<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-12574
TEXAS BIOTECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3532643
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Fannin, 20th Floor, Houston, Texas 77030
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(Address of principal executive office) (Zip code)
(713) 796-8822
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
----- ----------------------------
common stock, $0.005 par value 40,860,126
<PAGE> 2
TEXAS BIOTECHNOLOGY CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION -------
<S> <C>
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 and the six months ended June 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 14
ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 15
ITEM 2: Changes in Securities 15
ITEM 3: Defaults Upon Senior Securities 15
ITEM 4: Submission of Matters to a Vote of Security Holders 16
ITEM 5: Other Information 16
ITEM 6: Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 19
</TABLE>
<PAGE> 3
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
JUNE 30, DECEMBER 31,
2000 1999
----------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 24,041,853 $ 2,804,270
Short-term investments 45,497,859 11,366,066
Other current receivables 11,600,448 1,067,738
Receivable from related party under
collaborative arrangement 1,086,681 --
Prepaids 1,238,915 1,453,090
------------ ------------
Total current assets 83,465,756 16,691,164
Long-term investments 8,000,000 1,000,000
Equipment and leasehold improvements, at
cost less accumulated depreciation and
amortization 2,567,725 2,998,431
Investment in affiliate, at equity (2,498,134) --
Other assets 115,096 115,096
------------ ------------
Total assets $ 91,650,443 $ 20,804,691
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,051,849 $ 556,664
Accrued expenses 1,698,009 1,657,706
------------ ------------
Total current liabilities 2,749,858 2,214,370
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, par value $.005 per
share. At June 30, 2000, 5,000,000
shares authorized; none outstanding.
At December 31, 1999, 5,000,000 shares
authorized; none outstanding. -- --
Common stock, par value $.005 per share.
At June 30, 2000, 75,000,000 shares
authorized; 40,806,822 shares issued
and outstanding. At December 31, 1999,
75,000,000 shares authorized; 34,392,909
shares issued and outstanding. 204,034 171,964
Additional paid-in capital 187,585,122 118,317,599
Accumulated deficit (98,888,571) (99,899,242)
------------ ------------
Total stockholders' equity 88,900,585 18,590,321
------------ ------------
Total liabilities and stockholders' equity $ 91,650,443 $ 20,804,691
============ ============
See accompanying notes to consolidated financial statements
FORM 10 Page 1
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Research agreement $ 531,229 495,130 1,053,837 1,030,055
Collaborative research and development
from related party 153,402 -- 153,402 --
License fee and milestone income 10,564,516 -- 10,564,516 --
------------ ----------- ------------ -----------
Total revenues 11,249,147 495,130 11,771,755 1,030,055
------------ ----------- ------------ -----------
Expenses:
Research and development 3,408,450 3,056,120 7,190,399 6,214,760
Charge for purchase of in-process
research and development 965,970 -- 965,970 --
General and administrative 1,437,804 1,597,091 3,368,739 2,936,532
------------ ----------- ------------ -----------
Total expense 5,812,224 4,653,211 11,525,108 9,151,292
------------ ----------- ------------ -----------
Operating income (loss) 5,436,923 (4,158,081) 246,647 (8,121,237)
Equity in loss of affiliate (566,658) -- (566,658) --
Investment income 1,127,264 302,455 1,330,682 686,774
------------ ----------- ------------ -----------
Net income (loss) $ 5,997,529 (3,855,626) 1,010,671 (7,434,463)
============ =========== ============ ===========
Net income (loss) per common share:
Basic $ 0.15 (0.11) 0.03 (0.22)
Diluted $ 0.14 (0.11) 0.02 (0.22)
Weighted average common shares used to
compute net income (loss) per common share:
Basic 40,033,069 34,216,941 37,322,681 34,192,905
Diluted 43,261,069 34,216,941 40,692,575 34,192,905
</TABLE>
See accompanying notes to consolidated financial statements
FORM 10-Q Page 2
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TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,010,671 $ (7,434,463)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 484,294 416,607
Equity in loss of affiliate 566,658 --
Purchase of in-process R&D 965,970 --
Expenses paid with stock and warrants 14,888 11,332
Loss on disposition of fixed assets 6,500 --
Change in operating assets and liabilities
(Increase) decrease in prepaids 214,175 (982,569)
(Increase) decrease in receivables (10,532,710) 116,903
Increase in receivable from related party
under collaborative arrangement (1,086,681) --
Increase (decrease) in current liabilities -- (318,330)
------------ -------------
Net cash used in operating activities (8,356,235) (8,190,520)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (60,088) (236,997)
Purchase of investments (52,110,935) (7,417,855)
Maturities of investments 11,245,034 21,232,712
(Increase) decrease in interest receivable
included in short-term investments (265,892) 264,302
Equity investment in affiliate, net 1,931,476 --
------------ -------------
Net cash provided by (used in)
investing activities (39,260,405) 13,842,162
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and
exercises of options and warrants, net 68,318,735 207,195
------------ -------------
Net increase in cash and cash equivalents 20,702,095 5,858,837
Cash and cash equivalents at beginning of period 2,804,270 4,176,911
------------ -------------
Cash and cash equivalents at end of period $ 23,506,365 $ 10,035,748
============ =============
Supplemental disclosure of noncash
financing activities:
Expenses and purchase of in-process of
R&D paid with stock $ 908,858 $ 11,332
============ =============
See accompanying notes to consolidated financial statements
FORM 10-Q Page 3
<PAGE> 6
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Texas Biotechnology Corporation (the "Company" or "TBC") is a
biopharmaceutical company focused on the discovery, development
and commercialization of novel synthetic small molecule compounds
for the treatment of a variety of vascular diseases. Since its
formation in 1989, the Company has been engaged principally in
research and drug discovery programs and clinical development of
certain drug compounds. On July 25, 1994, the Company acquired
all of the outstanding common stock of ImmunoPharmaceutics, Inc.
("IPI") in exchange for common stock, par value $.005 per share
(the "Common Stock"), of the Company. On June 6, 2000 TBC and ICOS
Corporation ("ICOS") entered into an agreement and formed
ICOS-Texas Biotechnology, Limited Partnership, a Delaware limited
partnership ("ICOS-TBC") to develop and globally commercialize
endothelin-A receptor antagonists. TBC and ICOS are both 50%
owners in ICOS-TBC.
The Company is presently working on a number of long-term
development projects which involve experimental and unproven
technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. The
Company anticipates the launch of its first product, argatroban,
for the treatment of heparin induced thrombocytopenia ("HIT")
in 2000.
(b) Basis of Consolidation
The Company's consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, IPI
and TBC-ET, Inc., a Delaware corporation ("TBC-ET"). All material
intercompany transactions have been eliminated.
(c) Cash, Cash Equivalents, Short-Term Investments and Long-Term
Investments
Cash equivalents are considered to be those securities or
instruments with original maturities, when purchased, of three
months or less. At June 30, 2000, approximately $1,085,000 was
invested in demand and money market accounts. Short-term
investments are those investments which have an original maturity
of less than one year and greater than three months at the
purchase date. At June 30, 2000, the Company's short-term
investments consisted of approximately $11,012,000 in Government
Agency Discount Bonds and $34,485,000 in Corporate Commercial
Paper and loan participations. Long-term investments consist of
approximately $8,000,000 in Government Agency Discount Bonds with
a remaining maturity of one year or more. Cash equivalents,
short-term and long-term investments are stated at cost plus
accrued interest, which approximates market value. Interest
income is accrued as earned. The Company classifies all
short-term investments and long-term investments as held to
maturity.
(d) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation of
furniture and equipment is provided on the straight-line method
over the estimated useful lives of the respective assets (3 to 10
years). Amortization of leasehold improvements is provided on the
straight-line method over the shorter of the useful life or the
remaining minimum lease term.
(e) Investment in ICOS - TBC
ICOS - Texas Biotechnology, Limited Partnership ("ICOS-TBC") is
accounted for using the equity method. Accordingly, the
investment is recorded at cost, adjusted for the Company's share
of income or loss of the entity and amortization of revenues for
upfront and milestone payments. See footnote 8.
(f) Research and Development Costs
FORM 10-Q Page 4
<PAGE> 7
All research and development costs are expensed as incurred and
include salaries of research and development employees, certain
rent and related building services, research supplies and
services, clinical trial expenses and other associated costs.
Salaries and benefits for the three months ended June 30, 2000
and 1999 were approximately $1,658,000 and $1,663,000,
respectively, of which approximately $1,246,000 and $1,277,000,
respectively, was charged to research and development. Salaries
and benefits for the six months ended June 30, 2000 and 1999,
were approximately $3,435,000 and $3,328,000, respectively, of
which approximately $2,606,000 and $2,555,000, respectively, was
charged to research and development. Payments related to the
acquisition of in-process research and development are expensed.
(g) Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by
dividing the net income (loss) by the weighted average number of
common shares outstanding during the period. For the three and
six months ended June 30, 1999, there were no common dilutive
shares used in the calculation of weighted average common shares
outstanding. For the three months ended June 30, 2000 and 1999,
the weighted average common shares used to compute basic net
income (loss) per common share totaled 40,033,069 and 34,216,941,
respectively. For the six months ended June 30, 2000 and 1999,
the weighted average common shares used to compute basic net
income (loss) per common share totaled 37,322,681 and 34,192,905,
respectively. The exercise of stock options and warrants were not
assumed in the calculation of diluted net loss per common share
for the three and six months ended June 30, 1999 because the
effect would have been antidilutive. Diluted net income per
common share is calculated by dividing the net income by the
weighted average number of common shares outstanding during the
period, including dilutive securities. For the three and six
months ended June 30, 2000, the weighted average common shares
used to compute diluted net income per common share totaled
43,261,069 and 40,692,575 respectively, and included the exercise
of 1,475,575 dilutive stock options and 1,752,425 dilutive
warrants. The following securities were not considered in the
computation of diluted net income per share because the effect
would have been antidilutive.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
------------------ ----------------
Stock Options 358,666 230,605
Stock Warrants 142,858 142,858
(h) Reclassifications
Certain reclassifications have been made to prior period
financial statements to conform with the June 30, 2000
presentation with no effect on net loss previously reported.
(i) Revenue Recognition
Revenue from research agreements is recognized as the services
are performed and/or milestones are met. Milestone payments
related to contractual agreements are recognized as the
milestones are achieved. Revenue from licensing fees is recorded
when the license is granted subject to section (m) of this
footnote (1) regarding accounting pronouncements dealing with
revenue recognition.
(j) Patent Application Costs
Costs incurred in filing for patents are expensed as incurred.
(k) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
these estimates.
FORM 10-Q Page 5
<PAGE> 8
(l) Interim Financial Information
The Consolidated Balance Sheet as of June 30, 2000, and the
related Consolidated Statement of Operations for the three and
six months ended June 30, 2000 and 1999 and Consolidated
Statements of Cash Flows for the six months ended June 30, 2000
and 1999 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year. The consolidated financial
statements and notes are presented as permitted by Form 10-Q and
do not contain certain information included in the Company's
Annual Consolidated Financial Statements and Notes which should
be read in conjunction with these consolidated financial
statements and notes.
(m) New Accounting Bulletins
In December 1999, the United States Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No. 101
("SAB101"), Revenue Recognition in Financial Statements. SAB101
summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in
financial statements. The Company will be required to implement
SAB101 in the fourth quarter of the year ended December 31, 2000.
The Company has not yet determined the impact, if any, that
SAB101 will have on its financial statements.
In March 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44 ("FIN44"), Accounting for Certain
Transactions involving Stock Compensation. The provisions of
FIN44 that are applicable to the Company were effective July 1,
2000. The Company has not yet determined the impact, if any, that
FIN44 will have on its financial statements.
In June 1998, the Financial Accounting Standards Board issued
FASB Statement No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 138. SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of
financial position at fair value. We will adopt SFAS 133
beginning in fiscal year 2001. We do not expect the adoption of
SFAS 133 will have a material effect on our financial condition
or results of operation because we historically have not entered
into derivative or other financial instruments for trading or
speculative purposes nor do we use or intend to use derivative
financial instruments or derivative commodity instruments.
(2) CAPITAL STOCK
In April 2000, the Company sold 5,750,000 shares of Common Stock for
$12.50 per share in an underwritten public offering. The net proceeds to
the Company from this offering were approximately $65.2 million after
deducting selling commissions and expenses of approximately $4.6 million
related to the offering and approximately $2.1 million in proceeds
allocable to selling shareholders.
FORM 10-Q Page 6
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(3) STOCK OPTIONS AND WARRANTS
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for its plans and applies Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation and
related interpretations in reporting for its plans.
A summary of stock options as of June 30, 2000, follows:
<TABLE>
<CAPTION>
Exercise Price Exercised Available
Stock Option Plans Per Share Authorized Outstanding /Other Exercisable for Grant
------------------ -------------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1990 Plan $1.38 - $21.59 285,715 190,495 95,220 139,496 ---
1992 Plan $1.41 - $21.59 1,700,000 948,601 702,832 717,071 48,567
1995 Plan $1.31 - $8.13 2,000,000 1,585,745 228,807 1,249,829 185,448
1999 Plan $20.13 - $20.13 1,000,000 181,000 --- --- 819,000
Director Plan $3.50 - $4.54 71,429 34,242 37,187 34,242 ---
1995 Director Plan $1.38 - $11.31 500,000 259,096 36,427 175,096 204,477
----------- --------- --------- --------- ---------
TOTALS 5,557,144 3,199,179 1,100,473 2,315,734 1,257,492
=========== ========= ========= ========= =========
</TABLE>
As of March 6, 2000, the Compensation and Personnel Committee of the
Board of Directors approved an increase in the number of shares
authorized of 200,000 shares in the Amended and Restated 1995
Non-Employee Director Stock Option Plan which was approved by
stockholders at the annual meeting on June 8, 2000 and are included
above.
(4) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
At June 30, 2000 the net deferred tax asset, representing primarily net
operating loss carryforwards, totaled approximately $36,072,000. The
Company has established a valuation allowance for the full amount of
these deferred tax assets, as management believes that it is not more
likely than not that the Company will recover these assets. The Company
did not incur any tax expense in any year due to operating losses.
At June 30, 2000 the Company had net operating loss carryforwards of
approximately $63,255,000 for federal income tax return purposes.
Utilization of the Company's net operating loss carryforwards is subject
to certain limitations due to specific stock ownership changes which
have occurred or may occur. To the extent not utilized, the
carryforwards will expire during the years beginning 2002 through 2019.
FORM 10-Q Page 7
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(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
June 30, 2000 December 31, 1999
------------- -----------------
Laboratory and office equipment $ 5,760,621 $ 5,760,113
Leasehold improvements 3,974,942 3,974,942
--------- ---------
9,735,563 9,735,055
Less accumulated depreciation and
amortization (7,167,838) (6,736,624)
------------ -----------
$ 2,567,725 $ 2,998,431
=========== ===========
(6) COMMON STOCK RESERVED
The Company has reserved Common Stock for issuance as of June 30, 2000
as follows:
Stock option plans 4,456,671
Publicly traded warrants outstanding 3,882,092
Other warrants outstanding 634,063
---------
Total shares reserved 8,972,826
=========
(7) REGULATORY FILING
On June 30, 2000, the Company received final approval from the FDA for
argatroban as an anticoagulant for prevention or treatment of thrombosis
in patients with heparin-induced thrombocytopenia ("HIT").
(8) LICENSE AGREEMENTS
Pursuant to the terms of the limited partnership agreement for ICOS-TBC,
TBC and ICOS will equally fund the cost of research and development of
sitaxsentan and second-generation endothelin antagonist compounds,
commercialize resulting products, and share equally in the profits from
this worldwide collaboration. ICOS will make upfront and milestone
payments to TBC that could be as much as $55.5 million for the
development and commercialization of products resulting from the
collaboration. The immediate focus of the ICOS-TBC partnership will be to
initiate a Phase IIb/III pulmonary hypertension clinical trial for
sitaxsentan, continue clinical development for sitaxsentan in chronic
heart failure, and explore applications for second-generation endothelin
antagonists including TBC3711.
Pursuant to the terms of the limited partnership agreement, ICOS-TBC has
been initially capitalized by a cash contribution from ICOS and the
Company's contribution of intellectual property associated with
sitaxsentan sodium. The intellectual property contributed to ICOS-TBC had
no basis for financial reporting purposes and, accordingly, the Company
has recorded the transfer of this technology to ICOS-TBC at zero. The
Company received a license fee from ICOS-TBC upon transfer of this
technology and conducts research and development activities on behalf of
ICOS-TBC and is paid for such services based upon costs incurred. The
Company has deferred full recognition of the license fee and has recorded
approximately $567,000 of expenses representing its proportionate share
of ICOS-TBC's net losses. Also, the Company recorded approximately $1.1
million for cost reimbursements during June 2000 related to the research
and development activities provided to ICOS-TBC of which approximately
$153,000 was recognized as revenue. The license fee and any future
milestones paid to the Company will be amortized over the anticipated
development period. Pursuant to the partnership agreement, TBC assigned
one-half of the remaining payments under the agreement with LG Chemical
to the partnership.
On June 30, 2000, TBC and Schering-Plough Corporation
("Schering-Plough") entered into a worldwide research collaboration and
license agreement to discover, develop and commercialize VLA-4
antagonists. VLA-4 antagonists represent a new class of compounds that
has shown promise in multiple preclinical animal models of asthma. The
primary focus of the collaboration will be to discover orally available
VLA-4 antagonists as treatments for asthma.
Under the terms of the agreement, Schering-Plough obtains the exclusive
worldwide rights to develop, manufacture and market all compounds from
TBC's library of VLA-4 antagonists, as well as the rights to a second
integrin antagonist. TBC will be responsible for optimizing a lead
compound and additional follow-on compounds. Schering-Plough will
FORM 10-Q Page 8
<PAGE> 11
support research at TBC and will be responsible for all costs associated
with the worldwide product development program and commercialization of
the compound. In addition to research costs, Schering-Plough will pay an
upfront license fee, development milestones and royalties on product
sales resulting from the agreement. Total payments to TBC for both
programs, excluding royalties, could reach $87.0 million.
On June 30, 2000, TBC issued 71,429 shares of Common Stock to the former
licensor of argatroban in conjunction with the approval of the NDA for
argatroban in patients with HIT. The Company recorded a $965,970
non-cash charge to in-process research and development during the second
quarter of 2000 related to the issuance. This transaction represents the
final amount to be paid in exchange for the license to the argatroban
technology from the former licensee.
(9) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16.0 million. Plaintiffs were
two individuals who purchased the Company's shares on December 16, 1993
following the Company's initial public offering ("IPO"). In their
complaint, plaintiffs sued the Company, certain members of the board of
directors and certain officers alleging violations of Sections 11, 12
and 15 of the Securities Act of 1933, as amended. A subsequently filed
class action arising out of the IPO was dismissed in June 1996, leaving
the first class action as the only pending litigation arising out of the
IPO.
In May 1999, the Company reached an agreement in principle to settle the
pending class action. The agreement in principle achieved with
plaintiff's counsel provides for dismissal of all claims against the
Company and the officers and directors named as defendants. The
settlement amount is $800,000, of which approximately $187,500 was
expensed during 1999 and paid by the Company into escrow during January
2000 and approximately $612,500 will be paid by the Company's insurer.
On December 21, 1999, the Company and the plaintiffs filed a Stipulation
of Settlement of All Claims Against Certain Defendants. On May 19, 2000,
the Court entered an order approving the settlement and dismissing all
claims against the Company and its officers and directors. The deadline
for appeal of that order expired on June 18, 2000. Accordingly, all
claims against the Company and its officers and directors are fully and
finally dismissed.
Lease Agreements
On June 30, 2000, the Company extended the lease agreement for its
facilities in Houston, Texas for a period of five years beginning
January 1, 2001. The lease extension contains terms substantially
similar to those contained in the original lease agreement.
FORM 10-Q Page 9
<PAGE> 12
ITEM 2.
TEXAS BIOTECHNOLOGY CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to the financial statements included in Form
10-K for the year 1999 and our consolidated financial statements and the
related notes to the financial statements included this Form 10-Q.
Since our inception in 1989, we have primarily devoted our resources to
funding drug discovery research and development. We have been unprofitable to
date and expect to incur substantial operating losses for the next several
years as we invest in product research and development, preclinical and
clinical testing and regulatory compliance. We have sustained net losses of
approximately $98.9 million from the date of our inception to June 30, 2000. We
have primarily financed our operations to date through private and public
offerings of our common and preferred stock.
During October 1996, we signed a research and common stock purchase
agreement with LG Chemical. LG Chemical purchased 1,250,000 shares of our
common stock for $5.0 million and committed to pay us up to $10.7 million over
a five-year period to develop two compounds in clinical development. Of this
amount, $6.1 million has been paid. Currently $1.0 million is receivable from
LG Chemical. Furthermore, $1.0 million will be paid on December 31, 2000, and
$1.3 million will be paid on June 30 and December 31, 2001. In June 2000, we
assigned one-half of the remaining payments under the LG Chemical agreement to
ICOS-TBC.
In August 1997, we entered into an agreement with SmithKline Beecham
plc, commonly known as SmithKline, whereby we granted SmithKline the exclusive
right to work with us in the development and commercialization of argatroban in
the U.S. and Canada for specified indications. Under this agreement, SmithKline
has paid an aggregate of $21 million in the form of license fees and milestone
payments for argatroban. Future milestone payments for the acute myocardial
infarction indication are subject to SmithKline's agreement to market
argatroban for the acute myocardial infarction indication. At this time,
SmithKline has no plans to conduct development work for the acute myocardial
infarction and stroke indications. We are evaluating the feasibility of
developing argatroban for ischemic stroke and possibly other indications. In
connection with the agreement, SmithKline purchased 176,922 shares of our
common stock for $1.0 million and an additional 400,000 shares of our common
stock for $2.0 million in conjunction with our public offering, which closed
during October 1997.
On June 6, 2000, TBC and ICOS entered into the ICOS-TBC limited
partnership. The partnership will seek to develop and globally commercialize
endothelin-A receptor antagonists. ICOS-TBC will make upfront and milestone
payments to TBC that could be as much as $55.5 million for the development and
commercialization of products resulting from the collaboration. See footnote 8
to the Consolidated Financial Statements for a discussion of this transaction.
On June 30, 2000, TBC and Schering-Plough Corporation entered into a
worldwide research collaboration and license agreement to discover, develop and
commercialize VLA-4 antagonists.
FORM 10-Q Page 10
<PAGE> 13
In addition to research costs, Schering-Plough will pay an upfront
license fee, development milestones and royalties on product sales resulting
from the agreement. Total payments to TBC for both programs, excluding
royalties, could reach $87.0 million. See footnote 8 to the Consolidated
Financial Statements for a discussion of this transaction.
Our operating results have fluctuated significantly during each quarter,
and we anticipate that such fluctuations, which are largely attributable to
varying research and development commitments and expenditures, will continue
for the next several years.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Revenues were $495,130 and $11,249,147 during the three months ended
June 30, 1999 and 2000, respectively. Revenues were composed of amounts
recognized under license agreements and research and development agreements and
increased 2172% due to an increase in license fees received in connection with
the formation of ICOS-TBC and the research collaboration and license agreement
with Schering-Plough and the milestone payment related to final approval of
argatroban due under the license agreement with SmithKline. Interest income for
the three months ended June 30, 1999 was 273% lower than the same period of
2000 due primarily to higher investment balances in 2000.
Research and development expenses increased 12% from $3,056,120 during
the three months ended June 30, 1999 to $3,408,450 for the same period of 2000.
The increase was due primarily to increased scaleup and manufacturing costs
related to the sitaxsentan development program for pulmonary hypertension.
General and administrative expenses decreased 10% from $1,597,091 during
the three months ended June 30, 1999 to $1,437,804 during the same period of
2000. The decrease was due primarily to decreased patent legal fees related to
the sitaxsentan program.
We incurred a net loss of $3,855,626 and attained net income of
$5,997,529 for the three months ended June 30, 1999 and 2000, respectively.
RESULTS OF OPERATIONS
SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Revenues were $1,030,055 and $11,771,755 during the six months ended
June 30, 1999 and 2000, respectively. Revenues were composed of amounts
recognized under license agreements and research and development agreements and
increased 1043% due to an increase in license fees received in connection with
the formation of ICOS-TBC and the research collaboration and license agreement
with Schering-Plough and the milestone payment related to final approval of
argatroban due under the license agreement with SmithKline. Interest income for
the six months ended June 30, 1999 was 94% lower than the same period of 2000
due primarily to higher investment balances in 2000.
Research and development expenses increased 16% from $6,214,760 during
the six months ended June 30, 1999 to $7,190,399 for the same period of 2000.
The increase was due primarily to increased scaleup and manufacturing costs
related to the sitaxsentan development program for pulmonary hypertension.
General and administrative expenses increased 15% from $2,936,532 during
the six months ended June 30, 1999 to $3,368,739 during the same period of
2000. The increase was due primarily to increases in premarketing and
consulting costs related to argatroban.
We incurred a net loss of $7,434,463 and attained net income of
$1,010,671 for the six months ended June 30, 1999 and 2000, respectively.
The Company had 83 employees at June 30, 1999 and 80 employees at June
30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our research and development activities to date
principally through:
FORM 10-Q Page 11
<PAGE> 14
o private and public offerings of our common and preferred stock;
o issuances of common stock in conjunction with acquisitions, research
and collaboration agreements and upon exercises of stock options and
warrants;
o milestone and research payments received in conjunction with
research and collaborative agreements; and
o investment income, net of interest expense.
In April 2000, we raised approximately $65.2 million from an
underwritten public offering of our common stock. At June 30, 2000 we had cash,
cash equivalents, short-term and long-term investments of $77,540,000.
Additionally, at July 31, 2000, we had cash, cash equivalents, short-term and
long-term investments of approximately $88.0 million.
We expect to incur substantial research and development expenditures as
we design and develop biopharmaceutical products for the prevention and
treatment of cardiovascular and other diseases. We anticipate that our
operating expenses will increase during 2000 and subsequent years because:
o We will incur significant clinical trial costs for sitaxsentan and
TBC1269 compounds and expect to begin to incur costs for clinical trials
related to additional compounds. These costs include:
o hiring personnel to direct and carry out all operations related to
clinical trials;
o hospital and procedural costs;
o services of a contract research organization; and
o purchasing and formulating large quantities of the compound to be
used in such trials.
o There will be additional costs in future periods related to argatroban
in complying with ongoing FDA requirements and possible clinical trial
expenditures for additional therapeutic indications.
Furthermore, we anticipate that the administrative costs associated with our
efforts will be significant. The amount and timing of expenditures will depend,
among other things, on our progress in ongoing research, clinical development
and commercialization efforts. On June 30, we received final approval from the
FDA for argatroban as an anticoagulant for prevention or treatment of
thrombosis in patients with HIT. As a result, we expect to begin to accrue
royalty revenues from sales of argatroban by SmithKline by year-end. Therefore,
we expect our royalty revenues to increase. However, increases in revenue, if
any, may be partially, if not fully, offset by increases in expenses related to
ICOS-TBC's development of sitaxsentan and continued research and development of
our other programs.
We anticipate that our existing capital resources and our other revenue
sources, should be sufficient to fund our cash requirements for the foreseeable
future which is contingent upon various factors, including royalty revenues
from argatroban, the rates of patient enrollment and spending associated with
clinical trials for sitaxsentan and TBC1269 and the level of research and
development expenditures for our other compounds. We cannot assure you that
there will be market acceptance and commercial success of argatroban, which
could significantly impact our cash flow.
We anticipate that we may need to raise substantial funds for future
operations, which may be raised through collaborative arrangements, public or
private issuance of debt and equity, or other arrangements. We expect that
additional expenditures will be required if additional product candidates enter
clinical trials, which may require additional expenditures for laboratory
space, scientific and administrative personnel, and services of contract
research organizations. We cannot assure you that we will be able to obtain
such additional financings on acceptable terms or in time to fund any necessary
or desirable expenditures. In the event such financings are not obtained, our
drug discovery or development programs may be delayed, scaled back or
eliminated; or we may be required to obtain funds through arrangements with
collaborative partners or others that may require that we relinquish rights to
certain of our technologies, product candidates or products that would not
otherwise be relinquished. Our ability to raise additional funding is
contingent upon a number of factors which include:
FORM 10-Q Page 12
<PAGE> 15
o the market acceptance and commercial success of argatroban;
o the ongoing cost of research and development activities;
o the attainment of research and clinical goals of product candidates;
o the continuance of research agreements with collaboration partners;
o the timely approval of our product candidates by appropriate governmental
and regulatory agencies;
o the presence and effect of competitive products;
o our ability to manufacture and market products commercially;
o the retention of key personnel; and
o conditions in the capital markets.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of hazardous
materials and waste products. Although we believe that our safety procedures
for handling and disposing of hazardous materials comply with the standards
prescribed by laws and regulations, the risk of accidental contamination or
injury from these materials cannot be eliminated completely. In the event of an
accident, we could be held liable for any damages that result. This liability
could exceed our resources or not be covered by our insurance. Although we
believe that we are in compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance that we will not
be required to incur significant costs to comply with environmental laws and
regulations in the future. There can also be no assurance that our operations,
business or assets will not be materially adversely affected by current or
future environmental laws or regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The pharmaceutical research industry is labor intensive, and wages and
related expenses increase in inflationary periods. The lease of space and
related building services for our Houston facility contains a clause that
escalates rent and related services each year based on the increase in building
operating costs and the increase in the Houston Consumer Price Index,
respectively. To date, inflation has not had a significant impact on our
operations.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in and incorporated by reference into this Form 10-Q are
forward-looking statements. These forward-looking statements include, without
limitation, statements regarding our estimate of the sufficiency of our
existing capital resources and our ability to raise additional capital to fund
cash requirements for future operations, and regarding the uncertainties
involved in the drug development process and the timing of regulatory approvals
required to market these drugs. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we can not give
any assurance that such expectations reflected in these forward-looking
statements will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations are discussed in our
registration statement on Form S-3, as amended, initially filed with the
Securities and Exchange Commission on March 8, 2000.
When used in this Form 10-Q, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking
statements contain these identifying words. Because these forward-looking
statements involve risks and uncertainties, actual results could differ
materially from those expressed or implied by these forward-looking statements
for a number of important reasons, including those discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
FORM 10-Q Page 13
<PAGE> 16
Operations - Liquidity and Capital Resources."
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our future
operating results or our future financial condition, or state other
"forward-looking" information. Before you invest in our common stock, you
should be aware that the occurrence of any of the contingent factors described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" could substantially harm our
business, results of operations and financial condition and that upon the
occurrence of any of these events, the trading price of our common stock could
decline, and you could lose all or part of your investment.
We cannot guarantee any future results, levels of activity, performance
or achievements. Except as required by law, we undertake no obligation to
update any of the forward-looking statements in this Form 10-Q after the date
of this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, interest rate risk has not had a significant impact on the
operations of the Company.
FORM 10-Q Page 14
<PAGE> 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 1994, a class action shareholders' suit was filed in the
United States District Court for the Southern District of Texas, Houston
Division seeking damages in the amount of $16 million. Plaintiffs were two
individuals who purchased the Company's shares on December 16, 1993 following
the Company's initial public offering ("IPO"). In their complaint, plaintiffs
sued the Company, certain members of the board of directors and certain
officers alleging violations of Sections 11, 12 and 15 of the Securities Act of
1933, as amended. A subsequently filed class action arising out of the IPO was
dismissed in June 1996, leaving the first class action as the only pending
litigation arising out of the IPO.
In May 1999, the Company reached an agreement in principle to settle the
pending class action. The agreement in principle achieved with plaintiff's
counsel provides for dismissal of all claims against the Company and the
officers and directors named as defendants. The settlement amount is $800,000,
of which approximately $187,500 was expensed during 1999 and paid by the
Company into escrow during January 2000 and approximately $612,500 will be paid
by the Company's insurer.
On December 21, 1999, the Company and the plaintiffs filed a Stipulation
of Settlement of All Claims Against Certain Defendants. On May 19, 2000, the
Court entered an order approving the settlement and dismissing all claims
against the Company and its officers and directors. The deadline for appeal of
that order expired on June 18, 2000. Accordingly, all claims against the Company
and its officers and directors are fully and finally dismissed.
ITEM 2. CHANGES IN SECURITIES
In April 2000, we issued an aggregate of 48,851 shares of our common
stock to certain institutions and individuals, pursuant to the exercise of
outstanding warrants for an aggregate purchase price of $19,972 including
43,981 shares issued pursuant to a cashless exercise of privately held
warrants. In addition, we issued 71,429 shares of common stock to the former
licensor of argatroban and recorded a non-cash expense for the purchase of
in-process research and development of $965,970 in June 2000. The issuance of
common stock was exempt from registration under Section 4 (2) of the Securities
Act of 1933, as amended. The warrants and the common stock underlying the
warrants may not be sold in the United States absent registration or an
applicable exemption from registration requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
FORM 10-Q Page 15
<PAGE> 18
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2000, an annual meeting of our stockholders was held. The
holders of 36,686,947 shares of common stock were present in person or
represented by proxy at the meeting. At the meeting, the stockholders
took the following actions:
(a) Election of Directors
The stockholders elected the following persons to serve as
directors of the Company until the next annual meeting of
stockholders, or until their successors are duly elected and
qualified:
NUMBER OF NUMBER OF
NAME VOTES FOR VOTES ABSTAINING
---- --------- ----------------
Ron J. Anderson 36,438,380 260,067
Frank C. Carlucci 36,436,610 261,837
Robert J. Cruikshank 36,432,755 265,692
Richard A. F. Dixon 36,453,450 244,997
David B. McWilliams 36,456,700 247,747
Suzanne Oparil 36,444,330 254,117
John M. Pietruski 36,443,375 255,072
James A. Thomson 36,445,950 252,497
James T. Willerson 34,748,944 1,949,503
(b) Adoption of the Amendment to the Amended and Restated 1995
Non-Employee Director Stock Option Plan
The stockholders approved the proposal to adopt the Amendment to
the Amended and Restated 1995 Non-Employee Director Stock Option
Plan. Votes were cast as follows:
NUMBER OF NUMBER OF NUMBER OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
---------- ------------- ----------------
35,795,463 722,687 180,297
ITEM 5. OTHER INFORMATION
None
FORM 10-Q Page 16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
One report on Form 8-K (Item 5) was filed during the quarter ended June
30, 2000. The report was filed with the Securities and Exchange Commission
June 15, 2000 regarding the formation of ICOS-TBC.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.8 Amendment to Article II of By-laws
99.4* Agreement of Limited Partnership of ICOS-Texas
Biotechnology L.P. among ICOS-ET-LP LLC and Texas
Biotechnology Corporation, as Limited Partners,
and ICOS-ET-GP LLC and TBC-ET, Inc., as General
Partners dated June 6, 2000
99.5* Endothelin License Agreement between Texas Biotechnology
Corporation and ICOS-Texas Biotechnology L.P. dated
June 6, 2000
99.6* Formation and Performance Agreement between ICOS
Corporation and Texas Biotechnology Corporation dated
June 6, 2000
99.7* Research and Development Service Agreement among ICOS
Corporation, Texas Biotechnology Corporation and
ICOS-Texas Biotechnology L. P.
99.8* Research Collaboration and License Agreement between
Texas Biotechnology Corporation and Schering-Plough LTD.
dated June 30, 2000
99.9* Research Collaboration and License Agreement between
Texas Biotechnology Corporation and Schering Corporation
dated June 30, 2000
27.1 Financial Data Schedule
* Confidential treatment requested
----------------
FORM 10-Q Page 17
<PAGE> 20
TEXAS BIOTECHNOLOGY CORPORATION
JUNE 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 14th day of August, 2000.
TEXAS BIOTECHNOLOGY CORPORATION
By: /s/ David B. McWilliams
------------------------------
David B. McWilliams
President and Chief Executive Officer
By: /s/ Stephen L. Mueller
-----------------------------
Stephen L. Mueller
Vice President, Finance and
Administration Secretary and
Treasurer (Principal Financial
and Accounting Officer)
FORM 10-Q Page 18
<PAGE> 21
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
3.8 Amendment to Article II of By-laws
99.4* Agreement of Limited Partnership of ICOS-Texas
Biotechnology L.P. among ICOS-ET-LP LLC and Texas
Biotechnology Corporation, as Limited Partners, and
ICOS-ET-GP LLC and TBC-ET, Inc., as General Partners
dated June 6, 2000
99.5* Endothelin License Agreement between Texas Biotechnology
Corporation and ICOS-Texas Biotechnology L.P. dated
June 6, 2000
99.6* Formation and Performance Agreement between ICOS
Corporation and Texas Biotechnology Corporation dated
June 6, 2000
99.7* Research and Development Service Agreement among ICOS
Corporation, Texas Biotechnology Corporation and
ICOS-Texas Biotechnology L. P.
99.8* Research Collaboration and License Agreement between Texas
Biotechnology Corporation and Schering-Plough LTD. dated
June 30, 2000
99.9* Research Collaboration and License Agreement between Texas
Biotechnology Corporation and Schering Corporation dated
June 30, 2000
27.1 Financial Data Schedule
* Confidential treatment requested
----------------
FORM 10-Q Page 19
