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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, 1999
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27972
TREGA BIOSCIENCES, INC.
(Exact Name of Registrant as Specified in its Charter)
--------------------------
DELAWARE 51-0336233
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9880 CAMPUS POINT DRIVE 92121
San Diego, California (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code): (858) 410-6500
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(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 Regulations S-K is not contained herein, and will not be
contained, to the best of the 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, based upon the closing sale price of the Common Stock on
March 7, 2000, as reported on the Nasdaq National Market, was approximately
$145,222,139. Shares of Common Stock beneficially held by each officer and
director of the Registrant and by each person who beneficially owns 10% or
more of the Registrant's outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 7, 2000, there were 19,552,344 shares of the Registrant's Common
Stock outstanding.
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TREGA BIOSCIENCES, INC.
FORM 10-K
INDEX
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PAGE
PART I ------
<S> <C> <C>
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 18
Item 3. Legal Proceedings............................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 19
Item 6. Selected Financial Data......................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 21
Item 7a. Qualitative and Quantitative Disclosure About Market
Risk............................................................ 24
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............................. 25
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 26
Item 11. Executive Compensation.......................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 32
Item 13. Certain Relationships and Related Transactions.................. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 35
SIGNATURES................................................................... 40
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, WITHOUT LIMITATION, STATEMENTS USING SUCH WORDS AS "MAY,"
"POTENTIAL," "EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS,"
"ANTICIPATES" AND SIMILAR EXPRESSIONS). FOR A DISCUSSION OF CERTAIN FACTORS
WHICH MAY AFFECT THE OUTCOMES PROJECTED IN SUCH STATEMENTS, SEE "RISK
FACTORS" ON PAGES 12 TO 18 OF THIS ANNUAL REPORT ON FORM 10-K. ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING STATEMENTS
REPRESENT THE COMPANY'S JUDGMENT AS OF THE DATE OF THE FILING OF THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY DISCLAIMS, HOWEVER, ANY INTENT OR OBLIGATION
TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Trega Biosciences, Inc. (the "Company" or "Trega") is focused on
accelerating drug discovery from disease targets to clinical candidates
through its iDiscovery-TM- technologies. Such technologies include (i) the
IDEA-TM- ("In Vitro Determination for the Estimation of ADME (absorption,
distribution, metabolism and excretion)") computerized predictive models for,
among other things, the prediction and selection of compounds with essential
drug-like characteristics for further development and (ii)
Chem.Folio-Registered Trademark- combinatorial libraries for screening and
optimization of potential drug candidates.
Since its inception, Trega has utilized combinatorial chemistry as a
foundation for its drug discovery activities; first, for the production of
peptides, then mixtures of small molecules, and finally, for singles-based
compound arrays. This technology has enabled Trega to develop and offer a
wide range of small-molecule libraries, including its Chem.Folio-Registered
Trademark- compound libraries, which are constructed in singles-based
compound arrays. In 1993, Trega used its combinatorial chemistry technologies
to discover a family of proprietary compounds that appear to influence the
production and activity of certain cytokines through interaction with
melanocortin receptors. These compounds include HP-228, which has competed a
Phase II clinical trial in the treatment of post-operative pain in hip and
knee replacements. As part of its activities, the Company formed
collaborative partnerships in the area of drug discovery and development.
Coinciding with this focus, Trega entered into collaborations with certain
pharmaceutical companies to develop compounds active against certain
melanocortin receptors.
The continuing development of Trega's combinatorial chemistry libraries
led to the development of information relevant to the drug discovery process,
which information was regularly supplied to library purchasers. The
development of this information and a growing belief in the importance of
information in the drug discovery process caused the Company to investigate
opportunities to acquire technologies directed at creating information
germane to the drug discovery process. In 1998, Trega acquired its wholly
owned subsidiary, NaviCyte, Inc. ("NaviCyte"), whose business included
the development of products and services to facilitate the rapid screening of
compounds for pharmacokinetic characteristics through the use of computer
models. With the technology acquired from NaviCyte, Trega developed and
released the first of the IDEA-TM- predictive models, the absorption module.
The Company has combined its Chem.Folio libraries and IDEA predictive models
in a collection of technologies called iDiscovery-TM-.
On February 11, 2000, the Company announced that it did not intend to
continue to support internal drug discovery programs, including its
melanocortin receptor programs, that are not funded by a collaborator. Trega
believes this strategic shift will permit it to better focus its efforts and
resources on the continuing development and commercialization of its
iDiscovery-TM- technologies. Trega is currently carrying out a collaborative
program in the area of diabetes, obesity and syndrome X, which is funded by
Novartis Pharma AG ("Novartis").
The Company, which was incorporated in Delaware in 1991, is located at
9880 Campus Point Drive, San Diego.
DRUG DISCOVERY IN TRANSITION
Trega believes that the fundamental ways in which drugs are discovered
and developed will change in response to dynamics in the marketplace, and can
change as a result of recent scientific advances. The factors encouraging
change are:
- limitations of traditional drug discovery and development methods;
- implications of recent technological developments on drug discovery and
development;
- advances in informatics that enable predictive modeling and virtual
drug discovery; and
- the growing importance of the Internet and e-commerce in the drug
discovery process.
Limitations of Traditional Drug Discovery and Development Methods
The first stage of the drug discovery process is the identification of a
biological target ("target"), typically a receptor that is responsible for
causing a medical condition. The second stage in early discovery is the
synthesis of compounds to be screened against the desired target, followed by
high throughput screening. High throughput screening involves the testing of
hundreds of thousands of compounds to identify potentially hundreds of
compounds that demonstrate activity against the target of choice. Active
compounds resulting from this process are known as "hits". The hits are then
chemically modified in a series of sequential steps to identify compounds
that (1) have improved activity at the target, (2) are absorbed following
oral administration, (3) have appropriate metabolism characteristics and (4)
do not have toxic effects. This series of steps results in the identification
of drug candidates. The testing used to develop the candidate is called "lead
optimization," and may involve animal models, which are low throughput and
poorly predictive of ultimate success. A drug candidate then undergoes
preclinical development and three phases of human clinical development before
being filed for approval with the U.S. Food and Drug Administration ("FDA").
The total time of this process has typically ranged from 12 - 16 years and
has actually increased in the 1990's according to the Tufts Center for the
Study of Drug Development.
The overall process is one of attrition with a high failure rate. The
early stages of the process are highly automated. Genomics is identifying
many new targets at a rapid rate. Combinatorial chemistry enables the
production of hundreds of thousands of compounds, while high throughput
screening enables the screening of these compounds. This highly automated
process, however, feeds thousands of hits into lead optimization, a low
throughput, animal model dependent process, which creates a bottleneck.
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In addition, the traditional drug discovery process is expensive. The
average direct and indirect costs of bringing a new drug to market has been
estimated to total approximately $650 million. It has been estimated that over
50% of all pharmaceutical products that reach human clinical trials fail as a
result of inappropriate absorption, distribution, metabolism, excretion, or
toxicity that was not predicted earlier in the drug development process.
Approximately $400 million of the cost of an average new drug has been
estimated to represent the cost of failed drugs.
Other factors providing incentives to pharmaceutical companies to reduce
the cost and time required to develop new drugs include the need to fill
product pipelines to support desirable rates of growth in their businesses
and cost containment initiatives by both public and private healthcare payor
systems.
Implications of Recent Technological Developments on Drug
Discovery and Development
As described above, the Company believes that recent advances in
discovery technologies have further strained the traditional drug discovery
process. Combinatorial chemistry has created hundreds of thousands of
compounds that are now available for screening in biological assays.
Automated screening systems that are capable of screening up to 100,000
compounds per day are available. The industry faces an avalanche of data and
the inability to prioritize hits for subsequent analysis and development.
In addition, the human genome sequencing effort is providing genetic
information that is directed at the identification of thousands of new drug
targets based upon increasingly sophisticated and complex genetic information
about disease. This information is anticipated to enable the customization of
patient care. The Company believes the flood of data resulting from screening
against these additional genetic targets will add to the already compromised
capacity of existing drug discovery processes and will encourage the
development of more efficient screening techniques, such as virtual screening.
The availability of millions of compounds for screening and related data
combined with the sequential and time-consuming nature of traditional drug
discovery methods have increased the demand for products and services which
can accelerate the overall drug discovery and development process.
Advances in Informatics that Enable Predictive Modeling
and Virtual Drug Discovery
The use of computers for managing information in the discovery and
development process has become commonplace. Advanced computing, combined with
the linkage of disparate datasets and modeling capabilities, enable parts of
the drug discovery and development process to be performed entirely
in the computer (in silico) without exposure to animals or humans. Virtual
approaches for designing drug structures, screening against targets,
evaluating pharmacokinetics, studying disease models and even conducting
clinical trials are currently under development by a number of companies.
The Growing Importance of the Internet and E-Commerce in
the Drug Discovery Process
The acceptance of the Internet has created an environment that values
information and its efficient dissemination. The business expectation created
by the Internet is that successful companies will be those that are able to
produce immediately accessible information-rich products. In addition,
business to business e-commerce sites are simplifying the process by which
all businesses, including pharmaceutical companies, purchase products and
services.
iDISCOVERY-TM- TECHNOLOGIES
Trega's iDiscovery-TM- technologies include its information-based
products that it believes will improve the probability of success and
accelerate the pharmaceutical discovery and development process. The
underlying premise of iDiscovery-TM- technologies is to increase the
likelihood of clinical success by identifying those compounds with essential
drug-like characteristics at an early stage in the development process. As a
result, subsequent preclinical trials may become confirmatory rather than
exploratory. iDiscovery's-TM- principal products include the IDEA-TM-
predictive computer models and Trega's combinatorial chemistry technologies,
such as the Chem.Folio-Registered Trademark- compound libraries.
IDEA-TM- Predictive Models
The Company believes that the IDEA-TM- absorption model represents the
first product of its kind. As such, there is no historical market data for
similar products. Estimates by Pharmaceutical Research and Manufacturing of
America 1999 Annual Survey ("PhRMA Survey") show that the United States
pharmaceutical industry alone spends each year $422.3 million on
bioavailability testing, $1.1 billion on toxicology and safety testing, and
$1.7 billion on formulation and stability testing. A PriceWaterhouseCoopers
report, Pharma 2005, Silicon Rally: The Race to e-R&D, estimated that
pharmaceutical companies could save up to $200 million and two to three years
per drug by using a predictive computer model. The Company anticipates that
early discussions with prospective customers will stress product performance
and scientific validation, not the price of its IDEA-TM- absorption module.
Trega acquired the IDEA-TM- predictive model technology in connection
with the acquisition of NaviCyte in November 1998. IDEA-TM-predictive models
are a set of physiologically based computer simulations that Trega is
developing to predict the ADME characteristics of compounds. Trega believes
that, upon development and commercialization, the IDEA-TM- predictive models
will enable pharmaceutical companies to prioritize their hit compounds for
further development based upon their drug-like ADME characteristics.
The first IDEA-TM- predictive model module for predicting absorption has
been completed and is in the early rollout phase of commercialization. The
absorption module is designed to predict the oral absorption of compounds in
the human digestive system. It
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is based upon actual human clinical data contributed by a consortium of
pharmaceutical companies which included SmithKline Beecham, Genentech,
Parke-Davis, Schering-Plough, and the R.W. Johnson Pharmaceutical Research
Institute of Johnson & Johnson. The Company intends to offer the IDEA-TM-
absorption module under a three-year license with yearly subscription fees.
Currently, Trega is conducting negotiations with potential customers, but has
yet to execute any such license agreements or receive any material revenues
from its IDEA-TM- predictive models. The Company intends to also develop
modules to predict absorption in animal digestive systems, metabolism,
distribution, and the effectiveness of alternate methods of drug
administration, including ocular, transdermal and pulmonary methods, but
there can be no assurance that such modules will be successfully completed or
commercialized.
Trega believes the IDEA-TM- predictive models, when developed, will apply
across the spectrum of pharmaceutical discovery and development activities.
Currently, the IDEA-TM- predictive model of absorption can be used to help
prioritize hits from high throughput screens during the early phase of drug
discovery, permitting the research team to focus its valuable optimization
efforts and limited resources on a smaller number of compounds. The IDEA-TM-
absorption model's primary function in this phase is rank ordering compounds
in a batch mode.
Trega is in the process of refining the IDEA-TM- predictive models to
assist chemists later in the discovery process, when handcrafting of
compounds to meet specific and refined activity and performance criteria is
necessary. The Company expects the IDEA-TM- predictive models will be used to
sort through structure-activity-relationship-data and to guide the
refinement of specific properties, such as solubility or permeability. Trega
believes that the IDEA-TM- predictive models, upon completion of development,
will reduce not only the synthesis effort required to produce an acceptable
compound, but also the amount of animal and laboratory testing required to
generate a clinical candidate. Thus, the data upon which a decision is based
to advance a compound to development is expected to be more predictive of the
outcome in humans.
The IDEA-TM- predictive models are also being developed for use in the
formulation process. Formulation can have a significant impact on a
compound's performance. Optimizing properties, such as solubility,
dissolution, time release or crystal formation, can affect the outcome of a
compound's clinical performance. Trega expects the IDEA-TM- predictive
models, as ultimately developed, to be used to generate hypothetical
scenarios and sentitivity analyses and to optimize different characteristics
to accelerate the development of the best formulation.
Combinatorial Chemistry
As described above, hits are extensively refined through chemical
optimization into qualified drug candidates. This technique requires access
to a large collection of compounds that can be tested rapidly for activity in
assays representing biologic intervention points (targets). Combinatorial
chemistry, which is a technique for simultaneously creating thousands of
chemical compounds, directly addresses the demand for large collections of
compounds. Combinatorial chemistry involves rapidly and systematically
assembling a variety of molecular entities, or building blocks, in many
different combinations to create libraries of chemically and structurally
diverse compounds that can be tested in drug discovery screening assays to
identify potential lead compounds.
The Company believes that its combinatorial chemistry technologies
facilitate the rapid identification of lead compounds for its customers by
creating compounds that offer the following important characteristics:
- PHARMACEUTICALLY RELEVANT COMPOUNDS. The Company believes that its
libraries are designed to produce pharmaceutically relevant compounds.
Trega's combinatorial chemistry libraries are created to meet the design,
diversity, molecular weight, quality and purity criteria preferred by the
pharmaceutical industry.
- TEMPLATE NOVELTY. The Company believes that the distinctive core
structures, or templates, around which the Company's small-molecule
libraries are built, possess the physico-chemical properties and structural
characteristics of pharmaceutical compounds, yet in many cases have not
previously been thoroughly explored as potential drugs. Trega has applied
for patents on nearly all of these libraries.
- EASY-TO-SCREEN FORMATS. Trega's libraries are formatted in singles-based
compound arrays and consist of compounds free in solution, without
interfering solid supports, such as beads, pins, chips or tags. These
libraries do not require use of time consuming deconvolution strategies
commonly employed to identify active compounds in mixture-based libraries.
Moreover, compounds formatted as singles-based compound arrays are created
and screened as individual compounds to facilitate the rapid identification
of active hits.
- VALIDATION. Multiple leads and highly active compounds have been identified
and/or optimized utilizing Trega's technologies, both by Trega and its
collaboration partners.
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Trega's combinatorial chemistry approach to the design and synthesis of
novel, diverse chemical libraries involves the integration of medicinal
chemistry, computational design, solid-phase chemical synthesis, the patented
Tea-Bag method of simultaneous parallel synthesis and automated library
synthesis.
Trega focuses its combinatorial library synthesis program on creating
diverse, low molecular weight compounds, especially heterocyclic structures.
Heterocycles, as a class of compounds, are considered desirable pharmaceutical
candidates because they are more likely to be orally available, are generally
less expensive to manufacture and typically have a longer duration of action
than other compound classes such as peptides and proteins. The Company believes
that compounds of low molecular weight, especially heterocycles, represent the
majority of drugs currently on the market.
Extending the range of Trega's libraries involves developing novel
templates and, subsequently, libraries based on those templates. New
libraries are designed to add to the structural diversity of Trega's existing
libraries, thereby enhancing their utility by increasing the likelihood that
screening of the libraries against a particular biological target will result
in identification of a compound or compounds with activity against that
target. Once a lead compound is identified from a screening library, Trega
utilizes a computational representation of the possible compounds that can be
created around that structure to uncover a set of closely related compounds
(analogues) that can be synthesized and screened to identify the most active
chemical structure.
Chem.Folio-Registered Trademark- Combinatorial Libraries
Chem.Folio-Registered Trademark- libraries and services include:
(i) Chem.Folio-Registered Trademark- screening libraries which offer
off-the-shelf compound libraries for immediate screening for hit finding,
(ii) custom synthesis around customer templates and chemical motifs and
(iii) rapid analoging using Chem.Folio-Registered Trademark- virtual library
and proprietary Tea Bag synthesis technology. Chem.Folio-Registered
Trademark- combinatorial libraries consist of drug-like molecules suitably
formatted for modern screening techniques. In addition, Trega provides
Chem.Folio-Registered Trademark- compounds along with their related synthesis
protocols, which enable a customer to manufacture additional supplies. Also
provided is information on solubility and cytotoxicity, and other information
relevant to the compounds' status as potential drug candidates and
suitability for screening. This information, when combined with the quality of
the Chem.Folio-Registered Trademark- libraries, is intended to assist
customers in more rapidly optimizing hit compounds by facilitating the
development of structure to activity relationships. Trega believes that the
addition of such valuable information will help pharmaceutical companies
reduce the cost and time of their drug discovery programs.
Trega plans to continue enhancing its Chem.Folio-Registered Trademark-
combinatorial libraries by linking them to the information generated from the
IDEA-TM- predictive models. The Company believes that with adequate resources
and development success, such a combination could result in the following:
- When Chem.Folio-Registered Trademark- compounds are screened in
an activity assay, the resulting hits would enable medicinal chemists to
know whether such hits or structural analogs have the potential to
become therapeutic products. This information would allow medicinal
chemists to rank order the chemical series (hits) based on structure,
ADME and toxicology characteristics, thus reducing the time for
optimization by allowing them to focus on the most promising candidates.
- Certain Chem.Folio-Registered Trademark- compounds could be
computationally screened to determine which compounds have drug-like
characteristics. Such compounds could then be screened against a large
variety of targets to quickly determine which targets should be pursued
first. Following the sequencing of the human genome and the application
of other down-stream technologies such as proteomics, when the
availability of targets is anticipated to increase substantially, this
approach could allow pharmaceutical companies to focus their initial
discovery efforts on targets that can actually be successfully
addressed with small molecule chemistry.
- Virtual libraries could be computationally screened against targets, and
only those virtual compounds with drug-like characteristics and calculated
activity would be created and tested.
- Using combinatorial libraries with historical data generated against
other targets, virtual screening in combination with technologies in
structural biology could be expected to identify target structures and
leads.
- The Company believes that by utilizing the IDEA-TM- predictive
models and information-rich chemistry, far fewer exploratory
experiments may need to be conducted. The necessity for mass screening of
compounds against a particular target and wet lab experimentation could
decrease. Experiments would be confirmatory (to validate the prediction
of the computational model) rather than exploratory.
In addition to its direct sales efforts, Trega distributes
Chem.Folio-Registered Trademark- products through two other channels. In August
1999, the Company entered into a strategic relationship with
ChemNavigator.com-TM-, Inc. ("CNC"), a business to business e-commerce
company, to offer Chem.Folio-Registered Trademark- compounds to researchers
over the Internet. The CNC distribution channel allows Trega to access
markets difficult to reach by its current direct sales organization including
universities, research institutions, smaller and/or geographically isolated
research companies and researchers without direct access to chemistry
resources who are interested in purchasing a single or small numbers of
compounds. In contrast to other electronic research supply catalogs, CNC
permits researchers
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to search for compounds on the basis of structure. Trega owns shares
presently comprising an approximate 20% interest in CNC and holds a warrant
to acquire shares presently comprising an additional 5% interest. (See
"Principal Strategic Alliances and Collaborations.-- ChemNavigator.com-TM-
Inc." below) The CNC website was launched in November 1999, and, as such the
revenue to the Company generated through the website has been immaterial.
Trega also sells access to Chem.Folio-Registered Trademark- compounds
through screening service companies, including EVOTEC BioSystems AG.
("EVOTEC"), a leading European screening company, which has developed
miniaturized biological activity screening technology. Trega will receive a
fee for each Chem.Folio-Registered Trademark- compound screened by EVOTEC as
part of screening service agreements with its clients. (See "Principal
Strategic Alliances and Collaborations--EVOTEC BioSystems AG" below). Trega
intends to enter into similar additional agreements, allowing the generation
of revenue and follow up services from a much wider client base.
Customized Combinatorial Libraries
The Company also offers customized compound libraries. Trega works
closely with each customer to ensure that the compound libraries meet the
criteria set forth by the customer. Trega has provided customized libraries
as stand-alone products or as part of drug discovery collaborations. (See
"Principal Strategic Alliances and Collaborations--Novartis Pharma AG and Ono
Pharmaceuticals Co., Ltd." below.)
OTHER TECHNOLOGIES
Internal Drug Discovery Programs
On February 11, 2000, the Company announced that it did not intend to
continue to support internal drug discovery programs that are not funded by a
collaborator. Although the primary focus of the Company is on the continuing
development and expansion of its IDEA-TM- predictive models and
Chem.Folio-Registered Trademark- libraries, Trega's current intention is to
carry forward the drug discovery program with Novartis.
Trega is currently engaged in a multi-year, fully funded discovery
collaboration with Novartis in the field of diabetes, obesity, and syndrome
X. In addition to a three-year funding commitment to Trega of $3.3 million
per year, which commenced in June 1998, Novartis will pay milestones and
royalties to Trega for the successful development of a product in this field.
The current program with Novartis is funded semi-annually at a rate of
$825,000 per quarter, which is adequate to cover the cost of the activities
expected to be carried out by Trega under this agreement. (See "Principal
Strategic Alliances and Collaborations--Novartis Pharma AG" below.)
In addition, the Company has conducted research resulting in lead
compounds for the treatment of sexual dysfunction. This program is at a stage
of development that Trega does not intend to carry forward without funding
from a collaborator. Trega is currently seeking such a collaborator.
The Company also owns a compound designated HP-228, which has completed a
Phase II clinical trial in the treatment of post-operative pain in hip and knee
replacements. The Company does not intend to pursue further development and
commercialization of this compound without a collaborative partner.
Caco-2 Cell Line
The Company obtained a worldwide, exclusive license for all commercial
applications of the Caco-2 cell line and its derivatives in connection with its
acquisition of NaviCyte. The licensor is Memorial Sloan-Kettering Cancer
Research Institute. The Company believes that the Caco-2 cell line is currently
the most widely used cell line for in-vitro estimation of the oral absorption of
compounds. Trega currently grants nonexclusive sublicenses at a relatively
modest cost to companies wishing to use the Caco-2 cell line for their internal
use and to service firms for use in contract research studies.
BUSINESS STRATEGY
Trega's objective is to be the leading developer and supplier of
information-based products that will reduce the cost of, simplify, and
accelerate drug discovery and development, particularly focusing on the
bottleneck represented by the inefficient process of turning hit compounds into
validated drug candidates. In 1999, Trega invested significantly in three areas:
(1) the development and completion of the first IDEA-TM- predictive module
for absorption;
(2) the further development of the Chem.Folio-Registered Trademark-
combinatorial chemistry libraries and the addition of an Internet-based
distribution channel, CNC, for such libraries; and
(3) the screening of the Company's combinatorial chemistry libraries
against a series of melanocortin receptors.
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Trega's commercial approach focuses on the intended development and
implementation of a mix of the Company's proprietary iDiscovery-TM-
technologies, corporate collaborations and acquisitions or licensing of
complementary technologies. To implement its strategy, Trega intends to:
- - Develop, both internally and through corporate collaborations, the
IDEA-TM- predictive models to facilitate the rapid screening of drug
development candidates for pharmacokinetic characteristics (such as how
such candidates are absorbed in humans, distributed through the body,
metabolized and excreted). The first IDEA-TM- module for predicting
absorption has been completed and is in the early rollout phase of
commercialization. Additional simulation modules that are intended to
predict metabolism, and toxicology profiles of compounds are under
development. Trega has entered into a collaboration with EVOTEC, focusing
on the development of new, miniaturized, high-throughput ADME assays for
pre-clinical lead optimization. Such assays will be used to screen
certain Chem.Folio-Registered Trademark- compounds. Trega intends to use
the resulting data to further enhance the IDEA-TM- predictive models.
- - Support the drug discovery efforts of pharmaceutical and biopharmaceutical
customers (1) by offering, through Chem.Folio-Registered Trademark-,
non-exclusive access to diverse, small-molecule
compound libraries and (2) by providing compound libraries custom
synthesized to the requirements of the individual customer. Since the
introduction of its Chem.Folio-Registered Trademark- library program in
mid-1998, Trega has entered into arrangements for the sale of
Chem.Folio-Registered Trademark- combinatorial libraries to Biogen, ISIS,
Parke-Davis, Elitra Pharmaceuticals, Cytokinetics, Inc., DuPont Crop
Protection, EVOTEC, Discovery Technologies, Ltd. ("DTL) and others. Trega
entered into a custom synthesis agreement with Boehringer Ingelheim
International GmbH and has provided custom libraries in connection with
its drug discovery collaborations with Ono Pharmaceuticals Co., Ltd.
("Ono"), focusing on the identification of small-molecule agonists of
melanocortin-1 to treat inflammatory conditions, and Novartis focusing on
treatments of certain diseases believed to be mediated by the
melanocortin-4 receptor pathway such as obesity, Type II diabetes and
Syndrome X.
- - Acquire or license complementary information-based technologies. The
computational area is populated with many companies possessing proprietary
technologies in niche areas. Trega intends to consider the acquisition or
licensing of those technologies that will add market value to its
iDiscovery-TM- technologies.
- - Expand Trega's use of the Internet and intranets to market and
disseminate Trega's iDiscovery-TM- products and services. Currently,
customers may order Chem.Folio-Registered Trademark- compounds on the
Internet through CNC. The Company intends to develop a web portal through
which existing and potential customers may (1) access information on
compound structures contained in Chem.Folio-Registered Trademark-
libraries, (2) learn more about Trega's IDEA-TM- predictive models and,
ultimately, (3) access and use Chem.Folio-Registered Trademark- virtual
libraries and the IDEA-TM- predictive models on a secure site. Trega's
efforts in developing this web portal is in their preliminary stages.
There can be no assurance that the Company will be successful in developing
and implementing its Internet based strategy.
PRINCIPAL STRATEGIC ALLIANCES AND COLLABORATIONS
EVOTEC BioSystems AG
In January 2000, Trega entered into an Agreement for Joint Development of
Assays and the Cross Licensing of Affiliated Technologies with EVOTEC, a
Hamburg, Germany based company, pursuant to which the parties will
collaborate on the development of new, miniaturized, high-throughput ADME
assays for pre-clinical lead optimization. The objective of the collaboration
is to develop assays that will aid in the faster and more cost efficient
development of drug candidates with higher chances of success prior to
clinical testing. The collaboration combines EVOTEC's expertise in ultra
high-throughput screening technology, miniaturized assay development and its
detection expertise based on its proprietary single molecule detection
technology with Trega's capabilities in the field of ADME screening and assay
development. EVOTEC was granted a nonexclusive license to commercialize the
jointly developed assays and Trega has the right to the assays for internal
use. Trega will be entitled to royalties resulting from EVOTEC's
commercialization of the assays. In addition, EVOTEC will be granted a
license to the IDEA-TM- absorption module under certain circumstances.
In December 1999, the Company entered into a Library Sales Agreement with
EVOTEC, pursuant to which EVOTEC will purchase certain amounts of all
Chem.Folio-Registered Trademark- compounds contained within Trega's inventory
as well as certain compounds produced through the end of 2000. Selected
compounds will be screened through the jointly developed assays and Trega
intends to use the data to enhance the IDEA-TM- predictive models, which data
and models will be owned by Trega. The purchased compounds will also include
associated information, such as synthetic protocols, cytotoxicity, and
physico-chemical data. EVOTEC will use the Chem.Folio-Registered Trademark-
compounds in its internal drug discovery programs and will allow its
screening customers access to Chem.Folio -Registered Trademark- compounds on
a fee per compound basis, which fee will be passed through to Trega.
ChemNavigator.com-TM-, Inc.
In August 1999, Trega entered into a strategic relationship with CNC, a
privately held i-Research-TM- company, founded to supply chemistry and
reagents to pharmaceutical, biotechnology, agricultural and life science
researchers. Certain of Trega's Chem.Folio-Registered Trademark- compounds
will occupy a position on the website of CNC, providing a complement to
Trega's existing distribution channels. The CNC website was launched in
November 1999, and as such, the revenue to the Company generated through the
website has been immaterial.
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The CNC website is an e-commerce site that Trega believes will provide a new
strategy for finding and purchasing research compounds and reagents from sources
around the world. It is the Company's understanding that CNC (1) will provide a
unique and powerful proprietary search engine to facilitate structure and
property-based searches of compound collections and libraries available on the
site and (2) will also contain links to other relevant databases.
Under the terms of the strategic relationship, Trega acquired 1,176,666 shares
of the Series B Convertible Preferred Stock of CNC, representing approximately
20% of the outstanding equity securities of CNC and a warrant to purchase an
additional 294,167 shares of CNC's Common Stock at a purchase price of $5.00 per
share. In exchange, Trega paid $1.0 million and issued 1.0 million shares of its
Common Stock to CNC. Trega also agreed to issue a warrant to CNC to purchase an
additional 294,167 shares of Trega Common Stock at a purchase price of $5.00 per
share.
Novartis Pharma AG
In May 1998, Trega entered into a Research, Development and License
Agreement with Novartis (the "Research Agreement"), pursuant to which the
companies are focused on the identification and development of orally-active
small molecules for the treatment of certain diseases believed to be mediated by
the melanocortin-4 receptor pathway, including obesity, Type II diabetes and
Syndrome X. The Research Agreement provides for (i) an equity investment at
Trega's option, which the Company exercised in November 1998 and received $7.0
million in exchange for approximately 1.9 million shares of the Company's Common
Stock; (ii) an additional $12 million in committed funding (consisting of $2.0
million received upon the execution of the Research Agreement for past research
activities and $10 million over a three-year period); and (iii) potential
milestone payments and royalties from the successful development and
commercialization of products (for which Novartis has worldwide rights). In
October 1999, the parties expanded their research efforts to include an
undisclosed, additional obesity-related biological target.
In February 2000, the Company announced that it did not intend to support
internal drug discovery programs that are not funded by a collaborator. Trega's
current intention is to carry forward only those drug discovery programs that
are fully funded at the end of the first quarter of 2000, which includes its
joint development program with Novartis. The current program is funded semi
annually at a rate of $825,000 per quarter, which is adequate to cover the cost
of the activities expected to be carried out by Trega under this agreement.
Ono Pharmaceuticals Co., Ltd.
In June 1997, Trega entered into a Research and Development Agreement with
Ono pursuant to which the Company screened its combinatorial chemistry libraries
and certain of Ono's chemical compounds against a melanocortin-1 receptor screen
to identify potential small-molecule agonists of the receptor to treat
inflammatory conditions. Trega received an up-front license fee and an
additional payment for work to be performed during the first 24 months under the
agreement. Trega will also receive milestone and royalty payments on products it
discovers which are subsequently developed and marketed by Ono, if any. Rights
to commercialize products resulting from the arrangement, if any, will belong to
Ono in China, Japan, South Korea and Taiwan and to Ono and Trega in Europe, with
Trega holding such rights with respect to North America and the rest of the
world. The research phase of this agreement, and consequently Trega's obligation
to conduct work and Ono's funding obligation to Trega, have ended. Trega
believes that Ono is not currently pursuing the development of any compounds
covered by this agreement. In May 1998, Trega and Ono reached a definitive
agreement for Trega to create additional custom combinatorial libraries and
optimize lead compounds discovered by Ono, and to screen those compounds in a
target of interest to Ono. Trega received approximately $1.9 million in research
funding to perform this work, which has been completed.
Chugai Biopharmaceuticals, Inc.
A collaboration with Chugai Biopharmaceuticals, Inc. ("Chugai"), a
subsidiary of Chugai Pharmaceutical Co., Ltd., was initiated in January
1997. Pursuant to this arrangement, Trega provided Chugai with
combinatorial libraries which Chugai screens against a range of targets.
Compounds identified with activity in bone, cardiovascular and infectious
diseases as well as hematological growth factors and oncology may be
developed by Chugai, and Chugai will pay milestone payments and royalties
on compounds, if any, discovered from Trega's libraries and subsequently
developed and marketed by Chugai (for which Chugai would have worldwide
rights). Chugai and Trega will jointly own any compounds with identified
activity in Chugai's inflammation screens. In addition, Trega may develop
any compounds discovered in selected Chugai screens targeted at obesity
and central nervous system diseases, with a royalty obligation payable to
Chugai for any compounds that are commercialized.
CERTAIN LICENSE AND OTHER TECHNOLOGY ARRANGEMENTS
Torrey Pines Institute For Molecular Studies ("TPIMS")
Pursuant to a Restated and Third Amended Research and Option
Agreement with TPIMS (the "TPIMS Agreement"), Trega historically relied
upon TPIMS, a not-for-profit biomedical research institute founded by the
founder of the Company (Dr. Richard Houghten), for certain basic research
and laboratory facilities and scientific personnel necessary for the
Company to conduct a significant portion of its
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combinatorial chemistry business. As a result of (i) Trega's development
of internal resources and personnel to support the conduct of its
combinatorial chemistry business and (ii) Trega's adoption of techniques
for the creation of combinatorial libraries in singles-based arrays,
which techniques are not within the special interest of TPIMS in creating
mixture-based libraries, the Company no longer relies upon TPIMS for
those facilities and services previously provided. Pursuant to the TPIMS
Agreement, Trega funded TPIMS through July 14, 1998.
Pursuant to the TPIMS Agreement, Trega purchased TPIMS' entire right, title
and interest in and to certain technology that arose at TPIMS and was identified
in the Agreement, subject to the continuing rights of the United States
government, if any, and of TPIMS to use the technology for academic purposes.
This purchase eliminated the obligation of Trega to make milestone payments and
to pay royalties in respect of products based upon this technology. The purchase
price pertaining to these rights was $1.3 million.
Subsequently, as of March 4, 1999, Trega entered into a Services and License
Agreement (the "Services Agreement") with TPIMS which gives the Company the
opportunity to call upon TPIMS for chemistry services on an as-needed basis.
Under the Services Agreement, Trega returned to TPIMS for its use certain
combinatorial chemistry libraries which were of no further interest to the
Company, and TPIMS agreed to give the Company a right of first refusal in the
field of melanocortin receptor ligands.
Dura Pharmaceuticals, Inc.
In February 1996, Trega entered into a Research and Development Agreement
(the "Original Agreement") with Dura Pharmaceuticals, Inc. ("Dura"). Dura
markets pharmaceuticals for the treatment of respiratory diseases and is
developing a dry powder inhalation system for pulmonary delivery of respiratory
drugs and other pharmaceuticals. Pursuant to the Original Agreement, Trega
committed to provide funding totaling $6.0 million (the "Research Funds") over
four years to seek to apply Dura's proprietary drug delivery technology to
Company compounds. Concurrent with the execution of the Original Agreement, Dura
purchased shares of the Company's preferred stock, which were converted to
shares of the Company's Common Stock upon closing of Trega's initial public
offering, for $5.0 million.
In April 1998, Trega initiated a Phase I dose-escalation trial evaluating
the safety of administering HP-228 to the lungs. In the trial, HP-228 was
delivered using Dura's proprietary pulmonary drug delivery system. In
September 1998, Trega announced completion of four of the five planned dosage
groups, with the Company electing not to study the highest dosage level.
Preliminary data indicated systemic absorption from delivery to the lungs and
no safety problems at the doses studied.
In June 1999, Trega and Dura signed a Mutual Release which releases the
parties from certain responsibilities set forth in the Original Agreement and
terminates the Original Agreement other than in certain limited regards. As
of December 31, 1999, $5.1 million of the Research Funds had been paid by the
Company. The Mutual Release provides that the outstanding balance due on this
obligation shall be limited to payments of $200,000, which was made upon the
signing of the Mutual Release, and $138,414, which is due by March 31, 2000.
The Scripps Research Institute
Trega is the assignee of a license to the method patent covering the Tea Bag
simultaneous parallel solid-phase synthesis technology from The Scripps Research
Institute ("Scripps"). This license was acquired from the technology's inventor,
Dr. Richard Houghten. Trega, under certain circumstances, may be required to pay
royalties, which were amended in October 1999, to Scripps for use of the Tea Bag
technology. This method patent expires in 2003.
Northwest Neurologic, Inc.
In May 1997, Trega entered into a Research & License Agreement with
Northwest Neurologic, Inc. ("NNL"), which was subsequently amended (the "NNL
License Agreement"). Under the NNL License Agreement, Trega acquired a
nonexclusive license to certain technology related to the melanocortin receptors
for use in a defined field. In exchange, Trega agreed to pay cash to NNL and to
provide NNL with the use of up to 10 combinatorial libraries and certain other
services to be provided by the Company. Each party will owe milestone payments
and royalties to the other based upon the development and commercialization of
products employing the technology received under the NNL License Agreement. In
March 1998, NNL was acquired by Neurocrine Biosciences, Inc.
SALE OF ASSETS
Harvard Apparatus, Inc.
In December 1999, the diffusion chamber systems product line of Trega's
wholly owned subsidiary, NaviCyte, was sold to Harvard Apparatus, Inc.,
("Harvard Apparatus") a Holliston, MA based company. The diffusion chamber
product line is a patented line of devices which provides for in vitro
simulation of the environments on either side of a biological membrane or
cultured cell monolayers to
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permit screening of drug compounds outside of the body. Previously, NaviCyte
sold the devices directly to researchers as well as through Corning/Costar.
Trega divested this product line in order to focus on its iDiscovery-TM-
technologies business and because the revenues generated by the product line
were immaterial.
Under the terms of the transaction, Harvard Apparatus paid Trega an up
front fee and will pay royalties for an agreed upon term on future sales of
diffusion chamber products. To date, Trega has not received any royalties.
ChromaXome Corp.
In March 1999, substantially all of the assets of ChromaXome Corp.,
("ChromaXome"), a wholly owned subsidiary of Trega, were sold to TerraGen
Discovery Inc. ("Discovery"), the wholly owned subsidiary of TerraGen
Diversity Inc. ("Diversity"). As consideration for the sale, Trega received
$2.0 million in cash, interest-bearing promissory notes of Discovery with an
aggregate principal amount of $3.0 million and 600,000 shares of Diversity
preferred stock. Of the $3.0 million in principal amount of notes, $2.0
million has been timely paid and the remaining $1.0 million is payable no
later than April 15, 2000, with the entire amount secured by Discovery's
pledge of the assets acquired from ChromaXome.
Until the closing of such sale, Trega had been conducting an early-stage
combinatorial biology program through ChromaXome (which the Company acquired
in August 1996). In combinatorial biology, scientists attempt to create
libraries of potentially new compounds through the molecular manipulation,
cloning and transfer of genetic material from a naturally occurring
microorganism into a suitable industrial microbial host. As a result of
Trega's current focus on developing technologies that add to its drug
discovery techniques (such as the iDiscovery-TM- technologies), the Company
determined that further development of a parallel technology to create
molecular diversity (i.e., combinatorial biology as compared to Trega's core
competency in combinatorial chemistry) created unneeded redundancy and
diverted funds and other resources away from complementary development
programs. As a result of the sale, eight persons formerly employed by
ChromaXome became employees of Discovery (comprising the entire staff of
ChromaXome at the time of the sale).
MARKETING AND SALES
Trega has established a direct sales, marketing, and business
development organization to support the distribution of Trega products and
services, including its IDEA-TM- absorption simulation modules,
Chem.Folio-Registered Trademark- compound libraries, custom compound library
synthesis and Caco-2 cell lines. Field-based sales representatives are
supported by Ph.D. scientists from the corporate office. The Company also
offers its Chem.Folio-Registered Trademark- compounds through the CNC website
and two screening service companies, EVOTEC and DTL. (See "Trega's Drug
Discovery Technologies--Combinatorial Chemistry--
Chem.Folio-Registered Trademark- Combinatorial Libraries" above.)
PATENTS
The Company's policy is to file patent applications to protect
technology, inventions and improvements that are considered important to the
development of its business. The Company currently pursues patent protection
for its IDEA-TM- predictive modeling technologies, its combinatorial
chemistry technologies and libraries, including its qChem.Folio-Registered
Trademark- libraries, and its efforts in the melanocortin area. Currently,
the Company has approximately 36 issued United States patents and 62 pending
United States patent applications, plus their foreign equivalents. The patent
positions of pharmaceutical and biotechnology firms, including the Company,
are uncertain and involve complex legal and factual questions for which
important legal principals are largely unresolved.
RESEARCH AND DEVELOPMENT EXPENSES
Trega incurred research and development expenses totaling approximately
$17.9 million, $17.9 million and $14.8 million in 1999, 1998 and 1997,
respectively. (See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" below.)
EMPLOYEES
At March 3, 2000, the Company had 117 full-time employees, including 78
in research and development. Of the Company's total employees, approximately
50 hold advanced degrees. Trega places an emphasis on obtaining the highest
available quality of staff. Trega has selected and assembled a group of
experienced scientists and managers with skills in a wide variety of
disciplines, including chemistry, biology, pharmaceutical and software
development. None of the Company's employees is covered by collective
bargaining arrangements, and management considers relations with its
employees to be good.
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RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS, IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE COULD AFFECT,
THE COMPANY'S ACTUAL RESULTS AND COULD CAUSE THE COMPANY'S ACTUAL
CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE
COMPANY. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; IRREGULAR
REVENUE FLOW
The Company has experienced significant operating losses since inception.
For the years ended December 31, 1999, 1998 and 1997, the Company had net losses
of approximately $8.7 million, $12.8 million and $9.4 million, respectively. As
of December 31, 1999, the Company had an accumulated deficit of approximately
$77.1 million.
The Company expects that its ability to achieve profitability will be
partly dependent upon the ability of the Company to market and sell its
iDiscovery-TM- technologies, which includes its IDEA-TM- predictive models
and Chem.Folio-Registered Trademark- compound libraries. There can be no
assurance that Trega will be successful in marketing its products in a
manner, including through collaborative ventures, that will result in
additional revenues. Although Trega has changed it strategic focus to
concentrate on the development and marketing of its iDiscovery-TM-
technologies, the Company still depends in part on revenues from
collaborative arrangements in its internal drug discovery programs. There can
be no assurance that the Company will be successful in entering into
additional collaboration arrangements that will result in revenues or that
the Company will receive additional revenues under existing collaboration
arrangements in such internal drug discovery programs. If the Company is
unable to receive significant additional revenues from its iDiscovery-TM- or
internal drug discovery programs, the Company expects to incur additional
operating losses in the future and expects cumulative losses to increase as
the Company's research and development efforts are expanded. Any revenues
from the achievement of milestones, royalties or license fees from the
discovery, development or sale of a commercial drug by a collaborator are not
expected to be material to the Company's financial position for several
years, if at all. The Company has been unprofitable since its inception and,
while the Company has set as an objective reaching positive cash flow by the
end of 2000, the Company is unable to predict when, if ever, it will become
profitable or give assurances that the Company's positive cash flow objective
will be met.
As a result of factors affecting the Company's business (including the
importance to the Company of collaborative arrangements and the Company's
inability to control the actions, timing, funding or success of its current
and potential collaborative partners), the revenues of the Company may vary
substantially from period to period. In addition, the Company has limited
experience marketing its first IDEA-TM- module, the absorption module, which
was launched in December 1999. The Company believes that the absorption
module is the first of its kind. As such, the Company anticipates that
potential customers will wish to perform extensive validation studies. The
sales cycle of such product is therefore unknown. Thus, the Company's results
for any one period may not be indicative of the results which can be expected
for any other period.
NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS
Drug discovery methods based upon the IDEA-TM- predictive models and
combinatorial chemistry technologies, such as Chem.Folio, are new compared to
traditional methods of drug discovery. There can be no assurance that such
methods will lead to the discovery or development of commercial
pharmaceutical products or that the Company will be able to employ these or
other methods of drug discovery successfully. Moreover, the Company's
technology development programs, including certain of the IDEA-TM- modules,
such as metabolism, are at early stages of development, and there can be no
assurance that such technology programs will be developed, employed or
commercialized successfully, work efficiently or otherwise enhance the
Company's ability to engage in the acceleration of the drug discovery
process. The efficacy of the IDEA-TM- predictive models, the types of
combinatorial libraries the Company is capable of offering, the nature of the
compounds the Company is able to synthesize and the relative value of any
other drug development technologies which the Company may be able to provide
will, in large part, determine the demand for the Company's drug discovery
capabilities. An inability to offer competitive or commercially viable
predictive technologies or compound libraries or other drug discover
technologies, or an inability to synthesize compounds that have actual or
potential utility, would have a material adverse effect on the Company.
Failures in the field of drug discovery, including predictive models and
combinatorial chemistry, could have a material adverse effect on the Company.
EARLY STAGE OF PRODUCT DEVELOPMENT
Certain of the Company's technology development programs, including the
Company's IDEA-TM- predictive technologies, may not result in additional
products or services that can be utilized within the foreseeable future, if
ever. Although the IDEA-TM- predictive technologies have been validated by the
IDEA-TM- consortium, they have not been commercially validated by potential
customers. There can be no assurances that these programs will be successfully
completed or result in products or services that are efficacious, perceived as
valuable by pharmaceutical partners or customers, useful in the Company's
internal development programs or otherwise an enhancement to the Company's
ability to accelerate the drug discovery process.
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The Company's internal drug discovery programs, including the Company's
program with respect to potential drug candidates for the treatment of
diseases believed to be mediated by the melanocortin receptor pathway, are at
early stages. The Company only intends to proceed with such internal drug
discovery programs if, and to the extent, they are funded by collaborators.
The development of any lead compounds resulting from the Company's research
and development programs, such as HP-228, will be under the control of the
Company's partners. In addition, such compounds are not expected to be
commercially available for a number of years, if ever, even if any such
compounds are successfully developed and are proven to be safe and effective.
There can be no assurances that any of the Company's product development
efforts will be successfully completed, that development arrangements with
pharmaceutical partners will be established on acceptable terms, if at all,
that regulatory approvals will be obtained or will be as broad as sought,
that any candidate products will be capable of being produced in commercial
quantities at reasonable cost, or that any products, if introduced, will
achieve market acceptance or profitability.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The continued development of the Company's technologies and compounds
will require the commitment of substantial additional funds to continue its
development of the IDEA-TM- predictive models and to maintain the
competitiveness of its combinatorial chemistry technologies. The Company's
future capital requirements will depend on many factors, including, among
others, (i) continued scientific progress in its research and development
programs, (ii) the costs involved in developing and refining the IDEA-TM-
predictive models, (iii) the costs involved in further developing and
sustaining internal combinatorial chemistry, including the Chem.Folio
- -Registered Trademark- compound libraries, (iv) the costs involved in
developing additional drug discovery technologies, (v) the ability of the
Company to establish and maintain collaborative arrangements with respect to
the Company's internal drug discovery programs, (vi) the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims,
(vii) competing technological and market developments and (viii) changes in
the Company's existing collaborations. Assuming a level of Chem.Folio
- -Registered Trademark- compound library revenues in fiscal 2000 that is
comparable to Chem.Folio -Registered Trademark- compound library revenues in
fiscal 1999 (a portion of which is covered by existing product sales
agreements), the Company anticipates that its existing capital resources and
funding under an existing research and development collaboration, and notes
due to the Company in connection with the sale of assets of its wholly-owned
subsidiary, ChromaXome Corp., together with its currently available property
and equipment financing and line of credit, will be sufficient to fund its
current and planned operations through the next 12 months. The failure to
materialize of any one or more of its anticipated sources of revenue could
have a material adverse impact on the Company.
The Company anticipates that it will be required to raise additional
capital over a period of several years in order to conduct its operations.
Such capital may be raised through additional public or private financings,
as well as collaborative arrangements, borrowings and other available
sources. There can be no assurance that additional financing will be
available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs, which could
have a material adverse effect on the Company.
DEPENDENCE ON COLLABORATORS
The Company's strategy for the utilization and development of Trega's
drug discovery technologies, such as the iDiscovery-TM- technologies, and for
the development, clinical testing, manufacturing and commercialization of any
lead compounds depends, at least in part, upon the formation of
collaborations and arrangements with corporate collaborators, licensors,
licensees and others. The Company intends to proceed with its internal drug
discovery programs only if collaborators are available to fully fund such
programs. There may only be a limited number of pharmaceutical and
biotechnology companies that would potentially collaborate with the Company.
Historically, pharmaceutical and biotechnology companies have conducted lead
compound identification and optimization within their own research
departments, due to the highly proprietary nature of the activities being
conducted, the central importance of these activities to their drug discovery
and development efforts and the desire to obtain maximum patent and other
proprietary protection on the results of their internal programs.
Pharmaceutical and biotechnology companies must be convinced that the
Company's drug discovery technologies and expertise justify outsourcing these
programs to the Company. The amount and timing of resources that current and
future collaborators, if any, devote to collaborations with the Company are
not within the control of the Company. There can be no assurance that such
collaborators will perform their obligations as expected or that the Company
will derive any additional revenue from such arrangements. Because the
Company's arrangements with its collaborators may entail the provision of
identical or similar libraries, or compound technologies or information to
multiple parties, there can be no assurance that conflicts will not arise
between collaborators as to proprietary rights to particular libraries, or
particular compounds in the Company's libraries. Moreover, the Company's
collaborations and licenses may be terminated under certain circumstances by
the other parties thereto, which terminations could result in the Company
relinquishing rights to products, if any, developed jointly with its
collaborators. Any such conflicts or terminations could have a material and
adverse effect on the Company.
There can be no assurance that (i) the Company's present or any future
collaborators will not pursue their existing or alternative technologies in
preference to those of the Company, (ii) any product will be developed and
marketed as a result of such collaborations or (iii) the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that such current or future collaborative arrangements will
be successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, (i) it will require substantially greater capital
to undertake the research, development and marketing of
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products, such as IDEA-TM- and Chem.Folio, at the Company's own expense and
(ii) in the case of Trega's internal drug discovery programs, the Company
will not pursue the continuation of such programs. In addition, the Company
may encounter significant delays in developing compounds or find that the
development, manufacture or sale of its proposed products is materially and
adversely affected by the absence of such collaborative agreements.
COMPETITION
The Company is engaged in a highly competitive and rapidly changing
industry. Trega's IDEA-TM- predictive models compete not only with the
products of other predictive modeling companies, but also companies employing
more mature and established technologies, including cell-based and animal
testing technologies. The Company's combinatorial chemistry business competes
with other combinatorial chemistry companies and companies that may utilize
other technologies for the same objectives. Competition from fully integrated
pharmaceutical companies, biotechnology companies and other drug discovery
companies is intense and is expected to increase. Many pharmaceutical and
biotechnology companies, which represent the largest potential market for the
Company's predictive models, combinatorial chemistry and other drug discovery
technologies, have developed or are developing internal predictive modeling
and/or combinatorial chemistry programs or have entered into collaborations
with companies conducting such programs. Many of these pharmaceutical and
biotechnology companies, as compared with the Company, have significantly
greater financial resources and expertise in research and development,
manufacturing, preclinical and clinical testing, obtaining regulatory
approvals and marketing. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Academic
institutions, governmental agencies and other public and private research
organizations also conduct research, seek patent protection and establish
collaborative arrangements for products and clinical development and
marketing which may be competitive with the Company's efforts. These
companies and institutions compete with the Company in recruiting and
retaining highly qualified management, scientific and software development
personnel. There is also competition for access to novel pharmacophores and
desirable assays to use for screening of libraries, and any inability of the
Company to develop novel pharmacophores or maintain access to a sufficiently
broad range of assays for screening potential drugs would have a material
adverse effect on the Company. There can be no assurance that the Company's
competitors will not develop more effective or more affordable technology or
products, or achieve earlier product development and commercialization than
the Company, thus rendering the Company's technologies and/or products
obsolete, non-competitive or uneconomical.
A number of companies have indicated that they have developed or are
developing predictive models. Trega is aware of one company that has launched
a product that might be competitive with the IDEA-TM- predictive models. The
Company believes that the principal competitive factors affecting its market
in the predictive modeling industry include performance, price, ease of use,
product reputation, patent position, quality, customer service and support,
effectiveness of sales and marketing efforts and company reputation. Although
Trega believes that it currently competes favorably with respect to such
factors, there can be no assurance that the Company can maintain such a
position against current or potential competitors in the predictive modeling
industry.
In combinatorial chemistry and other drug discovery technologies, the
Company faces competition based on a number of factors, including price, size,
diversity of libraries, ease of use of libraries, purity, target specificity,
speed and costs of identifying and optimizing potential lead compounds, access
to novel pharmacophores and desirable assays, patent position and the ability to
provide drug discovery technologies desired by or useful to potential partners.
In view of the competitive nature of the Company's industry, the Company expects
to face continued and substantial downward pressure on the prices which the
Company is able to charge for its products and services.
In addition, products and therapies that will compete directly with any
compounds that the Company seeks to develop (such as HP-228), or that the
Company's collaborative partners may seek to develop, currently exist or are
being developed. In product development and marketing, the Company and its
collaborative partners will face competition based on product efficacy and
safety, the timing and scope of regulatory approvals, availability of supply,
marketing and sales capability, reimbursement coverage, price and patent
position.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend in large part on its ability to obtain
patents for its methodologies and the compounds and other products, if any,
resulting from the application of such methodologies, defend patents once
obtained, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the U.S. and in foreign countries. The
patent positions of pharmaceutical and biotechnology companies, and companies
utilizing drug discovery technologies such as predictive modeling and
combinatorial chemistry (including the Company), are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. There can be no assurance that the Company will develop or
obtain the rights to products or processes that are patentable, that patents
will issue from any of the pending applications or that claims allowed will be
sufficient to protect the Company's technologies or products. Pending patent
applications for which rights are uncertain include applications being
prosecuted by the Company with respect to the Company's IDEA-TM- predictive
technologies, combinatorial chemistry libraries and certain uses for HP-228.
There can be no assurance that the patents of, or with respect to which rights
have been licensed to, the Company will not be challenged, invalidated or
circumvented, or that the rights granted or licensed to the Company will provide
14
<PAGE>
proprietary protection or competitive advantages to the Company. Such patents
include a U.S. patent for the Tea Bag technology, which is licensed to the
Company, and the Company's U.S. patent for the composition of matter of
HP-228 and certain uses of HP-228. The U.S. patent on the Tea Bag technology,
that the Company believes is important to the Company's business, expires in
2003. Competitors (some of which have, or are affiliated with companies
having, substantially greater resources than the Company) may have filed
applications, may have been issued patents or may obtain additional patents
and proprietary rights to or the use of certain methodologies relating to
products or processes competitive with those of the Company or which could
block the Company's efforts to obtain patents or conduct its business.
A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in the fields of combinatorial chemistry and other drug
discovery technologies and with respect to products and therapies that may
have potential uses which are similar to the Company's current research and
development areas. The commercial success of the Company will depend in part
on the Company's not infringing patents and not breaching the patent and
know-how licenses upon which any of the Company's technologies or compounds
are based or having such licenses breached or terminated by others. Certain
patent applications or patents may conflict with the Company's patent
applications and patents either by claiming the same methods or compounds or
by claiming methods or compounds which would dominate those of the Company. A
U.S. patent application is maintained under conditions of confidentiality
while the application is pending in the U.S. Patent and Trademark Office
("PTO") so that the Company cannot determine the inventions being claimed in
pending patent applications filed by its competitors in the PTO. Any such
conflicts could result in a significant reduction of the coverage of the
Company's issued or licensed patents and its ability to obtain issuance of
significant patent protection from its applications. In addition, if patents
are issued to other companies which contain competitive or conflicting
claims, the Company may be required to obtain licenses to these patents or to
develop or obtain alternative technology. If any license is required, there
can be no assurance that the Company will be able to obtain any such license
on commercially favorable terms, if at all. If such licenses are not
obtained, the Company could be prevented from pursuing the development or
commercialization of its technologies or potential products. The Company's
breach of an existing license or failure to obtain a license to any
technology that it may require to commercialize its technologies or its
potential products may have a material adverse impact on the Company.
Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or
to determine the scope and validity of third party proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be
held valid by a court of competent jurisdiction or that an alleged infringer
would be found to be infringing. Further, with respect to certain technology
in-licensed by the Company, the Company does not have the right to control
any litigation with respect to such technology. An adverse outcome could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease using such technology, any of which could have a material adverse
effect on the Company. Moreover, merely the uncertainties resulting from
institution and continuation of any technology-related litigation could have
a material adverse effect on the Company's ability to compete in the
marketplace or raise capital pending resolution of the disputed matters. If
competitors of the Company prepare and file patent applications in the U.S.
that claim technology also claimed by the Company, the Company may have to
participate in interference proceedings declared by the PTO to determine the
priority of the invention, which could result in substantial cost to the
Company, even if the outcome is favorable to the Company. An adverse outcome
could subject the Company to significant liabilities to third parties and
require the Company to license disputed rights from third parties or
discontinue using the technology.
The Company also relies on trade secrets to protect technology,
especially where patent protection is not believed to be appropriate or
obtainable. The Company attempts to protect its proprietary technology and
processes in part through confidentiality agreements with its employees,
consultants and certain contractors. There can be no assurance, however, that
these agreements will not be breached or terminated, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by
competitors. The Company, as well as its consultants and research
collaborators in their work for the Company, uses intellectual property owned
by others. Disputes may arise as to the rights in technology resulting from
collaborations and in the related know-how and inventions. The Company relies
on certain technologies to which it does not have exclusive rights or which
may not be patentable or proprietary and thus may be available to competitors.
CACO-2 CELL LICENSES
The Company presently receives a limited amount of revenues from the sale
by NaviCyte of non-exclusive Caco-2 cell licenses and limited delivery
services (i.e., contract testing). Although the Company believes that the
Caco-2 cell line is currently the most widely used cell line for in-vitro
estimation of the oral absorption of compounds, there can be no assurances
that third parties will continue to use such cells or seek to license related
rights or acquire Caco-2 cells or any derivatives from NaviCyte. Furthermore,
the Company is aware that certain third parties are claiming the right to use
Caco-2 cells without a license from NaviCyte. Such circumstances may require
the Company to enforce its rights through litigation.
15
<PAGE>
MANAGEMENT AND EMPLOYEES
The Company has certain drug discovery technologies and collaborative
arrangements, and the Company desires to further develop and expand its drug
discovery capabilities and to enter into additional collaborative
relationships. The Company's success will depend upon the effective
management of these drug discovery technologies and capabilities and current
and prospective collaborative relationships, including maintaining
confidentiality of the research being provided for collaborators as well as
the maintenance and further development of the Company's technologies and
progress in the Company's research and development programs. Trega is highly
dependent on the principal members of its management and scientific staff,
the loss of whose services might adversely impact the achievement of the
Company's goals. To further develop its technologies (including the IDEA(TM)
predictive models, combinatorial chemistry, and automated compound
synthesis), and to pursue its product development plans, the Company will be
required to hire additional qualified scientific personnel to perform
research and development, as well as personnel with software development
expertise. These requirements, as well as the management of current and
prospective collaborative arrangements, are expected to demand the addition
of management personnel and the development of additional expertise by
existing management personnel. There is currently a shortage of skilled
candidates, which is likely to continue. As a result, competition for skilled
personnel by pharmaceutical, biotechnology and software companies,
universities, and other research institutions is intense, and the turnover
rate can be high. Failure to recruit and retain personnel could impair the
Company's ability to develop products and services and to pursue additional
collaborations.
GOVERNMENT REGULATION
The manufacturing and marketing of certain products developed by the
Company or its collaborators will be subject to regulation for safety and
efficacy by governmental authorities in the U.S. and other countries. In the
U.S., pharmaceuticals are subject to rigorous regulation by the Food and Drug
Administration ("FDA"). The Federal Food, Drug and Cosmetic Act and the
Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of
pharmaceutical products. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.
The steps required before a pharmaceutical agent may be marketed in the
U.S. include (i) preclinical laboratory and animal tests, (ii) submission to
the FDA of an Investigational New Drug application ("IND"), which must be
deemed acceptable before human clinical trials may commence, (iii) adequate
and well-controlled human clinical trials to establish the safety and
efficacy of the drug, (iv) submission of a New Drug Application ("NDA") or
Product License Application ("PLA") to the FDA and (v) FDA approval of the
NDA or PLA prior to any commercial sale or shipment of the drug. In addition
to obtaining FDA approval for each product, each domestic drug manufacturing
facility is subject to inspections every two years by the FDA and must comply
with current Good Laboratory Practices and Good Manufacturing Practices
("GMP"). To supply products for use in the U.S., foreign manufacturing
facilities also must comply with GMP and are subject to periodic inspection
by the FDA or by regulatory authorities in such countries under reciprocal
agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND and, unless the FDA objects, the Company submitting the IND
may start clinical studies 30 days following its submission to the FDA.
Clinical trials involve the administration of the pharmaceutical product
to volunteers or to patients identified as having the condition for which the
pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are
conducted in accordance with protocols previously submitted to the FDA as
part of the IND which detail the objectives of the study, the parameters used
to monitor safety and the efficacy criteria evaluated. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution at which the study is conducted. The IRB
considers, among other things, ethical factors, the safety of the human
subjects and the possible liability risk for the institution.
Clinical trials are typically conducted in three sequential phases that
may overlap. Phase I consists of the initial introduction of the
pharmaceutical into human volunteers, and the emphasis is on testing for
safety (adverse effects), dosage tolerance, absorption, metabolism,
distribution, excretion and clinical pharmacology. Phase II involves studies
in a limited patient population to determine the efficacy of the
pharmaceutical for specific targeted indications, to determine dosage
tolerance, optimal dosage and dosing frequency, and to identify possible
adverse side effects and safety risks. Once a compound is found to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to further evaluate both clinical efficacy
and safety within an expanded patient population at multiple clinical study
sites. The FDA reviews both the clinical plans and results of the trials and
may order suspension of the trials at any time if there are significant
safety issues.
Results of the preclinical and clinical trials are submitted to the FDA
in the form of an NDA or PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort, and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including severity of
the disease,
16
<PAGE>
availability of alternative treatments, and risks and benefits demonstrated
in clinical trials. Additional animal studies or clinical trials may be
requested during the FDA review process and may delay marketing approval.
After FDA approval for the initial indications, further clinical trials are
necessary to gain approval for use of the product for any additional
indications. The FDA may also require post-marketing testing to monitor for
adverse effects, which can involve significant expense. Failure to comply
with applicable regulatory requirements after obtaining regulatory approval
can, among other things, result in the suspension of regulatory approval, as
well as possible civil and criminal sanctions. In addition, changes in
regulations could have a material adverse effect on this industry.
For marketing outside the U.S., the Company's collaborators and the
Company will also be subject to foreign regulatory requirements governing
human clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
With respect to any potential products that enter clinical trials (such
as HP-228), there can be no assurance that the Company or its collaborators
will be permitted to continue or undertake new human clinical testing of such
potential products, or, if permitted, that such potential products will be
demonstrated to be safe and efficacious. The lead compounds of the Company or
its collaborators may prove to have undesirable and unintended side effects
or other characteristics that may prevent or limit their commercial use. In
addition, there can be no assurance that any of the potential products of the
Company or its collaborators will ultimately obtain FDA or foreign marketing
approval for any indication, that an approved compound will be capable of
being produced in commercial quantities at reasonable cost or that any such
compound will be successfully marketed. Furthermore, even if approval is
ultimately obtained, delays in the approval process could have a material
adverse effect on the Company.
In addition to regulations enforced by the FDA, the Company is also
subject to other regulation, including regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, regulations
promulgated by the United States Department of Agriculture, and other
federal, state and local laws and regulations.
MANUFACTURING
The Company has no manufacturing facilities for its pharmaceutical
products and will need to rely on contract manufacturers to produce these
items (including any compounds for clinical trials and commercialization).
The Company's products under development have never been manufactured on a
commercial scale and there can be no assurance that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. Moreover, contract manufacturers that the Company may use must adhere
to GMP regulations enforced by the FDA through its facilities inspection
program. If these facilities cannot pass a pre-approval plant inspection, the
FDA pre-market approval of the products will not be granted.
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
The Company's business will expose it to potential product liability
risks that are inherent in the testing, manufacturing and marketing of human
therapeutic products and other facets of the drug development process. The
Company does have product liability insurance, but there can be no assurance
that the Company will be able to maintain such insurance on acceptable terms
or that this insurance will provide adequate coverage against potential
liabilities. The Company also has clinical trial liability insurance, but
there can be no assurance that the Company will be able to maintain such
insurance for any of its clinical trials or that such insurance will provide
adequate coverage against potential liabilities.
POTENTIAL LIABILITY REGARDING HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. In addition,
there can be no assurance that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of life sciences companies have been
highly volatile and the market has experienced significant price and volume
fluctuations, some of which are unrelated to the operating performance of
particular companies. Announcements of technological innovations or new
commercial products or failures of potential products by the Company, its
collaborators or its competitors, developments in the Company's relationships
with current or future collaborative partners, developments concerning
proprietary rights, including patents and litigation matters, publicity
regarding actual or potential results with respect to compounds under
development by the Company or its collaborators, regulatory developments in
both the U.S. and foreign countries, public
17
<PAGE>
concern as to the efficacy of combinatorial chemistry or other new drug
discovery technologies, changes in reimbursement policies, general market
conditions, as well as quarterly fluctuations in the Company's revenues and
financial results and other factors, may have a significant impact on the
market price of the Company's Common Stock. In particular, the realization of
any of the risks described in these "Risk Factors" may have a material
adverse impact on such market price.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of preferred stock with
voting, conversion and other rights and preferences that could adversely
affect the voting power and other rights of the holders of the Company's
Common Stock. Although the Company has no current plans to issue any shares
of preferred stock, the issuance of preferred stock or of rights to purchase
preferred stock could be used to discourage an unsolicited acquisition
proposal. In addition, the possible issuance of preferred stock could
discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. The Company's Certificate of Incorporation provides for
staggered terms for the members of the Board of Directors. A staggered Board
of Directors and certain provisions of the Company's by-laws and Certificate
of Incorporation and of Delaware law applicable to the Company could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. In addition, the Company is subject to Section 203 of the General
Corporate Law of Delaware which, subject to certain exceptions, restricts
certain transactions and business combinations between a corporation and a
stockholder owning 15% or more of the corporation's outstanding voting stock
(an "interested stockholder") for a period of three years from the date the
stockholder becomes an interested stockholder. These provisions, and certain
other provisions of the Certificate of Incorporation and the Company's
by-laws, may have the effect of delaying or preventing a change of control of
the Company without action by the stockholders and, therefore, could
adversely affect the price of the Company's Common Stock.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM
The Company expects that significantly all of its revenues in the
foreseeable future will be derived from products and services provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's
success in the foreseeable future is directly dependent upon the success of
the companies within those industries and their continued demand for the
Company's services and compounds. The levels of revenues and profitability of
pharmaceutical companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of health
care through various means and the initiatives of third party payors with
respect to the availability of reimbursement. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject
to governmental control. In the U.S., there have been, and the Company
expects that there will continue to be, a number of federal and state
proposals to implement similar governmental control. It is uncertain what
legislative proposals may be adopted or what actions federal, state or
private payors for health care goods and services may take in response to any
health care reform proposals or legislation. To the extent that such
proposals or reforms have a material adverse effect on the business,
financial condition and profitability of pharmaceutical or biotechnology
companies that are actual or prospective customers for the Company's products
and services, the Company's market value, access to financing, business,
financial condition and results of operations could be materially and
adversely affected.
ITEM 2. PROPERTIES
The Company currently leases a facility of 71,510 square feet
(approximately 55,000 square feet of laboratory and office space) located at
9880 Campus Point Drive, San Diego, California. The lease term extends until
May 1, 2008.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth at Item 10(b) below is incorporated
herein by reference.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market (the
Nasdaq National Market) under the symbol "TRGA". The following table sets forth
the high and low sale prices for the Company's Common Stock as reported on the
Nasdaq National Market for the periods indicated. These prices reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- -------- -------
<S> <C> <C>
First Quarter........................... $ 5 1/4 $ 2 13/16
Second Quarter.......................... 6 2 7/8
Third Quarter........................... 4 1/2 1 3/16
Fourth Quarter.......................... 3 1/4 1 3/8
1999 HIGH LOW
---- -------- -------
First Quarter........................... $ 4 $ 1 7/16
Second Quarter.......................... 2 1/2 1 1/2
Third Quarter........................... 1 5/8 31/32
Fourth Quarter.......................... 3 5/8 1
2000 HIGH LOW
---- -------- -------
First Quarter (through March 1, 2000)... $ 14 5/8 $ 1 7/8
</TABLE>
There were approximately 149 holders of record of the Company's Common Stock
as of March 1, 2000. The Company has not paid any cash dividends to date on its
Common Stock and does not anticipate paying any dividends in the foreseeable
future.
Exempt Sales of Securities
On August 20, 1999, Trega issued 1,000,000 shares of the Company's Common
Stock to CNC in exchange for 1,176,666 shares of Series B Preferred Stock of
CNC. As a result, the Company owns approximately 20% of the outstanding
equity securities of CNC. In addition, as part of the foregoing transaction,
the parties each acquired a warrant to acquire additional securities of the
other. The sale occurred pursuant to arrangements entered into in connection
with a Supplier Agreement between the Company and CNC. The issuance of such
Common Stock and warrant was deemed to be exempt from registration under the
Securities Act of 1933, as amended (the "1933 Act"), by virtue of Section
4(2) thereof and Rule 506 of Regulation D thereunder ("Rule 506") as a
transaction not involving any public offering. An appropriate filing on Form
D was made. CNC represented it will hold the shares of the Company's Common
Stock (including shares underlying the warrant) solely for investment
purposes, and not with a view to the distribution thereof. CNC had adequate
access to information about the Company and an appropriate legend was affixed
to the certificate representing the securities.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The data presented below should be read in conjunction with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company (and the
notes thereto) contained elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997(1) 1996 1995(1)
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (in thousands, except net loss per share)
<S> <C> <C> <C> <C> <C>
Revenues:
Compound revenues............................................. $ 7,504 $ 2,257 $ -- $ -- $ --
Related party contract research............................... 3,300 3,970 -- -- --
Contract research and license fees............................ 2,260 4,542 7,334 5,750 293
Net sales..................................................... 313 21 430 2,507 1,077
-------- -------- -------- -------- --------
Total revenues........................................ 13,377 10,790 7,764 8,257 1,370
Costs and expenses:
Cost of sales................................................. 332 7 341 2,025 1,313
Research and development...................................... 17,903 17,934 14,819 11,781 7,289
Acquired in-process research and development.................. -- 1,000 -- 2,585 --
Selling, general and administrative........................... 7,344 5,181 4,346 4,191 2,722
------- -------- -------- -------- --------
Total costs and expenses.............................. 25,579 24,122 19,506 20,582 11,324
------- -------- -------- -------- --------
Loss from operations before equity in losses of affiliate....... (12,202) (13,332) (11,742) (12,325) (9,954)
Equity in losses of affiliate (66) -- -- -- --
-------- -------- -------- -------- --------
Loss from operations (12,268) (13,332) (11,742) (12,325) (9,954)
Other income (expense):
Net interest income and other............................... 82 531 1,115 637 50
Gain on sale of subsidiary.................................. 3,513 -- 1,255 -- --
Corporate joint venture..................................... -- -- -- -- 414
-------- -------- -------- -------- --------
Net loss........................................................ $ (8,673) $(12,801) $ (9,372) $(11,688) $ (9,490)
======== ======== ======== ======== ========
Basic and diluted net loss per share(2)......................... $ (.47) $ (.89) $ (.69) (1.17) $ (33.53)
======== ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share(2)......................................... 18,389 14,380 13,603 9,956 283
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ---------- ---------- ------- --------
CONSOLIDATED BALANCE SHEETS DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments...... $ 6,434 $ 16,262 $ 19,427 $ 27,443 $ 1,161
Working capital........................................ 820 8,057 12,791 22,482 (2,345)
Total assets........................................... 22,661 29,535 25,119 30,513 2,746
Notes payable and obligations under capital
leases, less current portion......................... 2,484 2,689 1,589 633 470
Series One Redeemable Preferred Stock.................. -- -- -- -- 2,772
Accumulated deficit.................................... (77,103) (68,430) (55,629) (46,257) (34,522)
Total stockholders' equity (deficit)................... 11,510 17,640 16,218 24,156 (4,375)
</TABLE>
- ---------
(1) A portion of the 1995 results do not include revenues from the Company's
former subsidiary, Multiple Peptide Systems (" MPS"), as substantially all
of MPS's assets were transferred to a separate entity, Chiron Mimotopes
Peptide Systems, LLC, as of January 1, 1994; however, the separate entity
was dissolved and certain assets were transferred to MPS beginning April 1,
1995. The 1997 results reflect MPS operations through February 1997 after
which time MPS was sold. See "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" below.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of basic and diluted net loss per share.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES (SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL,"
"EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND
SIMILAR EXPRESSIONS). THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW AND IN ITEM 1 OF THIS ANNUAL
REPORT ON FORM 10-K UNDER THE CAPTION "RISK FACTORS," THAT COULD CAUSE ACTUAL
RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY EXPRESSLY DISCLAIMS ANY
OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE
COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS
OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "ITEM 6 - SELECTED
FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY (AND
NOTES THERETO) CONTAINED ELSEWHERE HEREIN.
OVERVIEW
Trega Biosciences, Inc. (the "Company" or "Trega") is focused on
accelerating drug discovery from disease targets to clinical candidates
through its iDiscovery-TM- technologies. Such technologies include (i) the
IDEA-TM- ("In Vitro Determination for the Estimation of ADME (absorption,
distribution, metabolism and excretion)") computerized predictive models for,
among other things, the prediction and selection of compounds with essential
drug-like characteristics for further development and (ii)
Chem.Folio-Registered Trademark- combinatorial libraries for screening and
optimization of potential drug candidates.
Since its inception, Trega has utilized combinatorial chemistry as a
foundation for its drug discovery activities; first, for the production of
peptides, then mixtures of small molecules, and finally, for singles-based
compound arrays. This technology has enabled Trega to develop and offer a
wide range of small-molecule libraries, including its Chem.Folio-Registered
Trademark- compound libraries, which are constructed in singles-based
compound arrays. In 1993, Trega used its combinatorial chemistry technologies
to discover a family of proprietary compounds that appear to influence the
production and activity of certain cytokines through interaction with
melanocortin receptors. These compounds include HP-228, which has competed a
Phase II clinical trial in the treatment of post-operative pain in hip and
knee replacements. As part of its activities, the Company formed
collaborative partnerships in the area of drug discovery and development.
Coinciding with this focus, Trega entered into collaborations with certain
pharmaceutical companies to develop compounds active against certain
melanocortin receptors.
The continuing development of Trega's combinatorial chemistry libraries
led to the development of information relevant to the drug discovery process,
which information was regularly supplied to library purchasers. The
development of this information and a growing belief in the importance of
information in the drug discovery process caused the Company to investigate
opportunities to acquire technologies directed at creating information
germane to the drug discovery process. In 1998, Trega acquired its wholly
owned subsidiary, NaviCyte, Inc. ("NaviCyte"), whose business included
the development of products and services to facilitate the rapid screening of
compounds for pharmacokinetic characteristics through the use of computer
models. With the technology acquired from NaviCyte, Trega developed and
released the first of the IDEA(TM) predictive models, the absorption module.
The Company has combined its Chem.Folio libraries and IDEA predictive models
in a collection of technologies called iDiscovery-TM-.
On February 11, 2000, the Company announced that it did not intend to
continue to support internal drug discovery programs, including its
melanocortin receptor programs, that are not funded by a collaborator. Trega
believes this strategic shift will permit it to better focus its efforts and
resources on the continuing development and commercialization of its
iDiscovery-TM- technologies. Trega is currently carrying out a collaborative
program in the area of diabetes, obesity and syndrome X, which is funded by
Novartis Pharma AG ("Novartis").
The timing and amounts of revenues from Trega's iDiscovery-TM-
technologies, if any, may be subject to significant fluctuations and
therefore the Company's results of operations for any period may not be
comparable to the results of operations for any other period and may not be
indicative of future operating results. The Company will be required to
conduct significant research and development during the next several years
for the development of its predictive models and through the middle of next
year to fulfill its obligations to a corporate partner. The Company has been
unprofitable since its inception and, while the Company has set as an
objective reaching positive cash flow by the end of 2000, the Company is
unable to predict when, if ever, it will become profitable or give assurances
that the Company's positive cash flow objective will be met. As of December
31, 1999, the Company's accumulated deficit was approximately $77.1 million.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 COMPARED TO 1998
In 1999, the Company recorded revenues of approximately $13.4 million as
compared to approximately $10.8 million in 1998, representing an increase of
approximately $2.6 million, or 24%. This increase was due primarily to a $5.2
million increase in revenues from the sale of the Company's
Chem.Folio-Registered Trademark- combinatorial libraries. Much of this
increase is due to the fact that in June of 1999 Trega began to establish a
direct sales, marketing, and business development organization to support the
distribution of Trega's products and services, including its
Chem.Folio-Registered Trademark- compound libraries. Additionally in the
fourth quarter of 1999, the Company began offering its Chem.Folio-Registered
Trademark- compounds through the ChemNavigator.com-TM-, Inc. ("CNC") website,
and is now also offering its Chem.Folio-Registered Trademark- compounds
through two screening service companies, EVOTEC BioSystems AG ("EVOTEC") and
Discovery Technologies, Ltd.. The sale of Chem.Folio-TM- compounds
through these new distribution channels did not contribute to 1999 revenues.
(See "Trega's Drug Discovery Technologies--Combinatorial
Chemistry--Chem.Folio-Registered Trademark- Combinatorial Libraries" above.)
Partially offsetting this increase in Chem.Folio-Registered Trademark-
revenues was a decrease in revenues from research conducted under
collaborative research agreements (with both related and unrelated parties)
of approximately $3.0 million due to the completion of certain agreements. In
February 2000, the Company announced that it did not intend to continue to
support internal drug discovery programs that are not funded by a
collaborator. Trega's current intention is to carry forward only those drug
discovery programs that are fully funded at the end of the first quarter of
2000, which includes its joint development program with Novartis. Trega is
currently carrying out a collaborative program
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with Novartis in the area of diabetes, obesity and syndrome X, which is funded
at a rate of $825,000 per quarter, and as such, it is Trega's intention that
this program will be staffed only to that level.
The characterization of Trega's revenues began to shift between 1998 and
1999. In 1999, Chem.Folio-Registered Trademark- revenues accounted for
approximately 56% of total revenues as compared to only 21% in 1998. In 1999,
revenues from research conducted under collaborative research agreements
(both related and unrelated parties) accounted for only 42% of Trega's
revenues versus 79% in the prior year. The Company expects this trend to
continue in 2000. Trega's only currently funded drug discovery program, the
Company's collaboration with Novartis, is expected to generate revenues of
approximately $3.3 million in 2000. The timing and amounts of revenues from
Trega's iDiscovery technologies may be subject to significant fluctuations
and therefore the Company's results of operations for any period may not be
comparable to the results of operations for any other period and may not be
indicative of future revenue levels or operating results. In addition, Trega
believes that its quarterly revenues may reflect some seasonality and, when
combined with anticipated fluctuations in results, does not expect unbroken
quarter to quarter increases in revenue for fiscal year 2000.
As of December 31, 1999, the Company's financial statements reflect a
liability for deferred revenue in the amount of approximately $1.8 million. This
represents the excess of payments received from research collaborators over the
revenue from libraries and cells shipped or work performed, and will be
recognized when the correlative shipments are made or services are performed or
the period for performance expires.
Cost of sales for the year ended December 31, 1999 were approximately
$332,000 compared with approximately $7,000 for the same period in 1998. Cost of
sales were primarily related to Trega's device sales. The device business was
sold in November 1999.
While the Company's total research and development expenses remained
substantially unchanged for years ended December 31, 1999 and 1998, there was a
shift in the composition of these expenses from research carried out to support
internal drug discovery programs to research and development carried on the
Company's predictive models. The Company expects this trend to continue in 2000.
Additionally, in connection with the acquisition of NaviCyte, Inc. ("NaviCyte"),
the Company recorded an expense related to in-process research and development
of $1.0 million in 1998. See Note 4 to the Company's Consolidated Financial
Statements.
Selling, general and administrative expenses totaled approximately $7.3
million in 1999 as compared to $5.2 million in 1998. The increase of $2.1
million, or 42%, was due primarily to the fact that in June of 1999 Trega began
to establish a direct sales, marketing, and business development organization to
support the distribution of Trega's products and services. Additionally,
amortization of goodwill associated with the Company's acquisition of Navicyte
(in November 1998) and its investment in CNC, accounted for approximately
$800,000 of this increased expense.
Net interest income and other income for 1999 totaled $82,000 as compared to
$531,000 in 1998. This decrease was the result of reduced interest income due to
lower average cash and short-term investment balances and higher interest
expense associated with equipment financing obligations and the Company's line
of credit entered into in 1999.
In 1999, the Company recorded a gain of approximately $3.5 million in
connection with the sale of the assets of ChromaXome Corp. ("ChromaXome") on
March 15, 1999. See Note 3 to the Company's Consolidated Financial Statements.
No tax benefit has been recognized for 1999 or 1998, as the utilization of
these operating losses is uncertain. As of December 31, 1999, the Company had
federal and state operating loss carryforwards of approximately $62.5 million
and $9.2 million, respectively. Realization of future tax benefits from
utilization of net operating loss carryforwards is uncertain. See Note 10 to
the Company's Consolidated Financial Statements.
1998 COMPARED TO 1997
The Company recorded revenues of approximately $10.8 million in 1998 as
compared to approximately $7.8 million in 1997. Revenues in 1998 increased
approximately $3 million, or 39%, over 1997. Of this $3 million increase,
approximately $2.3 million was due to the sale of the Company's
Chem.Folio-Registered Trademark- combinatorial libraries which were first
marketed in 1998. The remaining increase was due primarily to increased
revenues under collaborative research agreements offset in part by
approximately a $409,000 decrease in products sales, the result of the sale
of custom peptides and combinatorial peptide libraries by the Company's
former subsidiary, Multiple Peptide Systems, Inc. ("MPS"). MPS was sold on
February 28, 1997.
Cost of sales in 1998 were related to one month's device sales from the
Company's subsidiary, Navicyte, acquired in November 1998. In 1997, cost of
sales resulted primarily from sale of custom peptides and combinatorial peptide
libraries made by MPS.
The Company's research and development costs totaled $17.9 million for
1998 as compared to $14.8 million for 1997. The increase of 21% is due to
additional research and development costs associated with the Company's
partnered drug discovery and melanocortin programs in addition to expenses
incurred as a result of building the Company's
Chem.Folio-Registered Trademark- combinatorial library business. Additionally,
in connection with the acquisition of Navicyte, the Company recorded an expense
related to in-process research and development of $1.0 million in 1998. See
Note 4 to the Company's Consolidated Financial Statements.
Selling and administrative expenses totaled $5.2 million in 1998 as compared
to $4.3 million in 1997. This increase of 19% was due primarily to higher
headcount as well as costs associated with the Company's newly leased facility.
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Net interest income and other for 1998 totaled $531,000 as compared to
$1,115,000 in 1997. This decrease was the result of lower interest income due
to lower average cash and short-term investment balances and higher interest
expense associated with equipment financing obligations. This decrease was
partially offset by a 1997 loss on investments related to the sale of stock
received by the Company's former subsidiary, MPS, in 1996. Additionally, in
1997, the Company recorded a gain of approximately $1.3 million in connection
with the sale of MPS on February 28, 1997.
No tax benefit has been recognized for 1998 or 1997, as the utilization
of these operating losses is uncertain. As of December 31, 1998, the Company
had federal and state operating loss carryforwards of approximately $53.4
million and $7.2 million, respectively. Realization of future tax benefits
from utilization of net operating loss carryforwards is uncertain. See Note
10 to the Company's Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1999, the Company has financed
its activities primarily from public and private sales of equity, funding
from collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries (through MPS), sales of its businesses
believed to be no longer strategic to the Company and interest income. At
December 31, 1999, the Company had cash, cash equivalents and marketable
securities aggregating $6.4 million compared to $16.3 million on December 31,
1998. The Company's working capital at December 31, 1999 was approximately
$800,000 compared to $8.1 million at December 31, 1998. The Company has
invested a portion of its excess funds in cash equivalents and short-term
investments primarily of highly-rated debt instruments of financial
institutions and corporations. See Item 7a, Qualitative and Quantitative
Disclosure About Market Risk.
It is the Company's intention to build and fund its business on a revenue
driven approach in the future. As a result, the Company intends to fund a
significant portion of its business with revenues derived from Trega's
iDiscovery-TM- technologies that include Chem.Folio-Registered Trademark-
libraries and services and IDEA-TM- predictive models. The
Chem.Folio-Registered Trademark- libraries and services include: (i)
Chem.Folio-Registered Trademark- screening libraries which offer
off-the-shelf compound libraries for immediate screening for hit finding,
(ii) custom synthesis around customer templates and chemical motifs, and
(iii) rapid analoging using Chem.Folio-Registered Trademark-'s virtual
library and proprietary Tea Bag synthesis technology. Additionally,
IDEA-TM- predictive models are a set of physiologically based computer
simulations that Trega is developing to predict the ADME characteristics of
compounds. The timing and amounts of revenues from Trega's iDiscovery-TM-
technologies, if any, may be subject to significant fluctuations and
therefore the Company's results of operations for any period may not be
comparable to the results of operations for any other period and may not be
indicative of future operating results. The Company has been unprofitable
since its inception and the Company is unable to predict when, if ever, it
will become profitable.
The decrease in cash and cash equivalents in 1999 amounted to
approximately $4.4 million. Cash used to fund operating activities of $12.7
million was offset, in part, by the net sale and maturities of short term
investments ($5.5 million), through the sale of assets of the Company's
former subsidiary, ChromaXome Corp ($3.7 million) and $2.6 million in
proceeds from the Company's equipment notes and notes payable (including a
$1.5 million line of credit entered into in 1999). Additionally during the
year, the Company invested $1.0 million in cash in CNC and $1.7 million in
property and equipment as well as made $1.3 million in principal payments
under debt obligations. The amounts invested in property and equipment were
funded, in part, by equipment lease lines. See Notes 3, 6 and 7 to the
Company's Consolidated Financial Statements.
On August 20, 1999, the Company acquired 1,176,666 shares of Series B
Convertible Preferred Stock of CNC in exchange for $1.0 million in cash and
1.0 million shares of the Company's common stock, valued at $1.5 million. As
a result, the Company owns approximately 20% of the outstanding equity
securities of CNC as of the date of investment. In addition, as part of the
foregoing transaction, the parties each acquired a warrant to acquire
additional securities of the other. Under these warrants, the Company has the
right to acquire an additional 294,167 shares of CNC Series B Convertible
Preferred Stock at a price of $5.00 per share and CNC had a contingent right
to acquire an additional 294,167 shares of the Company's common stock at a
price of $5.00 per share. As of December 31, 1999, CNC met the criteria to
cause the delivery of the warrant to acquire the additional 294,167 shares of
the Company's common stock. CNC has launched an Internet website where
scientists will be able to conduct structural searches among listed compounds
and purchase compounds meeting self-selected search criteria. The Company has
agreed to list for sale certain of its compounds on the CNC site.
In August 1999, the Company entered into a line of credit in the amount
of $1.5 million that provides funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% (9.25% at December 31, 1999) and
is for a term of one year. The line of credit contains covenants relating to
cash flow coverage and minimum cash balances. As of December 31, 1999, the
Company is in compliance with all debt covenants. In August the entire line
of $1.5 million was accessed and the Company has $1.5 million in debt
outstanding under the line at December 31, 1999.
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In December 1998, the Company obtained an equipment financing line of
$2.2 million, of which it had accessed the entire $2.2 million by December
31, 1999. The loan, which is secured by the equipment, bears interest between
11.2% and 12.8% and is to be repaid monthly over a four-year term.
In connection with equipment financing lines, the Company entered into
certain financial covenants pertaining to the amount of its cash and
marketable securities to be maintained during the terms of the financing. The
Company's unrestricted cash, as defined in the agreements, has dropped below
the applicable levels thereby obligating the Company to make security
deposits of $490,223 with the lessor. No further security deposits will be
necessary as the aforementioned deposit fulfills the Company's obligation.
These security deposits have been included in other assets in the
consolidated balance sheet.
In June 1999, the Company signed a Mutual Release with Dura
Pharmaceuticals ("Dura") which releases the parties from certain
responsibilities set forth in a research agreement signed in February 1996
and terminates the agreement other than in certain limited regards. Under the
agreement, the Company was committed to fund $6 million over four years in a
drug discovery and development collaboration using Dura's proprietary drug
delivery technology and Company compounds (such as HP 228). As of December
31, 1999, $5.1 million of this obligation had been paid by the Company. The
Mutual Release provides that the outstanding balance due on this obligation
shall be limited to payments of $200,000, which was made upon signing, and
$138,414 due by March 31, 2000.
The Company intends to use its financial resources primarily to fund
research and development relating to the expansion of its combinatorial
chemistry library inventories and its IDEA-TM- computerized predictive
models. The amounts actually expended for each purpose may vary significantly.
Assuming a level of Chem.Folio-Registered Trademark- compound library
revenues in fiscal 2000 that is comparable to Chem.Folio-Registered
Trademark- compound library revenues in fiscal 1999 (a portion of which is
covered by existing product sales agreements), the Company anticipates that
its existing capital resources and funding under an existing research and
development collaboration, and notes due to the Company in connection with
the sale of assets of its wholly-owned subsidiary, ChromaXome Corp., together
with its currently available property and equipment financing and line of
credit, will be sufficient to fund its current and planned operations through
the next 12 months. There can be no assurances, however, that changes in the
Company's revenues, research and development plans or other changes affecting
the Company's operating expenses will not result in the expenditure of such
resources before such time.
The Company will need to raise additional capital to fund its operations.
The Company expects that its primary potential revenue sources for the
foreseeable future will be sales of combinatorial libraries or compounds,
revenues generated by the Company's IDEA-TM- predictive models and additional
collaborative agreements. The Company intends to seek additional funding
through additional research and development agreements with suitable
corporate collaborators, extensions of an existing corporate collaborations,
and through public or private financings, if available and consistent with
the Company's business objectives. There can be no assurances, however, that
such collaboration arrangements, licensing or public or private financings
will be available on acceptable terms, if at all. If funds are raised through
equity arrangements, further dilution to stockholders may result. If adequate
funds are not available, the Company may be required to delay, reduce the
scope of, or eliminate one or more of its research and development programs
or take other measures to cut costs, which could have a material adverse
effect on the Company.
In March 2000, the Board of Directors, subject to stockholder approval,
reserved an additional 2.5 million shares for issuance under the Company's
1996 Stock Incentive Plan.
OTHER MATTERS
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expensed less than $100,000 during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems or the products and services of third parties. The
Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.
THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT.
ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
held-to-maturity securities. The Company invests its excess cash in highly
liquid short-term investments that are typically held for the duration of the
term of the respective instrument. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions to manage
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exposure to interest rate changes. Accordingly, the Company believes that,
while the securities the Company holds are subject to changes in the
financial standing of the issuer of such securities, the Company is not
subject to any material risks arising from changes in interest rates, foreign
currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's Consolidated Financial Statements (and
notes thereto) and supplementary data required by this item and set forth at
the pages indicated in Item 14(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.
DIRECTORS OF THE REGISTRANT
The directors of the Company as of March 7, 2000 are as follows:
(a) Identification of Directors.
The Company has three classes of Directors (designated Class I, Class II
and Class III) serving staggered three-year terms. Class I, II and III
Directors have terms expiring at the time of the Annual Meetings of
Stockholders to be held in 2001, 2002 and 2000, respectively, or until each
such Director's successor shall have been elected and qualified.
Set forth below is information regarding the Directors as to their
principal occupations at present and for the past five years, certain
directorships held by each and their ages as of March 7, 2000.
<TABLE>
<CAPTION>
Name Age
- ---- -----
<S> <C>
CLASS I
MICHAEL G. GREY .......................................................................................................... 47
Mr. Grey has served as a Director of the Company since December 1998. As of January 1999, Mr. Grey also
became the President and Chief Executive Officer of the Company. Prior to joining the Company, Mr. Grey
was the President of BioChem Therapeutic, Inc., the pharmaceutical operating division of BioChem Pharma
Inc. from November 1994 to August 1998. In that role, he was responsible for all company operations
including research, development, sales and marketing, finance and human resources. During 1994, Mr. Grey
was the President and Chief Operating Officer for Ansan, Inc. From 1974 to 1993, Mr. Grey served in
various roles with Glaxo Inc. and Glaxo Holdings, p.l.c., culminating in his position as Vice President,
Corporate Development. Mr. Grey serves on the Board of Directors of Cortex Pharmaceuticals, Inc.,
Epimmune Inc. and ChemNavigator.com-TM-, Inc. Mr. Grey received a B.Sc. in Chemistry from the University
of Nottingham, England.
HARVEY S. SADOW, Ph.D. ................................................................................................... 77
Dr. Sadow has served as a Director of the Company since October 1992. From January 1988 through December
1990, Dr. Sadow served as Chairman of the Board of Boehringer Ingelheim Corporation and Boehringer
Ingelheim Pharmaceuticals, Inc. Dr. Sadow served as the President and Chief Executive Officer of
Boehringer Ingelheim Corporation and Boehringer Pharmaceuticals, Inc. from 1971 until his retirement in
January 1988. Dr. Sadow serves as the Chairman of the Board of Cholestech Corp., and is a Director of
Anika Therapeutics, Inc. Dr. Sadow received a B.S. from the Virginia Military Institute, an M.S. from the
University of Kansas and a Ph.D. from the University of Connecticut.
ROBERT S. WHITEHEAD ...................................................................................................... 49
Mr. Whitehead has served as Chairman of the Board of Diretors of the Company since February 1998 and as a
Director since August 1993. From August 1993 to December 1998, Mr. Whitehead served as President and
Chief Executive Officer of the Company and from February 1998 to December 1998 as Acting Chief Financial
Officer. Since July 1, 1998, Mr. Whitehead has been President of Dura Pharmaceuticals, Inc. Prior to
joining the Company in 1993, Mr. Whitehead was Senior Vice President, Commercial Operations, Solvay
Pharmaceuticals from February 1992 to April 1993. Mr. Whitehead graduated from Temple University with a
degree in pre-medicine.
26
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<S> <C>
CLASS II
LAWRENCE D. MUSCHEK, Ph.D. ............................................................................................... 56
Dr. Muschek served as President, Research and Development of the Company, until his retirement in
December 1999, and as a Director of the Company since October 1997. Prior to joining the Company, Dr.
Muschek worked for Solvay as Senior Vice President, Research and Development worldwide from April 1994
to September 1997 and Senior Vice President, Research & Development, United States from March 1990 to
April 1994. Before joining Solvay, Dr. Muschek worked as the Vice President, Research for Ayerst
Laboratories Research, Inc. and spent 18 years at McNeil Pharmaceuticals, Inc., a Johnson & Johnson
affiliate company, where he held positions of increasing responsibility in pharmaceutical research and
development. Dr. Muschek received a B.S. in Chemistry from the Philadelphia College of Pharmacy and
Science and a Ph.D. in Biochemistry from Michigan State University.
MYRA N. WILLIAMS, Ph.D. .................................................................................................. 58
Dr. Williams has been a director of the Company since December 1999. From April 1997 to April 1999, Dr.
Williams was the President and Chief Executive Officer of Molecular Applications Group. Prior to the
merger between Glaxo plc and Wellcome Inc., Dr. Williams served as the Chief Information Officer for
Glaxo Inc. Following the merger, Dr. Williams was appointed Vice President and Worldwide Director of
Research and Development Information Resources. Dr. Williams received a B.S. in physics and math from
Southern Methodist University and a Ph.D. in molecular biophysics from Yale University.
CLASS III
JAMES C. BLAIR, Ph.D. .................................................................................................... 60
Dr. Blair has served as a Director of the Company since May 1992 and served as Chairman of the Board of
Directors of the Company from September 1992 through January 1998. Dr. Blair has been a managing member
of Domain Associates, L.L.C., a venture capital management company, since 1985. Dr. Blair is on the
Boards of Directors of Amylin Pharmaceuticals, Inc., Aurora Biosciences, Inc., Dura Pharmaceuticals,
Inc., and Vista Medical Technologies, Inc. Dr. Blair received a B.S.E. from Princeton University and an
M.S.E. and Ph.D. from the University of Pennsylvania, all in electrical engineering.
RONALD R. TUTTLE, Ph.D. .................................................................................................. 63
Dr. Tuttle has served as a Director of the Company since May 1992. He served as the Company's Executive
Vice President, Research and Development, from January 1992 to January 1996 and as Chief Scientific
Officer from January 1996 to December 1996. Dr. Tuttle received his Ph.D. in Pharmacology from the
University of Manitoba, Canada.
</TABLE>
(b) Identification of Executive Officers.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 7, 2000 are as follows:
MICHAEL G. GREY, age 47, has served as a Director of the Company since
December 1998. As of January 1999, Mr. Grey also became the President and
Chief Executive Officer of the Company. Prior to joining the Company, Mr.
Grey was the President of BioChem Therapeutic, Inc., the pharmaceutical
operating division of BioChem Pharma Inc., from November 1994 to August 1998.
In that role, he was responsible for all company operations including
research, development, sales and marketing, finance and human resources.
During 1994, Mr. Grey was the President and Chief Operating Officer for
Ansan, Inc. From 1974 to 1993, Mr. Grey served in various roles with Glaxo
Inc. and Glaxo Holdings, p.l.c., culminating in his position as Vice
President, Corporate Development. Mr. Grey serves on the Board of Directors
of Cortex Pharmaceuticals, Inc., Epimmune Inc. and ChemNavigator.com-TM-,
Inc. Mr. Grey received a B.Sc. in Chemistry from the University of
Nottingham, England.
GEORGE M. GRASS, Pharm.D., Ph.D., age 42, has served as President of
NaviCyte, Inc., a wholly owned subsidiary of the Company since its
acquisition in November 1998. In addition to co-founding NaviCyte, Inc. in
1996 and serving as its Chief Executive Officer, Dr. Grass has served as the
President of Precision Instrument Design, Inc., a developer and manufacturer
of devices to determine the transport of drug substances through biological
tissues and cell culture monolayers, since December 1987. From 1985 to 1991
Dr. Grass worked at Syntex Research, Inc. at the Institute of Pharmaceutical
Sciences and was responsible for the
27
<PAGE>
development of early stage (pre IND, IND and pre NDA) compounds for oral
delivery. Dr. Grass received his Pharm.D. from the University of Nebraska
Medical Center College of Pharmacy and his Ph.D. in Pharmacy from the
University of Wisconsin, Madison. He is the 1981 co-recipient of the Ebert
Prize, which he received for his work in the ocular delivery of drugs.
ALAN HILLYARD, PH.D, age 49, has served as the Company's Vice President,
Informatics and Chief Information Officer since December 1999. Prior to
joining the Company, Dr. Hillyard was employed by Axys Pharmaceuticals, Inc.
where he served as Vice President, Information Systems from July 1999 until
November 1999. From 1996 until 1999, Dr. Hillyard served as Vice President,
Chief Technical Officer of Base4 Bioinformatics, Inc. where he provided
technical vision for a company focused on the application of information
technologies ("IT") to the acceleration of drug discovery process. From 1989
until 1996, Dr. Hillyard held various positions, including his final position
of Manager, Research Computing, at The Jackson Laboratories, where he
established the Research Computing Department and as a member of the IT
planning committee helped formulate a 5 year strategic IT plan. Dr. Hillyard
received his Ph.D. in Oceanography from the University of Maine.
JOHN S. KIELY, PH.D., age 48, joined the Company in 1996 and has served
as the Vice President, Combinatorial and Exploratory Chemistry since 1999,
where the focus of his efforts encompasses all aspects of conception and the
production small molecule heterocyclic combinatorial libraries. In April
1995, Dr. Kiely joined the Torrey Pines Institute for Molecular Studies. In
1993 Dr. Kiely joined ISIS Pharmaceuticals, Inc. as Associate Director and
then as Director of Medicinal Chemistry, where he was involved in
combinatorial chemistry and antisense medicinal chemistry. From 1981 to 1993
he worked as a Senior Research Associate with Parke-Davis. At Parke-Davis he
was a co-founder of the Bioorganic Section, which developed the
Diversomer-TM- technology for combinatorial libraries. Dr. Kiely received his
Ph.D. in Organic Chemistry from North Dakota State University, in 1979 and
did a postdoctoral fellowship at the University of California, Berkeley.
MARK SCHWARTZ, Ph.D, age 44, joined the Company in June 1999 as Vice
President, Commercial Operations and Chief Commercial Officer. From September
1998 to June 1999, Dr. Schwartz served as Vice President, Marketing and
Business Development of Argonaut Technologies. From September 1997 to
September 1998, Dr. Schwartz served as Vice President, Marketing and Business
Development of Synteni Inc/Incyte Pharmaceuticals. From March 1994 to
September 1997, Dr. Schwartz served in various positions at Tripos, Inc.,
including his last position as Vice President and General Manager of
Accelerated Discovery Services. Dr. Schwartz received his Ph.D. in
Biochemistry from Arizona State University.
GERARD A. WILLS, age 42, joined the Company in January 1999 as the
Company's Vice President, Finance and Chief Financial Officer. Prior to
joining the Company, Mr. Wills was employed by Molecular Biosystems, Inc.
where he served as Vice President, Finance and Chief Financial Officer from
August 1994 to December 1998 and as its Controller from February 1993 to
August 1994. From 1990 to February 1993, Mr. Wills served as the Corporate
Manager of Finance for Maxwell Laboratories, Inc. and from 1986 through 1990,
Mr. Wills was employed by Intermark, Inc. where he last served as the
Corporate Controller. Mr. Wills received a B.S. in Business Administration
from the University of Notre Dame.
(c) Compliance with Section 16(a) of the Exchange Act.
Under the securities laws of the United States, the Company's Directors,
executive officers and any persons holding more than 10% of the issued and
outstanding Common Stock are required to report their initial ownership of
Common Stock, any subsequent changes in that ownership and, in certain
instances, an annual statement of changes in ownership to the Securities and
Exchange Commission. Specific due dates for these reports have been
established and the Company is required to identify those persons who failed
to file these reports in a timely manner. In making this disclosure the
Company has relied solely upon the written representations of its Directors
and executive officers and copies of the reports that have been filed with
the SEC. Based upon the Company's review of such representations and reports,
the Company believes that all such reports were filed on a timely basis for
the year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Directors who are employees of the Company do not receive any fees for
service on the Board of Directors. Each non-employee Director of the Company
receives a per meeting fee of $1,000 for every Board meeting at which such
director is in attendance in person and $500 for every Board meeting at which
such director is in attendance by telephone (plus $500 for each committee
meeting attended by committee members in person and $250 by telephone). In
addition, each non-employee Director of the Company receives an initial grant
of a non-qualified option to purchase 15,000 shares of Common Stock (an
"Initial Option") and a yearly grant (following each Annual Meeting of
Stockholders) of a non-qualified option to purchase 5,000 shares of Common
Stock (an "Annual Option"). The exercise price for each Initial Option and
Annual Option is equal to the fair market value of Common Stock on the date
of grant. Initial Options become exercisable in 12 equal installments at
three-month intervals over the 36-month period commencing on the date of
grant. Annual Options vest in full on the earlier of the first anniversary of
the date of grant or the date of the next
28
<PAGE>
Annual Meeting of Stockholders. Directors may also be reimbursed for certain
expenses in connection with attendance at meetings of the Company's Board of
Directors and its committees.
Summary Compensation Table
The following table summarizes all compensation paid in the fiscal years
ended December 31, 1999, 1998 and 1997 to (i) the Company's Chief Executive
Officer and (ii) certain of the Company's other most highly compensated
executive officers during 1999.
<TABLE>
<CAPTION>
LongTerm
Compensation
Awards
Annual Compensation Number of
----------------------------------- Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary (1) Bonus Compensation Options Compensation (2)
- --------------------------------------- ------ --------- ------ ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Grey 1999 $ 283,077 $25,000 $28,125 (3) 450,000 $33,614
President and Chief Executive Officer 1998 - - - 50,000 (4) -
1997 - - - - -
Lawrence D. Muschek (5) 1999 266,448 - 40,000 3,450
President, Research and Development 1998 250,000 25,100 - - 50,000
1997 52,083 - - - 200,000 20,841
George M. Grass 1999 200,000 - - 225,000 1,194
President, NaviCyte Inc. 1998 8,333 - - - -
1997 - - - - -
Michael J. Green (6) 1999 202,258 - - 90,000 2,000
Vice President, Drug Discovery 1998 186,875 15,100 - 50,000 2,000
1997 175,000 96,837 - 25,000 13,820
Gerard A. Wills 1999 187,179 - - 175,000 -
Vice President, Finance and 1998 - - - - -
Chief Financial Officer 1997 - - - - -
- -----------
</TABLE>
(1) Includes amounts deferred pursuant to the Company's 401(k) Plan.
(2) Includes reimbursement for relocation expenses paid to Mr. Grey
($31,614 in 1999), Dr. Muschek ($3,450 in 1999 and $20,841 in 1997),
Dr. Grass ($1,194 in 1999), Dr. Green ($11,820 in 1997) and Mr. Wehrli
($2,556 in 1999). The balance of these amounts reflect the Company's
matching contributions pursuant to the Company's 401(k) plan.
(3) In 1999, the Company loaned Mr. Grey $150,000, which was evidenced by a
promissory note secured by a pledge of Company securities. The interest
rate on the loan is 4.44% per annum, with interest payable quarterly.
The original principal amount of the loan is forgiven in equal
quarterly installments of $9,375 until either the loan is forgiven in
full or the total amount of the forgiveness and principal paid in
lawful money equals the original principal amount of the note.
(4) In December 1998, pursuant to an Executive Employment Agreement between
the Company and Mr. Grey, the company granted Mr. Grey an option to
acquire 50,000 shares of common stock at $2.50 per share.
(5) Dr. Muschek retired from his position with the Company on December 31,
1999.
(6) Dr. Green resigned from his position as Vice President, Drug
Discovery and became a consultant to the Company, effective March 1,
2000.
29
<PAGE>
Stock Options
The following tables set forth certain information as of December 31, 1999
and for the fiscal year then ended with respect to options to acquire Common
Stock granted to and exercised by the individuals named in the Summary
Compensation Table above. No stock appreciation rights have been granted to
date.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term(6)
Options Employees in Price Expiration -------------------------
Name Granted(#) Fiscal Year ($/Sh)(4) Date(5) 5%($) 10%($)
---- ------------- ---------------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Grey 450,000 (1) 16.2 2.50 01/07/2009 432,630 1,355,266
Lawrence D. Muschek 40,000 (2) 1.4 1.88 06/01/2009 47,167 11,951
George M. Grass 150,000 (1) 5.4 2.50 01/20/2009 235,835 597,653
75,000 (3) 2.7 1.44 12/07/2009 67,826 171,885
Michael J. Green 90,000 (2) 3.2 1.88 06/01/2009 106,126 268,944
Gerard A. Wills 150,000 (1) 5.4 2.50 01/20/2009 235,835 597,653
25,000 (3) 0.9 1.44 12/07/2009 22,609 57,295
- -------------------
</TABLE>
(1) The options granted to Mr. Grey, Dr. Grass and Mr. Wills,
are subject to the following vesting schedule: (i) 10% of
the shares subject to the option vest at the end of the first quarter
following the grant date; and (ii) 6% of the shares subject to the
option vest at the end of each successive three-month period following
the date of the grant (thus permitting 100% vesting over the course of
48 months); provided that these options, subject to certain conditions,
immediately vest upon a merger, reorganization or other change in
control of the Company.
(2) The options granted to Dr. Muschek and Dr. Green are
subject to the following vesting schedule: (i) 4% of the shares subject
to the option immediately vested upon grant; and (ii) 6% of the shares
subject to the option vest at the end of each successive three-month
period following the date of the grant (thus permitting 100% vesting
over the course of 48 months); provided that these options, subject to
certain conditions, immediately vest upon a merger, reorganization or
other change in control of the Company.
(3) The options granted to Dr. Grass and Mr. Wills are
subject to the following vesting schedule: (i) eight equal installments
of 12.5% of the shares subject to the option vest quarterly following
the date of grant (thus permitting 100% vesting over the course of 24
months); provided that these options, subject to certain conditions,
immediately vest upon a merger, reorganization or other change in
control of the Company.
(4) The exercise price on the date of grant was equal to 100% of the per
share fair market value of Common Stock on the date of grant with the
exception of the grant of 450,000 options granted to Mr. Grey. The
exercise price of Mr. Grey's grant represents a per share premium of
18% of the fair market value of Common Stock on the date of grant.
(5) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(6) The 5% and 10% assumed annual rates of compounded stock price
appreciation are suggested by rules of the Securities and Exchange
Commission and do not represent Company estimates or projections
regarding the future price of Common Stock. There can be no assurance
provided to any executive officer or any other holder of the Company's
securities that actual stock price movement over the 10-year option
term will be at the assumed 5% and 10% levels of appreciation, or any
other defined level.
30
<PAGE>
Aggregated Option Exercises in 1999 and 1999
Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Shares Unexercised Options in-the-Money Options
Acquired at December 31, 1999 at December 31, 1999(1)
on Value ----------------------- -----------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------------- ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael G. Grey - $ - 109,999 390,001 $ - $ -
Lawrence D. Muschek - - 133,399 156,601 3,002 15,758
George M. Grass - - 42,000 183,000 - 67,950
Michael J. Green - - 81,818 113,414 12,267 35,808
Gerard A. Wills - - 33,000 142,000 - 22,650
- ------------
</TABLE>
Calculated on the basis of (i) the fair market value of Common Stock at
December 31, 1999 ($2.344 per share) MINUS (ii) the exercise price.
Executive Employment Agreements and Termination of Employment and Change in
Control Arrangements
Pursuant to the terms of an Executive Employment Agreement dated November
6, 1998 between the Company and Michael G. Grey, the Company agreed to retain
Mr. Grey as President and Chief Executive Officer of the Company at an annual
salary of $300,000. In December 1999, this amount was increased to $310,000
per year. The Agreement also provides that if Mr. Grey is terminated without
cause, he is entitled to continuation of his salary for a period of twelve
months. In connection with the Agreement, Mr. Grey was granted, in December
1998, options to acquire 50,000 shares of Common Stock at $2.50 per share
(vesting over four years). In addition, in January 1999, Mr. Grey was granted
options to acquire 450,000 shares of Common Stock at $2.50 per share (vesting
over four years).
In January 1999, the Company loaned Mr. Grey $150,000, which was
evidenced by a promissory note secured by a pledge of Company securities. The
interest rate on the loan is 4.44% per annum, with interest payable
quarterly. The original principal amount of the loan is forgiven in equal
quarterly installments of $9,375 until either the loan is forgiven in full or
the total amount of the forgiveness and principal paid in lawful money equals
the original principal amount of the note.
Pursuant to the terms of an Executive Employment Agreement dated October
11, 1998 between the Company and George M. Grass, the Company agreed to
retain Dr. Grass as President of NaviCtye at an annual salary of $200,000.
The Agreement also provides that if Dr. Grass is terminated without cause, he
is entitled to the balance of his base salary during the period from the date
of termination through October 11, 2000. In connection with the Agreement,
Dr. Grass was granted options to acquire 150,000 shares of Common Stock at
$2.50 per share (vesting over four years).
Options granted to officers and directors of the Company vest fully in
the event the Company is subject to a change in control (as defined in the
respective stock option plans under which such options are granted).
Compensation Committee Interlocks and Insider Participation
During 1999, the Compensation Committee consisted of Dr. Blair, Mr.
Whitehead and Mr. Wiklund (until December 1999), each of whom is an outside
Director of the Company. None of the members of the Compensation Committee
had any "interlock" relationship to report during the Company's fiscal year
ended December 31, 1999.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 7, 2000 as
to shares of Common Stock beneficially owned by: (i) each person who is known
by the Company to own beneficially more than 5% of the issued and outstanding
Common Stock; (ii) each of the Company's Directors as well as certain
affiliated entities; (iii) each of the individuals named in "Executive
Compensation--Summary Compensation Table" above; and (iv) all directors and
executive officers of the Company as a group. Ownership information is based
upon information furnished by the respective individuals or entities, as the
case may be.
<TABLE>
<CAPTION>
Directors, Nominees, Named Executive Percent
Officers, 5% Stockholders, and Directors Shares Beneficially Beneficially
and Executive Officers as a Group Owned (1)(2) Owned (1)(2)
- ---------------------------------------- ------------------------ ------------------
<S> <C> <C>
Biotechnology Investments Limited .............................................. 1,436,831 7.3
Post Office Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands
ChemNavigator.com-TM-, Inc. .................................................. 1,000,000 5.1
6166 Nancy Ridge Drive
San Diego, CA 92121
Domain Partners II, L.P. ....................................................... 962,724 4.9
One Palmer Square
Princeton, New Jersey 08542
Domain Partners III, L.P. ...................................................... 891,133 4.6
One Palmer Square
Princeton, New Jersey 08542
DP III Associates, L.P. ........................................................ 30,936 *
One Palmer Square
Princeton, New Jersey 08542
Domain Associates .............................................................. 6,966 *
One Palmer Square
Princeton, New Jersey 08542
Novartis Pharma AG.............................................................. 1,866,667 9.5
Lichstrasse 35
Basel, CH-4002, Switzerland
James C. Blair (3) ............................................................. 1,939,117 9.9
Michael G. Grey (4) ............................................................ 205,499 *
Lawrence D. Muschek (5) ........................................................ 163,800 *
Harvey S. Sadow (6) ............................................................ 31,301 *
Ronald R. Tuttle (7) ........................................................... 316,089 1.6
Robert S. Whitehead (8) ........................................................ 232,557 1.2
Myra N. Williams (9) ........................................................... 2,395 *
George M. Grass (10) ........................................................... 1,458,605 8.0
Michael J. Green (11) .......................................................... 100,491 *
Gerard A. Wills (12)............................................................ 54,124 *
All directors and executive officers as a group (13 persons)(13) ............... 4,632,242 23.7
- --------------
* Less than 1%.
</TABLE>
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock beneficially owned includes the
shares issuable pursuant to stock options that may be exercised within
60 days after March 7, 2000. Shares issuable pursuant to such options
are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options but are not deemed
outstanding for purposes of computing the percentage ownership of any
other person.
32
<PAGE>
(3) Includes 17,358 shares issuable upon exercise of options held by Dr.
Blair that are exercisable within the 60-day period following March 7,
2000. Also includes 962,724 shares beneficially owned by Domain
Partners II, L.P., 891,133 shares beneficially owned by Domain Partners
III, L.P., 30,936 shares beneficially owned by DP III Associates, L.P.
and 6,966 shares beneficially owned by Domain Associates, L.L.C. Dr.
Blair is a general partner of One Palmer Square Associates, II, L.P.,
which is the general partner of Domain Partners II, L.P., and he is
also a general partner of One Palmer Square Associates, III, L.P., the
general partner of Domain Partners III, L.P. and DP III Associates,
L.P. Dr. Blair is a managing member of Domain Associates, L.L.C. Dr.
Blair disclaims beneficial ownership of shares held by One Palmer
Square Associates, II, L.P. and One Palmer Square Associates, III, L.P.
which are not actually distributed to him.
(4) Includes 182,499 shares issuable upon exercise of options held by Mr.
Grey that are exercisable within the 60-day period following March 7,
2000.
(5) Includes 162,800 shares issuable upon exercise of options held by Dr.
Muschek that are exercisable within the 60-day period following March
7, 2000.
(6) Includes 19,841 shares issuable upon exercise of options held by Dr.
Sadow that are exercisable within the 60-day period following March 7,
2000.
(7) Includes 55,010 shares issuable upon exercise of options held by Dr.
Tuttle that are exercisable within the 60-day period following March 7,
2000.
(8) Includes 232,557 shares issuable upon exercise of options held by Mr.
Whitehead that are exercisable within the 60-day period following March
7, 2000.
(9) Includes 2,395 shares issuable upon exercise of options held by Dr.
Williams that are exercisable within the 60-day period following March
7, 2000.
(10) Includes 60,374 shares issuable upon exercise of options held by Dr.
Grass that are exercisable within the 60-day period following March 7,
2000.
(11) Includes 95,032 shares issuable upon exercise of options held by Dr.
Green that are exercisable within the 60-day period following March 7,
2000.
(12) Includes 54,124 shares issuable upon exercisable of options held by Mr.
Wills that are exercisable within the 60-day period following March 7,
2000.
(13) Includes 1,028,983 shares issuable upon exercise of options that are
exercisable within the 60-day period following March 7, 2000. Includes
962,724 shares held by Domain Partners II, L.P., 891,133 shares held by
Domain Partners III, L.P., 30,936 shares held by DP III Associates,
L.P., and 6,966 shares held by Domain Associates. See footnote (3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other Arrangements
In February 1996, the Company entered into an agreement with Dura
Pharmaceuticals, Inc. ("Dura") which requires, among other things, the
Company to pay Dura $6.0 million over four years for product development (the
"Dura Agreement"). As of December 31, 1999, $5.1 million had been funded
under the Dura Agreement. As of July 1, 1998, Robert S. Whitehead, Chairman
of the Board of Directors and former Chief Executive Officer of the Company,
became President of Dura. James C. Blair, a member of the Board of Directors
of Dura, is a member of the Board of Directors of the Company. In connection
with the Dura Agreement, Dura invested $5.0 million in the Company's stock
(originally shares of Series G Preferred Stock which converted into 775,193
shares of Common Stock upon the consummation of the Company's initial public
offering).
On January 7, 1999, the Company advanced to its Chief Executive Officer,
Michael G. Grey, a forgivable loan in the amount of $150,000 due on or before
January 8, 2003 and secured by a pledge of Company securities. The interest
rate on the loan is 4.44% and is payable quarterly, with the principal
balance to be forgiven in equal quarterly installments of $9,375 until either
the loan is forgiven
33
<PAGE>
in full or the total amount of the forgiveness and principal paid in lawful
money equals the original principal amount of the note. The note, to the
extent unpaid or unforgiven, becomes due and payable upon the termination of
Mr. Grey's employment.
In December 1998, Robert S. Whitehead resigned from his position as Chief
Executive Officer, President and Acting Chief Financial Officer of the Company.
In recognition of his continued service as a Director, the Board of Directors
amended the August 23, 1993 Stock Option Agreement between Mr. Whitehead and the
Company. As a result, the expiration date of his outstanding options subject to
that grant will now be the earliest of either (i) 10 years following August 23,
1993; (ii) the date 90 days after the termination of his service as a Director
for any reason other than total and permanent disability; or (iii) the date 12
months after the termination of Mr. Whitehead's service as a Director by reason
of total and permanent disability.
On February 1, 1999, the Company advanced to its Sr. Director, Legal
Affairs and Corporate Secretary, John E. Wehrli, a loan in the amount of
$120,000 which is secured by a pledge of Company securities. Interest will
accumulate on the outstanding principal balance at the rate of 4.64%, and all
unpaid principal and interest will become due and payable on the earlier of
February 1, 2001 or the termination of Mr. Wehrli's employment. The loan was
repaid in full by Mr. Wehrli in February, 2000 after his resignation as an
employee of the Company.
On August 20, 1999, the Company entered into a Supplier Agreement with
CNC, a private company that has developed an Internet website for the sale of
chemicals and related information to the pharmaceutical, biotechnology, and
agricultural industries and to academia. The website is designed to enable
scientists to conduct structural searches among listed compounds and purchase
compounds meeting self-selected search criteria. The Company has agreed to
list for sale certain of its compounds on the CNC site. As part of the
transaction, the Company acquired 1,176,666 shares of Series B Convertible
Preferred Stock of CNC in exchange for $1.0 million in cash and 1.0 million
shares of the Company's common stock, valued at $1.5 million. As a result,
the Company owns approximately 20% of the outstanding equity securities of
CNC. In addition, as part of the foregoing transaction, the parities each
acquired a warrant to acquire additional securities of the other. Under these
warrants, the Company has the right to acquire an additional 294,167 shares
of CNC Series B Convertible Preferred Stock at a price of $5.00 per share and
CNC has a right to acquire an additional 294,167 shares of the Company's
common stock at a price of $5.00 per share. Chief Executive Officer of the
Company, Michael G. Grey, is a Director of CNC.
In May 1998, the Company entered into a Research, Development and License
Agreement with Novartis Pharma AG ("Novartis") pursuant to which the
companies are focused on the identification and development of orally-active
small molecules for the treatment of certain diseases believed to be mediated
by the melanocortin-4 receptor pathway, including obesity, Type II diabetes
and Syndrome X. The Agreement provides for (i) an equity investment at the
Company's option, which the Company exercised in November 1998 and received
$7.0 million in exchange for approximately 1.9 million shares of the
Company's Common Stock; (ii) an additional $12.0 million in committed funding
(consisting of $2.0 million received upon the execution of the Agreement for
past research activities and $10.0 million over a three-year period); and
(iii) potential milestone payments and royalties from the successful
development and commercialization of products (for which Novartis has
worldwide rights).
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on Page F-1 of this Annual Report on Form 10-K:
<TABLE>
<S> <C>
Report of Ernst & Young LLP,
Independent Auditors....................... F-2
Consolidated Balance Sheets at December
31, 1999 and 1998.......................... F-3
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1999.................... F-4
Consolidated Statements of Stockholders'
Equity (Deficit) for each of the
three years in the period ended
December 31, 1999.......................... F-5
Consolidated Statements of Cash Flows
for each of the three years in the
period ended December 31, 1999............. F-6
Notes to Consolidated Financial
Statements................................. F-7
</TABLE>
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required or not applicable, or the information is otherwise included.
(3) Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K has been identified with an
asterisk ("*") in the table of exhibits set forth below at item 14(c).
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1999.
(C) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1+(1) Stock Purchase Agreement dated as of February 28, 1997 among the
Registrant, Multiple Peptide Systems, Inc.,RAH
Acquisition Corp. and Richard A. Houghten, Ph.D.
2.2 (8) Agreement and Plan of Reorganization dated as of November 12,
1998 by and among the Registrant, NaviCyte, TPNC Acquisition
Corporation, George M. Grass, Ph.D. and Patrick J. Sinko, Ph.D.
2.3 (9) Purchase and Sale of Assets Agreement dated March 12, 1999
among the Registrant, ChromaXome Corp. and TerraGen
Discovery Inc.
3.3(2) Restated Certificate of Incorporation of the Registrant.
35
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
3.4(3) Certificate of Ownership and Merger (amending Section 1 of the
Restated Certificate of Incorporation).
3.5(4) Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.3, 3.4 and 3.5.
10.1(2) Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
*10.2(2) Amended and Restated 1992 Stock Plan of the Registrant(the
"1992 Plan").
*10.3(2) Forms of agreements under the 1992 Plan.
*10.4(2) 1995 Stock Plan of the Registrant (the "1995 Plan").
*10.5(2) Forms of agreements under the 1995 Plan.
*10.6(5) 1996 Incentive Stock Plan of the Registrant, as amended.
*10.7(10) 1996 Employee Stock Purchase Plan, as amended.
10.8(2) Form of Agreement Regarding Confidentiality and Non-
Competition.
*10.9(2) The 401(k) Plan of the Registrant, as amended.
10.13(11) NaviCyte, Inc. 1997 Stock Plan (the "NaviCyte Plan").
10.14(11) Form of Registrant's Stock Option Agreement relating to options
originally granted under the NaviCyte Plan (Incentive Stock
Options).
10.15(11) Form of Registrant's Stock Option Agreement relating to options
originally granted under the NaviCyte Plan (Nonstatutory Stock
Options).
10.28(2) Master Equipment Lease Agreement No. 8020 between Dominion
Ventures, Inc. and the Registrant dated October 7, 1992, with
amendments.
10.29+(2) April 11, 1985 License Agreement between The Scripps Clinic and
Research Foundation and Richard Houghten (re: "Means for
Sequential Solid Phase Organic Syntheses and Methods Using the
Same; Patent Disclosure #85-35)-- the "Tea Bag" License
Agreement, including assignments to the Registrant.
10.33+(2) January 1, 1994 License and Option to License Agreement
between Chiron Corporation, Chiron Mimotopes Pty Ltd.
and the Registrant.
10.34+(2) January 1, 1994 Sub-License Agreement between Chiron
Corporation and the Registrant.
36
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
10.35+(2) Letter of Understanding Concerning Licensing Agreements from the
Registrant to Chiron Corporation and Chiron Mimotopes
U.S. dated December 15, 1994.
10.36+(2) March 31, 1995 Heads of Agreement Contract between Chiron
Corporation, the Registrant, Multiple Peptide Systems, Chiron
Mimotopes U.S. and Chiron Mimotopes Peptide Systems L.L.C.
10.46+(2) Research and Development Agreement dated February 7, 1996
between Dura Pharmaceuticals, Inc. and the Registrant.
10.48+(6) Restated and Third Amended Research and Option Agreement
entered into as of April 15, 1997 between Torrey Pines Institute for
Molecular Studies and the Company.
10.49+(6) Research and Development Agreement dated as of June 18, 1997
between Ono Pharmaceutical Co., Ltd. and the Company.
10.50 (7) Lease between the Company and Aid Associations for Lutherans,
dated September 24, 1997, for premises at 9880 Campus Point
Drive.
10.51 (7) Equipment Financing Line between the Company and Lease
Management Services, Inc. dated September 19, 1997.
*10.53(14) Executive Employment Agreement between Lawrence D.
Muschek and the Registrant dated October 6, 1997.
10.54 Reference is made to Exhibits 2.1 and 2.2.
10.55(14) Master Loan and Security Agreement between the Company and
Transamerica Business Credit Corporation dated December 23,
1998.
10.56+(12) Stock Purchase Agreement made as of May 26, 1998 between
Novartis Pharma AG and the Registrant.
10.57+(12) Research, Development and License Agreement dated as of May
26,1998 between Novartis Pharma AG and the Registrant (as
amended).
10.58+(13) Library Supply and Sublicense Agreement dated as of September
30,1998 between Biogen, Inc. and the Registrant.
*10.60(14) Employment letter dated November 6, 1998 between the Registrant and
Michael G. Grey.
*10.61(14) Secured Promissory Note dated January 8, 1999 in the amount of
$150,000 from Michael G. Grey.
*10.62(14) Secured Promissory Note dated January 11, 1999 in the amount of
$120,000 from John E. Wehrli.
*10.63(14) Employment letter dated January 11, 1999 between the Registrant
and John E. Wehrli.
37
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
*10.64(14) Employment letter dated December 16, 1998 between the
Registrant and Gerard A. Wills.
*10.65(14) Employment letter dated January 16, 1996 between the Registrant
and Michael J. Green, Ph.D.
*10.66(15) Employment Agreement dated May 12, 1999 between the
Registrant and Mark W. Schwartz, Ph.D.
*10.67 Employment letter dated October 22, 1999 between the Registrant
and Alan L. Hillyard, Ph.D.
10.68(15) Mutual Release dated June 30, 1999 between the Registrant
and Dura Pharmaceuticals, Inc.
10.69(16) Series B Convertible Preferred Stock and Warrant Purchase
Agreement dated as of August 20, 1999 between
ChemNavigator.com-TM-, Inc., the Company and certain other
parties.
10.70(16) Stock and Warrant Issuance Agreement dated as of August 20,
1999 between the Company and ChemNavigator.com-TM-, Inc.
10.71(16) Warrant to Purchase 294,164 Shares of the Common
Stock of ChemNavigator.com-TM-, Inc. dated August 20, 1999.
10.72(16) Form of Warrant to Purchase 294,164 Shares of the Common
Stock of Trega Biosciences, Inc.
10.73+ Library Sales Agreement dated as of December 8, 1999 between
the Registrant and EVOTEC Biosystems AG.
10.74+ Agreement for Joint Development of Assays and the Cross
Licensing of Affiliated Technologies dated January 12, 2000
between the Registrant and EVOTEC Biosystems AG.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (included in Signature section of this Report).
27.1 Financial Data Schedule.
</TABLE>
- -----------------
(1) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated February 28, 1997 (Exhibit 1).
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-1376) which was declared effective on March 29, 1996
(to the Exhibits of the same numbers in such Registration Statement).
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated May 1, 1997 (Exhibit 1).
(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997 (Exhibit 3.4).
(5) Incorporated by reference from Appendix A of the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(6) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1997.
(7) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1997.
(8) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated November 23, 1998 (Exhibit 2.1).
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated March 16, 1999 (Exhibit 2.1).
38
<PAGE>
(10) Incorporated by reference from Appendix B of the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(11) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 filed on November 24, 1998 with respect to the NaviCyte Plan
(Exhibits 99.1, 99.2 and 99.3).
(12) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1998 (Exhibits 10.1 and 10.2)
(13) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1998 (Exhibit 10.1).
(14) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the Year Ended December 31, 1998 (Exhibits 10.53, 10.55, 10.59-10.65).
(15) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1999 (Exhibits 10.1 and 10.2).
(16) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated September 1, 1999 (Exhibits 10.1 - 10.4).
+ The Registrant has been granted or has applied for confidential treatment of
certain portions of these agreements or arrangements.
(D) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
TREGA BIOSCIENCES, INC.
Date: March , 2000
/s/ MICHAEL G. GREY
-------------------
Michael G. Grey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ GERARD A. WILLS
-------------------
Gerard A. Wills
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael G. Grey and Gerard A. Wills, and each one
of them, his true and lawful attorney-in-fact, each with full power of
substitution, in any and all capacities to sign any amendments to this Annual
Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact or their
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ ---------------------------------- -------------
<S> <C> <C>
/s/ Robert S. Whitehead Chairman of the Board of Directors
- ------------------------------
Robert S. Whitehead
/s/James C. Blair Director March 10, 2000
- ------------------------------
James C. Blair
Director, President and Chief
Executive
/s/ Michael G. Grey Officer March 10, 2000
- ------------------------------
Michael G. Grey
/s/ Lawrence D. Muschek Director March 10, 2000
- ------------------------------
Lawrence D. Muschek
/s/ Harvey S. Sadow Director March 10, 2000
- ------------------------------
Harvey S. Sadow
/s/ Ronald R. Tuttle Director March 10, 2000
- ------------------------------
Ronald R. Tuttle
/s/ Myra N. Williams Director March 10, 2000
- ------------------------------
Myra N. Williams
</TABLE>
40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
TREGA BIOSCIENCES, INC.
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the three years in the period ended
December 31, 1999 F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Trega Biosciences, Inc.
We have audited the accompanying consolidated balance sheets of Trega
Biosciences, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Trega Biosciences,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
January 27, 2000
F-2
<PAGE>
Trega Biosciences, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,393 $ 9,755
Short-term investments 1,041 6,507
Accounts receivable and other current assets 2,541 778
-------- --------
Total current assets 8,975 17,040
Property and equipment, at cost:
Machinery and equipment 6,902 5,868
Leasehold improvements 877 859
Furniture and fixtures 419 412
-------- --------
8,198 7,139
Less accumulated depreciation and amortization (4,019) (3,016)
-------- --------
4,179 4,123
Investment in affiliate, net of amortization 2,581 -
Other assets 6,926 8,372
--------- --------
$ 22,661 $ 29,535
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 696 $ 1,539
Accrued compensation and other accrued liabilities 2,867 2,399
Line of credit 1,500 -
Current portion of debt obligations 1,272 1,251
Deferred revenue 1,820 3,794
-------- --------
Total current liabilities 8,155 8,983
Long-term debt obligations, net of current portion 2,484 2,689
Deferred rent 512 223
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000 at December 31, 1999 and 1998
Issued and outstanding shares - 19,101,437 and 17,481,097 at
December 31, 1999 and 1998, respectively 19 18
Additional paid-in capital 89,067 86,645
Common stock issuable 16 16
Deferred compensation (489) (609)
Accumulated deficit (77,103) (68,430)
-------- --------
Total stockholders' equity 11,510 17,640
-------- --------
$ 22,661 $ 29,535
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Operations
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Compound revenues $ 7,504 $ 2,257 $ -
Related party contract research 3,300 3,970 -
Contract research and license fees 2,260 4,542 7,334
Net sales 313 21 430
------------ ------------ ------------
13,377 10,790 7,764
Costs and expenses:
Cost of sales 332 7 341
Research and development 17,903 17,934 14,819
Acquired in-process research and
development - 1,000 -
Selling, general and administrative 7,344 5,181 4,346
------------ ------------ ------------
25,579 24,122 19,506
------------ ------------ ------------
Loss from operations before equity in
Losses of affiliate (12,202) (13,332) (11,742)
Equity in losses of affiliate (66) - -
------------ ------------ ------------
Loss from operations (12,268) (13,332) (11,742)
Other income:
Net interest income and other 82 531 1,115
Gain on sale of subsidiary 3,513 - 1,255
------------ ------------ ------------
Net loss $ (8,673) $ (12,801) $ (9,372)
============ ============ ============
Basic and diluted net loss per share $ (.47) $ (.89) $ (.69)
============ ============ ============
Shares used in computing basic and diluted
net loss per share 18,389 14,380 13,603
=========== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Common
------------------------- Paid-in Stock Deferred Accumulated
Shares Amount Capital Issuable Compensation Deficit Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 13,368,772 $ 13 $ 71,050 $ 1,281 $ (1,931) $ (46,257) $ 24,156
Exercise of stock options and other 211,284 -- 473 -- -- -- 473
Issuance of common stock under
employee stock purchase plan 30,581 -- 119 -- -- -- 119
Amortization of deferred compensation -- -- -- -- 661 -- 661
Reverse unrealized loss on short-term
investments -- -- 131 -- -- -- 131
Issuance of common stock related to
previous recognition of ChromaXome
Corp milestones 240,804 1 1,264 (1,265) --
Issuance of common stock for services 12,121 -- 50 -- -- -- 50
Net loss -- -- -- -- -- (9,372) (9,372)
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 13,863,562 14 73,087 16 (1,270) (55,629) 16,218
Exercise of stock options 282,055 -- 140 -- -- -- 140
Issuance of common stock under
employee stock purchase plan 40,582 -- 122 -- -- -- 122
Amortization of deferred compensation -- -- -- -- 661 -- 661
Issuance of common stock to Novartis
Pharma 1,866,667 2 6,998 -- -- -- 7,000
NaviCyte acquisition 1,428,231 2 6,187 -- -- -- 6,189
Extension of officer options -- -- 111 -- -- -- 111
Net loss -- -- -- -- -- (12,801) (12,801)
-------------------------------------------------------------------------------------------
Balance at December 31, 1998 17,481,097 18 86,645 16 (609) (68,430) 17,640
Exercise of stock options 594,039 -- 43 -- -- -- 43
Issuance of common stock under
employee stock purchase plan 26,301 -- 42 -- -- -- 42
Amortization of deferred compensation -- -- -- -- 671 -- 671
Deferred compensation for issuance of
stock options -- -- 551 -- (551) -- --
Issuance of common stock related to
investment in affiliate 1,000,000 1 1,499 -- -- -- 1,500
Issuance of warrants related to
investment in affiliate and line of
credit -- -- 287 -- -- -- 287
Net loss -- -- -- -- -- (8,673) (8,673)
------------------------------------------------------------------------------------------
Balance at December 31, 1999 19,101,437 $ 19 $ 89,067 $ 16 $ (489) $ (77,103) $ 11,510
===========================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,673) $ (12,801) $ (9,372)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 2,028 1,604 1,033
Impairment of patents and purchased technology 791 -- --
Amortization of note receivable discount (126) (50) (37)
Amortization of deferred compensation 671 661 661
Equity in losses of affiliate 66 -- --
Accrued interest on TPIMS notes payable -- (81) --
Gain on sale of asset -- (68) --
Realized loss on sale of investment -- -- 88
Equity instruments issued for services 13 111 50
Gain on sale of subsidiary (3,513) -- (1,255)
Acquired in-process research and development -- 1,000 --
Changes in operating assets and liabilities, net of
effects from the transfer of assets from
sale of MPS in 1997 and CXC in 1999:
Accounts receivable (1,977) (134) (61)
Other current assets 214 148 (422)
Accounts payable (843) 962 (479)
Accrued compensation and other accrued liabilities 467 423 (522)
Deferred rent 289 223 --
Deferred revenue (1,974) 660 1,244
---------- --------- ---------
Net cash used in operating activities (12,567) (7,342) (9,072)
INVESTING ACTIVITIES
Purchases of short-term investments (8,098) (7,064) (21,540)
Maturities of short-term investments 13,564 14,527 21,441
Purchase of property and equipment (1,656) (2,788) (2,045)
Investment in affiliate (1,000) -- --
Proceeds from disposition of equipment 8 198 --
Proceeds from sale of subsidiary 3,705 -- 1,149
Purchase of NaviCyte, net of cash acquired -- (557) --
Other assets 280 (226) (39)
---------- --------- ---------
Net cash provided by (used in) investing activities 6,803 4,090 (1,034)
FINANCING ACTIVITIES
Principal payments under debt obligations (1,310) (2,177) (569)
Proceeds from equipment notes and notes payable 2,627 2,465 1,925
Issuance of common stock 85 7,262 592
---------- --------- ---------
Net cash provided by financing activities 1,402 7,550 1,948
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents (4,362) 4,298 (8,158)
Cash and cash equivalents at beginning of year 9,755 5,457 13,615
---------- --------- ---------
Cash and cash equivalents at end of year $ 5,393 $ 9,755 $ 5,457
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 348 $ 232 $ 117
---------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes received in connection with the sale of MPS, net of discount of $213 $ -- $ -- $ 537
========== ========= =========
Note payable issued in exchange for TPIMS patent and purchased technology $ -- $ -- $ 1,300
========== ========= =========
Issuance of common stock and options to acquire NaviCyte $ -- $ 6,189 $ --
========== ========= =========
Issuance of common stock and warrants for investment in affiliate $ 1,774 $ -- $ --
========== ========= =========
Deferred compensation $ 551 $ -- $ --
========== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Trega Biosciences, Inc. (the "Company" or "Trega") is focused on
accelerating drug discovery from disease targets to clinical candidates
through its iDiscovery-TM- technologies. Such technologies include (i) the
IDEA-TM- ("In Vitro Determination for the Estimation of ADME (absorption,
distribution, metabolism and excretion)") computerized predictive models for,
among other things, the prediction and selection of compounds with essential
drug-like characteristics for further development and (ii)
Chem.Folio-Registered Trademark- combinatorial libraries for screening and
optimization of potential drug candidates.
Since its inception, Trega has utilized combinatorial chemistry as a
foundation for its drug discovery activities; first, for the production of
peptides, then mixtures of small molecules, and finally, for singles-based
compound arrays. This technology has enabled Trega to develop and offer a
wide range of small-molecule libraries, including its Chem.Folio-Registered
Trademark- compound libraries, which are constructed in singles-based
compound arrays. In 1993, Trega used its combinatorial chemistry technologies
to discover a family of proprietary compounds that appear to influence the
production and activity of certain cytokines through interaction with
melanocortin receptors. These compounds include HP-228, which has competed a
Phase II clinical trial in the treatment of post-operative pain in hip and
knee replacements. As part of its activities, the Company formed
collaborative partnerships in the area of drug discovery and development.
Coinciding with this focus, Trega entered into collaborations with certain
pharmaceutical companies to develop compounds active against certain
melanocortin receptors.
The continuing development of Trega's combinatorial chemistry libraries
led to the development of information relevant to the drug discovery process,
which information was regularly supplied to library purchasers. The
development of this information and a growing belief in the importance of
information in the drug discovery process caused the Company to investigate
opportunities to acquire technologies directed at creating information
germane to the drug discovery process. In 1998, Trega acquired its wholly
owned subsidiary, NaviCyte, Inc. ("NaviCyte"), whose business included
the development of products and services to facilitate the rapid screening of
compounds for pharmacokinetic characteristics through the use of computer
models. With the technology acquired from NaviCyte, Trega developed and
released the first of the IDEA(TM) predictive models, the absorption module.
The Company has combined its Chem.Folio libraries and IDEA predictive models
in a collection of technologies called iDiscovery-TM-.
On February 11, 2000, the Company announced that it did not intend to
continue to support internal drug discovery programs, including its
melanocortin receptor programs, that are not funded by a collaborator. Trega
believes this strategic shift will permit it to better focus its efforts and
resources on the continuing development and commercialization of its
iDiscovery-TM- technologies. Trega is currently carrying out a collaborative
program in the area of diabetes, obesity and syndrome X, which is funded by
Novartis Pharma AG ("Novartis").
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with maturities, when
purchased, of three months or less to be cash equivalents. The Company invests
in short-term debt securities with original maturities in excess of 90 days,
which are presented as short-term investments in the accompanying consolidated
balance sheets. At December 31, 1999 and 1998, the cost of cash equivalents and
short-term investments was the same as the market value. Accordingly, there were
no unrealized gains or losses. The Company evaluates the financial strength of
institutions at which significant investments are made and believes the related
credit risk is limited to an acceptable level. The following is a summary of
available-for-sale securities (in thousands) which are classified as short-term
investments:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
U.S. corporate debt securities............................................... $ 241 $ 6,354
Other........................................................................ 800 153
----------- --------------
$1,041 $ 6,507
----------- --------------
</TABLE>
All available-for-sale securities by contractual maturities are due in one
year or less. The Company had $1.5 million in cash equivalents classified as
available-for-sale at December 31, 1999. There were no cash and cash equivalents
classified as available-for-sale at December 31, 1998.
REVENUE RECOGNITION
Contract research is recorded as earned, generally ratably, as research
and development activities are performed under the terms of the contract.
Payments received in excess of amounts earned are recorded as deferred
revenue. Revenue from product sales and library access fees are recognized
upon shipment. License fees consists of non-refundable fees from the sale of
license rights to our proprietary technologies. Revenues from these fees are
recorded when no further performance obligations exist in accordance with
Staff Accounting Bulletin ("SAB") No. 101.
Novartis is a related party based on its ownership interest in the Company,
and revenues received from Novartis therefore are classified as related party
revenue.
DEPRECIATION AND AMORTIZATION
F-7
<PAGE>
Depreciation of property and equipment is provided using the
straight-line method over the estimated useful lives of three to five years
or the lease term. Amortization of leasehold improvements is provided using
the straight-line method over the lesser of the remaining lease term or the
life of the asset. Amortization of property held under capital leases is
included in depreciation expense.
PATENTS AND PURCHASED TECHNOLOGY
Patents and purchased technology are stated at cost and are included in
other assets in the accompanying consolidated balance sheets. The patents and
purchased technology are being amortized using the straight-line method over
a useful life of ten years. Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If
impairment is indicated, the Company will value the asset at fair value. The
Company periodically monitors the patents and purchased technology for
indications of impairment of value. During the year ended December 31, 1999,
the Company recorded $791,000 of impairment charges related to its evaluation
of the value of the patents and purchased technology.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current years' presentation.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," allows companies to either account
for stock-based compensation under the provisions of SFAS No. 123 or under
the provisions of Accounting Principles Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," but requires pro forma disclosure
in the footnotes to the financial statements as if the measurement provisions
of SFAS No. 123 had been adopted. The Company has continued accounting for
its stock-based compensation in accordance with the provisions of APB No. 25.
Options or stock awards issued to non-employees and consultants are recorded
at their fair value as determined in accordance with SFAS No. 123 and EITF
96-18 and recognized over the stated service period.
NET 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." SFAS No. 128 requires the presentation of basic and
diluted earnings per share amounts. Basic earnings per share is calculated
based upon the weighted average number of common shares outstanding during
the period while diluted earnings per share also gives effect to all
potential diluted common shares outstanding during the period such as those
underlying outstanding options, warrants and convertible securities and
contingently issuable shares. SFAS No. 128 is effective for periods ending
after December 15, 1997. All common shares, outstanding options, warrants and
convertible securities and contingently issuable shares have been excluded
from the calculation of diluted earnings per share, as their inclusion would
be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standard No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income
is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments and
unrealized gains and losses on investments, are required to be reported, net
of their related tax effect, to arrive at comprehensive income. For the three
years ended December 31, 1999, comprehensive loss is the same as net loss.
F-8
<PAGE>
2. FINANCIAL STATEMENT DETAILS
OTHER ASSETS
Other assets consist of the following major classes (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Patents and purchased technology $235 $1,274
Developed technology 6,356 6,356
----- -----
6,591 7,630
Less: Accumulated amortization (751) (274)
------ ------
5,840 7,356
Other assets 1,086 1,016
------ ------
$6,926 $8,372
====== ======
</TABLE>
ACCRUED COMPENSATION AND OTHER ACCRUED LIABILITIES
Accrued compensation and other accrued liabilities consist of the
following major classes (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Accrued compensation $685 $662
Other accrued liabilities 2,182 1,737
------ -------
$2,867 $2,399
======= =======
</TABLE>
NET INTEREST INCOME AND OTHER
Net interest income and other consist of the following major classes (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Interest income $486 $769 $1,405
Interest expense (404) (238) (202)
Loss on investment - - ( 88)
--------- ---------- --------
$82 $531 $1,115
========= ========== =========
</TABLE>
3. SALE OF ASSETS OF CHROMAXOME CORP.
In March 1999, the Company's wholly owned subsidiary, ChromaXome Corp.
("CXC") sold substantially all of its assets (valued at approximately
$110,000) to TerraGen Discovery Inc. ("Discovery"), a privately held company.
As consideration for the sale, Trega received $2.0 million in cash, two
interest bearing notes in the amounts of $2.0 million and $1.0 million plus
600,000 shares of preferred stock in the parent of Discovery, which is also a
privately held company. As of December 31, 1999, the Company had received
cash proceeds of $4.0 million. The $1.0 million note remains outstanding, and
is expected to be paid by April 15, 2000, and may be accelerated in certain
events. The Company had recorded a gain on the sale of these assets of
approximately $3.5 million which relates to the cash proceeds of $4.0 million
received by December 31, 1999, offset by the assets sold and expenses
incurred by the Company in relation to the sale. Any gains resulting from
future payments and the preferred stock received have been deferred until
such time as the payments are received or value is realized from the
preferred stock.
F-9
<PAGE>
4. ACQUISITION OF NAVICYTE, INC.
In November 1998, the Company acquired all of the outstanding common
stock of NaviCyte, Inc. in a transaction accounted for as a purchase. Total
consideration included 1,428,000 shares of the Company's common stock, the
assumption of options to acquire 1,071,000 shares of the Company's common
stock and $560,000 of cash. A summary of the acquisition costs and allocation
to the assets acquired and liabilities assumed is as follows:
<TABLE>
<S> <C>
Total acquisition costs:
Cash paid at acquisition date $ 560,000
Issuance of common stock and options 6,189,000
Acquisition related expenses 378,000
Assumed liabilities 520,000
-----------
$7,647,000
===========
Allocation to assets and liabilities as follows:
Tangible assets acquired $ 291,000
Acquired in-process technology 1,000,000
Developed technology 6,356,000
-----------
$7,647,000
===========
</TABLE>
Assuming that the acquisition of NaviCyte had occurred on the first day
of the Company's fiscal year ended December 31, 1997, pro forma condensed
consolidated results of operations would be as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
------- ------
<S> <C> <C>
(unaudited)
Net revenues $11,947 $8,551
Net loss (12,720) (10,343)
Basic and diluted net loss per share $ (.80) $ (.69)
</TABLE>
5. SALE OF MULTIPLE PEPTIDE SYSTEMS, INC.
In February 1997, the Company sold its wholly-owned subsidiary, Multiple
Peptide Systems, Inc. ("MPS"), to an entity owned by Richard A. Houghten,
Ph.D. ("Dr. Houghten"). Dr. Houghten is a founder of the Company and prior to
the sale of MPS was the Chief Technical Officer and a Director of the Company.
In exchange for the sale of MPS, the Company received consideration of
$1.5 million and a $750,000 non-interest bearing note with payments due on
the third, fourth, and fifth anniversaries of the sale. The $750,000 was
discounted by $213,000 to a present value of $537,000, using an imputed rate
of interest of 9%. In September 1999, the Company received cash consideration
which eliminated the non-interest bearing note. The Company recorded a gain
on the sale of MPS of $1.255 million. In connection with the sale, the
Company has agreed, for a period of seven years, not to (i) engage in certain
activities which would be competitive with the business of MPS or (ii)
license certain technologies (which are presently licensed from the Company
to MPS) to entities which are engaged primarily in a business similar to the
business of MPS.
6. COMMITMENTS AND LONG-TERM DEBT
LINE OF CREDIT
In August 1999, the Company entered into a line of credit in the amount
of $1.5 million that provides funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% (9.25% at December 31, 1999) and
is for a term of one year. The line of credit contains covenants relating to
cash flow coverage and minimum cash balances. As of December 31, 1999, the
Company is in compliance with all debt covenants. In August 1999, the entire
line of credit $1.5 million was accessed and $1.5 million remains outstanding
at December 31, 1999. In connection with the receipt of the line of credit,
the Company issued warrants to purchase 20,000 shares of its common stock at
$1.75 per share, expiring on August 5, 2004.
LEASES
In September 1997, the Company entered into a 10-year lease for its
facility in San Diego, California. The initial annual rent was $1.7 million
and is subject to annual increases of 3.5%. The Company has the option to
extend the lease for an additional term of 5 years subject to terms and
conditions specified in the lease. Rent expense for the year ending December
31, 1999 was approximately $2.3 million.
F-10
<PAGE>
The Company moved out of its former facility completely as of June 1998.
Rent expense for both premises for the years ending December 31, 1998 and 1997
was approximately $1.8 million and $.8 million, respectively. The Company leases
certain equipment under a capital lease obligation. The Company did not acquire
any equipment under capital leases during the years ending December 31, 1999 and
1998.
Annual future minimum payments under capital and operating leases at
December 31 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDED DECEMBER 31 LEASES LEASES
- ----------------------- --------- ---------
<S> <C> <C>
2000 $ 2,045,000 $ 68,000
2001 2,117,000 -
2002 2,191,000 -
2003 2,267,000 -
2004 2,347,000 -
Remaining term of lease 8,422,000 -
--------------- ---------
$ 19,389,000 68,000
------------
Less amounts representing interest (2,000)
-----------
Present value of remaining minimum payments 66,000
Less current portion of obligations (66,000)
-----------
Long-term obligations $ -
===========
</TABLE>
LONG-TERM DEBT
In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it had accessed the entire $2.2 million by December 31, 1999.
The loan, which is secured by the equipment, bears interest between 11.2% and
12.8% and is to be repaid monthly over a four-year term.
In connection with certain equipment financing lines, the Company must
meet certain financial covenants pertaining to the amount of its cash and
marketable securities to be maintained during the terms of the financing. Due
to certain covenant violations, the Company has provided required security
deposits and therefore has fulfilled its obligations related to the
covenants. The security deposits are included in other assets in the
consolidated balance sheet.
Principal payments due on long-term debt at December 31 are as follows:
<TABLE>
<CAPTION>
LONG-TERM
YEARS ENDED DECEMBER 31 DEBT
- ----------------------- ----
<S> <C>
2000 $ 1,206,000
2001 1,235,000
2002 788,000
2003 393,000
2004 68,000
-----------
$ 3,690,000
Less current portion of obligations (1,206,000)
-----------
Long-term obligations $ 2,484,000
===========
</TABLE>
The carrying value of the Company's obligations under long-term debt
approximates its fair value and the implicit interest rate approximates the
Company's borrowing rate.
F-11
<PAGE>
7. COLLABORATIVE ARRANGEMENTS
CHEM.FOLIO-Registered Trademark- Combinatorial Libraries
In December 1999, the Company entered into a Library Sales Agreement with
EVOTEC BioSystems AG ("EVOTEC"), pursuant to which EVOTEC will purchase certain
amounts of all Chem.Folio-Registered Trademark- compounds contained within
Trega's inventory as well as certain compounds produced through the end of 2000.
Selected compounds will be screened through the jointly developed assays and
Trega intends to use the data to enhance the IDEA-TM- predictive models, which
data and models will be owned by Trega. The purchased compounds will also
include associated information, such as synthetic protocols, cytotoxicity, and
physico-chemical data. EVOTEC will use the Chem.Folio-Registered Trademark-
compounds in its internal drug discovery programs and will allow its screening
customers access to Chem.Folio-Registered Trademark- compounds on a fee per
compound basis, which fee shall be passed through to Trega.
IDEA-TM- Predictive Models
In March 1999 and February 1999, the Company entered into Software
License Agreements that added the R.W. Johnson Pharmaceutical Research
Institute and Schering-Plough Research Institute to the IDEA-TM- absorption
consortium. Under the terms of the agreements, both companies provided data
and made initial and milestone payments over the course of the development of
the IDEA-TM- predictive absorption module and database. The Company has
licensed its IDEA-TM- absorption predictive module for use by both companies.
In December 1999, the Company announced the completion of the final
consortium milestone in the development of the absorption module of its
IDEA-TM- predictive models. The completion of the milestone introduced the
IDEA-TM-predictive absorption module into the commercial market.
OTHER ARRANGEMENTS
In January 2000, Trega entered into an Agreement for Joint Development of
Assays and the Cross Licensing of Affiliated Technologies with EVOTEC, a
Hamburg, Germany based company, pursuant to which the parties will
collaborate on the development of new, miniaturized, high-throughput ADME
assays for pre-clinical lead optimization. The objective of the collaboration
is to develop assays that will aid in the faster and more cost efficient
development of drug candidates with higher chances of success prior to
clinical testing. The collaboration combines EVOTEC's expertise in ultra
high-throughput screening technology, miniaturized assay development and its
detection expertise based on its proprietary single molecule detection
technology with Trega's capabilities in the field of ADME screening and assay
development. EVOTEC was granted a nonexclusive license to commercialize the
jointly developed assays and Trega has the right to the assays for internal
use. Trega will be entitled to royalties resulting from EVOTEC's
commercialization of the assays. In addition, EVOTEC will be granted a
license to the IDEA(TM) absorption module under certain circumstances.
On August 20, 1999, the Company acquired 1,176,666 shares of Series B
Convertible Preferred Stock of ChemNavigator.com-TM-, Inc. ("CNC") in
exchange for $1.0 million in cash and 1.0 million shares of the Company's
common stock, valued at $1.5 million. As a result, the Company owns
approximately 20% of the outstanding equity securities of CNC. In addition,
as part of the foregoing transaction, the parties each acquired a warrant to
acquire additional securities of the other. Under these warrants, the Company
has the right to acquire an additional 294,167 shares of CNC Series B
Convertible Preferred Stock at a price of $5.00 per share and CNC has a right
to acquire an additional 294,167 shares of the Company's common stock at a
price of $5.00 per share. CNC has launched an internet website where
scientists will be able to conduct structural searches among listed compounds
and purchase compounds meeting self-selected search criteria. The Company has
agreed to list for sale certain of its compounds on the CNC site.
In June 1999, the Company signed a Mutual Release with Dura Pharmaceuticals
("Dura") which releases the parties from certain responsibilities set forth by
the original research agreement signed in February 1996 and terminates the
original research agreement other than in certain limited regards. Under the
original research agreement, the Company was committed to fund $6 million over
four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and Company compounds (such as HP 228). As
of December 31, 1999, $5.1 million of this obligation had been paid by the
Company. The Mutual Release provides that the outstanding balance due on this
obligation shall be limited to a payment of $200,000, which was made upon
signing, and $138,414 due by March 31, 2000.
8. STOCKHOLDERS' EQUITY
COMMON STOCK WARRANTS
At December 31, 1999, the Company had outstanding warrants to purchase
35,437 shares of its common stock at $4.52 per share and 8,118 shares of common
stock at $5.91 per share, expiring on October 7, 2002 and June 21, 2005,
respectively. An aggregate of 43,555 shares of common stock have been reserved
for issuance upon the exercise of the warrants, which include certain
anti-dilution provisions as well as allowance of cashless exercises.
On August 20, 1999, in connection with the transaction with CNC, the Company
issued warrants to purchase 294,167 shares of its common stock at $5.00 per
share, expiring on August 19, 2009.
F-12
<PAGE>
On August 6, 1999, the Company issued warrants to purchase 20,000 shares of
its common stock at $1.75 per share, expiring on August 5, 2004. The warrants
were issued in connection with the Company's receipt of a line of credit.
STOCK INCENTIVE PLANS
The Company is authorized to issue 6,032,221 shares of common stock to
eligible employees, officers, directors and consultants. Of the authorized
shares, 1,038,153 options were granted under the Company's 1992 Stock Option
Plan and 1995 Stock Plan (the "Predecessor Plans") and 1,071,756 options were
granted under the 1997 Stock Plan of NaviCyte. In November 1998, pursuant to a
Merger Agreement between the Company and NaviCyte, the Company assumed the 1997
Stock Plan of NaviCyte. In February 1996, the Board of Directors approved the
1996 Stock Plan (the "1996 Plan") under which an additional 822,312 shares of
common stock were reserved for issuance. In the second quarter of 1997 and third
quarter of 1998, the Company's Board of Directors and stockholders approved an
additional 1.1 million and 2 million shares, respectively, of common stock for
issuance under the 1996 Plan. As of December 31, 1999, an aggregate of 4,581,791
shares of common stock have been reserved for issuance upon exercise of the
options.
The 1996 Plan provides for awards in the form of restricted shares, stock
units, options or stock appreciation rights. The 1996 Plan replaces the
Predecessor Plans whereby shares available under the Predecessor Plans were
transferred to the 1996 Plan. All outstanding options under the Predecessor
Plans will remain exercisable in accordance with their original terms, which are
substantially the same terms and conditions specified for option grants under
the 1996 Plan. The 1996 Plan provides for the grant of incentive and
nonstatutory stock options. Terms of the stock option agreements, including
vesting requirements, are determined by the Board of Directors. The exercise
price of incentive stock options must equal at least the fair market value on
the date of grant and the maximum term of options granted is ten years.
In February 1998, the Company's Board of Directors approved an exchange
program for certain stock options under the 1996 Plan. Options having a price
greater than the closing price of the Company's stock, as reported by the Nasdaq
National Market, on the date of approval were eligible to participate; however,
options granted to executive officers, directors, consultants and advisors of
the Company were excluded from exchange. There were 360,174 options eligible for
participation, which resulted in an effective repricing to an exercise price of
$3.375 (as well as the modification of certain terms). Of the total eligible,
237,768 options were repriced. Eligible employees who elected to participate
were subject to a 12-month "no-vest" clause. Following the 12-month period, the
vesting schedules reverted to their original vesting schedules prior to
participation in the exchange program.
A summary of the Company's stock option activity and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------- ----------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,805,112 $ 2.12 1,409,972 $ 3.10 1,111,027 $ 1.99
Granted 2,883,250 1.71 2,084,962 1.61 653,019 4.43
Exercised (594,927) .07 (282,055) 0.50 (212,084) 1.76
Forfeited (648,922) 3.10 (407,767) 4.04 (141,990) 3.74
---------- --------- ---------
Outstanding at end of year 4,444,513 $1.98 2,805,112 $ 2.12 1,409,972 $ 3.10
============ ===== =========== ===== ========== ======
Exercisable at end of year 1,639,946 1,733,149 643,965
============ =========== ==========
Weighted average fair value of
options granted during the
year $ 1.68 $ 2.72 $ 4.45
======= ======= ======
</TABLE>
F-13
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------ -------------------------------------------------
Weighted
Remaining Weighted Average
Number Contractual Average Number Exercise
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Price
- -------------------------------------- ---------------------- ------------------- ------------------ ---------------- -------------
<C> <C> <C> <C> <C> <C>
$0.0085 - $1.1250 1,183,850 8.33 $0.54 492,707 $0.40
$1.2900 - $1.8750 1,220,075 9.36 1.72 173,007 1.81
$2.1250 - $2.5000 1,236,304 8.22 2.40 518,132 2.29
$3.1880 - $5.0000 804,284 7.68 3.88 456,101 3.90
---------------------- ------------------- ------------------ ---------------- -------------
4,444,513 8.47 $1.98 1,639,946 $2.12
====================== =================== ================== ================ =============
</TABLE>
The Company recorded approximately $551,000 of deferred compensation for
options granted during the year ended December 31, 1999, representing the
difference between the option exercise price and the fair market value for
financial statement presentation purposes. The Company is amortizing the
deferred compensation ratably over the vesting period of the options.
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of these
options for the year ended December 31, 1999 was estimated at the date of grant
using the "Black-Scholes" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 6.86%; dividend yield
of 0%; volatility of 1.4703; and a weighted-average expected life of the option
of 1 year to 6 years. The fair value of these options for the years ended
December 31, 1998 and 1997 was estimated at the date of grant using the
"Black-Scholes" method for option pricing with the following weighted-average
assumptions: risk-free interest rates of 5.32% and 5.71%, respectively; dividend
yield of 0%; volatility of 1.0222 and .9168, respectively; and a
weighted-average expected life of the option of 1 year to 6 years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. Because
the SFAS 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the pro forma information may not be representative of that
to be expected in future years. The Company's adjusted pro forma information is
as follows (in thousands, except for per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1999 1997 1998
--------- -------- -------
<S> <C> <C> <C>
Adjusted pro forma net loss $ (10,305) $(14,123) $(10,380)
========= ======== =========
Adjusted pro forma basic and diluted net loss per share $ ( .56) $ (.98) $ (.76)
========= ======== =========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
As of December 31, 1999, the Company had 152,536 shares available for future
issuance under the employee stock purchase plan (the "Purchase Plan"). On
January 1 or July 1, employees may enroll in the Purchase Plan and purchase
stock over a six-month participation period valued at up to but not exceeding
10% of each employee's earnings. The stock purchase price shall be the lesser of
85% of the fair market value of the stock on the last day before the
participation period commences or 85% of the fair market value on the last day
of the participation period.
9. 401(K) PLAN
The Company has a 401(k) defined contribution savings and retirement plan
(the "Plan"). The Plan is for the benefit of all qualifying employees and
permits employee voluntary contributions of up to 15% of base salary (as
defined) and elective Company matching contributions. Company contributions to
the Plan totaled $133,000, $107,000 and $80,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
10. INCOME TAXES
As of December 31, 1999, the Company had federal and California income tax
net operating loss carryforwards of approximately $62.5 million and $9.2 million
respectively. The difference between the federal and California tax loss
carryforwards are primarily attributable to the capitalization of research and
development expenses for California income tax purposes, the 50% limitation on
California loss carryforwards, and the expiration of California loss
carryforwards. The federal tax loss carryforwards will begin to expire in 2007
unless previously utilized. Approximately $1.6 million of California tax loss
carryforwards expired in 1999. The California tax loss carryforwards will
continue to expire in 2000 unless utilized. The Company also has federal and
California
F-14
<PAGE>
research and development tax credit carryforwards of $3.3 million and $1.7
million, respectively, which will begin to expire in 2007 unless previously
utilized. Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and tax credit carryforwards may be limited due to
a cumulative change in ownership of more than 50% within a three-year period,
which occurred in April 1996. However, the Company's management does not
anticipate that such limitation would materially affect the Company's ability to
utilize the net operating loss and tax credit carryforwards.
Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $28.4 million has been recognized to offset the
deferred tax assets, as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Developed technology $(2,309,000) $(2,547,000)
------------ ------------
Total deferred tax liability (2,309,000) (2,547,000)
Deferred tax assets:
Net operating loss carryforwards 22,403,000 19,111,000
Research and development credits 4,375,000 3,959,000
Capitalized research and development 1,888,000 1,800,000
Deferred revenue 742,000 1,492,000
Other, net 1,291,000 1,408,000
------------ ------------
Total deferred tax assets 30,699,000 27,770,000
Valuation allowance for deferred tax assets (28,390,000) (25,223,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
</TABLE>
F-15
<PAGE>
Exhibit 10.67
October 22, 1999
Alan L. Hillyard, Ph.D.
1752 Kent Place
Vista, CA 92084
Dear Alan:
We are pleased to extend you an offer of employment with Trega Biosciences,
Inc. (the "Company"). This letter shall serve to clarify the terms and
conditions of the job we are offering you.
We are offering you a full-time position as Vice President, Informatics and
Chief Information Officer, working under the direction of Michael G. Grey,
President & Chief Executive Officer of Trega. Your employment will begin on a
mutually agreed upon date with an exempt monthly salary of $15,416.67.1
Should the Company meet its annual goals you will be eligible to receive a
bonus, with a target of 50% of your annual salary.
You will be eligible to participate in the Company's health-care benefit
plans on the first of the month following your hire date and in the Company's
401 (k) Retirement Plan during the first enrollment period following your
date of hire. You will begin accruing vacation at a rate of 15 days per year
which you will be eligible to take as it is accrued. Further, as part of
Trega's holiday leave policy, you will receive five (5) additional days of
leave between the Christmas and New Year's holidays. Subject to the approval
of the Compensation Committee on October 29, 1999, you will be granted an
option to acquire 150,000 shares of stock at an exercise price equal to the
closing price of Trega common stock on such date. The option is subject to
the terms of the Option Agreement, the 1996 Stock Incentive Plan and your
written acceptance of this offer letter on or before October 28, 1999.
You acknowledge that as a condition of employment you will be required to
execute a Confidentiality Agreement and any and all other documents
reasonably required by the Company to protect its proprietary trade secrets
from disclosure and to prevent the unauthorized use by the Company of any
proprietary trade secrets of other parties or entities. These documents are
attached to this letter as Exhibit A and are incorporated into this letter by
reference.
- -----------------------
1Please be advised that this offer is contingent on your completing an I-9 form
and submitting support information regarding your right to work in the United
States within three days of hire.
<PAGE>
Alan L. Hillyard, Ph.D.
October 22, 1999
Page 2
You acknowledge and agree that in accordance with California law, your
employment with the Company is "at will" and you understand that the Company
or you may terminate your employment at any time, for any reason whatsoever,
with or without cause and with or without notice. The Company also reserves
the right to make personnel decisions regarding your employment, including
but not limited to discussions regarding any promotion, salary adjustment,
transfer or disciplinary action, up to and including termination, consistent
with the needs of the business. You shall be entitled to receive a severance
payment equal to six months' salary in the event that you are terminated
without cause within 180 days following any of: (i) the filing by the
Company of a voluntary petition for reorganization or dissolution under the
U.S. bankruptcy laws; (ii) the filing against the Company of an involuntary
petition, not promptly dismissed or bonded over, seeking dissolution of the
Company under the U.S. bankruptcy laws, or (iii) a "change in control" of the
Company where "change in control" means (a) the sale of all or substantially
all of the Company's assets in a single transaction or a series of related
transactions to an unaffiliated party, (b) the acquisition in a single
transaction or a series of related transactions by an unaffiliated party of a
majority of the Company's voting securities, or (c) the merger of the Company
with another unaffiliated entity following which the shareholders of the
Company prior to the transaction shall come to hold, by virtue of the merger
transaction, fewer than a majority of the voting securities of the merged
entity.
You and the Company further agree that all disputes, claims or causes of
action arising out of or relating to your employment or its termination,
shall be submitted to binding arbitration before a neutral arbitrator, except
where the law specifically forbids the use of arbitration as a final and
binding remedy (See Exhibit B).
Alan, my colleagues and I look forward to your joining our organization. We
are pleased to have someone of your expertise and leadership assist in the
facilitation of Trega's continued growth and success. I would like to do
whatever I can over the next few days to facilitate a quick, but informed
decision on your part. Please do not hesitate to contact me either at work,
(858) 410-6631 or home at (858) 509-9648. If this letter accurately reflects
our agreement and your acceptance of these terms, please sign one copy and
return it to me by Thursday, October 28, 1999. The other copy is for your
records.
Sincerely,
/s/ Michael J. Green
Michael J. Green, Ph.D.
Vice President, Drug Discovery
For Michael G. Grey,
Chief Executive Officer
<PAGE>
Alan L. Hillyard, Ph.D.
October 22, 1999
Page 3
ACKNOWLEDGMENT
I agree to the terms and conditions of employment set forth in this letter.
/s/ Alan Hillyard October 26, 1999
- ----------------------------- ----------------
Alan Hillyard, Ph.D. Date
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 10.73
CONFIDENTIAL TREATMENT REQUESTED: PAGES WHERE CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED ARE MARKED "CONFIDENTIAL TREATMENT REQUESTED" AND APPROPRIATE
SECTIONS, WHERE TEXT HAS BEEN OMITTED, ARE NOTED WITH "[CONFIDENTIAL TREATMENT
REQUESTED]." AN UNREDACTED VERSION OF THIS DOCUMENT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
LIBRARY SALES AGREEMENT
THIS LIBRARY SALES AGREEMENT dated as of December 8, 1999 (the
"Agreement"), is entered into between TREGA BIOSCIENCES, INC., a Delaware
corporation ("Trega"), having a place of business at 9880 Campus Point Drive,
San Diego, California 92121 and Evotec BioSystems AG ("Purchaser"), a German
corporation having a place of business at Schnackenburgallee 114, 22525 Hamburg
Germany.
The parties intending to be legally bound hereby agree as follows:
ARTICLE 1
DEFINITIONS
The following capitalized terms used in this Agreement shall have the following
meaning:
1.1 "AFFILIATE" means, with respect to any person, any other person
which directly or indirectly controls, is controlled by, or is under common
control with, such person. A person shall be regarded as in control of another
person if it owns, or directly or indirectly controls, more than fifty percent
(50%) of the voting stock or other ownership interest of the other person, or if
it directly or indirectly possesses the power to direct or cause the direction
of the management and policies of the other person.
1.2 "[CONFIDENTIAL TREATMENT REQUESTED]" means all patents and patent
applications claiming [CONFIDENTIAL TREATMENT REQUESTED] used to create Trega
Materials.
1.3 "BUILDING BLOCKS" means the organic chemical component molecules
that when combined form a combinatorial library of organic chemical compounds.
1.4 "CLIENT" means a Third Party to whom Purchaser agrees to provide
Screening Services on a target provided by such Third Party in exchange for a
fee but excludes Purchaser's Partners.
1.5 "CLIENT ACCESS FEE" means the fees payable by Client for Screening
Services in respect of biological targets against Trega Materials pursuant to
Article 3.2 and Exhibit C.
1.6 "COMBINATORIAL LIBRARY" means the physical samples of that portion
of a Virtual Combinatorial Library which is synthesized by Trega for use in its
organic chemical compound supply business.
1.7 "CONFIDENTIAL INFORMATION" means all confidential proprietary
information of a Party that, if disclosed in a nontangible medium, is identified
as being confidential or that, if disclosed in a tangible medium, is marked as
being confidential.
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CONFIDENTIAL TREATMENT REQUESTED
1.8 "CUSTOMER" means a Third Party to whom Purchaser provides Screening
Services on a target provided by such Third Party in respect of Trega Materials
including without limitation Clients and Purchaser's Partners.
1.9 "EFFECTIVE DATE" means the date of this Agreement.
1.10 "PACKAGING PROTOCOL" means the protocol pursuant to Article 2.4 or
such other packaging protocol as the parties may agree in writing from time to
time.
1.11 "PARTY" means Purchaser and/or Trega.
1.12 "PRODUCT" means a product which contains, incorporates, uses, is
the result of, is a chemical or biological derivative of, is based upon, is
derived directly or indirectly from or by use of, or is a by-product of a Subset
Library Compound which would have not been discovered but for use of such Subset
Library Compound. "Product" shall not include any product that was developed or
derived independently of Trega Materials.
1.13 "PURCHASER'S PARTNER" means a Third Party with whom Purchaser
enters into an agreement to work exclusively with such Third Party in conducting
research in a particular field and/or Purchaser's drug development and/or drug
discovery partners.
1.14 "QUARTER" the quarterly periods ending 31st March, 30th June, 30th
September and 31st December;
1.15 "SCREENING SERVICES" means the Purchaser's proprietary high
throughput screening services conducted for a Customer on such Customer's
target.
1.16 "SUBSET LIBRARY" means a portion of a Combinatorial Library.
1.17 "[CONFIDENTIAL TREATMENT REQUESTED]" means, with respect to Trega
Materials delivered to Purchaser hereunder, a detailed description of the
know-how necessary for a skilled, [CONFIDENTIAL TREATMENT REQUESTED] to create
compounds contained within such Trega Materials, but specifically excluding
[CONFIDENTIAL TREATMENT REQUESTED].
1.18 "[CONFIDENTIAL TREATMENT REQUESTED]" means the intellectual
property rights (including without limitation know how, trade secrets,
copyrights and database rights) in the [CONFIDENTIAL TREATMENT REQUESTED].
1.19 "SUBSET LIBRARY COMPOUND" means a compound contained within a
Subset Library.
1.20 "THIRD PARTY" means any person other than the Parties.
1.21 "TREGA MATERIALS" means Subset Libraries and Subset Library
Compounds delivered to Purchaser pursuant to this Agreement.
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CONFIDENTIAL TREATMENT REQUESTED
1.22 "TREGA PATENTS" means all patents and patent applications used to
create a Combinatorial Library including any provisional applications, priority
applications, divisionals, continuations, continuations-in-part, reissues,
reexaminations, supplemental protection certificates and the like, renewals, and
extensions which are owned by, licensed to, or controlled by Trega, as of the
Effective Date, or as to which Trega acquires ownership or control at any time
during the term of this Agreement, where ownership or control includes a right
to grant licenses thereto [CONFIDENTIAL TREATMENT REQUESTED].
1.23 "TEA-BAG PATENTS" means the following patents and patent
applications including any provisional applications, priority applications,
divisionals, continuations, continuations-in-part, reissues, reexaminations,
supplemental protection certificates and the like, renewals, and extensions:
U.S. Patent 4,631,211, and its foreign counterparts.
1.24 "VIRTUAL COMBINATORIAL LIBRARY" means a [CONFIDENTIAL TREATMENT
REQUESTED] collection of organic chemical compounds determined by Trega to be
chemically feasible. Such compounds comprise [CONFIDENTIAL TREATMENT REQUESTED].
ARTICLE 2
COMPOUND PURCHASE PROVISIONS
2.1 SUPPLY OF SUBSET LIBRARIES TO PURCHASER.
2.1.1 As at the Effective Date Trega has synthesized or is in the
process of synthesizing [CONFIDENTIAL TREATMENT REQUESTED] Subset Libraries
comprising approximately [CONFIDENTIAL TREATMENT REQUESTED]. Purchaser shall
purchase such Subset Libraries from Trega and Trega shall, subject to
determination of the Packaging Protocol pursuant to Article 2.4, deliver such
Subset Libraries to Purchaser as follows:
2.1.1.1 within 30 days of the Effective Date Trega
shall ship Purchaser [CONFIDENTIAL TREATMENT REQUESTED] Subset Libraries; and
2.1.1.2 by no later than [CONFIDENTIAL TREATMENT
REQUESTED] Trega shall ship Purchaser [CONFIDENTIAL TREATMENT REQUESTED]
additional Subset Libraries.
2.1.2 In the period to [CONFIDENTIAL TREATMENT REQUESTED] Trega
shall offer Purchaser a minimum of [CONFIDENTIAL TREATMENT REQUESTED] further
Subset Libraries.
2.1.3 None of the Subset Libraries offered under Article 2.1.1
and 2.1.2 shall contain less than [CONFIDENTIAL TREATMENT REQUESTED] Subset
Library Compounds and not more than [CONFIDENTIAL TREATMENT REQUESTED] of the
Subset Libraries offered to Purchaser under Article 2.1.1 and 2.1.2 shall
contain more than [CONFIDENTIAL TREATMENT REQUESTED] Subset Library Compounds.
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CONFIDENTIAL TREATMENT REQUESTED
2.2 MINIMUM PURCHASE. Purchaser shall purchase from Trega a minimum of
[CONFIDENTIAL TREATMENT REQUESTED] Subset Library Compounds by no later than
[CONFIDENTIAL TREATMENT REQUESTED] and, for the avoidance of doubt, the Subset
Library Compounds purchased by Purchaser pursuant to Article 2.1.1 shall count
towards such minimum purchase. Purchase of Subset Library Compounds in excess of
[CONFIDENTIAL TREATMENT REQUESTED] shall be at the absolute discretion of
Purchaser.
2.3 GENERAL TERMS FOR SUPPLY OF TREGA MATERIALS. Trega shall supply
Trega Materials to Purchaser according to the following terms and conditions:
2.3.1 The supply of Trega Materials to Purchaser is governed by
the terms of this Agreement. None of the terms or conditions of any order,
invoice, confirmation or similar instrument is applicable, except those
specifying quantity ordered, delivery date, designated carrier and insurance
information.
2.3.2 Purchaser shall order Trega Materials in writing save that
on the Effective Date the Purchaser shall be deemed to have placed a firm order
for the Subset Library Compounds referred to in Article 2.1.1. Trega shall ship
Trega Materials (other than the Subset Library Compounds referred to in Article
2.1.1) to Purchaser within 60 days of the date of order.
2.3.3 All Trega Materials will be shipped F.C.A (as defined in
Incoterms 1990). Trega's place of manufacture. Trega shall invoice Purchaser for
all reasonable shipping and insurance charges. The risk of loss and damage to
Trega Materials passes to Purchaser upon release to Purchaser's designated
carrier or, in the absence of such designation by Purchaser, to a carrier
designated by Trega. At the time each Trega Material is released to Purchaser's
designated carrier, Trega shall send to Purchaser a release memo and release
information detailing the Trega Materials shipped and the date of shipping.
2.4 PACKAGING. [CONFIDENTIAL TREATMENT REQUESTED]. Trega shall package
all Trega Materials to be delivered under this Agreement in accordance with the
Packaging Protocol.
2.5 INSPECTION AND ACCEPTANCE. Purchaser shall inspect Trega Materials
within [CONFIDENTIAL TREATMENT REQUESTED] receipt thereof by Purchaser.
Purchaser shall accept Trega Materials which pass [CONFIDENTIAL TREATMENT
REQUESTED].
2.6 [CONFIDENTIAL TREATMENT REQUESTED]. On delivery of each consignment
of Trega Materials to Purchaser Trega shall provide Purchaser with [CONFIDENTIAL
TREATMENT REQUESTED] for such Trega Materials in written format similar to that
of peer reviewed journals
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CONFIDENTIAL TREATMENT REQUESTED
2.7 DELIVERY OF VIRTUAL COMBINATORIAL LIBRARIES. Delivery shall be in
[CONFIDENTIAL TREATMENT REQUESTED] or a reasonable alternative as determined by
Trega.
2.8 REPORTS. Purchaser shall notify Trega in writing when a Product is
planned to be the subject of a of a public disclosure, including, but not
limited to, a publication, presentation, or press release. These disclosures are
not required to disclose the biological target of the Product. Notification by
Purchaser to Trega in respect of Products of Purchaser's Customers shall be
subject to Purchaser obtaining the relevant Customer's consent thereto.
2.9 DEVELOPMENT PLANS. Trega shall keep Purchaser fully informed of
Trega's plans for the synthesis of new Combinatorial Libraries, including
without limitation details of the chemistries planned to be synthesized and the
timing thereof.
ARTICLE 3
LICENSES
3.1 TECHNOLOGY GRANT. Trega hereby grants to Purchaser:
3.1.1 a world-wide, irrevocable, royalty-free, sublicensable,
non-exclusive license under the Trega Patent to make, have made, use, offer for
sale, import and sell Products synthesized or derived directly or indirectly
from, or by use of, Trega Materials; and
3.1.2 [CONFIDENTIAL TREATMENT REQUESTED].
3.2 COMPOUND STRUCTURES. Following the provision of Screening Services
to a Customer in respect of any Trega Material, Purchaser shall be entitled to
disclose the compound structure of the Subset Library Compound to the Customer.
3.3 CLIENT ACCESS FEES Purchaser shall charge each Client a Client
Access Fee in respect of each Trega Material screened in a primary or initial
screen against a target by Purchaser for the Client. Such Client Access Fee
shall be calculated in accordance with Exhibit C to this Agreement. Purchaser
shall impose on Clients in respect of Client Access Fees a payment period
[CONFIDENTIAL TREATMENT REQUESTED] from the completion of the relevant screening
program and shall pay all Client Access Fees received by it to Trega. Purchaser
shall take normal commercial steps to chase late payments of Client Access Fees
including, without limitation, such steps as Purchaser routinely takes to
recover debts owed to it. In no circumstances shall Purchaser be liable to make
up any shortfall in payments of Client Access Fees by Clients.
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CONFIDENTIAL TREATMENT REQUESTED
3.4 TECHNOLOGY GRANT EXCEPTION. The rights and licenses granted by this
Agreement, including those arising from the purchase of Trega Materials
specifically exclude the right to:
3.4.1 [CONFIDENTIAL TREATMENT REQUESTED];
3.4.2 Evaluate, investigate or characterize Trega Materials or
Products for purposes of establishing their direct effects on [CONFIDENTIAL
TREATMENT REQUESTED]; provided, however, Purchaser may evaluate, investigate, or
characterize Trega Materials and Products that have indirect effects on
[CONFIDENTIAL TREATMENT REQUESTED];
3.4.3 Make, have made, use, sell, offer for sale, or import
Products that result from the activities prohibited in Articles 3.4.1 and 3.4.2
above; or
3.4.4 Sell or offer to sell to Third Parties a Combinatorial
Library in competition with Trega's combinatorial library business always
provided that Purchaser may:
3.4.4.1 sell, otherwise provide or offer to sell or
otherwise provide Trega Materials to Third Parties in conjunction with
Screening Services or following the provision of Screening Services in
respect of the relevant Trega Materials; and
3.4.4.2 sell, otherwise provide or offer to sell or
otherwise provide selections of any Trega Materials to Third Parties
following screening of such Trega Materials by Purchaser alone or screening
of such Trega Materials by Purchaser in conjunction with any Purchaser's
Partner.
3.4.4.3 purchase organic chemical compounds from third
party combinatorial chemistry providers and/or develop its own combinatorial
chemistries.
3.5 MARKETING. Each Party shall use its reasonable endeavors to itself
market and to support the marketing by the other Party of Purchaser's Screening
Services in respect of the Trega Materials and in particular but without
limitation:
3.5.1 Trega shall, at its own expense, produce and provide to
Purchaser free of charge sufficient promotional materials (including without
limitation brochures and leaflets) promoting Trega Materials.
3.5.2 Purchaser shall, at its own expense, produce and provide to
Trega free of charge sufficient promotional materials (including without
limitation brochures and leaflets) promoting the Screening Services in respect
of Trega Materials.
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CONFIDENTIAL TREATMENT REQUESTED
3.5.3 Each Party agrees that it will use the other Party's
promotional material provided pursuant to this Article 3.4 in the promotion of
Purchaser's Screening Services in respect of the Trega Materials but not
otherwise.
3.5.4 Each Party agrees that it shall not modify the other's
promotional materials without the other's prior written consent.
3.5.5 Each Party agrees to consult with the other and provide the
other with information and assistance in connection with the use of the other's
promotional materials.
3.5.6 Neither Party shall publish or distribute promotional
materials featuring the other Party's name or trade marks or otherwise use the
other Party's name or trade marks without having first obtained the other
Party's prior written approval of a sample of such promotional materials or, as
appropriate, the nature and form of the intended use.
ARTICLE 4
PAYMENT OBLIGATIONS
4.1 PAYMENTS FOR SUBSET LIBRARIES. Purchaser shall pay to Trega a sum
calculated in accordance with Exhibit C for each Trega Material delivered.
4.2 PAYMENT METHOD. Upon shipment of any Trega Material to Purchaser
under this Agreement, Trega shall submit an invoice to Purchaser, and Purchaser
shall pay each invoice in full within thirty (30) days of receipt and acceptance
of both the Trega Material and the associated [CONFIDENTIAL TREATMENT
REQUESTED]. Purchaser shall make all payments to Trega under this Agreement in
United States dollars by check or by bank wire transfer in immediately available
funds to an account designated by Trega, on or before the date on which such
payments are due.
4.3 LATE PAYMENTS. Unless otherwise provided in this Agreement,
Purchaser shall pay interest to Trega on the aggregate amount of any payments
that are not paid on or before the date the payments are due under this
Agreement, at an annual rate equal to the prime rate of interest as reported by
Bank of America NT&SA in San Francisco, California, from time to time plus
[CONFIDENTIAL TREATMENT REQUESTED] or any lower maximum rate allowable by law.
4.4 TAXES AND OTHER CHARGES. Purchaser shall pay all federal, state,
county or municipal sales or use taxes, excise or similar charges (other than
taxes that may be assessed on the income of Trega), assessed or charged in
connection with the purchase of the Trega Materials according to this Agreement.
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CONFIDENTIAL TREATMENT REQUESTED
4.5 Payment of Client Access Fees.
4.5.1 Within [CONFIDENTIAL TREATMENT REQUESTED] of the end of
each Quarter Purchaser shall:
4.5.1.1 provide Trega with a financial statement for that
Quarter setting out the Client Access Fees received by it pursuant to
Article 3.3 in respect of such Quarter;
4.5.1.2 pay the Client Access Fees received by it in such
Quarter to Trega.
4.5.2 Purchaser shall keep at its normal place of business
records and books of account sufficient to verify the accuracy of the
statements provided pursuant to Article 4.5.1.1.
4.5.3 Purchaser shall make its records and books available for
inspection during normal business hours by an independent professional
accountant appointed by Trega and reasonably acceptable to Purchaser for the
sole purpose of verifying the accuracy of any statement provided by Purchaser to
Trega pursuant to Article 4.5.1.1 provided that such accountant executes
Purchaser's non-disclosure agreement.
4.5.4 Trega shall be entitled to have inspections carried out
pursuant to Article 4.5.2 not more than once in any period of [CONFIDENTIAL
TREATMENT REQUESTED] on giving Purchaser [CONFIDENTIAL TREATMENT REQUESTED]
written notice prior to each inspection.
ARTICLE 5
OPTIONAL PRODUCTS OR SERVICES
5.1 Trega shall if so requested by Purchaser provide to Purchaser those
additional products and services described in Optional Products and Services in
Exhibit B on the terms and conditions set out in Exhibit B.
ARTICLE 6
CONFIDENTIALITY
6.1 CONFIDENTIAL INFORMATION. For purposes of Article 6, a Party
communicating Confidential Information shall be referred to as the "Disclosing
Party" and the Party receiving the Confidential Information shall be referred to
as the "Recipient Party." During the term of this Agreement, and until the fifth
anniversary following the expiration or earlier termination hereof, the
Recipient Party shall maintain in confidence all Confidential Information of the
Disclosing Party. Recipient Party shall not use, disclose or grant the use of
the Confidential Information except on a need-to-know basis to those directors,
officers, Affiliates, employees, collaborators, consultants, clinical
investigators or contractors (and, in the case of Purchaser, Customers) of the
Recipient Party, to the extent
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such disclosure is reasonably necessary in connection with the Recipient Party's
activities as expressly authorized by this Agreement. To the extent that
disclosure is authorized by this Agreement, prior to disclosure, each Party
shall obtain agreement of any person to whom Confidential Information will be
disclosed to hold such Confidential Information in confidence in accordance with
this Article 6 and not make use of the Confidential Information for any purpose
other than that permitted by this Agreement.
6.2 PERMITTED DISCLOSURES. The confidentiality obligations contained in
Article 6.1 above do not apply to the extent that:
6.2.1 any Recipient Party is required (i) to disclose information
by law, order or regulation of a governmental agency or a court of competent
jurisdiction, or (ii) to disclose information to any governmental agency for
purposes of obtaining approval to test or market a product or obtain patent
protection, provided in either case that, where practicable, the Recipient shall
provide written notice thereof to the other Party; or
6.2.2 the Recipient Party can demonstrate that (i) the disclosed
information was public knowledge at the time of its disclosure to the Recipient
Party, or thereafter became public knowledge, other than as a result of actions
of the Recipient Party in violation of this section 6; (ii) the disclosed
information was rightfully known by the Recipient Party or any of its Affiliates
(as shown by its written records) prior to the date of disclosure to the
Recipient Party or any of its Affiliates by the Disclosing Party hereunder;
(iii) the disclosed information was disclosed to the Recipient Party or any of
its Affiliates from a source unrelated to any Party to this Agreement and not
under a duty of confidentiality to the Disclosing Party; or (iv) the disclosed
information was independently developed by the Recipient Party or any of its
Affiliates without such Confidential Information as shown through reasonable
documentary evidence thereof.
6.3 ANNOUNCEMENTS.
6.3.1 Purchaser and Trega hereby agree to publicly disclose the
signing of this Agreement by means of a joint announcement, the timing and
content of which shall be agreed in advance by both Parties. In addition,
following public disclosure by Purchaser of matters pertaining to the
development, regulatory approval, or commercialization of Products, Trega shall
be entitled to publicly announce that those Products were derived from Trega
Materials, always provided that any Customer of Purchaser associated therewith
has given its prior consent to such announcement.
6.3.2 Trega shall ensure that any announcement pursuant to
Article 6.3.1 does not disclose the identity of any compounds or the targets at
which the compounds are directed, unless the Purchaser and any relevant Customer
has agreed otherwise. Purchaser and any relevant Customer shall have the right
to review and amend the contents of such announcements prior to their being made
to the extent that they pertain to Purchaser, the Product and/or any Customer,
and such review and amendment shall be effected within a reasonable period.
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CONFIDENTIAL TREATMENT REQUESTED
6.3.3 The Parties acknowledge that this Agreement may be filed
with the U.S. Securities and Exchange Commission in satisfaction of Trega's
responsibilities as a public company. Purchaser shall be given an opportunity to
review any redacted version of this Agreement to be filed and shall provide its
comments within a reasonable period of time, being not less than [CONFIDENTIAL
TREATMENT REQUESTED].
6.3.4 Save as provided in this Article 6.3 and Article 3.5 and in
the absence of specific agreement between the parties, neither Party shall
originate any publicity, news release or public announcement, written or oral,
whether to the public or press, relating to this Agreement including but not
limited to performance under it or any dispute in relation to it always provided
that either party may disclose the existence of this Agreement and the name of
the other party in connection therewith.
ARTICLE 7
PATENTS
7.1 INFRINGEMENT.
7.1.1 [CONFIDENTIAL TREATMENT REQUESTED]
7.1.2 If either Party receives a claim or assertion or otherwise
becomes aware that practice of the rights licensed under this Agreement
infringes or otherwise violates the intellectual property rights of any Third
Party, then the Party against whom the claim is made shall promptly notify the
other Party to this Agreement of the claim and all reasonable details relating
to it. The Party against whom the claim is made shall
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CONFIDENTIAL TREATMENT REQUESTED
have the right to defend the claim and the other Party shall reasonably
cooperate with the Party against whom the claim is made in the defense of the
claim, at the request and expense of the Party against whom the claim is made.
Each Party has the right to be represented by counsel of its own choice and at
its own expense in any proceedings.
7.2 LIMITATIONS. TREGA HEREBY DISCLAIMS THE OBLIGATION TO INDEMNIFY
PURCHASER OR ITS CUSTOMERS AGAINST COSTS, LOSSES, DAMAGES, OR LIABILITIES
REGARDING CLAIMS OF INFRINGEMENT OR MISAPPROPRIATION BY THIRD PARTIES PERTAINING
TO TREGA MATERIALS OR USES THEREOF OR IMPROVEMENTS THERETO.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
Each Party hereby represents and warrants to the other Party as
follows:
8.1 AUTHORIZATION AND ENFORCEMENT OF OBLIGATIONS. It (a) is duly
organized, validly existing and in good standing under the laws where organized
(b) has the requisite power and authority and the legal right to enter into this
Agreement and to perform its obligations hereunder, and (c) has taken all
necessary action on its part to authorize the execution and delivery of this
Agreement and the performance of its obligations hereunder. This Agreement has
been duly executed and delivered on behalf of such Party, and, subject to
satisfaction of the condition precedent at Article 1A, constitutes a legal,
valid and binding obligation, enforceable against such Party in accordance with
its terms.
8.2 NO CONFLICT. The execution and delivery of this Agreement and the
performance of such Party's obligations hereunder (a) do not conflict with or
violate any requirement of applicable laws or regulations and (b) do not
conflict with, or constitute a default under, any contractual obligation of such
Party.
8.3 TREGA MATERIALS. Trega represents and warrants that:
8.3.1 Trega shall use reasonable endeavors to maximize the
diversity of the Subset Library Compounds supplied and offered to Purchaser
pursuant to this Agreement and such Subset Library Compounds shall be
representative of the developments made by Trega over the term of this
Agreement;
8.3.2 all Trega Materials shall materially conform to the
specifications and certificates of analysis provided by Trega to Purchaser and
in any case shall conform to the specifications set out in Exhibit A;
8.3.3 Trega is not at the Effective Date aware of any Third Party
intellectual property rights that may be infringed by the use of Trega
Materials, the [CONFIDENTIAL TREATMENT REQUESTED] or the Virtual Combinatorial
Libraries (in each case in accordance with this Agreement); and
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CONFIDENTIAL TREATMENT REQUESTED
8.3.4 Trega shall promptly notify Purchaser if it receives a
claim or assertion or otherwise becomes aware that the use of Trega Materials,
the [CONFIDENTIAL TREATMENT REQUESTED] or the Virtual Combinatorial Libraries
(in each case in accordance with this Agreement) infringes or otherwise violates
the intellectual property rights of any Third Party.
8.4 DISCLAIMER OF WARRANTIES.
8.4.1 NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A
REPRESENTATION MADE, OR WARRANTY GIVEN, BY TREGA THAT ANY PATENT WILL ISSUE
BASED UPON ANY PENDING PATENT APPLICATION WITHIN THE TREGA PATENTS, THAT ANY
PATENT WITHIN THE TREGA PATENTS WHICH ISSUES WILL BE VALID, OR THAT THE USE OF
ANY TREGA MATERIALS OR TREGA PATENTS WILL NOT INFRINGE THE PATENT OR PROPRIETARY
RIGHTS OF ANY OTHER PERSON.
8.4.2 EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE 8.3, TREGA
EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES AND WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE
PRACTICES.
8.4.3 IN NO EVENT WILL EITHER PARTY, OR, IN THE CASE OF TREGA,
ANY OF TREGA'S THIRD PARTY LICENSORS WHOSE TECHNOLOGY IS UTILISED IN PROVIDING
TREGA MATERIALS HEREUNDER, OR, IN THE CASE OF PURCHASER, ANY OF ITS CUSTOMERS,
BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM
THE EXERCISE OF THE RIGHTS AND LICENCES GRANTED HEREUNDER OR THE USE OF THE
TREGA MATERIALS OR TREGA PATENT RIGHTS.
8.4.4 NEITHER PARTY GIVES THE OTHER ANY WARRANTY AS TO THE
SUCCESS OF THE MARKETING TO BE CARRIED OUT PURSUANT TO ARTICLE 3.4 AND IN
PARTICULAR PURCHASER GIVES NO WARRANTY THAT ANY OR A PARTICULAR AMOUNT OF CLIENT
ACCESS FEES WILL BE PAYABLE TO TREGA PURSUANT TO THIS AGREEMENT.
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CONFIDENTIAL TREATMENT REQUESTED
ARTICLE 9
TERM AND TERMINATION
9.1 EXPIRATION. Unless terminated earlier pursuant to Article 9.2 below
or extended by mutual agreement, the term of this Agreement expires on
[CONFIDENTIAL TREATMENT REQUESTED].
9.2 TERMINATION FOR CAUSE. Either Party may terminate this Agreement
upon or after the breach of any material provision of this Agreement, if the
breaching Party has not cured such breach within ninety (90) days after notice
thereof from the other Party.
9.3 EFFECT OF EXPIRATION AND TERMINATION. Expiration or termination of
this Agreement shall not relieve the Parties of any right or obligation accruing
prior to such expiration or termination. The provisions of Articles 1, 3.1, 3.2,
3.3, 4, 6, 7, 8, 9 and 14 shall survive the expiration or termination of this
Agreement.
9.4 MARKETING MATERIALS. Following termination of this Agreement,
howsoever caused each party shall return to the other any marketing materials
received by it pursuant to Article 3.5.1 or 3.5.2, as applicable.
ARTICLE 10
INDEMNITY
10.1 DIRECT INDEMNITY. Each Party shall indemnify and hold the other
Party, its Affiliates, directors, officers, employees, agents and stockholders
(and, in the case of the Purchaser, Customers) harmless and hereby forever
releases and discharges the other Party, its Affiliates, directors, officers,
employees, agents and stockholders from and against all losses, liabilities,
damages and expenses (including reasonable attorneys' fees and costs and amounts
paid in settlement) that the other Party, its Affiliates, directors, officers,
employees, agents and stockholders (and, in the case of the Purchaser,
Customers) may suffer or
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incur as a result of any claims, demands, actions or other proceedings made or
instituted by a Third Party against any of them arising out of or relating to
(a) any breach by the indemnifying Party of its representations, warranties or
obligations under this Agreement, or (b) the negligence, recklessness, or
intentional acts or omissions in connection with the performance of obligations
hereunder by or on behalf of the indemnifying Party hereunder, but not to the
extent of the indemnified Party's negligence, recklessness, or intentional acts
or omissions.
10.2 OTHER INDEMNITY. Purchaser shall indemnify and hold Trega, its
Affiliates, directors, officers, employees and agents harmless and hereby
forever releases and discharges Trega, its Affiliates, directors, officers,
employees and agents from and against all losses, liabilities, damages and
expenses (including reasonable attorneys' fees and costs) that Trega, its
Affiliates, directors, officers, employees and agents may suffer or incur as a
result of any claims, demands, actions or other proceedings made or instituted
by a Third Party against any of them arising out of or relating to (a) the use
by or on behalf of Purchaser or its Customers of Trega Materials, or (b) the
research, development, manufacture, storage, use, consumption, sale,
administration or advertisement of a Product (without regard to culpable
conduct) developed, designed, manufactured or commercialized by or on behalf of
Purchaser, or its Customers provided that this indemnity shall not apply to the
extent that such claims, demands, actions or other proceedings arise in
connection with a matter covered by Article 10.1.
10.3 PROCEDURE. As a condition for obtaining indemnification hereunder,
a Party that intends to claim indemnification under this Article 10 (the
"Indemnitee") shall promptly notify the other Party (the "Indemnitor") of any
claim, demand, action or other proceeding for which the Indemnitee intends to
claim such indemnification, and the Indemnitor will have the right to
participate in, and, to the extent the Indemnitor so desires, jointly with any
other indemnitor similarly noticed, to assume the sole control over defense and
settlement thereof with counsel selected by the Indemnitor; PROVIDED, HOWEVER,
that the Indemnitee will have the right to retain its own counsel, with the fees
and expenses to be paid by the Indemnitor, if representation of the Indemnitee
by the counsel retained by the Indemnitor would be inappropriate due to actual
or potential conflict of interest between the Indemnitee and any other person
represented by such counsel in such proceedings. The Indemnitor shall not be
obliged to indemnify the Indemnitee under this Article 10 in respect of amounts
paid in settlement of any loss, claim, damage, liability or action unless such
settlement is effected or approved in advance by the Indemnitor. The failure to
deliver notice to the Indemnitor within a reasonable time after the commencement
of any such action, if prejudicial to its ability to defend such action,
relieves the Indemnitor of any liability to the Indemnitee under this Article
10, but the omission so to deliver notice to the Indemnitor will not relieve it
of any liability that it may have to the Indemnitee otherwise than under this
Article 10. The Indemnitor may not settle the action or otherwise consent to an
adverse judgment in such action that constitutes an admission of liability by
the Indemnitee without the express written consent of the Indemnitee. The
Indemnitee, its employees and agents, shall cooperate fully with the Indemnitor
and its legal representatives in the investigation of any action, claim or
liability covered by this indemnification.
10.4 INSURANCE.
10.4.1 Purchaser and Trega each shall maintain, through self
insurance or otherwise, insurance with respect to the research, development,
manufacture and sales of Products by Purchaser or Trega, as the case may be, in
such amount as Purchaser or Trega, respectively, customarily maintains covering
its similar activities. Trega and Purchaser, as applicable, shall maintain such
insurance for so long as each continues to conduct such research, development,
manufacture or sales, and thereafter for so long as Trega and Purchaser, as
applicable, each customarily maintains insurance for itself covering its similar
activities.
-14-
<PAGE>
10.4.2 Effective as of such time as a Product developed by
Purchaser enters human clinical trials, Purchaser, with respect to such Product,
at its sole cost and expense shall insure its activities under this Agreement
and obtain, keep in force and maintain insurance, including without limitation
product liability insurance, in amounts sufficient to cover its obligations
under this Article 10 and consistent with reasonable business practice in the
industry. Upon reasonable request, Purchaser shall furnish Trega with
certificates of insurance evidencing compliance with all requirements.
10.4.3 Purchaser shall use reasonable commercial efforts to
negotiate the inclusion in contracts with Customers of a requirement for
Customers to obtain product liability insurance in respect of research,
development, manufacture or sale of Products developed by Customers.
ARTICLE 11
FORCE MAJEURE
Neither Party shall be held liable or responsible to the other Party
nor be deemed to have defaulted under or breached this Agreement for failure or
delay in fulfilling or performing any term of this Agreement to the extent, and
for so long as, such failure or delay is caused by or results from causes beyond
the reasonable control of the affected Party including but not limited to fire,
floods, embargoes, war, acts of war (whether war be declared or not),
insurrections, riots, civil commotions, strikes, lockouts or other labor
disturbances, acts of God or acts, omissions or delays in acting by any
governmental authority or the other Party.
ARTICLE 12
ASSIGNMENT
This Agreement may not be assigned or otherwise transferred, nor,
except as expressly provided hereunder, may any right or obligations hereunder
be assigned or transferred by either Party without the consent of the other
Party provided, however, that either Trega or Purchaser may, without such
consent, assign this Agreement and its rights and obligations hereunder to its
Affiliates or in connection with the transfer or sale of all or substantially
all of its business (or, in the case of Trega, all or substantially all of its
combinatorial chemistry business), or in the event of its merger or
consolidation or change in control or similar transaction. Any permitted
assignee shall assume all obligations of its assignor under this Agreement.
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ARTICLE 13
SEVERABILITY
Each Party hereby acknowledges that it does not intend to violate any
public policy, statutory or common laws, rules, regulations, treaty or decision
of any government agency or executive body thereof of any country or community
or association of countries. Should one or more provisions of this Agreement be
or become invalid, the Parties shall substitute, by mutual consent, valid
provisions for such invalid provisions which valid provisions in their economic
effect are sufficiently similar to the invalid provisions that it can be
reasonably assumed that the Parties would have entered into this Agreement with
such provisions. In case such provisions cannot be agreed upon, the invalidity
of one or several provisions of this Agreement shall not affect the validity of
this Agreement as a whole, unless the invalid provisions are of such essential
importance to this Agreement that it is to be reasonably assumed that the
Parties would not have entered into this Agreement without the invalid
provisions.
ARTICLE 14
MISCELLANEOUS
14.1 NOTICES.
14.1.1 Any consent, notice or report required or permitted to be
given or made under this Agreement by one of the Parties to the other will be in
writing, delivered personally, by courier, by facsimile (and promptly confirmed
by personal delivery, by courier or by air mail postage prepaid) or by air mail
postage prepaid addressed to such other Party at its address indicated below, or
to such other address as the addressee shall have last furnished in writing to
the addressor.
If to Trega: Trega Biosciences, Inc.
9880 Campus Point Drive
San Diego, California 92121
Attention: President
If to Purchaser: Evotec BioSystems AG
Schnackenburgallee 114
22525 Hamburg Germany
Attention: President
14.1.2 Any notice delivered personally or by courier shall be
effective on delivery, any notice sent by facsimile shall be effective on the
next business day following the day of transmission and any notice sent by air
mail shall be effective on the tenth day after the day of posting (including the
day of posting).
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<PAGE>
14.2 APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the state of Delaware, United States, and the
parties hereby submit to the exclusive jurisdiction of the courts of the state
of Delaware.
14.3 COMPLIANCE WITH APPLICABLE LAWS. Purchaser shall, and shall
request its Customers to, use reasonable efforts to comply with all applicable
laws, regulations and governmental orders in connection with their respective
activities related to this Agreement, including without limitation the research,
development, manufacture, use and sale of Products. Without limiting the
foregoing, Purchaser shall, and shall request its Customers to use reasonable
efforts to observe and comply with all applicable United States and other
foreign laws with respect to the transfer of Products and related technical data
to foreign countries.
14.4 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the Parties with respect to the subject matter hereof and neither Party shall
be liable to the other for loss arising from or in connection with any
representations, agreements or undertakings not incorporated into this
Agreement. All express or implied agreements and understandings, either oral or
written, heretofore made are expressly superseded by this Agreement. This
Agreement may be amended, or any term hereof modified, only by a written
instrument duly executed by both Parties. The Parties agree to discuss annually
the evolution of Purchaser's Screening Services and to amend this agreement by
mutual agreement as necessary to reflect such evolution.
14.5 HEADINGS. The captions to the several Articles hereof are not a
part of this Agreement, but are merely guides or labels to assist in locating
and reading the several Articles hereof.
14.6 INDEPENDENT CONTRACTORS. It is expressly agreed that Trega and
Purchaser are independent contractors and that the relationship between the two
Parties does not constitute a partnership, joint venture or agency. Neither
Trega nor Purchaser has the authority to make any statements, representations or
commitments of any kind, or to take any action that binds the other, without the
prior written consent of the other Party.
14.7 WAIVER. The waiver by either Party of any right in respect of the
failure to perform or breach by the other Party of this Agreement shall not be
deemed a waiver of any right in respect of any other breach or failure by said
other Party whether of a similar nature or otherwise.
14.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first set forth above.
TREGA BIOSCIENCES, INC. PURCHASER
By: /s/ Mike Grey By: /s/ Karsten Henco
------------------------------- ------------------------------
Printed Name: Mike Grey Name: Karsten Henco
--------------------- -----------------------------
Title: CEO Title: CEO, CFO
---------------------------- ---------------------------
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT A: SPECIFICATIONS
[CONFIDENTIAL TREATMENT Each Subset Library Compound purchased
REQUESTED] PER COMPOUND. shall be shipped [CONFIDENTIAL TREATMENT
REQUESTED], based on the [CONFIDENTIAL
TREATMENT REQUESTED]. Subset Library
Compounds shall be shipped [CONFIDENTIAL
TREATMENT REQUESTED].
SUBSET LIBRARY SPECIFICATIONS Subset Libraries must be [CONFIDENTIAL
TREATMENT REQUESTED] using appropriate
[CONFIDENTIAL TREATMENT REQUESTED] of the
Subset Library Compounds
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library. Trega shall
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library [CONFIDENTIAL TREATMENT REQUESTED]
Subset Library Compound. Such
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library Compounds.
Trega shall
[CONFIDENTIAL TREATMENT REQUESTED] Trega
Materials
[CONFIDENTIAL TREATMENT REQUESTED] which
in respect of such shipment:
- [CONFIDENTIAL TREATMENT REQUESTED]
the Subset Library Compounds
[CONFIDENTIAL TREATMENT REQUESTED] and
[CONFIDENTIAL TREATMENT REQUESTED] of
the same
- [CONFIDENTIAL TREATMENT REQUESTED] with
the [CONFIDENTIAL TREATMENT REQUESTED] set
out above; and
- [CONFIDENTIAL TREATMENT REQUESTED] the
[CONFIDENTIAL TREATMENT REQUESTED]used.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT B
OPTIONAL PRODUCTS AND SERVICES
[CONFIDENTIAL TREATMENT
REQUESTED] Trega grants to Purchaser the option to have
Trega [CONFIDENTIAL TREATMENT REQUESTED]
Subset Library Compounds.
[CONFIDENTIAL TREATMENT REQUESTED]
compounds will
[CONFIDENTIAL TREATMENT REQUESTED] as the
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library Compound. If requested by
Purchaser, Trega will
[CONFIDENTIAL TREATMENT REQUESTED] to
Purchaser
[CONFIDENTIAL TREATMENT REQUESTED],
PROVIDED HOWEVER, that at least
[CONFIDENTIAL TREATMENT REQUESTED]is
[CONFIDENTIAL TREATMENT REQUESTED] by
Trega for
[CONFIDENTIAL TREATMENT REQUESTED]. In any
case, Purchaser may provide Trega with
[CONFIDENTIAL TREATMENT REQUESTED] of all
compounds under this Agreement for Trega's
[CONFIDENTIAL TREATMENT REQUESTED]. Prior
to Purchaser's
[CONFIDENTIAL TREATMENT REQUESTED] a
Subset Library, Purchaser and Trega will
[CONFIDENTIAL TREATMENT REQUESTED] for
Subset Library Compound
[CONFIDENTIAL TREATMENT REQUESTED] should
Purchaser decide not to
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library Compounds
[CONFIDENTIAL TREATMENT REQUESTED].
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
EXHIBIT C - FEES
PAYMENTS FOR SUBSET LIBRARIES. Purchaser shall pay to Trega the sum of
[CONFIDENTIAL TREATMENT REQUESTED] for
[CONFIDENTIAL TREATMENT REQUESTED]
Subset Library Compound purchased.
Purchaser acknowledges that purchase of
the minimum number of Subset Library
Compounds in accordance with Article 2.2
shall give rise to fees of
[CONFIDENTIAL TREATMENT REQUESTED].
CLIENT ACCESS FEES The Client Access Fees payable pursuant to
Article 3.2 shall be calculated
[CONFIDENTIAL TREATMENT REQUESTED] a
Subset Library Compound as follows:
[CONFIDENTIAL TREATMENT REQUESTED]
The [CONFIDENTIAL TREATMENT REQUESTED]
Client Access Fee for a
[CONFIDENTIAL TREATMENT REQUESTED] Subset
Library Compound
[CONFIDENTIAL TREATMENT REQUESTED],
irrespective of
[CONFIDENTIAL TREATMENT REQUESTED].
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<PAGE>
DATED 2000
- -------------------------------------------------------------------------------
CONFIDENTIAL TREATMENT REQUESTED EXHIBIT 10.74
CONFIDENTIAL TREATMENT REQUESTED: PAGES WHERE CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED ARE MARKED "CONFIDENTIAL TREATMENT REQUESTED" AND APPROPRIATE
SECTIONS, WHERE TEXT HAS BEEN OMITTED, ARE NOTED WITH "[CONFIDENTIAL TREATMENT
REQUESTED]." AN UNREDACTED VERSION OF THIS DOCUMENT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
(1) EVOTEC BIOSYSTEMS AG
- AND -
(2) TREGA BIOSCIENCES, INCORPORATED
----------------------------------------------------
AGREEMENT FOR THE JOINT DEVELOPMENT OF ASSAYS
AND THE CROSS LICENSING OF AFFILIATED TECHNOLOGY
----------------------------------------------------
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
THIS AGREEMENT IS MADE THE _____ DAY OF JANUARY 2000
BETWEEN:
(1) EVOTEC BIOSYSTEMS AG, a German corporation having a place of business at
Schnackenburgallee 114, 22525 Hamburg Germany ("Evotec"); and
(2) TREGA BIOSCIENCES, INCORPORATED, a Delaware corporation, having a place of
business at 9880 Campus Point Drive, San Diego, California 92121 ("Trega").
BACKGROUND:
(A) Evotec and Trega have independently developed expertise in the field of
ADME. Evotec has expertise in ADME related hardware and assay detection
technology. Trega has expertise in ADME testing, choice and generation of
cell lines, data interpretation and simulations.
(B) Evotec and Trega wish to combine their expertise and resources to create
new assays, which will be exploited by both parties, either jointly or
independently, in accordance with this Agreement.
(C) Evotec shall commercially exploit the jointly developed new assays in
combination with Evotec's own technology and pay Trega royalties in respect
of such commercial exploitation.
(D) Trega shall use the Assays to expand the predictive capabilities of Trega's
IDEA-TM- simulation software and shall grant Evotec a time-limited
world-wide, fully paid-up, royalty free, non-exclusive, non-transferable
license of such software for the purposes of internal drug development
only.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS
In this Agreement the following words shall have the following meanings:-
1.1 ADME absorption, distribution, metabolism,
excretion;
1.2 ADME Hardware Evotec's ADME hardware known as
"[CONFIDENTIAL TREATMENT REQUESTED]"
further described in Schedule 1;
1.3 Appointee shall be a person appointed by either
party to the Joint Steering Committee
pursuant to Clause 2.3;
1.4 Assay an assay which falls within the
definition of Jointly Developed
Technology at Clause 3.4 or an assay
created, invented or discovered
by Trega using the ADME Hardware or
[CONFIDENTIAL TREATMENT REQUESTED]
Technology, as referred to at
Clause 4.2.2;
1.5 Assay Screening the screening by Evotec of any compound
using an Assay;
1.6 Affiliate an Affiliate of a company shall be any
legal entity which:
- 1 -
<PAGE>
(a) is directly or indirectly owned
and/or controlled by that company;
(b) directly or indirectly owns and/or
controls 50% or more of that
company; or
(c) is directly or indirectly owned or
controlled by the legal entity
referred to in (b) above.
In the case of legal entities
having stocks and/or shares,
ownership or control shall exist
through the direct or indirect
ownership and/or control of more
than fifty percent of the voting
shares. In the case of any other
legal entity, ownership and/or
control shall exist through the
ability to directly or indirectly
control the management and/or business
of the legal entity;
1.7 Business Day all days other than Saturdays, Sundays
and public holidays in either the United
States or Germany;
1.8 Client any third party other than an Internal
Drug Development Partner;
1.9 Commencement Date the date of signature of this Agreement;
1.10 Commercialisation in respect of any Assay the earlier of
the date on which Evotec first uses it
in Assay Screening for any Client,
licenses it to any Client or sells it to
any Client;
1.11 Confidential Information shall have the meaning given to it in
Clause 12;
1.12 Evotec Background Technology all technology covered by Patents or
Patent Applications or comprising
Know-how and in each case owned by
Evotec;
1.13 First Commercialisation Date the date of Commercialisation of first
Assay to be Commercialised;
1.14 IDEA Software the software, including improvements and
updates thereto, owned by Trega known as
IDEA-TM- a description of which is set
out in Schedule 2;
1.15 Intellectual Property Patents, Know-how, copyrights, design
rights, semi-conductor topography
rights, moral rights, database rights,
trade marks, service marks, applications
for any of the foregoing, the right to
apply for any of the foregoing, rights
in trade names, business names, brand
names, get-up, logos and all other forms
of intellectual property right having
equivalent or similar effect to any of
the foregoing which may exist anywhere
in the world;
1.16 Internal Drug in respect of either party, drug
development carried out solely by that
party or carried out by that
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Development party in conjunction with an Internal
Drug Development Partner;
1.17 Internal Drug in respect of either party, a third
Development Partner party with whom that party has agreed
to work exclusively in conducting
research in a particular field;
1.18 Joint Steering Committee the joint steering committee to be
constituted by the parties pursuant to
Clause 2;
1.19 Jointly Developed Technology shall have the meaning given to it in
Clause 3.4;
1.20 Know-how know-how, show-how, trade secrets,
confidential information and data
exclusivity rights, in each case insofar
as the same is documented;
1.21 Library Sales Agreement the organic chemical compound library
sales agreement entered into by the
parties on December 8, 1999;
1.22 Patents patents, any extensions of the
exclusivity granted in connection with
patents (including extensions granted
under the US Drug Price Competition and
Patent Term Restoration Act 1984 and the
EC Supplementary Protection Certificate
Regulation), petty patents, utility
models, registered designs, applications
for any of the foregoing and the right
to apply for any of the foregoing;
1.23 Project a project for the joint development of
Assays agreed upon by the Joint Steering
Committee pursuant to Clause 2;
1.24 Quarter the quarterly periods ending 31st March,
30th June, 30th September and
31st December;
1.25 [CONFIDENTIAL Evotec's [CONFIDENTIAL TREATMENT
TREATMENT REQUESTED] technology known as
REQUESTED] Technology "[CONFIDENTIAL TREATMENT REQUESTED]"
further described in Schedule 1;
1.26 Solely Developed Technology shall have the meaning given to it in
Clause 3.3;
1.27 Trega Material a subset library compound purchased by
Evotec from Trega pursuant to the
Library Sales Agreement;
1.28 Trega Background Technology all technology covered by Patents or
owned by Trega; comprising Know-how in each case and
1.29 Trega Competitor such entities as can be reasonably
considered to compete with Trega in
the combinatorial chemistry library
business. Trega's Competitors at the
Commencement Date include, but are not
limited to, those listed in Schedule 4.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
2. DEVELOPMENT PROJECTS AND JOINT STEERING COMMITTEE
2.1 The parties shall form a Joint Steering Committee which shall have
responsibility for developing and approving Projects for the joint
development of Assays and authority to determine all matters in
connection therewith. The area of the Joint Steering Committee's
responsibility and authority shall include, in respect of each Project:
2.1.1 scientific objectives;
2.1.2 the respective obligations of the parties including the
resources and the Background Technology to be made available by
each party and the costs to be borne by each party; and
2.1.3 any milestones to be achieved on which the payment of sums or
performance of other obligations is dependent;
but in the event of any conflict between the plan for any Project and
the terms of this Agreement, this Agreement shall prevail unless the
parties expressly agree in writing that an amendment of this Agreement
is intended.
2.2 Each party shall use its reasonable endeavours to ensure that,
within [CONFIDENTIAL TREATMENT REQUESTED] of the Commencement
Date, its Appointees to the Joint Steering Committee agree on at
least one Project with the other party's Appointees.
2.3 At any time each party shall be entitled to appoint up to three
Appointees to the Joint Steering Committee. Each party's
Appointees at the Commencement Date are set out in Schedule 3.
Either party may change its Appointee or appoint further
Appointees (up to the maximum of 3) by notice to the other
party, such notice to be given not less than 10 Business Days
prior to any meeting of the Joint Steering Committee. Unless
otherwise agreed, a party's Appointees must be employees of that
party. Evotec and Trega shall each have the right, but not the
obligation, to appoint the chairman of the Joint Steering
Committee from their Appointees for alternate years, with Evotec
having the right to appoint the chairman for the year commencing
on the Commencement Date.
2.4 Each party shall procure that its Appointees attend a meeting of
the Joint Steering Committee within 60 days of the Commencement
Date and thereafter attend such meetings at intervals agreed by
the parties but in any case no less frequently than every
Quarter, unless otherwise agreed.
2.5 The location for meetings of the Joint Steering Committee shall
alternate between the offices of the two parties, unless
otherwise agreed. Each party shall bear its own costs of
attendance at the meetings.
2.6 All the Appointees of each party shall share one vote and the
parties shall abide by and shall carry out all unanimous
decisions of the Joint Steering Committee in accordance with and
subject to the terms of this Agreement. For the avoidance of
doubt the chairman of the Joint Steering Committee shall not
have a deciding vote.
2.7 If in respect of any matter the Appointees of the two parties
cannot reach agreement either party shall, at the request of the
other party, procure that its chief executive officer meets with
the chief
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
executive officer of the other party to discuss the matter
within 60 days of such request. Unless agreement is reached on
the disputed matter within 10 days of such meeting either party
may terminate this Agreement, subject to surviving obligations
under Section 16 of this Agreement, by notice to the other
having immediate effect.
2.8 Each party shall, at meetings of the Joint Steering Committee
and otherwise from time to time as may be appropriate, keep the
other informed of any on-going technology development by that
party which could apply to ADME. Technology which could apply to
ADME shall include [CONFIDENTIAL TREATMENT REQUESTED] technology
and software prediction models.
2.9 The obligation at Clause 2.8 shall apply whether the relevant
technology is being developed by a party either solely in-house
or in collaboration with any third party always provided that
neither party shall be obliged to make any disclosure which
would be a breach of confidentiality obligations owed to a third
party.
2.10 The obligations of the parties and the Joint Steering Committee
under this Clause 2 to agree on Projects shall commence on the
Commencement Date and, subject to earlier termination of this
Agreement and unless the parties agree to extend the same, shall
terminate [CONFIDENTIAL TREATMENT REQUESTED].
3. OWNERSHIP AND LICENSING OF INTELLECTUAL PROPERTY RIGHTS USED IN
AND ARISING FROM PROJECTS
BACKGROUND TECHNOLOGY
3.1 Each party and/or its licensors shall retain ownership of all
Intellectual Property Rights in that party's Background
Technology. Each party hereby grants the other a non-exclusive,
non-transferrable, royalty-free, fully paid-up licence to use
its Background Technology solely for the purpose of carrying out
its obligations pursuant to any Project.
SOLELY DEVELOPED TECHNOLOGY
3.2 Each party shall own all Intellectual Property Rights in any
technology which is created, invented or discovered in the
course of carrying out any Project solely by that party without
use of the other party's Background Technology or other party's
Solely Developed Technology ("Solely Developed Technology").
3.3 Neither party shall be subject to any restriction in its use of
its own Solely Developed Technology. Each party shall grant the
other a non-exclusive, non-transferrable, royalty-free, fully
paid-up licence to use its Solely Developed Technology for the
purpose of carrying out its obligations pursuant to any Project.
JOINTLY DEVELOPED TECHNOLOGY
3.4 In respect of technology which is created, invented or
discovered in the course of carrying out any Project and to
which Clause 3.3 does not apply ("Jointly Developed
Technology"):
3.4.1 Evotec shall own all Intellectual Property Rights in all
Jointly Developed Technology which relates principally
to Evotec's Background Technology;
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
3.4.2 Trega shall own all Intellectual Property Rights in all
Jointly Developed Technology which relates principally
to Trega's Background Technology.
3.5 Each party agrees to make all such assignments of its rights,
title and interest in and to the Intellectual Property Rights in
Jointly Developed Technology as may be necessary to effect the
allocation of ownership referred to in Clause 3.4.
3.6 If either party disputes the other party's claim to ownership of
any Jointly Developed Technology it shall notify the other party
and the parties shall each appoint a patent attorney to
negotiate the dispute on their behalf. If the parties'
respective patent attorneys do not resolve the dispute within 30
days then the two patent attorneys shall agree on the
appointment of a third, independent patent attorney and the
majority decision of the three patent attorneys shall be binding
on the parties. Each party shall bear the costs of appointment
of its own patent attorney and the costs of the third patent
attorney shall be split equally between the parties unless the
third patent attorney determines otherwise.
3.7 Each party hereby grants the other a world-wide, non-exclusive,
non-transferrable license to Jointly Developed Technology
comprising Assays owned by that party on terms permitting the
use of the same as set out below:
3.7.1 Trega may use the Assays only in [CONFIDENTIAL TREATMENT
REQUESTED] and only for any one or all of the following:
[CONFIDENTIAL TREATMENT REQUESTED]. For the purposes of
this Clause 3.7.1 [CONFIDENTIAL TREATMENT REQUESTED]
means [CONFIDENTIAL TREATMENT REQUESTED]. No royalties
or fees shall be payable by Trega to Evotec in respect
of the exercise of the rights so licensed;
3.7.2 Evotec may use the Assays in any form for Internal Drug
Development. No royalties or fees shall be payable by
Evotec to Trega in respect of the exercise of the rights
so licensed;
3.7.3 subject to payment of any applicable royalties in
accordance with Clause 6 and to Clause 7.1, Evotec may
commercially exploit the Assays in any form without
restriction, including:
3.7.3.1 by the utilisation of the Assays, in combination
with screening and/or other technology owned by
or licensed to Evotec, for the provision of
services to Clients;
3.7.3.2 by way of licence of the Assays; and
3.7.3.3 by way of sale of the Assays.
DATA PRODUCED IN THE COURSE OF ASSAY SCREENINGS
3.8 All data produced in the course of the Assay Screening to be
carried out pursuant to Clauses 6.2 and 6.3 shall be owned by
Trega.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
3.9 Trega hereby grants to Evotec in respect of data produced from
the Assay Screening of Trega Materials pursuant to Clause 6.2 a
world-wide, non-exclusive, non-transferable, royalty free, fully
paid-up license to:
3.9.1 use the same for Internal Drug Development;
3.9.2 use the same as a marketing tool for the purposes of
promoting Trega Materials to Evotec's clients, the form
of such promotion to be approved by Trega in advance.
4. EVOTEC'S [CONFIDENTIAL TREATMENT REQUESTED] TECHNOLOGY AND ADME
HARDWARE
4.1 Evotec shall, at the time of providing any [CONFIDENTIAL
TREATMENT REQUESTED] Technology or ADME Hardware to a third
party on commercial terms and subject to any contractual
restrictions imposed on Evotec by such third party,
[CONFIDENTIAL TREATMENT REQUESTED]. Trega shall notify Evotec of
its acceptance or rejection of such offer within 30 days of
receiving the same.
4.2 If Trega accepts the offer made to it by Evotec pursuant to
Clause 4.1 Trega shall, for the duration of any license and
lease agreement, promptly notify Evotec of:
4.2.1 any improvements to [CONFIDENTIAL TREATMENT REQUESTED]
Technology or ADME Hardware developed by Trega; and
4.2.2 any Assays developed by Trega using the [CONFIDENTIAL
TREATMENT REQUESTED] Technology or ADME Hardware.
4.3 Trega hereby grants Evotec a world-wide, non-exclusive,
royalty-free, fully paid-up licence (with the right to
sub-license) in respect of improvements notifiable to Evotec
pursuant to Clause 4.2.1.
4.4 Trega hereby grants to Evotec a world-wide, non-exclusive,
non-transferrable license of Assays notifiable to Evotec
pursuant to Clause 4.2.2 to:
4.4.1 use the Assays in any form for Internal Drug
Development. No royalties or fees shall be payable by
Evotec to Trega in respect of this exercise of the
rights so licensed;
4.4.2 (subject to payment of any applicable royalties in
accordance with Clause 6 and to Clause 7.1) commercially
exploit the Assays in any form without restriction,
including:
4.4.2.1 by the utilisation of the Assays, in combination
with screening and/or other technology owned by
or licensed to Evotec, for the provision of
services to Clients;
4.4.2.2 by way of licence of the Assays; and
4.4.2.3 by way of sale of the Assays.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
5. LICENSE OF IDEA SOFTWARE
5.1 Trega shall retain ownership of the IDEA Software and all
improvements or enhancements thereto made by Trega.
5.2 [CONFIDENTIAL TREATMENT REQUESTED].
5.3 Evotec may sub-license the rights granted to it under Clause 5.2
to its Affiliates but not otherwise.
5.4 For the avoidance of doubt neither Evotec nor any of its
Affiliate sub-licensees shall have any right to use the
[CONFIDENTIAL TREATMENT REQUESTED].
5.5 Trega shall provide to Evotec and Evotec's Affiliate
sub-licensees free of charge the standard level of support
services offered to any third party from time to time in respect
of the IDEA Software .
5.6 If so agreed by the parties, Trega shall [CONFIDENTIAL TREATMENT
REQUESTED].
5.7 Evotec may at any time [CONFIDENTIAL TREATMENT REQUESTED] to
Evotec under Clause 5.2 by [CONFIDENTIAL TREATMENT REQUESTED]
written notice to Trega. With [CONFIDENTIAL TREATMENT REQUESTED]
but, for the avoidance of doubt, [CONFIDENTIAL TREATMENT
REQUESTED] until completed or terminated in accordance with this
Agreement.
6. ROYALTIES
NO ROYALTIES ON USE OF JOINTLY DEVELOPED TECHNOLOGY FOR INTERNAL
DRUG DEVELOPMENT
6.1 Neither party shall pay the other any royalties in respect of
the use, including by means of screening, of the Jointly
Developed Technology for Internal Drug Development or in respect
of the sale or license of any technology arising from any such
Internal Drug Development.
SCREENING OBLIGATION
6.2 [CONFIDENTIAL TREATMENT REQUESTED].
6.3 [CONFIDENTIAL TREATMENT REQUESTED].
REVENUE FROM ASSAY SCREENING FOR CLIENTS
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6.4 Evotec shall pay Trega a royalty in respect of Assay Screening
for any Client. Such royalty shall be calculated as follows:
<TABLE>
<CAPTION>
TOTAL RELEVANT SCREENING FEES IN ANY COMMERCIALIZATION YEAR ROYALTY RATE
<C> <S>
up to [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
between [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
above [CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
</TABLE>
where:
<TABLE>
<S> <C>
"Relevant Screening Fees" is the proportion of the net fees received by Evotec from the Client in respect of
screening services which is attributable to the use of the Assay. Net fees shall be
the total fees received in respect of screening services less sales taxes, customary
trade discounts, costs of delivery and amounts repaid or credited for defective Assay
Screening. Marketing costs described in Clause 8.2 shall not be considered in any
calculation of Relevant Screening Fees;
"Commercialisation Year" is a calendar year commencing on the First Commercialisation Date or any anniversary
thereof.
</TABLE>
6.5 All obligations of Evotec to pay royalties under Clause 6.4
shall expire, in respect of each Assay, [CONFIDENTIAL TREATMENT
REQUESTED] from the date of Commercialisation of that Assay.
REVENUE FROM THE LICENSE OR SALE OF ASSAYS
6.6 Evotec shall pay Trega [CONFIDENTIAL TREATMENT REQUESTED] of:
6.6.1 all up-front lump sum license fees and royalties
received by Evotec from any third party in respect of
such third party's exploitation of the Assays;
6.6.2 the net sales price received by Evotec in respect of the
sale of any Assay. The net sale price for the purposes
of this Clause 6.6.2 shall be calculated after the
deduction of sales taxes, customary trade discounts,
costs of delivery, amounts repaid or credited for
defective or returned Assays and government rebates
charged on the purchase price.
6.6.3 the net sales price received by Evotec, less costs of
production, in respect of the sale of any reagent
relating to an Assay.
6.7 Where an Assay is licensed or sold in combination with other
technology or when any aspect of an Assay is sold in conjunction
with a reagent under Clause 6.6.3 Evotec shall present the Joint
Steering Committee with a calculation of the up-front lump sum
licence fees and royalties or sales
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
price, as applicable, attributed to the Assay or reagent, as the
case may be. If the parties are unable to agree the attribution
the matter shall be referred to an expert for determination in
accordance with Clauses 17.18 to 17.21.
6.8 All obligations of Evotec to make payments under Clause 6.6
shall expire, in respect of each Assay, [CONFIDENTIAL TREATMENT
REQUESTED] from the date of Commercialisation of that Assay.
NO DOUBLE ROYALTY
6.9 For the avoidance of doubt, in no circumstances shall Trega be
entitled to a share of any sum received from a Client under more
than one of Clauses 6.4 or 6.6.1 or 6.6.2.
DEDUCTION OF COSTS OF PROCURING PAYMENT
6.10 Before calculating any sums due pursuant to Clauses 6.4 or 6.6
Evotec may deduct from the relevant sums received from Clients
any direct and/or third party costs and/or expenses incurred by
Evotec in procuring payment of such royalties and/or licence
fees.
DUE DATES FOR PAYMENT
6.11 All sums due to Trega from Evotec pursuant to Clauses 6.4 or 6.6
shall be payable by Evotec within 60 days of the end of the
Quarter in which they are received by Evotec. For the purposes
of calculating the royalty rate applicable under Clause 6.4
Evotec shall take into account all Relevant Screening Fees
received to the date of payment in the relevant
Commercialisation Year.
6.12 Evotec shall notify Trega within 60 days of the end of each
Quarter with a financial statement for that Quarter setting
out:-
6.12.1 the payments due to Trega pursuant to Clauses 6.4 and
6.6; and
6.12.2 the amount of any withholding tax deducted pursuant to
Clause 10.1.3.
RECONCILIATION OF SCREENING ROYALTIES
6.13 In the final statement to be provided by Evotec to Trega
pursuant to Clause 6.12 in respect of any Commercialisation Year
Evotec shall present Trega with a calculation setting out
royalties paid under Clause 6.4 and royalties actually due
taking into account royalty rates applicable in respect of all
Relevant Screening Fees received during the Commercialisation
Year. Where there is an overpayment of royalties due under
Clauses 6.4 Trega shall refund such overpayment within 30 days
of receipt of the statement. Where there is an underpayment of
royalties due under Clause 6.4 Evotec shall pay the balance due
on presentation of the statement to Evotec.
PAYMENTS DUE FROM TREGA TO EVOTEC IN RESPECT OF SCREENING
SERVICES
6.14 In respect of any Assay Screening to be carried out by Evotec
pursuant to Clauses 6.2 and 6.3 no fees shall be payable by
Trega to Evotec and no royalties shall be payable by Evotec to
Trega pursuant to Clause 6.4.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6.15 Subject to Clause 6.14, all screening services performed by
Evotec for Trega at Trega's request from time to time shall be
charged by Evotec to Trega on terms equivalent to the most
favourable terms (number of compounds, type and number of
assays) on which Evotec provides screening services to Clients.
6.16 Evotec shall credit any sums accrued due under Clauses 6.4 or
6.6 against any sums due from Trega to Evotec in respect of
screening services provided by Evotec.
7. RESTRICTIONS ON THE PARTIES
7.1 [CONFIDENTIAL TREATMENT REQUESTED].
7.2 [CONFIDENTIAL TREATMENT REQUESTED].
7.3 Except as provided in Clause 3.7.1, Trega shall not at any time
[CONFIDENTIAL TREATMENT REQUESTED].
8. MARKETING
8.1 The parties shall develop a joint marketing programme to
maximise the value of the Assays and the parties' respective
technologies applicable to such Assays and such activities shall
include:
8.1.1 developing marketing materials highlighting the
partnership between the parties. Each party shall ensure
that such marketing materials are used whenever the
Assays and applicable technologies are presented to
third parties;
8.1.2 presenting the story of the parties' technical
partnership at meetings and conferences world-wide.
8.2 Unless otherwise agreed, the parties shall split the costs of
marketing activities equally between them, always provided that
neither party shall be obliged to reimburse the other for any
marketing activity unless it has approved the activity and the
Affiliated cost in advance.
9. PARTY [CONFIDENTIAL TREATMENT REQUESTED]
9.1 The parties shall [CONFIDENTIAL TREATMENT REQUESTED].
9.2 The conditions attached to any [CONFIDENTIAL TREATMENT
REQUESTED] shall be subject to the agreement of both parties.
The parties shall act reasonably in considering any
[CONFIDENTIAL TREATMENT REQUESTED] and the conditions attached,
always provided that neither party shall be obliged to agree any
terms which would reduce the anticipated benefits of this
Agreement to that party or which would allow the other party a
disproportionate share of such benefits.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
9.3 Unless otherwise agreed, [CONFIDENTIAL TREATMENT REQUESTED]
shall be split between the parties in proportion to the parties'
respective contributions, whether financial or in the form of
resources, other than resources comprising Background
Technology, Solely Developed Technology, the IDEA Software , the
ADME Hardware or the [CONFIDENTIAL TREATMENT REQUESTED]
Technology.
9.4 Any balance of [CONFIDENTIAL TREATMENT REQUESTED] remaining
after completion of any Project for which the [CONFIDENTIAL
TREATMENT REQUESTED] was provided shall be [CONFIDENTIAL
TREATMENT REQUESTED] the parties, always provided that:
9.4.1 nothing in this Clause shall affect the application of
Clauses 6.4 and 6.6 to any fees received by Evotec from
the third party funder in respect of the exploitation of
Assays resulting from such Project; and
9.4.2 [CONFIDENTIAL TREATMENT REQUESTED].
10. PAYMENTS
10.1 All sums payable under this Agreement:-
10.1.1 are exclusive of any sales taxes which, where
applicable, shall be payable by the payer in addition,
provided that the payee provides the payer with an
invoice suitable for sales tax purposes;
10.1.2 shall be paid in United States dollars to the credit of
a bank account nominated by the payee, details of which
shall be notified to the payer as and when necessary;
10.1.3 shall be subject to any deductions that the payer is
required by law to deduct. If the payer is required by
law to deduct withholding tax then the payer shall
co-operate with the payee to assist the payee to obtain
a tax credit in respect of the amount withheld.
10.2 If sums in respect of which Trega is entitled to royalties or a
revenue share pursuant to Clause 6.4 or 6.6 are received by
Evotec from third parties in a currency other than United States
dollars, the royalties payable in respect of such sales under
this Agreement shall be first determined in the currency of the
country in which such sales took place and then converted into
United States dollars at the exchange rate prevailing at the end
of the Quarter in which the sales took place as stated in the
London Financial Times.
11. RECORDS, INSPECTIONS AND STATEMENTS
MAINTENANCE OF RECORDS
11.1 Evotec shall keep at its normal place of business records and
books of account sufficient to calculate any sums due to Trega
under Clauses 6.4 or 6.6 in each case during the previous two
years.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
INSPECTIONS
11.2 Evotec shall make its records and books available for inspection
during normal business hours by an independent professional
accountant appointed by Trega and reasonably acceptable to
Evotec for the sole purpose of verifying the accuracy of any
statement provided by Evotec to Trega pursuant to Clause 6.12
provided that such accountant executes Evotec's non-disclosure
agreement.
11.3 Trega shall be entitled to have inspections carried out pursuant
to Clause 11.2 not more than once in any period [CONFIDENTIAL
TREATMENT REQUESTED] on giving Evotec [CONFIDENTIAL TREATMENT
REQUESTED] written notice prior to each inspection.
11.4 Trega shall bear the costs of carrying out the inspections
referred to in Clause 11.2 unless an inspection reveals a
deficit of more than [CONFIDENTIAL TREATMENT REQUESTED] in any
payment made to Trega pursuant to this Agreement in which case
Evotec shall promptly pay to Trega the reasonable costs incurred
by Trega's accountant in making the inspection concerned.
12. CONFIDENTIALITY
12.1 In this Clause 12, "Confidential Information" shall, subject to
Clause 12.3, mean:
12.1.1 in respect of Evotec, any Evotec [CONFIDENTIAL TREATMENT
REQUESTED] Technology or ADME Hardware licensed to
Trega;
12.1.2 in respect of Trega, the IDEA Software ;
12.1.3 in respect of each party, its Background Technology and
Solely Developed Technology and any and all know-how,
data, results, show-how, plans, business information and
other information, whether oral, in writing or in any
other form, disclosed before, on or after the
Commencement Date by that party to the other; and
12.1.4 in respect of both parties the Jointly Developed
Technology.
12.2 In this Clause 12, "Disclosing Party" shall mean the party
disclosing Confidential Information and "Receiving Party" shall
mean the party to whom the Confidential Information is
disclosed.
12.3 Confidential Information shall not include any information
which:-
12.3.1 is or becomes public knowledge through no improper
conduct on the part of the Receiving Party, its
officers, employees, agents, representatives or those of
its sub-licensees;
12.3.2 is already lawfully possessed by the Receiving Party
prior to first receiving it from the Disclosing Party;
12.3.3 is obtained subsequently by the Receiving Party from a
third party without any obligations of confidentiality
and such third party is in lawful possession of such
information and not in violation of any contractual or
legal obligation to maintain the confidentiality of such
information; and/or
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
12.3.4 is released from confidentiality in writing by the
Disclosing Party.
12.4 For the avoidance of doubt, information shall not be deemed to
be within any of the exceptions set out in Clause 12.3 merely
because it is embraced by general disclosure (1) in the public
domain or (2) in the lawful possession of the Receiving Party,
nor shall a combination of information be deemed to be within
any of the exceptions set out in Clause 12.3 merely because
individual items of information are (1) in the public domain or
(2) in the lawful possession of the Receiving Party, unless the
specific combination (if any) is (1) in the public domain or (2)
in the lawful possession of the Receiving Party.
12.5 The onus shall be on the Receiving Party to prove that any of
the exceptions set out in Clause 12.3 apply to any information
referred to in Clause 12.1.
12.6 The Receiving Party shall not use, copy or disclose to any third
party any Confidential Information received from the Disclosing
Party (whether before, on or after the Commencement Date) except
as set out in Clause 12.7.
12.7 The Receiving Party may:
12.7.1 use Confidential Information received from the
Disclosing Party for the purpose of carrying out its
obligations or exploiting its rights under this
Agreement;
12.7.2 disclose Confidential Information received from the
Disclosing Party to its officers, employees and
sub-contractors and those of its Affiliates (and in the
case of Evotec with regard to the IDEA Software , those
of its Internal Drug Development Partners) who need to
know the same provided that the Receiving Party shall
remain responsible for procuring that such officers,
employees and sub-contractors do not further disclose
the Confidential Information or use it for any purpose
other than to assist the Receiving Party carry out its
obligations under this Agreement;
12.7.3 disclose Confidential Information comprising of Assays,
[CONFIDENTIAL TREATMENT REQUESTED] Technology, ADME
Hardware and the IDEA Software to Clients, potential
Clients and Internal Drug Development Partners insofar
as is necessary for the purposes of carrying out its
obligations or exploiting its rights under this
Agreement always provided that the Receiving Party
ensures that such Clients, potential Clients and
Internal Drug Development Partners have entered into an
appropriate confidentiality agreement prior to such
disclosure being made;
12.7.4 disclose Confidential Information received from the
Disclosing Party to the extent that it is specifically
authorised to do so in writing by an authorised
representative of the Disclosing Party; and/or
12.7.5 disclose any part of the Confidential Information
received from the Disclosing Party solely to the extent
that it is legally required to do so pursuant to an
order of a court of competent jurisdiction or
governmental authority provided that the Receiving Party
uses its best endeavours to limit such disclosure and to
provide the Disclosing Party with an opportunity to make
representations to the relevant court or governmental
authority.
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<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
13. UNDERTAKINGS, WARRANTIES AND LIABILITY
13.1 Each party undertakes that it shall perform its obligations
under any Project diligently and with reasonable skill and care.
13.2 Trega warrants that the IDEA Software shall perform in
accordance with the specifications that are then standard for
the relevant version of the product. Trega shall remedy any
defects or errors in the IDEA Software free of charge in
accordance with the standard level of support services offered
to any third party from time to time in respect the IDEA
Software and in any case within a reasonable time, having regard
to the severity of the error.
13.3 Evotec shall provide its [CONFIDENTIAL TREATMENT REQUESTED]
Technology and ADME Hardware to Trega with such warranties and
subject to such limitations as are offered to other commercial
clients.
13.4 Each party warrants to the other that:
13.4.1 it has the full authority, power and capacity to enter
into this Agreement and all necessary actions have been
taken to enable it lawfully to enter into this
Agreement;
13.4.2 it has not entered into any agreement or other
arrangement with any third party that is inconsistent
with the provisions of this Agreement;
13.4.3 it is not at the Commencement Date aware of any third
party Intellectual Property Rights that may be infringed
by its own or the other party's use, in accordance with
this Agreement, of its Background Technology existing at
the Commencement Date; and
13.4.4 it shall promptly notify the other if it receives a
claim or assertion or otherwise becomes aware that its
own or the other party's use of its own or the other
party's Background Technology, Solely Developed
Technology or Jointly Developed Technology, in each case
in accordance with this Agreement infringes or otherwise
violates the Intellectual Property Rights of any third
party.
13.5 Save as set out in Clauses 13.1, 13.2 and 13.4 neither
party gives any undertakings or warranties, either
express or implied, with respect to:
13.5.1 its Background Technology, its Solely Developed
Technology or any other materials provided by or
produced by it pursuant to this Agreement and in
particular their safety or efficacy or appropriateness
for any Project, their satisfactory or merchantable
quality or fitness for a particular purpose and their
non-infringement of the Intellectual Property Rights of
any third party;
13.5.2 its performance of its obligations under any Project or
this Agreement, including its ability to market Assays
or secure funding for Projects.
13.6 Subject to Clause 13.7, each party ("the Defaulting Party")
shall indemnify and hold harmless the other ("the Non-defaulting
Party") from and against any and all losses, damages and/or
expenses (including legal expenses) incurred by the
Non-defaulting Party arising out of or in connection with:
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<PAGE>
13.6.1 any breach by the Defaulting Party of this Agreement or
any negligent act or omission of the Defaulting Party in
connection therewith;
13.6.2 any claims, demands, actions or other proceedings made
or instituted by a third party against the
Non-defaulting Party or any Affiliates, directors,
officers, employees or agents of the Non-defaulting
Party insofar as the same relate to the use by or on
behalf of the Defaulting Party or any of its Internal
Drug Development Partners of Assays;
13.6.3 any claims, demands, actions or other proceedings made
or instituted by a third party against the
Non-defaulting Party or any Affiliates, directors,
officers, employees or agents of the Non-defaulting
Party insofar as the same relate to the development,
manufacture, storage, use, sale, administration or
advertisement of a product which has been designed,
manufactured or sold by the Defaulting Party or any of
its Internal Drug Development Partners and which
incorporates, derives from, is based upon or is a
by-product of an Assay.
13.7 In no circumstances shall the Defaulting Party have any
liability to the Non-defaulting Party for any incidental,
special or consequential losses of the Non-defaulting Party
arising from the Defaulting Party's breach of this Agreement or
the Defaulting Party's negligent act or omission.
14. FORCE MAJEURE
14.1 In this Agreement, "Force Majeure" shall mean any cause
preventing either party from performing any or all of its
obligations which arises from or is attributable to acts,
events, omissions or accident beyond the reasonable control of
the party so prevented including without limitation strikes,
lock-outs or other industrial disputes, act of God, war, riot,
civil commotion, malicious damage, compliance with any law or
governmental order, rule, regulation or direction, accident,
breakdown of plant or machinery, fire, flood, or storm.
14.2 Subject to Clause 14.3, neither party shall have any liability
for any non-performance or delay in performance of its
obligations under any Project or this Agreement which is caused
by Force Majeure for so long as the event of Force Majeure
continues.
14.3 The exemption from liability at Clause 14.2 is subject to the
party affected by Force Majeure promptly giving the other party
full details of the relevant Force Majeure event and using all
reasonable endeavours to mitigate the effects of the Force
Majeure event.
15. COMMENCEMENT AND DURATION OF THIS AGREEMENT
15.1 This Agreement shall commence on the Commencement Date and shall
continue unless or until terminated pursuant to Clauses 2.7,
15.2 or 15.3.
15.2 Either party may terminate this Agreement at any time without
cause by 90 days' written notice to the other.
15.3 Either party may terminate this Agreement at any time by giving
the other immediate notice of termination if the other:
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<PAGE>
15.3.1 is in material breach of this Agreement and in the case of a
breach capable of remedy, has not remedied such breach within
60 (sixty) days of being notified in writing of such breach;
15.3.2 ceases to do business, becomes unable to pay its debts as they
fall due, becomes or is deemed insolvent, has a receiver,
manager, administrator, administrative receiver or similar
officer appointed in respect of the whole or any part of its
assets or business, makes any composition or arrangement with
its creditors, takes or suffers any similar action in
consequence of debt or an order or resolution is made for its
dissolution or liquidation (other than for the purpose of
solvent amalgamation or reconstruction), or any equivalent or
similar action or proceeding is taken or suffered in any
jurisdiction and the same is not dismissed or discharged within
thirty (30) days thereafter.
16. CONSEQUENCES OF TERMINATION OF THIS AGREEMENT
16.1 On termination of this Agreement howsoever caused:
16.1.1 each party shall retain all rights granted to it in this
Agreement to use and exploit the Jointly Developed Technology;
16.1.2 the licences granted to Evotec under Clauses 4.3 and 4.4
shall remain in full force and effect;
16.1.3 any lease or licence of [CONFIDENTIAL TREATMENT REQUESTED]
Technology or ADME Hardware paid for by Trega pursuant to
Clause 4 shall remain in force until the termination thereof
in accordance with the terms of such lease or licence;
16.1.4 nothing shall affect the accrued rights and liabilities of the
parties; and
16.1.5 in addition to the provisions listed at Clauses 16.1.1 to
16.1.4, Clauses 1, 12 and 17 shall remain in full force and
effect.
16.2 On termination of this Agreement by either party pursuant to Clause
15.2:
16.2.1 any obligation of Evotec to pay royalties to Trega in accordance
with Clauses 6.4 and 6.6 shall continue until its expiry
pursuant to Clauses 6.5 and 6.8 respectively; and
16.2.2 the license of the IDEA Software granted in Clause 5 shall
continue until its expiry pursuant to Clause 5.2;
in each case subject to the right of Evotec to terminate the
license of the IDEA Software under Clause 5.7 and thus terminate
the obligation to pay royalties.
16.3 On termination of this Agreement by Evotec pursuant to Clause 15.3 the
license to Evotec of the IDEA Software shall continue until its expiry
pursuant to Clause 5.2, PROVIDED, HOWEVER, that Evotec continue to pay
royalties under Clauses 6.4 and 6.6 until the earlier expiration under
Clause 5.2 or Clauses 6.5 and 6.8 respectively. On expiry of the license
pursuant to Clause 5.2, Evotec can purchase a license to the IDEA
software in the form and on commercial terms offered to the public at
that time.
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<PAGE>
16.4 On termination of this Agreement by Trega pursuant to Clause 15.3 any
obligation of Evotec to pay royalties under Clauses 6.4 and 6.6 shall
continue until its expiry pursuant to Clause 6.5 and 6.8 respectively.
17. MISCELLANEOUS
INTERPRETATION
17.1 In this Agreement:
17.1.1 "including" means including without limitation and "include" and
"includes" shall be construed accordingly;
and
17.1.2 the headings are for convenience only and shall not
affect the interpretation of this Agreement.
17.2 In the event of any inconsistency or conflict between the provisions of
the main body of this Agreement (Clauses 1 to 17) and the provisions of
the Schedules to this Agreement, the provisions of the main body of
this Agreement shall override those of the Schedules to the extent of
the inconsistency or conflict only.
NOTICES
17.3 Any notice or other communication given under this Agreement shall be
in writing in the English language and shall be:-
17.3.1 delivered by hand; or
17.3.2 sent by pre-paid airmail; or
17.3.3 sent by fax (confirmed by pre-paid airmail or first class post
as appropriate placed in the post on or on the Business Day
after the date of transmission);
in each case to the address or fax number set out below or to
such other address or fax number as may from time to time be
notified to the other party in writing.
Notices to Trega: Notices to Evotec:
F.A.O. The Company Secretary F.A.O. The Company Secretary
Trega Biosciences Incorporated Evotec BioSystems AG
9880 Campus Point Drive Schnackenburgallee 114
San Diego 22525 Hamburg
California 92121 Germany
Fax No. 001 858 410 6664 Fax No. 00 49 40 5608 1222
17.4 Any notice given under Clause 17.3 shall be deemed to have been
received:-
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<PAGE>
17.4.1 on the date of delivery if delivered by hand prior to 5:00 p.m.
on a Business Day, otherwise on the next Business Day following
the date of delivery;
17.4.2 on the tenth Business Day from and including the day of posting
in the case of pre-paid airmail; or
17.4.3 on the next Business Day following the day of transmission in
the case of facsimile (confirmed by pre-paid first class
post/airmail as provided above).
SEVERABILITY
17.5 If any provision of this Agreement is declared by any judicial or other
competent authority to be void, voidable, illegal or otherwise
unenforceable then the remaining provisions of this Agreement shall
continue in full force and effect. The judicial or other competent
authority making such determination shall have the power to limit,
construe or reduce the duration, scope, activity and/or area of such
provision, and/or delete specific words or phrases as necessary to
render, such provision enforceable.
WAIVER
17.6 Failure or delay by either party to exercise any right or remedy under
this Agreement shall not be deemed to be a waiver of that right or
remedy, or prevent it from exercising that or any other right or remedy
on that occasion or on any other occasion.
ENTIRE AGREEMENT AND AMENDMENTS
17.7 This Agreement constitutes the entire agreement and understanding of the
parties relating to the subject matter of this Agreement and supersede
all prior oral or written agreements, representations, understandings or
arrangements between the parties relating to the subject matter of this
Agreement.
17.8 The parties acknowledge that they are not relying on any agreement,
understanding arrangement, warranty, representation or term which is
not set out in this Agreement.
17.9 The parties irrevocably and unconditionally waive any rights and/or
remedies they may have to the fullest extent permitted by law (including
but not limited to the right to claim damages and/or to rescind this
Agreement) in respect of any misrepresentation other than a
misrepresentation which is contained in this Agreement.
17.10 Nothing in this Agreement shall operate to limit or exclude any
liability, right or remedy to a greater extent than is permissible under
Delaware law.
17.11 No change may be made to this Agreement except in writing in the English
language signed by the duly authorised representatives of both parties.
RELATIONSHIP OF THE PARTIES
17.12 Nothing in this Agreement shall create, evidence or imply any agency,
partnership or joint venture between the parties.
-19-
<PAGE>
17.13 Neither party shall not act or describe itself as the agent of the other
nor shall it represent that it has any authority to make commitments on
the other's behalf.
ASSIGNMENT AND SUB-CONTRACTING
17.14 Either party may assign this Agreement (or any of its rights or
obligations under this Agreement) to any Affiliate of that party and for
the avoidance of doubt the statement anywhere in this Agreement that a
license is non-transferrable shall not prevent the assignment of such
license by the relevant licensee to any one of its Affiliates.
17.15 Save as provided in Clause 17.14 neither party may assign or otherwise
transfer this Agreement (or any of its rights under this Agreement)
without the prior written consent of the other party.
ANNOUNCEMENTS
17.16 Any announcement of the signing of this Agreement and any other third
party funding agreement entered into pursuant to it shall be in a form
agreed by both parties, acting reasonably.
FURTHER ASSURANCES
17.17 Each party shall, as and when requested by the other party, do all acts
and execute all documents as may be reasonably necessary to give effect
to the provisions of this Agreement including carrying out such acts
and/or executing such instruments as Evotec may require in order to
register this Agreement and/or the licences granted in Clause 3 with
patent offices in any country.
EXPERT DETERMINATION
17.18 Where under Clause 6.8 any matter is to be determined by an Expert the
matter shall be referred to such person as may be appointed by agreement
between the parties or, in default of agreement, as is nominated on the
application of either party by the President for the time being of the
Association of the British Pharmaceutical Industry ("the Expert").
17.19 The Expert shall act as an expert and not as an arbitrator and shall be
entitled to appoint such technical expert or experts as he considers
necessary to assist him in determining the matter referred to him. The
decision of the Expert (which shall be given by him in writing stating
his reasons therefor) shall in the absence of manifest error be final
and binding on the parties.
17.20 Each party shall provide any Expert with such information as he may
reasonably require for the purposes of his determination; if either
party claims any such information to be confidential to it then,
provided that in the opinion of the Expert that party has properly
claimed the same as confidential, the Expert shall not disclose the
same to the other party or to any third party.
17.21 The costs of any Expert (including the costs of any technical expert
appointed by him) shall be borne in such proportions as the Expert may
determine to be fair and reasonable in all the circumstances or, if no
such determination is made by the Expert, by the parties in equal
proportions.
-20-
<PAGE>
LAW AND JURISDICTION
17.22 The validity, construction and performance of this Agreement shall be
governed by laws of the State of Delaware and, the parties accept the
exclusive jurisdiction of the Delaware courts in respect thereof.
-21-
<PAGE>
AGREED by the parties through their duly authorised signatories on the
Commencement Date.
For and on behalf of For and on behalf of
EVOTEC BIOSYSTEMS AG TREGA BIOSCIENCES, INCORPORATED
Signed /s/ Karsten Henco Signed /s/ Mark W. Schwartz
----------------------------- -----------------------------
Full Name Dr. Karsten Henco Full Name Dr. Mark W. Schwartz
-------------------------- --------------------------
Title CEO Title Chief Commercial Officer
------------------------------ -----------------------------
-22-
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 1
BRIEF TECHNOLOGY DESCRIPTION: [CONFIDENTIAL TREATMENT REQUESTED]
PROJECT IDEA:
Use of [CONFIDENTIAL TREATMENT REQUESTED] as an [CONFIDENTIAL TREATMENT
REQUESTED] for the [CONFIDENTIAL TREATMENT REQUESTED]. The [CONFIDENTIAL
TREATMENT REQUESTED] is [CONFIDENTIAL TREATMENT REQUESTED] by [CONFIDENTIAL
TREATMENT REQUESTED]. The [CONFIDENTIAL TREATMENT REQUESTED] allows the
[CONFIDENTIAL TREATMENT REQUESTED]. A [CONFIDENTIAL TREATMENT REQUESTED] enables
the [CONFIDENTIAL TREATMENT REQUESTED] of their [CONFIDENTIAL TREATMENT
REQUESTED] with [CONFIDENTIAL TREATMENT REQUESTED]. The [CONFIDENTIAL TREATMENT
REQUESTED] is [CONFIDENTIAL TREATMENT REQUESTED] with a [CONFIDENTIAL TREATMENT
REQUESTED].
STATUS:
Presently, the [CONFIDENTIAL TREATMENT REQUESTED] is on [CONFIDENTIAL TREATMENT
REQUESTED] of the [CONFIDENTIAL TREATMENT REQUESTED] of the [CONFIDENTIAL
TREATMENT REQUESTED] and not on [CONFIDENTIAL TREATMENT REQUESTED]. The
[CONFIDENTIAL TREATMENT REQUESTED] was [CONFIDENTIAL TREATMENT REQUESTED]. The
[CONFIDENTIAL TREATMENT REQUESTED]. The [CONFIDENTIAL TREATMENT REQUESTED] of
[CONFIDENTIAL TREATMENT REQUESTED] was [CONFIDENTIAL TREATMENT REQUESTED]. A
[CONFIDENTIAL TREATMENT REQUESTED] of the [CONFIDENTIAL TREATMENT REQUESTED] is
[CONFIDENTIAL TREATMENT REQUESTED].
PROPOSED PROJECT OBJECTIVES [CONFIDENTIAL TREATMENT REQUESTED]:
1. [CONFIDENTIAL TREATMENT REQUESTED].
2. [CONFIDENTIAL TREATMENT REQUESTED].
3. [CONFIDENTIAL TREATMENT REQUESTED].
4. [CONFIDENTIAL TREATMENT REQUESTED].
5. [CONFIDENTIAL TREATMENT REQUESTED].
[Depending on [CONFIDENTIAL TREATMENT REQUESTED], an [CONFIDENTIAL TREATMENT
REQUESTED] could [CONFIDENTIAL TREATMENT REQUESTED].]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 2
DESCRIPTION OF [CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED].
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 3
TREGA'S COMPETITORS AT THE COMMENCEMENT DATE
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 4
EVOTEC AND TREGA'S STEERING COMMITTEE APPOINTEE AT THE COMMENCEMENT DATE
Trega Members: [CONFIDENTIAL TREATMENT REQUESTED]
EVOTEC Members: [CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
Exhibit 21.1
Subsidiaries of Trega Biosciences, Inc.
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
---------- ----------------------
<S> <C>
ChromaXome Corp. Delaware
NaviCyte, Inc. Delaware
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 333-17235) pertaining to the 1992 Stock Incentive
Plan; (ii) the Registration Statement (Form S-8 No. 333-17273) pertaining to
the 1995 Stock Incentive Plan; (iii) the Registration Statements (Form S-8
No. 333-2910, Form S-8 No. 333-40903 and Form S-8 No. 333-65323) pertaining
to the 1996 Stock Incentive Plan; (iv) the Registration Statements (Form S-8
No. 333-2908 and Form S-8 No. 333-65343) pertaining to the 1996 Employee
Stock Purchase Plan; and (v) the Registration Statement (Form S-8 No.
333-67833) pertaining to the NaviCyte, Inc. 1997 Stock Plan of Trega
Biosciences, Inc. of our report dated January 27, 2000, with respect to the
consolidated financial statements of Trega Biosciences, Inc. included in its
Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
San Diego, California
March 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT DECEMBER 31, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000887920
<NAME> TREGA BIOSCIENCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,393
<SECURITIES> 1,041
<RECEIVABLES> 2,176
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,975
<PP&E> 8,198
<DEPRECIATION> 4,019
<TOTAL-ASSETS> 22,661
<CURRENT-LIABILITIES> 8,155
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 11,491
<TOTAL-LIABILITY-AND-EQUITY> 22,661
<SALES> 313
<TOTAL-REVENUES> 13,377
<CGS> 332
<TOTAL-COSTS> 25,579
<OTHER-EXPENSES> 66
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> (8,673)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,673)
<EPS-BASIC> (.47)
<EPS-DILUTED> (.47)
</TABLE>
