See "Business -- Competition."
-6-
<PAGE> 10
WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE IN THE
BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES, WHICH COULD MAKE OUR PRODUCTS
OBSOLETE
Biotechnology and related pharmaceutical technologies have undergone
and continue to be subject to rapid and significant change. We expect that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Our future will depend in large part on our ability
to maintain a competitive position with respect to these technologies. Any
compounds, products or processes that we develop may become obsolete before we
recover expenses incurred in developing those products.
OUR SUCCESS MAY DEPEND ON THIRD-PARTY REIMBURSEMENT OF PATIENTS' COSTS FOR OUR
PRODUCTS
Our ability to commercialize products successfully will depend in part
on the extent to which various third parties are willing to reimburse patients
for the costs of our products and related treatments. These third parties
include government authorities, private health insurers and other organizations,
such as health maintenance organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize or may
limit reimbursement for our products, even if they are safer or more effective
than the alternatives. In addition, the trend toward managed healthcare and
government insurance programs could result in lower prices and reduced demand
for our products. Cost containment measures instituted by healthcare providers
and any general healthcare reform could affect our ability to sell products and
may have a material adverse effect on us.
We cannot predict 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 any legislation or regulation might have on our
business.
OUR ACTIVITIES INVOLVE THE USE OF HAZARDOUS MATERIALS, WHICH SUBJECT US TO
REGULATION, RELATED COSTS AND DELAYS AND POTENTIAL LIABILITIES
Our activities involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although we believe that
our procedures for handling and disposing of these materials comply with state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. If an accident occurs, we could be held
liable for resulting damages, which could be substantial. We are 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 our operations may be adopted in the
future. We may incur substantial costs to comply with and substantial fines or
penalties if we violate any of these laws or regulations.
OUR BUSINESS HAS A SUBSTANTIAL RISK THAT PRODUCT LIABILITY CLAIMS AND INSURANCE
MAY BE EXPENSIVE OR UNAVAILABLE
We may be subject to product liability claims if the use of our
products is alleged to injure subjects or patients. This risk exists for
products tested in human clinical trials as well as products that are approved
to be sold commercially. Product liability claims could result in a recall of
products or a change in the indications for which they may be used. We presently
have product liability insurance coverage for claims arising from the use of our
products in clinical trials; however, this insurance may not be adequate to
cover all potential claims. Furthermore, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to maintain current
amounts of insurance coverage, obtain additional insurance for clinical trials
or for commercial sales or obtain insurance at a reasonable cost or in
sufficient amounts to protect against losses that could have a material adverse
effect on us.
-7-
<PAGE> 11
WE DEPEND ON KEY PERSONNEL AND COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE,
WHICH COULD RESULT IN DELAYS OR ADDITIONAL COSTS
We believe that our ability to successfully implement our business
strategy is highly dependent on our management and scientific team. The loss of
services of one or more of our executive officers might hinder the achievement
of our development objectives. We are also highly dependent on our ability to
hire and retain qualified scientific and technical personnel. The competition
for these employees is intense. We may not be able to continue to hire and
retain the qualified personnel that we need for our business. Loss of the
services of or failure to recruit key scientific and technical personnel could
substantially hurt us and our product development efforts.
WE HAVE BROAD DISCRETION OVER THE PROCEEDS OF THE OFFERING
The net proceeds of this offering to be received by us have not been
allocated to any specific purpose and will be available to the board of
directors and management to use in their sole discretion to support our
operations. We may decide to use those proceeds for unspecified investments,
acquisitions and expenses, the terms of which will solely be subject to our
discretion. The use of these funds by the company may determine when additional
funding will be required. See "Use of Proceeds."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION ON THE NET TANGIBLE BOOK
VALUE OF THE COMMON STOCK
Purchasers of common stock in the offering will experience immediate
and substantial dilution in the net tangible book value per share. At an assumed
public offering price of $2.4375 per share, the dilution to purchasers of the
common stock in this offering would be $1.29 per share. These investors will
also experience additional dilution upon the exercise of outstanding options and
warrants. See "Dilution."
CONTINGENT STOCK RIGHTS COULD RESULT IN SUBSEQUENT DILUTION TO NET TANGIBLE BOOK
VALUE OF SHARES
Pursuant to the terms of our 1995 merger with Triplex Pharmaceutical
Corporation, we are obligated to issue shares of common stock to certain of
their former security holders if our board of directors determines that data
from clinical trials of Zintevir(R) on or before September 11, 2000 is
sufficient to file an FDA new drug application, which we refer to as an "NDA."
If that event occurs, these rights will result in the issuance of up to an
aggregate of $5.0 million of common stock. These shares will be valued at the
current market value of the common stock at the time the event requiring
issuance of the shares occurs. As a result, you would experience further
dilution in the net tangible book value per share.
NO DIVIDENDS ARE EXPECTED TO BE PAID TO INVESTORS
We do not anticipate paying cash dividends in the foreseeable future.
Accordingly, investors should not make an investment in this Common Stock if
they want to receive dividend payments.
THE COMMON STOCK HAS LIMITED TRADING VOLUME AND A HISTORY OF VOLATILITY, WHICH
MAY AFFECT THE PRICE OF THE COMMON STOCK
The historical trading volume of our common stock has been limited. An
active public market for the common stock may not develop or be sustained. As a
result, you may be unable to sell your shares purchased in this offering at the
time or price desired. The trading price of the common stock and the price at
which we may sell securities in the future could be subject to large
fluctuations in response to a number of factors. These factors could include
announcements of research activities, technological innovations or new products
by us or our competitors, changes in government regulations, developments
concerning proprietary rights, quarterly variations in operating results,
litigation, clinical trials of products, approval or denial of FDA new drug
applications, general market conditions, our liquidity, our ability to raise
additional funds and other events. The market price of the common stock, and the
market prices for securities of emerging biotechnology companies generally, has
fluctuated dramatically in recent years. These fluctuations have sometimes been
unrelated to the operating performance of the affected companies. As a result,
the value of your shares could vary significantly from time to time.
-8-
<PAGE> 12
BOTH OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW HAVE ANTI-TAKEOVER
PROVISIONS THAT MAY DISCOURAGE TRANSACTIONS FOR CONTROL AT PREMIUM PRICES
Our certificate of incorporation:
o provides for staggered terms of office for directors;
o requires certain procedures to be followed and time periods to
be met for any stockholder to propose matters to be considered
at annual meetings of stockholders, including nominating
directors for election at those meetings;
o prohibits stockholders from calling special meetings of
stockholders; and
o authorizes our board of directors to issue up to 5,000,000
shares of preferred stock without stockholder approval and to
set the rights, preferences and other designations, including
voting rights, of those shares as the board of directors may
determine.
These provisions, alone or in combination with each other, may discourage
transactions involving actual or potential changes of control, including
transactions that otherwise could involve payment of a premium over prevailing
market prices to holders of common stock.
In addition, we are subject to provisions of the Delaware General
Corporation Law that may make some business combinations more difficult.
Accordingly, transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of common stock may be discouraged or more
difficult for our company than for other companies organized in other
jurisdictions. See "Description of Capital Stock."
YEAR 2000 ISSUES MAY RESULT IN UNANTICIPATED COSTS OF ADVERSE EFFECTS ON
OPERATIONS
Many currently installed systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with these "Year 2000" requirements. We are in the
process of working with our software vendors to ensure that the software that we
have licensed from third parties will operate properly in the year 2000 and
beyond. In addition, we are working with our external suppliers, service
providers and corporate partners to ensure that they and their systems will be
able to support our needs and, where necessary, interoperate with our server and
networking hardware and software infrastructure in preparation for the year
2000. We do not anticipate that we will incur significant operating expenses or
be required to invest heavily in computer systems improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problems of ours, our customers or vendors could have a material
adverse effect on our business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
CAUTION AS TO FORWARD-LOOKING STATEMENTS
** 1 This prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our drug
development programs, clinical trials, receipt of regulatory approval, capital
needs, intellectual property, expectations and intentions. These statements can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "continue," "estimate," "believe" or other similar
words. Forward-looking statements necessarily involve risks and uncertainties,
and our actual results could differ materially from those anticipated in the
forward-looking statements, including those listed below under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus. The factors set forth under "Risk Factors" and other cautionary
statements made in this prospectus should be read and understood as being
applicable to all related forward-looking statements wherever they appear in
this prospectus.
-9-
<PAGE> 13
USE OF PROCEEDS
The net proceeds to Aronex Pharmaceuticalsfrom the sale of the
4,500,000 shares of common stock offered by this prospectus at an assumed public
offering price of $2.4375 per share (the last sale price of the common stock on
February 9, 1999 was $2.4375) are estimated to be approximately $9.7 million.
We anticipate that the net proceeds of this offering will be used to
fund the continued clinical and preclinical development of our existing products
in an amount equal to approximately $7.6 million, and for capital expenditures
and other general corporate purposes including selling, general and
administrative expenses in an amount equal to approximately $2.1 million. Exact
allocation of the proceeds for these purposes and timing of the expenditures
will vary depending on numerous factors, including the hiring of additional
personnel, the progress of our research and development programs, the results of
clinical and preclinical trials of products, the cost and timing of regulatory
approvals, technological advances, the commercial potential of our products, the
terms of any collaborative arrangements entered into by us and the status of
competitive products. Our board of directors and management have significant
discretion in the application of these funds.
Based upon currently planned development activities and related costs,
we anticipate that the net proceeds of this offering, together with existing
resources, should be sufficient to meet our capital and operating requirements
into the second quarter of 2000. During this period, we anticipate receiving
further payments from Abbott Laboratories under the license agreement for
NYOTRAN(R); however, these payments are dependent upon performance and are not
guaranteed. In the event that we do not receive the estimated gross proceeds of
$11.0 million from this offering, it is anticipated that the existing financial
resources will be applied to continue to fund the development of the leading
drug candidates, NYOTRAN(R) and ATRAGEN(R), and that the development of
remaining products may be adversely delayed. In the future we will need
additional capital in order to successfully complete development of current
products, even if the entire estimated gross proceeds of $11.0 million are
raised in this offering.
Pending application of the proceeds described above, we intend to
invest the net proceeds in cash equivalents and short-term investments,
including United States government securities and high-grade corporate
investments, commercial paper and bankers acceptances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." We intend to invest and use the net proceeds
so as not to be considered an investment company under the Investment Company
Act of 1940.
DIVIDEND POLICY
Aronex Pharmaceuticals has never paid cash dividends on the common
stock. We currently intend to retain earnings, if any, to support the
development of our business and do not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
-10-
<PAGE> 14
PRICE RANGE OF COMMON STOCK
Aronex Pharmaceuticals' common stock is traded on the Nasdaq National
Market under the symbol "ARNX." The last sale price of the common stock as
reported on the Nasdaq National Market on February 9, 1999, was $2.4375 per
share. At December 31, 1998, there were approximately 200 holders of record and
approximately 4,400 beneficial owners of our common stock. The following table
sets forth the range of high and low sales prices per share of common stock, as
reported on the Nasdaq National Market, during the periods presented. The
information provided in the table gives effect to a one-for-two reverse split of
our common stock effected in July 1996. The information provided in the table
for the first quarter of the year ended December 31, 1999 is through February 9,
1999.
<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 5 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
YEAR ENDED DECEMBER 31, 1998:
1st Quarter........................................ $ 4 3/4 3
2nd Quarter........................................ 4 7/8 3 1/16
3rd Quarter........................................ 4 2 1/32
4th Quarter ....................................... 4 3/4 $ 1 11/16
YEAR ENDED DECEMBER 31, 1999:
1st Quarter ....................................... $ 3 3/8 1 3/4
</TABLE>
-11-
<PAGE> 15
DILUTION
Net tangible book value of our common stock as of September 30, 1998
was $11,353,000, or $0.73 per share. Net tangible book value per share
represents our total tangible assets reduced by total liabilities and divided by
the number of shares of common stock outstanding as of September 30, 1998. After
giving effect to the sale of the common stock to Abbott Laboratories in November
1998, and the stock offered by this prospectus at an assumed public offering
price of $2.4375 per share and the deduction of the commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
September 30, 1998, as adjusted, would have been $24,019,000, or $1.15 per
share. The issuance of common stock in this offering represents an immediate
increase in the net tangible book value of $0.27 per share to existing
stockholders and an immediate dilution of $1.29 per share to new investors
purchasing shares of common stock in this offering. The dilution schedule
assumes no exercise of any outstanding options or warrants to purchase common
stock or issuance of common stock under outstanding contingent stock rights and
no exercise of the warrants to purchase an aggregate of 450,000 shares of common
stock to be issued to Paramount Capital, Inc. or its designees in connection
with this offering. See "Plan of Distribution," "Description of Capital Stock --
Warrants," "-- Options," -- "Contingent Stock Rights" and our financial
statements and related notes included elsewhere in this prospectus.
The following table illustrates the per share dilution to new investors
purchasing common stock in this offering:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................... $ 2.44
---------
Net tangible book value per share as of September 30, 1998............ 0.73
Pro forma increase resulting from sale of 837,989 shares for
$3.0 million to Abbott Laboratories on November 30, 1998 ......... 0.15
Increase per share attributable to new investors...................... 0.27
----
Pro forma net tangible book value as adjusted for this offering............ $ 1.15
---------
Dilution per share to new investors........................................ $ 1.29
=========
</TABLE>
-12-
<PAGE> 16
CAPITALIZATION
The following table describes:
o the actual capitalization of Aronex Pharmaceuticals as of
September 30, 1998;
o our pro forma capitalization as of September 30, 1998 giving
effect to the November 30, 1998, sale of 837,989 shares of
common stock to Abbott Laboratories for $3.0 million; and
o our pro forma as adjusted capitalization as of September 30,
1998 giving effect to the sale of common stock to Abbott
Laboratories and the sale of the shares of common stock
offered hereby and the application of the net proceeds as
described under "Use of Proceeds."
This table assumes no exercise of any outstanding options or warrants to
purchase common stock or issuance of common stock under outstanding contingent
stock rights and no issuance of the 450,000 shares of common stock upon the
exercise of warrants to be issued to Paramount Capital, Inc. or its designees in
connection with this offering. See "Plan of Distribution," "Description of
Capital Stock -- Warrants," " -- Options," "-- Contingent Stock Rights," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term obligations .......................................... $ 1,047 $ 1,047 $ 1,047
-------- --------- ---------
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,
15,503,745, 16,341,734 and 20,841,734 shares issued and
outstanding, respectively ................................. 15 16 21
Additional paid-in capital .................................. 97,660 100,659 110,320
---------
Common stock warrants ....................................... 50 50 50
Treasury stock .............................................. (11) (11) (11)
Deferred compensation ....................................... (545) (545) (545)
Unrealized loss on securities available-for-sale ............ (66) (66) (66)
Deficit accumulated during development stage ................ (85,750) (85,750) (85,750)
-------- --------- ---------
Total stockholders' equity .................................. 11,353 14,353 24,019
-------- --------- ---------
Total capitalization ...................................... $ 12,400 $ 15,400 $ 25,066
======== ========= =========
</TABLE>
-13-
<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from Aronex
Pharmaceuticals' financial statements as of and for each of the years in the
five-year period ended December 31, 1997, and as of and for the nine month
periods ending September 30, 1997 and 1998. Our financial statements as of and
for each of the years in the five year period ended December 31, 1997, have been
audited by Arthur Andersen LLP, independent public accountants. Arthur Andersen
LLP has not audited the following financial statements for the nine months ended
September 30, 1997 and 1998. Arthur Andersen LLP has informed us that, if the
conditions described in Note 1 of the Notes to Financial Statements continue to
exist at the time of their audit of the financial statements for the year ended
December 31, 1998, their report on those statements will include an explanatory
fourth paragraph expressing substantial doubt about our ability to continue as a
going concern.
On September 11, 1995, we acquired Triplex Pharmaceutical Corporation
and Oncologix Inc. This transaction was 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 described below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts ........ $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income ................ 217 534 452 1,692 2,059 1,632 1,013
------- ------- -------- -------- -------- -------- --------
Total revenues ........ 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development ....... 4,491 7,637 8,347 10,357 13,993 9,864 15,399
Purchase of in-process
research and development .... -- -- 8,383 242 3,000 3,000 --
General and administrative ..... 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other ..... 123 196 184 173 257 160 41
------- ------- -------- -------- -------- -------- --------
Total expenses ........ 6,490 9,783 19,129 12,392 19,891 14,501 17,888
------- ------- -------- -------- -------- -------- --------
Net loss ....................... $(6,225) $(9,052) $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546)
------- ------- -------- -------- -------- -------- --------
Basic and diluted loss per
share ....................... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
======= ======= ======== ======== ======== ======== ========
Weighted average shares
used in computing basic
and diluted loss per share .. 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <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 $ 32,738 $ 16,015
Total assets ................... 21,187 12,958 15,530 44,281 32,125 $ 35,588 18,522
Total long-term obligations .... 913 1,218 1,574 146 6 13 1,047
Deficit accumulated during
development stage ........... (17,702) (26,754) (44,183) (52,213) (69,204) (64,491) (85,750)
Total stockholders' equity ..... 19,471 10,660 11,994 40,477 27,379 31,810 11,353
</TABLE>
-14-
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1986, Aronex Pharmaceuticals has primarily
devoted its resources to fund research, drug discovery and development. We
have been unprofitable to date and expects to incur substantial operating
losses for the next several years as it expends its resources for product
research and development, preclinical and clinical testing and regulatory
compliance. Aronex Pharmaceuticals has sustained losses of approximately $85.8
million through September 30, 1998. We have financed our research and
development activities and operations primarily through public and private
offerings of securities. Its operating results have fluctuated significantly
during each quarter, and we anticipate that these 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
Nine Month Periods Ended September 30, 1997 and 1998
Revenues from research and development grants and contracts decreased
44% to $329,000 for the nine months ended September 30, 1998, from $591,000 for
the nine months ended September 30, 1997. For the nine months ended September
30, 1997, research and development revenue was composed of:
o $150,000 in revenue from the initiation of a license agreement
with F. Hoffman-LaRoche Ltd.,
o $166,000 in development revenue from Targeted Genetics,
Incorporated and
o $250,000 in the third quarter of 1997 from a gene therapy
licensing agreement with Genzyme Corporation.
Aronex Pharmaceuticals has not received any revenues in 1998 under the
agreement with Hoffman-LaRoche, which was terminated in September 1998. The
three-year agreement with Targeted Genetics ended in the second quarter of 1997.
The majority of research and development revenue for the nine months ended
September 30, 1998 represents Small Business Innovative Research grant revenue
relating to Zintevir(R).
Interest income decreased 38% to $1.0 million for the nine months ended
September 30, 1998, from $1.6 million for the nine months ended September 30,
1997. The decrease in interest income resulted from a decrease of funds
available for investment.
Research and development expenses increased 56% to $15.4 million for
the nine months ended September 30, 1998, from $9.9 million for the nine months
ended September 30, 1997. The increase in research and development expenses
resulted primarily from an increase of $4.4 million in clinical investigation
costs for the nine months ended September 30, 1998. The majority of these
expenses relate to clinical trials of our lead products, NYOTRAN(R),
which increased $3.6 million, and ATRAGEN(R), which increased $389,000. The
increase in research and development expenses also reflects an increase of $1.3
million in medical affairs and regulatory salaries and payroll costs for the
nine months ended September 30, 1998, as the number of personnel in these
departments increased significantly from the same period in 1997. The majority
of the increase in salaries and payroll costs was attributable to development of
NYOTRAN(R).
The cost of $3.0 million incurred for the purchase of in-process
research and development in the third quarter of 1997 related to a non-cash
issuance of common stock under the contingent stock rights issued in the merger
with Triplex. An aggregate of 686,472 shares of common stock with an aggregate
value of $3.0 million were issued under the Triplex contingent stock rights
because equity milestone payments of $5.0 million were not received from Genzyme
relating to ATRAGEN(R) on or before September 11, 1997. See Note 4 of Notes to
Financial Statements.
General and administrative expenses increased 60% to $2.4 million for
the nine months ended September 30, 1998, from $1.5 million for the nine months
ended September 30, 1997. The increase in general and administrative expenses
resulted primarily from:
o an increase of $601,000 in salaries and payroll costs;
o an
-15-
<PAGE> 19
increase of $119,000 relating to business development
activities;
o an increase of $64,000 in investor and public relations
expenses; and
o the addition of $159,000 in marketing expenses, relating
primarily to ATRAGEN(R), for the nine month period ended
September 30, 1998.
Several new positions have been added since the first quarter of 1997
and a Chief Executive Officer was added in the fourth quarter of 1997.
Additionally, the former President, who resigned in January 1998, is entitled to
certain severance payments in accordance with his termination and severance
agreement . These severance payments, which continue through January 1999, were
recorded as compensation expense in the first quarter of 1998. See Note 11 of
Notes to Financial Statements.
Interest expense and other decreased 74% to $41,000 for the nine months
ended September 30, 1998, from $160,000 for the nine months ended September 30,
1997. The decrease in interest expense and other resulted primarily from a loss
of $107,000 in the quarter ended September 30, 1997, from the disposition of
equipment and leasehold improvements that had been used in research activities
eliminated in early 1997 and a decrease in interest expense for the first half
of 1998 resulting from a reduction in the average amount of capital lease
obligations and indebtedness used to fund the acquisition of laboratory
equipment.
Net loss increased 35% to $16.6 million for the nine months ended
September 30, 1998, from $12.3 million for the nine months ended September 30,
1997. The increase in net loss resulted primarily from the increase in research
and development expenses.
Years Ended December 31, 1996 and 1997
Research and development grants and contracts decreased 70% to $0.8
million in 1997, from $2.7 million in 1996. The decrease in 1997 research and
development grants and contracts was due primarily to the following factors:
o we received no revenues from Hoechst Marion Roussel, Inc.
in 1997 compared with $1.3 million in revenues from Hoechst in 1996,
as a result of the expiration of the research and development
agreement with Hoechst at the end of 1996;
o we 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
o we received $166,000 in revenues under a research and development
agreement with 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 contracts
in 1997 was partially offset by the receipt in 1997 of $250,000 under the
license agreement with Hoffman-LaRoche and an additional $250,000 under a new
license agreement with Genzyme relating to gene therapy.
Interest income increased 24% 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 35% to $14.0 million in
1997, from $10.4 million in 1996. This increase in research and development
expenses was due primarily to:
o an increase of $1.2 million in clinical investigation costs relating
mostly to NYOTRAN(R);
o 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;
o an increase of $687,000 in drug materials and manufacturing costs,
relating mainly to NYOTRAN(R) and Zintevir(R); and
o an increase of $678,000 in outside pharmacology studies, relating
mainly to ATRAGEN(R).
These increases were partially offset by a decrease of $1.2 million in
research expenses resulting from the elimination of the majority of internal
research efforts in the second quarter of 1997, relating in part to the
termination of research funding from Hoechst.
The costs of $3.0 million incurred for the purchase of in-process
research and development in 1997 related to a non-cash research and development
charge incurred in 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
Triplex contingent stock rights issued in the Triplex merger. The issuance of
such shares under the Triplex contingent stock rights was required because
equity milestone payments of $5.0 million were not received from Genzyme
relating to ATRAGEN(R) 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 our 1995 mergers with Triplex and
Oncologix, including the non-cash settlement of a lawsuit filed by certain
stockholders of Oncologix as a result of the mergers in September 1995.
-16-
<PAGE> 20
General and administrative expenses increased 63% 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: (1) 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 Marketing and Business
Development; and (2) an increase of $195,000 in stock and stock option
compensation expense.
Aronex Pharmaceuticals' net loss increased 111% to $16.9 million in
1997 from $8.0 million in 1996. The increase was primarily a result of the
following:
o an increase of $3.6 million in research and development expenses due
to increased salaries and payroll costs and other expenses relating
to advancing products;
o a $3.0 million charge relating to the issuance of shares of common
stock under the Triplex contingent stock rights (see Note 4 of Notes
to Financial Statements);
o 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
o a decrease of $1.9 million in research and development grants and
contracts, 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 125% 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 recognition of
$576,000 in revenues during the third and fourth quarters of 1996 relating to
pharmaceutical development work performed in connection with the collaborative
agreement with Genzyme and recognition of revenues of $1.3 million from
Hoechst. Aronex Pharmaceuticals did not recognize any revenue relating to the
Genzyme agreement in 1995, as all these 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 following the 1995 merger with Triplex.
Interest income increased 276% 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 25% to $10.4 million in
1996, from $8.3 million in 1995, due primarily to the addition of Triplex's
research department following the Triplex merger and increased clinical
investigation costs relating to the NYOTRAN(R) and Zintevir(R) products.
In-process research and development costs of $242,000 in 1996 and $8.4
million in 1995 were incurred in connection with the Triplex and Oncologix
mergers in September 1995 and represent the amount of the purchase price
allocated to acquired research and development. The charges in 1996 include the
non-cash settlement of a lawsuit filed by certain stockholders of Oncologix.
General and administrative expenses decreased 27% to $1.6 million in
1996 from $2.2 million in 1995, primarily due to non-recurring operating
expenses incurred on behalf of Oncologix and paid in 1995 by us pursuant to the
terms of the Oncologix merger agreement and a decrease in salary and personnel
costs from 1995 due to severance payments made to the former President in 1995.
Aronex Pharmaceuticals' net loss decreased 54% 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 the Triplex and Oncologix mergers.
-17-
<PAGE> 21
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On September 11, 1995, Aronex Pharmaceuticals acquired two development
stage companies, Triplex Pharmaceutical Corporation and Oncologix, Inc. These
acquisitions were accounted for under the purchase method of accounting in which
the aggregate purchase price was allocated to tangible and intangible assets
acquired based on their relative fair values as of the date of the transaction.
We allocated approximately $2.8 million of the purchase price for Triplex and
$5.6 million of the purchase price for Oncologix to in-process research and
development. Aronex Pharmaceuticals' valuation of the research and development
acquired considered: (1) the current scientific and development status of the
projects; (2) the expected amount of time and resources required to complete the
projects; (3) the probability of obtaining collaborators to help finance and
develop the projects; and (4) the potential market for the projects.
Our ability to commercialize the products acquired is affected by
several risks. These risks include:
o the successful filing and acceptance by the FDA of the
Investigational New Drug application;
o the completion of all stages of clinical trials;
o the submission of data for the approval of a new drug
application, including the demonstration of safety and
efficacy;
o the ability to enter into collaborative arrangements to fund
the future development of the acquired products; and
o the ability to manufacture the acquired products.
See "Business."
At the time of acquisition, Triplex's major focus was the development of a new
class of drugs to treat serious diseases where currently available therapy was
inadequate or non-existent. Triplex had, at that time, one compound,
Zintevir(R), that was at an advanced preclinical stage of development. Triplex
also had a number of other compounds in early stages of preclinical development.
Zintevir(R) was being developed for the treatment of HIV infection. At the time
of acquisition, laboratory tests had shown that Zintevir(R) inhibited the viral
replication of certain HIV-infected cells and Triplex was performing work to
determine its properties. Additional preclinical and manufacturing work was
required to enter clinical trials.
In order for Zintevir(R) to become a marketable product, it will be
necessary to conduct several clinical trials and to improve the manufacturing of
the product. Aronex Pharmaceuticals anticipated that it would take 3 to 5 years
to complete the development of Zintevir(R). Management estimated it would cost
several million dollars to complete early-stage clinical trials and to
manufacture the necessary drug for these trials. If results from the early-stage
clinical trial currently being conducted are positive, we expect the potential
market value of Zintevir(R) to be adequate to receive financial support through
collaborators to complete further development. We began a Phase I clinical trial
for Zintevir(R) in October 1995 and expect to complete a Phase I/II trial in
1999. Subsequent to the acquisition, Aronex Pharmaceuticals expended
approximately $3 million for the development of Zintevir(R). We will evaluate
the results of the Phase I/II clinical trial and does not intend to progress
into additional development of Zintevir(R) unless another company agrees to fund
the additional development work. If funding is obtained and the results of Phase
I/II clinical trial are satisfactory, we estimate it would require an additional
$50 million over 3 to 5 years to complete the development of Zintevir(R). See
"Business -- Infectious Diseases -- Zintevir(R) for HIV Infection (Phase I/II)."
At the time of acquisition, Oncologix was engaged in the research and
development of drugs for the treatment of cancer. Aronex Pharmaceuticals
acquired the Oncologix projects to complement its existing product portfolio.
The Oncologix compounds were licensed by Oncologix from other companies, and
were at a preclinical or early clinical stage. Additional clinical trials and
laboratory work were necessary to complete the development of these compounds.
After the acquisition, in order to determine the best way to complete
development, Aronex Pharmaceuticals devoted limited scientific resources to
review the preclinical and clinical data on these projects. The majority of
effort expended by us was to identify other companies who would be interested in
funding these projects. One collaborative agreement was entered into relating to
the projects acquired from Oncologix. In 1996, we entered into a license
agreement with Hoffman-LaRoche related to the compound AR209, which was being
developed for breast cancer. Under the agreement,
-18-
<PAGE> 22
Hoffman-LaRoche was responsible for funding the costs of all remaining
preclinical and clinical development of AR209. Hoffman-LaRoche paid Aronex
Pharmaceuticals a license fee when the agreement was entered into and an annual
license fee in 1997. The agreement was terminated without cause by
Hoffman-LaRoche in September 1998 when they stopped development. Rights to AR209
have returned to Aronex Pharmaceuticals. Aronex Pharmaceuticals has ceased
further development of AR209 until funding from a corporate partner is obtained.
Management estimates it would require an additional $25 to $40 million and take
5 to 8 years to complete the development of AR209 for cancer therapies. The
license of other compounds by Oncologix have not been maintained by Aronex
Pharmaceuticals.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Aronex Pharmaceuticals' primary source of cash has
been from financing activities, which have consisted primarily of sales of
equity securities. We have raised an aggregate of approximately $75 million from
the sale of equity securities from its inception through September 30, 1998. In
July 1992, we raised net proceeds of approximately $10.7 million in the initial
public offering of its common stock. In September 1993, Aronex Pharmaceuticals
entered into a collaborative agreement with Genzyme Corporation relating to the
development and commercialization of ATRAGEN(R), in which we received net
proceeds of approximately $4.5 million from the sale of common stock to Genzyme.
In November 1993, Aronex Pharmaceuticals raised net proceeds of approximately
$11.5 million and in May 1996, Aronex Pharmaceuticals raised net proceeds of
approximately $32.1 million in public offerings of common stock. From October
1995 through September 30, 1998, we received aggregate net proceeds of
approximately $6.5 million from the exercise of certain warrants issued in its
1995 merger with Oncologix. In November 1998, Aronex Pharmaceuticals entered
into a license agreement with Abbott Laboratories relating to NYOTRAN(R), in
which Abbott purchased 837,989 shares of common stock for $3.0 million. An
additional $8.4 million has been received from Abbott in up-front and milestone
payments, all of which payments are non-refundable. From its inception until
September 30, 1998, Aronex Pharmaceuticals also received an aggregate of $5.1
million cash from other collaborative arrangements and small business innovation
research grants.
In September 1996, Genzyme advanced us $2.0 million relating to a $5.0
million equity milestone under its collaborative agreement with Genzyme. Early
in 1997, the agreement was amended under which: (1) Genzyme was released from
any further obligation to perform development work for ATRAGEN(R) and (2) the
license granted to Genzyme under the agreement was converted to an option to
acquire the right to market and sell ATRAGEN(R) worldwide. We retained
co-promotion rights in the United States. If Genzyme exercises its option,
Genzyme will be required to pay Aronex Pharmaceuticals $3.0 million and product
royalties and Aronex Pharmaceuticals will be entitled to retain the $2.0 million
advance. We have the right on or before December 4, 1999 to reacquire these
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. If Aronex Pharmaceuticals reacquires these marketing rights, it will
also be required to pay Genzyme product royalties, including $500,000 in minimum
royalties in the first year following its reacquisition of the rights. If
Genzyme does not exercise its option prior to its expiration, we will be
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. Genzyme's option to acquire these rights expires on
June 4, 1999, which is six months after the filing of the NDA for ATRAGEN(R).
The majority of Aronex Pharmaceuticals' development activities are
committed on a short-term, as-needed basis through contracts and purchase
orders. These arrangements can be changed based on our needs and development
activities. Aronex Pharmaceuticals has contracted with certain clinical research
organizations to conduct its non-United States clinical trials for NYOTRAN in
the following indications: cryptococcal meningitis, presumed fungal infections
and Aspergillus. The remaining amount projected to be expended to complete the
clinical research organizations' activities with respect to those indications is
approximately $2.0 million. The agreements provide that Aronex Pharmaceuticals
can terminate them at any time, should either its financial situation, or the
results of the studies, require it. Nonetheless, Aronex Pharmaceuticals intends
to continue to engage clinical research organizations in the future to monitor
its various clinical trials in non-United States countries.
-19-
<PAGE> 23
Aronex Pharmaceuticals' 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 $14.0 million
and $8.1 million was used in operating activities during the first nine months
of 1998 and 1997. We had cash, cash-equivalents and short-term and long-term
investments of $16.0 million as of September 30, 1998, consisting primarily of
cash and money market accounts, and United States government securities and
investment grade commercial paper.
Aronex Pharmaceuticals has experienced negative cash flows from
operations since its inception and has funded its activities to date primarily
from equity financings. Aronex Pharmaceuticals 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.
Excluding the proceeds of this offering and payments expected from
Abbott Laboratories, Aronex Pharmaceuticals expects that its existing financial
resources should be sufficient to fund its capital requirements into the fourth
quarter of 1999. Aronex Pharmaceuticals expects that its existing financial
resources, together with the estimated proceeds of this offering, should be
sufficient to fund its capital requirements into the second quarter of 2000.
During this period, we anticipate receiving further payments from Abbott
Laboratories under the license agreement for NYOTRAN(R), however these payments
are dependent upon performance and are not guaranteed. In the future, Aronex
Pharmaceuticals may need to raise substantial additional capital to fund its
operations. Aronex Pharmaceuticals' independent public accountants have informed
management that, if at the time of their audit of the financial statements for
the year ending December 31, 1998 Aronex Pharmaceuticals' existing financial
resources continue to only be sufficient to fund capital requirements into the
fourth quarter of 1999, their report on those statements will include an
explanatory fourth paragraph expressing substantial doubt about Aronex
Pharmaceuticals' ability to continue as a going concern.
Aronex Pharmaceuticals has experienced significant increases in
accounts payable and accrued payroll since 1996, primarily as a result of the
increased development activities relating to our two late-stage products. We
anticipate that the amounts expended for these items in the future will continue
to correspond with its development activities. If the volume of development
activities decreases there will be a decrease in outstanding payables and a
decrease in our liquidity position. We expect that our expenses relating to
development activities will fluctuate from quarter to quarter over the next few
years as we have not yet generated revenues from product sales. Also, we have
typically obtained debt financing when necessary for equipment, furniture and
leasehold improvement requirements. In 1998, our capital requirements increased
with the move into new facilities. As a result, we borrowed $1.4 million in 1998
to finance its requirements in connection with this move. It is expected that we
will continue to incur additional debt to meet our capital requirements from
time to time in the future, based on our financial resources and needs.
Our capital requirements will depend on many factors, including the
risk factors more completely described under "Risk Factors" above. These factors
include:
o problems, delays, expenses and complications frequently
encountered by development stage companies;
o the progress of our research, development and clinical trial
programs;
o the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements;
o the costs and timing of seeking regulatory approvals of our
products;
o our ability to obtain regulatory approvals;
o the success of our sales and marketing programs;
o the costs of filing, prosecuting and defending and enforcing
any patent claims and other intellectual property rights; and
o changes in economic, regulatory or competitive conditions of
our planned business.
Estimates about the adequacy of funding for our activities are based on certain
assumptions, including the assumption that testing and regulatory procedures
relating to our products can be conducted at projected costs.
-20-
<PAGE> 24
There can be no assurance that changes in our research and development plans,
acquisitions, or other events will not result in accelerated or unexpected
expenditures.
To satisfy our capital requirements, we may seek to raise additional
funds in the public or private capital markets. Our ability to raise additional
funds in the public or private markets will be adversely affected if the
results of our current or future clinical trials are not favorable. We may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any funding will be available to us on
favorable terms or at all. If adequate funds are not available, we may be
required to curtail significantly one or more of its research or development
programs, or we may be required to obtain funds through arrangements with
future collaborative partners or others that may require us to relinquish
rights to some or all of our technologies or products. If we are 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
our common stock.
YEAR 2000
Year 2000 issues result from the inability of certain computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is represented as the year
1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.
Aronex Pharmaceuticals is in the process of assessing all of its
financial and operational systems and equipment to ensure year 2000 compliance.
We have completed our initial review of our financial and operational systems
and equipment, with the exception of certain personal computer and network
hardware which we are continuing to assess. Except for the personal computer and
network hardware that remains under assessment, the company has either obtained
certifications as to year 2000 compliance from vendors or has tested the year
2000 compliance of substantially all its systems and equipment, and has taken
the steps it believes will be necessary to remediate year 2000 problems
associated with the systems and equipment that it determined not to be year 2000
compliant. We plan to complete our assessment of our financial and operational
systems and equipment in the first quarter of 1999. We believe that the
potential impact, if any, of our systems not being year 2000 compliant could
result in the loss of data, which is available in hard-copy, that would have to
be re-entered. We believe that any loss of computer data will not materially
affect our ability to continue its research and development activities or have a
material adverse effect on our business, results of operations or financial
condition. However, this potential loss of data could result in a material delay
in completing clinical studies of our products which could have a material
adverse effect on our business, results of operations and financial condition.
Aronex Pharmaceuticals is in the process of contacting its consultants
and other suppliers of goods and services, as well as its corporate partners, to
assess the possible impact of year 2000 compliance of their systems and
equipment on us. We plan to complete our assessment of these matters by July 31,
1999. We believe that the potential impact, if any, of the systems of our
consultants (including clinical research organizations and hospitals), suppliers
and corporate partners not being year 2000 compliant could result in the loss of
data, which is available in hard-copy, that would have to be re-entered. Any
loss of computer data will not materially affect our ability to continue its
research and development activities. However, this potential loss of data could
result in a material delay in completing clinical studies of our products which
could have a material adverse effect on our business, results of operations and
financial condition.
Based on our assessments and remediation efforts to date, we do not
anticipate that we will incur any significant costs relating to the assessment
and remediation of year 2000 issues. To date, we estimate that we have spent
less than $25,000 in reviewing and remediating year 2000 issues and that total
expenditures incurred in completing our review and remediation efforts will not
exceed $100,000. However, there can be no assurance that planned expenditures
for these efforts will not exceed such amount should unforeseen complications
arise during such review and assessment or as a result of our remediation
efforts or those of our
-21-
<PAGE> 25
vendors, consultants or partners. Such expenditures are budgeted as part of our
operating expenses. Also, there can be no assurance that we or our consultants,
suppliers and corporate partners will successfully be able to identify and
remedy all potential year 2000 problems or that a system failure resulting from
a failure to identify any problems would not have a material adverse effect on
us.
We have developed and are implementing a contingency plan of
maintaining all data that is generated or collected by it or its collaborators,
including clinical research organizations, hospitals, physicians, consultants
and others, in hard-copy. Any loss of data due to year 2000 problems could be
re-entered manually. We also maintain all of our accounting records in hard copy
so that it can continue to manually pay vendors, employees, consultants and
collaborators in the event that its accounting software or other computer
programs or systems malfunction due to the year 2000 issue. Our employees also
have keys to the doors to enable them to gain access to their laboratory and
offices in the event that the building's security systems malfunction. We are
continuing to review these and related operational requirements in order to
complete our contingency plan for the company's noncritical business functions.
-22-
<PAGE> 26
BUSINESS
GENERAL
Aronex Pharmaceuticals is a biopharmaceutical company engaged in the
identification and development of proprietary innovative medicines to treat
cancer and infectious diseases. Our strategy is to identify and develop
medicines based upon either refinements of proven therapies or new ways of
treating specific diseases. We have a portfolio of clinical products that we
believe balances the risks encountered in development of pharmaceutical
products against the rewards from the practical commercial applications of our
products. We believe our focus on medicines for cancer and infectious diseases
for which current therapy is inadequate will assist in development and product
marketing and will facilitate expedited commercialization of our products.
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. Our strategy encompasses five key elements:
Therapeutic Focus. We have 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. We
believe that this focus provides synergies in the development of products as a
result of common patient populations, and will provide synergies in the
marketing and commercialization of products as a result of the common
hospital-based sales and distribution channels and concentrated customer base
associated with these products. In addition, we believe our focus on medicines
for cancer and infectious diseases for which current therapy is inadequate may
facilitate expedited commercialization of our products.
Balanced Product Portfolio. We have a portfolio of clinical products
that we believe provides a balanced development and commercialization risk
profile. Four of our products are liposomal formulations of drugs that are
currently on the market, designed to improve effectiveness and reduce adverse
side effects. Liposomal formulations are products where the drug is trapped
within a lipid-based environment. We believe that this should contribute to a
reduction in the development risks associated with our products. Two of our
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, we believe that these products may have a substantial impact
against the diseases they are intended to treat. We believe that this balanced
development and commercialization risk profile limits our dependence on a
single product.
Expedited Drug Development Programs. We believe that we have 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, we believe that we have the ability to effectively advance
preclinical and clinical products through the development pipeline.
Leveraged Research and Technological Resources. We rely on several
sources to provide potential opportunities to expand our pipeline of products
for commercialization. Using academic and corporate collaborations, we seek
late-stage preclinical products for advancement into our clinical pipeline as
well as early-stage clinical products with prospects for rapid clinical
development. Additional opportunities are available through our existing
capabilities in drug formulation and delivery.
Marketing and Commercialization Strategy. Our marketing and
commercialization effort is designed to create a revenue stream utilizing two
diverse methods. We intend to market products in the United States through our
own sales and marketing efforts or through co-marketing, and to market products
overseas through licensing arrangements with corporate partners. We also intend
to market those products requiring broader marketing and distribution efforts
through licensing arrangements with corporate partners.
-23-
<PAGE> 27
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. Aronex Pharmaceuticals is targeting the development of
drugs for cancer and infectious diseases that are selective in their actions,
with unique or special ways of acting and more favorable safety profiles.
Infectious Diseases
The immune system, the major line of defense against infection, may be
weakened by diseases, such as HIV and diabetes, or by drugs or agents used for
the treatment of other medical conditions, such as chemotherapy in cancer
patients or immunosuppressive, anti-rejection, therapy in patients receiving
organ transplants. A weak immune system predisposes patients to opportunistic
infections caused by otherwise harmless microbes. These opportunistic
infections are caused by microbes which may be fungi such as Aspergillus and
Candida, viruses or bacteria. Some of these "opportunistic" 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. According to the American Cancer Society,
major classes of cancer include:
o solid tumors, the most common of which are breast cancer and
cancers of the lung;
o cancers of the lymphoid system; and
o cancers of the blood.
In the United States there are annually approximately 179,000 new cases of
breast cancer, 171,000 new cases of lung cancer, 62,000 new cases of lymphoma
and 29,000 new cases of leukemia, according to the American Cancer Society.
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, or 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 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.
Our Approach to the Treatment of Cancer and Infectious Diseases
-24-
<PAGE> 28
Aronex Pharmaceuticals has a focused effort aimed at identifying
highly-specific, novel medicines for the treatment of cancer and infectious
diseases. Our research and development strategy is to augment its pipeline by
partnering with academic centers such as The University of Texas M.D. Anderson
Cancer Center. These relationships are intended to permit us to identify
opportunities which have already been validated in preclinical and, in some
instances, clinical studies before we allocate resources for further evaluation
and development. We also anticipate expansion of our product pipeline through
acquisitions, licenses and joint ventures with corporate partners. This
strategy is further intended to allow us to bypass the lengthy and uncertain
drug discovery and screening process and to proceed quickly to product
development and clinical evaluation. We believe that utilizing this strategy
will allow us to maintain a full pipeline of innovative products for the
treatment of cancer and infectious diseases. See "-- Collaborative Agreements."
PRODUCTS IN CLINICAL AND PRECLINICAL DEVELOPMENT
The following table lists our clinical products, along with their
initial indications and clinical status:
<TABLE>
<CAPTION>
PRODUCT INDICATIONS CLINICAL STATUS
------- ----------- ---------------
<S> <C> <C>
INFECTIOUS DISEASES
NYOTRAN(R)....................... Presumed Fungal Infections Phase III completed
Cryptococcal Meningitis Phase III
Candidemia Phase II completed
Aspergillus Salvage Phase II
Zintevir(R)...................... HIV Infection Phase I/II
CANCER
ATRAGEN(R)....................... Acute Promyelocytic Leukemia Phase II (pivotal)
Non-Hodgkin's Lymphoma Phase II
Prostate Cancer Phase II
Renal Cell Carcinoma Phase I/II
Kaposi's Sarcoma Phase II completed
Annamycin...................... . Breast Cancer Phase II
Platar........................... Lung Cancer Phase II
</TABLE>
"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 distribution of a drug in a human patient.
"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 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. A "Pivotal" clinical trial is defined as a clinical trial that
produces data sufficient for submission of an NDA.
We can give no assurance that the results of any of our clinical
trials will be favorable or that our products will obtain regulatory approval
for commercialization. See "Risk Factors -- Clinical Trial Results May Result
in Failure to Obtain FDA Approval and Inability to Sell Products."
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(R) for life-threatening
systemic, or internal, fungal infections and Zintevir(R) for the treatment of
HIV infection.
-25-
<PAGE> 29
NYOTRAN(R) for Presumed Fungal Infections (Phase III completed),
Candidemia (Phase II completed), Aspergillus Salvage (Phase II) and
Cryptococcal Meningitis (Phase III)
Systemic fungal infections are generally serious and may result in
death. Most systemic fungal infections are caused by Candida, or yeasts, and
Aspergillus, or 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
anti-rejection therapy in patients receiving organ transplants. The population
of patients who become candidates for antifungal 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.
We believe that the drugs that are currently used to treat systemic
fungal infections, including fluconazole, itraconazole, amphotericin B and
liposomal formulations of amphotericin B, have limitations that present a need
for new therapies. Data from recent in vitro or test tube studies as well as
clinical trial data indicate that a number of fungal strains are becoming
increasingly resistant to known therapies. Fluconazole and itraconazole are
relatively safe and are effective in inhibiting fungal growth in Candida, but
are not effective in inhibiting fungal growth in Aspergillus and are generally
not effective in treating fungal infections in patients who are seriously ill
and whose immune systems are compromised and not functioning properly.
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(R) is a lipid-based, intravenous formulation of the drug
nystatin, an established, widely-used topical anti-fungal agent. Although
nystatin has proven to be a potent anti-fungal against a broad spectrum of
fungi, including Candida, Cryptococcus, Histoplasma, Blastomyces and
Aspergillus, its poor solubility and toxicity have previously precluded its
systemic administration as a therapy for these fungal infections. We have
developed a proprietary formulation of NYOTRAN(R) that reduces the toxicity of
nystatin. In addition, we believe that NYOTRAN(R)'s lipid-based formulation
addresses the solubility problem of nystatin. We believe NYOTRAN(R) offers
potential advantages over current systemic anti-fungal therapies. Our 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, we believe that our Phase I and Phase
II clinical trials suggest that NYOTRAN(R) can be administered at doses that
are effective in treating Aspergillus, Candida and Cryptococcus infections.
The strategy for the development of NYOTRAN(R) has involved several
stages. We have conducted three Phase I clinical studies which demonstrated a
favorable safety profile. We completed a Phase II open label study in patients
with Candidemia evaluating NYOTRAN(R) 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 of the maximum tolerated dose
established in Phase I appears to be efficacious. Based upon data from this
study, we initiated Phase III comparative multicenter trials in the United
States and in Europe of NYOTRAN(R) against amphotericin B in patients with
presumed fungal infections. Most frequently, in a hospital environment, a
patient with a fever of unknown origin will be treated with an antibiotic. When
this treatment proves ineffective, the physician then presumes that the patient
has a fungal infection, and begins treatment with an anti-fungal agent. The
diagnosis of a confirmed fungal infection may occur several days after
anti-fungal therapy has begun. We completed the clinical trials for presumed
fungal infections in late 1998.
To expand the potential indications for NYOTRAN(R), we commenced Phase
II/III trials for patients with cryptococcal meningitis and Phase II
Aspergillus salvage trials. Aspergillus salvage trials are designed to treat
patients with Aspergillus who have failed treatment with current products. We
plan to file an NDA for NYOTRAN(R) with the FDA in 1999 for an indication in
presumed systemic fungal infections. Following the United States submission,
Abbott Laboratories, the exclusive licensee for NYOTRAN(R), is expected to
begin to file additional international regulatory submissions. See "--
Government Regulation," "-- Collaborative Agreements --Collaborative Agreement
with Abbott Laboratories" and "Risk Factors -- Clinical Trial Results May
Result in Failure to Obtain FDA Approval and Inability to Sell Products."
-26-
<PAGE> 30
The active ingredient of NYOTRAN(R), nystatin, is available
commercially. We have utilized a contract manufacturer for our clinical
requirements of NYOTRAN(R), who we believe to be capable of satisfying the
quantities required for clinical trials and anticipated quantities for initial
commercial sales. However, we expect Abbott to manufacture the quantities of
NYOTRAN(R) necessary to conduct its remaining clinical trials and, following
regulatory approval, to manufacture NYOTRAN(R) for commercial sale.
We estimate that each year over 300,000 patients worldwide develop
systemic fungal infections. The current systemic anti-fungal market is
estimated at more than $1.5 billion on an annual basis. The number of patients
developing systemic fungal infections continues to increase because of the
aging population, 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
anti-fungal product, is an oral formulation used for a wide range of less
serious Candida indications. We are aware of other anti-fungal agents currently
in clinical development.
In November 1998, we entered into a license agreement with Abbott
Laboratories for NYOTRAN(R). The license agreement provides Abbott with
exclusive worldwide rights to market and sell NYOTRAN(R), subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal
and certain co-promotion rights retained by us in the United States and Canada.
Abbott has paid us milestone and up-front payments of $8.4 million under the
license agreement and purchased common stock for $3.0 million under a related
stock purchase agreement. Abbott has also agreed to provide funding for the
continuing clinical development of NYOTRAN(R) and to make subsequent milestone
payments as specified regulatory goals and sales targets are achieved. Abbott
has agreed to pay us royalties which increase in amount based upon the level of
product sales of NYOTRAN(R) in each year. See "-- Collaborative Agreements --
Collaborative Agreement with Abbott Laboratories."
M.D. Anderson has granted us the worldwide exclusive license under an
issued patent to the use of a liposomal formulation of nystatin in the
treatment of systemic fungal infections. A process which is of pharmaceutical
utility for making NYOTRAN(R) 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(R) for HIV Infection (Phase I/II)
Aronex Pharmaceuticals is developing Zintevir(R) for the treatment of
human immunodeficiency virus infection. The drugs currently approved in the
United States for treatment of HIV infection consist of reverse transcriptase
inhibitors, such as AZT, ddI, ddC, d4T and 3TC, and protease inhibitors, such
as saquinavir, ritinovir and indinavir. By contrast, we believe Zintevir(R)
inhibits HIV-1 integrase, a key enzyme in catalyzing the integration of HIV
within human cells. Integrase enzyme inhibitors act at a step in the HIV
life-cycle different than protease and/or reverse transcriptase enzymes. These
cell enzymes are responsible for replication of the virus.
Two Phase I trials on Zintevir(R) have been completed. A Phase I
single dose study of Zintevir(R) was initiated at San Francisco General
Hospital in October 1995, and a Phase I multiple dose study was initiated at
Harris Laboratories, Inc., a clinical research organization, in May 1996. The
primary objectives of these studies were to determine the safety and
distribution of Zintevir(R) in HIV infected patients. In November 1997, we
began a Phase I/II clinical trial designed to determine Zintevir(R)'s ability
to reduce the level of HIV as well as to gather additional data on the
product's safety and distribution throughout and elimination from the body. We
expect to complete the Phase I/II clinical trial in 1999. We will evaluate the
results of the Phase I/II clinical trials but do not intend to progress into
additional development of Zintevir(R) unless a third party agrees to fund the
additional development work. See "Risk Factors -- Clinical Trial Results May
Result in Failure to Obtain FDA Approval and Inability to Sell Products."
-27-
<PAGE> 31
The use and composition of a group of compounds including Zintevir(R)
are the subject of one issued patent and four United States patent applications
and eight foreign patent applications. These applications are either assigned
wholly to us, or jointly to us and Baylor College of Medicine, in which case we
have exclusively licensed Baylor's rights. The issued patent covers the
inhibition of HIV production in cultured cells by a group of compounds
including Zintevir(R). See "-- Patents and Proprietary Rights."
CANCER
Aronex Pharmaceuticals' programs in cancer focus on developing
medicines based upon either refinements of proven therapies or new approaches
to the treatment of specific disease targets. The clinical program currently
focuses on development of ATRAGEN(R) for hematological malignancies and solid
tumors and Annamycin for breast cancer.
ATRAGEN(R) for Acute Promyelocytic Leukemia (pivotal Phase II),
Non-Hodgkin's Lymphoma (Phase II), Prostate Cancer (Phase II), Renal
Cell Carcinoma (Phase I/II) and Kaposi's Sarcoma (Phase II completed)
In December 1998, we submitted an NDA to the FDA for ATRAGEN(R) for
the treatment of patients with acute promyelocytic leukemia, "APL", for whom
therapy with tretinoin is necessary but for whom an intravenous administration
is required. 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. ATRA, or tretinoin, has been approved as an oral formulation
by the FDA as a treatment for APL. ATRA and other retinoids cause cell
differentiation in contrast to most conventional chemotherapeutic agents.
Retinoids are molecules comprising both natural and synthetic derivatives of
retinol, otherwise known as vitamin A. However, we believe 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(R) is a lipid-based, intravenous formulation of ATRA which has
been studied in patients with APL and Kaposi's sarcoma. Our 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(R) 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(R) 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.
We completed a Phase I clinical trial of ATRAGEN(R) in 1995 in
patients with cancers of the blood. Phase I data presented in the journal Blood
during 1996 indicated that ATRAGEN(R) sustains levels in the blood after
prolonged dosing, is well tolerated, and shows evidence of activity against
certain leukemias and lymphomas. We recently completed patient enrollment for
the pivotal Phase II clinical evaluation of ATRAGEN(R) 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(R) has activity against APL. We completed patient enrollment of
the Phase II clinical trials in the third quarter of 1998. Based on the pivotal
Phase II data, we submitted an NDA for ATRAGEN(R) for the treatment of patients
with APL for whom therapy with the drug tretinoin is necessary but for whom an
intravenous administration is required.
ATRAGEN(R) has also been assessed in Phase II clinical trials in
collaboration with Genzyme Corporation for the treatment of Kaposi's sarcoma.
Results from this trial indicated that ATRAGEN(R) was generally well tolerated,
with headaches and dry skin being the primary reported adverse events. We are
not presently pursuing this indication, although we may do so in the future.
-28-
<PAGE> 32
We believe that ATRAGEN(R) may also be useful in treating other types
of cancer, and we are evaluating the efficacy of ATRAGEN(R) in other
hematologic malignancies and solid tumors. In 1998, we initiated a Phase II
clinical trial in non-Hodgkin's lymphoma and a Phase II clinical trial in
hormone-refractory prostate cancer. In early 1999, a Phase I/II clinical trial
in combination with interferon alpha in renal cell carcinoma was initiated at
New York Presbyterian Hospital and the Weill Medical College of Cornell
University under an institutional Investigational New Drug application, IND. We
plan to expand the initiation of clinical trials in other indications in the
near future. ATRAGEN(R) has been designated an orphan drug for the treatment of
acute and chronic leukemia by the FDA. See "-- Government Regulation" and "Risk
Factors -- Clinical Trial Results May Result in Failure to Obtain FDA Approval
and Inability to Sell Products."
According to the American Cancer Society, approximately 1,000 new
cases of APL in the United States are diagnosed annually, and each year
approximately 500,000 patients in the United States develop the various types
of cancer identified as potential indications for ATRAGEN(R).
In 1993, we entered into a collaborative agreement with Genzyme
Corporation to develop and commercialize ATRAGEN(R) for the treatment of
cancer. This agreement has subsequently been modified, with the result that:
(1) we retain responsibility for the further clinical development of ATRAGEN(R)
and (2) Genzyme has an option to acquire marketing rights to ATRAGEN(R),
subject to our right to retain or reacquire the marketing rights and subject to
certain other rights retained by us. See "-- Collaborative Agreements --
Collaborative Agreement with Genzyme Corporation."
The composition and method of use of ATRAGEN(R) is the subject of a
patent application, assigned to The University of Texas M.D. Anderson Cancer
Center, as to which the rights of M.D. Anderson are exclusively licensed to us.
These rights are subject to certain options held by Genzyme related to
development of ATRAGEN(R). Claims to the ATRAGEN(R) 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. (1) Cancer cells often develop a resistance to them, 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. (2)
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. Our
preclinical studies have shown that Annamycin, which is a lipid-based
formulation of a novel anthracycline, may be active against multi-drug
resistant tumor cells that over-express at least two of the pumps that are
believed to be, at least in part, responsible for tumor cells becoming
resistant to treatment. Over-express implies that the levels of the enzymes
present in a particular person is in excess of the levels found in a healthy or
normal person. Our preclinical studies of Annamycin in animals bearing human
tumors also indicate that Annamycin may be less cardiotoxic than doxorubicin. 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. We expect to complete Phase II clinical
trials in 1999. Clinical trials to assess the efficacy
-29-
<PAGE> 33
of Annamycin in patients with other solid tumors and with various hematological
malignancies are being planned. See "Risk Factors -- Clinical Trial Results May
Result in Failure to Obtain FDA Approval and Inability to Sell Products."
We believe 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. The American Cancer Society estimates that each year there
are approximately 179,000 new cases of breast cancer in the United States.
Annamycin also may be useful in treating other varieties of solid tumors,
leukemias and lymphomas.
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, we do not believe that
there are any medicines available that are active against multi-drug resistant
tumors. We are aware of some agents currently in Phase II clinical trials that
are designed to modify multi-drug resistance, but for which no efficacy data
are yet available. These agents would potentially be used in combination with
chemotherapeutic agents.
Our liposomal formulation of Annamycin is the subject of an issued
patent, licensed exclusively to us by The University of Texas M.D. Anderson
Cancer Center. In addition, a patent application has been filed with respect to
an improved process for preparing Annamycin. This patent application is also
licensed to us under the exclusive license with MD Anderson . Annamycin itself
is the subject of a patent that has been non-exclusively sublicensed to us by
M.D. Anderson, which M.D. Anderson licensed from Ohio State University. See "--
Patents and Proprietary Rights."
Platar for Lung Cancer (Institutional Phase II)
Aronex Pharmaceuticals, in conjunction with The University of Texas
M.D. Anderson Cancer Center, is developing the novel platinum analogue, Platar,
for the treatment of solid tumors. Platar 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.
Platar is currently being evaluated in a Phase II clinical trial,
under an institutional IND at M.D. Anderson Cancer Center, for the treatment of
mesothelioma, a type of lung cancer. This trial is funded by the Office of
Orphan Drug Products at the FDA. A Phase I clinical trial was previously
conducted under a physician's IND at M.D. Anderson Cancer Center.
Platar is covered by a series of patents and a patent application,
licensed exclusively to us by M.D. Anderson, relating to hydrophobic
cis-platinum complexes and to stable liposomal formulations of the lipophilic
platinum compounds. Hydrophobic or lipophilic means insoluble in water, and
refers to cis-platinum complexes which are platinum molecules joined at
different positions. The claims of these patents are drawn to novel cis-platinum
complexes having hydrophobic properties and possessing hydrocarbon substituents.
Hydrocarbon substituents are molecules consisting of hydrogen and carbon.
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 us is
the subject of an ongoing interference proceeding in the United States Patent
and Trademark Office challenging the validity of this patent. We cannot
currently predict the outcome of this matter. See "-- Patents and Proprietary
Rights."
AR209: erbB-2 Targeted Therapy for Solid Tumors (Preclinical)
AR209 is an innovative cancer therapy that we believe has potential
for additional solid tumor indications, including lung, ovarian and stomach
cancers. We believe the design of this product improves upon conventional
cancer therapy by targeting specific cancer cells that contain the oncoprotein
erbB-2. The erbB-2 protein occurs at high levels only in tumors and not in
normal tissues. AR209 is an antibody-toxin complex composed of a targeting
ligand and a fragment of the Pseudomonas exotoxin. The targeting ligand is the
molecule
-30-
<PAGE> 34
which carries the active toxin to its site of application. The toxin in this
case is derived from the organism Psuedomonas. This novel product is designed
to bind to cancer cells that contain the erbB-2 oncoprotein and to be
transported inside or internalized, and to kill the cancer cell. Preclinical
studies indicate that AR209 causes shrinkage of solid human tumors and is well
tolerated.
We have a worldwide license from the NIH to the Pseudomonas exotoxin
used in the design of AR209. We also have 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."
In 1996, we entered into a license agreement with Boehringer Mannheim
GmbH to develop and commercialize AR209. Boehringer Mannheim was subsequently
acquired by Hoffman La-Roche. Under the agreement, Boehringer Mannheim was
responsible for funding the costs of all remaining preclinical and clinical
development of AR209 and for manufacturing the product. Both parties had the
right to terminate the agreement without cause, with all rights reverting to
the non-terminating party. The agreement was terminated without cause by
Hoffman La-Roche in September 1998 with the result that rights to AR209 have
reverted to us.
RESEARCH PIPELINE
Our goal is to establish an effective and efficient pharmaceutical
development infrastructure and capability to provide a continuing pipeline of
products for commercialization. Our research and development strategy is to
augment its pipeline by partnering with academic centers such as The University
of Texas M.D. Anderson Cancer Center, as well as with private research
foundations. This partnering will allow us 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 us to bypass the lengthy and uncertain drug discovery and
screening process and to proceed quickly to product development and clinical
evaluation. We believe that using this strategy will allow us to maintain a
full pipeline of innovative products for the treatment of cancer and infectious
diseases. See "-- Collaborative Agreements."
COLLABORATIVE AGREEMENTS
Our development strategy involves entering into selected development
and licensing agreements with corporate partners to provide working capital as
well as assist in the efficient development and marketing of certain of our
products. See "Risk Factors -- Our Ability to Enter into Collaborative
Agreements is Critical to Our Successful Development, Sales and Licensing of
Products and Potential Profitability."
Collaborative Agreement with Abbott Laboratories
In November 1998, we entered into a stock purchase agreement and a
license agreement with Abbott Laboratories for NYOTRAN(R). The license
agreement provides Abbott with exclusive worldwide rights to market and sell
NYOTRAN(R), subject to rights previously granted to Grupo Ferrer Internacional,
S.A. in Spain and Portugal and co-promotion rights retained by us in the United
States and Canada for an initial two year period. These co-promotion rights
will renew annually thereafter for successive one year periods unless cancelled
by either party. To date, Abbott has purchased $3 million of Common Stock and
paid us up-front and milestone payments of $8.4 million under the license
agreement with an aggregate potential of $40 million in stock payments,
clinical development payments and sales milestone payments. Abbott's payments
to us provide funding for the continuing clinical development of NYOTRAN(R),
and are due as specified regulatory goals and sales targets are achieved.
However, there can be no assurance that these milestone payments will be made.
The research and development payments are subject to reduction in the event
that the completion of the applicable activity is delayed beyond various dates.
Once paid, all payments are non-refundable. Abbott will also pay us royalties
that increase in amount based upon the level of product sales of NYOTRAN(R) in
each year.
The licenses granted under the NYOTRAN(R) agreement terminate on a
country-by-country basis on the expiration of the last patent relating to that
product in that country. The agreement is terminable by Abbott in the event
certain regulatory milestone goals are not met or other specified events occur,
such as adverse safety and
-31-
<PAGE> 35
efficacy issues, and are terminable by either party on the occurrence of a
breach that is not cured by the breaching party within a certain time period
after notice has been given to that breaching party. In the event the agreement
is terminated by Abbott due to a regulatory milestone not being met on time or
other specified cause no further payments by Abbott are due.
Relationship with Grupo Ferrer Internacional, S.A.
In 1997, we entered into a supply and distribution agreement with
Grupo Ferrer Internacional, S.A. to commercialize and market NYOTRAN(R), under
which Grupo Ferrer received the exclusive right to distribute and sell
NYOTRAN(R) in Spain and Portugal. This agreement was subsequently amended to
enable Abbott to pursue an optimal registration and commercialization strategy
in all international markets. The three parties have agreed to commence
three-way discussions to define this strategy.
Collaborative Agreement with Genzyme Corporation
In 1993, we entered into a license and development agreement with
Genzyme Corporation to develop and commercialize ATRAGEN(R). The initial focus
of the collaboration was the development of ATRAGEN(R) for the treatment of
myelogenous leukemias and certain non-hematologic cancers. Clinical development
responsibilities and research program funding were shared by both parties
through the end of 1996. Under the agreement, Genzyme was required to make up
to $1.5 million in milestone payments to us upon the occurrence of certain
events and to pay us 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. We had the right to terminate the
agreement if Genzyme failed to satisfy certain milestones. Under the
collaborative agreement, Genzyme made a net $4.5 million equity investment in
us and agreed to make an additional $5.0 million equity investment if certain
developmental goals were achieved.
In September 1996, Genzyme advanced us $2.0 million relating to the
$5.0 million equity milestone. Early in 1997, we amended the agreement through
which (1) we released Genzyme from any further obligation to perform
development work for ATRAGEN(R) and (2) the license granted to Genzyme under
the agreement was converted to an option to acquire the right to market and
sell ATRAGEN(R) worldwide. We retained co-promotion rights in the United
States. If Genzyme exercises its option, Genzyme will be required to pay us
$3.0 million and product royalties and we will be entitled to retain the $2.0
million advance. We have the right on or before December 4, 1999, to reacquire
the marketing rights by repaying the $2.0 million advance and, if applicable,
returning to Genzyme the $3.0 million received as a result of Genzyme's
exercise of the option . If we reacquire marketing rights, we will also be
required to pay Genzyme product royalties, including $500,000 in minimum
royalties in the first year following its reacquisition of these rights. If
Genzyme does not exercise its option prior to its expiration, we will be
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. Genzyme's option to acquire marketing rights
expires on June 4, 1999, which is six months after our filing of an NDA for
ATRAGEN(R).
Relationship with The University of Texas M.D. Anderson Cancer Center
We have two license agreements with The University of Texas M.D.
Anderson Cancer Center which grant us exclusive rights to manufacture, use,
market and sell products based upon certain technology developed at M.D.
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. Human monocyte or murine
macrophage-derived cytotoxins refers to the source of the cytotoxins, which is
either human or mouse-based. NYOTRAN(R), ATRAGEN(R), Annamycin and Platar are
products derived from our relationship with M.D. Anderson.
The license agreements with M.D. Anderson require us to pay royalties
for licensed technology based on specified percentages of cumulative net sales
and royalties from sublicensees. We are also obligated to pay a milestone
payment of $200,000 upon the filing of an NDA for each licensed product.
Because we have not sold
-32-
<PAGE> 36
any products or processes to date, we have not paid any royalties under the
license agreements. M.D. Anderson is responsible for the preparation, filing
and prosecution of all patent applications, foreign and domestic, relating to
technology developed at M.D. Anderson, and we reimburse M.D. Anderson for
expenses incurred during these activities.
The license agreements generally remain in force until the expiration
of the last patent subject to the 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 that agreement. M.D. Anderson 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, we believe our
ongoing and active research and development efforts directed at commercial
marketing of the licensed products currently satisfies this obligation.
We have entered into research and development contracts with M.D.
Anderson in conjunction with the license agreements which obligate us to fund
research and development expenses incurred by the M.D. Anderson scientists that
relate to the technology licensed by us. These contracts grant us an exclusive
worldwide license to technology under the license agreements and developed as a
result of research funded by us. These contracts also grant us a right of first
refusal to acquire an exclusive worldwide license to certain technology
developed at M.D. Anderson which is not the result of projects funded by us. We
have agreed to the funding commitments for research projects under these
contracts through November 15, 1999. The amount of funding committed for 1999
is $117,333, and subsequent periods are expected to be negotiated on an annual
basis, based upon a variety of factors including the number and cost of
projects to be funded, the staffing requirements associated with these
projects, and other related matters. If we default in the payment of research
and development funding commitments due M.D. Anderson under these contracts,
M.D. Anderson may suspend the related research and development projects or, if
our default continues for a period of 60 days, M.D. Anderson may terminate the
related contract upon 60 days notice . If the research and development contract
with M.D. Anderson is terminated, no further inventions or improvements
developed at M.D. Anderson relating to the products licensed to us would be
transferred or licensed to us.
Relationship with Baylor College of Medicine
We have had collaborative arrangements with Baylor College of
Medicine, under licensing, consulting and research and development arrangements
entered into by Triplex beginning in 1989. We have an exclusive, worldwide,
royalty-free license from Baylor to certain technology developed by Baylor,
including the product Zintevir(R). The collaboration arrangements terminated in
1996. The license agreement terminates on the expiration of the last patent to
expire that is licensed thereunder, which is projected to be October 22, 2013.
MANUFACTURING
Aronex Pharmaceuticals does not have the facilities necessary to
manufacture its products in accordance with the good manufacturing practices
guidelines established by the FDA for companies manufacturing pharmaceutical
products. We do have the capability to develop formulations, analytical
methods, process controls and manufacturing technology for its products. We
generally use contract manufacturers to produce batches of its products for
clinical testing, although we expect Abbott Laboratories to supply the
quantities of NYOTRAN(R) necessary to conduct our remaining clinical trials of
that product. We and the manufacturers of our products, other than Abbott, have
not entered into any written agreements other than periodic purchase orders for
the supply of the products they manufacture on its behalf. Contract
manufacturers are closely supervised to ensure adherence to established
production methods and compliance with our rigorous quality control and quality
assurance standards. We do not expect to establish any significant
manufacturing capacity in the near future. We do not operate, and do not
currently plan to operate, manufacturing facilities for the production of our
products in commercial quantities, and intend to contract with third parties
for the manufacture and supply of our products. There can be no assurance that
we will be able to obtain supplies of products from third-party suppliers on
terms or in quantities acceptable to us. Also, we depend on third parties for
the manufacture of our products. This may adversely affect our product margins
and ability to develop and deliver products on a timely basis. Any third-party
suppliers of this kind or any manufacturing facility we establish will be
required to meet FDA good manufacturing practices requirements. FDA inspection
and approval of manufacturing facilities and quality
-33-
<PAGE> 37
procedures for a drug are a prerequisite to approval of an NDA for that drug.
We may encounter significant delays in obtaining supplies from third-party
manufacturers or experience interruptions in our supplies. If we are unable to
obtain adequate supplies, our business would be materially adversely affected.
The raw materials required for the majority of our products are
currently available in quantities sufficient to conduct our research,
development, preclinical safety and clinical development activities. Certain of
our products, such as Annamycin, are new syntheses and, therefore, are not yet
available in commercial quantities. We cannot give assurance that the raw
materials necessary for the manufacture of our 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 our competitive position and potential
profitability.
SALES AND MARKETING
We presently intend to market our products in North America through
our own sales and marketing infrastructure or under co-promotion arrangements,
and will build our sales and marketing infrastructure in accordance with
regulatory submissions. We currently plan 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, we may enter into co-marketing
arrangements with, or license marketing rights to, third parties. Our
international strategy is to negotiate marketing agreements with pharmaceutical
manufacturers and distributors which will entitle us to receive a percentage of
net product sales.
We do not have any experience in sales, marketing or distribution. To
market any of our products, we 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 us to develop these capabilities.
We have entered into agreements with Abbott Laboratories and Grupo Ferrer
Internacional, S.A. with respect to the marketing and sale of NYOTRAN(R). In
addition, we have entered into an agreement with Genzyme Corporation under
which Genzyme may acquire the right to market and sell ATRAGEN(R), subject to
certain conditions and certain rights retained by us. To the extent that
Genzyme does not acquire or we reacquire these marketing rights, we may enter
into marketing agreements with one or more other pharmaceutical companies to
market ATRAGEN(R). In addition, we may enter into marketing agreements with one
or more pharmaceutical companies to market other products that we may develop.
To the extent we rely upon licensing, marketing or distribution arrangements
with others, any revenues we receive will depend upon the efforts of third
parties. We cannot assure that any third party will market our products
successfully or that any third-party collaboration will be on terms favorable
to us. If any marketing partner does not market a product successfully, our
business would be materially adversely affected. We cannot give assurance that
we will be able to establish sales, marketing and distribution capabilities or
that we or our collaborators will be successful in gaining market acceptance
for any products that we may develop. Our failure to establish marketing
capabilities or to enter into marketing arrangements with third parties would
have a material adverse effect on us.
PATENTS AND PROPRIETARY RIGHTS
Aronex Pharmaceuticals' 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 us 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 our product candidates. We cannot assure
that:
o the patent applications licensed to or owned by us will result in
issued patents;
o that patent protection will be secured for any particular
technology;
o that any patents that have been or may be issued to us or our
licensors will be valid or enforceable;
-34-
<PAGE> 38
o that any patents will provide meaningful protection to us;
o that others will not be able to design around the patents; or
o that our patents will provide a competitive advantage or have
commercial application.
We cannot give assurance that patents owned by or licensed to us will not be
challenged by others. We 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 our inventions and products as well as
about the enforceability, validity or scope of protection afforded by the
patents. We are currently involved in an interference proceeding against
Sumitomo Pharmaceuticals before the United States Patent and Trademark Office
regarding the drug NDDP used in the formula of Platar. Platar consists of the
liposomal formulation of the NDDP molecule. Both of the parties claim sole
right to the invention. Sumitomo Pharmaceuticals is relying on a Japanese
patent for priority. The interference was declared by an examiner to be between
a currently pending United States patent application owned by Sumitomo
Pharmaceuticals and certain issued patents licensed by us from the University
of Texas M.D. Anderson Cancer Center. Should the Patent Office deem the
Sumitomo Pharmaceuticals Japanese patent to be first in time over the date
relating to our issued patents, our patents may be revoked or alternatively,
some of the claims contained in these patents would be revoked. Under these
circumstances, we would need to enter into a license agreement to obtain rights
to NDDP in order to commercialize the product in the United States. There can
be no assurance that we will be able to enter into a license on acceptable
terms, if at all. See "-- Cancer -- Platar for Lung Cancer (Institutional Phase
II)."
We cannot give assurance that the manufacture, use or sale of our
product candidates will not infringe patent rights of others. We 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. We cannot give assurance that a license will be available to us, if at
all, upon terms and conditions acceptable to us or that we will prevail in any
patent litigation. Patent litigation is costly and time consuming, and we
cannot assure that we will have sufficient resources to bring the litigation to
a successful conclusion. If we do not obtain a license under such patents, are
found liable for infringement, or are not able to have infringing patents
declared invalid, we may be liable for significant money damages, may encounter
significant delays in bringing products to market, or may be precluded from
participating in the manufacture, use or sale of products or methods of
treatment requiring these licenses. We do not believe that the
commercialization of our products will infringe upon the patent rights of
others. However, we cannot assure that we have identified all or any United
States and foreign patents that pose a risk of infringement.
We also rely upon trade secrets and other unpatented proprietary
information in our product development activities. To the extent we rely on
trade secrets and unpatented know-how to maintain our competitive technological
position, we cannot assure that others may not independently develop the same
or similar technologies. We seek to protect trade secrets and proprietary
knowledge, in part through confidentiality agreements with our employees,
consultants, advisors and collaborators. Nevertheless, these agreements may not
effectively prevent disclosure of our confidential information and may not
provide us with an adequate remedy in the event of unauthorized disclosure of
such information. If our employees, scientific consultants or collaborators
develop inventions or processes independently that may be applicable to our
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. These inventions and processes will not necessarily
become our 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 our proprietary rights. Failure to obtain or maintain
patent and trade secret protection, for any reason, would have a material
adverse effect on us.
We engage 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 these collaborations and agreements as required by law or the
agreements. These rights typically allow the government to use the invention
for free on an internal basis and for research and development purposes. None
of our inventions are subject to these rights, except for AR209.
-35-
<PAGE> 39
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 our intellectual property estate is uncertain.
GOVERNMENT REGULATION
Aronex Pharmaceuticals' research and development activities,
preclinical studies and clinical trials, and ultimately the manufacturing,
marketing and labeling of 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 associated
regulations 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 our 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 our products. Delays or rejections in obtaining regulatory approvals
would adversely affect our ability to commercialize any product we develop and
our 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 our 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 our products to the satisfaction of the FDA
and other regulatory authorities, we will not receive the approvals necessary to
market our products, which would have a material adverse effect on us.
The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes:
o preclinical tests;
o submission to the FDA of an IND which must become effective before
human clinical trials may commence;
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the drug in its intended application;
o submission of an NDA to the FDA; and
o 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 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 FDA good manufacturing
practices.
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 the good laboratory practices guidelines
established by the FDA for companies conducting research and development on
proposed pharmaceutical products. 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.
The Institutional Review Board will consider, among other things, ethical
factors, the safety of human subjects, and the possible liability of the
institution conducting the clinical trials.
-36-
<PAGE> 40
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, dosage tolerance, metabolism, distribution and
excretion. 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.
Phase III clinical trials are not always required, however, where the data
obtained in Phase II trials is determined to be "pivotal." There can be no
assurance that any of our clinical trials will be completed successfully or
within any specified time period. We or the FDA may suspend clinical trials at
any time.
We have designed the protocols for our pivotal clinical trials based on
analysis of our research, including various parts of its Phase I and Phase II
clinical trials. Although copies of our 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 established by the FDA. 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 our 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, we intend to
pursue opportunities for accelerated review of our products. We cannot predict
the ultimate effect of this review process on the timing or likelihood of FDA
review of any of our products.
Even if regulatory approvals for our products are obtained, our
products and the facilities manufacturing our products are subject to continual
review and periodic inspection. The FDA will require post-marketing reporting to
monitor the safety of our 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 good
manufacturing practices. To supply drug products for use in the United States,
foreign manufacturing establishments must comply with the FDA's good
manufacturing practices and are subject to periodic inspection by the FDA or by
regulatory authorities in those countries under reciprocal agreements with the
FDA. In complying with good manufacturing practices, manufacturers must expend
funds, time and effort in the area of production and quality control to ensure
full technical compliance. We do 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.
-37-
<PAGE> 41
Before our 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 our products, no assurance can be given
that it will approve satisfactory prices for the products.
Our research and development involves the controlled use of hazardous
materials, chemicals, viruses, and various radioactive compounds. Although we
believe that our 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 an accident of this type
occurs, we could be held liable for resulting damages, which could be material
to our financial condition and business. We are 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 us may be adopted in the future. Any violation of these
laws and regulations, and the cost of compliance, could materially and adversely
affect us.
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. We 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 our 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 that party. Exclusivity granted under the Orphan Drug Act is typically for a
four to seven year period.
COMPETITION
Aronex Pharmaceuticals 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. We are 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 ours may develop
products that directly compete with our products. Those entities may succeed in
developing products, including liposomes and liposomal products, that are safer,
more effective or less costly than our products. Even if our products should
prove to be more effective than those developed by other companies, other
companies may be more successful than us 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 we commence significant
commercial sales of our products, we or our collaborators will compete in areas
in which we have little or no experience such as manufacturing and marketing.
There can be no assurance that our products, if commercialized, will be accepted
and prescribed by healthcare professionals.
Some of our competitors are active in the development of proprietary
liposomes and in 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 us could adversely affect the market acceptance of our
-38-
<PAGE> 42
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 our financial
condition and results of operations. We believe that competition will be intense
for all of our product candidates.
EMPLOYEES
As of December 31, 1998, we had 93 full time employees, 76 of whom were
engaged in research, development, clinical and regulatory affairs and 17 of whom
were engaged in marketing, business development and administration. Our
employees include two M.D.s, sixteen Ph.D.s, two Pharm.D's and seven R.N.s. We
have not experienced any work stoppages and consider relations with our
employees to be good.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
PROPERTIES
Our 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 we
have renewal options to extend the lease to 2018. Our lease provides an option
to add 40,000 square feet at the then-current market rate. We consider that the
current facilities will be suitable for our needs for the foreseeable future. We
do not intend to develop any internal manufacturing facilities in the near
future.
-39-
<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Aronex Pharmaceuticals are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Geoffrey F. Cox, Ph.D.(3)............... 55 Chairman of the Board of Directors (Class II) and Chief
Executive Officer
David S. Gordon, M.D.................... 57 Senior Vice President of Medical Affairs and Chief
Medical Officer
Praveen Tyle, Ph.D...................... 38 Senior Vice-President, Development and Operations
and Chief Technical Officer
Paul A. Cossum, Ph.D.................... 46 Vice President, Preclinical Development
Janet M. Walter......................... 36 Vice President, Marketing and Business Development
Terance A. Murnane...................... 48 Controller and Secretary
Gabriel Lopez-Berestein, M.D.(1)........ 51 Director (Class II) and Chief Scientific Advisor
Ronald J. Brenner, Ph.D................. 65 Director (Class I)
James R. Butler(1)(3)................... 58 Director (Class III)
Phyllis I. Gardner, M.D................. 48 Director (Class II)
Martin P. Sutter(2)(3).................. 43 Director (Class I)
Gregory F. Zaic(2)...................... 51 Director (Class III)
</TABLE>
- ---------------------------
(1) Member of the audit committee of the board of directors
(2) Member of the compensation committee of the board of directors
(3) Member of the nominating committee of the board of directors
Geoffrey F. Cox, Ph.D. joined Aronex Pharmaceuticals as Chairman of the
Board and Chief Executive Officer in November 1997 and has served as a member of
the board of directors since January 1994. Dr. Cox joined Genzyme Corporation in
1984, was appointed Managing Director of Genzyme, Ltd. (U.K.) in 1986, Senior
Vice President of worldwide manufacturing operations in May 1988 and Executive
Vice President in 1996, with responsibility for manufacturing operations and the
Pharmaceuticals, Diagnostic Products and Genetic Diagnostic Products units of
Genzyme.
David S. Gordon, M.D. joined Aronex Pharmaceuticals in April 1997 as
its Senior Vice President of Medical Affairs and Chief Medical Officer. Dr.
Gordon has over 20 years experience in internal medicine, oncology and
hematology, clinical research and the pharmaceutical industry. From 1995 to
1997, Dr. Gordon was a consultant to several pharmaceutical companies. From 1990
to 1995, he held clinical and administrative positions with The Liposome Company
and the RW Johnson Pharmaceutical Research Institute of Johnson & Johnson. Prior
to positions in the pharmaceutical industry, Dr. Gordon held a number of
academic positions, including Professor of Medicine (Hematology & Oncology) at
Emory University School of Medicine and Director, Division of Immunology at the
Centers for Disease Control, both in Atlanta, Georgia. Dr. Gordon currently
serves as a director of Hycor Biomedical, Inc. Dr. Gordon is board certified in
internal medicine and medical oncology. He has published over 100 articles and
abstracts in the fields of cancer, infectious disease and immunology.
Praveen Tyle, Ph.D. is currently Senior Vice President, Development and
Operations and Chief Technical Officer. Dr. Tyle joined the company in February
1997 as its Vice President of Pharmaceutical Development and Operations. Dr.
Tyle has more than 15 years of worldwide pharmaceutical industry experience,
serving most recently (1991-97) as Senior Director, Pharmaceutical Development
at Agouron Pharmaceuticals, Inc., where he was responsible for the development
of preclinical and clinical products and their preparation toward
commercialization. From 1984 to 1991, Dr. Tyle held product development
positions at American Cyanamid
-40-
<PAGE> 44
Company and Novartis (formerly Sandoz Pharmaceuticals Corporation). Dr. Tyle
serves as a member of the Board of Directors of Lipomed,Inc. and of the
Scientific Advisory Board of a French biotechnology company, Biovector
Therapeutics, S.A., and is a scientific advisor to Merck KGaA
Biopharmaceuticals, Germany. Dr. Tyle also serves as an adjunct Professor of
Pharmaceutical Sciences at the University of Houston. He holds several U.S.
patents in the areas of drug development and delivery systems.
** 2 Paul A. Cossum, Ph.D. joined Triplex as Vice President of
Preclinical Development in 1993 and assumed the position of Vice President of
Preclinical Development of Aronex Pharmaceuticals in September 1995 upon
consummation of our mergers with Triplex and Oncologix. From 1992 to 1993, he
was the Director of Preclinical Development at Isis Pharmaceuticals. While at
Isis, he implemented preclinical programs to support the development INDs for
two anti-viral oligonucleotide compounds. Prior to his employment at Isis, Dr.
Cossum worked in the Department of Pharmacological Sciences at Genentech, Inc.,
where he participated in the filing of several INDs and NDAs for certain
endocrine, cardiovascular and neurologic therapeutic proteins. He has published
widely in the fields of metabolism and toxicology of oligonucleotides,
recombinant proteins and conventional drugs.
Janet M. Walter joined Aronex Pharmaceuticals in August 1997 as Vice
President of Marketing and Business Development. Ms. Walter, has more than ten
years of oncology marketing experience. From 1995-1997, she served as Director,
Global Marketing at Schering-Plough Pharmaceuticals, Inc. where she was
responsible for the worldwide development of INTRON A(R). From 1993 to 1995, she
served as Senior Product Manager for Bristol- Myers Squibb Oncology Division,
where she was responsible for the launch of TAXOL(R) in several different
markets, and Product manager at U.S. Bioscience. In addition, Ms. Walter has
several years of prior experience in oncology clinical research and field sales.
Terance A. Murnane joined Aronex Pharmaceuticals in May 1990 as its
Controller and was appointed Secretary in January 1992. Mr. Murnane was a
self-employed accountant from February 1988 until April 1990. From October 1987
to February 1988, he served as the Controller for a privately-held wholesale
company. Prior to that time, he spent ten years in the Private Business/Audit
Department at KPMG Peat Marwick, an international accounting firm, serving most
recently as Senior Manager. Mr. Murnane is a Certified Public Accountant.
Gabriel Lopez-Berestein, M.D., a co-founder of Aronex Pharmaceuticals,
has served as a member of the board of directors and our Chief Scientific
Advisor since January 1988. Dr. Lopez-Berestein is Professor of Medicine and
Chief of the Immunobiology and Drug Carriers Section at The University of Texas
M.D. Anderson Cancer Center, with which he has been affiliated since 1979. Dr.
Lopez-Berestein is the author of over 125 publications in the areas of
macrophage research and drug carrier technology. Dr. Lopez-Berestein is also the
recipient of a number of grants and awards, including a Scholar Award of the
Leukemia Society of America and various NIH awards.
Ronald J. Brenner, Ph.D. has served as a member of the board of
directors since September 1995. Since 1988, Dr. Brenner has been a Vice
President of Hillman Medical Ventures, Inc., a venture capital firm, and a
general partner of several Hillman investment partnerships. From 1984 to 1988,
Dr. Brenner was President and Chief Executive Officer of Cytogen Corporation, a
biotechnology company. Prior to 1984, he was Vice President, Corporate External
Research, at Johnson & Johnson, a major pharmaceutical company, and also served
as a Chairman of McNeil Pharmaceutical, Ortho Pharmaceutical Corp. and the Cilag
Companies, all subsidiaries of Johnson & Johnson. Dr. Brenner is a director of
Cytogen Corporation.
James R. Butler has served as a member of the board of directors since
June 1997. Mr. Butler is Senior Vice President, Sales and Marketing for ALZA
Corporation, a California-based pharmaceutical company developing therapeutics
using its proprietary drug delivery systems. Mr. Butler has overseen ALZA
Pharmaceuticals since August 1993. ALZA Pharmaceuticals has responsibility for
domestic sales and marketing, government affairs, ex- U.S. commercialization of
ALZA products, new product planning, and ALZA scientific. ALZA scientific is
responsible for all aspects of the ALZA product line. Prior to joining ALZA in
1993, Mr. Butler was Vice President and General Manager of Glaxo Inc.'s
Corporate Division. Mr. Butler held numerous sales and marketing positions
during his 23-year tenure at Glaxo.
-41-
<PAGE> 45
Phyllis I. Gardner, M.D. has served as a member of the board of directors since
September 1998. Dr. Gardner is the Senior Associate Dean for Education and
Student Affairs at Stanford University School of medicine, and has been a
tenured associate professor in the departments of molecular pharmacology and
medicine at Stanford since 1984. Since 1994, Dr. Gardner has worked closely with
ALZA Corporation in the areas of drug formulation and drug delivery. From 1996
to 1998, she was Vice President of Research and Head of the ALZA Technology
Institute. Dr. Gardner is also a consultant or advisor to a number of companies
and serves as a member of the board of directors of Health Hero Network and Elim
Biopharmaceuticals, Inc.
Martin P. Sutter, a co-founder of Aronex Pharmaceuticals, has served as
a director of the company since June 1986 and served as Chairman of the Board of
Directors of the company from 1986 to 1997. Since July 1988, Mr. Sutter has been
the managing General Partner of The Woodlands Venture Partners, L.P., a venture
capital firm based in The Woodlands, Texas, and the General Partner of The
Woodlands Venture Fund, L.P., one of the company's principal stockholders. In
addition, Mr. Sutter has been a General Partner of Essex Woodlands Health
Ventures, L.P. since September 1994. From January 1985 to July 1988, he served
as President of The Woodlands Venture Capital Company. Mr. Sutter is the
Chairman of the Board of Directors of Zonagen, Inc., a biotechnology company
based in The Woodlands, Texas, and a director of Targeted Genetics and several
privately held healthcare and biotechnology companies.
Gregory F. Zaic has served as a member of the board of directors since
September 1995. Mr. Zaic has been an investor primarily focused on medical and
life science investment opportunities since 1983. He currently is a General
Partner of Prince Ventures and has served as acting president and director of
many private and public companies, including GenVec, Inc., Thiktillos, Inc. and
Xylos Corporation. Before his investment career, Mr. Zaic served in several
financial, technical, and operational capacities, including heading the Special
Products Division of Baxter, a manufacturer of custom medical devices for the
cardiopulmonary and intravenous solution administration markets.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued during the last three years to Aronex
Pharmaceuticals' Chief Executive Officer and to each of the other executive
officers of the company, determined as of the end of the last fiscal year, whose
annual compensation exceeded $100,000, the "Named Executive Officers", and
excludes any information relating to 1998 bonuses which have not yet been
determined. Further information with respect to each of the Named Executive
Officer's compensation is described below the table.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- -----------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS (#) COMPENSATION
--------------------------- ---- ------ ----- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox, Ph.D................. 1998 $ 300,000 -- -- -- $ 27,475
Chief Executive Officer 1997 $ 50,000 $ 110,000 $ 93,992 500,000 $ 134
David S. Gordon, M.D.................. 1998 $ 213,000 80,000 $ 22,486
Senior Vice President of Medical 1997 $ 146,208 $ 28,400 -- 125,000 $ 21,360
Affairs and Chief Medical Officer
Praveen Tyle, Ph.D.................... 1998 $ 180,600 -- -- 80,000 $ 1,376
Senior Vice President, Development 1997 $ 147,377 $ 30,100 $ 36,250 125,000 $ 77,956
and Operations and Chief Technical
Officer
Paul A. Cossum, Ph.D.................. 1998 $ 168,000 -- -- 80,000 $ 1,373
Vice President, Preclinical 1997 $ 168,000 $ 33,600 -- 41,000 $ 1,302
Development 1996 $ 163,000 $ 2,000 -- 44,800 $ 1,292
Janet M. Walter....................... 1998 $ 160,000 -- -- 50,000 $ 1,353
Vice President, Marketing and 1997 $ 60,000 $ 12,000 -- 100,000 $ 8,974
Business Development
</TABLE>
-42-
<PAGE> 46
Dr. Cox joined Aronex Pharmaceuticals in November 1997 at an annual
base salary of $300,000. The bonus in 1997 represents a cash bonus paid upon
commencement of employment. The restricted stock awards in 1997 represent a
stock bonus of 17,278 shares of common stock issued upon commencement of
employment and recorded at fair market value at the time of issuance. Other
compensation in 1998 represents $26,004 in relocation costs, $471 in taxable
life insurance and $1,000 in matching contribution to our 401(k) savings plan.
Other compensation in 1997 represents taxable life insurance. We will pay the
income tax related to the relocation costs in 1999.
Dr. Gordon joined Aronex Pharmaceuticals in April 1997 at an annual
base salary of $213,000. Other compensation in 1998 represents $21,000 in
housing allowance, $486 in taxable life insurance and $1,000 in matching
contributions to our 401(k) savings plan. Other compensation in 1997 represents
$6,952 in relocation costs, $12,250 in housing allowance, $1,158 in taxable life
insurance and $1,000 in matching contributions to our 401(k) savings plan.
Dr. Tyle joined Aronex Pharmaceuticals in February 1997 at an annual
base salary of $168,000. Dr. Tyle's current annual base salary is $210,000. The
restricted stock awards in 1997 represent a stock bonus of 5,000 shares of
common stock issued upon commencement of employment and recorded at fair market
value at the time of issuance. Other compensation in 1997 represents $46,386 in
relocation costs, $30,397 in estimated federal income taxes relating to his
relocation costs, which were reimbursed by the company in 1998, $173 in taxable
life insurance and $1,000 in matching contributions to our 401(k) savings plan.
Other compensation in 1998 represents $376 in taxable life insurance and $1,000
in matching contribution to our 401(k) savings plan.
Dr. Cossum joined Aronex Pharmaceuticals in September 1995 at an annual
base salary of $160,000. Dr. Cossum's current annual base salary is $176,400.
Other compensation represents $1,000 in matching contributions to our 401(k)
savings plan in 1996, 1997 and 1998, respectively, and taxable life insurance of
$292, $302 and $373 in 1996, 1997 and 1998 respectively.
Janet M. Walter joined Aronex Pharmaceuticals in August 1997 at an
annual base salary of $160,000. Other compensation in 1997 represents $7,924 in
relocation costs, $50 in taxable life insurance and $1,000 in matching
contributions to our 401(k) savings plan. Other compensation in 1998 represents
$353 in taxable life insurance and $1,000 in matching contributions to our
401(k) savings plan.
Option Grants in 1998
The following table provides certain information with respect to
options granted to the Chief Executive Officer and to each of the Named
Executive Officers during the fiscal year ended December 31, 1998, under our
Employee Option Plan. The SEC requires disclosure of the potential realizable
value or present value of each grant. The disclosure assumes the options will be
held for the full seven-year term prior to exercise. These options may be
exercised prior to the end of the seven-year term. The actual value, if any, an
executive officer may realize will depend upon the excess of the stock price
over the exercise price on the date the option is exercised. There can be no
assurance that the stock price will appreciate at the rates shown in the table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------- -------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE ON STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN PRICE PER DATE OF EXPIRATION FOR OPTION TERM(1)
NAME GRANTED (#) FISCAL YEAR SHARE GRANT DATE 5% 10%
- ---------------- ----------- ------------- --------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox -- -- $ -- $ -- -- $ -- $ --
David S. Gordon 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Praveen Tyle 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Paul A. Cossum 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Janet M. Walter 50,000 7.3% $ 2.44 $ 2.44 12/10/08 $ 49,666 $ 114,054
</TABLE>
Year-End Option Values
The following table sets forth certain information regarding (1) the
number of shares of common stock underlying unexercised options held by the
Chief Executive Officer and each Named Executive Officer as of December 31,
1998, and (2) the value, at December 31, 1998, of exercisable and unexercisable
"in-the-money"
-43-
<PAGE> 47
stock options held by the Chief Executive Officer and each Named Executive
Officer. Neither the Chief Executive Officer nor any other Named Executive
Officer exercised any stock options during the year ended December 31, 1998. A
stock option is "in-the-money" if the closing market price of Aronex
Pharmaceuticals' common stock exceeds the exercise price of the stock option.
The value of "in-the-money" unexercised stock options set forth in the foregoing
table represents the difference between the exercise price of these options and
the closing sales price of our common stock on December 31, 1998, as reported by
the Nasdaq Stock Market, $2.00 per share.
1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END
------------------------------ -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
GEOFFREY F. COX, PH.D............ 249,157 283,343 $ -- $ --
DAVID S. GORDON, M.D............. 67,500 137,500 $ -- $ --
PRAVEEN TYLE, PH.D............... 63,735 86,265 $ -- $ --
PAUL A. COSSUM, PH.D............. 72,200 133,100 $ 15,833 $ --
JANET M. WALTER.................. 71,226 126,569 $ -- $ --
</TABLE>
EMPLOYMENT AGREEMENTS
Aronex Pharmaceuticals has entered into employment agreements with Dr.
Cox, Dr. Gordon, Dr. Cossum, Dr. Tyle, Ms. Walter and Mr. Murnane that establish
their annual salaries and provide for the payment of bonus compensation as may
be awarded by the Board of Directors and for their participation in all employee
benefit plans sponsored by us. The employment agreement for Dr. Cox has a
primary term ending in 2000, with automatic monthly renewals starting in May
1999 for an on-going eighteen months unless terminated by either party. Dr.
Cox's agreement provides that if he is terminated for any reason other than
cause, we are obligated to pay him a lump-sum payment equal to 1.5 times his
annual salary and continue the provision of employment benefits for eighteen
months following termination. If Dr. Cox terminates his employment as a result
of a material reduction in job duties following a change in control of the
company, we are obligated to pay him a lump sum payment equal to 2.5 times his
annual base salary. All other employment agreements are for a one year period
and renew automatically for one year periods unless terminated by either party.
These agreements provide that if the employee is terminated for any reason other
than cause, we are obligated to pay to the employee an amount equal to one
year's annual base salary and continue the provision of employment benefits for
one year following termination. If any of Dr. Gordon, Dr. Cossum or Mr. Murnane
terminates his employment as a result of a material reduction in job duties
following a change in control of the company, we are obligated to pay each of
them an amount equal to two years' annual base salary.
CERTAIN TRANSACTIONS
In February 1998, we amended our consulting agreement with our chief
scientific advisor and board member, Dr. Gabriel Lopez-Berestein, for a
three-year period ending December 31, 2000, whereby we are 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 common stock. We 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.
In addition, the Stock Purchase Agreement entered into between the
company and Abbott Laboratories relating to Abbott's purchase of Common Stock in
November 1998 provides that we may require Abbott, under certain circumstances,
to invest an additional $1,500,000 in our Common Stock. The number of shares of
Common Stock which may be acquired by Abbott will depend upon the then-current
fair market value of the Common Stock and certain other factors, but under no
circumstance will it exceed 418,994 shares.
-44-
<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of equity securities of Aronex Pharmaceuticals (which
includes shares that may be acquired on the exercise of the currently vested
portion of stock options) at December 31, 1998, and as adjusted to reflect the
sale of the shares offered hereby, by:
o each person who is known by us to own beneficially more than five
percent of the outstanding shares of common stock;
o each director of the company;
o our chief executive officer and each of the other executive
officers of the company with annual compensation in excess of
$100,000; and
o all directors and officers as a group, including all stock options
vested through February 28, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------
SHARES OF
COMMON
STOCK
NUMBER OF SHARES OF UNDERLYING
COMMON STOCK STOCK PRIOR TO AFTER
NAME BENEFICIALLY OWNED OPTIONS(11) OFFERING OFFERING
- ------------------------------------------------------- ------------------ ----------- -------- --------
<S> <C> <C> <C> <C>
Paragon Associates and Paragon Associates II
Joint Venture and the Bradbury Dyer Foundation(1)
500 Crescent Court, Suite 260
Dallas, Texas 75201.................................... 1,351,000 -- 8.2% 6.5%
Hillman Medical Venture Partnerships(2)
824 Market Street, Suite 900
Wilmington, Delaware 19801............................. 1,187,925 -- 7.3% 5.7%
Abbott Laboratories
100 Abbott Park Road
Abbott Park, Illinois 60064........................... 837,989 -- 5.1% 4.0%
Geoffrey F. Cox(3)..................................... 307,485 265,825 1.8% 1.5%
Martin P. Sutter(4).................................... 561,383 96,250 3.4% 2.7%
Gabriel Lopez-Berestein(5)............................. 168,741 72,500 1.0% *
Ronald J. Brenner(6)................................... 1,245,513 47,500 7.6% 6.0%
Gregory F. Zaic(7)..................................... 452,739 47,500 2.8% 2.2%
James R. Butler(8)..................................... 38,000 32,500 * *
Phyllis I. Gardner..................................... 25,000 25,000 * *
Paul A. Cossum(9)...................................... 81,119 74,711 * *
Praveen Tyle........................................... 91,288 75,633 * *
David S. Gordon(10).................................... 79,613 71,750 * *
Janet M. Walter........................................ 61,719 61,719 * *
All directors and officers as a group (11 persons) 3,158,981 910,889 19.2% 15.1%
(3)-(10)...............................................
</TABLE>
- ---------------------------
*Less than one percent.
(1) Consists of 1,331,000 shares beneficially owned by Paragon Associates II
Joint Venture, which includes ownership of Paragon Associates and
Paragon Associates II, and 20,000 shares owned by the Bradbury Dyer
Foundation. The sole general partner of Paragon Associates and Paragon
JV, Bradbury Dyer III, may be deemed to be the beneficial owners of
1,351,000 shares.
(2) Consists of 141,232 shares owned by Hillman Medical Ventures 1989 L.P.,
441,383 shares owned by Hillman Medical Ventures 1990 L.P. and 605,310
shares owned by Hillman Medical Ventures 1991 L.P.
-45-
<PAGE> 49
The general partners of the Hillman Medical Venture Partnerships are
Cashon Biomedical Associates, L.P. and Hillman/Dover Limited
Partnership. The general partner of Hillman/Dover Limited Partnership
is a wholly-owned subsidiary of The Hillman Company, a firm engaged
in diversified investments and operations. The Hillman Company is
controlled by Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees of the Henry L. Hillman Trust, which Trustees
may be deemed the beneficial owners of the 1,187,925 shares owned by
the Hillman Medical Venture Partnerships. Dr. Brenner is the managing
partner of Cashon Biomedical Associates, L.P., of which the other
general partners are Hal S. Broderson, M.D. and Charles G. Hadley. Dr.
Brenner, Dr. Broderson and Mr. Hadley may be deemed to beneficially
own these shares.
(3) Includes 17,278 shares owned by Dr. Cox's spouse which may be
considered to be beneficially owned.
(4) Includes 463,883 shares owned by The Woodlands Venture Fund, L.P. Mr.
Sutter is a general partner of The Woodlands Venture Partners, L.P.,
which is the general partner of The Woodlands Venture Fund, L.P. Mr.
Sutter disclaims beneficial ownership of the 463,883 shares owned by
The Woodlands Venture Fund, L.P.
(5) Excludes 19,697 shares held by a relative of Dr. Lopez-Berestein, to
which he disclaims beneficial ownership.
(6) Includes 1,187,925 shares owned by the Hillman Medical Venture
Partnerships, of which Dr. Brenner is the managing general partner of
one of the general partners.
(7) Includes 403,539 shares owned by Prince Venture Partners III, L.P. Mr.
Zaic is the general partner of Prince Ventures, L.P., which is a
general partner of Prince Venture Partners III, L.P. Mr. Zaic
disclaims beneficial ownership of the shares held by Prince Venture
Partners III, L.P.
(8) Includes 3,000 shares owned through The Butler Living Trust and 2,500
shares owned by the spouse of Mr. Butler which may be considered to be
beneficially owned.
(9) Includes 1,000 shares owned by two daughters of Dr. Cossum which may
be considered to be beneficially owned.
(10) Includes 3,000 shares owned by Gordon Strategic, Inc. which is wholly
owned by Dr. Gordon and 500 shares owned by Dr. Gordon's spouse which
may be considered to be beneficially owned.
(11) The number of shares of Common Stock underlying stock options shown
in this column are included in the column entitled "Number of Shares
of Common Stock Beneficially Owned."
-46-
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
Aronex Pharmaceuticals' Certificate of Incorporation provides for
authorized capital stock of 35,000,000 shares, consisting of 30,000,000 shares
of common stock, par value $0.001 per share, and 5,000,000 shares of preferred
stock, par value $0.001 per share. A copy of the Certificate of Incorporation is
filed as an exhibit to the registration statement of which this prospectus is a
part.
COMMON STOCK
Holders of common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all the directors. Subject to the terms
of any outstanding series of preferred stock, the holders of common stock are
entitled to dividends in amounts and at times as may be declared by the board of
directors out of funds legally available therefor. See "Dividend Policy." Upon
liquidation or dissolution, holders of common stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payment of any liquidation preferences to holders of preferred stock. Holders of
common stock have no redemption, conversion or preemptive rights.
PREFERRED STOCK
The board of directors has the authority to cause the company to issue
up to the authorized number of shares of preferred stock in one or more series,
to designate the number of shares constituting any series, and to fix the
rights, preferences, privileges and restrictions of these shares, including
dividend rights, voting rights, redemption and conversion rights and liquidation
preferences of that series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the common stock. We have no present
plan to issue any shares of preferred stock.
OPTIONS
At September 30, 1998, we had outstanding options issued to purchase
2,624,776 shares of common stock at an average purchase price of $5.25 per
share. In addition, the Stock Purchase Agreement entered into with Abbott
Laboratories relating to Abbott's purchase of Common Stock in November 1998
provides that we may require Abbott, under certain circumstances, to invest an
additional $1,500,000 in our Common Stock. The number of shares which may be
acquired by Abbott will depend on the then-current fair market value of our
Common Stock and certain other factors, but under no circumstances will it
exceed 418,994 shares.
WARRANTS
We currently have outstanding warrants issued in financing transactions
to purchase an aggregate of 17,951 shares of common stock and outstanding
warrants issued in the September 1995 merger with Oncologix to purchase an
aggregate of 158,990 shares of common stock. The Oncologix Warrants have an
exercise price of $12.00 per share and expire on December 11, 1999. At September
30, 1998, we had outstanding warrants issued to purchase an aggregate of 176,941
shares of common stock at a weighted average purchase price of $11.53 per share.
CONTINGENT STOCK RIGHTS
In the Triplex merger, we issued contingent stock rights to the former
holders of Triplex stock and options entitling them to receive additional shares
of common stock upon the occurrence of certain events. The Triplex contingent
stock rights entitle the former Triplex stock and option holders to receive
shares of common stock with an aggregate fair market value at the time of
issuance of $5.0 million, subject to certain adjustments, if we obtain data from
clinical trials of Zintevir(R) on or before September 11, 2000 that our board of
directors determines to be sufficient to file an NDA.
-47-
<PAGE> 51
CERTAIN PROVISIONS OF ARONEX PHARMACEUTICALS' CHARTER AND BYLAWS AND DELAWARE
LAW
Certain provisions of the company's Certificate of Incorporation and
Bylaws are intended to enhance the likelihood of continuity and stability in our
board of directors and in our policies, but might have the effect of delaying or
preventing a change in control of Aronex Pharmaceuticals and may make more
difficult the removal of incumbent management even if the transactions could be
beneficial to the interests of stockholders. A summary description of these
provisions is below:
Authority to Issue Preferred Stock. The Certificate of Incorporation
authorizes the Board, without stockholder approval, to establish and to issue
shares of one or more series of preferred stock, each series having the voting
rights, divided rates, liquidation, redemption, conversion and other rights as
may be fixed by the Board.
Stockholder Actions and Meetings. The Bylaws direct that special
meetings of the stockholders may only be called by a majority of the members of
the board of directors, the Chairman of the Board of Directors, the President or
the holders of not less than 30 percent of the total voting power of all shares
of our capital stock entitled to vote in the election of directors. The Bylaws
further provide that stockholders' nominations to the Board of Directors and
other stockholder business proposed to be transacted at stockholder meetings
must be timely received by us in a proper written form which meets the
prescribed content requirements. The Certificate of Incorporation and Bylaws
prohibit stockholders from taking any action by written consent.
Classification of Directors. The Certificate of Incorporation and Bylaws
provide that the directors of the company shall be divided into three classes as
equal in number as possible serving three-year terms.
Limitation of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Although
Section 102(b) does not change directors' duty of care it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. The Certificate of Incorporation limits the liability of directors
to the company or its stockholders (in their capacity as directors but not in
their capacity as officers) to the fullest extent permitted by Section 102(b).
Specifically, directors of the company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director, except
for liability:
o for any breach of the director's duty of loyalty to the company or
its stockholders;
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o for unlawful payments of dividends or unlawful stock repurchases
or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
o for any transaction from which the director derived an improper
personal benefit.
Indemnification. To the maximum extent permitted by law, the Certificate
of Incorporation and Bylaws provide for mandatory indemnification of directors
and permit indemnification of officers, employees and agents of Aronex
Pharmaceuticals against all expense, liability and loss to which they may become
subject or which they may incur as a result of being or having been a director,
officer, employee or agent of the company. In addition, Aronex Pharmaceuticals
must advance or reimburse directors, and may advance or reimburse officers,
employees and agents for expenses incurred by them as a result of indemnifiable
claims.
Section 203 of the Delaware General Corporation Law generally provides
that a stockholder acquiring more than 15 percent of the outstanding voting
stock of a corporation subject to the statute but less than 85 percent of the
outstanding voting stock may not engage in certain business combinations with
the corporation for a period of three years after the date on which the
stockholder became an interested stockholder unless:
-48-
<PAGE> 52
o prior to this date, the corporation's board of directors approved
either the business combination or the transaction in which the
stockholder became an interested stockholder; or
o the business combination is approved by the corporation's board of
directors and authorized at a stockholders' meeting by a vote of
at least two-thirds of the corporation's outstanding voting stock
not owned by the interested stockholder.
Under Section 203, these restrictions will not apply to certain business
combinations proposed by an interested stockholder following the earlier of the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who was not an interested stockholder
during the previous three years or who became an interested stockholder with the
approval of the corporation's board of directors, if the extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to any person becoming an interested stockholder during the
previous three years or were recommended for election or elected to succeed
those directors by a majority of those directors.
Section 203 defines the term "business combination" to encompass a wide
variety of transactions with or caused by an interested stockholder, including
transactions in which the interested stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the interested
stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the interested
stockholder or transactions in which the interested stockholder receives certain
other benefits.
The provisions of Section 203, together with the ability of our board of
directors to issue Preferred Stock without further stockholder action, could
delay or frustrate the removal of incumbent directors or a change in control of
Aronex Pharmaceuticals. The provisions also could discourage, impede or prevent
a merger, tender offer or proxy contest, even if this event would be favorable
to the interests of stockholders. Our stockholders, by adopting an amendment to
the Certificate of Incorporation or Bylaws, may elect not to be governed by
Section 203 effective 12 months after adoption. Neither our Certificate of
Incorporation nor Bylaws currently exclude us from the restrictions imposed by
Section 203.
REGISTRATION RIGHTS
Under a registration rights agreement dated August 2, 1989, holders of
approximately 1,011,790 shares of common stock and of warrants to purchase
17,951 shares of common stock have the right to demand up to three registrations
of certain registrable securities under the Securities Act of 1933. These demand
registration rights are subject to certain conditions and limitations, including
the right of the underwriters to limit the number of shares offered in a
registration and to require a lock-up of shares not included in a registration
and the right to refuse a registration under certain conditions, such as the
ninety-day period immediately following effectiveness of a registration
statement and the sixty-day period preceding an expected filing of a
registration statement. If we propose an offering of registrable securities,
either for our own account or for other stockholders exercising registration
rights, the other holders of these rights are entitled to notice of the
contemplated registration and an opportunity to include their securities, or
"piggyback" them, in that registration. We must use our best efforts to effect a
registration, with certain limitations. Furthermore, we are required to pay the
associated registration expenses, excluding the underwriting discounts and sales
commissions, for the holders exercising demand or piggyback registration rights.
In addition, Genzyme Corporation and Abbott Laboratories each have demand
registration rights, which require us to register all shares of common stock
that they currently hold or may acquire in the future. Abbott also holds
piggyback registration rights.
Aronex Pharmaceuticals also entered into registration rights agreements
dated September 1, 1986, with Dr. Jim Klostergaard and Dr. Gabriel
Lopez-Berestein. Under these agreements, Drs. Klostergaard and Lopez-Berestein
have piggyback registration rights to include the shares of common stock owned
by them in any company sponsored registration, including this offering. These
registration rights are subject to the right of Aronex Pharmaceuticals or its
underwriters to determine the size of the offering and limit the number of
shares offered by these individuals in a registration. These rights have been
waived with respect to this offering.
In the Triplex merger, we granted the former stockholders of Triplex
unlimited piggyback registration rights that provide that, if we propose an
offering of common stock, either for our own account or for other stockholders
exercising registration rights, the holders of the rights are entitled to notice
of the contemplated registration and an opportunity to include their common
stock in a registration, subject to certain limitations. We have notified the
holders of those rights of this offering, and these rights have been waived or
expired.
-49-
<PAGE> 53
In addition, Paramount Capital has been granted demand and piggyback
registration rights for the shares of common stock which may be acquired upon
exercise of their Warrants. The rights commence on the expiration of nine months
from the effective date of the registration statement of which this prospectus
is a part and expire five years from the effective date, in the case of the
demand rights, and seven years from the effective date, in the case of the
piggyback rights, or the date on which the shares can be sold without
restriction under Rule 144.
TRANSFER AGENT
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
-50-
<PAGE> 54
PLAN OF DISTRIBUTION
Aronex Pharmaceuticals is offering the shares of common stock offered by
this prospectus, on a best efforts, all or nothing basis, principally to
selected investors. Paramount Capital, Inc. has been retained to act as the
exclusive agent for us in the arrangement of these offers and sales on a best
efforts basis. The Placement Agent is not obligated to and does not intend to
itself or purchase any of the shares offered by this prospectus. However,
certain affiliates of the Placement Agent may invest in the offering net of
commissions. The Placement Agent will obtain indications of interest from
potential investors for the amount of the offering. We will not request
effectiveness of the registration statement and no investor funds will be
accepted until indications of interest have been received for the full amount of
the offering. The Placement Agent will distribute confirmation and definitive
prospectuses to all investors as soon as practicable after pricing, informing
investors of the closing date, which will be scheduled for three business days
after pricing.
Neither Aronex Pharmaceuticals nor the Placement Agent will accept
investor funds prior to effectiveness of the Registration Statement. Prior to
the closing date, the Placement Agent will promptly place all investor funds in
escrow with State Street Bank and Trust, as escrow agent, in an escrow account
established for the benefit of the investors. All checks shall be made payable
to the Escrow Agent. Upon receipt by the Placement Agent of any of these checks,
the Placement Agent shall transmit the checks to the Escrow Agent by noon of the
first business day following their receipt. The escrow agent will invest the
funds in accordance with Rule 15c2-4 defined under the Securities Exchange Act
of 1934. Prior to the closing date, the Escrow Agent will advise us that payment
for the purchase of the shares of common stock offered by this prospectus has
been affirmed by the investors and that the investors have deposited the
requisite funds in the escrow account at the Escrow Agent. Upon receipt of this
notice, we will deposit the shares with The Depositary Trust Company to be
credited to the respective accounts of the investors. We will collect investor
funds, together with interest on those funds, if any, through the facilities of
the Escrow Agent on the scheduled closing date. The offering will not continue
after the closing date. In the event that investor funds are not received in the
full amount necessary to satisfy the requirements of the offering, all funds
deposited in the Escrow Agent escrow account will promptly be returned.
The following table sets out the nature of the compensation and the
amounts of commissions and fees to be paid to the Placement Agent for each share
and in total.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price........................... $ $
Commissions and Fees............................ $ $
Proceeds to Aronex Pharmaceuticals.............. $ $
</TABLE>
Aronex Pharmaceuticals has agreed, among other things:
o to pay the Placement Agent a fee in connection with the
arrangement of this financing of 8% of the Price to Public for
shares sold to purchasers who are not affiliates of the company
and 5% for shares sold to purchasers who are affiliates of the
company;
o to indemnify the Placement Agent against certain liabilities
including liabilities under the Securities Act;
o to reimburse the Placement Agent for out-of-pocket expenses; and
o to issue to the Placement Agent, upon the closing of the offering,
warrants to purchase 450,000 shares of Common Stock.
The warrants may be exercised at 150% of the price at which shares of common
stock are sold in this offering, for a period of four years commencing 12 months
after the closing. The warrants will have a cashless exercise feature and demand
and piggyback registration rights. The warrants may not be sold, transferredor
assigned by the Placement Agent for a period of 12 months from the effective
date of the registration statement, except in accordance with Rule 2710(c)(7)(A)
of the NASD Conduct Rules.
-51-
<PAGE> 55
We estimate that our expenses associated with the offering will be
$425,000.
All of the officers and directors of Aronex Pharmaceuticals, and Hillman
Medical Ventures, have agreed that they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of common stock or any securities
convertible into or exercisable for, or any rights to purchase or acquire,
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of the Placement Agent (which consent may be given
without notice to our stockholders or other public announcement).
LEGAL MATTERS
The validity of the shares to be offered by this prospectus will be
passed upon for Aronex Pharmaceuticals by Andrews & Kurth L.L.P., The Woodlands,
Texas.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance thereto, upon the authority of said
firm as experts in giving said report.
AVAILABLE INFORMATION
Aronex Pharmaceuticals is subject to the informational requirements of
the Exchange Act, and, accordingly, files reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
filed with the SEC are available for inspection and copying at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549. The public may obtain information on the operation
of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC
maintains a site on the World Wide Web at "http://www.sec.gov" that contains
reports, proxy statements and other information regarding registrants that file
electronically with the SEC. In addition, these materials and other information
concerning Aronex Pharmaceuticals can be inspected at the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
Aronex Pharmaceuticals has filed with the SEC a registration statement
under the Securities Act, on Form S-1 to register with the SEC the securities
offered by it using this prospectus. This prospectus is a part of that
registration statement. As allowed by SEC rules, this prospectus does not
contain all of the information contained in the registration statement or the
exhibits to that registration statement.
-52-
<PAGE> 56
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 and September 30, 1998 (unaudited)............................ F-3
Statementsof Operations for the Years ended December 31, 1995, 1996 and 1997,
and for the Nine Months Ended September 30, 1997 and 1998 (unaudited)
and the
Period from Inception (June 13, 1986) through September 30, 1998 (unaudited)........................ F-4
Statements of Stockholders' Equity for the Period from Inception (June 13, 1986) through
September 30, 1998 (unaudited)...................................................................... F-5
Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997, and for the
Nine Months Ended September 30, 1997 and 1998 (unaudited) and the Period from
Inception (June 13, 1986) through September 30, 1998 (unaudited).................................... F-11
Notes to Financial Statements................................................................................. F-12
</TABLE>
F-1
<PAGE> 57
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> 58
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
BALANCE SHEETS
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
December 31
------------------------------ September 30,
1996 1997 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 4,179 $ 2,029 $ 3,791
Short-term investments ................................................... 30,414 17,783 10,936
Accounts receivable ...................................................... 78 100 --
Prepaid expenses and other assets ........................................ 663 474 384
------------ ------------ ------------
Total current assets ................................................. 35,334 20,386 15,111
Long-term investments ........................................................ 6,795 10,142 1,288
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,869, $3,660, and $2,781, respectively ................. 2,152 1,107 2,123
Deposits ..................................................................... -- 490 --
------------ ------------ ------------
Total assets ......................................................... $ 44,281 $ 32,125 $ 18,522
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................... $ 1,191 $ 1,977 $ 2,959
Accrued payroll .......................................................... 126 554 933
Advance from Genzyme ..................................................... 2,000 2,000 2,000
Current portion of notes payable ......................................... 325 191 217
Current portion of obligations under capital leases ...................... 16 18 13
------------ ------------ ------------
Total current liabilities ............................................ 3,658 4,740 6,122
Long-term liabilities:
Notes payable, net of current portion .................................... 121 -- 1,047
Obligations under capital leases, net of current portion ................. 25 6 --
------------ ------------ ------------
Total long-term obligations .......................................... 146 6 1,047
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,
15,459,166 and 15,503,745 shares issued and outstanding, respectively. 15 15 15
Additional paid-in capital ............................................... 93,742 96,606 97,660
Common stock warrants .................................................... 968 967 50
Treasury stock ........................................................... (11) (11) (11)
Deferred compensation .................................................... (1,949) (907) (545)
Unrealized loss on securities available-for-sale ......................... (75) (87) (66)
Deficit accumulated during development stage ............................. (52,213) (69,204) (85,750)
------------ ------------ ------------
Total stockholders' equity ........................................... 40,477 27,379 11,353
------------ ------------ ------------
Total liabilities and stockholders' equity ............................... $ 44,281 $ 32,125 $ 18,522
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
(All amounts in thousands, except loss per share data)
<TABLE>
<CAPTION>
Period from
Inception
Nine Months Ended (June 13,1986)
Years Ended December 31, September 30, through
------------------------------------ ---------------------- September 30,
1995 1996 1997 1997 1998 1998
-------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Interest income ............................ $ 452 $ 1,692 $ 2,059 $ 1,632 $ 1,013 $ 6,594
Research and development grants and
contracts .................................. 1,248 2,670 841 591 329 5,379
-------- -------- -------- -------- -------- --------
Total revenues .................... 1,700 4,362 2,900 2,223 1,342 11,973
-------- -------- -------- -------- -------- --------
Expenses:
Research and development ................... 8,347 10,357 13,993 9,864 15,399 68,534
Purchase of in-process research
and development ....................... 8,383 242 3,000 3,000 -- 11,625
General and administrative ................. 2,215 1,620 2,641 1,477 2,448 16,252
Interest expense and other ................. 184 173 257 160 41 1,312
-------- -------- -------- -------- -------- --------
Total expenses .................... 19,129 12,392 19,891 14,501 17,888 97,723
-------- -------- -------- -------- -------- --------
Net loss ....................................... (17,429) $ (8,030) $(16,991) $(12,278) $(16,546) $(85,750)
======== ======== ======== ======== ======== ========
Basic and diluted loss per share ............... $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
======== ======== ======== ======== ========
Weighted average shares used in computing
basic and diluted loss per share.......... 6,488 13,048 14,896 14,714 15,475
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- 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
Accumulate
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> 61
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- Paid-In Stock Deferred Available
Shares Amount Capital Warrants Compensation for Sale
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <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>
Deficit
Accumulate
During Total
Development Treasury Stockholders'
Stage Stock Equity
---------- ---------- ----------
<S> <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> 62
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- Paid-In Stock Deferred Available
Shares Amount Capital Warrants Compensation for Sale
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <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 ...... -- -- -- -- -- (315)
Net loss .............................................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1994 .......................... 5,202,476 $ 5 $ 38,220 $ -- $ (496) $ (315)
<CAPTION>
Deficit
Accumulate
During Total
Development Treasury Stockholders'
Stage Stock Equity
---------- ---------- ----------
<S> <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)
Net loss .............................................. (9,052) -- (9,052)
- ---------- ---------- ----------
Balance at December 31, 1994 .......................... $ (26,754) $ -- $ 10,660
</TABLE>
(continued on next page)
F-7
<PAGE> 63
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- Paid-In Stock Deferred Available
Shares Amount Capital Warrants Compensation for Sale
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ..................... 5,202,476 $ 5 $ 38,220 $ -- $ (496) $ (315)
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 4) ........... 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 ..................................... -- -- -- -- -- 199
Net loss ......................................... -- -- -- -- -- --
---------- -------- ---------- ---------- -------- ----------
Balance at December 31, 1995 ..................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536) $ (116)
<CAPTION>
Deficit
Accumulate
During Total
Development Treasury Stockholders'
Stage Stock Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 ..................... $ (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 4) ........... -- -- 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
Net loss ......................................... (17,429) -- (17,429)
---------- ---------- ----------
Balance at December 31, 1995 ..................... $ (44,183) $ (11) $ 11,994
</TABLE>
(continued on next page)
F-8
<PAGE> 64
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- Paid-In Stock Deferred Available
Shares Amount Capital Warrants Compensation for Sale
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ...................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536) $ (116)
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 .. -- -- -- -- -- 41
Net loss .......................................... -- -- -- -- -- --
---------- ---------- ---------- --------- -------- ----------
Balance at December 31, 1996 ...................... 14,597,247 15 93,742 968 (1,949) (75)
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 -- -- --
Issuance of shares through the 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 .. -- -- -- -- -- (12)
Net loss .......................................... -- -- -- -- -- --
---------- ---------- ---------- --------- -------- ----------
Balance at December 31, 1997 ...................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907) $ (87)
<CAPTION>
Deficit
Accumulate
During Total
Development Treasury Stockholders'
Stage Stock Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995 ...................... $ (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
Net loss .......................................... (8,030) -- (8,030)
--------- ---------- --------
Balance at December 31, 1996 ...................... (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
Issuance of shares through the employee 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)
Net loss .......................................... (16,991) -- (16,991)
--------- ---------- --------
Balance at December 31, 1997 ...................... $ (69,204) $ (11) $ 27,379
</TABLE>
F-9
<PAGE> 65
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period from Inception (June 13, 1986) through September 30, 1998
(All amounts in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Loss on
Common Stock Additional Common Securities
---------------------- Paid-In Stock Deferred Available
Shares Amount Capital Warrants Compensation for Sale
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ......................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907) $ (87)
Stock Options exercised January through June
1998 (unaudited) ................................ 8,115 -- 3 -- -- --
Issuance of Common Stock for services ................ 17,192 -- 70 -- -- --
Warrants expired June 1998 (unaudited) ............... -- -- 917 (917) -- --
Issuance of shares through the employee stock
purchase plan, June 1998 ($3.35) (unaudited) .... 19,272 -- 64 -- -- --
Compensation expense related to stock
options (unaudited) ............................. -- -- -- -- 362 --
Unrealized gain on securities available for sale ..... -- -- -- -- -- 21
Net loss (unaudited) ................................. -- -- -- -- -- (16,546)
---------- ---------- ---------- ---------- -------- ----------
Balance at September 30, 1998 (unaudited) ............ 15,503,745 $ 15 $ 97,660 $ 50 $ (545) $ (66)
========== ========== ========== ========== ======== ==========
<CAPTION>
Deficit
Accumulate
During Total
Development Treasury Stockholders'
Stage Stock Equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1997 ......................... $ (69,204) $ (11) $ 27,379
Stock Options exercised January through June
1998 (unaudited) ................................ -- -- 3
Issuance of Common Stock for services ................ -- -- 70
Warrants expired June 1998 (unaudited) ............... -- -- --
Issuance of shares through the employee stock
purchase plan, June 1998 ($3.35) (unaudited) .... -- -- 64
Compensation expense related to stock
options (unaudited) ............................. -- -- 362
Unrealized gain on securities available for sale ..... -- -- 21
Net loss (unaudited) ................................. -- (16,546)
--------- ---------- --------
Balance at September 30, 1998 (unaudited) ............ $ (85,750) $ (11) $ 11,353
========= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 66
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
(All amounts in thousands)
<TABLE>
<CAPTION>
Period from
Inception
(June 13,
Nine Months Ended 1986)
Years Ended December 31, September 30, through
--------------------------------- --------------------- September 30,
1995 1996 1997 1997 1998 1998
--------- --------- --------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (17,429) $ (8,030) $ (16,991) $ (12,278) $ (16,546) $ (85,750)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Depreciation and amortization ........................... 749 936 1,139 652 521 4,547
Loss (gain) on disposal of assets ....................... -- -- 200 107 (2) 198
Compensation expense related to stock and
stock options ......................................... 499 553 594 400 432 3,668
Charge for purchase of in-process research and
development ........................................... 8,383 164 3,000 3,000 -- 11,547
Unrealized gain (loss) on investment .................... 199 41 (12) (31) 21 (66)
Acquisition costs, net of cash received ................. (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 (45) 90 (199)
Decrease (increase) in accounts receivable .............. (32) 267 (22) (88) 100 --
Increase (decrease) in accounts payable and
accrued expenses ...................................... 796 (322) 1,214 211 1,361 3,819
Increase (decrease) in deferred revenue ................ 272 (876) -- -- -- (353)
--------- --------- --------- --------- --------- ---------
Net cash used in operating activities ................... (6,534) (7,592) (10,689) (8,072) (14,023) (62,262)
Cash flows from investing activities:
Purchases of investments ................................ (5,438) (92,560) (71,047) (50,064) (37,539) (244,980)
Sales of investments .................................... 15,532 59,585 80,331 56,456 53,240 238,491
Purchase of furniture, equipment and leasehold
improvements .......................................... (137) (256) (352) (280) (1,545) (5,666)
Proceeds from sale of assets ............................ -- -- 54 34 9 63
Decrease (increase) in deposits ......................... -- -- (490) (336) 490 --
Investment in affiliate ................................. -- -- -- -- -- (500)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities ............................................ 9,957 (33,231) 8,496 5,810 14,655 (12,592)
Cash flows from financing activities:
Proceeds from notes payable and capital leases .......... 64 2,000 -- -- 1,369 6,041
Repayment of notes payable and principal
payments under capital lease obligations .............. (321) (534) (272) (237) (307) (2,765)
Purchase of treasury stock .............................. (11) -- -- -- -- (11)
Proceeds from issuance of stock ......................... 3,200 35,755 315 241 68 75,380
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities ............................................ 2,932 37,221 43 4 1,130 78,645
--------- --------- --------- --------- --------- ---------
Net increase in cash and cash equivalents ............... 6,355 (3,602) (2,150) (2,258) 1,762 3,791
Cash and cash equivalents at beginning
of period ............................................. 1,426 7,781 4,179 4,179 2,029 --
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of period ................. $ 7,781 $ 4,179 $ 2,029 $ 1,921 $ 3,791 $ 3,791
========= ========= ========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ................ $ 184 $ 120 $ 57 $ 52 $ 14 $ 826
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-11
<PAGE> 67
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 ("Triplex") and Oncologix, Inc. ("Oncologix")
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. See "Risk
Factors" elsewhere herein. 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 The
University of Texas M.D. Anderson Cancer Center ("M.D. Anderson"). Further,
during the period required to develop these products, the Company will require
additional funds which may not be available to it. Accordingly, there can be no
assurance of the Company's future success. The Company expects that its existing
financial resources should be sufficient to fund its capital requirements into
the fourth quarter of 1999. As a result, the Company's independent public
accountants have informed the Company that if at the time of their audit of the
financial statements for the year ending December 31, 1998, the Company's
existing resources continue to only be sufficient to fund capital requirements
into the fourth quarter of 1999, their report on those financial statements will
include an explanatory fourth paragraph expressing substantial doubt about the
Company's ability to continue as a going concern.
2. ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements as of September 30, 1998, and for the
nine months ended September 30, 1997 and September 30, 1998, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
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.
F-12
<PAGE> 68
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. At September 30, 1998, 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 $10,936,000 (unaudited), which approximates fair market value and cost.
Long-term investments at September 30, 1998 are 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 $1,354,000
(unaudited), a fair market value of $1,288,000 (unaudited) and a gross
unrealized loss of $66,000 (unaudited) at September 30, 1998. The Company
currently has no trading securities.
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>
December 31,
-----------------------
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
the related work is performed. 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 grant and contract revenues
are received under best efforts contracts and such revenue is not refundable.
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
F-13
<PAGE> 69
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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. The $500,000 investment was recorded in the
financial statements as investment in affiliate. The investment was written down
during 1994, 1995 and 1996 to the carrying value of zero. 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 from the merger. Such shares have a zero carrying value in the
accompanying financial statements. In October 1998, the Company received 104,596
(unaudited) shares of Targeted Genetics common stock upon the successful
completion of certain milestones. These shares are subject to Rule 144(k) of the
1933 Securities Act. Under the drug development agreement with RGene, Aronex
Pharmaceuticals performed certain research and development activities 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 and
Oncologix 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;
F-14
<PAGE> 70
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
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(R) 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 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. Upon the failure to exercise a series of
warrant rights prior to their expiration, the warrant holder forfeits all
remaining rights under the terms of the Warrant. The Series A component of the
Warrants expired in 1995. At December 31, 1997 the Series B and Series C
components to purchase approximately 1.4 million and 1.2 million shares of
Common Stock, respectively, had exercise prices of $8.00 and $12.00 per share,
respectively, and expiration dates of June 1998 and December 1999, respectively.
In June 1998, the Series B component of the Warrants expired. At September 30,
1998, Series C Warrants to purchase approximately 160,000 (unaudited) shares of
Common Stock were outstanding.
In October 1995, the Company was named a defendant in a lawsuit filed
by certain warrant holders challenging the redemption of the Warrants. To
resolve this matter, the Company entered into an agreement in December 1995
which settled the lawsuit. In accordance with the settlement agreement the
plaintiffs were issued 531,552 shares of Common Stock in exchange for 3,576,668
Warrants in 1995. In 1996, in accordance with the settlement agreement an
additional 18,722 shares of Common Stock were issued to the warrant holders'
attorneys for related expenses. The excess of the fair value of the common stock
over the warrant value was charged to expense.
F-15
<PAGE> 71
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
In August 1995, the Company was a defendant in a lawsuit filed by
certain common stockholders of Oncologix, Inc. challenging the merger with
Oncologix, Inc. To resolve this matter, the Company entered into an agreement in
July 1996 which settled the lawsuit. In accordance with the settlement
agreement, the plaintiffs were issued 20,000 shares of Common Stock. The fair
value of these common shares was charged to expense.
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. This loan was paid in
full in 1998.
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).
In May 1998, the Company entered into a master loan agreement for the
financing of $1.5 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 60 monthly installments. In June 1998, the Company
borrowed $1,369,000 (unaudited) through this agreement bearing interest at 12%.
Future principal payments under the master loan agreement at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
Note Payable
Master Loan
Year Ending Agreement
December 31, (unaudited)
------------ -------------
<S> <C>
1998 $ 50,000
1999 221,000
2000 250,000
2001 281,000
2002 318,000
2003 144,000
-------------
Total $ 1,264,000
=============
</TABLE>
The Company leases certain 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 at December 31, 1997 are as follows:
F-16
<PAGE> 72
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Year Ending
December 31, Capital Leases
------------ --------------
<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% 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 September 30, 1998, the Company had warrants outstanding, relating
to certain financing and leasing transactions, to purchase 17,951 (unaudited)
shares of Common Stock at exercise prices ranging from $3.63 per share to $12.00
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 September 30, 1998, warrants to purchase approximately 160,000
(unaudited) shares of Common Stock remained outstanding at an exercise price of
$12.00 per share. The Warrants expire in 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, $5.0 million
contingent stock rights remain outstanding, contingent upon the development and
licensing of a certain product (see Note 4).
7. STOCK OPTION PLANS
During 1989, the Company's stockholders approved the 1989 Stock Option
Plan (the "Plan"). The Plan, as amended in 1992 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.
F-17
<PAGE> 73
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
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
Granted (unaudited)............................... 290,320 $ 2.19 to $4.63
Exercised (unaudited)............................. (8,115) $ 0.12 to $3.88
Forfeited (unaudited)............................. (110,646) $ 3.88 to $14.88
-----------
Balance at September 30, 1998 (unaudited)............... 2,132,276 $ .04 to $14.88
----------- ----------------
Exercisable at September 30, 1998 (unaudited)........... 954,652 $ .04 to $14.88
=========== ================
</TABLE>
During June 1998, the Company's stockholders approved the 1998 Stock
Option Plan. This plan authorizes the issuance of options to purchase up to
750,000 (unaudited) shares of Common Stock. Shares issued under this plan expire
10 years from the date of issuance. In 1998, options to purchase 320,000 shares
(unaudited) of Common Stock at an exercise price of $3.88 were issued to
employees under this plan. These shares will vest at various dates based on the
achievement of corporate and personal goals as determined by the Board of
Directors' compensation committee and the achievement of specific Common Stock
price targets. None of the options issued under this plan were exercisable at
September 30, 1998.
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
F-18
<PAGE> 74
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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
------- -----------------
Granted (unaudited).................................... 25,000 $ 2.53
Exercised (unaudited).................................. -- $ --
------- -----------------
Balance at September 30, 1998 (unaudited).............. 392,500 $ 2.53 to $11.00
======= =================
Exercisable at September 30, 1998 (unaudited).......... 348,750 $ 2.53 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-19
<PAGE> 75
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-20
<PAGE> 76
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 M.D. 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 M.D. 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.
F-21
<PAGE> 77
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 1995, 1996 and 1997, the Company paid M.D.
Anderson $392,000, $144,000, and $108,000, respectively, for research performed
on behalf of the Company. At December 31, 1998, the Company was committed to pay
M.D. Anderson $117,000 for research through November 15, 1999.
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 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(R) 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 the Company $2.0 million relating to
the $5.0 million equity milestone. The advance does not bear interest. In early
1997, the license and development agreement was amended and Genzyme was released
from any further obligation to perform development work for ATRAGEN(R). Under
the amendment, the license granted to Genzyme was converted to an option to
acquire the right to market and sell ATRAGEN(R) 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(R) to exercise the option, and would thereafter be required to pay
royalties on sales of ATRAGEN(R). The Company has the right to reacquire the
marketing rights at any time within the twelve months following the filing of an
NDA for ATRAGEN(R) by returning Genzyme's $3.0 million option exercise payment,
repaying Genzyme's $2.0 million advance and paying royalties on sales of
ATRAGEN(R), including $500,000 in minimum royalties in the first year. If
Genzyme does not exercise its option, the Company is required to repay Genzyme
the $2.0 million advance and to pay royalties on sales of ATRAGEN(R), 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 GmbH (subsequently acquired by F. Hoffman-LaRoche Ltd. ("Roche")) to
develop and commercialize one of the Company's products, AR209. Under the
agreement, Roche was responsible for funding the costs of all remaining
preclinical and clinical development of AR209 and for manufacturing the product.
Roche paid the Company $150,000 in license fees in connection with this
agreement in 1997 and agreed to pay minimum annual license fees of $100,000
during the term of the agreement. In addition, Roche was required to pay the
Company up to $2.65 million in milestone payments upon the occurrence of certain
events and to pay the Company royalties on sales of the product. The Company had
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. Roche had the right to terminate the
agreement if the costs of developing AR209 were materially greater than
anticipated and Roche determined, in its reasonable discretion, not to proceed
with the development of the product in light of such increased costs. The
Company had the right to terminate the agreement if Roche failed to achieve
certain milestones. Both parties had the right to terminate the agreement
without cause, with all rights to AR209 reverting to the non-terminating party.
The agreement was terminated without cause by Roche in September 1998, as a
result of which all rights to AR209 have reverted to the Company.
F-22
<PAGE> 78
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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 paid 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.
F-23
<PAGE> 79
ARONEX PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
12. 401(k) PLAN
The Company maintains a retirement savings plan, effective as amended on
January 1, 1991, in which any employee of the Company who has completed one
month of employment may elect to participate. The plan is an individual account
plan providing for deferred compensation as described in Section 401(k) of the
Code and is subject to, and intended to comply with, the Employee Retirement
Income Security Act of 1974, as amended. Each eligible employee is permitted to
contribute up to 20% of his annual salary up to the applicable statutory maximum
prescribed in the Code. The Company may, in its discretion, contribute an amount
equal to the employee's contribution, but such Company contribution may not
exceed an amount equal to six percent of the employee's compensation. A
participant is 50% vested in the accrued benefits derived from the Company's
contributions after completion of one year of employment following his election
to participate in the plan, and 100% vested in such contributions after
completion of two years of employment following such election. Participants may
receive hardship loans under the terms of the plan. The plan provides for
distributions in the event a participant dies, reaches the age of 65, becomes
disabled or terminates his employment prior to the age of 65. The Company made
contributions of approximately $25,800, $40,000 and $45,700 under the 401(k)
plan for the years ended December 31, 1995, 1996 and 1997, respectively.
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.
14. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED)
On November 12, 1998, the Company entered into a license agreement with
Abbott Laboratories ("Abbott") for NYOTRAN(R). The license agreement provides
Abbott with exclusive worldwide rights to market and sell NYOTRAN(R), subject to
rights previously granted to Grupo Ferrer Internacional, S.A. in Spain and
Portugal and certain copromotion rights retained by the Company in the United
States and Canada. Abbott paid the Company up-front payments of $2.8 million
under the license agreement on November 25, 1998 and additional milestone
payments of $5.6 million were received in December 1998 and January 1999. These
amounts are not refundable, do not relate to any future performance obligations
and were recognized as revenue in the fourth quarter of 1998. Abbott purchased
837,989 shares of the Company's common stock for $3.0 million under a related
stock purchase agreement on November 30, 1998. Abbott is providing funding for
the continuing clinical development of NYOTRAN(R) and is making subsequent
milestone payments as specified regulatory goals and sales targets are achieved.
Abbott will also pay to the Company escalating royalties on all product sales of
NYOTRAN(R).
F-24
<PAGE> 80
================================================================================
We have not authorized any dealer, salesperson or other person to give you
written information (other than this prospectus) or to make any representations
as to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or a
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sale made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date thereof.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Table of Contents...................................................... ii
Prospectus Summary..................................................... 1
Risk Factors........................................................... 3
Caution as to Forward-Looking Statements............................... 9
Use of Proceeds........................................................ 10
Dividend Policy........................................................ 10
Price Range of Common Stock............................................ 11
Dilution............................................................... 12
Capitalization......................................................... 13
Selected Financial Data................................................ 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations.......................................................... 15
Business............................................................... 23
Management............................................................. 40
Certain Transactions................................................... 44
Principal Stockholders................................................. 45
Description of Capital Stock........................................... 47
Plan of Distribution................................................... 51
Legal Matters.......................................................... 52
Experts................................................................ 52
Available Information.................................................. 52
</TABLE>
------------
================================================================================
================================================================================
4,500,000 Shares
[aronex LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
PARAMOUNT CAPITAL, INC.
, 1999
================================================================================
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
An itemized statement of the estimated amount of all expenses in connection
with the distribution of the securities registered hereby, all of which will be
paid by the Company, is as follows:
<TABLE>
<S> <C>
Registration fee................................................ $ 3,953
NASD filing fee................................................. 1,922
Nasdaq listing fee.............................................. 17,500
Blue Sky fees and expenses...................................... 2,500
Printing and engraving expenses................................. 10,000
Legal fees and expenses......................................... 220,000
---------
Accounting fees and expenses.................................... 125,000
---------
Miscellaneous fees and expenses................................. 44,125
---------
Total ................................................. $ 425,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Similar indemnity is
authorized for such persons against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
any such threatened, pending or completed action or suit if such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and provided further that (unless a court of
competent jurisdiction otherwise provides) such person shall not have been
adjudged liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145. The Company
maintains policies insuring its and its subsidiaries' officers and directors
against certain liabilities for actions taken in such capacities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
Article VIII of the Amended and Restated Certificate of Incorporation of
the Company and Article VII of the Bylaws of the Company provides for
indemnification of the directors of the Company to the full extent permitted by
law, as now in effect or later amended. Article VII of the Bylaws also permits
the indemnification to the same extent of officers, employees or agents of the
Company if, and to the extent, authorized by the Board of Directors. In
addition, the Bylaws provide for indemnification against expenses incurred by a
director to be paid by the Company at reasonable intervals in advance of the
final disposition of such action, suit or proceeding upon receipt of an
II-1
<PAGE> 82
undertaking by or on behalf of the director or officer to repay such amount if
it shall be ultimately determined that he is not entitled to be indemnified by
the Company. The Bylaws further provide for a contractual cause of action on the
part of directors of the Company for indemnification claims that have not been
paid by the Company.
The Company also has provided liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Company.
Article VII of the Company's Amended and Restated Certificate of
Incorporation, as amended, limits under certain circumstances the liability of
the Company's directors for a breach of their fiduciary duty as directors. These
provisions do not eliminate the liability of a director (i) for a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL (relating to the
declaration of dividends and purchase or redemption of shares in violation of
the DGCL) or (iv) for any transaction from which the director derived an
improper personal benefit.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES
On November 12, 1998, the Company entered into a license agreement and a
related stock purchase agreement with Abbott Laboratories ("Abbott") for
NYOTRAN(R). In connection with the license agreement, Abbott purchased 837,989
shares of the Company's common stock pursuant to the stock purchase agreement.
Closing of the transaction occurred on November 30, 1998. The sale of shares of
the Company's common stock to Abbott was conducted as a private placement
pursuant to Regulation D (Rule 501(a)(3) and Rule 505) promulgated under the
Securities Act.
ITEM 16. EXHIBITS
+1.1 Form of Placement Agency Agreement dated as of November 19, 1998
between Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
+1.2 Form of Warrant for the purchase of shares of common stock to be
issued to Paramount Capital, Inc. (included herein as Exhibit C
to Placement Agency Agreement which is filed herewith as Exhibit
1.1)
3.1 Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ending June 30, 1997 (the
"June 1997 Form 10-Q")).
3.2 Restated Bylaws (incorporated by reference to 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).
4.1 Specimen certificate for shares of Common Stock, par value
$0.001 per share (incorporated by reference to Exhibit 4.1 to
the Company's Annual Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996).
+5.1 Opinion of Andrews & Kurth L.L.P.
10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18,
1990, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992
Registration Statement).
II-2
<PAGE> 83
10.3 Second Amendment to Registration Rights Agreement dated October 31,
1991, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.4 to the 1992 Registration
Statement).
10.4 Third Amendment to Registration Rights Agreement dated September 10,
1993, among the Company and certain of its stockholders
(incorporated by reference to 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).
10.5 Fourth Amendment to Registration Rights Agreement dated January 20,
1994, among the Company and certain of its stockholders
(incorporated by reference to 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")).
10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).
10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9 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 (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
10.10 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 (incorporated by reference to
Exhibit 10.9 to the 1992 Registration Statement).
10.11 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 (incorporated by reference to Exhibit 10.10 to
the 1992 Registration Statement).
10.12 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 (incorporated by reference to
Exhibit 10.11 to the 1992 Registration Statement).
10.13 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
(incorporated by reference to Exhibit 10.20 to the 1993 Registration
Statement).
10.14 Sponsored Laboratory Study Agreement dated July 9, 1993, between the
Company and The University of Texas M. D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.21 to the 1993 Registration
Statement).
10.15 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
(incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-4 (No. 33-91584) dated July 24,
1995 (the "Merger Registration Statement")).
10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit 10.23
to the 1992 Registration Statement).
II-3
<PAGE> 84
10.17 Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.24 to the 1992 Registration
Statement).
10.18 Stock Purchase Warrant dated March 29, 1990, from the Company in
favor of Pacific Venture Finance, Inc (incorporated by reference to
Exhibit 10.28 to the 1992 Registration Statement).
10.19 Master Loan and Security Agreement dated March 1, 1993, between the
Company and MMC/GATX Partnership No. 1 (incorporated by reference to
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")).
10.20 Common Stock Purchase Warrant dated June 28, 1993 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference to
Exhibit 10.22 to the 1993 Form 10-K).
10.21 Common Stock Purchase Warrant dated March 21, 1994 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference to
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")).
10.22 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc
(incorporated by reference to Exhibit 10.29 to the 1993 Form 10-K).
10.23 License and Development Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Registration Statement).
10.24 Common Stock Purchase Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.23 to the 1993 Registration Statement).
10.25 Amendment No. 2 to License and Development Agreement dated September
10, 1996, between the Company and Genzyme Corporation (incorporated
by reference to 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")).
10.26 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the September 1996 Form 10-Q).
10.27 Amendment No. 3 to License and Development Agreement dated March 25,
1997, between the Company and Genzyme Corporation (incorporated by
reference to 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")).
10.28 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q).
10.29 Licensing Agreement dated December 7, 1996, between the Company and
Boehringer Mannheim GmbH (incorporated by reference to Exhibit 10.51
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.30 Plan and Agreement of Merger dated February 22, 1995, among Triplex
Pharmaceutical Corporation, Argus Pharmaceuticals, Inc. and API
Acquisition Company No. 1 (incorporated by reference to Exhibit 1.1
to the Company's Current Report on Form 8-K dated February 22, 1995
(the "February 1995 Form 8-K")).
10.31 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.32 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No. 2
(incorporated by reference to Exhibit 1.7 to the February 1995 Form
8-K).
II-4
<PAGE> 85
10.33 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K herein by reference).
10.34 Agreement between Oncologix and HCV Group (incorporated by reference
to Exhibit 1.9 to the February 1995 Form 8-K).
10.35 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
(incorporated by reference to Exhibit 1.2 to the Company's Current
Report on Form 8-K dated December 12, 1995).
10.36 Employment Agreement dated March 12, 1997, between the Company and
David S. Gordon, M.D (incorporated by reference to Exhibit 10.4 to
the March 1997 Form 10-Q).
10.37 Employment Agreement dated July 28, 1997, between the Company and
Janet Walter (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997).
10.38 Employment Agreement dated November 3, 1997 between the Company and
Geoffrey Cox, Ph.D (incorporated by reference to Exhibit 10.39 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K")).
10.39 Employment Termination and Severance Agreement dated January 1,
1998, between the Company and James M. Chubb, Ph.D (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998 (the "March 1998
Form 10-Q")).
10.40 Consulting Agreement dated January 1, 1998, between the Company and
Gabriel Lopez-Berestein (incorporated by reference to Exhibit 10.2
to the March 1998 Form 10-Q).
10.41 Consulting Agreement dated April 1, 1998, between the Company and
Roman Perez-Solar (incorporated by reference to Exhibit 10.3 to the
March 1998 Form 10-Q).
10.42 Employment Agreement dated June 12, 1998, between the Company and
Praveen Tyle, Ph.D. (incorporated by reference to Exhibit 10.2 to
the June 1998 Form 10-Q).
10.43 Employment Agreement dated June 12, 1998, between the Company and
Paul A. Cossum, Ph.D. (incorporated by reference to Exhibit 10.3 to
the June 1998 Form 10-Q).
10.44 Employment Agreement dated June 12, 1998, between the Company and
Terance A. Murnane, Ph.D. (incorporated by reference to Exhibit 10.4
to the June 1998 Form 10-Q).
10.45 Lease Agreement dated April 4, 1997, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 10.3 to
the June 1997 Form 10-Q).
10.46 License Agreement dated November 12, 1998, between the Company and
Abbott Laboratories (incorporated by reference to Exhibit 10.1 to
the December 2, 1998 Form 8-K) (certain portions of the exhibit have
been omitted based upon a request for confidential treatment, and
have been separately filed with the Commission).
10.47 Stock Purchase Agreement dated November 12, 1998, between the
Company and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K) (certain portions of
the exhibit have been omitted based upon a request for confidential
treatment, and have been separately filed with the Commission).
11.1 Statement regarding computation of loss per share (incorporated by
reference to Exhibit 11.1 to the 1997 Form 10-K).
II-5
<PAGE> 86
* 23.1 Consent of Arthur Andersen LLP
+ 23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on the signature page of this
Registration Statement).
- ---------------
* Filed herewith.
+ Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3
to this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in The Woodlands, State of Texas, on February 12,
1999.
ARONEX PHARMACEUTICALS, INC.
By: /s/ Geoffrey F. Cox
------------------------------------
Geoffrey F. Cox
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Geoffrey F. Cox Chairman of the Board and Chief February 12, 1999
- ----------------------------- Executive Officer (Principal executive
Geoffrey F. Cox officer)
/s/ Terance A. Murnane Controller (Principal financial and February 12, 1999
- ----------------------------- accounting officer)
Terance A. Murnane
* Director
- -----------------------------
Gabriel Lopez-Berestein, M.D.
* Director
- -----------------------------
Ronald J. Brenner, Ph.D.
Director
- -----------------------------
James R. Butler
* Director
- -----------------------------
Martin P. Sutter
* Director
- -----------------------------
Phyllis I. Gardner, M.D.
* Director
- -----------------------------
Gregory F. Zaic
*By /s/ Terance A. Murnane
------------------------
Terance A. Murnane
Attorney-in-Fact
Date: February 12, 1999
</TABLE>
II-7
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<S> <C>
+1.1 Form of Placement Agency Agreement dated as of November 19, 1998
between Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
+1.2 Form of Warrant for the purchase of shares of common stock to be
issued to Paramount Capital, Inc. (included herein as Exhibit C
to Placement Agency Agreement which is filed herewith as Exhibit
1.1)
3.1 Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ending June 30, 1997 (the
"June 1997 Form 10-Q")).
3.2 Restated Bylaws (incorporated by reference to 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).
4.1 Specimen certificate for shares of Common Stock, par value
$0.001 per share (incorporated by reference to Exhibit 4.1 to
the Company's Annual Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996).
+5.1 Opinion of Andrews & Kurth L.L.P.
10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18,
1990, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992
Registration Statement).
10.3 Second Amendment to Registration Rights Agreement dated October 31,
1991, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.4 to the 1992 Registration
Statement).
10.4 Third Amendment to Registration Rights Agreement dated September 10,
1993, among the Company and certain of its stockholders
(incorporated by reference to 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).
10.5 Fourth Amendment to Registration Rights Agreement dated January 20,
1994, among the Company and certain of its stockholders
(incorporated by reference to 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")).
10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).
10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9 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 (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
</TABLE>
<PAGE> 89
<TABLE>
<S> <C>
10.10 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 (incorporated by reference to
Exhibit 10.9 to the 1992 Registration Statement).
10.11 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 (incorporated by reference to Exhibit 10.10 to
the 1992 Registration Statement).
10.12 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 (incorporated by reference to
Exhibit 10.11 to the 1992 Registration Statement).
10.13 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
(incorporated by reference to Exhibit 10.20 to the 1993 Registration
Statement).
10.14 Sponsored Laboratory Study Agreement dated July 9, 1993, between the
Company and The University of Texas M. D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.21 to the 1993 Registration
Statement).
10.15 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
(incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-4 (No. 33-91584) dated July 24,
1995 (the "Merger Registration Statement")).
10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit 10.23
to the 1992 Registration Statement).
10.17 Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.24 to the 1992 Registration
Statement).
10.18 Stock Purchase Warrant dated March 29, 1990, from the Company in
favor of Pacific Venture Finance, Inc (incorporated by reference to
Exhibit 10.28 to the 1992 Registration Statement).
10.19 Master Loan and Security Agreement dated March 1, 1993, between the
Company and MMC/GATX Partnership No. 1 (incorporated by reference to
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")).
10.20 Common Stock Purchase Warrant dated June 28, 1993 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference to
Exhibit 10.22 to the 1993 Form 10-K).
10.21 Common Stock Purchase Warrant dated March 21, 1994 from the Company
in favor of MMC/GATX Partnership No. 1 (incorporated by reference to
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")).
10.22 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc
(incorporated by reference to Exhibit 10.29 to the 1993 Form 10-K).
10.23 License and Development Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.22 to the 1993 Registration Statement).
10.24 Common Stock Purchase Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.23 to the 1993 Registration Statement).
</TABLE>
<PAGE> 90
<TABLE>
<S> <C>
10.25 Amendment No. 2 to License and Development Agreement dated September
10, 1996, between the Company and Genzyme Corporation (incorporated
by reference to 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")).
10.26 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the September 1996 Form 10-Q).
10.27 Amendment No. 3 to License and Development Agreement dated March 25,
1997, between the Company and Genzyme Corporation (incorporated by
reference to 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")).
10.28 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q).
10.29 Licensing Agreement dated December 7, 1996, between the Company and
Boehringer Mannheim GmbH (incorporated by reference to Exhibit 10.51
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
10.30 Plan and Agreement of Merger dated February 22, 1995, among Triplex
Pharmaceutical Corporation, Argus Pharmaceuticals, Inc. and API
Acquisition Company No. 1 (incorporated by reference to Exhibit 1.1
to the Company's Current Report on Form 8-K dated February 22, 1995
(the "February 1995 Form 8-K")).
10.31 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.32 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No. 2
(incorporated by reference to Exhibit 1.7 to the February 1995 Form
8-K).
10.33 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K herein by reference).
10.34 Agreement between Oncologix and HCV Group (incorporated by reference
to Exhibit 1.9 to the February 1995 Form 8-K).
10.35 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
(incorporated by reference to Exhibit 1.2 to the Company's Current
Report on Form 8-K dated December 12, 1995).
10.36 Employment Agreement dated March 12, 1997, between the Company and
David S. Gordon, M.D (incorporated by reference to Exhibit 10.4 to
the March 1997 Form 10-Q).
10.37 Employment Agreement dated July 28, 1997, between the Company and
Janet Walter (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997).
10.38 Employment Agreement dated November 3, 1997 between the Company and
Geoffrey Cox, Ph.D (incorporated by reference to Exhibit 10.39 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K")).
10.39 Employment Termination and Severance Agreement dated January 1,
1998, between the Company and James M. Chubb, Ph.D (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998 (the "March 1998
Form 10-Q")).
10.40 Consulting Agreement dated January 1, 1998, between the Company and
Gabriel Lopez-Berestein (incorporated by reference to Exhibit 10.2
to the March 1998 Form 10-Q).
</TABLE>
<PAGE> 91
<TABLE>
<S> <C>
10.41 Consulting Agreement dated April 1, 1998, between the Company and
Roman Perez-Solar (incorporated by reference to Exhibit 10.3 to the
March 1998 Form 10-Q).
10.42 Employment Agreement dated June 12, 1998, between the Company and
Praveen Tyle, Ph.D. (incorporated by reference to Exhibit 10.2 to
the June 1998 Form 10-Q).
10.43 Employment Agreement dated June 12, 1998, between the Company and
Paul A. Cossum, Ph.D. (incorporated by reference to Exhibit 10.3 to
the June 1998 Form 10-Q).
10.44 Employment Agreement dated June 12, 1998, between the Company and
Terance A. Murnane, Ph.D. (incorporated by reference to Exhibit 10.4
to the June 1998 Form 10-Q).
10.45 Lease Agreement dated April 4, 1997, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 10.3 to
the June 1997 Form 10-Q).
10.46 License Agreement dated November 12, 1998, between the Company and
Abbott Laboratories (incorporated by reference to Exhibit 10.1 to
the December 2, 1998 Form 8-K) (certain portions of the exhibit have
been omitted based upon a request for confidential treatment, and
have been separately filed with the Commission).
10.47 Stock Purchase Agreement dated November 12, 1998, between the
Company and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K) (certain portions of
the exhibit have been omitted based upon a request for confidential
treatment, and have been separately filed with the Commission).
11.1 Statement regarding computation of loss per share (incorporated by
reference to Exhibit 11.1 to the 1997 Form 10-K).
* 23.1 Consent of Arthur Andersen LLP
+ 23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on the signature page of this
Registration Statement).
- ---------------
* Filed herewith.
+ Previously filed.
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and all references to our Firm included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Houston, Texas
February 11, 1999
