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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 0-20111
ARONEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0196535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ARONEX PHARMACEUTICALS, INC.
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281) 367-1666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 25, 1999 was $44,720,070, based on the closing sales
price of the registrant's common stock on the Nasdaq National Market on such
date of $2.50 per share. For purposes of the preceding sentence only, all
directors, executive officers and beneficial owners of ten percent or more of
the common stock are assumed to be affiliates. As of March 25 , 1999,
22,463,211 shares of the registrant's common stock were outstanding.
Certain sections of the registrant's definitive proxy statement
relating to the registrant's 1999 annual meeting of stockholders, which proxy
statement will be filed under the Securities Exchange Act of 1934 within 120
days of the end of the registrant's fiscal year ended December 31, 1998, are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business......................................................... 1
General........................................................ 1
Business Strategy.............................................. 1
Clinical and Scientific Background............................. 2
Products in Clinical and Preclinical Development............... 3
Infectious Diseases............................................ 4
Cancer......................................................... 6
Research Pipeline.............................................. 10
Collaborative Agreements....................................... 10
Manufacturing.................................................. 12
Sales and Marketing ........................................... 13
Patents and Proprietary Rights................................. 13
Government Regulation.......................................... 15
Competition.................................................... 17
Employees...................................................... 18
Additional Business Risks...................................... 18
Item 2. Properties....................................................... 24
Item 3. Legal Proceedings................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 25
Item 6. Selected Financial Data.......................................... 26
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 27
Overview....................................................... 27
Results of Operations.......................................... 27
Acquired In-Process Research and Development................... 29
Liquidity and Capital Resources................................ 30
Year 2000...................................................... 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 33
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PART III
Item 10. Directors and Executive Officers of the Registrant............... 34
Item 11. Executive Compensation........................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management... 34
Item 13. Certain Relationships and Related Transactions................... 34
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on
Form 8-K......................................................... 35
Signatures................................................................. 40
Index to Financial Statements.............................................. F-1
</TABLE>
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this document, the words "anticipate," "believe,"
"expect," "estimate," "project" and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated or projected. For additional discussion of such risks, uncertainties
and assumptions, see "Item 1. Business -- Manufacturing," "-- Sales and
Marketing," "-- Patents and Proprietary Rights," "-- Government Regulation,"
"-- Competition" and "-- Additional Business Risks" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
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PART I
ITEM 1. 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 the 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.
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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.
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 1999 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.
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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
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:
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PRODUCT INDICATIONS CLINICAL STATUS
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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
Bladder Cancer Phase I/II
Kaposi's Sarcoma Phase II completed
Annamycin...................... Breast Cancer Phase II
Platar......................... Lung Cancer Phase II
Renal Cell Carcinoma 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
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trial is defined as a clinical trial that produces data sufficient for
submission of a new drug application with the FDA, commonly referred to as 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 "Additional Business Risks -- 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.
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 anti-fungal treatment is increasing
because of a number of factors, including more aggressive use of chemotherapy
in cancer patients, increases in organ and bone marrow transplants, increased
use of in-dwelling catheters for prolonged periods and the spread of HIV.
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
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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 "Additional Business Risks -- Clinical Trial
Results May Result in Failure to Obtain FDA Approval and Inability to Sell
Products."
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.
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."
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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 "-- Additional Business Risks -- Clinical
Trial Results May Result in Failure to Obtain FDA Approval and Inability to
Sell Products."
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), Bladder Cancer (Phase I/II) and Kaposi's
Sarcoma (Phase II completed)
In December 1998, we filed 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
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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.
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. In
March 1999, we initiated a Phase I/II clinical trial in bladder cancer.
ATRAGEN(R) has been designated an orphan drug for the treatment of acute and
chronic leukemia by the FDA. See "-- Government Regulation" and "-- Additional
Business Risks -- 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.
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
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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 of Annamycin in patients
with other solid tumors and with various hematological malignancies are being
planned. See "-- Additional Business Risks -- 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) and Renal Cell
Carcinoma (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.
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Platar is currently being evaluated in two Phase II clinical trials,
under institutional IND's at M.D. Anderson Cancer Center: a trial for the
treatment of mesothelioma, a type of lung cancer, funded by the Office of
Orphan Drug Products at the FDA, and a trial for the treatment of metastatic
renal cell carcinoma funded by Aronex Pharmaceuticals. Phase I clinical trials
were 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 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.
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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 "-- Additional Business Risks -- 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 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.
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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 had exercised its option, Genzyme would have been required
to pay us $3.0 million and product royalties we would have been entitled to
retain the $2.0 million advance. In March 1999, Genzyme notified us that they
do not intend to exercise their option. As a result of the election, we have
reacquired full marketing rights to ATRAGEN(R) on a worldwide basis and we are
obligated to repay Genzyme the $2.0 million advance by April 24, 1999 and to
pay product royalties, including $500,000 in minimum royalties by April 24,
2000.
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 approval of an NDA for each licensed product.
Because we have not sold 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
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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 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.
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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;
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
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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) and Renal Cell Carcinoma (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.
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.
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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.
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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.
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<PAGE> 20
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
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<PAGE> 21
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 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.
ADDITIONAL BUSINESS RISKS
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 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 December 31, 1998, our accumulated deficit was
$87.4 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. We expect that our existing financial resources 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. 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
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<PAGE> 22
our products or to declare bankruptcy. If we raise funds by selling more stock,
share ownership by current stockholders of Aronex Pharmaceuticals will be
diluted. In addition, we may grant future investors rights which are superior
to those of current stockholders.
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 " -- 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 " --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 " --
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 " -- 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.
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<PAGE> 23
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 " -- Patents and Proprietary Rights."
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 " -- 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
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<PAGE> 24
manufacture of products may also reduce our profit margins and ability to
develop and deliver products with sufficient speed. See " -- 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 " --Manufacturing."
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). We have retained
co-marketing rights under the Abbott agreement for a limited period of time.
See " -- 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 " -- Collaborative Agreements."
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<PAGE> 25
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 " --Competition."
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
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<PAGE> 26
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.
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.
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 a new drug application with the FDA. 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, current shareholders could experience further dilution in the net
tangible book value per share.
Year 2000 Issues May Result in Unanticipated Costs or 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,
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<PAGE> 27
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."
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 March 25, 1999, was $2.50 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997: HIGH LOW
-------- ---------
<S> <C> <C>
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
4th Quarter..................................... 4 3/4 1 11/16
</TABLE>
DIVIDENDS
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.
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<PAGE> 29
ITEM 6. 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, 1998, which have been audited by Arthur
Andersen LLP, independent public accountants. 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 set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Aronex
Pharmaceuticals' financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Research and development grants
and contracts ................. $ 197 $ 1,248 $ 2,670 $ 841 $ 6,737
Interest income .................... 534 452 1,692 2,059 1,265
-------- -------- -------- -------- --------
Total revenues ................ 731 1,700 4,362 2,900 8,002
Expenses:
Research and development ........... 7,637 8,347 10,357 13,993 22,793
Purchase of in-process research
and development ............... -- 8,383 242 3,000 --
General and administrative ......... 1,950 2,215 1,620 2,641 3,354
Interest expense and other ......... 196 184 173 257 86
-------- -------- -------- -------- --------
Total expenses ................ 9,783 19,129 12,392 19,891 26,233
-------- -------- -------- -------- --------
Net loss .............................. $ (9,052) $(17,429) $ (8,030) $(16,991) $(18,231)
======== ======== ======== ======== --------
Basic and diluted loss per share ...... $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (1.17)
======== ======== ======== ======== ========
Weighted average shares used in
computing basic and diluted loss
per share .......................... 5,153 6,488 13,048 14,896 15,571
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term and long-term investments .. . $ 10,019 $ 12,015 $ 41,388 $ 29,954 $ 20,390
Total assets ........................ 12,958 15,530 44,281 32,125 23,045
Total long-term obligations ......... 1,218 1,574 146 6 1,012
Deficit accumulated during
development stage ................ (26,754) (44,183) (52,213) (69,204) (87,435)
Total stockholders' equity .......... 10,660 11,994 40,477 27,379 13,610
</TABLE>
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<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and related Notes contained elsewhere herein.
OVERVIEW
Since its inception in 1986, Aronex Pharmaceuticals has primarily
devoted its resources to fund research, drug discovery and development. Aronex
Pharmaceuticals has been unprofitable to date and expects to incur substantial
operating losses for the next several years as it expends its resources for
product research and development, preclinical and clinical testing and
regulatory compliance. Aronex Pharmaceuticals has sustained losses of
approximately $87.4 million through December 31, 1998. The company's research
and development activities and operations have been financed primarily through
public and private offerings of securities. The company's 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
Years Ended December 31, 1997 and 1998
Revenues from research and development grants and contracts increased
697% to $6.7 million in 1998, from $841,000 in 1997. This increase was due
primarily to $6.2 million in milestone and development payments received from
Abbott Laboratories in the fourth quarter of 1998.
Interest income decreased 39% to $1.3 million in 1998, from $2.1
million in 1997. The decrease in interest income resulted from a decrease of
funds available for investment.
Research and development expenses increased 63% to $22.8 million in
1998, from $14 million in 1997. The increase in research and development
expenses resulted in an increase of $8.8 million in the medical affairs
department costs in 1998 primarily from:
o an increase of $6.1 million in clinical trials for our lead
product NYOTRAN(R);
o an increase of $486,000 in clinical trials for ATRAGEN(R);
and
o an increase of $1.4 million in salaries and payroll costs.
In 1998, the number of personnel in this department increased significantly
from the same period in 1997. The majority of the personnel added was
attributable to the development of NYOTRAN(R).
The $3.0 million in cost 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.
General and administrative expenses increased 31% to $3.4 million in
1998, from $2.6 million in 1997. The increase in general and administrative
expenses resulted primarily from:
o an increase of $290,000 in salaries and payroll costs;
o an increase of $110,000 relating to business development
activities;
o an increase of $78,000 in investor and public relations
expenses; and
o the addition of $261,000 in marketing expenses, relating
primarily to ATRAGEN(R), in 1998.
-27-
<PAGE> 31
Several new administrative positions were added during the second half of 1997,
including a Chief Executive Officer was added in the fourth quarter of 1997.
Additionally, the former President, who resigned in January 1998, was entitled
to certain severance payments in accordance with his termination and severance
agreement. These severance payments, which continued through January 1999, were
recorded as compensation expense in the first quarter of 1998.
Interest expense and other decreased 67% to $86,000 in 1998, from
$257,000 in 1997. The decrease in interest expense and other resulted primarily
from a loss of $200,000 in 1997 from the disposition of equipment and leasehold
improvements that had been used in research activities eliminated in early
1997, as well as 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 7% to $18.2 million in 1998, from $17 million in
1997. The increase in net loss resulted primarily from the increase in research
and development expenses offset by an increase in revenues.
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.
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<PAGE> 32
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. 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.
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:
o 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
o 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;
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.
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:
o the current scientific and development status of the
projects;
o the expected amount of time and resources required to
complete the projects;
o the probability of obtaining collaborators to help finance
and develop the projects; and
o 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."
-29-
<PAGE> 33
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. We anticipate that it will take 3 to 5 years to complete the
development of Zintevir(R). We estimate it will 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, we expended approximately $3 million for the development of
Zintevir(R). We will evaluate the results of the Phase I/II clinical trial and
do 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 trials are satisfactory, we
estimate it will 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, 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. We estimate 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 has 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 $78 million
from the sale of equity securities from the company's inception through
December 31, 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,
we 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 December 31, 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. Through February 28, 1999, the company received an additional $8.4
million in up-front and milestone payments
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<PAGE> 34
from Abbott, all of which payments are non-refundable. In February 1999, Aronex
Pharmaceuticals raised net proceeds of approximately $11.8 million in a public
offering of 6,000,000 shares of its common stock.
In September 1996, Genzyme advanced us $2.0 million relating to a $5.0
million equity milestone. Early in 1997, the agreement was amended through
which: (1) we released Genzyme was 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 had exercised its option, Genzyme would have been required to pay us
$3.0 million and product royalties and would have been entitled to retain the
$2.0 million advance. In March 1999 Genzyme notified us that they do not intend
to exercise their option. As a result of the election, we have reacquired full
marketing rights to ATRAGEN(R) on a worldwide basis and we are obligated to
repay Genzyme the $2.0 million advance by April 24, 1999 and to pay product
royalties, including $500,000 in minimum royalties by April 24, 2000.
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 the company's needs and
development activities. Aronex Pharmaceuticals has contracted with certain
clinical research organizations to conduct its non-United States clinical
trials for NYOTRAN(R) 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, we intend to continue to engage clinical research organizations in
the future to monitor the company's various clinical trials in non-United
States countries.
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
$12.4 million and $10.7 million was used in operating activities during 1998
and 1997. The company had cash, cash-equivalents and short-term and long-term
investments of $20.4 million as of December 31, 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.
We expect that Aronex Pharmaceuticals' existing financial resources
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,
we may need to raise substantial additional capital to fund the Company's
operations.
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
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<PAGE> 35
from quarter to quarter over the next few years as the company has 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, Aronex Pharmaceuticals' capital requirements increased
with the move into new facilities. As a result, the company borrowed $1.4
million in 1998 to finance its requirements in this new facility. We expect
that Aronex Pharmaceuticals will continue to incur additional debt to meet its
capital requirements from time to time in the future, based on our financial
resources and needs.
Aronex Pharmaceuticals' capital requirements will depend on many
factors, including the risk factors more completely described under "Business
- -- Additional Business Risks" 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. 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 Aronex Pharmaceuticals' 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 the
company's research or development programs, or we may be required to obtain
funds through arrangements with future collaborative partners or other parties
that may require us to relinquish rights to some or all of our technologies or
products. If we are successful in obtaining additional financing for the
company, 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.
We are in the process of assessing all of Aronex Pharmaceuticals'
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
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<PAGE> 36
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
the company's 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 the
company's 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 the
company's business, results of operations and financial condition.
We are in the process of contacting Aronex Pharmaceuticals'
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 the company's 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 the company will incur any significant costs relating to the
assessment and remediation of year 2000 issues. To date, we estimate that the
company has 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 vendors, consultants
or partners. Such expenditures are budgeted as part of the company's 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 the
company.
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 Aronex Pharmaceuticals 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. We also have keys to the doors of our facilities to enable us to gain
access to our 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 Aronex
Pharmaceuticals' non-critical business functions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are incorporated under
Item 14 in Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item as to the directors and
executive officers of Aronex Pharmaceuticals is hereby incorporated by
reference from the information appearing under the captions "Proposals-Proposal
I: Election of Directors" and "Company Information -- Executive Officers" in
Aronex Pharmaceuticals' definitive proxy statement which involves the election
of directors and is to be filed with the Securities and Exchange Commission
(the "Commission") pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act") within 120 days of the end of Aronex Pharmaceuticals'
fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item as to the management of Aronex
Pharmaceuticals is hereby incorporated by reference from the information
appearing under the captions "Company Information -- Executive Compensation"
and " -- Director Compensation" in Aronex Pharmaceuticals' definitive proxy
statement which involves the election of directors and is to be filed with the
Commission pursuant to the Exchange Act within 120 days of the end of Aronex
Pharmaceuticals' fiscal year ended December 31, 1998. Notwithstanding the
foregoing, in accordance with the instructions to Item 402 of Regulation S-K,
the information contained in Aronex Pharmaceuticals' proxy statement under the
sub-heading "Company Information -- Report of the Compensation Committee" and "
- -- Performance Graph" shall not be deemed to be filed as part of or
incorporated by reference into this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item as to the ownership by
management and others of securities of Aronex Pharmaceuticals is hereby
incorporated by reference from the information appearing under the caption
"Stock Ownership of the Company's Largest Stockholders and Management" in
Aronex Pharmaceuticals' definitive proxy statement which involves the election
of directors and is to be filed with the Commission pursuant to the Exchange
Act within 120 days of the end of Aronex Pharmaceuticals' fiscal year ended
December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item as to certain business
relationships and transactions with management and other related parties of
Aronex Pharmaceuticals is hereby incorporated by reference to such information
appearing under the caption "Transactions with Affiliates" in Aronex
Pharmaceuticals' definitive proxy statement which involves the election of
directors and is to be filed with the Commission pursuant to the Exchange Act
within 120 days of the end of Aronex Pharmaceuticals' fiscal year ended
December 31, 1998.
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<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report
(a)(1) FINANCIAL STATEMENTS
See Index to Financial Statements on Page F-1 of this report.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Aronex Pharmaceuticals' 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
Aronex Pharmaceuticals' 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 Aronex
Pharmaceuticals' Annual Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996).
10.1 Registration Rights Agreement dated August 2, 1989, by and among
Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 and certain of its stockholders (incorporated by
reference to Exhibit 10.24 to Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals and certain of its
stockholders (incorporated by reference to Exhibit 10.28 to Aronex
Pharmaceuticals' 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).
</TABLE>
-35-
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.8+ 1998 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Aronex Pharmaceuticals' 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 Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals, 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 Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals, 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 Aronex Pharmacueticals, 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
Aronex Pharmaceuticals 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 Aronex
Pharmaceuticals' 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 Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No.1
(incorporated by reference to Exhibit 10.28 to the 1992
Registration Statement).
10.19 Common Stock Purchase Warrant dated June 28, 1993 from Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No. 1
(incorporated by reference to Exhibit 10.22 to the 1993 Form
10-K).
10.20 Common Stock Purchase Warrant dated March 21, 1994 from Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No. 1
(incorporated by reference to Exhibit 10.4 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (the "March 1994 Form 10-Q")).
</TABLE>
-36-
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.21 License and Development Agreement dated September 10, 1993,
between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.22 to the 1993
Registration Statement).
10.22 Common Stock Purchase Agreement dated September 10, 1993, between
Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 10.23 to the 1993 Registration Statement).
10.23 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between Aronex Pharmaceuticals and Genzyme
Corporation (incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996 (the "September 1996 Form
10-Q")).
10.24 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the September 1996
Form 10-Q).
10.25 Amendment No. 3 to License and Development Agreement dated March
25, 1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended March 30, 1997 (the "March 1997 Form 10-Q")).
10.26 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.27 Licensing Agreement dated December 7, 1996, between Aronex
Pharmaceuticals and Boehringer Mannheim GmbH (incorporated by
reference to Exhibit 10.51 to Aronex Pharmaceuticals' Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.28 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 Aronex Pharmaceuticals' Current Report on Form 8-K
dated February 22, 1995 (the "February 1995 Form 8-K")).
10.29 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.30 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc.,Aronex Pharmaceuticals and API Acquisition Company
No. 2 (incorporated by reference to Exhibit 1.7 to the February
1995 Form 8-K).
10.31 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K).
10.32 Agreement between Oncologix and HCV Group (incorporated by
reference to Exhibit 1.9 to the February 1995 Form 8-K).
10.33 Exchange Agreement dated December 2, 1995, among Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals' Current Report on Form 8-K dated December
12, 1995).
10.34+ Employment Agreement dated March 12, 1997, between Aronex
Pharmaceuticals and David S. Gordon, M.D. (incorporated by
reference to Exhibit 10.4 to the March 1997 Form 10-Q).
</TABLE>
-37-
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.35+ Employment Agreement dated July 28, 1997, between Aronex
Pharmaceuticals and Janet Walter (incorporated by reference to
Exhibit 10.1 to Aronex Pharmaceuticals' Quarterly Report on Form
10-Q for fiscal quarter ended September 30, 1997).
10.36+ Employment Agreement dated November 3, 1997 between Aronex
Pharmaceuticals' and Geoffrey Cox, Ph.D. (incorporated by
reference to Exhibit 10.39 to Aronex Pharmaceuticals' Annual
Report on Form 10-K for the fiscal year ended December 31, 1997
(the "1997 Form 10-K")).
10.37+ Employment Termination and Severance Agreement dated January 1,
1998, between Aronex Pharmaceuticals and James M. Chubb, Ph.D.
(incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998 (the "March 1998 Form 10-Q")).
10.38+ Consulting Agreement dated January 1, 1998, between Aronex
Pharmaceuticals and Gabriel Lopez-Berestein (incorporated by
reference to Exhibit 10.2 to the March 1998 Form 10-Q).
10.39+ Consulting Agreement dated April 1, 1998, between Aronex
Pharmaceuticals and Roman Perez-Solar (incorporated by reference
to Exhibit 10.3 to the March 1998 Form 10-Q).
10.40+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Praveen Tyle, Ph.D. (incorporated by reference
to Exhibit 10.2 to the June 1998 Form 10-Q).
10.41+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Paul A. Cossum, Ph.D. (incorporated by
reference to Exhibit 10.3 to the June 1998 Form 10-Q).
10.42+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Terance A. Murnane (incorporated by reference
to Exhibit 10.4 to the June 1998 Form 10-Q).
10.43 Lease Agreement dated April 4, 1997, between Aronex
Pharmaceuticals and The Woodlands Corporation (incorporated by
reference to Exhibit 10.3 to the June 1997 Form 10-Q).
10.44++ License Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference
to Exhibit 10.1 to the December 2, 1998 Form 8-K).
10.45++ Stock Purchase Agreement dated November 12, 1998, between
Aronex Pharmaceuticals and Abbott Laboratories (incorporated by
reference to Exhibit 10.2 to the December 2, 1998 Form 8-K).
10.46* Placement Agency Agreement dated as of November 19, 1998 between
Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
10.47 Form of Warrant issued on February 23, 1999 for the purchase of an
aggregate of 600,000 shares of common stock (included herein as
Exhibit C to Placement Agency Agreement which is filed herewith as
Exhibit 10.46)
11.1* Statement regarding computation of loss per share.
23.1* Consent of Arthur Andersen LLP.
24.1 Power of attorney (included on the signature page of this
Registration Statement).
27 Financial Data Schedule
</TABLE>
- ---------
* Filed herewith.
+ Management Contract or Compensatory Plan.
++ Portions of this exhibit have been omitted based upon a request for
confidential treatment pursuant to Rule 24b-2g of the Exchange Act.
Such omitted portions have been filed separately with the Commission.
-38-
<PAGE> 42
(b) REPORTS ON FORM 8-K
Aronex Pharmaceuticals filed a Current Report on Form 8-K dated
December 2, 1998 during the three-month period ended December 31, 1998. This
Current Report on Form 8-K related to the Company's execution of a License
Agreement and related Stock Purchase Agreement with Abbott Laboratories.
-39-
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ARONEX PHARMACEUTICALS, INC.
Dated: March 26, 1999 By: /s/ GEOFFREY F. COX
------------------------------------
Geoffrey F. Cox
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C> <C>
/s/ GEOFFREY F. COX Chairman of the Board of Directors March 26, 1999
- ---------------------------- Chief Executive Officer
Geoffrey F. Cox (Principal executive officer)
/s/ TERANCE A. MURNANE Controller March 22, 1999
- ---------------------------- (Principal financial and
Terance A. Murnane accounting officer)
/s/ JAMES R. BUTLER Director March 23, 1999
- ----------------------------
James R. Butler
/s/ GABRIEL LOPEZ-BERESTEIN Director March 22, 1999
- ----------------------------
Gabriel Lopez-Berestein
/s/ PHYLLIS I. GARDNER, M.D. Director March 23, 1999
- ----------------------------
Phyllis I. Gardner, M.D.
/s/ MARTIN P. SUTTER Director March 23, 1999
- ----------------------------
Martin P. Sutter
/s/ GREGORY F. ZAIC Director March 23, 1999
- ----------------------------
Gregory F. Zaic
</TABLE>
<PAGE> 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998........................................... F-3
Consolidated Statements of Operations for the Years ended December 31, 1996, 1997 and 1998,
and the Period from Inception (June 13, 1986) through December 31, 1998............................. F-4
Consolidated Statements of Comprehensive Income for the Years ended December 31, 1996,
1997 and 1998....................................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Period from Inception (June 13, 1986)
through December 31, 1998........................................................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1997 and 1998,
and the Period from Inception (June 13, 1986) through December 31, 1998............................. F-11
Notes to Consolidated Financial Statements............................................................. F-12
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aronex Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of
Aronex Pharmaceuticals, Inc. and subsidiaries (a Delaware corporation in the
development stage), as of December 31, 1997 and 1998, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998 and for the period from inception (June 13, 1986) through December 31,
1998. These consolidated financial statements are the responsibility of Aronex
Pharmaceuticals' management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Aronex Pharmaceuticals, Inc. as of December 31, 1997 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998 and for the period from inception (June 13,
1986) through December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 22, 1999
F-2
<PAGE> 46
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 2,029 $ 11,338
Short-term investments ....................................................... 17,783 7,757
Accounts receivable .......................................................... 100 132
Prepaid expenses and other assets ............................................ 474 260
--------- ---------
Total current assets .................................................... 20,386 19,487
Long-term investments ............................................................ 10,142 1,295
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $3,660, and $2,839, respectively ............................. 1,107 2,263
Deposits ......................................................................... 490 --
--------- ---------
Total assets ............................................................ $ 32,125 $ 23,045
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................................ $ 1,977 $ 5,319
Accrued payroll .............................................................. 554 885
Advance from Genzyme ......................................................... 2,000 2,000
Current portion of notes payable and obligations under capital leases ........ 209 219
--------- ---------
Total current liabilities ............................................... 4,740 8,423
Long-term liabilities:
Notes payable and obligations under capital leases, net of current portion ... 6 1,012
--------- ---------
Total long-term obligations ............................................. 6 1,012
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, 15,459,166
and 16,379,309 shares issued and outstanding, respectively .............. 15 16
Additional paid-in capital ................................................... 96,606 100,654
Common stock warrants ........................................................ 967 50
Treasury stock ............................................................... (11) (11)
Deferred compensation ........................................................ (907) (380)
Unrealized gain (loss) on securities available-for-sale ...................... (87) 716
Deficit accumulated during development stage ................................. (69,204) (87,435)
--------- ---------
Total stockholders' equity .............................................. 27,379 13,610
--------- ---------
Total liabilities and stockholders' equity ................................... $ 32,125 $ 23,045
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 47
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, INCEPTION (JUNE 13,
------------------------------------- 1986) THROUGH
1996 1997 1998 DECEMBER 31, 1998
--------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Interest income .................. $ 1,692 $ 2,059 $ 1,265 $ 6,846
Research and development grants
and contracts ............... 2,670 841 6,737 11,787
--------- --------- --------- ---------
Total revenues .......... 4,362 2,900 8,002 18,633
--------- --------- --------- ---------
Expenses:
Research and development ......... 10,357 13,993 22,793 75,928
Purchase of in-process research
and development ............. 242 3,000 -- 11,625
General and administrative ....... 1,620 2,641 3,354 17,158
Interest expense and other ....... 173 257 86 1,357
--------- --------- --------- ---------
Total expenses .......... 12,392 19,891 26,233 106,068
--------- --------- --------- ---------
Net loss ............................. $ (8,030) $ (16,991) $ (18,231) $ (87,435)
========= ========= ========= =========
Basic and diluted loss per share ..... $ (0.62) $ (1.14) $ (1.17)
========= ========= =========
Weighted average shares used in
computing basic and diluted loss
per share ........................ 13,048 14,896 15,571
========= ========= =========
</TABLE>
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<S> <C> <C> <C>
Comprehensive income:
Net loss ............................. $ (8,030) $(16,991) $(18,231)
Unrealized gain (loss) on securities
available for sale .............. 41 (12) 803
-------- -------- --------
Comprehensive Income ..................... $ (7,989) $(17,003) $(17,428)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 48
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <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>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <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> 49
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1989 ................... 1,847,582 $ 2 $ 5,062 $ -- $ --
Stock options exercised January 1990 ($.66
per share) ................................. 30 -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock ............................. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1990 ................... 1,847,612 2 5,062 -- --
Stock options exercised, May 1991 ($.66
per share) .................................. 75 -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ..... 596,095 -- 4,328 -- --
Deferred compensation relating to certain
stock options ............................... -- -- 326 -- --
Compensation expense related to stock options .. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1991 ................... 2,443,782 2 9,716 -- --
Stock options exercised, January, April, May,
October and December 1992 ($.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 -- --
Compensation expense related to stock options .. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992 ................... 3,342,344 $ 3 $ 22,084 $ -- $ --
<CAPTION>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1989 ................... $ -- $ -- $ (2,030) $ 3,034
Stock options exercised January 1990 ($.66
per share) ................................. -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock ............................. -- -- -- --
Net loss ....................................... -- -- (1,825) (1,825)
------------ ------------ ------------ ------------
Balance at December 31, 1990 ................... -- -- (3,855) 1,209
Stock options exercised, May 1991 ($.66
per share) .................................. -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ..... -- -- -- 4,328
Deferred compensation relating to certain
stock options ............................... (326) -- -- --
Compensation expense related to stock options .. 138 -- -- 138
Net loss ....................................... -- -- (2,914) (2,914)
------------ ------------ ------------ ------------
Balance at December 31, 1991 ................... (188) -- (6,769) 2,761
Stock options exercised, January, April, May,
October and December 1992 ($.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 ............................... (1,644) -- -- --
Compensation expense related to stock options .. 460 -- -- 460
Net loss ....................................... -- -- (4,708) (4,708)
------------ ------------ ------------ ------------
Balance at December 31, 1992 ................... $ (1,372) $ -- $ (11,477) $ 9,238
</TABLE>
(continued on next page)
F-6
<PAGE> 50
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ................... 3,342,344 $ 3 $ 22,084 $ -- $ --
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 ($9.00 per share) ............. 1,402,250 2 11,462 -- --
Compensation expense related to stock options .. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993 ................... 5,121,202 5 38,144 -- --
Deferred compensation relating to certain
stock options ............................... -- -- 66 -- --
Stock options exercised, January through
October 1994 ($.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 .. -- -- -- -- --
Unrealized loss on available-for-sale
securities .................................. -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 ................... 5,202,476 $ 5 $ 38,220 $ -- $ --
<CAPTION>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 ................... $ (1,372) $ -- $ (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 ($9.00 per share) ............. -- -- -- 11,464
Compensation expense related to stock options .. 396 -- -- 396
Net loss ....................................... -- -- (6,225) (6,225)
------------ ------------ ------------ ------------
Balance at December 31, 1993 ................... (976) -- (17,702) 19,471
Deferred compensation relating to certain
stock options ............................... (66) -- -- --
Stock options exercised, January through
October 1994 ($.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 -- -- 546
Unrealized loss on available-for-sale
securities .................................. -- (315) -- (315)
Net loss ....................................... -- -- (9,052) (9,052)
------------ ------------ ------------ ------------
Balance at December 31, 1994 ................... $ (496) $ (315) $ (26,754) $ 10,660
</TABLE>
(continued on next page)
F-7
<PAGE> 51
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ................... 5,202,476 $ 5 $ 38,220 $ -- $ --
Deferred compensation relating to certain
stock options ............................. -- -- 1,380 -- --
Stock options exercised, January through
December 1995 ($.66 per share) ............ 36,958 -- 24 -- --
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) .............................. 3,868,436 4 11,111 2,844 --
Warrants exercised ($4.50 per share) ........... 705,614 1 3,402 (226) --
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ......... 531,552 -- 2,046 (1,130) --
Issuance of Common Stock for services
rendered .................................. 37,500 -- 159 -- --
Treasury stock purchased ($4.42 per share) ..... (2,480) -- -- -- (11)
Compensation expense related to stock
options ................................... -- -- -- -- --
Unrealized gain on available-for-sale
securities .................................... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 ................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (11)
<CAPTION>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ................... $ (496) $ (315) $ (26,754) $ 10,660
Deferred compensation relating to certain
stock options ............................. (1,380) -- -- --
Stock options exercised, January through
December 1995 ($.66 per share) ............ -- -- -- 24
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) .............................. -- -- -- 13,959
Warrants exercised ($4.50 per share) ........... -- -- -- 3,177
Issuance of Common Stock pursuant to
settlement agreement (see Note 6) ......... -- -- -- 916
Issuance of Common Stock for services
rendered .................................. -- -- -- 159
Treasury stock purchased ($4.42 per share) ..... -- -- -- (11)
Compensation expense related to stock
options ................................... 340 -- -- 340
Unrealized gain on available-for-sale
securities .................................... -- 199 -- 199
Net loss ....................................... -- -- (17,429) (17,429)
------------ ------------ ------------ ------------
Balance at December 31, 1995 ................... $ (1,536) $ (116) $ (44,183) $ 11,994
</TABLE>
(continued on next page)
F-8
<PAGE> 52
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (11)
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) ............. 622,428 1 3,528 (194) --
Issuance of Common Stock pursuant to
settlement agreements ..................... 38,722 -- 221 (57) --
Compensation expense related to stock options .. -- -- -- -- --
Unrealized gain on available-for-sale
securities ................................ -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ................... 14,597,247 15 93,742 968 (11)
Warrants exercised February and March 1997
($8.00 per share) ......................... 3,499 -- 28 (1) --
Reversal of deferred compensation relating to
forfeited stock options ................... -- -- (578) -- --
Issuance of Common Stock for services .......... 22,278 -- 130 -- --
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) ...... 128,278 -- 215 -- --
Stock purchased-employee stock purchase
plan, June and December 1997 ($3.31
and $3.19 per share) ...................... 21,392 -- 69 -- --
Issuance of Common Stock pursuant to
contingent stock agreement ................ 686,472 -- 3,000 -- --
Compensation expense related to stock options .. -- -- -- -- --
Unrealized loss on securities
available-for-sale ........................ -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ................... 15,459,166 $ 15 $ 96,606 $ 967 $ (11)
<CAPTION>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ................... $ (1,536) $ (116) $ (44,183) $ 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 -- -- 553
Unrealized gain on available-for-sale
securities ................................ -- 41 -- 41
Net loss ....................................... -- -- (8,030) 8,030
------------ ------------ ------------ ------------
Balance at December 31, 1996 ................... (1,949) (75) (52,213) 40,477
Warrants exercised February and March 1997
($8.00 per share) ......................... -- -- -- 27
Reversal of deferred compensation relating to
forfeited stock options ................... 578 -- -- --
Issuance of Common Stock for services .......... -- -- -- 130
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) ...... -- -- -- 215
Stock purchased-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 -- -- 464
Unrealized loss on securities
available-for-sale ........................ -- (12) -- (12)
Net loss ....................................... -- -- (16,991) (16,991)
------------ ------------ ------------ ------------
Balance at December 31, 1997 ................... $ (907) $ (87) $ (69,204) $ 27,379
</TABLE>
(continued on next page
F-9
<PAGE> 53
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH DECEMBER 31, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL COMMON
COMMON STOCK PAID-IN STOCK TREASURY
SHARES AMOUNT CAPITAL WARRANTS STOCK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ................... 15,459,166 $ 15 $ 96,606 $ 967 $ (11)
Reversal of deferred compensation relating to
forfeited stock options ................... -- -- (28) -- --
Issuance of Common Stock for services .......... 23,494 -- 76 -- --
Warrants expired June 1998 ..................... -- -- 917 (917) --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share) .. 19,144 -- 7 -- --
Issuance of shares through the employee stock
purchase plan, June and December 1998
($3.35 and $1.70 per share) ............... 39,516 -- 99 -- --
Issuance of shares for cash November 1998
($3.58 per share) ......................... 837,989 1 2,977 -- --
Compensation expense related to stock options .. -- -- -- -- --
Unrealized gain on securities
available-for-sale ........................ -- -- -- -- --
Net loss ....................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ................... 16,379,309 $ 16 $ 100,654 $ 50 $ (11)
============ ============ ============ ============ ============
<CAPTION>
UNREALIZED DEFICIT
GAIN (LOSS) ACCUMULATED
ON SECURITIES DURING TOTAL
DEFERRED AVAILABLE DEVELOPMENT STOCKHOLDERS'
COMPENSATION FOR SALE STAGE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ................... $ (907) $ (87) $ (69,204) $ 27,379
Reversal of deferred compensation relating to
forfeited stock options ................... 28 -- -- --
Issuance of Common Stock for services .......... -- -- -- 76
Warrants expired June 1998 ..................... -- -- -- --
Stock options exercised, January through
December 1998 ($0.04 - $0.68 per share) .. -- -- -- 7
Issuance of shares through the employee stock
purchase plan, June and December 1998
($3.35 and $1.70 per share) ............... -- -- -- 99
Issuance of shares for cash November 1998
($3.58 per share) ......................... -- -- -- 2,978
Compensation expense related to stock options .. 499 -- -- 499
Unrealized gain on securities
available-for-sale ........................ -- 803 -- 803
Net loss ....................................... -- -- (18,231) (18,231)
------------ ------------ ------------ ------------
Balance at December 31, 1998 ................... $ (380) $ 716 $ (87,435) $ 13,610
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
<PAGE> 54
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
YEARS ENDED DECEMBER 31, 1986) THROUGH
-------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (8,030) $ (16,991) $ (18,231) $ (87,435)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization ............................ 936 1,139 821 4,847
Loss on disposal of assets ............................... -- 200 -- 200
Compensation expense related to stock
and stock options ........................................ 553 594 547 3,783
Charge for purchase of in-process research
and development .......................................... 164 3,000 -- 11,547
Unrealized gain (loss) on investment .......................... 41 (12) 803 716
Acquisition costs, net of cash received ....................... -- -- -- (270)
Loss in affiliate ............................................. 50 -- -- 500
Accrued interest payable converted to stock ................... -- -- -- 97
Changes in assets and liabilities:
(Decrease) increase in prepaid expenses and other
assets ................................................... (375) 189 214 (75)
Decrease (increase) in accounts receivable .................... 267 (22) (32) (132)
Increase (decrease) in accounts payable and accrued
expenses ................................................. (322) 1,214 3,673 6,131
Decrease in deferred revenue .................................. (876) -- -- (353)
------------ ------------ ------------ ------------
Net cash used in operating activities ......................... (7,592) (10,689) (12,205) (60,444)
Cash flows from investing activities:
Purchases of investments ...................................... (92,560) (71,047) (42,809) (250,250)
Sales of investments .......................................... 59,585 80,331 61,682 246,933
Purchase of furniture, equipment and leasehold
improvements ............................................. (256) (352) (1,958) (6,079)
Proceeds from sale of assets .................................. -- 54 9 63
Decrease (increase) in deposits ............................... -- (490) 490 --
Investment in affiliate ....................................... -- -- -- (500)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities ........... (33,231) 8,496 17,414 (9,833)
Cash flows from financing activities:
Proceeds from notes payable ................................... 2,000 -- 1,369 6,041
Repayment of notes payable and principal payments
under capital lease obligations .......................... (534) (272) (353) (2,811)
Purchase of treasury stock .................................... -- -- -- (11)
Proceeds from issuance of stock ............................... 35,755 315 3,084 78,396
------------ ------------ ------------ ------------
Net cash provided by financing activities ..................... 37,221 43 4,100 81,615
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .......... (3,602) (2,150) 9,309 11,338
Cash and cash equivalents at beginning of period .............. 7,781 4,179 2,029 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ....................... $ 4,179 $ 2,029 $ 11,338 $ 11,338
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ...................... $ 120 $ 57 $ 81 $ 866
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
consolidated financial statements.
F-11
<PAGE> 55
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("the Company" or "Aronex
Pharmaceuticals") 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). In 1998, the Company
formed a subsidiary, Aronex Europe Limited. Aronex Pharmaceuticals is a
development-stage company that 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, Aronex
Pharmaceuticals expects to continue to incur losses for the foreseeable future,
and there can be no assurance that Aronex Pharmaceuticals will successfully
complete the transition from a development-stage company to successful
operations. See "Business -- Additional Business Risks" in the Company's Form
10-K for the year ended December 31, 1998. The research and development
activities engaged in by Aronex Pharmaceuticals involve a high degree of risk
and uncertainty. The Company's ability 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. 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 its future success. The Company expects that its existing
financial resources should be sufficient to fund its capital requirements into
the second quarter of 2000.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Aronex
Pharmaceuticals, Triplex, Oncologix and Aronex Europe Limited. All material
intercompany transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short- and Long-Term Investments
Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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.
Cash and cash equivalents include money market accounts and
investments with an original maturity of less than three months. At December
31, 1998, short-term investments include held to maturity securities and
available for sale securities. The held to maturity securities consist of
high-grade commercial paper and United States Government backed securities with
a carrying value of $5,466,000 which approximates fair market value and cost.
Available for sale securities consist of high-grade commercial paper and
Targeted Genetics Corporation ("Targeted Genetics") common stock (see Note 3)
with an amortized cost of $1,575,000, a fair market value of $2,291,000 and a
gross unrealized gain of $716,000. Long-term investments at December 31, 1998
are available for sale securities which are United States mortgage backed
securities with maturity dates over the next twenty four years that have an
F-12
<PAGE> 56
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortized cost of $1,295,000 which approximates fair market value and cost.
Aronex Pharmaceuticals 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,
------------------
1997 1998
------- -------
<S> <C> <C>
Office furniture and equipment ........................ $ 611 $ 1,034
Laboratory equipment .................................. 2,802 3,285
Leasehold improvements ................................ 1,354 783
------- -------
4,767 5,102
Less accumulated depreciation and amortization ......... (3,660) (2,839)
------- -------
Furniture, equipment and leasehold improvements, net ... $ 1,107 $ 2,263
======= =======
</TABLE>
At December 31, 1998, the cost of all furniture, equipment and
leasehold improvements pledged as collateral on notes payable totaled
$1,369,000.
Revenue Recognition
Research and development grant and contract revenues are recognized as
the related work is performed. The measurement of the progress of work
performed under the terms of the contracts is based upon the costs incurred to
date as a percentage of the overall costs to be incurred. The overall costs to
be incurred are typically defined in the contracts. Any revenue contingent upon
future performance by Aronex Pharmaceuticals 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 Aronex Pharmaceuticals.
Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share", which establishes standards for computing and presenting earnings
per share. The new standard replaces the presentation of primary earnings per
share prescribed by Accounting Principles Board Opinion No. 15 ("APB 15"),
"Earnings per Share", with a presentation of basic earnings per share and also
requires dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all entities with complex capital
structures. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share is
computed similarly to fully-diluted earnings per share
F-13
<PAGE> 57
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pursuant to APB 15. Aronex Pharmaceuticals 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, Aronex Pharmaceuticals' basic and diluted earnings per
share are the same.
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.
Presentation
Certain reclassifications have been made to prior year balances to
conform with current year presentation.
3. INVESTMENT IN AFFILIATE
In April 1994, Aronex Pharmaceuticals invested in and entered into a
drug development agreement with RGene Therapeutics, Inc. ("RGene"). Aronex
Pharmaceuticals purchased $500,000 of RGene's preferred stock, which was
recorded in the financial statements as investment in affiliate. The original
investment was written off as RGene incurred losses. This resulted in a zero
basis when RGene was acquired by Targeted Genetics, a publicly traded company,
in June 1996.
The Company received 440,520 shares of Targeted Genetics common stock
from the acquisition of RGene in June 1996 and an additional 104,496 upon the
achievement of certain milestones in October 1998. These shares are subject to
Rule 144(k) of the Securities Act of 1933, were unregistered and subject to a
Lock-Up Agreement and Stock Pledge. The lock-up period was for thirty months
from the date of the merger. Twenty percent of the shares were released six
months after the merger date and additional increments of twenty percent of the
shares are released for each additional six month period. The Company recorded
the shares at zero in the financial statements until 1998 when they were
recorded at the fair market value of $716,000. This resulted in an unrealized
gain of $716,000 as reflected on the Company's balance sheet at December 31,
1998.
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 1996 and 1997, Aronex Pharmaceuticals recorded $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.
F-14
<PAGE> 58
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company 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:
o the current scientific and development status of the projects;
o the expected amount of time and resources required to complete
the projects;
o the probability of obtaining collaborators to help finance and
develop the projects; and
o the potential market for the projects.
The Company's 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. 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. The Company anticipates that it will take 3 to 5 years to
complete the development of Zintevir(R). If funding is obtained and the results
of Phase I/II clinical trials are satisfactory, the Company estimates it will
require an additional $50 million over 3 to 5 years to complete the development
of Zintevir(R).
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.
The Company 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 has not been maintained by Aronex
Pharmaceuticals.
In connection with the Triplex Agreement, Aronex Pharmaceuticals
issued the following to existing Triplex stockholders and option holders: (i)
3,441,436 shares of Common Stock; (ii) options to purchase 88,912 shares of
Common Stock; and (iii) contingent stock issue rights to receive shares of
Common Stock with a fair market value of up to $8.0 million, the conversion of
which is contingent upon the satisfaction of conditions which relate to the
licensing or development of certain products (the "Triplex Contingent Stock
Rights").
The Triplex Contingent Stock Rights entitle the former Triplex
stockholders and option holders to receive shares of Common Stock with an
aggregate fair market value at the time of issuance of $5.0 million (subject to
certain adjustments) if Aronex Pharmaceuticals either: (i) entered into an
agreement on or before September 11, 1997 with respect to the licensing of a
certain product whereby Aronex Pharmaceuticals received at least $5.0 million
in
F-15
<PAGE> 59
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals
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, Aronex Pharmaceuticals 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 charge to
in-process research and development of $3.0 million in 1997.
In connection with the Oncologix Agreement, Aronex Pharmaceuticals
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 Aronex Pharmaceuticals 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
December 31, 1998, Series C Warrants to purchase approximately 160,000 shares
of Common Stock were outstanding.
In October 1995, Aronex Pharmaceuticals 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 38,722 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.
In August 1995, Aronex Pharmaceuticals was a defendant in a lawsuit
filed by certain common stockholders of Oncologix, Inc. challenging the merger
with Oncologix, Inc. To resolve this matter, Aronex Pharmaceuticals 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 shares of Common Stock was charged to expense.
F-16
<PAGE> 60
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
In June 1993, Aronex Pharmaceuticals 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, Aronex Pharmaceuticals borrowed $607,000
and $392,000, respectively, through this agreement. In 1993 and 1994, in
connection with the financing, Aronex Pharmaceuticals 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 May 1998, Aronex Pharmaceuticals entered into a master loan
agreement for the financing of 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, Aronex
Pharmaceuticals borrowed $1,369,000 through this agreement bearing interest at
12%. Future principal payments under the master loan agreement at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, NOTE PAYABLE
------------ ------------
<S> <C>
1999 219,000
2000 247,000
2001 279,000
2002 314,000
2003 172,000
-----------
Total $ 1,231,000
===========
</TABLE>
6. STOCKHOLDERS' EQUITY
Common Stock
In July 1992, Aronex Pharmaceuticals, in an initial public offering,
issued 850,000 shares of Common Stock for $14 a share, with Aronex
Pharmaceuticals 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 Aronex Pharmaceuticals which resulted in Genzyme's ownership of
approximately 9% of the Aronex Pharmaceuticals' outstanding Common Stock at the
time the investment was made. In September 1994, Aronex Pharmaceuticals issued
to Genzyme 66,162 additional shares which were contingent on certain stock
performance criteria. In November 1993, Aronex Pharmaceuticals 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,
Aronex Pharmaceuticals 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. In November 1998 Abbott Laboratories ("Abbott")
purchased 837,989 shares of Common Stock under a stock purchase agreement for
$3,000,000 and also entered into a licensing agreement with the Company
relating to NYOTRAN(R) (described in Note 9).
F-17
<PAGE> 61
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Common Stock Warrants
At December 31, 1998, Aronex Pharmaceuticals had warrants outstanding,
relating to certain financing and leasing transactions, to purchase 17,951
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.
Aronex Pharmaceuticals issued warrants to purchase approximately 9.0
million shares of Common Stock in connection with the Oncologix merger in 1995
(see Note 4). At December 31, 1998, warrants to purchase approximately 160,000
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, Aronex
Pharmaceuticals issued $10.1 million contingent stock rights. At December 31,
1998, $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, Aronex Pharmaceuticals' 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, 1998, 203,318,
shares were available for future grant under the Plan.
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
<S> <C> <C>
Balance at December 31, 1995 ...... 788,537 $0.04 to $14.88
Granted ..................... 533,200 $5.50 to $12.00
Exercised ................... (93,541) $0.04 to $ 9.50
Forfeited ................... (109,047) $4.24 to $11.00
--------- ---------------
Balance at December 31, 1996 ...... 1,119,149 $0.04 to $14.88
Granted ..................... 1,232,578 $4.06 to $ 8.88
Exercised ................... (150,556) $0.04 to $ 5.50
Forfeited ................... (240,454) $0.66 to $10.50
--------- ---------------
Balance at December 31, 1997 ...... 1,960,717 $0.04 to $14.88
Granted ..................... 336,114 $2.06 to $ 4.63
Exercised ................... (42,638) $0.04 to $ 0.68
Forfeited ................... (228,946) $3.88 to $14.88
--------- ---------------
Balance at December 31, 1998 ...... 2,025,247 $0.04 to $14.88
========= ===============
Exercisable at December 31, 1998... 1,520,901 $0.04 to $14.88
========= ===============
</TABLE>
F-18
<PAGE> 62
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During June 1998, Aronex Pharmaceuticals' stockholders approved the
1998 Stock Option Plan (the "1998 Plan"). This plan authorizes the issuance of
options to purchase up to 750,000 shares of Common Stock. Shares issued under
the 1998 Plan expire 10 years from the date of issuance. In 1998, options to
purchase 370,000 shares of Common Stock were issued to employees and 320,000 of
these shares will vest at the earlier of 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 or nine years and ten months from the date of grant.
A summary of stock option activity for the 1998 Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
<S> <C> <C>
Balance at December 31, 1997 ...... -- $ --
Granted ..................... 370,000 $2.44 to $3.88
Exercised ................... -- $ --
Forfeited ................... -- $ --
---------- --------------
Balance at December 31, 1998 ...... 370,000 $2.44 to $3.88
========== ==============
Exercisable at December 31, 1998... 10,000 $ 2.44
========== ==============
</TABLE>
During 1993, Aronex Pharmaceuticals 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 Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals' stock at the
date of issuance. In 1996, Discretionary Grants to purchase a total of 87,500
shares of Common Stock were issued to two Non-Employee Directors. These options
vest over four years and were issued at less than the fair market value of
Aronex Pharmaceuticals' Common Stock at the date of grant.
F-19
<PAGE> 63
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the Director Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------------
<S> <C> <C>
Balance at December 31, 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 ............................ 62,500 $2.00 to $ 2.53
Exercised .......................... -- $ --
------- ---------------
Balance at December 31, 1998 ....... 430,000 $2.00 to $11.00
======= ===============
Exercisable at December 31, 1998 ... 386,250 $2.00 to $11.00
======= ===============
</TABLE>
Aronex Pharmaceuticals records deferred compensation for the
difference between the grant price and the deemed fair value for financial
statement presentation purposes related to options. The balance at December 31,
1998 was $380,000. In 1996, 1997 and 1998, $553,000, $464,000 and $499,000
respectively, in related expense was recorded. The balance will be amortized to
expense over the remaining vesting periods of the options.
Aronex Pharmaceuticals 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"), Aronex Pharmaceuticals' net loss per share would have been increased to
the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss:
As reported ................... $ (8,030,000) $(16,991,000) $(18,231,000)
============ ============ ============
Pro forma ..................... $ (9,062,000) $(19,129,000) $(19,598,000)
============ ============ ============
Loss Per Share (basic and diluted):
As reported ................... $ (0.62) $ (1.14) $ (1.17)
============ ============ ============
Pro forma ..................... $ (0.69) $ (1.28) $ (1.26)
============ ============ ============
</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 1996, 1997 and 1998, respectively: risk-free interest rates
of 5.4% to 6.4%, 5.7% to 6.9% and 4.3% to 5.8%, with no expected dividends;
expected lives of 5 years and expected volatility of 116% in 1996, 114% in 1997
and 113% in 1998.
F-20
<PAGE> 64
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of Aronex Pharmaceuticals' three stock option
plans as of December 31, 1996, 1997 and 1998 and charges during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------ ------------------------
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 ...... 891,037 $ 4.29 1,319,149 $ 5.27 2,328,217 $ 5.37
Granted ........................... 643,200 $ 6.89 1,400,078 $ 4.99 768,614 $ 3.52
Repriced .......................... -- $ -- -- $ -- -- $ --
Exercised ......................... (106,041) $ 3.24 (150,556) $ 1.43 (42,638) $ 0.18
Forfeited ......................... (109,047) $ 6.75 (240,454) $ 5.91 (228,946) $ 5.27
---------- ---------- ----------
Balance at end of year ............ 1,319,149 $ 5.27 2,328,217 $ 5.37 2,825,247 $ 4.96
========== ========== ==========
Options exercisable at year end ... 437,391 $ 4.10 915,103 $ 5.56 1,917,151 $ 5.40
========== ========== ==========
Weighted-average fair value of
options granted during the year ... $ 7.99 $ 4.02 $ 2.68
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 3.00 202,050 7.6 $ 2.00 110,250 $ 1.62
$3.01 - $ 7.00 2,245,460 6.0 $ 4.68 1,508,829 $ 4.98
$7.01 - $14.88 377,737 6.0 $ 8.19 298,072 $ 8.30
--------- ---------
2,825,247 1,917,151
========= =========
</TABLE>
8. FEDERAL INCOME TAXES
Aronex Pharmaceuticals 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 Aronex
Pharmaceuticals' effective income tax rate for the periods ended December 31,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Statutory rate (34.0)% (34.0)% (34.0)%
Purchase of in-process research and development 1.1% 6.6% 0.0%
Stock option compensation not deductible (deductible) (0.3)% (0.2)% (0.0)%
Other -- (0.7)% 0.9%
Adjustment to deferred tax valuation allowance 33.2% 28.3% 33.1%
------ ------ ======
0.0% 0.0% 0.0%
====== ====== ======
</TABLE>
F-21
<PAGE> 65
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of Aronex Pharmaceuticals' net deferred tax
asset at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets relating to:
Federal net operating loss carryforwards .................. $ 27,640,500 $ 35,760,000
Financial statement depreciation and amortization in
excess of (less than) amount deductible for income
tax purposes ......................................... 132,000 121,400
Accrued liabilities not currently deductible
for income tax purposes .............................. 725,100 739,300
Equity in loss of affiliate not currently
deductible for income tax purposes ................... 170,000 170,000
Other items, net .......................................... (19,400) (34,300)
------------ ------------
Total deferred items, net .................................... 28,648,000 36,756,400
Deferred tax valuation allowance ............................. (28,648,000) (36,756,400)
------------ ------------
Net deferred tax asset ....................................... $ -- $ --
============ ============
</TABLE>
At December 31, 1998, Aronex Pharmaceuticals had net operating loss
("NOL") carryforwards for federal income tax purposes of approximately $102.2
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
Aronex Pharmaceuticals' ability to utilize these NOLs and tax credits.
Accordingly, Aronex Pharmaceuticals' 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, Aronex Pharmaceuticals 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 Aronex Pharmaceuticals' deferred tax assets, a valuation
allowance has been established to offset these tax assets. The valuation
allowance increased $3,504,000, $5,551,800 and $8,108,400 for the years ended
December 31, 1996, 1997 and 1998, respectively. These increases were primarily
due to Aronex Pharmaceuticals' 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). Aronex Pharmaceuticals
has not made any federal income tax payments since inception.
9. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
Aronex Pharmaceuticals has two exclusive license agreements with M.D.
Anderson that 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, Aronex Pharmaceuticals believes its ongoing research
and development efforts currently satisfy this obligation to commercialize.
The license agreements require Aronex Pharmaceuticals to pay
royalties for licensed patent products or processes based on cumulative net
sales percentages. Aronex Pharmaceuticals 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 Aronex Pharmaceuticals has had no
sales.
F-22
<PAGE> 66
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the years ended December 31, 1996, 1997 and 1998, Aronex
Pharmaceuticals paid M.D. Anderson $144,000, $108,000 and $23,000,
respectively, for research performed on behalf of Aronex Pharmaceuticals. At
December 31, 1998, Aronex Pharmaceuticals was committed to pay M.D. Anderson
$117,000 for research through November 15, 1999.
In 1993, Aronex Pharmaceuticals entered into a non-exclusive license
agreement with a pharmaceutical company to use a patented process in the
manufacture, use and sale of certain of Aronex Pharmaceuticals' products with
an initial fee of $30,000. Annual royalty payments by Aronex Pharmaceuticals
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, Aronex Pharmaceuticals 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. Aronex
Pharmaceuticals 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 Aronex
Pharmaceuticals upon the occurrence of certain events and to pay Aronex
Pharmaceuticals 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. Aronex Pharmaceuticals 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 Aronex Pharmaceuticals and agreed to make an additional
$5.0 million equity investment in Aronex Pharmaceuticals if certain
developmental goals were achieved.
In September 1996, Genzyme advanced us $2.0 million relating to the
$5.0 million equity milestone. The advance does not bear interest. Early in
1997, the Company amended the agreement through which (1) the Company 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. The
Company retained co-promotion rights in the United States. Genzyme was required
to pay Aronex Pharmaceuticals $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). Aronex Pharmaceuticals has
the right to re-acquire the marketing rights at any time within the six months
following Genzyme's exercise of the option by returning Genzyme's $3.0 million
option exercise payment, repaying Genzyme's $2.0 million advance and paying
royalties on sales of ATRAGEN(R), including $500,000 in minimum royalties in
the first year. If Genzyme does not exercise its option, Aronex Pharmaceuticals
is required to repay Genzyme the $2.0 million advance and to pay royalties on
sales of ATRAGEN(R), including $500,000 in minimum royalties in the first year
following the expiration of the option.
In 1996, Aronex Pharmaceuticals entered into a license agreement with
Boehringer Mannheim GmbH (subsequently acquired by F. Hoffman-LaRoche Ltd.
("Roche")) to develop and commercialize one of Aronex Pharmaceuticals'
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 Aronex Pharmaceuticals $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 Aronex Pharmaceuticals up to $2.65 million
in milestone payments upon the occurrence of certain events and to pay Aronex
Pharmaceuticals royalties on sales of the product. Aronex Pharmaceuticals 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. Aronex Pharmaceuticals 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
F-23
<PAGE> 67
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
terminated without cause by Roche in September 1998, as a result of which all
rights to AR209 have reverted to Aronex Pharmaceuticals.
On November 12, 1998, Aronex Pharmaceuticals entered into a license
agreement with 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 Aronex Pharmaceuticals in
the United States and Canada. Under the license agreement Abbott paid Aronex
Pharmaceuticals up-front payments, development milestones and development
payments totaling $6.2 million in the fourth quarter of 1998. 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 Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals' escalating royalties
on all product sales of NYOTRAN(R).
The strategy for the development of NYOTRAN(R) has involved several
stages. The Company has conducted three Phase I clinical studies which
demonstrated a favorable safety profile. The Company completed a Phase II open
label study in patients with Candidemia evaluating NYOTRAN(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, the Company 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. The
Company completed the clinical trials for presumed fungal infections in late
1998.
To expand the potential indications for NYOTRAN(R) , the Company
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. The Company plans to file a New Drug Application 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.
10. COMMITMENTS AND CONTINGENCIES
Aronex Pharmaceuticals leases laboratory and office space under
operating leases and certain office equipment on a short-term basis. In 1997,
Aronex Pharmaceuticals entered into a lease for a building from its existing
landlord who was a related party until late in 1997. Under this lease, Aronex
Pharmaceuticals has committed to lease 30,000 square feet for ten years
beginning in January 1998. Rental expense relating to these leases was
approximately $268,000, $236,000, and $667,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
F-24
<PAGE> 68
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum noncancellable payments under operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1999 706,000
2000 702,000
2001 702,000
2002 699,000
2003 681,000
Thereafter 2,684,000
----------
Total $6,174,000
==========
</TABLE>
Aronex Pharmaceuticals is subject to numerous risks and uncertainties
because of the nature of and status of its operations. Aronex Pharmaceuticals
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 Aronex Pharmaceuticals' financial position or results of
operations.
11. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS
During 1996, 1997 and 1998, Aronex Pharmaceuticals entered into
employment agreements with its chief executive officer and other officers and
certain employees that 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, Aronex
Pharmaceuticals 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 Aronex Pharmaceuticals with a balance of approximately $19,000 at December
31, 1998. This loan will be repaid over the next three years. Current annual
salaries relating to these agreements total $1.4 million at December 31, 1998.
In February 1998, Aronex Pharmaceuticals amended a consulting
agreement with Aronex Pharmaceuticals' chief scientific advisor for a
three-year period ending December 31, 2000, whereby Aronex Pharmaceuticals 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 Aronex Pharmaceuticals Common Stock.
Aronex Pharmaceuticals paid cash of $144,000, $156,000 and $78,000 for the
years ended December 31, 1996, 1997 and 1998, respectively, and 18,352 shares
of common stock in 1998, pursuant to this agreement.
During 1996, Aronex Pharmaceuticals paid $2,500 in consulting fees to
a consulting firm which is wholly-owned by a former member of the Board of
Directors.
12. 401(k) PLAN
Aronex Pharmaceuticals maintains a retirement savings plan, effective
as amended on January 1, 1991, in which any employee of Aronex Pharmaceuticals
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. Aronex Pharmaceuticals
may, in its discretion, contribute an amount equal to the employee's
contribution, but such Company contribution may not exceed an amount equal to
6% of the employee's compensation. A participant is 50% vested in the accrued
benefits derived from Aronex
F-25
<PAGE> 69
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pharmaceuticals' 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. Aronex Pharmaceuticals made contributions of approximately $40,000,
$45,700 and $56,500 under the 401(k) plan for the years ended December 31,
1996, 1997 and 1998, 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, 21,392 shares were purchased by employees at $3.31
and $3.19 per share. In 1998, 39,516 shares were purchased by employees at
$3.35 and $1.70 per share.
14. EVENTS SUBSEQUENT TO YEAR END
In February 1999, Aronex Pharmaceuticals, Inc. raised net proceeds of
approximately $11.8 million in a public offering of 6,000,000 shares of Common
Stock. In connection with this offering, the Company issued warrants to
purchase 600,000 shares of Common Stock at a price of $3.28 per share. These
warrants expire in February 2003.
In March 1999, Genzyme notified the Company that they do not intend to
exercise their option. As a result of the election, the Company has reacquired
full marketing rights to ATRAGEN(R) on a worldwide basis and the Company is
obligated to repay Genzyme the $2.0 million advance by April 24, 1999 and to
pay product royalties, including $500,000 in minimum royalties by April 24,
2000.
F-26
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Aronex Pharmaceuticals' 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
Aronex Pharmaceuticals' 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 Aronex
Pharmaceuticals' Annual Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996).
10.1 Registration Rights Agreement dated August 2, 1989, by and among
Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 and certain of its stockholders (incorporated by
reference to Exhibit 10.24 to Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals and certain of its
stockholders (incorporated by reference to Exhibit 10.28 to Aronex
Pharmaceuticals' 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).
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Aronex Pharmaceuticals' 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
Aronex Pharmaceuticals' 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 Aronex
Pharmaceuticals' Annual Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996).
10.1 Registration Rights Agreement dated August 2, 1989, by and among
Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 Aronex Pharmaceuticals 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 and certain of its stockholders (incorporated by
reference to Exhibit 10.24 to Aronex Pharmaceuticals' 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 Aronex Pharmaceuticals and certain of its
stockholders (incorporated by reference to Exhibit 10.28 to Aronex
Pharmaceuticals' 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).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.8+ 1998 Stock Option Plan (incorporated by reference to Exhibit
10.1 to Aronex Pharmaceuticals' 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 Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals, 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 Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals, 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 Aronex Pharmaceuticals, 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
Aronex Pharmaceuticals 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 Aronex
Pharmaceuticals' 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 Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No.1
(incorporated by reference to Exhibit 10.28 to the 1992
Registration Statement).
10.19 Common Stock Purchase Warrant dated June 28, 1993 from Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No. 1
(incorporated by reference to Exhibit 10.22 to the 1993 Form
10-K).
10.20 Common Stock Purchase Warrant dated March 21, 1994 from Aronex
Pharmaceuticals in favor of MMC/GATX Partnership No. 1
(incorporated by reference to Exhibit 10.4 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (the "March 1994 Form 10-Q")).
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.21 License and Development Agreement dated September 10, 1993,
between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.22 to the 1993
Registration Statement).
10.22 Common Stock Purchase Agreement dated September 10, 1993, between
Aronex Pharmaceuticals and Genzyme Corporation (incorporated by
reference to Exhibit 10.23 to the 1993 Registration Statement).
10.23 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between Aronex Pharmaceuticals and Genzyme
Corporation (incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996 (the "September 1996 Form
10-Q")).
10.24 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the September 1996
Form 10-Q).
10.25 Amendment No. 3 to License and Development Agreement dated March
25, 1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended March 30, 1997 (the "March 1997 Form 10-Q")).
10.26 Amendment No. 3 to Common Stock Purchase Agreement dated March 25,
1997, between Aronex Pharmaceuticals and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.27 Licensing Agreement dated December 7, 1996, between Aronex
Pharmaceuticals and Boehringer Mannheim GmbH (incorporated by
reference to Exhibit 10.51 to Aronex Pharmaceuticals' Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.28 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 Aronex Pharmaceuticals' Current Report on Form 8-K
dated February 22, 1995 (the "February 1995 Form 8-K")).
10.29 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.30 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc.,Aronex Pharmaceuticals and API Acquisition Company
No. 2 (incorporated by reference to Exhibit 1.7 to the February
1995 Form 8-K).
10.31 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K).
10.32 Agreement between Oncologix and HCV Group (incorporated by
reference to Exhibit 1.9 to the February 1995 Form 8-K).
10.33 Exchange Agreement dated December 2, 1995, among Aronex
Pharmaceuticals, 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
Aronex Pharmaceuticals' Current Report on Form 8-K dated December
12, 1995).
10.34+ Employment Agreement dated March 12, 1997, between Aronex
Pharmaceuticals and David S. Gordon, M.D. (incorporated by
reference to Exhibit 10.4 to the March 1997 Form 10-Q).
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
10.35+ Employment Agreement dated July 28, 1997, between Aronex
Pharmaceuticals and Janet Walter (incorporated by reference to
Exhibit 10.1 to Aronex Pharmaceuticals' Quarterly Report on Form
10-Q for fiscal quarter ended September 30, 1997).
10.36+ Employment Agreement dated November 3, 1997 between Aronex
Pharmaceuticals' and Geoffrey Cox, Ph.D. (incorporated by
reference to Exhibit 10.39 to Aronex Pharmaceuticals' Annual
Report on Form 10-K for the fiscal year ended December 31, 1997
(the "1997 Form 10-K")).
10.37+ Employment Termination and Severance Agreement dated January 1,
1998, between Aronex Pharmaceuticals and James M. Chubb, Ph.D.
(incorporated by reference to Exhibit 10.1 to Aronex
Pharmaceuticals' Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998 (the "March 1998 Form 10-Q")).
10.38+ Consulting Agreement dated January 1, 1998, between Aronex
Pharmaceuticals and Gabriel Lopez-Berestein (incorporated by
reference to Exhibit 10.2 to the March 1998 Form 10-Q).
10.39+ Consulting Agreement dated April 1, 1998, between Aronex
Pharmaceuticals and Roman Perez-Solar (incorporated by reference
to Exhibit 10.3 to the March 1998 Form 10-Q).
10.40+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Praveen Tyle, Ph.D. (incorporated by reference
to Exhibit 10.2 to the June 1998 Form 10-Q).
10.41+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Paul A. Cossum, Ph.D. (incorporated by
reference to Exhibit 10.3 to the June 1998 Form 10-Q).
10.42+ Employment Agreement dated June 12, 1998, between Aronex
Pharmaceuticals and Terance A. Murnane (incorporated by reference
to Exhibit 10.4 to the June 1998 Form 10-Q).
10.43 Lease Agreement dated April 4, 1997, between Aronex
Pharmaceuticals and The Woodlands Corporation (incorporated by
reference to Exhibit 10.3 to the June 1997 Form 10-Q).
10.44++ License Agreement dated November 12, 1998, between Aronex
Pharmaceuticals and Abbott Laboratories (incorporated by reference
to Exhibit 10.1 to the December 2, 1998 Form 8-K).
10.45++ Stock Purchase Agreement dated November 12, 1998, between
Aronex Pharmaceuticals and Abbott Laboratories (incorporated by
reference to Exhibit 10.2 to the December 2, 1998 Form 8-K).
10.46* Placement Agency Agreement dated as of November 19, 1998 between
Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
10.47 Form of Warrant issued on February 23, 1999 for the purchase of an
aggregate of 600,000 shares of common stock (included herein as
Exhibit C to Placement Agency Agreement which is filed herewith as
Exhibit 10.46)
11.1* Statement regarding computation of loss per share.
23.1* Consent of Arthur Andersen LLP.
24.1 Power of attorney (included on the signature page of this
Registration Statement).
27 Financial Data Schedule
</TABLE>
- ---------
* Filed herewith.
+ Management Contract or Compensatory Plan.
++ Portions of this exhibit have been omitted based upon a request for
confidential treatment pursuant to Rule 24b-2g of the Exchange Act.
Such omitted portions have been filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.46
EXECUTION COPY
ARONEX PHARMACEUTICALS, INC.
PLACEMENT AGENCY AGREEMENT
Dated as of November 19, 1998
Paramount Capital, Inc.
787 Seventh Avenue, 48th Floor
New York, New York 10019
Dear Sirs:
Aronex Pharmaceuticals, Inc., a Delaware corporation (the
"Company") proposes to issue, offer and sell (the "Offering"), up to an
aggregate of 6,000,000 shares (the "Shares") of its common stock (the "Offering
Amount"), par value $.001 per share (the "Common Stock"). The Company hereby
confirms its agreement to retain Paramount Capital, Inc. (the "Placement
Agent") on an exclusive "best efforts" basis to introduce the Company to, and
to obtain indications of interest from, prospective purchasers ("Purchasers")
of the Shares, at a price per share (the "Offering Price") equal to the price
set forth on the cover page of the Prospectus (as defined below) on the date
that the Registration Statement is declared effective (the "Effective Date").
1. Appointment of Placement Agent.
(a) The Placement Agent is hereby appointed
exclusive placement agent of the Company (subject to the Placement Agent's
right to have Selected Agents, as defined in Section 1(c) hereof, participate
in the Offering) during the Offering Period herein specified for the purposes
of assisting the Company in obtaining indications of interest from qualified
Purchasers. The Placement Agent shall not be deemed an agent of the Company for
any other purpose.
(b) Subject to the performance by the Company of all
of its obligations to be performed under this Agreement and to the completeness
and accuracy of all representations and warranties of the Company contained in
this Agreement, the Placement Agent hereby accepts such agency and agrees to
use its best efforts to assist the Company in obtaining indications of interest
from Purchasers pursuant to the Offering. It is understood that the Placement
Agent has no obligation to sell the Shares, but only to use its best efforts to
obtain indications of interest therefor. Furthermore, it is understood that
neither the Placement Agent nor any of its affiliates are under any obligation
to purchase any Shares in the Offering. The Placement Agent's agency hereunder
is not terminable by the Company prior to the Termination Date except as set
forth in Section 8(g).
<PAGE> 2
(c) The Placement Agent may engage other persons,
selected by it in its sole discretion, who are members of the National
Association of Securities Dealers, Inc., ("NASD") or who are located outside
the United States and that have executed a Selected Agents' Agreement (each
such person being hereinafter referred to as a "Selected Agent") and the
Placement Agent may allow such persons such part of the compensation and
payment of expenses payable to the Placement Agent hereunder as the Placement
Agent shall determine; provided, however, that any such compensation shall be
received pursuant to Section 4(m) hereof.
2. Offering Period; Escrow Agreement; Delivery and Payment.
(a) The "Offering Period" shall be deemed to have
commenced on November 20, 1998 (the date on which the first Preliminary
Prospectus was made available to the Placement Agent by the Company for use in
connection with the Offering). If not terminated earlier pursuant to this
Agreement, the Offering Period shall terminate at 11:59 p.m. Eastern Standard
Time on March 31, 1999, or such later time and date as may be consented to by
the Placement Agent (the "Termination Date"). If indications of interest for
the entire Offering Amount are not received prior to the end of the Offering
Period, the Offering will be terminated.
(b) On or prior to the Effective Date, the Company,
the Placement Agent and State Street Bank & Trust Co., as escrow agent (the
"Escrow Agent"), shall enter into an escrow agreement in customary form
mutually acceptable to the Company, the Placement Agent and the Escrow Agent
(the "Escrow Agreement"), pursuant to which an escrow account will be
established, at the Company's expense, for the benefit of the Purchasers (the
"Escrow Account"). Such Escrow Agreement shall conform in all material respects
to the requirements of Rule 15c2-4 under the Securities Exchange Act of 1934,
as amended. The Company will not request effectiveness of the Registration
Statement until indications of interest for the entire Offering Amount have
been received. When the condition set forth in the immediately preceding
sentence has been met, the Company shall request that the Commission (as
defined below) declare the Registration Statement effective. The Offering Price
shall be determined (the "Pricing") on the Effective Date. Immediately after
the Pricing, the Placement Agent will distribute confirmations and final
prospectuses to all Purchasers, and shall inform each Purchaser of the
following: (i) the closing date (the "Closing Date"), which will be scheduled
for three business days after the Pricing or such other time as may be agreed
upon by the Company and the Placement Agent, but in no event on the date prior
to the date on which the Escrow Agent has received an amount equal to the
proceeds of the sale of all of the Shares offered hereby (the "Requisite
Funds"); (ii) the Offering Price; and (iii) the total amount of funds such
Purchaser shall deposit in the Escrow Account. The Escrow Agreement shall
provide that the Escrow Agent shall notify the Company and the Placement Agent
in writing when the Purchasers have deposited funds into the Escrow Account the
Requisite Funds. At 9:00 a.m.,
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<PAGE> 3
New York City time, on the Closing Date, the Escrow Agent will release the
Requisite Funds from the Escrow Account for collection by the Company and the
Placement Agent as provided in the Escrow Agreement and the Company shall
deliver the Shares to the Purchasers, which delivery may be made through the
facilities of The Depository Trust Company. The Closing shall take place at the
offices of the Placement Agent, 787 Seventh Avenue, 48th floor, New York, New
York 10019. All actions taken at the Closing shall be deemed to have occurred
simultaneously. If the Closing Date shall not have occurred on or prior to
April 5, 1999, or such later date as may be consented to by Placement Agent,
all funds together with any interest earned thereon or provided in the Escrow
Agreement shall be returned to the Purchasers who deposited such funds in the
Escrow Account and the Offering shall terminate.
(c) Unless delivery of the Shares is made through
the facilities of The Depository Trust Company, certificates evidencing the
Shares shall be in definitive form and shall be registered in such names and in
such denominations as the Placement Agent shall request by written notice to
the Company and shall be available at the Closing for immediate delivery
thereafter to the Purchasers. For the purpose of expediting the checking and
packaging of certificates for the Shares, the Company agrees to make such
certificates available for inspection at least 24 hours prior to the Closing
Date.
3. Representations and Warranties and Covenants of the
Company. The Company represents, warrants and covenants to the Placement Agent
and each Selected Dealer, if any, as follows:
(a) Securities Law Compliance. (i) A registration
statement (File No. 333-67599) on Form S-1 under the Act, relating to the
Offering of the Shares, including a form of prospectus subject to completion,
has been prepared by the Company in accordance with the requirements of the Act
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder (the "Rules and Regulations") and has been filed with
the Commission under the Act. After the execution of this Agreement, the
Company shall file with the Commission any amendments to such registration
statement as required by the Commission or deemed necessary or appropriate by
the Company, including a form of prospectus, a copy of which amendments shall
have been furnished to and approved by the Placement Agent prior to the filing
thereof. As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it is declared
effective, including all financial statements and exhibits thereto and
including any information deemed to be part of the Registration Statement at
the Effective Date pursuant to Rule 430A under the Act; the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it is declared effective); and the term
"Prospectus" means the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b), such term means the prospectus
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<PAGE> 4
included in the Registration Statement; except that if such registration
statement or prospectus is amended or such prospectus is supplemented after the
effective date of such registration statement, the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(ii) Neither the Commission nor any state
securities commission has issued any order preventing or suspending the use of
any Preliminary Prospectus or has instituted or threatened to institute any
proceedings with respect to such an order. When any Preliminary Prospectus was
filed with the Commission it (i) complied in all material respects with the
requirements of, the Act and the Rules and Regulations and (ii) did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. At the time the Registration Statement, or any amendments thereto,
becomes effective and at all times subsequent thereto up to and including the
Closing Date (i) the Registration Statement and Prospectus will comply in all
material respects to the requirements of the Act and the Rules and Regulations;
(ii) the Registration Statement will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (iii) the
Prospectus will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(b) Organization. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own and
lease its properties, to carry on its business as currently conducted and as
proposed to be conducted (all as described in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus)), to execute and deliver this Agreement and to carry
out the transactions contemplated by this Agreement. The Company is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in the State of Texas and in each jurisdiction in which the nature of
the business conducted, or the properties owned, leased or operated by it,
makes such qualification or licensing necessary, except where the failure to be
so qualified would not have a material adverse effect upon the business,
prospects and financial condition of the Company and its subsidiaries taken as
a whole (a "Material Adverse Effect").
(c) Capitalization. The authorized, issued and
outstanding capital stock of the Company prior to the consummation of the
transactions contemplated hereby is as set forth in the Prospectus under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
this Agreement or as permitted under Section 3(f) of this Agreement). All
issued and outstanding shares of the Company are duly and validly issued, fully
paid and nonassessable and
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<PAGE> 5
have not been issued in violation of the preemptive rights of any stockholder
of the Company. The Shares, when issued, will be validly issued, fully paid and
non-assessable and will not have been issued in violation of the preemptive
rights of any stockholder of the Company. All prior sales of the Company's
securities by the Company were either registered under the Act and applicable
state securities laws or exempt from such registration, and no security holder
has any rescission rights against the Company with respect thereto. Except as
set forth in or contemplated by the Prospectus, there are not any outstanding
warrants, options, agreements, convertible securities, rights of first refusal,
rights of first offer, preemptive rights or other rights to subscribe for or to
purchase, or other commitments pursuant to which the Company is, or may be
reasonably expected to become, obligated to issue, any shares of its capital
stock or other securities of the Company. This Offering will not cause any
anti-dilution adjustments to any outstanding securities except as reflected in
the Registration Statement. Except as set forth in the Prospectus and as
otherwise required by law, there are no restrictions on the voting or transfer
of any shares of the Company's capital stock pursuant to the Company's
Certificate of Incorporation, By-laws or other governing documents or any
agreement or other instruments to which the Company is a party or by which the
Company is bound.
(d) Investments; Subsidiaries' Organization. Other
than as disclosed in the Registration Statement or on Schedule 2(d) hereto, the
Company has no subsidiaries, nor does the Company own, directly or indirectly,
capital stock or other equity ownership or proprietary interests in any other
corporation, association, trust, partnership, joint venture or other entity.
Each subsidiary listed on Schedule 2(d) hereto (a "Subsidiary") is duly
incorporated, validly existing and in good standing under the laws of the state
of its incorporation and has all requisite corporate power and authority to own
and lease its properties and to carry on its business as currently conducted
and as proposed to be conducted. Each Subsidiary is qualified to do business as
a foreign corporation and is in good standing in each jurisdiction in which the
nature of the business conducted, or the properties owned, leased or operated
by it, makes such qualification necessary, except where the failure to be so
qualified would not have a Material Adverse Effect.
(e) Financial Statements. The financial statements,
including the notes thereto, included in the Prospectus present fairly the
financial position of the entities purported to be represented thereby as of
the dates indicated and the results of operations for the periods specified.
Except as otherwise stated in the Prospectus, such financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis in accordance with the books and records of the
Company, and are correct and complete in all material respects. The "pro forma"
and "as adjusted" financial information included in the Prospectus, fairly
present the information purported to be shown therein at the dates thereof and
for the respective periods covered thereby and all adjustments have been
properly applied. No other financial statements are required by Form S-1, or
otherwise, to be included in the Registration Statement or the Prospectus other
than those included therein.
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<PAGE> 6
(f) Absence of Changes. Except as has been or will
be reflected in the Prospectus prior to the Closing, since the respective dates
as of which information is given in the Prospectus, (i) the Company has not
incurred any material liabilities or obligations, direct or contingent, nor has
the Company entered into any transaction that is material to the business of
the Company, (ii) there has not been (A) any change in the capital stock of, or
issuance of options, warrants or other rights to purchase capital stock of, the
Company (other than issuances of shares of Common Stock upon the exercise of
options or warrants outstanding on the date on which such information is given
in the Prospectus, or the issuance of option and other awards pursuant to the
Company's 1989 Stock Option Plan as in effect on December 31, 1997, 1998 Stock
Option Plan as initially adopted, 1993 Non-Employee Director Plan as amended
and in effect on December 31, 1997), (B) any incurrence of long-term debt in
excess of $750,000, or (C) any material adverse change in the condition
(financial or otherwise), net worth, results of operations, business, key
personnel or properties which would be material to the business, prospects or
financial condition of the Company, (iii) the Company has not become a party
to, and neither the business nor the property of the Company has become subject
of, any material litigation whether or not in the ordinary course of business
and (iv) there has been no dividend or distribution of any kind declared or
paid or made on the capital stock of the Company.
(g) Title. The Company has good title to all
tangible properties and assets owned by it, free and clear of all liens,
charges, encumbrances or restrictions except (i) as described in the Prospectus
or (ii) such as are not material to the Company and do not interfere with the
use of such assets in the Company's business. Except as has been or will be
reflected in the Prospectus prior to the Closing, all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee are in full force and effect, and the Company is not in default in
any material respect under the terms or provisions of any of such leases or
subleases, and no material claim has been asserted by anyone adverse to rights
of the Company as lessor, sublessor, lessee or sublessee under any such leases
or subleases mentioned above, or affecting or questioning the right of the
Company to continued possession of the leased or subleased premises or assets
under any such lease or sublease. The Company owns or leases all such tangible
properties as are necessary to its operations as now conducted and proposed to
be conducted, and, except to the extent described in the Prospectus, the
Company presently does not anticipate the need for any material capital
expenditures to conduct its operations as now conducted as described in the
Prospectus.
(h) Proprietary Rights. To the best of the Company's
knowledge and except as has been or will be reflected in the Prospectus prior
to the Closing, the Company owns or possesses, adequate licenses or other
enforceable rights to use all patents, patent applications, trademarks, service
marks, trade names, corporate names, copyrights, trade secrets, processes, mask
works, licenses, inventions, formulations, technology and know-how and other
intangible property used or proposed to be used in, and that are material to,
the conduct of its business as described in or contemplated by the Prospectus
(the "Proprietary Rights"). To the best of the Company's
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<PAGE> 7
knowledge and except as has been or will be reflected in the Prospectus prior
to the Closing Date, the Company and the entities from whom the Company has
acquired right has taken all necessary action to protect all of its Proprietary
Rights. Except as has been or will be set forth in the Prospectus, the Company
has not received any notice of, and there are not any facts known to the
Company that indicate the existence of (i) any infringement or misappropriation
by any third party of any of the Proprietary Rights or (ii) any claim by a
third party contesting the validity of any of the Proprietary Rights. The
Company has not received any notice of any infringement, misappropriation or
violation by the Company or any of its employees of any Proprietary Rights of
third parties, and, to the best of the Company's knowledge, neither the Company
nor any of its employees has infringed, misappropriated or otherwise violated
any Proprietary Rights of any third parties; and, to the best of the Company's
knowledge, no infringement, illicit copying, misappropriation or violation of
any intellectual property rights of any third party has occurred or will occur
with respect to any products currently being sold by the Company or with
respect to any products currently under development by the Company or with
respect to the conduct of the Company's business as currently contemplated.
Except as has been or will be described in the Prospectus, the Company is not
aware that any of its employees are obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of the employee's best efforts to promote the
interest of the Company or that would conflict with the Company's business as
currently conducted or proposed to be conducted. To the Company's knowledge,
neither the execution nor delivery of this Agreement, nor the carrying on of
the Company's business by the employees of the Company, nor the conduct of the
Company's business, as currently conducted or as proposed to be conducted, will
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated.
(i) Material Contracts. Each contract, agreement,
instrument, lease, license or other item required to be described in the
Registration Statement or Prospectus or filed as an exhibit to the Registration
Statement has been so described or filed, as the case may be. The description
of any such contracts is complete and accurate in all respects, does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading.
(j) Litigation. Except as described in the
Prospectus, there is no material action, suit, claim or proceeding at law or in
equity, or, to the Company's knowledge, investigation or customer complaint, by
or before any arbitrator, governmental instrumentality or other agency now
pending, or, to the knowledge of the Company, threatened against the Company
(or basis therefor known to the Company which the Company believes will result
in the foregoing), the adverse outcome of which might reasonably be expected to
have a Material Adverse Effect. The Company is not subject to any judgment,
order, writ, injunction or decree of any Federal, state,
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<PAGE> 8
municipal or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign which might reasonably be expected to
have a Material Adverse Effect.
(k) Non-Defaults, Non-Contravention. The Company is
not in violation of or default under, nor will the execution and delivery of
this Agreement, the Escrow Agreement or the Placement Warrants (as described
below) (the "Offering Documents") or the consummation of the transactions
contemplated herein or therein result in a violation of or constitute a default
in the performance or observance of any obligation of the Company under (i) its
Certificate of Incorporation, its By-laws, (ii) any indenture, mortgage,
purchase order or other agreement or instrument to which the Company is a party
or by which it or its property is bound or affected or (iii) any order, writ,
injunction or decree of any court of any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, except where such violation or default would not have a
Material Adverse Effect. There is no existing condition, event or act which
constitutes, nor which after notice, the lapse of time or both, could
constitute, a default under any of the foregoing that would have a Material
Adverse Effect.
(l) Taxes. The Company has filed all Federal and
state tax returns and all material local and foreign tax returns required to be
filed by it and all such returns are true and correct in all material respects.
The Company has paid all taxes pursuant to such returns or pursuant to any
assessments received by it or which it is obligated to withhold from amounts
owing to any employee, creditor or third party. The provisions and reserves on
the books of the Company in respect of federal, state, local and other taxes
for any taxable period as to which the Company's liability for taxes has not
been finally determined or remain open to examination by applicable taxing
authorities are adequate. The Company does not have knowledge of any tax
deficiency which has been or could be assessed against the Company which,
individually or in the aggregate, would have a Material Adverse Effect.
(m) Compliance With Laws, Licenses, Etc. The Company
has not received notice of any violation of, or non-compliance with, any
Federal, state, local or foreign, laws, ordinances, regulations and orders
applicable to its business, the violation of, or noncompliance with which,
would have a Material Adverse Effect. The Company has all governmental licenses
and permits and other governmental certificates, authorizations and permits and
approvals (collectively, "Licenses") required by every Federal, state and local
government or regulatory body for the operation of its business as currently
conducted and the use of its properties, except where the failure to be
licensed would not have a Material Adverse Effect. The Company's Licenses are
in full force and effect and no proceeding is pending or, to the best knowledge
of the Company, threatened to revoke or limit any such License, except where
the failure to hold such License would not have a Material Adverse Effect. No
violations by the Company with respect to any License are or have been
recorded, except for such violations that are immaterial and would not cause in
the future a Material Adverse Effect.
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<PAGE> 9
(n) Authorization of Documents and Common Stock.
Each of the Offering Documents and the Registration Statement, and the
execution, delivery and performance of the Offering Documents and the
Registration Statement, has been, or prior to the Closing will be, duly and
validly authorized by all necessary corporate action on the part of the
Company. Each of the Offering Documents, when executed and delivered,
constitute or will constitute on or prior to the Closing (assuming that such
agreements are countersigned, if necessary) the valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, subject to (i) the availability and enforceability of equitable remedies
(regardless of whether such enforceability is considered in a proceeding or
action in equity or at law), (ii) applicable bankruptcy and other laws relating
to or affecting the rights of creditors generally and (iii) the enforcement of
the rights to indemnification and contribution hereunder and under any other
Offering Documents may be limited by federal or state securities laws or public
policy. The Company has all requisite corporate power and authority to
authorize, issue and sell the Shares to be sold to the Purchasers. The Company
has obtained or will obtain prior to the Closing Date, all consents required by
the Company or from any third party to perform any of the Company's obligations
under this Agreement or any of the other Offering Documents.
(o) Title to Common Stock. When certificates
representing the Shares shall have been duly delivered to the Purchasers and
payment shall have been made for the Shares, the several Purchasers shall have
good and marketable title to the Shares free and clear of all liens,
encumbrances and claims and adverse claims whatsoever (other than those created
by, or arising through the acts of, the Purchasers themselves or arising from
applicable Federal and state securities laws), and the Company shall have paid
all taxes, if any, in respect of the original issuance thereof. When
certificates representing the Placement Warrants shall have been duly delivered
to the Placement Agent, the Placement Agent or its designees shall have good
and marketable title to the Placement Warrants, and upon exercise of such
Placement Warrants, will have good and marketable title to the Common Stock
issuable upon such exercise, in each case free and clear of all liens,
encumbrances and adverse claims, whatsoever (other than those created by, or
arising through the acts of, the Purchasers, the Placement Agent or their
designees themselves or arising from applicable Federal and state securities
laws), and the Company shall have paid all taxes, if any, in respect of the
original issuance thereof.
(p) Brokers. No person is entitled, directly or
indirectly, to compensation from the Company for services as a broker or finder
in connection with the transactions contemplated by this Agreement other than
the Placement Agent.
(q) Non-Affiliated Directors. The Company's Board of
Directors has not less than two (2) directors who are independent from (as
defined in Rule 4460 of the NASD Market Place Rules), and unaffiliated with,
management of the Company.
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<PAGE> 10
(r) Accuracy of Reports. All material reports
required to be filed by the Company within the two years prior to the date of
this Agreement under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), have been duly filed with the SEC, complied at the time of
filing in all material respects with the requirements of their respective forms
and, except to the extent updated or superseded by the Prospectus or any
subsequently filed report, were complete and correct in all material respects
as of the dates at which the information was furnished and contained (as of the
time of such filings) no untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading.
(s) Reservation of Shares; Transfer Taxes, Etc. The
Company shall at all times reserve and keep available, out of its authorized
and unissued shares of Common Stock, solely for the purpose of effecting the
exercise of Placement Warrants, such number of shares of its Common Stock free
of preemptive rights as shall be sufficient to effect the exercise of the
Placement Warrants. The Company shall use its best efforts from time to time,
in accordance with the laws of the State of Delaware, to increase the
authorized number of shares of Common Stock if at any time the number of shares
of authorized, unissued and unreserved Common Stock shall not be sufficient to
permit the exercise of the Placement Warrants.
(t) Registration Rights Except as described in the
Prospectus, or as set forth in this Agreement, no person or entity has the
right, by contract or otherwise, to require registration under the Act of
shares of capital stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby, except for such
rights as have been, or prior to Closing will be, legally and effectively
waived.
(u) Investment Company Act. Neither the Company nor
any of its subsidiaries is, and upon consummation of the transactions
contemplated hereby none of them will be, subject to registration as an
"investment company" as defined pursuant to the Investment Company Act of 1940,
as amended.
(v) NASDAQ. The Common Stock of the Company is
included for trading on the Nasdaq National Market; based upon communications
with The Nasdaq Stock Market, Inc., the Offering will not violate Rule 4460(i)
of the Nasdaq Marketplace Rules.
(w) Accounting. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") and to maintain accountability for assets; (iii)
the access to the assets of the Company and each of its subsidiaries is
permitted only in accordance with
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<PAGE> 11
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(x) No Labor Disputes. Other than as disclosed in
the Prospectus, no labor dispute with the employees of the Company is pending
or, to the knowledge of the Company, threatened that, individually or in the
aggregate, would have a Material Adverse Effect.
(y) Insurance. The Company is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the business in which the Company is
engaged. The Company has no reason to believe that it will not be able to renew
existing insurance coverage from similar insurers, except as disclosed in the
Prospectus.
(z) Business Relationships. Except as disclosed in
the Prospectus, there are no business relationships or related party
transactions of the nature described in Item 404 of Regulation S-K of the
Commission involving the Company or any other persons referred to in such Item
404, except for such transactions as are not required under Item 404 to be
disclosed in the Prospectus.
(aa) Unlawful Payments. Neither the Company nor, to
the knowledge of the Company, any director, officer or employee of the Company
has, directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
(bb) Price Manipulation. Neither the Company nor, to
the Company's knowledge, any officer, director, or affiliate (as defined in the
Rules and Regulations) of the Company has taken, directly or indirectly, any
action designed to cause or result in, or which constitutes or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(cc) No Business with Cuba. Neither the Company nor,
to the knowledge of the Company, any affiliate of the Company does business
with the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075 Florida Statutes.
4. Conditions to Placement Agent's Obligations. The
obligations of the Placement Agent hereunder are subject to the accuracy of the
representations and warranties of the
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<PAGE> 12
Company herein contained as of the date hereof and as of the Closing Date, to
the performance by the Company of its covenants and obligations hereunder and
to the following additional conditions:
(a) Effectiveness of Registration Statement. If the
Company has elected to rely on Rule 430A under the Act, the Registration
Statement shall have been declared effective, and the Prospectus (containing
the information omitted pursuant to Rule 430A) shall have been filed with the
Commission not later than the Commission's close of business on the second
business day following the date hereof or such later time and date to which the
Placement Agent shall have consented. If the Company has not elected to rely on
Rule 430A, the Registration Statement shall have been declared effective not
later than the Termination Date or such later time and date to which the
Placement Agent shall have consented. No stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Placement Agent, shall be
contemplated by the Commission.
(b) No Material Misstatements. The Placement Agent
shall not have advised the Company that the Registration Statement, or any
amendment thereto, contains an untrue statement of fact which, in the Placement
Agent's opinion, or in the opinion of counsel for the Placement Agent, is
material, or omits to state a fact which, in the Placement Agent's opinion, or
in the opinion of counsel for the Placement Agent, is material and is required
to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Placement Agent's opinion, or in the
opinion of counsel for the Placement Agent, is material, or omits to state a
fact which, in the Placement Agent's opinion, or in the opinion of counsel for
the Placement Agent, is material and is required to be stated therein or is
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(c) Compliance with Agreements. The Company shall
have complied with all agreements and satisfied all conditions on its part to
be performed or satisfied hereunder and under the other Offering Documents at
or prior to the Closing.
(d) Corporate Action. The Company shall have taken
all corporate action necessary to permit the valid execution, delivery and
performance of the Offering Documents by the Company, including, without
limitation, obtaining the approval of the Company's board of directors for the
execution and delivery of the Offering Documents and the performance by the
Company of its obligations hereunder and the offering contemplated hereby;
(e) Opinion of Counsel to the Company. The Placement
Agent shall receive the opinion of Andrews & Kurth, L.L.P., counsel to the
Company, dated as of the Closing Date, substantially to the effect that:
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(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware;
(ii) the Company has the requisite corporate power
and authority necessary to own or hold its properties and conduct its business
as described in the Prospectus;
(iii) the Company is duly qualified to do business
as a foreign corporation and is in good standing in the State of Texas and in
each other jurisdiction in which the nature of the business conducted by it, or
the properties owned, leased or operated by it, makes such qualification
necessary, except where the failure to be so qualified would not have a
Material Adverse Effect. Other than with respect to the Subsidiaries or as
described in the Prospectus, the Company does not own, directly or indirectly,
any capital stock or other equity ownership or proprietary interests in any
other corporation, association, trust, partnership, joint venture or other
entity;
(iv) the authorized capitalization of the Company as
of the date of the Prospectus is as set forth under "Capitalization" in the
Prospectus; (A) all the outstanding shares of Common Stock issued by the
Company pursuant to the Company's acquisition of Oncologix, Inc. and Triplex
Pharmaceutical Corporation by the merger of such corporations with subsidiaries
of the Company and issued by the Company subsequent to the date of such mergers
and (B) the 837,989 shares of Common Stock issued to Abbott Laboratories on
November 30, 1998, have been duly authorized, are validly issued, fully paid
and nonassessable, and have not been issued in violation of the preemptive or
similar rights arising by operation of law or under the charter or bylaws of
the Company or, to such counsel's knowledge after due inquiry, under any
agreement to which the Company is a party;
(v) the shares of Common Stock (including the
Shares) conform in all material respects to the descriptions thereof contained
in the Prospectus under the caption "Description of Capital Stock;" the
Placement Warrants conform in all material respects to the description thereof
contained in the Prospectus;
(vi) the Shares and the shares of Common Stock to be
issued upon exercise of the Placement Warrants (the "Warrant Shares"), when
issued and delivered for value received by the Company, not less than the par
value thereof, in accordance with the terms of this Agreement or the Placement
Warrants, as the case may be, will be validly issued, fully paid,
non-assessable, and the issuance of such shares of Common Stock is not subject
to any preemptive or similar rights arising by operation of law or under the
charter or bylaws of the Company or, to such counsel's knowledge after due
inquiry, under any agreement to which the Company is a party; the Company has
reserved a sufficient number of shares of Common Stock for issuance upon
exercise of the Placement Warrants;
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<PAGE> 14
(vii) to such counsel's knowledge after due inquiry,
neither the filing of the Registration Statement nor the offering or sale of
the Shares or the exercise of the Placement Warrants, as contemplated by this
Agreement gives rise to any rights of any person, corporation, partnership or
other entity to require registration under the Act of any shares of Common
Stock or other securities of the Company, other than such rights which have
been waived or satisfied in accordance with the requirements of the instruments
granting such rights and the rights contained in the Placement Warrants;
(viii) the execution, delivery and performance of
each of the Offering Documents to which the Company is a signatory, and the
issuance of the Shares, the Placement Warrants and the Warrant Shares, have
been duly authorized by all necessary corporate action on the part of the
Company or its shareholders;
(ix) the Placement Agency Agreement, the Placement
Warrants and the Escrow Agreement have been duly executed and delivered by the
Company; the Placement Warrants constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their terms under the law of the State of New York, expressed to govern the
same, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights and to general principles of equity (including,
without limitation, principles of reasonableness, materiality, good faith and
fair dealing, regardless of whether considered in a proceeding in equity or at
law);
(x) the certificates evidencing the Shares comply in
all material respects as to form under the Delaware General Corporation Law;
(xi) except as described in the Prospectus, to such
counsel's knowledge after due inquiry, (i) there are no pending or threatened
legal or governmental proceedings to which the Company is a party, which might
reasonably be expected to materially adversely affect the business, property,
financial condition, or operations of the Company or seek to enjoin or prevent
the issuance, sale and delivery of the Shares or question the validity of the
Offering Documents or actions to be taken thereunder, and (ii) there are no
governmental proceedings or regulations that are required to be described or
referred to in the Registration Statement which are not so described or
referred to;
(xii) the execution and delivery of this Agreement
and the other Offering Documents and the consummation of the transactions
contemplated hereby and thereby, will not result in a breach or violation of,
or constitute a default under, (i) the Certificate of Incorporation or By-laws
of the Company, (ii) any contract, indenture, mortgage, loan agreement, lease,
joint venture, or other agreement or instrument filed as an exhibit to the
Registration Statement (other than with respect to covenants or agreements of a
financial or numerical nature or requiring computation, as to which such
counsel need express no opinion) or (iii) any order, rule, regulation,
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writ, injunction, or decree known to such counsel of any government,
governmental instrumentality, or court, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or any of their
properties or business, other than, in the case of clauses (ii) and (iii), any
such default which would not have a Material Adverse Effect;
(xiii) the Registration Statement has become
effective under the Act, and to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued, and
no proceedings for that purpose have been instituted or are pending before, or
threatened by, the Commission;
(xiv) the Registration Statement, when it became
effective, and the Prospectus (except for the financial statements, related
notes and schedules thereto, and other financial and statistical data contained
therein, as to which such counsel need express no opinion) on the date of
filing or date thereof complied as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations;
(xv) such counsel does not know of any contracts or
agreements to which the Company is a party of a character required to be
summarized or described in the Prospectus or to be filed as exhibits to the
Registration Statement which are not so summarized, described, or filed;
(xvi) to the such counsel's knowledge, no
authorization, approval, consent, or license of any governmental or regulatory
authority or agency is necessary in connection with the authorization,
issuance, transfer, sale, or delivery of the Shares by the Company, the
execution, delivery, and performance of this Agreement by the Company or the
taking of any action contemplated herein, or the issuance of the Placement
Warrants or the Warrant Shares, other than registrations or qualifications of
the Shares under applicable state or foreign securities or Blue Sky laws and
registration under the Act or as may be required by the National Association of
Securities Dealers, Inc. (the "NASD");
(xvii) upon the issuance of the Shares, the
Placement Warrants and the Warrant Shares, each of the Purchasers or the
Placement Agent and its designees, as the case may be, shall acquire such
securities, free and clear of all pledges, liens, claims or encumbrances
imposed by the Company under its Certificate of Incorporation or Bylaws or, to
such counsel's knowledge, under any agreement to which the Company is a party;
and
(xvii) the Company is not, and upon the consummation
of the transactions contemplated by this Agreement will not be an "investment
company" as defined pursuant to the Investment Company Act of 1940, as amended.
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Such opinion shall include a statement to
substantially the following effect:
"In the course of the preparation of the Registration
Statement and Prospectus we have among other things: (i) made
inquiries concerning various legal matters and have reviewed certain
corporate records, documents and proceedings; (ii) we have
participated in conferences with officers and other representatives of
the Company, representatives of Arthur Andersen LLP, independent
public accountants for the Company, and the Placement Agent and their
counsel during which the contents of the Registration Statement and
the Prospectus and related matters were discussed. We have not,
however, independently verified the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the
Prospectus. On the basis of the foregoing and relying as to
materiality to a large extent upon facts provided to us by officers
and other representatives of the Company, we advise you that nothing
has come to our attention that would lead us to believe that the
Registration Statement and the Prospectus included therein at the time
the Registration Statement became effective (except for financial
statements and notes thereto and other financial and statistical data
included or incorporated by reference therein, as to which we express
no opinion) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or that the
Prospectus (except for financial statements and notes thereto and
other financial and statistical data included or incorporated by
reference therein, as to which we express no opinion) contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading."
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Placement Agent or counsel for the Placement Agent
shall reasonably request.
In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact.
(f) Opinion of Patent Counsel. The Placement Agent
shall receive (unless waived in writing by the Placement Agent) the opinion of
patent counsel to the Company (which such counsel shall be satisfactory to the
Placement Agent), dated the Closing Date in the form and substance satisfactory
to counsel for the Placement Agent.
(g) Comfort Letter. The Company shall cause Arthur
Andersen, LLP, the Company's independent public accountants, to address and
deliver to the Company and the Placement Agent a letter or letters (which
letters are frequently referred to as "Comfort Letters") dated as of the
Effective Date and the Closing Date.
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<PAGE> 17
(h) Officer's Certificate. The Placement Agent shall
receive an Officer's Certificate substantially in the form of Exhibit A hereto
and a Secretary's Certificate substantially in the form of Exhibit B hereto,
signed by the appropriate parties and dated as of the Closing Date.
(i) Escrow Agreement. The Placement Agent shall
receive a copy of a duly executed Escrow Agreement with State Street Bank &
Trust Company.
(j) Transmittal Letters. The Placement Agent shall
receive copies of all letters from the Company to the investors transmitting
the Common Stock and shall receive a letter from the Company confirming
transmittal of the securities to the investors.
(k) NASDAQ. The Shares and the Common Stock issuable
upon exercise of the Placement Warrants, shall have been duly authorized for
quotation on the Nasdaq National Market, subject to notice of issuance.
(l) Blue Sky. A summary blue sky survey, at the sole
cost of the Company (including, without limitation, the legal fees and
disbursements in connection therewith), shall be prepared by counsel to the
Company stating the extent to which and the conditions upon which offers and
sales of the Shares may be made in certain jurisdictions.
(m) Placement Fees and Expenses. (i) At the Closing,
pursuant to the terms of the Escrow Agreement, the Escrow Agent shall release
the funds held in the Escrow Account for collection by the Company and the
Placement Agent. The Company agrees that the Placement Agent shall receive a
commission (the "Cash Commission") equal to (A) eight percent (8%) of the
aggregate purchase price of all of the Shares sold in the Offering to
non-affiliates of the Company and (B) five percent (5%) of the aggregate
purchase price of all of the Shares sold in the Offering to affiliates of the
Company. The Company further agrees to reimburse the Placement Agent for all
out-of-pocket expenses incurred by the Placement Agent in connection with such
Offering as more fully set forth in section 5(l) below, in an amount not to
exceed $150,000 in the aggregate. In addition, at the Closing, the Company will
sell to the Placement Agent and/or its designees, for $.001 per warrant,
warrants in the form attached hereto as Exhibit C (the "Placement Warrants") to
acquire a number of newly issued shares of Common Stock equal, but not greater
than, ten percent (10%) of the number of shares of Common Stock issued and sold
in the Offering, exercisable for a period of five (5) years from the Effective
Date and commencing 12 months after the Effective Date at an exercise price
equal to one hundred fifty percent (150%) of the Offering Price. The Company
agrees with the Placement Agent and its successors and assigns that the
securities underlying the Placement Warrants will not be subject to redemption
by the Company nor will they be callable or mandatorily convertible by the
Company. The Placement Warrants cannot be transferred, sold, assigned or
hypothecated for 12 months except that they may be assigned in whole or in part
during such period to any NASD member participating in the Offering or any
officer
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<PAGE> 18
of the Placement Agent or any such NASD member. The Placement Warrants will
contain a cashless exercise feature and certain registration rights.
(ii) The Cash Commission and Placement
Warrants as set forth in this Agreement shall be paid to the Placement Agent
with respect to any investment by any investors introduced to the Company by
the Placement Agent ("Covered Investors") in the event that any such Covered
Investor purchases any securities from the Company during the 12 months
following the Closing in a transaction other than a public offering registered
under the Act.
(n) No Adverse Changes. There shall not have
occurred, at any time prior to the Closing (i) any domestic or international
event, act or occurrence which has materially disrupted, or in the Placement
Agent's determination will in the immediate future materially disrupt, the
securities markets of the United States; (ii) a general suspension of, or a
general limitation on prices for, trading in securities on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market; (iii) any
outbreak of major hostilities or other national or international calamity; (iv)
any banking moratorium declared by a federal, Texas or New York state
authority; (v) any moratorium declared in foreign exchange trading by major
international banks or other persons; (vi) any material interruption in the
mail service or other means of communication within the United States; (vii)
since the respective dates as of which information is given in the Registration
Statement or the Prospectus, any material adverse change in the business,
properties, assets, results of operations, financial condition or prospects of
the Company; or (viii) any change in the market for securities in general or in
political, financial, or economic conditions which, in the Placement Agent's
reasonable judgment, makes it inadvisable to proceed with the offering, sale,
and delivery of the Shares.
(o) Waiver of Registration Rights. All rights,
whether by contract or otherwise, that any person has, to require registration
under the Act of shares of capital stock or other securities of the Company
because of the filing or effectiveness of the Registration Statement or
otherwise in connection with the sale of the Shares contemplated hereby, shall
have been legally and effectively waived.
(p) Lock-Ups. The Placement Agent shall have
received from the officers and directors of the Company, and the Company shall
have used its reasonable best efforts to obtain from each stockholder with
beneficial ownership in excess of 5% of the outstanding shares of the Company's
Common Stock, an agreement that they will not, directly or indirectly, offer,
sell, contract to sell, make any short sale (including, but not limited to, a
"short against the box"), pledge, 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 that
the Registration Statement is filed with the Commission, without the prior
written consent of the Placement Agent.
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<PAGE> 19
(q) No Amendments. No amendment to the Registration
Statement or the Prospectus (other than the filing of the Prospectus pursuant
to Rule 424(b) of the Act or a Registration Statement, if any, pursuant to Rule
462(b) of the Act) shall have been filed from the date on which the
Registration Statement is declared effective without the prior consent of the
Placement Agent.
5. Covenants of the Company. The Company covenants and agrees
as follows:
(a) Registration Statement Filing. The Company will
use its best efforts to cause the Registration Statement and any amendments
thereto to become effective pursuant to the terms hereof. If required, the
Company will file the Prospectus and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rule 424(b)
under the Act. During any time when a prospectus relating to the Shares is
required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the Rules and Regulations to the
extent necessary to permit the continuance of sales of or dealings in the
Shares in accordance with the provisions hereof and of the Prospectus, as then
amended or supplemented, and (ii) will not file with the Commission any
prospectus, any amendment or supplement to any prospectus or any amendment to
the Registration Statement of which the Placement Agent shall not previously
have been advised and furnished with a copy a reasonable period of time prior
to the proposed filing and as to which the Placement Agent shall not have given
its consent.
(b) Notices of Certain Events. As soon as the
Company is advised or obtains knowledge thereof, the Company will advise the
Placement Agent: (i) when the Registration Statement, as amended, has become
effective; (ii) if the provisions of Rule 430A promulgated under the Act will
be relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement
becomes effective; (iii) of any request made by the Commission for amending the
Registration Statement, for supplementing any Preliminary Prospectus or the
Prospectus or for additional information; or (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and will use its best efforts to
prevent the issuance of any such order and, if issued, to obtain the lifting
thereof as soon as possible.
(c) Prospectus. The Company consents to the use of
the Prospectus (and any amendment or supplement thereto) by the Placement Agent
in connection with the solicitation of indications of interest in purchasing
the Shares and for such period of time thereafter as the Prospectus is required
by law to be delivered in connection therewith. If, at any time when a
prospectus relating to the Shares is required to be delivered under the Act,
any event occurs as a result of which the Prospectus, as then amended or
supplemented, would include any untrue
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<PAGE> 20
statement of a material fact or omit to state a material fact necessary to make
the statements therein not misleading, or if it becomes necessary at any time
to amend or supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company promptly will so notify the Placement Agent and,
subject to Section 5(a) hereof, will prepare and file with the Commission an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, each such amendment or supplement to be reasonably satisfactory to
counsel to the Placement Agent.
(d) Rule 158. As soon as practicable, but in any
event not later than 45 days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during which the
effective date of the Registration Statement occurs (90 days in the event that
the end of such fiscal quarter is the end of the Company's fiscal year), the
Company will make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the Placement
Agent, an earnings statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited unless
required by the Act or the Rules and Regulations, covering a period of at least
12 consecutive months after the effective date of the Registration Statement.
(e) Public Documents. For a period of three years
following the Closing of the Offering, the Company will furnish to the
Placement Agent: (i) as soon as practicable (but in the case of the annual
report of the Company to its stockholders, within 120 days after the end of
each fiscal year of the Company) one copy of: (A) its annual report to its
stockholders (which annual report shall contain financial statements audited in
accordance with generally accepted accounting principles in the United States
of America by a firm of certified public accountants of recognized standing),
(B) if not included in substance in its annual report to stockholders, its
annual report on Form 10-K, (C) each of its quarterly reports to its
stockholders, if any, and if not included in substance in its quarterly reports
to stockholders, its quarterly report on Form 10-Q, (D) each of its current
reports on Form 8-K; (E) as soon as they are available, copies of all other
information (financial or otherwise) mailed to the Company's stockholders; and
(ii) upon reasonable request, any other information prepared by the Company
that is generally available to the public.
(f) Transfer Agent. The Company will maintain a
Transfer Agent and, if necessary under the jurisdiction of incorporation of the
Company, a Registrar (which may be the same entity as the Transfer Agent) for
its Common Stock.
(g) Copies of Registration Statement, Prospectuses.
The Company will furnish, without charge, to the Placement Agent or on the
Placement Agent's order, at such place as the Placement Agent may designate,
copies of each Preliminary Prospectus, the Registration Statement and any
pre-effective or post-effective amendments thereto (two of which copies will be
signed and will include all financial statements and exhibits) and the
Prospectus, and all amendments
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and supplements thereto, in each case as soon as available and in such
quantities as the Placement Agent may reasonably request.
(h) Nasdaq Listing Application. The Company will
file a listing application for the Shares and the Common Stock issuable upon
exercise of the Placement Warrants with the Nasdaq National Market prior to the
Closing Date.
(i) No Manipulation. Neither the Company nor any of
its officers or directors, nor affiliates of any of them (within the meaning of
the Rules and Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to cause or
result in the manipulation of the price of any securities of the Company in
violation of the Exchange Act.
(j) Filings with the Commission. The Company will
timely file all such reports, forms or other documents as may be required from
time to time, under the Act, the Rules and Regulations, the Exchange Act, and
the rules and regulations thereunder, and all such reports, forms and documents
filed will comply as to form and substance with the applicable requirements
under the Act, the Rules and Regulations, the Exchange Act and the rules and
regulations thereunder.
(k) Use of Proceeds. The net proceeds of the
Offering will be used by the Company substantially as set forth in the
Prospectus. The Company shall not use any of the proceeds from this Offering to
repurchase, redeem or otherwise acquire shares of capital stock of the Company
held by, or to repay indebtedness of the Company to, any of the current
executive officers, directors or principal stockholders of the Company.
(l) Expenses of Offering. The Company shall be
responsible for and shall bear all expenses incurred by the Company in
connection with the proposed Offering, including but not limited to, the costs
of preparing and duplicating the Registration Statement and all exhibits
thereto; the costs of preparing, printing and filing with the Securities and
Exchange Commission (the "SEC") the Registration Statement and amendments,
post-effective amendments and supplements thereto; preparing, duplicating and
delivering exhibits thereto and copies of the preliminary, final and
supplemental prospectus; preparing, duplicating and delivering (including by
facsimile) all selling documents, including but not limited to the Registration
Statement and Prospectus, this Agreement, blue sky memorandum and stock
certificates; blue sky fees, filing fees and legal fees and disbursements of
counsel in connection with blue sky filings; and fees and disbursements of the
transfer agent (collectively, the "Company Expenses"). The Company has
previously paid to the Placement Agent an expense allowance equal to fifteen
thousand dollars ($15,000) to cover the initial costs of the Placement Agent's
mailing, telephone, telecopy and travel to due diligence meetings. The Company
shall be responsible for and bear all actual, accountable out-of-pocket
expenses incurred by the Placement Agent, including but not limited to legal
fees and disbursements, filing fees with the NASD, telephone, travel, mailing
and other similar expenses, up to and not
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exceeding $150,000 in aggregate (the "Placement Agent Expenses"). If the
proposed financing is not completed because the Company prevents it or because
of a breach by the Company of any covenants, representations or warranties
contained herein, or because indications of interest for the Offering Amount
have not been received by the Termination Date, then the Company shall
reimburse the Placement Agent for such Placement Agent Expenses (in addition to
the Company Expenses for which the Company shall in all events remain liable).
(m) Notification. The Company shall notify the
Placement Agent immediately, and in writing, (A) when any event shall have
occurred during the period commencing on the date hereof and ending on the
Closing Date as a result of which the Offering Documents would include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances under which they were made and (B) of the
receipt of any notification with respect to the modification, rescission,
withdrawal or suspension of the qualification or registration of the Common
Stock, or of any exemption from such registration or qualification, in any
jurisdiction. The Company will use its commercially reasonable best efforts to
prevent the issuance of any such modification, rescission, withdrawal or
suspension and, if any such modification, rescission, withdrawal or suspension
is issued and the Placement Agent so requests, to obtain the lifting thereof as
promptly as possible.
(n) Blue Sky. The Company will use its commercially
reasonable best efforts to qualify the Common Stock for offering and sale under
exemptions from qualification or registration requirements under the securities
or "blue sky" laws of such jurisdictions as the Placement Agent may reasonably
request; provided however, that the Company will not be obligated to qualify as
a dealer in securities in any jurisdiction in which it is not so qualified. The
Company will not consummate any sale of Common Stock in any jurisdiction in
which it is not so qualified or in any manner in which such sale may not be
lawfully made.
(o) No Offerings. Pending completion or termination
of the Offering in accordance with the terms of this Agreement, the Company
agrees that it will not enter into an agreement (whether binding or not) with
any other person or entity relating to a possible public or private offering or
placement of its securities (other than in connection with a corporate
partnership, strategic alliance or government funding).
(p) No Statements. Unless required by law, the
Company shall not use the name of the Placement Agent or any officer, director,
employee or shareholder thereof in any written press release without the
consent of the Placement Agent, which consent shall not be unreasonably
withheld.
6. Indemnification.
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(a) The Company agrees to indemnify and hold
harmless the Placement Agent and each Selected Agent, if any, and their
respective partners, affiliates, shareholders, directors, officers, agents,
advisors, representatives, employees, counsel and controlling persons within
the meaning of the Act (a "Paramount Indemnified Party") against any and all
losses, liabilities, claims, damages and expenses whatsoever (and all actions
in respect thereof), and to reimburse each such Paramount Indemnified Party for
legal fees and related expenses as incurred (including, but not limited to the
costs of giving testimony or furnishing documents in response to a subpoena or
otherwise, the costs of investigating, preparing, pursuing or defending any
such action or claim whether or not pending or threatened and whether or not
the Placement Agent or any Paramount Indemnified Party is a party thereto), in
so far as such losses, liabilities, claims, damages or expenses arise out of,
relate to, are incurred in connection with or are in any way a result of (i)
the engagement of the Placement Agent pursuant to this Agreement and in
connection with the transactions contemplated by this Agreement and the other
Offering Documents (the "Engagement"), including any modifications or future
additions to such Engagement and related activities prior to the date hereof,
(ii) any act by the Placement Agent or any Paramount Indemnified Party taken in
connection with the Engagement, (iii) a breach of any representation, warranty,
covenant, or agreement of the Company contained in this Agreement, (iv) the
employment by the Company of any device, scheme or artifice to defraud, or the
engaging by the Company in any act, practice or course of business which
operates or would operate as a fraud or deceit, or any conspiracy with respect
thereto, in connection with the sale of the Common Stock, or (v) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or Prospectus or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that the Company will not be liable in any such case if and
to the extent that any such loss, claim, damage, liability or expense (A) has
been judicially determined to have resulted from the willful misconduct, gross
negligence or unlawful act by the Placement Agent or such Paramount Indemnified
Party or (B) arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by the Placement Agent or any such Paramount Indemnified
Party in writing specifically for use in therein;
(b) The Company agrees to indemnify and hold
harmless a Paramount Indemnified Party to the same extent as the foregoing
indemnity, and subject to the limitations set forth therein, against any and
all loss, liability, claim, damage and expense whatsoever directly arising out
of the exercise by any person of any right under the Act or Exchange Act or the
securities or Blue Sky laws of any state on account of violations by the
Company of the representations, warranties or agreements set forth in Section 3
hereof.
(c) The Placement Agent agrees to indemnify and hold
harmless the Company, the Company's directors, officers, employees, counsel,
advisors, representatives and agents and controlling persons within the meaning
of the Act (a "Company Indemnified Party") and
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<PAGE> 24
each and all of them, to the same extent as set forth in Section 6(a)(v) of the
foregoing indemnity from the Company to the Placement Agent, but only with
reference to information, relating to the Placement Agent, furnished in writing
to the Company by the Placement Agent specifically for inclusion in the
Registration Statement and only to the extent that any losses, claims, damages,
and liabilities in respect of which indemnification claimed are finally
judicially determined to have resulted primarily and directly from the bad
faith or gross negligence of the Placement Agent.
(c) Promptly after receipt by a person entitled to
indemnification pursuant to subsection (a), (b) or (c) (an "indemnified party")
of this Section 6 of notice of the commencement of any action, the indemnified
party will, if a claim in respect thereof is to be made against a person
granting indemnification (an "indemnifying party") under this Section 6, notify
in writing the indemnifying party of the commencement thereof; but the omission
so to notify the indemnifying party will not relieve it from any liability
which it may have to the indemnified party otherwise than under this Section 6.
In case any such action is brought against an indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, subject to the provisions herein stated, with counsel
reasonably satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to the indemnified
party for any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof other than reasonable costs of
investigation incurred at the request of the indemnifying party. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that the fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the indemnified party or parties
and the indemnifying party and, in the opinion of counsel of the indemnified
party, a conflict of interest exists between such parties in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of the indemnified party or parties, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the indemnified party or parties. No settlement, compromise,
consent to entry of judgment or other termination of any action (collectively,
"Terminations") in respect of which a Paramount Indemnified Party may seek
indemnification hereunder (whether or not any Paramount Indemnified Party is a
party thereto) shall be made without the prior written consent of the Paramount
Indemnified Party, which such consent may be withheld at the sole discretion of
such Paramount Indemnified Party, provided, however, that the foregoing
requirement of prior written consent for Terminations shall not apply to the
Placement
-24-
<PAGE> 25
Agent who may agree to such Terminations without the prior written consent of
any Paramount Indemnified Party.
(e) Notwithstanding any of the provisions of this
Agreement, the aggregate indemnification or contribution of the Placement Agent
for or on account of any losses, claims, damages, liabilities or actions under
this Section 6, Section 7 or any other applicable section of this Agreement,
shall not exceed the Cash Commissions actually paid to the Placement Agent. The
respective indemnity and contribution agreements by the Company and the
Placement Agent contained in subsections (a), (b), (c) and (d) of this Section
6 and Section 7, and the covenants, representations and warranties of the
Company and the Placement Agent set forth in Sections 1, 2, 3, 4 and 5 shall
remain operative and in full force and effect regardless of (i) any
investigation made by the Placement Agent, on the Placement Agent's behalf or
by or on behalf of any person who controls the Placement Agent, the Company or
any controlling person of the Company or any director or officer of the
Company, (ii) acceptance of any of the Common Stock and payment therefor or
(iii) any termination of this Agreement, and shall survive the delivery of the
Common Stock, and any successor of the Placement Agent or of the Company or of
any person who controls the Placement Agent or the Company, as the case may be,
shall be entitled to the benefit of such respective indemnity and contribution
agreements. The respective indemnity and contribution agreements by the Company
and the Placement Agent contained in subsections (a), (b) and (c) of this
Section 6 and Section 7 shall be in addition to any liability which the Company
and the Placement Agent may otherwise have.
7. Contribution.
(a) To provide for just and equitable contribution,
if (i) an indemnified party makes a claim for indemnification pursuant to
Section 6 but it is found in a final judicial determination, by a court of
competent jurisdiction, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Agreement
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Act, the Exchange Act, or
otherwise, then the Company (including for this purpose any contribution made
by or on behalf of any officer, director, employee or agent for the Company, or
any controlling person of the Company), on the one hand, and the Placement
Agent and any Selected Agents (including for this purpose any contribution by
or on behalf of an indemnified party), on the other hand, shall contribute to
the losses, liabilities, claims, damages, and expenses whatsoever to which any
of them may be subject, in such proportions as are appropriate to reflect the
relative benefits received by the Company, on the one hand, and the Placement
Agent and the Selected Agents, on the other hand; provided, however, that if
applicable law does not permit such allocation, then other relevant equitable
considerations such as the relative fault of the Company and the Placement
Agent and the Selected Agents in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses shall also be
considered. In no case shall the Placement Agent or a Selected Agent be
responsible for a portion of the contribution obligation in excess of the
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<PAGE> 26
compensation received by it pursuant to Section 4 or 5 hereof or the Selected
Agent Agreement, as the case may be. No person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 7,
each person, if any, who controls the Placement Agent or a Selected Dealer
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act and each officer, director, stockholder, employee and agent of the
Placement Agent or a Selected Agent, shall have the same rights to contribution
as the Placement Agent or the Selected Agent, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and each officer, director, employee and agent of the
Company, shall have the same rights to contribution as the Company, subject in
each case to the provisions of this Section 7. Anything in this Section 7 to
the contrary notwithstanding, no party shall be liable for contribution with
respect to the settlement of any claim or action effected without its written
consent. This Section 7 is intended to supersede any right to contribution
under the Act, the Exchange Act, or otherwise.
8. Miscellaneous.
(a) Survival. Any termination of the Offering
without any Closing shall be without obligation on the part of any party except
that the provisions regarding fees and expenses contained in Sections 4(m) and
5(l), the indemnification provided in Section 6 hereof and the contribution
provided in Section 7 hereof shall survive any termination and shall survive
any Closing.
(b) Representations, Warranties and Covenants to
Survive Delivery. Except as provided in Section 8(a), the respective
representations, warranties, indemnities, agreements, covenants and other
statements of the Company and the Placement Agent as of the date hereof shall
survive execution of this Agreement and delivery of the Shares and the
termination of this Agreement.
(c) No Other Beneficiaries. This Agreement is
intended for the sole and exclusive benefit of the parties hereto and their
respective successors and controlling persons, and no other person, firm or
corporation shall have any third-party beneficiary or other rights hereunder.
(d) Governing Law. This Agreement shall be governed
by and construed in accordance with the law of the State of New York without
regard to conflict of law provisions.
(e) Counterparts. This Agreement may be signed in
counterparts with the same effect as if both parties had signed one and the
same instrument.
(f) Notices. Any communications specifically
required hereunder to be in writing, if sent to the Placement Agent, will be
mailed, delivered and confirmed to it at Paramount Capital, Inc., 787 Seventh
Avenue, 48th Floor, New York, New York, 10019, Att: Michael S. Weiss
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<PAGE> 27
and if sent to the Company, will be mailed, delivered or telegraphed and
confirmed to it at Aronex Pharmaceuticals, Inc., 8707 Technology Forest Place,
The Woodlands, Texas 77381-1191, Attn: Chief Executive Officer.
(g) Termination. Subject to the general survival
provisions contained in Sections 8(a) and 8(b) and, in the event of a
termination by the Company, provided that the Company pays all accountable
expenses of the Placement Agent as provided in Section 5(l), this Agreement may
be terminated by either party prior to the end of the Offering Period upon
written notice to the other party.
(h) Entire Agreement. This Agreement constitutes the
entire agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter hereof. Neither this Agreement
nor any term hereof may be changed, waived or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver or termination is sought.
(i) Nothing contained herein or otherwise shall
create a partnership or joint venture between the Placement Agent and the
Company.
(j) The headings and captions of the various
subdivisions of this Agreement are for convenience or reference only and shall
in no way modify or affect the meaning or construction of any of the terms or
provisions hereof.
-27-
<PAGE> 28
If you find the foregoing is in accordance with our
understanding, kindly sign and return to us a counterpart hereof, whereupon
this instrument along with all counterparts will become a binding agreement
between us.
Very truly yours,
ARONEX PHARMACEUTICALS, INC.
By:
-----------------------------------
Name: Geoffrey Cox
Title: Chief Executive Officer
Agreed to by:
PARAMOUNT CAPITAL, INC.
By:
--------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: Chairman
-28-
<PAGE> 29
SCHEDULE 2(d)
SUBSIDIARIES
Triplex Pharmaceuticals, Inc.
Oncologix, Inc.
Aronex Europe Limited
-29-
<PAGE> 30
EXHIBIT A
ARONEX PHARMACEUTICALS, INC.
OFFICER'S CERTIFICATE
I, Geoffrey F. Cox, certify that I am the Chairman of the
Board of Directors and Chief Executive Officer of Aronex Pharmaceuticals, Inc.,
a Delaware corporation (the "Company"), and that, as such, I am authorized to
execute this certificate on behalf of the Company. All capitalized terms used
herein but not otherwise defined herein shall the meanings ascribed to such
terms in the Placement Agency Agreement dated as of November 19, 1998 between
the Company and Paramount Capital, Inc. (the "Placement Agency Agreement").
Reference is made herein to the closing held on February __, 1999 (the "Closing
Date").
I do hereby certify that I have carefully examined all of the
Offering Documents and do hereby further certify that:
1. All of the representations and warranties of the Company
contained in the Placement Agency Agreement are true and correct in all
material respects on the Closing Date with the same force and effect as if made
on and as of the Closing Date, and the Company has performed in all material
respects all covenants and agreements and has satisfied all conditions in the
Placement Agency Agreement to be performed or satisfied on its part before the
Closing Date.
2. Since the date of the most recent financial statements and
the information included in the Registration Statement, there has been no
material adverse change in the condition (financial or other), earnings,
business, properties or prospects of the Company taken as a whole, whether or
not arising from transactions in the ordinary course of business, nor has there
occurred any material event required to be set forth in the Registration
Statement, including, without limitation, in accordance with Section 3(g) of
the Placement Agency Agreement.
This Certificate is made for the benefit of, and may be
relied upon by, Andrews & Kurth L.L.P., as counsel to the Company, the
Placement Agent, Kramer, Levin, Naftalis & Frankel, as counsel to the Placement
Agent, and each of the Purchasers.
IN WITNESS WHEREOF, I have executed this certificate on this
_____ day of February, 1999.
-------------------------------------
Name: Geoffrey F. Cox
Title: Chief Executive Officer
A-i
<PAGE> 31
EXHIBIT B
ARONEX PHARMACEUTICALS, INC.
SECRETARY'S CERTIFICATE
I, Terance A. Murnane, certify that I am the duly elected,
qualified and acting Secretary of Aronex Pharmaceuticals, Inc., Inc., a
Delaware corporation (the "Company"), and as such, I am duly authorized to
execute this Certificate on behalf of the Company, and that I am familiar with
the facts certified below. All capitalized terms used herein but not otherwise
defined herein shall the meanings ascribed to such terms in the Placement
Agency Agreement dated as of November 19, 1998 between the Company and
Paramount Capital, Inc. (the "Placement Agency Agreement"). Reference is made
herein to the closing held on February , 1999 (the "Closing Date"). In
connection with the offering and sale of 6,000,000 shares of Common Stock (the
"Offering Quantity") of the Company, par value $.001 per share (the "Common
Stock"), pursuant to the registration statement on Form S-1 File No. 333-67599
(the "Registration Statement"), for which Paramount Capital, Inc. (the
"Placement Agent") has acted as Placement Agent, I do hereby further certify as
follows:
1. Attached hereto as Annex A is a true, correct and complete
copy of the Company's Certificate of Incorporation, as amended as in full force
and effect on the Closing Date. No amendment to such certificate has been
approved by the Board of Directors or stockholders of the Company or filed with
the Delaware Secretary of State since______ __, 1998. There are no proceedings
or actions have been taken by the Board of Directors or the Stockholders of the
Company in contemplation of any amendment to the Company's Certificate of
Incorporation or in contemplation of the merger, liquidation, consolidation, or
sale of all or substantially all of the assets or business of the Company or
which would otherwise threaten or impair the Company's corporate existence.
2. Attached hereto as Annex B is a true, correct and complete
copy of the Bylaws of the Company, as in full force and effect on the Closing
Date and at all times from November 19, 1998 through the Closing Date. No
action has been taken by the Board of Directors or the stockholders of the
Company in contemplation of any amendment to such Bylaws of the Company.
3. Attached hereto as Annex C is a true, correct and complete
copy of resolutions duly adopted by the Board of Directors by unanimous written
consent dated October 23, 1998 and February , 1999, and at the meeting of the
Board of Directors on December ___, 1998, and by the Pricing Committee of the
Board of Directors on February __, 1999. Such resolutions are the only
resolutions in effect adopted by the Board of Directors of the Company or any
committee thereof with respect to the Offering of the Shares and the
transactions contemplated by the Placement
B-i
<PAGE> 32
Agency Agreement, and which have not been revoked, modified and amended or
rescinded and are in full force and effect on the Closing Date.
4. As of the Closing Date, each of the Offering Documents is
in the form authorized by the Board of Directors of the Company pursuant to the
resolutions set forth in Annex C.
5. Attached hereto as Annex D are true, correct and complete
copies of specimens of the certificates representing the Common Stock
heretofore approved and adopted by the Board of Directors of the Company. Each
of the certificates representing Common Stock delivered on the Closing Date to
each of the Purchasers has been executed by the genuine or facsimile signature
of officers of the Company who have been duly elected or appointed, qualified
and acting as such officers on the date such certificates were executed and
delivered, all in accordance with the Certificate and By-laws of the Company
and the requirements of applicable law.
6. Attached hereto as Annex E is a true, correct and complete
copy of the form of Placement Warrants heretofore approved and adopted by the
Board of Directors of the Company. Each of the Placement Warrants delivered on
the Closing Date pursuant to the Placement Agency Agreement has been executed
by the genuine or facsimile signature of officers of the Company who have been
duly elected or appointed, qualified and acting as such officers on the date
such certificates were executed and delivered, all in accordance with the
Certificate and By-laws of the Company and the requirements of applicable law.
6. The minute books and records of the Company, relating to
all proceedings of the stockholders, the Board of Directors of the Company and
the Compensation Committee, the Audit Committee and the Nominating Committee of
such Board have been made available to Kramer, Levin, Naftalis & Frankel,
counsel to the Placement Agent, and, in such form, are the original minute
books and records of the Company. There have been no material changes,
alterations or additions in such minutes or records since their examination by
Kramer, Levin, Naftalis & Frankel on behalf of the Placement Agent.
7. Attached as Annex F hereto are true and correct copies of
all correspondence and other written communications and all memoranda
evidencing any oral communications between any directors, officers, employees,
accountants, counsel or other representatives of the Company on the one hand
and any members of the staff of the Commission on the other hand in connection
with the Registration Statement. Neither the Company nor any of its directors,
officers, employees, accountants, counsel or other representatives has received
any written or oral comments from any member of the staff of the Commission
with respect to the Registration Statement other than those heretofore
communicated to counsel for the Placement Agent.
B-ii
<PAGE> 33
8. Each person who, as an officer or director of the Company,
signed any of the Offering Documents or any other document in connection with
the offering and sale of the Common Stock, the Placement Warrants and the
closing relating thereto was duly elected or appointed, qualified and acting as
such officer or director at the respective times of the signing and delivery
thereof and was duly authorized to sign such document on behalf of the Company,
and the signature of each such person appearing on each such document is the
genuine signature of such officer, director or person duly appointed for the
purpose of executing such documents under valid powers of attorney, and each
individual who signed such signature pages, personally or by an
attorney-in-fact, was then duly elected, qualified and acting as an officer or
director of the Company as stated therein.
9. The following persons are, and have been at all times
since a date prior to November 19, 1998, duly qualified and acting officers of
the Company, duly elected or appointed to the offices set forth opposite their
respective names, and the signature opposite the name of each such officer is
his or her, or a facsimile of his or her, authentic signature:
<TABLE>
<CAPTION>
Name Office Signature
---- ------ ---------
<S> <C> <C>
Geoffrey F. Cox Chairman, Chief ------------------
Executive Officer
Terance A. Murnane Secretary ------------------
</TABLE>
This certificate is made for the benefit of, and may be
relied upon by, Andrews & Kurth L.L.P., counsel to the Company, the Placement
Agent, Kramer, Levin, Naftalis & Frankel, as counsel to the Placement Agent,
and each of the Purchasers.
IN WITNESS WHEREOF, I have hereunto set forth my hand this ___
day of February, 1999.
[SEAL]
----------------------------------
Name: Terance A. Murnane
Title: Secretary
B-iii
<PAGE> 34
I, Geoffrey F. Cox, Chief Executive Officer of the Company,
do hereby certify that Terance A. Murnane whose genuine signature appears
above, is, and has been at all times since November 19, 1998, the duly elected
or appointed, qualified and acting Secretary of the Company.
IN WITNESS WHEREOF, I have hereunto set forth my hand this
___ day of February , 1999.
-------------------------------------
Name: Geoffrey F. Cox
Title: Chief Executive Officer
B-iv
<PAGE> 35
EXHIBIT C
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT.
ARONEX PHARMACEUTICALS, INC.
WARRANT FOR THE PURCHASE OF SHARES OF
COMMON STOCK
No. CW- [ ] [ ] Shares
FOR VALUE RECEIVED, ARONEX PHARMACEUTICALS, INC., a Delaware
corporation (the "COMPANY"), hereby certifies that [NAME], or its permitted
registered assigns is entitled to purchase from the Company, at any time or
from time to time commencing on [INSERT DATE THAT IS ONE YEAR FROM THE
EFFECTIVE DATE], 2000 and prior to 5:00 P.M., New York City time, on [INSERT
DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE], 2004 [INSERT NUMBER OF
SHARES] (_______) fully paid and non-assessable shares of common stock, $.001
par value per share, of the Company for an aggregate purchase price of
$_______. (Hereinafter, (i) said common stock, $.001 par value per share, of
the Company, is referred to as the "COMMON STOCK", (ii) the shares of the
Common Stock purchasable hereunder or under any other Warrant (as hereinafter
defined) are referred to as the "WARRANT SHARES", (iii) the aggregate purchase
price payable for the Warrant Shares purchasable hereunder is referred to as
the "AGGREGATE WARRANT PRICE", (iv) the price payable (initially $______ per
share, subject to adjustment) for each of the Warrant Shares hereunder is
referred to as the "PER SHARE WARRANT PRICE", (v) this Warrant, all similar
Warrants issued on the date hereof and all warrants hereafter issued in
exchange or substitution for this Warrant or such similar Warrants are referred
to as the "WARRANTS", (vi) the holder of this Warrant is referred to as the
"HOLDER" and the holder of this Warrant and all other Warrants and Warrant
Shares are referred to as the "HOLDERS" and Holders of more than fifty percent
(50%) of the outstanding Warrants and Warrant Shares are referred to as the
"MAJORITY OF THE HOLDERS") and (vii) the then Current Market Price per share of
the Common Stock (the "CURRENT MARKET PRICE") shall be deemed to be the last
sale price of the Common Stock on
C-i
<PAGE> 36
the trading day prior to such date or, in case no such reported sales take
place on such day, the average of the last reported bid and asked prices of the
Common Stock on such day, in either case on the principal national securities
exchange on which the Common Stock is admitted to trading or listed, or if not
listed or admitted to trading on any such exchange, the representative closing
sale price of the Common Stock as reported by the National Association of
Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other
similar organization if NASDAQ is no longer reporting such information, or, if
the Common Stock is not reported on NASDAQ, the high per share sale price for
the Common Stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or if not so available, the fair
market value of the Common Stock as determined in good faith by the Board of
Directors. The Aggregate Warrant Price is not subject to adjustment. The Per
Share Warrant Price is subject to adjustment as hereinafter provided; in the
event of any such adjustment, the number of Warrant Shares deliverable upon
exercise of this Warrant shall be adjusted by dividing the Aggregate Warrant
Price by the Per Share Warrant Price in effect immediately after such
adjustment.
This Warrant, together with Warrants of like tenor,
constituting in the aggregate Warrants to purchase [INSERT NUMBER OF SHARES]
Warrant Shares, was originally issued pursuant to an agency agreement between
the Company and Paramount Capital, Inc., as placement agent (the "PLACEMENT
AGENT") in connection with the offering (the "OFFERING") of 6,000,000 shares
(the "SHARES").
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole at any time, or in
part from time to time, commencing on [INSERT DATE THAT IS 12 MONTHS FROM THE
EFFECTIVE DATE], 2000 and prior to 5:00 P.M., New York City time, on [INSERT
DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE], 2004 by the Holder:
(i) by the surrender of this Warrant (with the
subscription form at the end hereof duly executed) at the address set forth in
Section 10(a) hereof, together with proper payment of the Aggregate Warrant
Price, or the proportionate part thereof if this Warrant is exercised in part,
with payment for the Warrant Shares made by certified or official bank check
payable to the order of the Company; or
(ii) on any date on which the Current Market Price
exceeds the Per Share Warrant Price, by the surrender of this Warrant (with the
cashless exercise form at the end hereof duly executed) (a "CASHLESS EXERCISE")
at the address set forth in Section 10(a) hereof. Such presentation and
surrender shall be deemed a release of the Company's obligation to issue
additional Warrant Shares pursuant to this Warrant and waiver of the Company's
right to require Holder to pay the Aggregate Warrant Price, or the
proportionate part thereof if this Warrant is exercised in part. In the event
of a Cashless Exercise, the Holder shall exchange its Warrant for that number
of
C-ii
<PAGE> 37
Warrant Shares subject to such Cashless Exercise multiplied by a fraction, the
numerator of which shall be the excess of the then Current Market Price over
the then Per Share Warrant Price, and the denominator of which shall be the
then Current Market Price. For purposes of any computation under this Section
1(a), the then Current Market Price shall be based on the trading day prior to
the Cashless Exercise. Notwithstanding the foregoing, the Company shall have no
obligation to issue Warrant Shares for a consideration less than the aggregate
par value of the Warrant Shares then issued.
(b) If this Warrant is exercised in part, this Warrant must
be exercised for a number of whole shares of the Common Stock and the Holder is
entitled to receive a new Warrant covering the Warrant Shares that have not
been exercised and setting forth the proportionate part of the Aggregate
Warrant Price applicable to such Warrant Shares. Upon surrender of this
Warrant, the Company will (i) issue a certificate or certificates in the name
of the Holder for the largest number of whole shares of the Common Stock to
which the Holder shall be entitled and, if this Warrant is exercised in whole,
in lieu of any fractional share of the Common Stock to which the Holder shall
be entitled, pay to the Holder cash in an amount equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part, pursuant to
the provisions of this Warrant.
2. RESERVATION OF WARRANT SHARES; LISTING.
The Company agrees that, prior to the expiration of this
Warrant, the Company shall at all times have authorized and in reserve, and
shall keep available, solely for issuance and delivery upon the exercise of
this Warrant, the shares of the Common Stock and other securities and
properties as from time to time shall be receivable upon the exercise of this
Warrant, free and clear of all restrictions on sale or transfer, other than
under Federal or state securities laws, and free and clear of all preemptive
rights and rights of first refusal and use its reasonable best efforts to keep
the Warrant Shares authorized for listing on the Nasdaq National Market or, if
the Common Stock is no longer traded there, the Nasdaq SmallCap Market, any
national securities exchange, or other trading market on which the Common Stock
trades, upon notice of issuance.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of
this Warrant, the Company shall (i) subdivide its outstanding shares of Common
Stock into a greater number of shares (whether by stock dividend or stock
split) or (ii) combine its outstanding shares of Common Stock into a smaller
number of shares, the Per Share Warrant Price shall be adjusted to be equal to
a fraction, the numerator of which shall be the Aggregate Warrant Price and the
denominator of which shall be the number of shares of Common Stock or other
capital stock of the Company that the
C-iii
<PAGE> 38
Holder would have owned immediately following such action had such Warrant been
exercised immediately prior thereto. An adjustment made pursuant to this
Subsection 3(a) shall become effective immediately after the record date in the
case of a dividend or distribution, and shall become effective immediately
after the effective date in the case of a subdivision or combination.
(b) In case of any capital reorganization or
reclassification, or any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another entity
of the property of the Company as an entirety or substantially as a entirety,
or in the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a third
corporation into the Company), the Holder of this Warrant shall have the right
thereafter to receive on the exercise of this Warrant the kind and amount of
securities, cash or other property which the Holder would have owned or have
been entitled to receive immediately after such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
had this Warrant been exercised immediately prior to the effective date of such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance and in any such case, if necessary, appropriate adjustment
shall be made in the application of the provisions set forth in this Section 3
with respect to the rights and interests thereafter of the Holder of this
Warrant to the end that the provisions set forth in this Section 3 shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant. The above provisions of this
Section 3(b) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, statutory exchanges, sales or
conveyances. The Company shall require the issuer of any shares of stock or
other securities or property thereafter deliverable on the exercise of this
Warrant to be responsible for all of the agreements and obligations of the
Company hereunder. Notice of any such reorganization, reclassification,
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so proposed to be made, shall be mailed to the Holders of the
Warrants not less than twenty (20) days prior to such event. A sale of all or
substantially all of the assets of the Company for a consideration consisting
primarily of securities shall be deemed a consolidation or merger for the
foregoing purposes.
(c) Whenever the Per Share Warrant Price is adjusted as
provided in this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall promptly
prepare a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause copies of such
certificate to be mailed to the Holders of the Warrants. The Company may, but
shall not be obligated to unless requested by a Majority of the Holders,
obtain, at its expense, a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular auditors of the Company) setting forth the Per Share Warrant
Price and the number of Warrant Shares in effect after such adjustment or the
effect of such modification, a brief statement of the facts
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<PAGE> 39
requiring such adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holders of the
Warrants.
4. FULLY PAID STOCK; TAXES. The shares of the Common Stock
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall at the time of such delivery, be duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
not subject to preemptive rights or rights of first refusal, and the Company
will take all such actions as may be necessary to assure that the par value, if
any, per share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company shall pay, when due and payable, any
and all Federal and state stamp, original issue or similar taxes which may be
payable in respect of the issue of any Warrant Share or any certificate thereof
to the extent required because of the issuance by the Company of such security.
The Company will not, however, be required to pay any such taxes imposed in
connection with any transfer of this Warrant or any Warrant Shares or any
federal or state income taxes payable in respect of the purchase, ownership,
sale, transfer, exercise or other disposition of this Warrant or any Warrant
Shares.
5. REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED. (a)
As used in this Section 5 of this Warrant, the following terms shall have the
following meanings:
(i) "Closing Date" shall mean the date on which this
Warrant was issued.
(ii) "Effective Date" shall mean the date on which
the registration statement filed in connection with the Offering was declared
effective by the SEC.
(iii) "Holder" shall mean the Person in whose name
the Warrant is registered and any Person holding Registrable Securities to whom
the rights under this Section 5 have been transferred in accordance with
Section 5(k) hereof.
(iv) "Person" shall mean any person, individual,
corporation, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign, federal,
state, local or otherwise).
(v) The terms "register,""registered" and
"registration" refer to the registration effected by preparing and filing a
registration statement in compliance with the Act, and the declaration or
ordering of the effectiveness of such registration statement.
(vi) "Registrable Securities" shall mean the shares
of Common Stock issuable upon exercise of the Warrants; provided, however, that
securities shall only be treated as Registrable Securities if and only for so
long as they (A) have not been disposed of pursuant to a registration statement
declared effective by the SEC, (B) have not been sold in a transaction exempt
from the registration and prospectus delivery requirements of the Securities
Act so that all transfer
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<PAGE> 40
restrictions and restrictive legends with respect thereto are removed upon the
consummation of such sale, (C) may not be sold by the Holder or a permitted
transferee under Rule 144(k) under the Securities Act (or other exemption from
registration acceptable to the Company) and (D) are held by a Holder (whether
the original Holder or a Holder that is a permitted transferee pursuant to
Section 5(k)).
(vii) "Registration Expenses" shall mean all
expenses incurred by the Company in complying with Sections 5(b) and 5(c)
hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and expenses of counsel for
the Company, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding selling
commissions or fees of legal counsel for any Holder).
(viii) "Registration Period" shall have the meaning
ascribed to such term in Section 5(d).
(ix) "Rule 144" shall mean Rule 144 promulgated by
the SEC under the Securities Act.
(x) "Securities Act" shall mean the Securities Act
of 1933, as amended.
(xi) "SEC" shall mean the United States Securities
and Exchange Commission.
(xii) "Selling Expenses" shall mean all underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities and all fees and expenses of legal counsel for any Holder.
(xiii) "Shelf Registration Statement" shall have the
meaning ascribed to such term in Section 5(b).
(b) Demand Registration Rights. (i) At any time after the
date that is twelve (12) months from the Effective Date, and continuing for a
period of five (5) years from the Effective Date, a Majority of the Holders may
on one (1) occasion demand that the Company (A) file with the SEC a shelf
registration statement under the Securities Act (a "Shelf Registration
Statement") with respect to the Registrable Securities and use its commercially
reasonable best efforts to have such Shelf Registration Statement declared
effective by the SEC and (B) use its commercially reasonable best efforts to
effect the registration, qualifications or compliances (including, without
limitation, the execution of any required undertaking to file post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws and appropriate compliance with applicable securities laws,
requirements or regulations) as may be so reasonably requested and
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<PAGE> 41
as would permit or facilitate the sale and distribution of all Registrable
Securities. Notwithstanding the foregoing, the Company will not be obligated to
enter into any underwriting agreement for the sale of any of the Registrable
Securities.
(ii) Notwithstanding any other provision of this Warrant, the
Company shall not be required to take any of the actions with respect to a
Shelf Registration Statement to the extent that the Company is in possession of
material non-public information that it has a bona fide business purpose for
preserving as confidential and that is not then otherwise required to be
disclosed and it delivers written notice to each Holder that it intends to
defer the actions so required, and that such Holder may not make offers or
sales under a Shelf Registration Statement, for a period not to exceed sixty
(60) days from the date of such notice; provided, however, that the Company may
deliver only two such notices in the aggregate during any twelve-month period.
(c) Piggy-Back Registration Rights. (i) The Company agrees
that if, at any time, and from time to time, commencing on the date that is
nine (9) months from the Effective Date and ending on the date that is seven
(7) years from the Effective Date, the Board of Directors of the Company shall
authorize the filing of a registration statement under the Securities Act
(other than a registration statement on Form S-8, Form S-4 or any other form or
successor form that does not include substantially the same information as
would be required in a form for the general registration of securities) in
connection with the proposed offer of any of its securities by it or any of its
stockholders, the Company shall, (A) promptly notify the Holder that such
registration statement will be filed and that the Registrable Securities will
be included in such registration statement at the Holder's request, (B) cause
such registration statement to cover all such Registrable Securities for which
the Holder requests inclusion, (C) use its reasonable best efforts to cause
such registration statement to become effective as soon as practicable and (D)
take all other action necessary under any Federal or state law or regulation of
any governmental authority to permit all such Registrable Securities to be sold
or otherwise disposed of, and will maintain such compliance with each such
Federal and state law and regulation of any governmental authority for the
period necessary for the Holder to effect the proposed sale or other
disposition, but in no event greater than nine (9) months.
(ii) Notwithstanding any other provision in this
Warrant, other than with respect to a registration statement filed pursuant to
Section 5(b), the Company may at any time abandon or delay any registration
commenced by the Company. In the event of such an abandonment by the Company,
the Company shall not be required to continue registration of the Registrable
Securities requested by the Holder for inclusion and the Holder shall retain
the right to request inclusion of the Registrable Securities in accordance with
Section 5(c)(i).
(iii) Notwithstanding any other provision in this
Warrant, the rights of the Holder hereunder shall be subordinate to the rights
of a holder with registration rights under the Registration Rights Agreement
dated September 11, 1995 by Argus Pharmaceuticals, Inc. for the benefit of each
such Holder (as defined therein).
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(d) Obligations. Whenever required under this Warrant to
include Registrable Securities in a Company registration statement, the Company
shall, as expeditiously as reasonably possible:
(i) use its reasonable best efforts to keep such
registration, and any qualification, exemption or compliance under state
securities laws which the Company determines to obtain, continuously effective
until the Holders have completed the distribution described in the registration
statement relating thereto or nine (9) months, whichever is shorter. The period
of time during which the Company is required hereunder to keep the Registration
Statement effective is referred to herein as "the Registration Period."
Notwithstanding the foregoing, at the Company's election, the Company may cease
to keep such registration, qualification, exemption or compliance effective
with respect to any Registrable Securities, and the registration rights of the
Holder shall expire, at such time as the Holder may sell under Rule 144(k)
under the Securities Act (or other exemption from registration acceptable to
the Company) all Registrable Securities then held by such Holder; and
(ii) advise the Holders:
(A) when such registration statement or any
amendment thereto has been filed with the SEC and when such registration
statement or any post-effective amendment thereto has become effective;
(B) of any request by the SEC for
amendments or supplements to such registration statement or the prospectus
included therein or for additional information;
(C) of the issuance by the SEC of any stop
order suspending the effectiveness of such registration statement or the
initiation of any proceedings for such purpose;
(D) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities included therein for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and
(E) of the happening of any event that
requires the making of any changes in such registration statement or the
prospectus so that, as of such date, the statements therein are not misleading
and do not omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the prospectus, in the
light of the circumstances under which they were made) not misleading;
(iii) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of any Registration
Statement at the earliest possible time;
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(iv) furnish to each Holder, without charge, at
least one copy of such registration statement and any post-effective amendment
thereto, including financial statements and schedules, and, if the Holder so
requests in writing, all exhibits (including those incorporated by reference)
in the form filed with the SEC;
(v) during the Registration Period, deliver to each
Holder, without charge, as many copies of the prospectus included in such
registration statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents to the use, consistent with
the provisions hereof, of the prospectus or any amendment or supplement thereto
by each of the selling Holders of Registrable Securities in connection with the
offering and sale of the Registrable Securities covered by the prospectus or
any amendment or supplement thereto. In addition, upon the reasonable request
of the Holder and subject in all cases to confidentiality protections
reasonably acceptable to the Company, the Company will meet with a Holder of
more than 10% of the Warrants or Warrant Shares, as the case may be, or a
representative thereof at the Company's headquarters to discuss all information
relevant for disclosure in such registration statement covering the Registrable
Securities, and will otherwise cooperate with any Holder conducting an
investigation for the purpose of reducing or eliminating such Holder's exposure
to liability under the Securities Act, including the reasonable production of
information at the Company's headquarters;
(vi) during the Registration Period, deliver to each
Holder, without charge, (A) as soon as practicable (but in the case of the
annual report of the Company to its stockholders, within 120 days after the end
of each fiscal year of the Company) one copy of: (1) its annual report to its
stockholders, if any (which annual report shall contain financial statements
audited in accordance with generally accepted accounting principles in the
United States of America by a firm of certified public accountants of
recognized standing); (2) if not included in substance in its annual report to
stockholders, its annual report on Form 10-K (or similar form); (3) each of its
quarterly reports to its stockholders, and, if not included in substance in its
quarterly reports to stockholders, its quarterly report on Form 10-Q (or
similar form), and (4) a copy of the full Registration Statement (the
foregoing, in each case, excluding exhibits); and (B) upon reasonable request,
all exhibits excluded by the parenthetical to the immediately preceding clause
(4), and all other information prepared by the Company that is generally
available to the public;
(vii) prior to any public offering of Registrable
Securities pursuant to any Registration Statement, register or qualify or
obtain an exemption for offer and sale under the securities or blue sky laws of
such jurisdictions as a Majority of the Holders reasonably requests in writing,
provided that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process in any
such jurisdiction, and do any and all other acts or things reasonably necessary
or advisable to enable the offer and sale in such jurisdictions of the
Registrable Securities covered by such registration statement;
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(viii) cooperate with the Holders to facilitate the
timely preparation and delivery of certificates representing Registrable
Securities to be sold pursuant to any Registration Statement free of any
restrictive legends to the extent not required at such time and in such
denominations and registered in such names as Holders may request at least
three (3) business days prior to sales of Registrable Securities pursuant to
such registration statement;
(vix) upon the occurrence of any event contemplated
by Section 5(d)(ii)(E) above, the Company shall promptly prepare a
post-effective amendment to such registration statement or a supplement to the
related prospectus, or file any other required document so that, as thereafter
delivered to purchasers of the Registrable Securities included therein, the
prospectus will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; and
(x) use its reasonable best efforts to comply with
all applicable rules and regulations of the SEC, and will make generally
available to the Holders not later than 45 days (or 90 days if the fiscal
quarter is the fourth fiscal quarter) after the end of its fiscal quarter in
which the first anniversary date of the effective date of such registration
statement occurs, an earnings statement satisfying the provisions of Section
11(a) of the Securities Act.
(e) Furnish Information. It shall be a condition precedent to
the obligation of the Company to take any action pursuant to this Warrant with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding the Holder, the
Registrable Securities held by the Holder, and the intended method of
disposition of such securities as shall be reasonably required by the Company
to effect the registration of such Holder's Registrable Securities.
(f) Expenses of Company Registration. The Company shall bear
and pay all Registration Expenses incurred in connection with any registration,
filing or qualification of Registrable Securities with respect to the
registrations pursuant to Sections 5(b) and/or 5(c) for each Holder relating or
apportionable thereto, but excluding Selling Expenses. Notwithstanding the
foregoing, each Holder shall pay all registration expenses that such Holder is
required to pay under applicable law.
(g) Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's capital stock,
the Company shall not be required under Section 5(c) to include any Holder's
Registrable Securities in such underwriting unless such Holder accepts the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by
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<PAGE> 45
stockholders to be included in such offering exceeds the amount of securities
sold other than by the Company that the underwriters determine in their sole
discretion is compatible with the success of the offering, then the Company
shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
stockholders according to the total amount of securities entitled to be
included therein owned by each selling stockholder, or in such other
proportions as have been granted prior to the date of this Warrant or mutually
agreed to by such selling stockholders). For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder who is a
holder of Registrable Securities and is a partnership or corporation, the
partners, retired partners and stockholders of such holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
stockholder", and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder", as defined in this sentence; provided, the rights to
apportionment of the Holder and other holders of Registrable Securities
underlying the warrants (including this Warrant) granted pursuant to the
Placement Agency Agreement dated as of November 19, 1999 between the Company
and Paramount Capital, Inc. shall be superior to any rights to apportionment
that are granted by the Company after the date hereof and applicable to such
registration.
(h) Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Warrant.
(i) Indemnification. In the event that any Registrable
Securities are included in a registration statement under this Warrant:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, or the Exchange Act,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (A) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (B) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (C) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, or
any rule or regulation promulgated under the Securities Act, or the Exchange
Act, and the Company will pay to each such
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Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section 5(i) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a violation which occurs
in reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder, underwriter or
controlling person.
(ii) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement, each person, if
any, who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, or the Exchange
Act, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this Section 5(i), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 5(i)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; provided, that, in no
event shall any indemnity under this Section 5(i) exceed the gross proceeds
from the offering received by such Holder.
(iii) Promptly after receipt by an indemnified party
under this Section 5 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 5,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly notified, to assume the defense thereof with counsel selected
by the indemnifying party and approved by the indemnified party (whose approval
shall not be unreasonably withheld); provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure
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to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 5, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 5.
(iv) To the extent permitted by law, if the
indemnification provided for in this Section 5 is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any
loss, liability, claim, damage, or expense referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party hereunder,
shall contribute to the amount paid or payable by such indemnified party as a
result of such loss, liability, claim, dam age, or expense in such proportion
as is appropriate to reflect the relative fault of the indemnifying party on
the one hand and of the indemnified party on the other in connection with the
statements or omissions that resulted in such loss, liability, claim, damage,
or expense as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
(v) Notwithstanding the foregoing, to the extent
that the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(vi) The obligations of the Company and Holders
under this Section 5 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Warrant, and
otherwise.
(j) Reports Under Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities
of the Company to the public without registration or pursuant to a registration
on Form S-3, the Company agrees to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all
reports and other documents required of the Company under the Securities Act
and the Exchange Act; and
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(iii) furnish to any Holder, so long as the Holder
owns any Registrable Securities, forthwith upon request (A) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (B) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
(k) Permitted Transferees. The rights to cause the Company to
register Registrable Securities granted to the Holders by the Company under
this Warrant may be assigned in full by a Holder in connection with a transfer
by such Holder of its Registrable Securities if: (i) such Holder gives prior
written notice to the Company; (ii) such transferee agrees to comply with the
terms and provisions of this Warrant; (iii) such transfer is otherwise in
compliance with this Agreement and (iv) such transfer is otherwise effected in
accordance with applicable securities laws. Except as specifically permitted by
this Section 5(k), the rights of a Holder with respect to Registrable
Securities as set out herein shall not be transferable to any other Person, and
any attempted transfer shall cause all rights of such Holder therein to be
forfeited.
(l) Termination of Registration Rights. In addition, the
right of any Holder to request inclusion in any registration pursuant to
Sections 5(b) and 5(c) shall terminate if all shares of Registrable Securities
held by such Holder may immediately be sold under Rule 144.
7. INVESTMENT INTENT; LIMITED TRANSFERABILITY.
(a) The Holder represents, by accepting this Warrant, that it
understands that this Warrant and any securities obtainable upon exercise of
this Warrant have not been registered for sale under Federal or state
securities laws and are being offered and sold to the Holder pursuant to one or
more exemptions from the registration requirements of such securities laws. In
the absence of an effective registration of such securities or an exemption
therefrom, any certificates for such securities shall bear the legend set forth
on the first page hereof. The Holder understands that it must bear the economic
risk of its investment in this Warrant and any securities obtainable upon
exercise of this Warrant for an indefinite period of time, as this Warrant and
such securities have not been registered under Federal or state securities laws
and therefore cannot be sold unless subsequently registered under such laws,
unless an exemption from such registration is available.
(b) The Holder, by its acceptance of this Warrant, represents
to the Company that it is acquiring this Warrant and will acquire any
securities obtainable upon exercise of this Warrant for its own account for
investment and not with a view to, or for sale in connection with, any
distribution thereof in violation of the Securities Act and that it is an
"accredited investor" within the meaning of Regulation D under the Securities
Act. The Holder agrees that this Warrant and any such securities will not be
sold or otherwise transferred unless (i) a registration statement with respect
to such transfer is effective under the Securities Act and any applicable state
securities laws or (ii) such sale or transfer is made pursuant to one or more
exemptions from the Securities Act.
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(c) This Warrant may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, directly or indirectly, for twelve (12)
months from the Effective Date except (i) to any firm or corporation that
succeeds to all or substantially all of the business of Paramount Capital,
Inc., (ii) to any of the officers of Paramount Capital, Inc., or of any such
successor firm, (iii) to any NASD member participating in the Offering or any
officer of such NASD member or (iv) in the case of an individual, pursuant to
such individual's last will and testament or the laws of descent and
distribution, and is so transferable only upon the books of the Company, which
the Company shall cause to be maintained for such purpose. The Company may
treat the registered Holder of this Warrant as it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
Holder of a Warrant or its duly authorized attorney, upon written request
during ordinary business hours, to inspect and copy or make extracts from its
books showing the registered Holders of Warrants. All Warrants issued upon the
transfer or assignment of this Warrant will be dated the same date as this
Warrant, and all rights of the holder thereof shall be identical to those of
the Holder.
8. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
9. WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not
confer upon the Holder any right to vote on or consent to or receive notice as
a stockholder of the Company, as such, in respect of any matters whatsoever,
nor any other rights or liabilities as a stockholder, prior to the exercise
hereof; this Warrant does, however, require certain notices to Holders as set
forth herein.
10. COMMUNICATION. No notice or other communication under
this Warrant shall be effective unless, but any notice or other communication
shall be effective and shall be deemed to have been given if, the same is in
writing and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 8707 Technology Forest Place, The
Woodlands, Texas 77381-1191, Attn: CEO or such other address as the
Company has designated in writing to the Holder, or
(b) the Holder at c/o Paramount Capital, Inc., 787 Seventh
Avenue, New York, NY 10019 or other such address as the Holder has
designated in writing to the Company.
11. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience and shall not affect the construction hereof.
C-xv
<PAGE> 50
12. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the law of the State of New York.
13. AMENDMENT, WAIVER, ETC. Except as expressly provided
herein, neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or
termination is sought; provided, however, that any provisions hereof may be
amended, waived, discharged or terminated upon the written consent of the
Company and the Majority of the Holders.
C-xvi
<PAGE> 51
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its Chief Executive Officer and has caused its corporate seal to be
hereunto affixed and attested by its Secretary this __th day of February, 1999.
ARONEX PHARMACEUTICALS, INC.
By:
---------------------------------
Name: Geoffrey Cox
Title: Chief Executive Officer and
Chairman of the Board of Directors
ATTEST:
- -----------------------------
Name: Terance A. Murnane
Title: Secretary
[Corporate Seal]
C-xvii
<PAGE> 52
SUBSCRIPTION (CASH)
The undersigned, ___________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and
purchase ____________________ shares of the Common Stock, par value $.001 per
share, of Aronex Pharmaceuticals, Inc. covered by said Warrant, and makes
payment therefor in full at the price per share provided by said Warrant.
Dated: Signature:
----------------- --------------------
Address:
----------------------
CASHLESS EXERCISE
The undersigned ___________________, pursuant to the
provisions of the foregoing Warrant, hereby elects to exchange its Warrant for
___________________ shares of Common Stock, par value $.001 per share, of
Aronex Pharmaceuticals, Inc. pursuant to the Cashless Exercise provisions of
the Warrant.
Dated: Signature:
----------------- --------------------
Address:
----------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby sells, assigns
and transfers unto ____________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
_____________________, attorney, to transfer said Warrant on the books of
Aronex Pharmaceuticals, Inc.
Dated: Signature:
------------------ --------------------
Address:
----------------------
C-xviii
<PAGE> 53
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby assigns and
transfers unto ____________________ the right to purchase _______ shares of
Common Stock, par value $.001 per share, of Aronex Pharmaceuticals, Inc.
covered by the foregoing Warrant, and a proportionate part of said Warrant and
the rights evidenced thereby, and does irrevocably constitute and appoint
____________________, attorney, to transfer such part of said Warrant on the
books of Aronex Pharmaceuticals, Inc.
Dated: Signature:
-------------------- --------------------
Address:
----------------------
C-xix
<PAGE> 1
EXHIBIT 11.1
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
Statement Regarding Computation of Per Share Earnings
The following reflects the information used in calculating the number of shares
in the computation of net loss per share for each of the periods set forth in
the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998: 15,459,166 11 170,050,826
15,460,684 71 1,097,708,564
15,465,729 1 15,465,729
15,467,281 97 1,500,326,257
15,497,443 92 1,425,764,756
15,503,745 1 15,503,745
15,503,745 40 620,149,800
15,508,745 9 139,578,705
15,509,301 5 77,546,505
16,347,290 23 375,987,670
16,349,706 6 98,098,236
16,352,277 6 98,113,662
16,352,763 2 32,705,526
16,379,309 1 16,379,309
365 5,683,379,290 /365 15,570,902 (18,231,000) (1.17)
</TABLE>
Page 1 of 4
<PAGE> 2
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997: 14,597,247 8 116,777,976
14,606,972 12 175,283,664
14,612,023 4 58,448,092
14,612,499 21 306,862,479
14,615,983 6 87,695,898
14,616,981 1 14,616,981
14,624,239 5 73,121,195
14,625,111 2 29,250,222
14,627,695 7 102,393,865
14,628,567 6 87,771,402
14,640,311 6 87,841,866
14,643,658 6 87,861,948
14,644,672 1 14,644,672
14,644,816 7 102,513,712
14,644,982 2 29,289,964
14,645,277 4 58,581,108
14,665,277 22 322,636,094
14,665,665 9 131,990,985
14,674,453 19 278,814,607
14,678,042 6 88,068,252
14,680,055 7 102,760,385
14,680,344 19 278,926,536
14,687,394 31 455,309,214
14,710,122 9 132,391,098
14,712,069 5 73,560,345
14,712,575 12 176,550,900
14,712,699 6 88,276,194
14,714,018 2 29,428,036
14,719,923 9 132,479,307
15,406,372 15 231,095,580
15,408,872 3 46,226,616
15,421,809 9 138,796,281
15,423,809 2 30,847,618
15,427,540 24 370,260,960
15,444,824 57 880,354,968
15,459,166 1 15,459,166
365 5,437,188,186 /365 14,896,406 (16,991,000) (1.14)
</TABLE>
Page 2 of 4
<PAGE> 3
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996: 10,380,056 1 10,380,056
10,390,003 10 103,900,030
10,409,608 4 41,638,432
10,418,676 2 20,837,352
10,478,786 1 10,478,786
10,046,458 3 30,139,374
10,598,792 1 10,598,792
10,678,561 2 21,357,122
10,680,653 1 10,680,653
10,680,903 3 32,042,709
10,710,132 4 42,840,528
10,718,504 6 64,311,024
10,727,170 4 42,908,680
10,728,565 1 10,728,565
10,729,263 1 10,729,263
10,729,394 7 75,105,758
10,731,487 19 203,898,253
10,742,559 7 75,197,913
10,771,115 2 21,542,230
10,775,477 2 21,550,954
10,776,991 4 43,107,964
10,784,842 1 10,784,842
10,812,921 1 10,812,921
10,832,546 2 21,665,092
10,847,725 3 32,543,175
10,848,023 5 54,240,115
10,849,767 7 75,948,369
10,851,626 3 32,554,878
10,858,605 1 10,858,605
10,862,095 2 21,724,190
10,962,004 1 10,962,004
10,962,593 4 43,850,372
10,965,241 2 21,930,482
10,965,939 1 10,965,939
10,967,993 6 65,807,958
10,927,354 5 54,636,770
10,997,354 2 21,994,708
10,978,310 7 76,848,170
10,983,980 4 43,935,920
10,989,215 1 10,989,215
13,992,587 1 13,992,587
13,996,077 1 13,996,077
13,996,949 6 83,981,694
14,446,949 1 14,446,949
14,453,492 5 72,267,460
14,456,109 5 72,280,545
14,465,806 1 14,465,806
14,472,786 2 28,945,572
14,473,658 1 14,473,658
14,478,658 3 43,435,974
14,481,500 1 14,481,500
14,483,680 3 43,451,040
14,484,059 1 14,484,059
14,485,899 2 28,971,798
14,488,079 3 43,464,237
14,526,802 26 377,696,852
14,531,016 1 14,531,016
14,543,516 20 290,870,320
14,543,736 1 14,543,736
14,544,318 18 261,797,724
14,545,238 2 29,090,476
14,545,321 7 101,817,247
14,555,018 14 203,770,252
14,556,217 5 72,781,085
14,557,089 8 116,456,712
14,563,193 17 247,574,281
14,568,375 3 43,705,125
14,569,375 7 101,985,625
14,570,954 3 43,712,862
14,579,548 4 58,318,192
14,582,198 1 14,582,198
14,583,853 3 43,751,559
14,584,853 3 43,754,559
14,586,353 14 204,208,942
14,595,950 10 145,959,500
14,596,513 11 160,561,643
14,597,247 8 116,777,976
365 4,762,415,001 /365 13,047,712 (8,030,000) (0.62)
</TABLE>
Page 3 of 4
<PAGE> 4
<TABLE>
<CAPTION>
AVERAGE LOSS
DAYS SHARES SHARES PER
SHARES OUTSTANDING X DAYS OUTSTANDING LOSS SHARE
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
5,202,476 2 10,404,952
5,214,976 2 10,429,952
5,221,604 82 428,171,528
5,232,463 57 298,250,391
5,233,599 41 214,577,559
5,233,978 18 94,211,604
5,235,493 51 267,010,143
9,128,929 20 182,578,580
9,136,184 34 310,630,256
9,200,154 3 27,600,462
9,201,669 2 18,403,338
9,202,805 12 110,433,660
9,216,760 1 9,216,760
9,217,843 6 55,307,058
9,260,401 3 27,781,203
9,274,343 5 46,371,715
9,316,912 2 18,633,824
9,857,533 5 49,287,665
9,887,531 5 49,437,655
9,899,311 2 19,798,622
9,900,249 2 19,800,498
9,902,749 4 39,610,996
9,969,021 2 19,938,042
9,981,786 3 29,945,358
10,380,056 1 10,380,056
365 2,368,211,877 /365 6,488,252 (17,429,000) (2.69)
</TABLE>
Page 4 of 4
<PAGE> 1
EXHIBIT 23.1
ARONEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 22, 1999 included in this Form 10-K, into Aronex
Pharmaceuticals, Inc. previously filed Registration Statements on Form S-8
dated August 18, 1992, June 7, 1994 and December 31, 1997.
ARTHUR ANDERSEN LLP
March 26, 1999
Houston, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ARONEX PHARMACEUTICALS, INC.AND
SUBSIDIARIES SET FORTH IN THE COMPANY'S FORM 10-K THE TWELVE MONTHS ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,788,000
<SECURITIES> 10,602,000
<RECEIVABLES> 132,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,487,000
<PP&E> 5,102,000
<DEPRECIATION> 2,839,000
<TOTAL-ASSETS> 23,045,000
<CURRENT-LIABILITIES> 8,423,000
<BONDS> 0
0
0
<COMMON> 16,000
<OTHER-SE> 13,594,000
<TOTAL-LIABILITY-AND-EQUITY> 23,045,000
<SALES> 0
<TOTAL-REVENUES> 8,002,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,000
<INCOME-PRETAX> (18,231,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,231,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,231,000)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
