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Filed pursuant to Rule 424(b)(4)
Registration No. 333-89177
PROSPECTUS
6,950,000 Shares
[TULARIK INC. LOGO]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
5,316,750 shares in public offerings in the United States and Canada and
outside the United States and Canada. No public market currently exists for our
shares. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TLRK."
Pharma Vision 2000 AG, our largest stockholder, has agreed, subject to
conditions, to purchase additional shares in a direct offering of our common
stock that would allow it to maintain its 23.5% ownership interest in us. We
are offering 1,633,250 shares of common stock in the direct offering. Any sales
to Pharma Vision in the direct offering will be made at the initial public
offering price concurrent with the public offerings.
Investing in the shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Public Offering Price....................................... $14.00 $97,300,000
Underwriting Discount in Public Offerings................... $ 0.98 $ 5,210,415
Proceeds to Tularik in Public Offerings..................... $13.02 $69,224,085
Proceeds to Tularik in Direct Offering...................... $14.00 $22,865,500
</TABLE>
We have granted the U.S. underwriters and international managers 30-day options
to purchase up to an aggregate of 797,512 additional shares of common stock
solely to cover over-allotments, if any. Pharma Vision 2000 AG has agreed,
subject to conditions, to purchase an additional 244,988 shares of our common
stock in order to maintain its 23.5% ownership interest in us in the event the
over-allotment options are exercised.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about December 15, 1999.
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Lehman Brothers
Hambrecht & Quist
J.P. Morgan & Co.
Warburg Dillon Read LLC
December 9, 1999
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Inside Front Cover
Most human diseases are linked to the inappropriate activation of genes, which
causes over-production of harmful proteins or under-production of beneficial
proteins. Tularik is committed to the discovery of novel drugs that can be
administered orally to treat disease by blocking or amplifying the activation
of genes.
Graphic Description: Graphic depicting how pills amplify beneficial activation
of genes or block harmful activation of genes.
Developing drugs to treat human disease by regulating genes.
Example: Inflammatory diseases/Immune system protein binds to cell surface and
causes inflammation.
Tularik's drug discovery platform is directed toward identifying numerous novel
proteins within a cell that are linked to disease--enabling us to identify
multiple drug targets and to focus on those that are optimal.
Graphic Description: Graphic depicting an example of the activation of genes
and the multiple protein components inside the cell that could be potential
drug targets.
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TABLE OF CONTENTS
<TABLE>
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
</TABLE>
<TABLE>
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Page
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Business................................................................... 30
Management................................................................. 55
Related Party Transactions................................................. 67
Principal Stockholders..................................................... 69
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 73
Underwriting............................................................... 75
Legal Matters.............................................................. 80
Experts.................................................................... 80
Where You Can Find More Information........................................ 80
Index to Financial Statements ............................................. F-1
</TABLE>
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ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
"Tularik" and the Tularik logo are trademarks of Tularik Inc. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
Until January 3, 2000, all dealers selling shares of the common stock,
whether or not participating in the public offerings, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes appearing
elsewhere in this prospectus. Unless otherwise indicated, information in this
prospectus assumes that the underwriters do not exercise their over-allotment
options and assumes the conversion of all of our preferred stock into common
stock upon completion of these offerings.
Tularik
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address large commercial markets, include
cancer, cytomegalovirus, diabetes, obesity, inflammation, immune disorders,
high blood cholesterol levels, known as hypercholesterolemia, bacterial
diseases and a class of drug targets called orphan nuclear receptors because
their exact function is unknown and they are located within the nucleus of the
cell. We have diversified our drug discovery and development efforts not only
across a large number of diseases, but also across multiple promising targets
and drug candidates for these diseases.
Gene regulation is the selective activation and deactivation of genes within
a cell and is fundamental to the development or progression of most diseases.
Our drug discovery approach, which is based on gene regulation, is amenable to
the discovery of orally available drugs. These drugs are well suited for the
treatment of chronic diseases requiring the daily administration of medications
over many years. We also selectively pursue drug candidates with mechanisms of
action other than gene regulation.
Our drug discovery and development expertise includes molecular biology,
biochemistry, structural biology, chemistry, pharmacology and human testing. To
complement our internal capabilities, we collaborate with world-renowned
scientists and clinicians and with leading pharmaceutical companies. We believe
that our integration of biology, chemistry and pharmacology enhances our
ability to find novel gene regulating drugs and that our drug discovery and
development efforts are highly efficient and productive. To date, we have:
. identified numerous novel proteins that regulate the expression of
disease-causing genes;
. established more than 80 automated drug testing systems, known as high
throughput screening assays, that mimic the diseases addressed by our
programs;
. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 14 drug leads, seven of which are being optimized by chemists;
. identified one cytomegalovirus drug candidate that is undergoing
preclinical testing consisting of animal studies designed to determine
the feasibility of human testing;
. identified one cancer drug candidate for which an Investigational New
Drug application has been approved by the U.S. Food and Drug
Administration;
. identified one cancer drug candidate that is undergoing human testing
designed to determine safety, known as phase 1 clinical trials; and
. obtained a license for a cancer drug candidate that has completed phase 1
clinical trials and that we expect to enter human testing designed to
determine efficacy, known as phase 2 clinical trials, during 2000.
We have commenced, or are preparing for, human testing of three cancer drug
candidates: lometrexol, T138067, which we refer to as T67, and T900607, which
we refer to as T607. Our most advanced drug candidate, which we recently
licensed from Eli Lilly, is called lometrexol. The utility of cancer drugs like
lometrexol has been proven by methotrexate, a drug used extensively in the
treatment of several tumor types. We expect to commence phase 2 clinical trials
of lometrexol in 2000. T67 acts on the same protein targeted by the cancer
drugs Taxol and vincristine. In contrast to these drugs, T67 retains its
activity against tumor cells that are multiple drug resistant and is able to
enter the brain. We have enrolled 29 patients in phase 1 clinical
4
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trials of T67 to date. Pending successful completion of these trials, we will
initiate phase 2 clinical trials of T67 in several tumor types, including brain
tumors. T607 is an analog of T67, has the same target and is similarly active
against multiple drug resistant tumors. Animal studies indicate that T607 is
distinct from T67 because T607 has a reduced ability to enter the brain, which
may make it suitable for the treatment of different tumor types than T67. We
recently received approval of an Investigational New Drug application for T607.
We intend to commercialize drugs independently and through collaborations
with pharmaceutical partners. To assist in the commercialization of some of our
products, and to fund research and development activities, we have established
and will continue to pursue collaborations with selected pharmaceutical and
biotechnology companies. We currently have corporate collaborations in six of
our research programs: with Knoll relating to obesity; with Japan Tobacco
relating to orphan nuclear receptors; with Roche Bioscience relating to
inflammation; with Japan Tobacco relating to obesity/diabetes; with Taisho
relating to immune disorders; and with Sumitomo relating to
hypercholesterolemia. We have retained significant rights to independently
market products resulting from most of our programs, including worldwide
commercialization rights to our cancer, bacterial diseases and cytomegalovirus
programs and North American commercialization rights in four of our externally
funded programs. As of September 30, 1999, we had received a total of $121.3
million from our current and former corporate collaborators, including $108.3
million in research funding and $13.0 million from equity purchases.
To date, we have funded our operations primarily through the sale of equity
securities, non-equity payments from collaborators and interest income. We
expect our sources of revenue, if any, for the next several years to consist
primarily of payments under corporate collaborations and interest income.
As of September 30, 1999, 41 U.S. patents based on our discoveries had been
issued or allowed. In addition, as of that date, we had 47 patent applications
pending in the United States and had filed several corresponding foreign patent
applications.
Tularik was incorporated in California in 1991 and reincorporated in Delaware
in 1997. Our principal office is located at Two Corporate Drive, South San
Francisco, California 94080, and our telephone number is (650) 825-7000.
The Offerings
<TABLE>
<C> <S>
Common Stock offered in the public offerings........ 5,316,750 shares
Common Stock offered in the direct offering......... 1,633,250 shares
Common Stock to be outstanding after the offerings.. 42,221,375 shares
Research and development
and general corporate
purposes. See "Use of
Use of proceeds..................................... Proceeds."
Approved Nasdaq National Market Symbol.............. "TLRK"
</TABLE>
The number of shares of common stock to be outstanding after the offerings is
based on the number of shares outstanding as of September 30, 1999 and
excludes:
. 5,955,965 shares of common stock underlying options outstanding as of
September 30, 1999 at a weighted average exercise price of $2.23 per
share;
. 1,015,091 shares of common stock underlying warrants outstanding as of
September 30, 1999 at a weighted average exercise price of $10.17 per
share;
. 436,112 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
5
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Summary Consolidated Financial Data
The following tables summarize our consolidated financial data. The pro forma
information contained in the consolidated statements of operations data gives
effect to the automatic conversion of all convertible preferred stock into
common stock upon the completion of this offering. The as adjusted column of
the consolidated balance sheet data reflects the conversion of our preferred
stock into common stock and the sale of 6,950,000 shares of our common stock in
the public offerings and the direct offering at an initial public offering
price of $14.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by us.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Op-
erations Data:
Collaborative research
and development
revenue............... $ 5,618 $11,124 $15,297 $20,009 $21,362 $ 13,664 $ 17,856
Total operating ex-
penses(1)............. 12,153 15,980 22,252 49,468 38,297 27,799 40,478
Net loss(1)............ (5,898) (3,607) (5,480) (25,374) (10,539) (9,303) (18,954)
Basic and diluted net
loss per share........ $ (2.27) $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
Shares used in
computing basic and
diluted net loss per
share................. 2,601 3,957 5,034 6,063 6,791 6,666 7,388
Pro forma basic and di-
luted net loss per
share................. $ (0.31) $ (0.55)
Shares used in comput-
ing pro forma basic
and diluted net loss
per share............. 33,687 34,314
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
As of 1999
December 31, ---------------------
1998 Actual As Adjusted
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(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities................................ $119,324 $104,188 $195,278
Working capital............................ 94,535 84,401 175,491
Total assets............................... 136,778 131,026 222,116
Long-term obligations, less current
portion................................... 4,734 10,254 10,254
Deferred compensation...................... (679) (5,377) (5,377)
Accumulated deficit........................ (61,857) (80,811) (80,811)
Total stockholders' equity................. 110,898 95,556 186,646
</TABLE>
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(1) Total operating expenses in 1997 include a non-cash charge of $18.9 million
for acquired in-process research and development in connection with our
acquisition of Amplicon Corp. You should read Note 6 of notes to
consolidated financial statements for information about this acquisition.
6
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RISK FACTORS
An investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm
our business. If any of these additonal risks or uncertainties occur, the
trading price of our common stock could decline, and you might lose all or part
of your investment.
RISKS RELATED TO TULARIK
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations.
We have generated operating losses since we began operations in November
1991. The extent of our future losses and the timing of profitability are
highly uncertain, and we may never achieve profitable operations. We have been
engaged in discovering and developing drugs since inception, which requires
significant research and development expenditures. To date, we have no products
that have generated any revenue. As of September 30, 1999, we had an
accumulated deficit of approximately $80.8 million. Even if we succeed in
developing a commercial product, we expect to incur losses for at least the
next several years and expect that these losses will increase as we expand our
research and development activities. If the time required to generate product
revenues and achieve profitability is longer than anticipated, we may not be
able to continue our operations. If we fail to obtain the necessary capital, we
will not be able to fund our operations.
Because our product candidates are in an early state of development, there is a
high risk of failure.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates are in early stages of development, and we
face the risks of failure inherent in developing drugs based on new
technologies. None of our prospective products, including lometrexol, T67 and
T607, is expected to be commercially available until at least 2004. Two of our
drug candidates, T67 and T607, operate in a similar manner. Based on results at
any stage of clinical trials, we may decide to discontinue development of one
or both of these compounds. Additionally, even if the clinical results are
favorable for both compounds, we may decide to commercialize only one of the
compounds.
Our products must satisfy rigorous standards of safety and efficacy before
they can be approved by the FDA and international regulatory authorities for
commercial use. We will need to conduct significant additional research, animal
testing, referred to as preclinical testing, and human testing, referred to as
clinical trials, before we can file applications with the FDA for product
approval. Clinical trials are expensive and have a high risk of failure. In
addition, to compete effectively, our products must be easy to use, cost-
effective and economical to manufacture on a commercial scale. We may not
achieve any of these objectives. Any of our products may not attain market
acceptance. Typically, there is a high rate of attrition for products in
preclinical testing and clinical trials. Also, third parties may develop
superior products or have proprietary rights that preclude us from marketing
our products. If research and testing is not successful or we fail to obtain
regulatory approval, we will be unable to market and sell our future product
candidates.
The progress and results of our animal and human testing are uncertain.
Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us several years to complete our testing, and
failure can occur at any stage of testing. Interim results of trials do not
necessarily predict final results, and acceptable results in early trials may
not be repeated in later trials. Success in preclinical testing and early
clinical trials does not ensure that later clinical trials will be successful.
7
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A number of companies in the pharmaceutical industry, including biotechnology
companies, have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. Commercialization of our product
candidates depends upon successful completion of clinical trials. We must
provide the FDA and foreign regulatory authorities with clinical data that
demonstrates the safety and efficacy of our products before they can be
approved for commercial sale. While we have recently licensed a product
candidate that is ready for the stage of human testing designed to determine
efficacy, known as phase 2 clinical trials, none of the product candidates that
we have internally developed have advanced beyond the stage of human testing
designed to determine safety, known as phase 1 clinical trials.
Any clinical trial may fail to produce results satisfactory to the FDA.
Preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval. Negative or inconclusive results
or adverse medical events during a clinical trial could cause a clinical trial
to be repeated or a program to be terminated. We typically rely on third-party
clinical investigators to conduct our clinical trials and other third-party
organizations to perform data collection and analysis, and as a result, we may
face additional delaying factors outside our control.
We do not know whether planned clinical trials will begin on time or whether
any of our clinical trials will be completed on schedule or at all. We do not
know whether any clinical trials will result in marketable products. Our
product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than planned.
If the delays are significant, our financial results and the commercial
prospects for our products will be harmed, and our ability to become profitable
will be delayed.
Our first three clinical candidates are directed to the treatment of cancer.
Cancer drugs generally have a narrow therapeutic window between efficacy and
toxicity. If unacceptable toxicity is observed in clinical trials, the trials
may be terminated at an early stage. Drug-related deaths may occur in phase 1
clinical trials with anti-cancer drugs, because drugs for the treatment of
cancer are typically dangerous and phase 1 patients are critically ill and
heavily pre-treated. Several deaths occurred during Eli Lilly's phase 1
clinical trials of lometrexol.
We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the requisite
regulatory approvals or will result in marketable products. Our failure to
adequately demonstrate the safety and efficacy of our products under
development will prevent receipt of FDA approval and, ultimately,
commercialization of our products.
For additional information concerning the testing of our prospective
products, see "Business--Government Regulation."
Because we must obtain regulatory approval to market our products in the United
States and foreign jurisdictions, we cannot predict whether or when we will be
permitted to commercialize our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be
obtained for any product we develop. A pharmaceutical product cannot be
marketed in the United States until it has completed rigorous preclinical
testing and clinical trials and an extensive regulatory clearance process
implemented by the FDA. Satisfaction of regulatory requirements typically takes
many years, is dependent upon the type, complexity and novelty of the product
and requires the expenditure of substantial resources. Of particular
significance are the requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human use.
Before commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug application. Clinical
trials are subject to oversight by institutional review boards and the FDA and:
. must be conducted in conformance with the FDA's good laboratory practice
regulations;
. must meet requirements for institutional review board oversight;
8
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. must meet requirements for informed consent;
. must meet requirements for good clinical practices;
. are subject to continuing FDA oversight;
. may require large numbers of test subjects; and
. may be suspended by us or the FDA at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the Investigational New
Drug application or the conduct of these trials.
Before receiving FDA clearance to market a product, we must demonstrate that
the product is safe and effective on the patient population that will be
treated. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations that could delay, limit or prevent regulatory
clearances. In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply with applicable
FDA or other applicable regulatory requirements may result in criminal
prosecution, civil penalties, recall or seizure of products, total or partial
suspension of production or injunction, as well as other regulatory action
against our potential products or us. Additionally, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval.
If regulatory clearance of a product is granted, this clearance will be
limited to those disease states and conditions for which the product is
demonstrated through clinical trials to be safe and efficacious. We cannot
ensure that any compound developed by us, alone or with others, will prove to
be safe and efficacious in clinical trials and will meet all of the applicable
regulatory requirements needed to receive marketing clearance.
Outside the United States, our ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the risks
associated with FDA clearance described above.
For additional information concerning regulatory approval of our prospective
products, see "Business--Government Regulation."
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research and development efforts.
We are a small company with approximately 200 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop and
maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense.
In particular, our product development programs depend on our ability to
attract and retain highly skilled chemists and clinical development personnel.
If we lose the services of any of these personnel, in particular, David V.
Goeddel, our Chief Executive Officer, it could impede significantly the
achievement of our research and development objectives. If we fail to negotiate
additional acceptable collaborations with academic institutions and scientists,
or if our existing academic collaborations were to be unsuccessful, our product
development programs may be delayed. In addition, we will need to hire
additional personnel and develop additional academic collaborations as we
continue to expand our research and development activities. We do not know if
we will be able to attract, retain or motivate personnel or maintain
relationships.
The drug discovery methods we employ are relatively new and may not lead to the
development of drugs.
The drug discovery methods we employ based upon gene regulation are
relatively new. We do not know if these methods will lead to the discovery of
commercially viable drugs. None of our cancer product candidates undergoing
clinical testing acts by gene regulation. There is limited scientific
understanding generally relating to gene expression and the role of genes in
complex diseases and relatively few products based on gene discoveries have
been developed and commercialized by drug manufacturers. Even if we are
successful in
9
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identifying the pathways that cells use to control the expression of genes
associated with specific diseases, these discoveries may not lead to the
development of drugs. Furthermore, our drug discovery efforts are focused on a
number of target genes, the functions of which have not yet been fully
identified. As a result, the safety and efficacy of drugs that alter the
expression of these genes have not yet been established. As a result, we cannot
assure you that our research and development activities will result in any
commercially viable products. We expect to continue to in-license or acquire
additional product candidates to augment the results of our internal research
activities, and in-licensed candidates may not prove to be successful.
If we cannot maintain our current corporate collaborations and enter into new
corporate collaborations, our product development could be delayed.
We rely, to a significant extent, on our corporate collaborators to provide
funding in support of our research and to jointly conduct some research and
preclinical testing functions. If any of our corporate collaborators were to
breach or terminate their agreement with us or otherwise fail to conduct the
collaborative activities successfully and in a timely manner, the preclinical
or clinical development or commercialization of the affected product candidates
or research programs could be delayed or terminated. We cannot control the
amount and timing of resources our corporate collaborators devote to our
programs or potential products. In addition, we expect to rely on our corporate
collaborators for commercialization of some of our products.
The continuation of any of our partnered drug discovery and development
programs may be dependent on the periodic renewal of our corporate
collaborations. All of our corporate collaborations have terms of six or fewer
years, which is less than the period required for the discovery, clinical
development and commercialization of most drugs. Each of our corporate
collaboration agreements provides that, upon expiration of a specified period
after commencement of the agreement, the corporate collaborator has the right
to terminate the agreement on short notice, and each corporate collaboration
agreement, other than the agreement with Roche Bioscience, provides that these
terminations do not require cause. Our collaboration with Yamanouchi
Pharmaceutical Co. was terminated by Yamanouchi in November 1996, and our
collaboration with Merck & Co. was terminated by Merck in March 1999. Our
existing corporate collaboration agreements also may terminate before the full
term of the collaborations. Moreover, we may not be able to renew these
collaborations on acceptable terms, if at all. We believe that our Sumitomo
collaboration will expire and not be renewed at the end of its five-year term
in January 2000. Although we are negotiating with Taisho regarding alternative
collaborative opportunities, we believe that Taisho will terminate its current
agreement with us in March 2000. If funding from one or more of our corporate
collaborations were reduced or terminated, including the expected expiration of
the Sumitomo collaboration and termination of the Taisho collaboration, we
would be required to devote additional internal resources to product
development or scale back or terminate some development programs or seek
alternative corporate collaborators.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. If business combinations involving
our corporate collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our corporate collaborations.
Until recently, our corporate collaboration strategy focused on partnering
with pharmaceutical companies to fund our research in gene regulation. Over the
past two years, as our partnered and unpartnered research has led to product
candidates, our corporate collaboration strategy has evolved. In addition to
seeking collaborations for our research-stage programs, we also seek to enter
into collaborations for the development of compounds discovered through our
research and development efforts. The timing of these collaborations may be
linked to clinical results of our product candidates. As a result, we expect
our net spending on research and development to increase significantly and that
our corporate collaborators will fund a smaller percentage of our expenses than
historically.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not be successful.
Our quarterly operating results may fluctuate significantly
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depending on the initiation of new corporate collaboration agreements or the
termination of existing corporate collaboration agreements.
If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. For a
description of programs for which we have retained commercialization rights,
see "Business--Corporate Collaborations." We may take advantage of these
currently retained rights directly or may exploit retained rights through
collaborations with others. The value of these rights, if any, will be largely
derived from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain.
The exploitation of retained commercialization rights requires sufficient
capital; technological, product development, manufacturing and regulatory
expertise and resources; and marketing and sales personnel. We may not be able
to develop or obtain these resources in sufficient quantity or of a sufficient
quality level to enable us to achieve our objectives. To the extent that we are
required to rely on third parties for these resources, failure to establish and
maintain our relationships will affect our ability to realize value from our
retained commercialization rights. If we seek to commercialize products for
which we have retained rights through joint ventures or collaborations, we may
be required to relinquish material rights on terms that may not be favorable to
us. We do not know whether we will be able to enter into any agreements on
acceptable terms, if at all, or that we will be able to realize any value from
our retained commercialization rights.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to successfully develop products.
We expect that significant additional financing will be required in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on terms
favorable to our stockholders or us. We have consumed substantial amounts of
cash to date and expect capital outlays and operating expenditures to increase
over the next several years as we expand our infrastructure and research and
development activities. We may raise this financing through public or private
equity offerings, debt financings or additional corporate collaboration and
licensing arrangements.
We believe that the net proceeds from the offerings, existing cash and
investment securities and anticipated cash flow from existing collaborations
will be sufficient to support our current operating plan through at least the
end of 2001. We have based this estimate on assumptions that may prove to be
wrong. Our future capital requirements depend on many factors that affect our
research, development, collaboration and sales and marketing activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates,
or grant licenses on terms that are not favorable to us. If adequate funds are
not available, we will not be able to continue developing our products.
If our competitors develop and market products that are more effective than
ours, our commercial opportunity will be reduced or eliminated.
Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects or
are less expensive than our product candidates. With respect
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<PAGE>
to our drug discovery programs, other companies have product candidates in
clinical trials to treat each of the diseases for which we are seeking to
discover and develop product candidates. These competing potential drugs are
further advanced in development than are any of our potential products and may
result in effective, commercially successful products. Even if our
collaborators or we are successful in developing effective drugs, our products
may not compete effectively with these products or other successful products.
Our competitors may succeed in developing and marketing products either that
are more effective than those that we may develop, alone or with our
collaborators, or that are marketed before any products we develop are
marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing different but related fields represent substantial
competition. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in drug development and in obtaining regulatory
approvals and greater marketing capabilities than we do. These organizations
also compete with us to:
. attract qualified personnel;
. attract parties for acquisitions, joint ventures or other collaborations;
and
. license the proprietary technology of these institutions that is
competitive with the technology we are practicing.
If our competitors successfully enter into partnering arrangements or license
agreements with academic research institutions, we will then be precluded from
pursuing those specific opportunities. Since each of these opportunities is
unique, we may not be able to find an acceptable substitute.
Because it is difficult and costly to protect our proprietary rights, we cannot
ensure their protection.
Our commercial success will depend in part on obtaining patent protection on
our products and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in these companies' patents.
The degree of future protection for our proprietary rights is uncertain and
we cannot ensure that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
Others may have filed and in the future are likely to file patent
applications covering genes, gene products or therapeutic products that are
similar or identical to ours. We cannot assure you that any patent application
will not have priority over patent applications filed by us. Any legal action
against our collaborators or us claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting us to potential liability for damages, require our
collaborator or us to obtain a license to continue to manufacture or market the
affected products and processes. We cannot predict whether we or our
collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be
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<PAGE>
significant litigation in the industry regarding patent and other intellectual
property rights. If we become involved in litigation, it could consume a
substantial portion of our managerial and financial resources.
We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able to
adequately protect our trade secrets or other proprietary information.
We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. If we are not
able to continue to license this technology on commercially reasonable terms,
our product development and research may be delayed. In addition, we generally
do not control the prosecution of in-licensed technology, and accordingly are
unable to exercise the same degree of control over this intellectual property
as we exercise over our internally developed technology.
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, then our ability to receive patent
protection or protect our proprietary information will be imperiled.
If we are unable to contract with third parties to manufacture our products in
sufficient quantities and at an acceptable cost, we may be unable to meet
demand for our products and lose potential revenues.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We will depend on our
collaborators or third parties for the manufacture of compounds for
preclinical, clinical and commercial purposes in their FDA-approved
manufacturing facilities. Our products may be in competition with other
products for access to these facilities. Consequently, our products may be
subject to delays in manufacture if collaborators or outside contractors give
other products greater priority than our products. For this and other reasons,
our collaborators or third parties may not be able to manufacture these
products in a cost-effective or timely manner. If not performed in a timely
manner, the clinical trial development of our product candidates or their
submission for regulatory approval could be delayed, and our ability to deliver
products on a timely basis could be impaired or precluded. We may not be able
to enter into any necessary third-party manufacturing arrangements on
acceptable terms, if at all. Our current dependence upon others for the
manufacture of our products may adversely affect our future profit margin and
our ability to commercialize products on a timely and competitive basis. In
particular, our current supply of finished product of lometrexol is limited and
may not be sufficient for completion of all phases of clinical development. The
manufacture of lometrexol is complex, and it may be difficult to efficiently
manufacture or to secure an adequate supply of this compound in a timely manner
or on an economical basis. We do not intend to develop or acquire facilities
for the manufacture of product candidates for clinical trials or commercial
purposes in the foreseeable future.
If we are unable to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize products.
We currently have no sales, marketing or distribution capability. In order to
commercialize any products, we must internally develop sales, marketing and
distribution capabilities or make arrangements with a third party to perform
these services. We intend to market some products directly and rely on
relationships with one or more pharmaceutical companies with established
distribution systems and direct sales forces to market other products. To
market any of our products directly, we must develop a marketing and sales
force with technical expertise and with supporting distribution capabilities.
We may not be able to establish in-house sales and distribution capabilities or
relationships with third parties. To the extent that we enter into co-promotion
or other licensing arrangements, our product revenues are likely to be lower
than if we directly marketed and sold our products, and any revenues we receive
will depend upon the efforts of third parties, which efforts may not be
successful.
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<PAGE>
Our ability to generate revenues will be diminished if we fail to obtain
acceptable prices or an adequate level of reimbursement for our products from
third-party payors.
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will limit our commercial
opportunity. For example, in some foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, we expect that there will continue to be a number of federal and state
proposals to implement similar government control. In addition, increasing
emphasis on managed care in the United States will continue to put pressure on
the pricing of pharmaceutical products. Cost control initiatives could decrease
the price that any of our collaborators or we would receive for any products in
the future. Further, cost control initiatives could adversely affect our
collaborators' ability to commercialize our products, and our ability to
realize royalties from this commercialization.
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the extent to which reimbursement for the
products will be available from:
. government and health administration authorities;
. private health insurers; and
. other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Third-party payors, including Medicare, are
challenging the prices charged for medical products and services. Government
and other third-party payors increasingly are attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new drugs
and by refusing, in some cases, to provide coverage for uses of approved
products for disease indications for which the FDA has not granted labeling
approval. Third-party insurance coverage may not be available to patients for
any products we discover and develop, alone or with collaborators. If
government and other third-party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be reduced.
If conflicts arise between our collaborators, advisors or directors and us,
they may act in their self-interest, which may be adverse to your best
interests.
If conflicts arise between us and our corporate or academic collaborators or
scientific advisors, the other party may act in its self-interest and not in
the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with others.
Our collaborators, however, may develop, either alone or with others, products
in related fields that are competitive with the products or potential products
that are the subject of these collaborations. Competing products, either
developed by the collaborators or to which the collaborators have rights, may
result in their withdrawal of support for our product candidates.
Genentech, Inc. is a potential competitor of ours and is also one of our
investors. David V. Goeddel, our Chief Executive Officer and a member of our
Board of Directors, is a consultant to Genentech. Mark J. Levin, a member of
our Board of Directors, is Chairman, President and Chief Executive Officer of
Millennium Pharmaceuticals, Inc., and Grant Heidrich, a member of our Board of
Directors, also serves on the board of directors of Millennium. Millennium has
publicly disclosed that it is pursuing an obesity program that is competitive
with, and may have scientific overlap with, our program.
We may incur significant costs if Year 2000 compliance issues are not properly
addressed.
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. Some of our older computer software programs and equipment are
unable to distinguish between the year 1900 and the year 2000. As a result,
time-sensitive
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<PAGE>
functions of those software programs and equipment may misinterpret dates after
January 1, 2000 to refer to the twentieth century rather than the twenty-first
century. This could cause system or equipment shutdowns, failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations, including inaccurate processing of financial information and/or
temporary inabilities to engage in normal business activities. In addition to
risks associated with our own computer systems and equipment, we have
relationships with, and are to varying degrees dependent upon, a large number
of third parties that provide information, goods and services to us. These
include financial institutions, suppliers, vendors, research partners and
governmental entities.
We have largely completed our assessment of our internal systems affected by
the Year 2000 issue and anticipate that we will not be required to modify or
replace significant portions of our software so that our computer systems will
properly utilize dates past December 31, 1999. We have initiated communications
with our significant suppliers to determine the extent to which we are
vulnerable to those parties' failure to solve their own Year 2000 issues. At
this time, we cannot predict the level of year 2000 readiness with respect to
our significant suppliers. We intend to continue to monitor the progress of
these third parties and will develop contingency plans in the event we become
aware that one or more of these third parties fails to solve their Year 2000
issues in such a way as to affect our operations. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, it could affect our ability to engage in
normal business activities.
Year 2000 issues affecting our business, if not adequately addressed by us,
our significant suppliers and our significant service providers could have a
number of "worst case" consequences. These include the loss of historical data
and our inability to continue our research efforts.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
products.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain
insurance at a reasonable cost, if at all. While under various circumstances we
are entitled to be indemnified against losses by our corporate collaborators,
indemnification may not be available or adequate should any claim arise.
If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and
regulations could be significant.
RISKS RELATED TO THE OFFERINGS
If our officers, directors and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.
Following completion of the offerings, our directors, executive officers and
principal stockholders and their affiliates will beneficially own approximately
41.0% of our common stock, based on their beneficial
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<PAGE>
ownership as of September 30, 1999. Accordingly, they collectively will have
the ability to determine the election of all of our directors and to determine
the outcome of most corporate actions requiring stockholder approval. They may
exercise this ability in a manner that advances their best interests and not
necessarily those of other stockholders.
In particular, Pharma Vision 2000 AG, a closed-end mutual fund investing in
pharmaceutical companies such as Roche, Glaxo and Hoechst, currently owns
approximately 23.5% of our outstanding common stock. Pharma Vision has agreed,
subject to conditions, to purchase directly from us concurrently with the
public offerings additional shares of common stock that would allow it to
maintain its approximate percentage ownership. Peter Sjostrand, a member of our
Board of Directors, and David V. Goeddel, our Chief Executive Officer and a
member of our Board of Directors, are members of the board of directors of
Pharma Vision. Pharma Vision is not a party to any standstill or other
agreement limiting its ability to acquire additional shares of our capital
stock and may in the future, through open market purchases or otherwise,
acquire additional shares of our common stock.
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
These provisions:
. establish that members of the board of directors may be removed only for
cause upon the affirmative vote of stockholders owning at least two-
thirds of our capital stock;
. authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. limit who may call a special meeting of stockholders;
. prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon at
stockholder meetings.
In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.
Our stock price may be volatile, and your investment in our stock could decline
in value.
Prior to this offering, there has been no public market for the common stock
and an active public market for our common stock may not develop or be
sustained after the offerings. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Among the factors to be
considered in determining the initial public offering price of the common
stock, in addition to prevailing market conditions, will be:
. estimates of our business potential and earnings prospects;
. an assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may have a significant impact on the market price of our common stock:
. announcements of technological innovations or new commercial products by
our competitors or us;
. developments concerning proprietary rights, including patents;
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<PAGE>
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disaster or crisis; or
. period-to-period fluctuations in financial results.
If our stockholders sell substantial amounts of our common stock after the
offerings, the market price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. After completion of the offerings, we
will have outstanding 42,221,375 shares of common stock, including 1,633,250
shares sold to Pharma Vision in the direct offering, and assuming no exercise
of outstanding options or warrants after September 30, 1999 and no exercise of
the underwriters' over-allotment options.
We intend to file a registration statement on Form S-8 covering an aggregate
of 6,371,768 shares issuable upon exercise of options to purchase common stock
and common stock reserved for issuance under our stock plans within 90 days
after the effective date of the Registration Statement of which this prospectus
is a part. For an additional description of the eligibility of shares for sale
into the public market following the offerings, see "Shares Eligible for Future
Sale."
The offerings will cause dilution in net tangible book value.
Purchasers in the public offerings and the direct offering will experience
immediate and substantial dilution in the net tangible book value of the common
stock from the initial public offering price. Additional dilution is likely to
occur upon exercise of options and warrants granted by us.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus are forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, are included, for example, in the
discussions about:
. our strategy;
. sufficiency of our cash resources;
. revenues from existing and new collaborations;
. product development;
. our research and development and other expenses;
. our operational and legal risks; and
. Year 2000 issues.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause these differences include, but are not limited to, those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 5,316,750 shares of common stock
in the public offerings are estimated to be $68,224,000 ($78,608,000 if the
underwriters' over-allotment options are exercised in full), at an initial
public offering price of $14.00 per share and after deducting the estimated
underwriting discount and estimated offering expenses. In addition, we will
receive $22,866,000 ($26,295,000 if the underwriters' over-allotment options
are exercised in full and Pharma Vision maintains its 23.5% ownership interest
in us) of additional proceeds if the direct offering to Pharma Vision is
consummated, at an initial public offering price of $14.00 per share. We intend
to use the net proceeds for research and development and general corporate
purposes. We may also use a portion of the net proceeds to acquire or invest in
businesses, products and technologies that are complementary to our own,
although no acquisitions are planned or being negotiated as of the date of this
prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending these uses, the net proceeds will be invested in
investment-grade interest-bearing securities.
The principal purposes of the offerings are to increase our capitalization
and financial flexibility, to provide a public market for our common stock and
to facilitate access to public equity markets. As of the date of this
prospectus we cannot specify with certainty all of the particular uses for the
net proceeds we will have upon completion of the offerings. Accordingly, our
management will have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.
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<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1999. Our capitalization is also presented:
. on a pro forma basis to give effect to the automatic conversion of all of
our preferred stock into an aggregate of 26,953,539 shares of common
stock, which will occur upon the closing of the offerings; and
. on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of 5,316,750 shares of common stock in the public
offerings and 1,633,250 shares of common stock to Pharma Vision in the
direct offering at an initial public offering price of $14.00 per share,
after deducting the estimated underwriting discount and estimated
offering expenses.
<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share amounts)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 10,254 $ 10,254 $ 10,254
Stockholders' equity:
Preferred stock, $0.001 par value, 33,000,000
shares authorized, 26,953,539 shares issued
and outstanding, actual, none issued
pro forma and pro forma as adjusted......... 27 -- --
Common stock, $0.001 par value; 55,000,000
shares authorized; 8,317,836 shares issued
and outstanding, actual; 35,271,375 shares
issued and outstanding, pro forma; and
42,221,375 shares issued and outstanding,
pro forma as adjusted....................... 8 35 42
Additional paid-in capital................... 182,356 182,356 273,439
Notes receivable from stockholders........... (647) (647) (647)
Deferred compensation........................ (5,377) (5,377) (5,377)
Accumulated deficit.......................... (80,811) (80,811) (80,811)
-------- -------- ---------
Total stockholders' equity................. 95,556 95,556 186,646
-------- -------- ---------
Total capitalization..................... $105,810 $105,810 $ 196,900
======== ======== =========
</TABLE>
The number of shares of common stock to be outstanding after the offerings is
based on the number of shares outstanding as of September 30, 1999 and
excludes:
. 5,955,965 shares of common stock underlying options outstanding as of
September 30, 1999 at a weighted average exercise price of $2.23 per
share;
. 1,015,091 shares of common stock underlying warrants outstanding as of
September 30, 1999 at a weighted average exercise price of $10.17 per
share;
. 436,112 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included in this prospectus.
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DILUTION
The pro forma net tangible book value of the common stock as of September 30,
1999 was $95.6 million or $2.71 per share, after giving effect to the automatic
conversion of all outstanding shares of preferred stock into an aggregate of
26,953,539 shares of common stock, which will occur upon the closing of the
offerings. After giving effect to the sale of the common stock in the public
offerings and the direct offering to Pharma Vision at an initial public
offering price of $14.00 per share, assuming that the underwriters' over-
allotment options are not exercised, and after deducting the estimated
underwriting discount and offering expenses, the adjusted pro forma net
tangible book value at September 30, 1999, would have been $186.6 million, or
$4.42 per share.
Pro forma net tangible book value per share before the offerings has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at September 30, 1999. The offerings will result in an increase in
pro forma net tangible book value per share of $1.71 to existing stockholders
and dilution in pro forma net tangible book value per share of $9.58 to new
investors who purchase shares in the public offerings and the direct offering.
Dilution is determined by subtracting pro forma net tangible book value per
share after the public offerings and the direct offering from the initial
public offering price of $14.00 per share. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $14.00
Pro forma net tangible book value per share at September 30,
1999......................................................... $2.71
Increase attributable to new investors........................ 1.71
-----
Pro forma net tangible book value per share after the public
offerings and the direct offering............................ 4.42
------
Dilution in net tangible book value to new investors.......... $ 9.58
======
</TABLE>
If the underwriters' over-allotment options are exercised in full and Pharma
Vision maintains its 23.5% ownership in us, the pro forma net tangible book
value per share after the offerings would be $4.63 per share, the increase in
net tangible book value per share to existing stockholders would be $1.92 per
share and the dilution in net tangible book value to new investors would be
$9.37 per share.
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the total consideration paid and the average
price per share paid by the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us based on an
initial public offering price of $14.00 per share:
<TABLE>
<CAPTION>
Shares Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
New investors................. 6,950,000 16.5% $ 97,300,000 35.7% $14.00
Existing stockholders......... 35,271,375 83.5 175,263,000 64.3 4.97
---------- ----- ------------ -----
Total....................... 42,221,375 100.0% $272,563,000 100.0%
========== ===== ============ =====
</TABLE>
These tables do not assume exercise of stock options and warrants outstanding
at September 30, 1999 and include 515,432 shares subject to repurchase by us at
a weighted average price of $2.01.
At September 30, 1999, there were 5,955,965 shares of common stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $2.23 per share and 1,015,091 shares of common stock issuable upon exercise
of outstanding warrants at a weighted average exercise price of $10.17 per
share.
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SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical consolidated financial data. You should
read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected data in this section is not intended to replace the
consolidated financial statements.
We derived the consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1999 and the consolidated balance sheet data as of December 31, 1997 and 1998
and September 30, 1999 from the audited consolidated financial statements
included in this prospectus. Ernst & Young LLP, our independent auditors,
audited these consolidated financial statements. The consolidated statement of
operations data for the years ended December 31, 1994 and 1995 and the
consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are
derived from our audited financial statements that are not included in this
prospectus. The consolidated statement of operations data for the nine months
ended September 30, 1998 are derived from our unaudited consolidated financial
statements but have been prepared on a basis consistent with our audited
financial statements and the notes thereto and include all adjustments
(consisting only of normal recurring adjustments) that we consider necessary
for a fair presentation of the information. Historical results are not
necessarily indicative of future results. See notes to the consolidated
financial statements for an explanation of the method used to determine the
number of shares used in computing pro forma basic and diluted loss per share.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------ -----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue:
Collaborative research
and development....... $ 5,618 $ 11,124 $ 15,297 $ 20,009 $ 21,362 $ 13,664 $ 17,856
Operating expenses:
Research and
development........... 9,934 13,473 18,622 26,546 33,264 24,149 31,855
Acquired in-process
research and
development........... -- -- -- 18,902 -- -- 3,000
General and
administrative........ 2,219 2,507 3,630 4,020 5,002 3,650 3,903
Amortization of
deferred stock
compensation.......... -- -- -- -- 31 -- 1,720
-------- -------- -------- -------- -------- -------- --------
12,153 15,980 22,252 49,468 38,297 27,799 40,478
-------- -------- -------- -------- -------- -------- --------
Loss from operations.... (6,535) (4,856) (6,955) (29,459) (16,935) (14,135) (22,622)
Interest income, net.... 637 1,249 1,475 4,085 6,396 4,832 3,668
-------- -------- -------- -------- -------- -------- --------
Net loss................ $ (5,898) $ (3,607) $ (5,480) $(25,374) $(10,539) $ (9,303) $(18,954)
======== ======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (2.27) $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
======== ======== ======== ======== ======== ======== ========
Shares used in computing
basic and diluted net
loss per share......... 2,601 3,957 5,034 6,063 6,791 6,666 7,388
======== ======== ======== ======== ======== ======== ========
Pro forma basic and
diluted net loss per
share.................. $ (0.31) $ (0.55)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 33,687 34,314
======== ========
<CAPTION>
December 31,
------------------------------------------------ September 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 22,338 $ 25,181 $ 77,078 $124,406 $119,324 $104,188
Working capital......... 15,236 15,193 69,394 116,527 94,535 84,401
Total assets............ 28,395 29,617 83,409 133,522 136,778 131,026
Long-term obligations,
less current portion... 2,477 1,712 2,128 3,456 4,734 10,254
Deferred compensation... -- -- -- -- (679) (5,377)
Accumulated deficit..... (16,857) (20,464) (25,944) (51,318) (61,857) (80,811)
Total stockholders'
equity................. 18,435 17,753 72,905 120,856 110,898 95,556
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
"Selected Consolidated Financial Data," consolidated financial statements and
related notes included elsewhere in this prospectus.
Overview
Since our founding in November 1991, we have been engaged in the discovery
and development of a broad range of novel, orally available drugs, most of
which act through gene regulation. Our research programs include cancer,
cytomegalovirus, diabetes, obesity, inflammation, immune disorders, high blood
cholesterol levels, known as hypercholesterolemia, and bacterial diseases and a
class of drug targets called orphan nuclear receptors. We have incurred net
losses since inception and expect to incur substantial and increasing losses
for at least the next several years as we expand our research and development
activities. To date, we have funded our operations primarily through the sale
of equity securities, non-equity payments from collaborators and interest
income. As of September 30, 1999, our accumulated deficit was approximately
$80.8 million. We received aggregate research funding under research and
development collaborations between 1995 and September 30, 1999 as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998 1999
----- ----- ----- ----- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Research funding received................. $13.5 $12.5 $20.0 $29.8 $21.0
</TABLE>
We expect our sources of revenue, if any, for the next several years to
consist primarily of payments under corporate collaborations and interest
income. The process of developing our products will require significant
additional research and development, preclinical testing and clinical trials,
as well as regulatory approval. These activities, together with our general and
administrative expenses, are expected to result in substantial operating losses
for the foreseeable future. We will not receive product revenue unless we or
our collaborative partners complete clinical trials, obtain regulatory approval
and successfully commercialize one or more of our products.
In order to accelerate product commercialization and finance research
activities, we are currently engaged in collaborations with leading
pharmaceutical companies as summarized below:
Collaborator Research Program Commencement Date
Knoll Obesity November 1998
Japan Tobacco Orphan Nuclear Receptors September 1998
Roche Bioscience Inflammation July 1997
Japan Tobacco Obesity/Diabetes September 1996
Taisho Immune Disorders April 1995
Sumitomo Hypercholesterolemia January 1995
Under the terms of the collaborations identified above, as of September 30,
1999, our partners had agreed to provide future research funding of up to
approximately $50.7 million over a five-year period as set forth in the table
below, including $33.5 million subject to possible cancellation, as well as
additional payments upon the achievement of specific research and development
milestones and royalties upon commercialization of any products. Research
funding that is payable in the future under existing collaborations was as
follows as of September 30, 1999:
<TABLE>
<CAPTION>
Three Months Year Ending December
Ending 31,
December 31, ----------------------
1999 2000 2001 2002 2003
------------ ----- ----- ----- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Contractual future research funding........ $2.7 $18.0 $14.5 $12.0 $3.5
</TABLE>
23
<PAGE>
Previously, we also had collaborations with Yamanouchi relating to
inflammation (commenced in November 1993, ended in November 1996) and with
Merck relating to viral disease (commenced in December 1993, ended in March
1999). Our collaborations with Sumitomo and Taisho are scheduled to end in
accordance with their terms during 2000 and 2001, respectively. Furthermore,
Taisho has the right to terminate its agreement with us during 2000, prior to
the scheduled expiration of the agreement in 2001. We do not expect the
Sumitomo collaboration to be extended. Although we are negotiating with Taisho
regarding alternative collaborative opportunities, we believe that Taisho will
exercise its contractual right to terminate its current agreement with us in
March 2000. During 1999, we received an aggregate of $6.7 million from these
agreements and from our prior collaboration with Merck. We do not expect to
receive any funding from Sumitomo or Merck and may not receive any further
funding from Taisho during 2000. Accordingly, if we do not enter into new
corporate collaborations, collaborative research and development revenue and
cash received from collaborative partners will decline for the foreseeable
future.
Acquisition
On October 31, 1997, we acquired Amplicon Corp., a research organization
engaged principally in identifying and characterizing human genes involved in
particular cancers. In connection with the acquisition, we issued 1,620,004
shares of preferred stock and warrants to acquire an additional 245,456 shares
of preferred stock in exchange for all of Amplicon's outstanding capital stock.
In addition, all outstanding stock options to purchase Amplicon common stock
were replaced with options and warrants to purchase shares of our preferred
stock. The aggregate value of the consideration issued to the Amplicon
stockholders and option holders was $18.9 million. The acquisition was recorded
using the purchase method of accounting. Accordingly, we allocated the purchase
price to the assets acquired and liabilities assumed based on their estimated
fair values as of the date of acquisition. The operating results of Amplicon
are included in our consolidated statements of operations data from the
effective date of the acquisition.
At the date of the acquisition, Amplicon's sole activity was performing basic
research to identify genes that may result in the development of diagnostic and
therapeutic products for the treatment of cancer. Prior to the acquisition,
Amplicon had discovered over twenty novel genetic regions that are commonly
mutated in human cancers and was actively searching within these regions for
genes that play an important role in the development of cancer. Amplicon's
efforts to identify cancer genes relied heavily on a proprietary methodology,
known as Representational Difference Analysis, that is distinct from other
methods as a result of its ability to identify non-inherited genetic mutations.
The Representational Difference Analysis methodology is specifically applicable
to the discovery of cancer genes, acquired genetic mutations and pathogens and
does not have alternative future uses.
From the date of the acquisition through September 30, 1999, we incurred $6.2
million (less than 9% of total research and development expenses during the
period) of expenses in connection with the effort to discover cancer genes at
Amplicon. We have no plans to significantly change our rate of investment in
the cancer gene discovery project for the foreseeable future. To date, no
products have been developed from this project, technological feasibility has
not been proven and no corporate collaborations have been consummated based on
the research at Amplicon. Accordingly, the future benefits of the ongoing
research remain uncertain. Due to the absence of tangible products from the
research and the uncertainties of the discovery process, we are not able to
precisely predict the time and resources that will be necessary to develop and
obtain regulatory approval for any product that may be discovered using the
acquired methodology.
In order to determine the value of the cancer gene discovery project and the
related methodology at the time of the acquisition, we considered a wide range
of estimates of the time and resources necessary to identify, characterize,
develop and obtain regulatory approval for potential cancer diagnostics and
therapeutics and the related market size and potential cash flows from
developed products. We also considered the risks associated with the
development process, including the inherent difficulties and uncertainties in
successfully developing diagnostic and therapeutic products, thereby achieving
technological feasibility, and the risk related to changes in target markets.
Using this approach, we concluded that the estimated fair value of the acquired
24
<PAGE>
in-process research and development was $21.4 million at the date of
acquisition. Accordingly, the purchase price was allocated to the tangible and
intangible net assets acquired and $18.9 million was expensed as acquired in-
process research and development. We believe this amount did not exceed the
amount a third party would have paid for the project.
License Agreement
On September 24, 1999, we executed a license agreement with Eli Lilly under
which we obtained an exclusive, worldwide, royalty-bearing license to make, use
and sell pharmaceutical products containing a compound known as lometrexol. In
connection with this agreement, we paid $3.0 million to Eli Lilly as an initial
license fee and agreed to pay specified milestones and royalties upon
successful commercialization of lometrexol. Under the agreement, Eli Lilly
granted us a license to its proprietary technology relating to lometrexol, and
also a sublicense under an exclusive license granted to Eli Lilly by Princeton
University relating to lometrexol. Eli Lilly has specified obligations under
the agreement to maintain the license from Princeton. Eli Lilly has the right
to match the material terms of any offer made by a third party to Tularik for
commercialization rights relating to lometrexol products. We may terminate the
agreement with Eli Lilly upon written notice. Eli Lilly may terminate our
license in specified major countries if we fail to use reasonable diligence to
develop lometrexol products in these countries and may terminate the agreement
if we fail to use appropriate diligence to develop lometrexol products in a
predetermined number of major countries. If Eli Lilly terminates the agreement,
Eli Lilly obtains a nonexclusive, royalty-bearing, worldwide license to our
technical improvements to lometrexol.
At the date of the license agreement, lometrexol had completed the first of
three phases of clinical trials required to seek regulatory approval from the
FDA. No trials had been commenced that could have demonstrated, with
statistical significance, the effectiveness of lometrexol as a treatment for
any type of cancer. These trials, necessary to establish the technological
feasibility of lometrexol, will not be completed for at least several years. In
addition, lometrexol has no known alternative future uses. Accordingly, the
initial license payment was allocated to acquired in-process research and
development and expensed at the time of the agreement.
Stock Compensation
During the year ended December 31, 1998 and the nine months ended September
30, 1999, in connection with the grant of stock options to employees, we
recorded deferred stock compensation totaling $7.1 million, representing the
difference between the deemed fair value of our common stock for financial
reporting purposes on the date these options were granted and the exercise
price. This amount is included as a reduction of stockholders' equity and is
being amortized over the vesting period of the individual options, generally
four years, using the graded vesting method. The graded vesting method provides
for vesting of portions of the overall award at interim dates and results in
higher vesting in earlier years than straight-line vesting. We recorded
amortization of deferred stock compensation of $31,000 for the year ended
December 31, 1998 and $1.7 million for the nine months ended September 30,
1999. At September 30, 1999, we had a total of $5.4 million remaining to be
amortized over the vesting periods of the stock options. We anticipate that
additional deferred compensation will be recorded for options granted after
September 30, 1999. You should read Note 2 of notes to consolidated financial
statements.
Results of Operations
Nine Months Ended September 30, 1999 and 1998
Collaborative research and development revenue. Collaborative research and
development revenue was $17.9 million for the nine months ended September 30,
1999, compared with $13.7 million during the nine months ended September 30,
1998. The increase in 1999 was principally attributable to revenue from new
corporate collaboration agreements signed in the second half of 1998. These
included agreements with Japan
25
<PAGE>
Tobacco in the area of orphan nuclear receptors and with Knoll in obesity. The
effect of these new agreements was partially offset by lower revenue from the
collaboration with Merck, which ended in March 1999. We expect collaborative
research and development revenue to decline for the foreseeable future as
existing collaborations expire at the end of their terms. We believe that our
Sumitomo collaboration will expire and not be renewed at the end of its five-
year term in January 2000. Although we are negotiating with Taisho regarding
alternative collaborative opportunities, we believe that Taisho will exercise
its contractual right to terminate its current agreement with us in March 2000.
Until recently, our corporate collaboration strategy focused on funding
research in gene regulation. Over the past two years, as this research has led
to product candidates, our corporate collaboration strategy has evolved. In
addition to seeking corporate collaborations for our research-stage programs,
we also seek to enter into collaborations for the development of compounds
discovered through our research and development efforts. The timing of these
collaborations may be linked to clinical results of our product candidates.
Research and development expenses. Research and development expenses were
$31.9 million for the nine months ended September 30, 1999, compared with $24.1
million during the nine months ended September 30, 1998. This increase was
primarily attributable to increases in employee costs, clinical and preclinical
costs and higher occupancy costs associated with a second building at our South
San Francisco, California facility, which we occupied in January 1999. We
expect research and development expenses to increase significantly in future
periods, particularly as new and existing product candidates advance into later
stages of development. Additionally, we expect that corporate collaborations
will fund a smaller percentage of our research and development expenses than
historically.
Acquired in-process research and development was written off during the nine
months ended September 30, 1999 in connection with the license agreement we
executed with Eli Lilly, which was effective September 24, 1999. You should
read Note 7 of the notes to consolidated financial statements.
General and administrative expenses. General and administrative expenses were
$3.9 million for the nine months ended September 30, 1999, compared with $3.7
million during the nine months ended September 30, 1998. This increase was
primarily attributable to higher employee and occupancy costs. We expect that
general and administrative expenses will increase in the future to support
continued growth of our research and development efforts and to accommodate new
demands associated with operating as a public company.
Amortization of deferred compensation. Amortization of deferred stock
compensation was $1.7 million for the nine months ended September 30, 1999.
There was no amortization of deferred stock compensation for the nine months
ended September 30, 1998. We recorded aggregate deferred stock compensation of
$7.1 million in the period from October 1, 1998 through September 30, 1999 for
options awarded to employees with exercise prices below the deemed fair value
for financial reporting purposes of our common stock on their respective grant
dates.
Interest income, net. Net interest income was $3.7 million for the nine
months ended September 30, 1999, compared with $4.8 million during the
corresponding period in 1998. The decrease in net interest income resulted from
lower average interest-bearing balances and higher debt balances during the
1999 period.
Years Ended December 31, 1998, 1997 and 1996
Collaborative research and development revenue. Collaborative research and
development revenue was $21.4 million in 1998, compared with $20.0 million in
1997 and $15.3 million in 1996. The increase in 1998 was principally
attributable to revenue from new collaboration agreements signed in 1998 with
Japan Tobacco in the area of orphan nuclear receptors and Knoll in obesity. The
increase in 1997 compared with 1996 was primarily due to a new collaboration
with Roche Bioscience to provide funding for our inflammation program after the
termination by Yamanouchi and the first full year of our collaboration with
Japan Tobacco in obesity/diabetes. These factors were partially offset by the
termination by Yamanouchi in November 1996 of its collaboration with us in the
inflammation area, which had accounted for $4.7 million of collaborative
research and development revenue during 1996.
26
<PAGE>
Research and development expenses. Research and development expenses were
$33.3 million in 1998, compared with $26.5 million in 1997 and $18.6 million in
1996. The increase in 1998 was primarily attributable to increases in employee
costs and clinical and preclinical development expenses as we added a research
program in the area of orphan nuclear receptors, acquired Amplicon and
increased the level of resources committed to existing research efforts.
Employee costs and development expenses also contributed to the increase in
research and development expenses in 1997 as compared with 1996. In addition,
1997 was our first full year in a new facility in South San Francisco,
California, which we occupied in April 1996 to accommodate our growth. This new
facility led to higher occupancy costs in 1997 than we incurred in 1996.
Acquired in-process research and development of $18.9 million was written-off
during 1997 in connection with our acquisition of Amplicon, which was effective
October 31, 1997. You should read Note 6 of the notes to consolidated financial
statements.
General and administrative expenses. General and administrative expenses were
$5.0 million, $4.0 million and $3.6 million in 1998, 1997 and 1996,
respectively. These increases reflected higher employee costs associated with
growth of most functional areas in support of our expanding research and
development activities. During this three-year period, general and
administrative expenses increased an aggregate 39% compared with 79% growth in
research and development expenses.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation was $31,000 in 1998. There was no amortization of deferred stock
compensation in 1997 and 1996. In 1998, we recorded deferred stock compensation
of approximately $710,000 for options awarded to employees with exercise prices
below the deemed fair value for financial reporting purposes of our common
stock on their respective grant dates.
Interest income, net. Net interest income was $6.4 million, $4.1 million and
$1.5 million in 1998, 1997 and 1996, respectively. These increases were due
primarily to sequentially higher interest-bearing balances as a result of
preferred stock financings in 1997 and 1996.
Liquidity and Capital Resources
Since inception, our primary sources of funds have been the sale of equity
securities, non-equity payments from collaborators and interest income. As of
September 30, 1999, we had raised $161.1 million from the sale of equity
securities, including $13.0 million from collaborators, and received $108.3
million in non-equity payments from collaborators. Aggregate interest income
earned since our inception was $21.5 million through September 30, 1999.
We had cash, cash equivalents and marketable securities of $104.2 million at
September 30, 1999, a decrease of $15.1 million from December 31, 1998. Cash
used in operations during the nine months ended September 30, 1999 was $11.6
million. Cash used to purchase a restricted investment in connection with a
secured financing arrangement was $4.0 million. Cash used for purchases of
equipment and leasehold improvements totaled $8.5 million during the nine
months ended September 30, 1999. Cash received from equipment financing during
the nine months ended September 30, 1999 was $10.1 million. The annual interest
rates of these financings ranged from 9.0% to 12.0% and the financing
arrangements have terms of approximately 4 years each. As of September 30,
1999,we had $2.9 million available under equipment financing arrangements,
which we expect to utilize in 2000. Repayments of long-term obligations totaled
$2.5 million during the nine months ended September 30, 1999. Cash received
from stock option exercises during the nine months ended September 30, 1999 was
$1.4 million. We expect operating spending to increase in the future as we
expand operations to support the development of new and existing product
candidates while capital spending is expected to decrease moderately from 1999
levels now that leasehold improvements in our second building have been
completed.
During the three year period ended December 31, 1998, cash used in operating
and investing activities was $10.5 million and $70.7 million, respectively.
Uses of cash in operating activities were primarily to fund net
27
<PAGE>
losses, excluding noncash charges. Uses of cash in investing activities
included $58.9 million used for net purchases of available-for-sale securities,
$9.2 million for capital expenditures, $2.0 million in purchases of long-term
investments and $500,000 related to the acquisition of Amplicon. Financing
activities provided cash of $116.5 million during the three year period ended
December 31, 1998. This amount represented primarily proceeds from the sale of
equity securities.
Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. We believe that our existing cash and investment
securities and anticipated cash flow from existing collaborations together with
the net proceeds of the public offerings and the direct offering to Pharma
Vision will be sufficient to support our current operating plan through at
least the end of 2001. We have based this estimate on assumptions that may
prove to be wrong. Our future capital requirements will depend on many factors,
including:
. the progress of our research activities;
. the number and scope of our research programs;
. the progress of our preclinical and clinical development activities;
. the progress of the development efforts of our collaborators;
. our ability to establish and maintain current and new collaboration and
licensing arrangements;
. our ability to achieve our milestones and receive funding under
collaboration arrangements;
. the costs involved in enforcing patent claims and other intellectual
property rights;
. the costs and timing of regulatory approvals; and
. the costs of establishing sales, marketing and distribution capabilities.
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least several years, we expect to finance future cash needs
through the sale of equity securities, strategic collaborations and debt
financing as well as interest income earned on cash balances. We cannot assure
you that additional financing or collaboration and licensing arrangements will
be available when needed or that, if available, this financing will be obtained
on terms favorable to us or our stockholders. Insufficient funds may require us
to delay, scale back or eliminate some or all of our research or development
programs, to lose rights under existing licenses or to relinquish greater or
all rights to product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose or may adversely affect our
ability to operate as a going concern. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result.
Our cash and investments policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high credit-
quality issuers.
As of September 30, 1999, we had federal net operating loss carryforwards of
approximately $54.2 million to offset future taxable income. We also had
federal research and development tax credit carryforwards of approximately $3.9
million. If not utilized, net operating loss and credit carryforwards will
begin to expire in 2007. Utilization of the net operating losses and credits
may be subject to a substantial annual limitation due to ownership change
limitations provided by the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of our net operating losses and credits
before they can be used. You should read Note 13 of notes to consolidated
financial statements.
Year 2000 Compliance
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. Some of our older computer software programs and
28
<PAGE>
equipment are unable to distinguish between the year 1900 and the year 2000. As
a result, time-sensitive functions of those software programs and equipment may
misinterpret dates after January 1, 2000 to refer to the twentieth century
rather than the twenty-first century. This could cause system or equipment
shutdowns, failures or miscalculations resulting in inaccuracies in computer
output or disruptions of operations, including inaccurate processing of
financial information and/or temporary inabilities to engage in normal business
activities. In addition to risks associated with our own computer systems and
equipment, we have relationships with, and are to varying degrees dependent
upon, a large number of third parties that provide information, goods and
services to us. These include financial institutions, suppliers, vendors,
research partners and governmental entities.
We have largely completed our assessment of our internal systems affected by
the Year 2000 issue and anticipate that we will not be required to modify or
replace significant portions of our software so that our computer systems will
properly utilize dates past December 31, 1999. We have initiated communications
with our significant suppliers to determine the extent to which we are
vulnerable to those parties' failure to solve their own Year 2000 issues. At
this time, we cannot predict the level of Year 2000 readiness with respect to
our significant suppliers. We intend to continue to monitor the progress of
these third parties. We have developed contingency plans to address potential
third party Year 2000 problems. These contingency plans include the procurement
of additional back-up power for our facilities in case of power outages,
selection of alternative suppliers for particular supplies if these supplies
become unavailable, and alternative methods of payment to suppliers and
employees if our payment systems become temporarily inoperable. If significant
numbers of these third parties experience failures in their computer systems or
equipment due to Year 2000 non-compliance, it could affect our ability to
engage in normal business activities. We have incurred $75,000 of expenses to
date to address various Year 2000 issues.
If we, our customers, our providers of hardware and software, or our third-
party computer network providers fail to remedy any Year 2000 issues, the
reasonably likely worst case scenario would be the loss of historical data and
interruption of our research programs, which could have a material adverse
effect on our business, financial condition and results of operations by
causing a significant number of operational inconveniences and inefficiences
that may divert our time and attention and financial and human resources from
our ordinary research and business activities. Presently we are unable to
quantitatively estimate the duration and extent of any interruption, or
estimate the effect these interruptions may have on our future revenue.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash equivalents
and investments that have maturities of less than two years. We maintain a non-
trading investment portfolio of investment grade, liquid debt securities that
limits the amount of credit exposure to any one issue, issuer or type of
instrument. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are therefore subject to interest rate
risk. We currently do not hedge interest rate exposure. If market interest
rates were to increase by 100 basis points, or 1%, from September 30, 1999
levels, the fair value of our portfolio would decline by approximately
$356,000. The modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest rates and
assumes ending fair values include principal plus accrued interest.
29
<PAGE>
BUSINESS
Overview
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address large commercial markets, include
cancer, cytomegalovirus, diabetes, obesity, inflammation, immune disorders,
high blood cholesterol levels, known as hypercholesterolemia, bacterial
diseases and a class of drug targets called orphan nuclear receptors because
their exact function is unknown and they are located within the nucleus of the
cell. We have diversified our drug discovery and development efforts not only
across a large number of diseases, but also across multiple promising targets
and drug candidates for these diseases.
Background
Small Molecule Drugs. Because small molecule drugs are generally administered
orally, they remain the preferred treatment for most diseases, and are
particularly appropriate for the treatment of chronic diseases requiring the
daily administration of medications over many years. Historically, the
opportunity to commercialize small molecule drugs has been limited by the
difficulty inherent in discovering safe and effective small molecule
therapeutics.
Molecular Biology Revolution. Groundbreaking advances in molecular biology in
the late 1970s expanded the range of drug treatment options beyond small
molecule drugs. Early biotechnology companies, such as Amgen and Genentech,
capitalized on these scientific advances by utilizing the coding elements of
genes to produce protein therapeutics. Unlike many small molecule drugs,
protein therapeutics must be given by injection. Dr. David V. Goeddel, our
Chief Executive Officer, was instrumental in the discovery and
commercialization of numerous therapeutic proteins at Genentech, including
human insulin, growth hormone and tissue plasminogen activator. These advances
in molecular biology led to other protein, DNA and gene related approaches.
More recently, chemistry-based drug development disciplines have been directed
toward finding small molecule drugs that interact with specific molecular
targets to achieve a desired therapeutic effect.
Gene Expression. The human body is composed of specialized cells that perform
different functions and are organized into tissues and organs. All cells in the
human body contain the same set of approximately 100,000 genes, referred to as
the human genome. Approximately 10% of the total number of genes are activated,
or expressed, in an individual human cell, and different subsets of genes are
activated in distinct cell types. Most genes direct the production of specific
proteins through a two-step decoding process, resulting in the production of
approximately 10,000 different proteins in a typical cell. Proteins, such as
hormones, enzymes and receptors, carry out critical biological functions. Gene
activation is known as gene expression, and the selective activation of
different subsets of genes in distinct cell types is referred to as
differential gene expression. All functions of cells, tissues and organs are
controlled by differential gene expression. As an example, cells in the
pancreas known as beta cells make large amounts of the insulin protein, which
is secreted and which circulates throughout the body, regulating glucose
metabolism. The exclusive production of insulin by these cells reflects the
fact that its encoding gene, the insulin gene, is expressed only in these
specialized cells. In all other cells of the body, the insulin gene is not
expressed. Differential gene expression results in the carefully controlled, or
regulated, production of functional proteins, such as insulin.
Regulation of Gene Expression. Central to the process of differential gene
expression are the regulatory elements of genes that are responsible for
determining when and where in the body a gene is expressed, or switched on. The
regulatory elements of genes operate by interacting with a specialized category
of proteins called transcription factors, which are responsible for turning the
genes on and off. In addition, the activities of transcription factors are
themselves controlled by a network of gene regulation pathways composed of
proteins. Transcription factors and the other proteins in this network of gene
regulation pathways represent potential targets for therapeutic intervention,
or drug discovery targets, because of their potential to switch genes on and
off. These protein targets reside inside the cell.
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The Role of Gene Regulation in Disease. When one or more steps in a normal
cellular pathway is upset or blocked, disrupting the normal balance or function
of essential proteins, disease may occur. This disruption can occur because of
an intrinsic defect, a harmful environmental stimulus or a combination of both.
Intrinsic defects arise from mutations in particular genes, which can either
affect the level of gene expression or alter the protein that is produced.
Inappropriate gene regulation, resulting in overexpression or underexpression
of a protein or group of proteins, plays an important role in numerous
diseases, including cardiovascular disease, inflammation and immune disorders
and metabolic diseases such as obesity and diabetes. Furthermore, infectious
agents, such as bacteria and viruses, rely on gene regulation to survive and
proliferate in the human body.
The Regulation of Genes with Small Molecule Drugs. Commencing in the 1970s, a
pioneering group of academic scientists, including Drs. Steven L. McKnight and
Robert Tjian, two of our founders, directed their research towards
understanding the regulatory elements of genes in order to clarify the
mechanisms responsible for turning genes on and off. The results of this
research suggested an approach to discovering novel drugs that target these
gene regulatory mechanisms that are within the cell, or intracellular. Protein
therapeutics are inappropriate for these targets because they are not small
molecules and therefore cannot penetrate the cell. By contrast, small molecules
are ideally suited for stimulating or inhibiting the function of intracellular
targets.
Tularik Advantage
We are a pioneer in the application of gene regulation biology to drug
discovery. Our drug discovery platform is directed toward the discovery of gene
regulating pathways and orally available drugs that act on these pathways. We
believe that our understanding of gene regulation, the strength of our
scientific and management team and the efficiencies captured through our
integrated drug discovery and development platform place us in a leading
position to discover, develop and commercialize novel, orally available drugs.
Advantages of Gene Regulation Approach. Approaches to drug discovery that
seek drug targets through the random sequencing of portions of the human genome
generally do not lead to an understanding of the relevance of discovered genes
as drug targets. Similarly, the identification of genes or proteins without an
understanding of the pathways by which they operate may not permit
identification of the optimal point of pharmaceutical intervention. In
contrast, our approach based on gene regulation permits the identification of
multiple targets within a pathway or subpathway that regulates genes and
increases the likelihood that we will be able to identify the optimal target
for effective therapeutic intervention. The potential to regulate the part of
the pathway that causes a specific disease without impacting other parts of the
same pathway that perform other functions may allow us to develop drugs that
have fewer side effects than less specific drugs. Many intracellular targets
associated with gene regulation pathways are well suited for small molecule,
orally available drugs. In addition, we believe that understanding the
mechanism of action of drug candidates that act by gene regulation may allow us
to select clinical indications and design clinical trials that have more
predictable results than has typically been the case. Finally, gene regulation
is fundamental to the development or progression of most diseases and,
therefore, may have broad applicability.
Integrated Drug Discovery and Development Platform. We have developed a drug
discovery and development infrastructure that we believe positions us to become
a leading pharmaceutical company. Our drug discovery and development expertise
includes molecular biology, biochemistry, structural biology, chemistry,
pharmacology and human testing. Our management team has extensive drug
discovery and development experience with large pharmaceutical companies. To
complement our internal capabilities, we collaborate with world-renowned
scientists and clinicians and with leading pharmaceutical companies. We believe
that our integration of biology, chemistry and pharmacology enhances our
ability to find novel gene regulating drugs and that our drug discovery and
development efforts are highly efficient and productive. To date, we have:
. identified numerous novel proteins that regulate the expression of
disease-causing genes;
. established more than 80 automated drug testing systems, known as high
throughput screening assays, that mimic the diseases addressed by our
programs;
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. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 14 drug leads, seven of which are being optimized by chemists;
. identified one cytomegalovirus drug candidate that is undergoing
preclinical testing consisting of animal studies designed to determine
the feasibility of human testing;
. identified one cancer drug candidate for which an Investigational New
Drug application has been approved by the FDA;
. identified one cancer drug candidate that is undergoing human testing
designed to determine safety, known as phase 1 clinical trials; and
. obtained a license for a cancer drug candidate that has completed phase 1
clinical trials and that we expect to enter human testing designed to
determine efficacy, known as phase 2 clinical trials, during 2000.
Clinical Candidates. We have commenced, or are preparing for, human testing
of three cancer drug candidates: lometrexol, T138067, which we refer to as T67,
and T900607, which we refer to as T607. Our most advanced drug candidate, which
we recently licensed from Eli Lilly, is called lometrexol. The utility of
cancer drugs like lometrexol has been proven by methotrexate, a drug that has
been used extensively in the treatment of several tumor types. We expect to
commence phase 2 clinical trials of lometrexol in 2000. T67 acts on the same
protein targeted by the cancer drugs Taxol and vincristine. In contrast to
these drugs, T67 retains its activity against tumor cells that are multiple
drug resistant and is able to enter the brain. We have enrolled 29 patients in
phase 1 trials of T67 to date. Pending successful completion of these trials,
we will initiate phase 2 clinical trials of T67 in several tumor types,
including brain tumors. T607 is an analog of T67, has the same target and is
similarly active against multiple drug resistant tumors. Animal studies
indicate that T607 is distinct from T67 because T607 has a reduced ability to
enter the brain, which may make it suitable for the treatment of different
tumor types than T67. We recently received approval of an Investigational New
Drug application for T607.
Attractive Commercial Opportunities. Our programs address cancer,
cytomegalovirus, diabetes, obesity, inflammation, immune disorders, high blood
cholesterol levels, known as hypercholesterolemia, bacterial diseases and a
class of drug targets called orphan nuclear receptors because their exact
function is unknown and they are located within the nucleus of the cell. These
programs offer potential opportunities to develop drugs for many therapeutic
indications. The significant unmet medical and quality-of-life needs for these
diseases represent large commercial markets. We intend to commercialize drugs
independently and through collaborations with pharmaceutical partners, and to
date we have retained significant rights to independently market products
resulting from most of our programs. The breadth of our current activities and
the potential for the application of our platform to additional diseases
reduces the risks associated with drug discovery, development and
commercialization.
Our Strategy
Our objective is to build a world-class pharmaceutical company that
discovers, develops and commercializes novel and superior drugs that act by
gene regulation. The key elements of our scientific and business strategy to
achieve our objective are:
Emphasize scientific excellence across our multidisciplinary drug discovery
and development platform. We intend to build on the excellence in biology
embodied in our target discovery, assay development and screening capabilities
by continuing to integrate high quality efforts in structural biology,
chemistry, pharmacology and preclinical and clinical development. We plan to
add management and technical expertise at each stage of our growth. Important
components of our strategy include entering into collaborations with leading
academic scientists and pharmaceutical companies and internally developing and
in-licensing state-of-the-art technologies as needed.
Focus on diseases representing large market opportunities with significant
unmet medical needs. Our drug discovery efforts generally target diseases that
represent large commercial opportunities and that are
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underserved by available therapeutic alternatives. Shortcomings of currently
available treatments may include limited efficacy, side effects or method of
delivery. In particular, we believe that orally available drugs that treat
disease with a high degree of specificity without these shortcomings will have
strong commercial potential.
Develop orally available small molecule drugs. Our drug discovery and
development efforts focus on orally available small molecule drugs. The major
advantage of small molecule therapeutics is the potential for oral
administration. In addition, these drugs can be manufactured by conventional
methods, resulting in lower manufacturing costs and higher margins than for
other types of drugs, such as protein therapeutics.
Increase likelihood of commercial success through diversification. To reduce
the risks inherent in drug discovery and development and our reliance on any
one of our programs, we have diversified our drug discovery and development
efforts by pursuing a large number of diseases and multiple promising targets
and drug candidates for these diseases. Where appropriate, we intend to pursue
product candidates that act through mechanisms of action other than gene
regulation.
Sustain a pipeline of drug candidates and accelerate drug development. We
expect our productive and efficient drug discovery and development platform,
coupled with the breadth of our programs, to consistently yield a large number
of drug candidates. We subject each product candidate to rigorous preclinical
scrutiny and determine its mechanism of action before we enter clinical trials.
This enables us to obtain the best drug candidate for each indication and to
focus financial resources only on drug candidates that we believe are the most
likely to become drugs. We may be able to accelerate approval and
commercialization by developing a detailed understanding of our products'
characteristics, which may enable us to select optimal clinical indications and
design the most appropriate clinical trials. We intend to augment our internal
discovery and development efforts by obtaining licenses to promising clinical
candidates.
Commercialize pharmaceuticals in selected markets. We intend to build a
world-class pharmaceutical company with the objective of bringing to market
novel and superior drugs that are proprietary to us. In North America, we
intend to develop a focused sales force to market products to specialty
physicians. We intend to seek corporate collaborations or joint ventures for
drugs prescribed by general practice physicians or a large number of
specialists. In addition, we also intend to continue to selectively collaborate
with pharmaceutical and biotechnology companies to accelerate product
commercialization in Asia and possibly Europe. Currently, five corporate
partners fund significant portions of six of our programs. We have retained
worldwide commercialization rights to our cancer, bacterial diseases and
cytomegalovirus programs and North American commercialization rights in four of
our externally funded programs.
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Product Development
Our drug discovery and development system is broadly applicable to a wide
range of diseases. We have applied this system to diseases that represent large
medical markets with significant patient populations that are underserved by
current therapeutic products. Our pipeline includes two cancer drug candidates
in clinical testing, one cancer drug candidate for which an Investigational New
Drug application has been approved, one preclinical cytomegalovirus drug
candidate and 14 drug leads in our other programs. The following table
summarizes key information in our nine programs:
<TABLE>
<CAPTION>
Program Status (1) Key Achievements
- -------------------------------------------------------------------------------
<C> <C> <S>
Cancer
Lometrexol Preparing for phase 2 Licensed from Eli Lilly a
clinical trials drug candidate with phase 1
clinical responses in a
range of human tumors.
T67 Phase 1 clinical trials Discovered an agent that
binds to a clinically
proven cancer target and
inhibits growth of multiple
drug resistant tumors in
animals.
T607 Investigational New Drug Generated second-generation
application approved analog of T67 that may have
advantages for treating
particular types of tumors.
- -------------------------------------------------------------------------------
Cytomegalovirus Preclinical Development Discovered compounds that
are orally active in animal
models of human
cytomegalovirus infection
and plan to file an
Investigational New Drug
application in 2000.
- -------------------------------------------------------------------------------
Diabetes Lead Optimization Identified compounds with
activity in animal models
predictive of anti-diabetic
efficacy.
- -------------------------------------------------------------------------------
Obesity Lead Optimization Discovered a series of
compounds that increase the
circulating level of a
protein that causes weight
loss in animals.
- -------------------------------------------------------------------------------
Inflammation Lead Optimization Elucidated key gene
regulation pathways and
discovered numerous
proteins involved in
inflammatory gene
regulation. Identified a
lead compound that inhibits
expression of inflammatory
response genes in animal
models.
- -------------------------------------------------------------------------------
Immune Disorders Lead Optimization Discovered and validated
two human transcription
factors as targets for
allergy/asthma and
autoimmune diseases.
Identified a series of
compounds that inhibit the
human transcription factor
that is a target for
allergy/asthma.
- -------------------------------------------------------------------------------
Hypercholesterolemia Lead Optimization Identified lead compounds
that lower cholesterol in
animals. Discovered
regulatory pathways
involved in cholesterol
metabolism.
- -------------------------------------------------------------------------------
Bacterial Diseases Lead Optimization Identified a series of
compounds that demonstrate
antibacterial activity and
confirmed protein target
using genetic techniques.
- -------------------------------------------------------------------------------
Orphan Nuclear Receptors Lead Optimization Discovered two nuclear
receptors. Developed novel
biochemical screening
technology to identify
nuclear receptor
modulators. Identified lead
series and initiated
chemistry.
</TABLE>
- --------
(1) "Lead Optimization"
Ongoing chemistry effort to improve potency, toxicity,
specificity and/or other properties of drug leads.
Evaluation of drug leads in relevant models.
"Preclinical Development"
Pharmacology and toxicology testing in preclinical models
to gather data necessary to comply with applicable
regulatory protocols prior to submission of an
Investigational New Drug application to the FDA.
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Cancer
Cancer is a group of diseases characterized by uncontrolled growth and
proliferation of abnormal cells. This growth ultimately invades vital organs
and often results in death. The worldwide market for branded cancer drugs
totaled approximately $7.8 billion in 1998 and is projected to grow at an 8.5%
compound annual growth rate. Cancer is the second leading cause of death in the
United States, exceeded only by cardiovascular disease. In 1999, it is
estimated that 1.22 million people will be diagnosed with cancer, and more than
550,000 patients will die of cancer. The five-year survival rates for patients
with metastatic cancers, or cancers that have spread from the primary tumor,
are poor; for example: 13% for colorectal cancer, 12% for lung cancer and 21%
for breast cancer. These poor survival rates reflect the limitations of current
treatments and the fact that cancers develop resistance to currently available
treatments. In addition, current treatments are often associated with severe
side effects. As a result, there is a medical need for the development of more
effective and less toxic treatments.
We currently have three drug candidates in our cancer program.
Lometrexol. We have licensed a cancer drug candidate known as lometrexol from
Eli Lilly. Lometrexol is an antifolate. Antifolates, which disrupt the
synthesis of DNA, have been validated for use in the treatment of cancer. For
example, methotrexate, which acts by a mechanism of action similar to that of
lometrexol, has been used extensively in the treatment of breast, bladder and
head and neck cancers. Eli Lilly conducted phase 1 trials of lometrexol both
with and without folic acid supplementation. Several deaths were observed in
phase 1 trials of lometrexol. However, patients treated with lometrexol who
received oral supplementation with folic acid demonstrated greatly improved
tolerance to the drug.
During the course of phase 1 clinical trials, Eli Lilly observed a total of
five partial responses and one complete response in different tumor types and
in different centers. Partial responses were noted for patients with melanoma,
breast cancer, soft tissue sarcoma, ovarian cancer and non-small cell lung
cancer. Despite the fact that it is unusual to see complete responses in phase
1 clinical trials because patients enrolling in these trials tend to be heavily
pre-treated and are typically at an advanced stage in the progression of their
disease, Eli Lilly noted a complete response lasting more than 18 months in a
patient with head and neck cancer.
We anticipate that we will commence phase 2 clinical trials of lometrexol in
2000. We have not yet selected the five or six tumor types to be treated during
phase 2 clinical trials, but we expect the trials will include melanoma and
soft tissue sarcoma patients. The primary endpoint of these studies will be
efficacy, as assessed by response rate.
T67. Our scientists have discovered T67, a cancer compound that binds
irreversibly to tubulin, the cellular building block of microtubules, which are
essential to cell division. T67 disrupts microtubule function, causing the cell
to die and potentially resulting in tumor shrinkage. Since cancer cells divide
more rapidly than normal cells and microtubules are essential for cell
division, cancer cells are more sensitive than normal cells to treatment with
T67. This concept has been proven clinically by other tubulin-active agents
such as Taxol and vincristine; however, over time, many tumors become resistant
to these drugs.
T67 causes tumor shrinkage in a variety of human tumors implanted into mice.
T67 retains its activity against those tumors and cell lines that are multiple
drug resistant. In contrast, these multiple drug resistant cells and tumors
were resistant to Taxol and doxorubicin. T67 demonstrates enhanced activity
when used in combination with cisplatin against the MX-1 mammary tumor
implanted into mice. T67 is currently in phase 1 clinical trials. A total of
four studies based on varying dosing regimens are either ongoing or planned at
major medical centers in the United States. To date, we have enrolled 29
patients and have observed a dose-limiting toxicity of neuropathy in one
patient at the highest administered dose. We expect to continue to enroll
additional patients at a lower dose level. This lower dose results in drug
levels that are sufficient to induce anti-tumor activity in animals. We expect
that data from the phase 1 clinical trials establishing a phase 2 infusion dose
and schedule will be available in 2000. Assuming that a tolerable dose and
schedule can be identified for
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repeat administration, we expect to initiate a number of phase 2 clinical
trials to determine anti-tumor activity. We expect to conduct one of these
trials in glioblastoma, a type of brain cancer, exploiting the ability of T67
to enter the brain. In the event that T67 has sufficient activity in refractory
tumor types for which no other treatment exists, T67 would be a potential
candidate for accelerated approval by the FDA.
T607. In November 1999, we received approval of an Investigational New Drug
application for T607, an analog of T67. This drug also binds irreversibly to
tubulin. Animal studies indicate that T607 is different from T67 in that T607
may be given by rapid injection, or bolus, and also has a reduced propensity to
enter the brain. This may be a desirable feature for treatment of peripheral
tumors. We intend to evaluate three different dosing schedules of T607 in phase
1 clinical trials.
Cancer Gene Discovery. We seek to discover cancer genes using a proprietary
technique known as Representational Difference Analysis. Representational
Difference Analysis works by sampling DNA from healthy and diseased cells from
the same person, and rapidly comparing the samples to identify mutant cancer
genes. Representational Difference Analysis does not require either prior
hereditary clues or an extensive sample collection from high-risk families that
have a history of disease. Prior to the time we obtained a license to this
technology, Representational Difference Analysis was utilized to isolate two
tumor suppressor genes, BRCA2 and PTEN.
Cytomegalovirus
Cytomegalovirus is a common virus that causes serious infection in patients
with compromised or immature immune systems, particularly transplant
recipients, AIDS patients and infants born to cytomegalovirus-infected mothers.
In the bone marrow and solid organ transplant population, cytomegalovirus can
cause life-threatening pneumonia. In the AIDS patient population, retinitis
caused by cytomegalovirus is the primary cause of blindness. Cytomegalovirus
infection in newborns can cause death or severe neurological damage, typically
deafness. In 1997, the incidence of cytomegalovirus disease worldwide totaled
approximately 31,000 patients, and worldwide revenues for cytomegalovirus drugs
totaled approximately $143 million and are projected to grow at a 6.5% compound
annual growth rate. Current therapy for cytomegalovirus disease is associated
with significant toxicity and poor oral bioavailability. These features limit
the utility of the current drugs in preventative therapy in patients at high
risk, such as patients receiving bone marrow transplants, and for treatment of
active infection in newborns.
We have identified a class of potent and orally available cytomegalovirus
compounds that interfere with the replication machinery of cytomegalovirus. We
believe that this class of compounds is the first to target a specific
cytomegalovirus-encoded enzyme that is necessary for initiating the synthesis
of viral DNA. This class of compounds is efficacious against clinical
cytomegalovirus taken from patients who have developed resistance to current
therapies. Animal toxicity studies suggest that this class of compounds will be
safer than current therapies. Because they can be taken orally, our
cytomegalovirus drug candidates may also be practical for use in preventative
settings, such as in transplant patients.
We have commenced preclinical testing of several advanced candidates. We
anticipate filing an Investigational New Drug application on a lead compound in
2000.
Diabetes
Diabetes mellitus is a chronic, progressively debilitating disease that
affected approximately 124 million people worldwide in 1997. Type II diabetes
represents 90% of the total population of people with diabetes, and its
prevalence is increasing as a function of the aging population and the
increasing population of obese people in the world. Worldwide sales for oral
type II diabetes drugs in 1998 totaled approximately $3.0 billion and are
expected to grow at a 35% compound annual growth rate. Type II diabetes usually
develops after the age of 40 and is characterized by the body's inability to
respond to insulin. Recently, a new class of drugs has been
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<PAGE>
introduced that permit type II diabetics to make better use of the insulin
produced by their bodies or taken by injection. Members of this class,
including the drug Rezulin, have proven to be moderately efficacious for the
treatment of type II diabetes but have also been associated with undesirable
side effects, such as liver toxicity and weight gain. These side effects limit
the number of eligible patients and increase the costs associated with
monitoring for adverse effects after initiation of treatment.
Our scientists have implemented a biochemical assay that employs the same
transcription factor that is targeted by Rezulin. Our current efforts are
focused on optimizing a lead series of potent and orally available agents
identified in this assay that improve insulin sensitivity and lower blood
glucose in animals. We believe that this series offers the potential for an
anti-diabetes drug with improved profile relative to existing agents. We have
commenced animal studies and a chemistry effort to clarify and exploit these
advantages.
We have collaborated with Japan Tobacco in obesity/diabetes research since
September 1996.
Obesity
Body weight is determined and regulated by a variety of genetic and
environmental factors. Weight change is influenced by eating behavior and by
energy utilization as determined by exercise and metabolic rate. Obesity
increases the risk of serious human diseases, including type II diabetes,
coronary artery disease and hypertension. At least 70 million people in the
United States are currently classified as obese. There is a large, unmet need
for a treatment for obesity. Recently, two drugs have been approved for this
disease, Xenical and Meridia, and no other drugs are approved specifically for
obesity. Since the beginning of 1999, these products generated combined
revenues of more than $500 million.
We have a robust program that currently is focused upon three pathways
involved in obesity. The first of these pathways involves the obese, or Ob,
gene. The Ob gene encodes the protein leptin, is expressed exclusively in fat
tissue and is regulated by diverse stimuli. When administered intravenously to
obese mice, the leptin protein results in significant weight loss. Our
scientists have established an assay that uses a genetically altered fat cell
line that is sensitive to stimuli responsible for controlling the Ob gene,
making it ideally suited for use in assays to identify compounds that will
regulate the Ob gene. We have identified a series of compounds in this assay
that increase leptin in the blood of laboratory animals. We have commenced
additional studies of the mechanism by which these compounds regulate the Ob
gene.
The second pathway we are evaluating involves a family of proteins known to
play a major role in determining metabolic rate. Studies have shown that there
is correlation between metabolic rate and the ability to turn food calories
into heat instead of storing food calories in fat cells. The ability to
dissipate food calories as heat in turn relies on this family of proteins. This
family of proteins is an important class of potential targets for the treatment
of obesity. Our scientists have established a panel of biochemical and cell-
based assays directed towards the identification of small molecule compounds
that selectively modulate the activity of this family of proteins. We have
commenced high throughput screening using these proprietary assays.
A third area of obesity research focuses on pathways involved in preventing
the creation of fat cells. In cell culture experiments using a compound we have
identified, our scientists have demonstrated that inhibiting a transcription
factor known as PPARg prevents the formation of fat cells.
We have collaborated with Knoll in obesity research since November 1998. We
have collaborated with Japan Tobacco in obesity/diabetes research since
September 1996.
Inflammation
Under normal circumstances, inflammation is an important defense response to
injury and infection. An early step in the inflammatory response is the
recruitment of white blood cells, or leukocytes, from the circulatory system to
damaged or infected tissue. Excessive or prolonged accumulation of leukocytes
can lead to inflammatory conditions, including asthma, inflammatory bowel
disease, multiple sclerosis, psoriasis,
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<PAGE>
rheumatoid arthritis and septic shock. In 1998, a total of approximately 28
million individuals in the United States suffered from these diseases.
Worldwide sales of non-steroidal anti-inflammatory drugs totaled approximately
$6.0 billion in 1998 and are expected to grow at a 4% compound annual growth
rate. An estimated 400,000 individuals in the United States and Europe have
Crohn's disease, a serious chronic inflammatory disease of the small and large
intestine.
Inflammatory messengers act by binding to specific cell surface receptors
that, in turn, set off signaling events culminating in the expression of many
inflammatory response genes. The crucial roles played by particular
inflammatory messengers in several inflammatory disease states have been
clearly demonstrated by studies utilizing antibodies and soluble receptors that
neutralize the activities of particular inflammatory messengers. The efficacy
demonstrated by Enbrel, a soluble inflammatory messenger receptor, has
validated this concept for the treatment of rheumatoid arthritis. We believe
that an orally available drug of comparable efficacy would represent formidable
competition for drugs that must be injected, such as Enbrel.
Several key inflammatory response genes are regulated by a single
transcription factor, NF-kB. Our scientists have discovered numerous novel
regulatory proteins in the gene regulation pathways leading from the receptors
for particular inflammatory messengers and have elucidated their roles in NF-kB
activation. On the basis of these landmark discoveries, our scientists are
recognized as leaders in this field of research.
Based upon this research, our scientists have determined that some of these
regulatory proteins appear to be exclusively dedicated to NF-kB activation and
the inflammatory response and therefore represent ideal drug discovery targets.
We are employing several of these targets in high throughput screening assays,
and a lead compound that inhibits one of the key components involved in NF-kB
activation is currently undergoing optimization. We believe that our
discoveries and the expertise we have developed in this disease area place us
in a leading position to identify the next generation of important anti-
inflammatory drugs.
We have collaborated with Roche Bioscience in inflammation research since
July 1997.
Immune Disorders
Many diseases result from defects in the immune system, including allergic
rhinitis, asthma, type I diabetes and rheumatoid arthritis. It is estimated
that a total of approximately 55 million people in the United States suffered
from these common immune disorders in 1998. Respiratory therapies including
anti-asthmatic and allergy relief medications totaled approximately $11.2
billion in worldwide revenues in 1998 and are expected to grow at a 16%
compound annual growth rate.
Our scientists have discovered two human transcription factors, STAT6 and
STAT4, that are key proteins involved in immune regulation. When
overstimulated, these proteins are instrumental in the development of allergy
and asthma in the case of STAT6, and in the development of autoimmune diseases
such as rheumatoid arthritis and inflammatory bowel disease in the case of
STAT4. Experiments in animals have demonstrated that disabling these proteins
is safe and blocks inappropriate immune responses. These results demonstrate
that STAT6 and STAT4 are excellent drug discovery targets. Our goal is to
discover drugs capable of selectively blocking STAT6 or STAT4 function.
Toward this end, we developed cell-based assays for high throughput screening
that enable the identification of compounds that interfere with functions
controlled by STAT proteins. We have also developed biochemical assays for high
throughput screening that permit the identification of compounds that will
inhibit STAT protein activation. Finally, our scientists have identified short
peptides, or protein fragments, that inhibit STAT function. These peptides have
served as leads for a chemistry optimization program and have also enabled the
synthesis of a drug candidate that completely inhibits STAT6 function in cells,
validating the underlying basis of this approach. The structures of several
proprietary STAT6 inhibitors bound to specific sites on the target protein have
been determined by X-ray crystallography and are being utilized to guide our
chemistry effort.
We have collaborated with Taisho in immune disorders research since April
1995.
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Hypercholesterolemia
Cardiovascular disease is the leading cause of death in the developed world.
The most clinically significant diseases, angina and myocardial infarction, are
causally related to elevated levels of low-density lipoprotein, or LDL,
cholesterol in the blood stream. The risk of death begins to increase when LDL
cholesterol levels rise above 126 mg/dl and progressively worsens with higher
levels. A total of approximately 39 million people in the United States have
LDL cholesterol levels above 168 mg/dl.
To date, statins are the most successful drugs for lowering LDL cholesterol
levels. Worldwide revenues for statins totaled approximately $9.6 billion in
1998 and are expected to grow at a 20% compound annual growth rate. Statins
lower LDL cholesterol levels in the bloodstream by indirectly increasing the
number of LDL receptors on the surface of cells. Despite the success of
statins, there is a significant patient population, particularly those
individuals having substantially elevated blood cholesterol levels, for which
these drugs alone are insufficient to achieve the desired efficacy. We believe
that a drug that either directly increases expression of LDL receptors or
induces cholesterol clearance mechanisms may show improved efficacy relative to
the current agents.
Toward this end, we have established proprietary assays for high throughput
screening that utilize liver cells to measure the compound-induced activity of
the LDL receptor gene. Using this approach, we have identified compounds that
lower serum cholesterol in animal models. This class of compounds is the focus
of a chemistry optimization effort.
Our scientists have also extended the understanding of the mechanism
regulating an important enzyme that is responsible for the body's clearance of
cholesterol. These scientists have discovered important transcription factors
involved in the process. They have also identified a natural receptor for bile
acids, which are the end products of cholesterol metabolism and suppress the
expression of this enzyme. We have established proprietary biochemical assays
for high throughput screening to detect inhibitors of this bile acid receptor
and are presently evaluating the therapeutic potential of early leads derived
from the screening effort.
We have a research collaboration with Professors Michael Brown and Joseph
Goldstein of the University of Texas Southwestern Medical School at Dallas, to
develop a detailed understanding of the intracellular events controlling
cholesterol metabolism. Professors Brown and Goldstein won a Nobel Prize for
their work in this area. This collaboration is currently focused upon
elucidating mechanisms involved in regulation of the transcription factors that
have been shown by Brown and Goldstein to activate the LDL receptor gene.
Efforts in this area have led to the establishment of a unique cell-based assay
for high throughput screening to identify compounds that modulate a novel
target discovered by Brown and Goldstein. Compounds that are active in this
assay are expected to lead to increased expression of the LDL receptor gene. We
have also established a biochemical assay to complement the ongoing cell-based
screening efforts. We have been collaborating with Professors Brown and
Goldstein since October 1992 and have the exclusive right to license the
results of the Brown and Goldstein research in this area.
We have collaborated with Sumitomo in hypercholesterolemia research since
January 1995.
Bacterial Diseases
The extensive use of antibiotics during the past three decades has
contributed significantly to the emergence of antibiotic-resistant strains of
bacteria. Worldwide revenues for broad-spectrum penicillins totaled
approximately $3.8 billion in 1998 and are expected to grow at a 4% compound
annual growth rate. Despite the wide variety of classes of antibiotics
currently available for clinical use, patients can die from an infection with
any one of multiple drug resistant forms of bacteria, including Mycobacterium
tuberculosis, Staphylococcus aureus or Enterococcus faecalis. With an estimated
two million patients developing hospital-acquired infections in the United
States each year and 90,000 deaths resulting from those infections, the need to
overcome evolving bacterial resistance is the major driving force behind
ongoing efforts to discover and develop chemical classes of antibacterial
agents for clinical use.
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We have focused our efforts on a number of cellular processes essential for
bacterial growth. RNA polymerase is a bacterial enzyme that is a proven
antibacterial target, because the potent antibiotic rifampicin inhibits a
subunit of this enzyme. The clinical utility of rifampicin, however, is
diminished by the rapid emergence of drug resistance. We have identified a
novel class of inhibitors of RNA polymerase that have antibacterial activity
against rifampicin-resistant bacteria. The current focus of this program
involves a lead candidate that is undergoing chemistry optimization.
Orphan Nuclear Receptors
Nuclear receptors are a family of transcription factors that play important
roles in nearly all aspects of development and adult physiology and therefore
have relevance to multiple disease indications. These receptors are activated
by naturally occurring hormones known as ligands, and many have therefore been
discovered to be targets for important orally available drugs, including
Premarin for estrogen replacement, levothyroxine, or Synthroid, for
hypothyroidism, tamoxifen for breast cancer, Pulmicort for asthma and Rezulin
for type II diabetes. Worldwide revenues for these five drugs totaled an
aggregate of more than $4 billion in 1998.
Until the natural ligand corresponding to a nuclear receptor is identified,
members of the nuclear receptor family are classified as orphan nuclear
receptors. Of the nearly 50 nuclear receptors identified to date, approximately
two-thirds are orphan nuclear receptors. Although the exact functions of these
orphan nuclear receptors are not known, the fact that nuclear receptors are
biologically important and are activated by small molecules makes this an
attractive opportunity for discovery of important new medicines. As an example
of the commercial potential of drugs that target orphan nuclear receptors, it
has recently been discovered that the antidiabetic drug Rezulin targets the
orphan nuclear receptor known as PPARg.
Our scientists are using proprietary screens to enable the discovery of both
stimulators and inhibitors for many orphan nuclear receptors and have
discovered two novel human orphan nuclear receptors. We are applying multiple
technologies, such as gene knock-out and X-ray crystallography, to both
elucidate function and guide drug discovery in this area. We have initiated
several assays for high throughput screening, and the first leads are
undergoing functional characterization in both cell-based and animal studies.
We have collaborated with Japan Tobacco in orphan nuclear receptor research
since September 1998.
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Drug Discovery and Development
We believe that our integrated drug discovery and development platform places
us in a leading position to discover, develop and commercialize novel, orally
available drugs. The following chart illustrates our drug discovery and
development system:
[FLOW CHART APPEARS HERE]
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Target Identification and Validation
A key focus of our scientists is to establish a link between specific genes
and diseases. Following the identification of such a link, we seek to identify
and characterize important proteins and regulatory pathways responsible for the
expression of these genes. Our ability to identify multiple targets within a
gene regulatory pathway or subpathway that regulates genes increases the
likelihood that we will be able to identify the optimal target for therapeutic
intervention.
Our scientists use a combination of biochemical, molecular biological and
genetic approaches to discover novel regulatory proteins. Once a regulatory
protein has been identified, we clone and express the gene that encodes that
protein. Cloning the regulatory protein allows us to conduct target validation,
which is the biological evaluation of the protein's specific function in the
disease process. We evaluate the physiological function of potential drug
targets we discover by manipulating their expression in cells, by mapping the
pathways by which they interact with other regulatory proteins to regulate
genes and by understanding the cell types in which they are expressed. This
information can be critical to assessing the suitability of a gene regulatory
protein as a target for pharmaceutical intervention.
In our target discovery efforts, we also search publicly available genome
databases, including data derived from the Human Genome Project. In the cancer
area, we seek to discover novel cancer genes using Representational Difference
Analysis. Some of these cancer genes may be targets for small molecule
intervention.
Where the target validation process indicates that a particular regulatory
protein may not be the most appropriate molecular target for assay development,
we use cellular and molecular biology studies to identify other proteins
involved in the same biochemical pathway(s) that may be better molecular
targets for drug discovery and therapeutic intervention. The target validation
process also provides us with opportunities to discover additional components
of the cellular pathway that may lead to identification of additional drug
discovery targets.
Primary Assays
We use primary assays specific to each target or program to rapidly search
our compound screening library for chemical structures that hold promise for
further study, or hits. We design and implement two main types of primary
assays, as described below.
Biochemical Assays. Our scientists use the results of target identification
efforts to craft specialized biochemical assays in which one or more target
proteins are reconstituted in a system that closely mimics their native
environment. At this stage, we adapt the assay to an automated format to allow
for high throughput screening. Biochemical assays provide several advantages in
the search for new drugs. In a biochemical assay, the components and mechanism
of action of the drug candidates are already known. This precision minimizes
inaccurate results and false-positive readings, thereby accelerating the
discovery process. Additionally, the identification of lead compounds using
biochemical assays bypasses the potential problems of false-negative readings
associated with the ability of a compound to penetrate a cell or the intrinsic
ability of cells to break down chemicals before they reach a target. Once hits
are identified, these properties can be subsequently manipulated through
chemistry. Since biochemical assays are usually highly amenable to high
throughput screening, results can be obtained rapidly and reproduced
consistently. We will perform high throughput screening with approximately 35
biochemical assays in 1999.
Cell-based Assays. High throughput screening using intact cell-based assays
complements and extends our biochemical screening capabilities. A major
advantage of cell-based assays over biochemical assays is that cell-based
assays allow analysis of sample activity in an environment similar to the one
in which a drug would act. In addition, the toxicity and ability to penetrate
into the cell can be assessed. In contrast to biochemical assays, where the
target protein for a drug is known, cell-based assays offer an additional
opportunity to discover drugs interacting with novel, previously unknown,
target proteins. We will perform high throughput screening with approximately
ten cell-based assays during 1999.
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High Throughput Screening
We have developed innovative hardware and software systems to automate the
entire drug screening process, from the preparation of solutions of the test
substances for screening to the analysis of the data generated from the assays.
In our automated screening facility, we can annually generate more than eight
million sample evaluations in our assays. Our automated systems can be
configured to run a wide variety of assay formats. Our data management system
stores the data for hundreds of thousands of samples, each tested in dozens of
assays. This relationally integrated system manages sample inventories through
a bar code system, configures plates for a wide variety of experiments and
coordinates the screening of large numbers of plates across multiple assays.
The data management system electronically recalls and presents data in formats
that allow rapid recognition of active compounds or extracts. This gives each
of our scientists the ability to analyze the results for a given assay within
the context of the entire drug discovery database, including the results of all
past screening assays.
Screening Library
Access to large libraries of highly diverse molecular structures is an
important aspect of our drug discovery efforts. We currently have a library of
over 500,000 synthetic compounds and natural product extracts. This library
includes in excess of 300,000 individual synthetic compounds. The screening
collection also includes combinatorial chemical libraries that contain in
excess of 200,000 synthetic compounds incorporating desirable molecular
features. Our library includes a natural product collection that currently
numbers in excess of 118,000 independent samples derived from microbial, plant
and marine sources. This library is supplemented with chemical libraries
provided by our collaborators for specific programs.
Secondary Assays
Secondary assays are designed to eliminate those "hits" that lack potency or
specificity, or have unwanted characteristics. If a compound survives the
secondary assay screening process, it is then subjected to further testing and
ultimately chemistry optimization. Generally, hits with promising results in
animal models and desirable chemical characteristics become lead compounds.
Lead Optimization
Regardless of whether a lead compound is obtained from biochemical or cell-
based assays, the pharmaceutical properties of that compound must be improved
before clinical development. This is the process of lead optimization.
Chemistry. We carry out traditional structure-activity relationship studies
of potential lead compounds and conduct lead optimization utilizing chemistry
techniques to synthesize new analogs of a lead compound with improved
properties. Our natural products chemists handle the separation, isolation and
structure elucidation of bioactive components derived from our natural product
extracts. In addition, we have computational chemistry capabilities, including
molecular modeling, to support lead optimization.
We complement this activity with directed combinatorial chemistry, which
enables the synthesis of thousands of chemical analogs of lead compounds
quickly. We continue to expand our efforts in this area as we believe that the
continued development of combinatorial chemistry technology will streamline the
ability of our chemists to improve upon promising lead compounds and facilitate
the expansion of our proprietary screening library.
Structural Biology. Structural biology techniques aid in drug design and
optimization by providing molecular "snapshots" that allow scientists to
visualize the interactions between a drug or lead and its protein target. These
interactions are analogous to the fit between a lock and a key. Nuclear
magnetic resonance, spectroscopy and X-ray crystallography comprise the
essential techniques of structural biology. We have
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established state of the art laboratories that allow us to readily utilize
these powerful tools for lead optimization. Utilizing structural information,
chemists can design and synthesize new analogs of lead compounds that are
likely to have a better fit with the target protein, and hence have greater
potency. We are applying structural biology broadly and have ongoing efforts in
many of our drug discovery programs.
Pharmacology and Preclinical Development
We believe that the rapid characterization and optimization of lead compounds
identified in high throughput screening will generate high-quality preclinical
development candidates. Our pharmacology and preclinical development group
facilitates lead optimization by characterizing lead compounds with respect to
pharmacokinetics, potency, efficacy and selectivity. The generation of proof-
of-principle data in animals and the establishment of standard pharmacological
models with which to assess lead compounds represent integral components of
lead optimization. As programs move through the lead optimization stage, our
pharmacology and preclinical development group supports our chemists and
biologists by performing the necessary studies, including toxicology, for
Investigational New Drug application submissions.
Clinical Development
We have assembled a team of experts in drug development to design and
implement clinical trials and to analyze the data derived from these studies.
The clinical development group possesses expertise in project management.
Research and Development Expenses
Our research and development expenses were $31.9 million for the nine months
ended September 30, 1999, $33.3 million in 1998, $26.5 million in 1997 and
$18.6 million in 1996.
Corporate Collaborations
To assist in product commercialization and fund research and development
activities, we have established and will continue to pursue corporate
collaborations with selected pharmaceutical and biotechnology companies. We
currently have corporate collaborations in six of our research programs: Knoll
relating to obesity; Japan Tobacco relating to orphan nuclear receptors; Roche
Bioscience relating to inflammation; Japan Tobacco relating to
obesity/diabetes; Taisho relating to immune disorders; and Sumitomo relating to
hypercholesterolemia. As of September 30, 1999, we had received a total of
$121.3 million, including $108.3 million in research funding and $13.0 million
from equity purchases, from these collaborators as well as under a prior
alliance with Yamanouchi that was terminated by Yamanouchi in November 1996 and
a prior alliance with Merck that was terminated by Merck in March 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" for additional details related to funding received to
date and future funding payable under existing corporate collaboration
agreements. In addition, we have a number of scientific collaborations with
academic and medical institutions and biotechnology companies under which we
have in-licensed technology. We intend to pursue further collaborations as
appropriate.
Our corporate collaboration agreements generally contain the following terms.
Every corporate collaboration agreement, except the agreement with Knoll,
provides that each party will retain ownership of all inventions and any
related patents made solely by its employees during the course of the
collaboration, except as limited by each party's license rights described
below. In every corporate collaboration agreement, we have agreed not to
conduct research in specified areas, independently or with any commercial third
party, that is in the same field and in the same geographical territory as that
covered by the corporate collaboration agreement.
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The table below summarizes the economic rights currently held by us and our
corporate collaborators in each of our programs and additional details relating
to specific corporate collaboration agreements.
<TABLE>
<CAPTION>
Economic Rights Holder
----------------------------------------------------------------------------------
Corporate
Program Collaborator North America Europe Asia (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cancer (1) -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Cytomegalovirus -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Diabetes (certain Japan Tobacco Profit split Profit split Profit split
targets)
- -------------------------------------------------------------------------------------------------------------------
Obesity (certain Knoll Knoll (Royalties shared Knoll (Royalties shared Profit split (with
targets) with Japan Tobacco) with Japan Tobacco) Japan Tobacco)
- -------------------------------------------------------------------------------------------------------------------
Obesity (certain Japan Tobacco Profit split Profit split Profit split
targets)
- -------------------------------------------------------------------------------------------------------------------
Inflammation
Inflammatory bowel Roche Bioscience Tularik (Royalties to Tularik (Royalties to Tularik (Royalties to
disease, skin diseases Roche Bioscience) Roche Bioscience) Roche Bioscience)
and eye diseases
Other indications Roche Bioscience Roche Bioscience Roche Bioscience Roche Bioscience
(Royalties to Tularik) (Royalties to Tularik) (Royalties to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Immune Disorders Taisho Tularik Tularik Taisho (Royalties
(certain targets) to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Hypercholesterolemia Sumitomo Tularik Tularik Sumitomo (Royalties
(certain targets) to Tularik)
- -------------------------------------------------------------------------------------------------------------------
Bacterial Diseases -- Tularik Tularik Tularik
- -------------------------------------------------------------------------------------------------------------------
Orphan Nuclear Receptors Japan Tobacco Profit split Profit split Profit split
</TABLE>
(1) We have agreed to pay Eli Lilly a royalty and to make milestone payments on
sales of lometrexol, as described below.
(2) Composition of Asian territory varies by agreement.
Knoll AG (Obesity)
Effective November 1998, we established a five-year research collaboration
with Knoll to discover, develop and market compounds that act on specified
obesity-related targets. Under the collaboration agreement, Tularik has
established assays for these obesity-related targets. Knoll and Tularik are
each to provide compound libraries, conduct screening and provide expertise to
support biology, pharmacology and chemistry for identified lead compounds.
Once the parties select a compound for preclinical testing in the treatment
or prevention of obesity, Knoll has the right to enter into a separate license
agreement granting Knoll exclusive rights to develop, manufacture and sell the
compound in countries other than in specified Asian countries for indications
related to obesity. Any license would survive termination of the research
portion of the collaboration, and require Knoll to pay to us milestones and
royalties. Each party has defined rights to develop compounds identified during
the course of performance of the research collaboration for indications and
uses other than obesity, subject to the payment to the other party in
particular circumstances of a royalty on product sales. The collaboration
agreement grants us exclusive rights under collaboration technology and
nonexclusive rights under specified Knoll technology to develop, manufacture
and sell obesity products in specified Asian countries, subject to the payment
of royalties to Knoll on sales of products if we obtain a license under
applicable Knoll technology. Knoll has a right of first refusal to obtain Asian
rights in the event that Japan Tobacco's rights terminate or expire. The rights
retained in specified Asian countries are subject to the Japan Tobacco
obesity/diabetes agreement.
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Knoll may terminate the collaboration agreement on the third or fourth
anniversary of the effective date upon prior written notice. Either party may
terminate the agreement at any time upon a material breach by the other party
of its obligations under the agreement. When the research collaboration
terminates, each party will retain rights to technology invented by it during
the collaboration or contributed by it to the collaboration, subject to the
rights and licenses described above. The parties would cross license to each
other the right to commercialize products already identified in the program.
Knoll is committed to pay Tularik up to $20.5 million in research payments, of
which $5.6 million has been paid as of September 30, 1999.
Japan Tobacco (Orphan Nuclear Receptors)
Effective September 1998, we established a five-year collaboration with Japan
Tobacco to discover, develop and market compounds that act by regulating orphan
nuclear receptors. We have developed assays and screened library compounds
against a number of orphan nuclear receptors. Both parties will participate in
chemistry and other preclinical activities for identified lead compounds.
The collaboration is structured to provide for the equal sharing of expenses
and profits on a worldwide basis. We retain exclusive marketing and sales
rights in the United States and Canada. Japan Tobacco retains exclusive
marketing and sales rights in Japan and Korea. Japan Tobacco and we jointly
determine marketing strategy in other countries. Japan Tobacco will be required
to provide funding for our research efforts and to make benchmark payments to
us based on clinical progress.
The research collaboration may be terminated by Japan Tobacco at the end of
the third and fourth years of the five-year research collaboration, on prior
written notice. Either party may elect to terminate its participation in the
co-promotion of products upon prior written notice to the other party, in which
case the other party may exclusively commercialize a product subject to the
payment of a royalty to the party that elects not to participate in co-
promotion. Either party may terminate the agreement at any time upon a material
breach by the other party of its obligations under the agreement. Japan Tobacco
is committed to pay Tularik up to $29.0 million in research payments related to
the orphan nuclear receptor collaboration, of which $12.0 million has been paid
as of September 30, 1999.
Roche Bioscience (Inflammation)
We established a five-year research and development collaboration with Roche
Bioscience in July 1997 to discover, develop and market anti-inflammatory gene
regulating drugs.
The agreement provides that we will establish assays for particular targets
within these signaling pathways and conduct high throughout screening of
compounds from the Roche Bioscience and Tularik libraries. Roche Bioscience
provides expertise and funding to support molecular structure validation and
chemistry. Roche Bioscience has exclusive, worldwide manufacturing and
marketing rights to develop and commercialize identified compounds resulting
from the research program for specified indications. Roche Bioscience is
obligated to pay us benchmark payments based on clinical progress and royalties
on sales of these compounds for the Roche Bioscience indications. We have
exclusive, worldwide manufacturing and marketing rights to develop and
commercialize other compounds resulting from the research program for other
specified indications. We are obligated to pay Roche Bioscience royalties on
sales of these compounds for indications we have retained. Our retained
indications include inflammatory bowel disease, as well as eye and skin
diseases. Tularik and Roche Bioscience are responsible for funding preclinical
testing and clinical development of compounds for their respective indications.
Roche Bioscience retains rights of first negotiation and of first refusal to
develop and commercialize various types of compounds identified both within and
outside the scope of the collaboration.
Roche Bioscience may terminate the research collaboration at the end of the
third year of the five-year research collaboration, on prior written notice, if
the then current research plan does not provide opportunities
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for new products or if we have not discharged our obligations under the
research collaboration. For a specified period at the conclusion of the
collaboration, either party may commercialize compounds resulting from the
research program for all indications, subject to the payment of royalties on
sales of the compound. The first party to commence preclinical development of a
compound receives exclusive commercialization rights to the compound and must
pay the other party royalties on the compound and, in the case of compounds
commercialized by Roche Bioscience, benchmark payments. After the specified
period, the first party to commence preclinical development of a compound
resulting from the research program receives exclusive commercialization rights
to the compound and may commercialize the compound without paying royalties to
the other party. Either party may terminate the agreement at any time upon a
material breach by the other party or in connection with the other party's
bankruptcy. Roche Bioscience is committed to pay Tularik up to $30.0 million in
research payments, of which $16.3 million has been paid as of September 30,
1999.
Japan Tobacco (Obesity/Diabetes)
We established a five-year collaboration with Japan Tobacco in September 1996
to research and develop products that regulate expression of genes implicated
in obesity and diabetes. The collaboration was amended in September 1998 and
currently addresses three gene regulatory pathways involved in obesity and
diabetes. We have developed assays and screened library compounds against a
number of obesity and diabetes targets. Both parties will participate in
chemistry and other preclinical activities for identified lead compounds.
The collaboration is structured to provide for the equal sharing of expenses
and profits on a worldwide basis. We retain exclusive marketing and sales
rights in the United States and Canada (with the exception of those obesity
targets that have been committed to Knoll). Japan Tobacco retains exclusive
marketing and sales rights in Japan and Korea, and Japan Tobacco and we will
jointly determine a sales and marketing strategy other than for those countries
in which Knoll may have rights to products that are active against specified
targets. Japan Tobacco will be required to provide funding for our research
efforts and to make benchmark payments to us based on clinical progress.
The research collaboration may be terminated by Japan Tobacco at the end of
the fourth year of the five-year research collaboration, on prior written
notice. Either party may elect to terminate its participation in the co-
promotion of products upon prior written notice to the other party, in which
case the other party may exclusively commercialize a product subject to the
payment of a royalty to the party that elects not to participate in co-
promotion. Either party may terminate the agreement at any time upon a material
breach by the other party of its obligations under the agreement. Japan Tobacco
is committed to pay Tularik up to $18.5 million in research payments related to
the obesity and diabetes collaboration, of which $14.0 million has been paid as
of September 30, 1999.
Under the terms of a related stock purchase agreement, Japan Tobacco
purchased 600,000 shares of Series F Preferred Stock at $10.00 per share in
September 1996, for an aggregate purchase price of $6.0 million.
Taisho Pharmaceutical Co. (Immune Disorders)
Effective April 1995, we established a five-year research and development
collaboration with Taisho focused on therapeutic modulation of the human immune
function. In January 1998, the parties extended the alliance for an additional
year. The goals of the research collaboration are to identify and develop
compounds that inhibit or promote the activity of STAT6 and STAT4.
Provided the research collaboration continues for the full six-year term,
Taisho will have exclusive rights to manufacture and sell products resulting
from the collaboration for therapeutic modulation of immune function in Japan
and in specified other Asian countries. Taisho will be required to make
benchmark payments to us based on clinical progress and royalty payments based
on sales in Taisho's territory. We will have exclusive rights in the rest of
the world, without any payment obligation to Taisho, unless the research
collaboration terminates prior to the full six-year term for our default under
the agreement or bankruptcy.
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Taisho has the right to terminate the collaboration with written notice
before the commencement of the sixth year. Although we are negotiating with
Taisho regarding alternative collaborative opportunities, we believe that
Taisho will exercise its contractual right to terminate its current agreement
with us in March 2000. In this event, we will have exclusive, worldwide,
royalty-free rights to all products identified in the collaboration. Either
party may terminate the agreement at any time upon a material breach by the
other party of its obligations under the agreement or upon the other party's
bankruptcy. Taisho was committed to pay, and has paid, Tularik $15.0 million in
research payments as of September 30, 1999.
Sumitomo Pharmaceuticals Co. (Hypercholesterolemia)
Effective January 1995, we established a five-year research and development
collaboration with Sumitomo to discover, develop and market compounds that act
to upregulate the gene encoding the low density lipoprotein, or LDL, receptor
and thereby lower serum LDL cholesterol. Under the collaboration agreement, we
have established assays for upregulators of the LDL receptor gene. Sumitomo and
Tularik are each to provide compound libraries, conduct screening and provide
expertise to support biology, pharmacology and chemistry for identified lead
compounds.
Sumitomo has the right to enter into a license agreement granting it
exclusive rights to develop, manufacture and sell in specified Asian countries
any compound selected for preclinical testing during the term of the
collaboration or during a specified period after expiration or termination of
the research program. Sumitomo must make benchmark payments to Tularik, and if
it obtains a license, as described above, royalty payments based on sales of
product in specified Asian countries. The collaboration agreement grants us
exclusive rights to develop, manufacture and sell licensed products in the rest
of the world, without payment obligation to Sumitomo. The license to Tularik
and the license to Sumitomo, if any, would survive termination of the research
portion of the collaboration, which we expect to terminate in January 2000 at
the expiration of the five-year term. When the research collaboration
terminates, each party will retain rights to technology invented by it during
the collaboration or contributed by it to the collaboration, subject to the
foregoing licenses. Any compound conceived during the research period and
reduced to practice within a year of termination will revert to us if not
licensed by Sumitomo within the specified period after the termination of the
research collaboration. Sumitomo was committed to pay, and has paid, Tularik
$15.0 million in research payments as of September 30, 1999.
Under the terms of a related stock purchase agreement, Sumitomo purchased
400,000 shares of our Series E Preferred Stock at $7.50 per share in February
1995 for an aggregate purchase price of $3.0 million.
Other Agreements
Eli Lilly (Lometrexol)
Effective September 24, 1999, we executed a license agreement with Eli Lilly
under which we obtained an exclusive, worldwide, royalty-bearing license to
make, use and sell pharmaceutical products containing a compound known as
lometrexol, and purchased related inventory. We would owe Eli Lilly milestones
and royalties upon successful commercialization of lometrexol. Eli Lilly filed
an Investigational New Drug application for lometrexol, a treatment for cancer,
in August 1988, a Clinical Trial Exemption for the United Kingdom in June 1991
and subsequently conducted phase 1 trials of lometrexol in cancer patients in
the United States and Europe. Under the agreement, Eli Lilly granted us a
license under Eli Lilly's proprietary technology relating to lometrexol, and
also a sublicense under the exclusive license granted to Eli Lilly by Princeton
University relating to lometrexol. Eli Lilly has specified obligations under
the agreement to maintain the license from Princeton. Eli Lilly has a right to
match the material terms of any offer made by a third party for
commercialization of lometrexol products.
We may terminate the agreement with Eli Lilly upon written notice. Eli Lilly
may terminate our license in specified major countries if we fail to use
reasonable diligence to develop lometrexol products in these countries, and may
terminate the agreement if we fail to use appropriate diligence to develop
lometrexol
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products in a predetermined number of major countries. Each party has the right
to terminate the agreement if the other party becomes insolvent or fails to
cure a breach of the agreement. If Eli Lilly terminates the agreement, Eli
Lilly obtains a nonexclusive, royalty-bearing, worldwide license to our
technical improvements to lometrexol.
Cold Spring Harbor Laboratory (Representational Difference Analysis)
Amplicon had been the exclusive licensee of the rights of Cold Spring Harbor
Laboratory in Representational Difference Analysis, and we acquired these
rights held by Amplicon when we acquired Amplicon. In connection with our
acquisition of Amplicon, we established a research collaboration with Cold
Spring Harbor Laboratory. As part of this collaboration, Dr. Michael Wigler of
Cold Spring Harbor Laboratory supervises research using Representational
Difference Analysis to search for tumor suppressor genes and DNA sequences that
are amplified in cancer. In addition, we may elect to obtain licenses under
inventions made under the research collaboration. Either party may terminate
the research collaboration for breach. We may terminate the license agreement
after October 2002. We intend to utilize the results of this research
collaboration and new discoveries from Dr. Wigler's laboratory to develop
proprietary high throughout screens for drug discovery.
Merck & Co. (Viral Diseases)
Effective December 1993, we established a five-year collaboration with Merck
to discover and develop compounds for the prevention or treatment of specified
viruses. This research collaboration ended in March 1999. Merck has exclusive,
worldwide manufacturing and marketing rights to develop and commercialize
products resulting from the human immunodeficiency virus, or HIV, program,
subject to obligations to pay to us benchmark payments based on clinical
progress and royalties on sales of HIV products. In November 1999, Merck orally
waived an option to assume responsibility for the development of our
cytomegalovirus drug candidate.
Under the terms of a related stock purchase agreement, Merck purchased
400,000 shares of Series D Preferred Stock at $5.00 per share in January 1994
for an aggregate purchase price of $2.0 million.
Patents and Proprietary Rights
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
Accordingly, patents and other proprietary rights are an essential element of
our business. As of September 30, 1999, 41 U.S. patents based on our
discoveries had been issued or allowed. In addition, as of that date, we had 47
patent applications pending in the United States and had filed several
corresponding foreign patent applications. Our policy is to file patent
applications and to protect technology, inventions and improvements to
inventions that are commercially important to the development of our business.
We seek U.S. and international patent protection for the genes we discover, as
well as therapeutic products and processes, drug screening methodologies,
transgenic animals, diagnostics and other inventions based on these genes. Our
commercial success will depend in part on obtaining this patent protection. We
also intend to seek patent protection or rely upon trade secret rights to
protect other technologies that may be used to discover and characterize genes
and that may be used to develop novel drugs. We seek protection, in part,
through confidentiality and proprietary information agreements. We are a party
to various license agreements that give us rights to use technologies in our
research and development processes.
We believe that we have developed proprietary technology for use in gene
discovery, regulatory pathway identification and assay design and have filed a
number of patent applications in these areas. In addition, an increasing
percentage of our recent patent applications have been related to potential
product candidates, or compounds, that we have discovered.
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<PAGE>
We have received letters from OSI Pharmaceuticals, Inc. indicating that OSI
believes that Tularik is utilizing patented technology relating to a
methodology for discovering transcription-based drugs and relating to the use
of orally available compounds to modulate gene transcription. OSI has offered
to license this technology to Tularik in exchange for milestones and a royalty
of .75% on net sales of products covered by the claims of these patents. We
believe that we do not infringe any valid and enforceable claims of these
patents and intend to vigorously defend any litigation commenced by OSI in
connection with its claims. We cannot predict whether any litigation will be
commenced, what claims OSI would assert or the outcome of any litigation.
Competition
We face, and will continue to face, intense competition from organizations
such as large pharmaceutical and biotechnology companies, as well as academic
and research institutions and government agencies. Our major competitors
include fully integrated pharmaceutical companies that have extensive drug
discovery efforts and are developing novel small molecule pharmaceuticals. We
face significant competition from organizations that are pursuing the same or
similar technologies, including the discovery of targets that regulate genes,
as the technologies used by us in our drug discovery efforts and from
organizations that are pursuing pharmaceuticals that are competitive with our
potential products.
Many of these companies and institutions, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
significantly greater experience than we do in:
. developing products;
. undertaking preclinical testing and clinical trials;
. obtaining FDA and other regulatory approvals of products; and
. manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before us. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or no
experience.
In addition, any product candidate that we successfully develop may compete
with existing therapies that have long histories of safe and effective use.
Competition may also arise from:
. other drug development technologies and methods of preventing or reducing
the incidence of disease;
. new small molecules; or
. other classes of therapeutic agents.
Developments by others may render our product candidates or technologies
obsolete or noncompetitive. We face and will continue to face intense
competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions, and for licenses to proprietary technology.
These competitors, either alone or with their collaborative partners, may
succeed in developing technologies or products that are more effective than
ours.
Our ability to compete successfully will depend, in part, on our ability to:
. develop proprietary products;
. develop and maintain products that reach the market first, are
technologically superior to and/or are of lower cost than other products
in the market;
. attract and retain scientific and product development personnel;
. obtain patent or other proprietary protection for our products and
technologies;
50
<PAGE>
. obtain required regulatory approvals; and
. manufacture, market and sell any product that we develop.
Government Regulation
The manufacturing and marketing of our potential products and our ongoing
research and development activities are subject to extensive regulation by
numerous governmental authorities in the United States and other countries.
Before marketing in the United States, any drug developed by us must undergo
rigorous preclinical testing and clinical trials and an extensive regulatory
clearance process implemented by the FDA under the federal Food, Drug and
Cosmetic Act. The FDA regulates, among other things, the development, testing,
manufacture, safety, efficacy, record keeping, labeling, storage, approval,
advertising, promotion, sale and distribution of biopharmaceutical products.
None of our product candidates has been approved for sale in the United States
or any foreign market. The regulatory review and approval process, which
includes preclinical testing and clinical trials of each product candidate, is
lengthy, expensive and uncertain. Securing FDA approval requires the submission
of extensive preclinical and clinical data and supporting information to the
FDA for each indication to establish a product candidate's safety and efficacy.
The approval process takes many years, requires the expenditure of substantial
resources, involves post-marketing surveillance, and may involve ongoing
requirements for post-marketing studies. Before commencing clinical
investigations in humans, we must submit to, and receive approval from, the FDA
of an Investigational New Drug application. We expect to rely on some of our
collaborative partners to file Investigational New Drug applications and
generally direct the regulatory approval process for some of our products.
Clinical testing must meet requirements for institutional review board
oversight, informed consent and good clinical practices. Clinical testing must
be conducted under FDA oversight. Before receiving FDA clearance to market a
product, we must demonstrate that the product is safe and effective on the
patient population that will be treated. If regulatory clearance of a product
is granted, this clearance will be limited to those disease states and
conditions for which the product is useful, as demonstrated through clinical
studies. Marketing or promoting a drug for an unapproved indication is
generally prohibited. Furthermore, clearance may entail ongoing requirements
for post-marketing studies. Even if this regulatory clearance is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections by the FDA. Discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on this product or manufacturer, including costly recalls or
withdrawal of the product from the market.
The length of time necessary to complete clinical trials varies significantly
and may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or the costs of these trials to increase, include:
. slow patient enrollment due to the nature of the protocol, the proximity
of patients to clinical sites, the eligibility criteria for the study or
other factors;
. inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials;
. delays in approvals from a study site's review board;
. longer treatment time required to demonstrate effectiveness or determine
the appropriate product dose;
. lack of sufficient supplies of the product candidate;
. adverse medical events or side effects in treated patients; and
. lack of effectiveness of the product candidate being tested.
Any drug is likely to produce some toxicities or undesirable side effects in
animals and in humans when administered at sufficiently high doses and/or for
sufficiently long periods of time. Unacceptable toxicities or side effects may
occur at any dose level at any time in the course of studies in animals
designed to identify unacceptable effects of a drug candidate, known as
toxicological studies, or clinical trials of our potential
51
<PAGE>
products. The appearance of any unacceptable toxicity or side effect could
cause us or regulatory authorities to interrupt, limit, delay or abort the
development of any of our product candidates and could ultimately prevent their
clearance by the FDA or foreign regulatory authorities for any or all targeted
indications.
Any of our contract manufacturers and we also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in
commercial manufacturing of our products. Our contract manufacturers or we may
not be able to comply with the applicable good manufacturing practice
requirements and other FDA regulatory requirements. If our contract
manufacturers or we fail to comply, our business, financial condition and
results of operations may be materially adversely affected.
Outside the United States, our ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Community registration procedures
are available to companies wishing to market a product in more than one EC
member state. If the regulatory authority is satisfied that adequate evidence
of safety, quality and efficacy has been presented, a marketing authorization
will be granted. This foreign regulatory approval process involves all of the
risks associated with FDA clearance discussed above.
Employees
As of September 30, 1999, we had 204 full-time employees, of whom 94 hold
Ph.D. and/or M.D. degrees and 26 hold other advanced degrees. Of our total
workforce, 173 are engaged in research and development activities and 31 are
engaged in business development, finance and administration. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe that our relations with our employees
are good.
Facilities
Our facilities consist of approximately 146,000 square feet of research and
office space located at Two Corporate Drive, South San Francisco, California
that is leased to us until 2011. We have options to renew these leases for two
additional periods of five years each. We have leased approximately 14,500
square feet of research and office space located at 266 Pulaski Road,
Greenlawn, New York that is leased to us until 2005. We believe that the space
needed to accommodate our growth through the year 2003 is available.
Scientific Advisory Boards
We utilize scientists and physicians to advise us on scientific and medical
matters as part of our Scientific Advisory Board including experts in human
genetics, mouse genetics, molecular biology, biochemistry, cell biology,
chemistry, infectious diseases, immunology and structural biology. Generally,
each of our scientific and medical advisors and consultants has received our
common stock or an option to purchase our common stock.
Robert Tjian, Ph.D. is one of our founders and has been the Chairman of the
Scientific Advisory Board since its inception. Dr. Tjian is an investigator of
the Howard Hughes Medical Institute at the University of California, Berkeley.
Dr. Tjian is one of the world leaders in the field of transcription factor
biochemistry and was the first to clone and characterize a promoter-selective
human transcription factor (Sp1 in 1986). He has been a member of the National
Academy of Sciences since 1991. Dr. Tjian received the California Scientist of
the Year Award in 1994.
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<PAGE>
The following is a list of our other Scientific Advisory Board members:
James P. Allison, Ph.D. is Professor of Immunology and Co-Chairman of the
Department of Molecular & Cell Biology and an investigator of the Howard Hughes
Medical Institute at the University of California, Berkeley. Dr. Allison is a
leader in the field of cellular immunology. Dr. Allison was elected to the
National Academy of Sciences in 1997.
Paul A. Bartlett, Ph.D. is Professor of the Chemistry Department at the
University of California, Berkeley. Dr. Bartlett is an expert in the field of
bioorganic molecules, medicinal chemistry and combinatorial chemistry. He is
one of the founders of Pharmacopoeia, Inc.
Michael S. Brown, M.D. is Professor of Medicine and Genetics and Joseph L.
Goldstein, M.D. is Professor and Chairman of the Department of Molecular
Genetics at University of Texas Southwestern Medical Center at Dallas. Working
as a team, Drs. Brown and Goldstein pioneered a multidisciplinary approach to
the study of hypercholesterolemia by using a combination of biochemistry,
somatic cell genetics, molecular biology and, most recently, gene regulation
and cell biology. In 1985, Drs. Brown and Goldstein were awarded the Nobel
Prize in Medicine for their work in the regulation of cholesterol metabolism,
and in 1988 they received the National Medal of Science. They were elected to
the National Academy of Sciences in 1980.
E.J. Corey, Ph.D. is Sheldon Emery Professor of Organic Chemistry in the
Chemistry Department at Harvard University. Dr. Corey is a leader in organic
synthetic chemistry, including applications for manufacturing of
pharmaceuticals and applying computers to organic chemical problems. In 1988,
Dr. Corey received the National Medal of Science and in 1990, he was awarded
the Nobel Prize in Chemistry for his development of the theory and methodology
of organic synthesis.
Donald E. Ganem, M.D. is Professor of Microbiology and Medicine at the
University of California, San Francisco. Dr. Ganem is a leader in the area of
human viruses and microbial infectious agents.
Richard M. Losick, Ph.D. is Professor and Chairman of the Department of
Molecular & Cellular Biology at Harvard University. Dr. Losick is a leader in
the field of microbial development and gene regulation. Dr. Losick was elected
to the National Academy of Sciences in 1992 and to the American Academy of Arts
and Sciences in 1996.
Brian W. Matthews, Ph.D., D.Sc. is Professor of Physics and Molecular Biology
and an investigator of the Howard Hughes Medical Institute at the University of
Oregon, Eugene. He is one of the world's leaders in structural biology and
biophysics, with a special expertise in X-ray crystallography and is a pioneer
in the study of protein folding, protein:protein interactions and protein:DNA
interactions. Dr. Matthews was elected to the National Academy of Sciences in
1986.
Kim Nasmyth, Ph.D. is a Professor and Director of the Research Institute of
Molecular Pathology in Vienna. Dr. Nasmyth is an expert in the area of yeast
genetics, cell cycle regulation and cancer biology.
Bruce W. Stillman, Ph.D. is Director of the Cold Spring Harbor Laboratory on
Long Island, New York. Dr. Stillman is an expert in the area of DNA
replication, cell cycle control and tumor biology. He is a fellow of the Royal
Society.
James Wells, Ph.D. is co-founder and chief scientific officer of Sunesis,
Inc. Dr. Wells is a leader in the field of biomolecular design, protein
structure and function as well as molecular biology and phage display
technology. Dr. Wells was elected to the National Academy of Sciences in 1999.
Keith R. Yamamoto, Ph.D. is Chairman of the Department of Cellular and
Molecular Pharmacology at the University of California, San Francisco. Dr.
Yamamoto is a leader in the field of steroid receptors, a special class of
inducible transcriptional regulators. Dr. Yamamoto was elected to the National
Academy of Sciences in 1990.
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Oncology Scientific Advisory Board
In addition to our Scientific Advisory Board, we utilize a number of
scientists and physicians to advise us on scientific and medical matters as
part of our Oncology Scientific Advisory Board.
David Botstein, Ph.D. is a Professor at Stanford University and is the
chairman of the Stanford Department of Genetics. Dr. Botstein is a member of
the National Academy of Sciences.
Larry Norton, M.D. heads the Division of Solid Tumor Oncology at Memorial
Sloan Kettering Cancer Center. Dr. Norton is a leading clinical oncologist and
an expert in the treatment of breast cancer.
Bruce W. Stillman, Ph.D.--See above.
Michael Wigler, Ph.D. is an Investigator at Cold Spring Harbor Laboratory.
Dr. Wigler focuses his research on cancer genes, such as the ras oncogene and
tumor suppressor genes. Dr. Wigler is a member of the National Academy of
Sciences.
Clinical Oncology Scientific Advisory Board
A global oncology advisory panel guides our clinical oncology program.
Members include:
Dr. Hilary Calvert, University of Newcastle, UK
Dr. Ross Donehower, Johns Hopkins Hospital, Baltimore, USA
Dr. Axel Hanauske, Munich, Germany
Dr. David Newell, University of Newcastle, UK
Dr. Larry Norton, Memorial Sloan Kettering Cancer Center, New York, USA
Dr. Eric Rowinsky, Institute of Drug Development, San Antonio, Texas, USA
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of September 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David V. Goeddel, Ph.D............. 48 Chief Executive Officer and Director
Andrew J. Perlman, M.D., Ph.D...... 51 Executive Vice President
Yasunori Kaneko, M.D............... 46 Vice President, Business Development
Corinne H. Lyle.................... 39 Vice President, Chief Financial Officer
William J. Rieflin................. 39 Vice President, General Counsel and Secretary
Terry J. Rosen, Ph.D............... 40 Vice President, Research Operations
Pieter B.M.W.M. Timmermans, Ph.D... 49 Vice President, Pharmacology and Preclinical Development
A. Grant Heidrich, III............. 47 Director
Mark J. Levin...................... 49 Director
Paul A. Marks, M.D................. 73 Director
Edward R. McCracken................ 55 Director
Steven L. McKnight, Ph.D........... 50 Director
Peter J. Sjostrand, M.D............ 53 Director
</TABLE>
David V. Goeddel, Ph.D. co-founded Tularik in November 1991 and has served as
a member of our board of directors since inception and as our Chief Executive
Officer since April 1996. From April 1996 to December 1997, Dr. Goeddel served
as our President and from inception to March 1996, Dr. Goeddel served as our
Vice President, Research. Dr. Goeddel was the first scientist hired by
Genentech, Inc. and from 1978 to 1993 served in various positions, including
Fellow and Staff Scientist and Director of Molecular Biology. Dr. Goeddel's
pioneering work in the field of gene cloning and expression of human proteins
has been the basis for five significant marketed therapeutics developed by
Genentech, including human insulin, human growth hormone, interferon-alpha,
interferon-gamma and tissue plasminogen activator. Based on his contributions
in gene cloning and expression of human proteins, Dr. Goeddel was elected to
the National Academy of Sciences and the American Academy of Arts and Sciences.
Since 1998, Dr. Goeddel has served on the board of directors of Pharma Vision
2000 AG, an investor in Tularik. Dr. Goeddel holds a Ph.D. in Biochemistry from
the University of Colorado and subsequently performed postdoctoral research at
Stanford Research Institute.
Andrew J. Perlman, M.D., Ph.D. has served as our Executive Vice President
since September 1999. From November 1997 to September 1999, Dr. Perlman served
as our Vice President, Medical Research and Corporate Development. From January
1993 to November 1997, Dr. Perlman served as our Vice President of Medical
Research. Prior to joining Tularik, Dr. Perlman held senior clinical research
positions at Genentech, Inc. Previously, Dr. Perlman served as a faculty member
in the Department of Medicine at Stanford University. Dr. Perlman is a director
of SangStat Medical Corporation. Dr. Perlman holds an M.D. degree and Ph.D. in
Physiology from New York University.
Yasunori Kaneko, M.D. has served as our Vice President, Business Development
since June 1992. Dr. Kaneko served as our Chief Financial Officer from June
1992 to October 1996. Prior to joining Tularik, Dr. Kaneko held senior
positions at Isis Pharmaceuticals, Inc., Paribas Capital Markets Limited
(Tokyo, Japan) and Genentech, Inc. Since 1998, Dr. Kaneko has served on the
board of directors of Leukosite Inc. Dr. Kaneko holds an M.D. from Keio
University (Tokyo, Japan) and an M.B.A. from Stanford University.
Corinne H. Lyle has served as our Vice President, Chief Financial Officer
since October 1998. From April 1996 to August 1998, Ms. Lyle was an investment
banker at Warburg Dillon Read LLC. Previously, Ms. Lyle was with PaineWebber
Incorporated and Kidder Peabody & Co. Incorporated as an investment banker.
Ms. Lyle holds an M.B.A. from Harvard Business School.
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William J. Rieflin has served as our Vice President, General Counsel and
Secretary since August 1996. From May 1992 to July 1996, Mr. Rieflin worked at
AMSCO International, Inc., serving in various positions, including Vice
President-Human Resources, General Counsel and Secretary. Previously, Mr.
Rieflin was an associate at the law firm of Sidley & Austin. Mr. Rieflin holds
a J.D. from Stanford Law School and an M.B.A. from the University of Chicago
Graduate School of Business.
Terry J. Rosen, Ph.D. has served as our Vice President, Research Operations
since October 1996. From June 1996 to October 1996, Dr. Rosen served as our
Vice President, Medicinal Chemistry and from October 1993 to June 1996 he
served as our Director, Medicinal Chemistry. Prior to joining Tularik, Dr.
Rosen worked at Pfizer Inc and Abbott Laboratories. Dr. Rosen holds a Ph.D. in
Organic Chemistry from the University of California, Berkeley.
Pieter B.M.W.M. Timmermans, Ph.D. has served as our Vice President,
Pharmacology and Preclinical Development since January 1997. From June 1984 to
December 1996, Dr. Timmermans worked at the DuPont Merck Pharmaceutical
Company, and its predecessor, E.I. DuPont de Nemours & Company, serving in
various positions including Vice President of Drug Discovery and Senior Vice
President of Research. While at DuPont, Dr. Timmermans led the team that
discovered the nonpeptide angiotensin II receptor antagonist, Cozaar, which is
currently marketed by Merck. Dr. Timmermans holds a Ph.D. in Pharmacology from
the University of Amsterdam.
A. Grant Heidrich, III has served as a member of our board of directors since
November 1991. Mr. Heidrich joined Mayfield Fund in 1982 and is currently a
general partner of Mayfield Fund. Mr. Heidrich serves on the board of directors
of Millennium Pharmaceuticals, Inc. and several private companies. Mr. Heidrich
holds an M.B.A. from Columbia University Graduate School of Business.
Mark J. Levin has served as a member of our board of directors since November
1991. From November 1991 to March 1992, Mr. Levin served as our Chief Executive
Officer. Since November 1994, he has served as the Chief Executive Officer of
Millennium Pharmaceuticals, Inc. and has served as a member of its board of
directors since its inception in 1993 and as its Chairman of the Board since
March 1996. Previously, Mr. Levin was a partner at Mayfield Fund. Mr. Levin
serves on the board of directors of CytoTherapeutics Inc. Mr. Levin holds an
M.S. from Washington University in St. Louis.
Paul A. Marks, M.D. has served as a member of our board of directors since
December 1993. Since July 1980, Dr. Marks has served as the President and Chief
Executive Officer of Memorial Sloan-Kettering Cancer Center. Previously, Dr.
Marks was the Vice President for Health Sciences and Director of the Cancer
Center at Columbia University Medical Center. Dr. Marks is a member of the
National Academy of Sciences and the Institute of Medicine and is a Fellow of
the American Academy of Arts and Sciences. Dr. Marks serves on the board of
directors of several Dreyfus Mutual Funds. Dr. Marks holds an M.D. from the
College of Physicians and Surgeons, Columbia University.
Edward R. McCracken has served as a member of our board of directors since
August 1993. From 1984 to 1998, Mr. McCracken served as Chief Executive Officer
of Silicon Graphics, Inc. Before joining Silicon Graphics, Mr. McCracken spent
16 years with Hewlett-Packard Company, where he worked in a variety of senior
management positions. Mr. McCracken serves as Chairman of the Board of The
PRASAD Project, a charitable foundation, and serves on the board of directors
of CustomerCast Inc., National Semiconductor Corporation and Minnesota Mining
and Manufacturing Company. Mr. McCracken holds an M.B.A. from Stanford
University.
Steven L. McKnight, Ph.D. co-founded Tularik in November 1991 and has served
as a member of our board of directors since inception. From September 1992 to
September 1995, Dr. McKnight served as our Director, Biology. Since January
1997, Dr. McKnight has been a consultant to Tularik. Dr. McKnight has
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served as Professor and Chairman of the Department of Biochemistry at the
University of Texas Southwestern Medical Center since 1995. Previously, Dr.
McKnight was an investigator at the Howard Hughes Medical Institute at the
Carnegie Institution of Washington. Dr. McKnight is recognized as one of the
world leaders in gene regulation based in part on his discovery of leucine
zipper proteins. Dr. McKnight is a member of the National Academy of Sciences
and the American Academy of Arts and Sciences. Dr. McKnight holds a Ph.D. in
Biology from the University of Virginia.
Peter J. Sjostrand, M.D. has served as a member of our board of directors
since October 1996. Dr. Sjostrand is a partner of the BZ Group of Switzerland.
From 1975 to 1993, Dr. Sjostrand held various senior management positions at
Astra AB, including Executive Vice President, Chief Financial Officer and
Regional Director of the Americas. Dr. Sjostrand serves on the board of
directors of Pharma Vision 2000 AG, an investor in Tularik, and AGA AB. Dr.
Sjostrand holds an M.D. from Karolinska Institute in Stockholm, Sweden.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.
Board Committees
Audit Committee. Our audit committee, consisting of Mr. Heidrich and Mr.
Levin, reviews our internal accounting procedures and the services provided by
our independent auditors.
Compensation Committee. Our compensation committee, consisting of Mr.
Heidrich and Mr. McCracken, reviews and recommends to our board of directors
the compensation and benefits of all our officers and establishes and reviews
general policies relating to compensation and benefits of our employees.
Compensation Committee Interlocks and Insider Participation
During 1998, our compensation committee consisted of Robert A. Swanson, Mr.
Heidrich and Mr. McCracken. None of the members of our compensation committee
has at any time been an officer or employee of Tularik. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Compensation of Directors
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In April 1998 and
in April 1999, each of our non-employee directors received an option to
purchase 8,000 shares of common stock at an exercise price of $3.00 per share
under our 1997 Non-Employee Directors' Stock Option Plan. In consideration for
consulting services, we granted Dr. McKnight additional options to purchase an
aggregate of 50,000 shares of common stock, 25,000 shares in each of June 1998
and in June 1999, at an exercise price of $3.00 per share. The $3.00 per share
exercise price for these options was equal to the fair market value of the
common stock on the date of grant as determined by our compensation committee.
These options vest in a series of equal annual installments beginning on the
grant date of the option and extending through the next four years of service.
For more information, see "Benefit Plans--1997 Non-Employee Directors' Stock
Option Plan."
In consideration for consulting services, in addition to the options
described above, we pay Dr. McKnight $85,000 per year. Dr. McKnight spends
approximately 20% of his time providing consulting services to Tularik.
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<PAGE>
Between January 1995 and February 1998, we forgave $165,968 of the principal
and $24,780 of the interest due on a loan of $240,000 we provided to Dr.
McKnight in June 1992 to cover housing differential costs in connection with
his move to California from another state. In addition, we have paid $153,082
to Dr. McKnight to offset taxable income to him arising as a consequence of our
loan forgiveness. No amounts are due by Dr. McKnight on this loan.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during 1998 to our Chief Executive Officer and each of the four other
most highly compensated executive officers that earned more than $100,000
during 1998. All option grants were made under our 1997 Equity Incentive Plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------------
Securities All Other
Name and Principal Position Salary($) Underlying Options Compensation($)(2)
- --------------------------- ------------ ------------------ ------------------
<S> <C> <C> <C>
David V. Goeddel, Ph.D...... $324,077 150,000 $879
Chief Executive Officer and
Director
John P. McLaughlin(1)....... $275,000 500,000 $663
President
Yasunori Kaneko, M.D. ...... $246,671 50,000 $2,924
Vice President, Business
Development
Andrew J. Perlman, M.D.,
Ph.D....................... $234,231 50,000 $2,988
Vice President, Medical
Research and Corporate
Development
Pieter B.M.W.M. Timmermans,
Ph.D....................... $229,538 50,000 $876
Vice President,
Pharmacology and
Preclinical Development
</TABLE>
- --------
(1) Mr. McLaughlin resigned as President of Tularik effective as of September
30, 1999.
(2) Includes term-life insurance premiums paid by us on behalf of these named
executive officers, wellness benefits and taxable travel reimbursement.
The following table sets forth summary information regarding the option
grants made to our Chief Executive Officer and each of our four other most
highly paid executive officers during 1998. Options granted to purchase shares
of our common stock under our 1997 Equity Incentive Plan are generally
immediately exercisable by the optionee but are subject to a right of
repurchase according to the vesting schedule of each specific grant. In the
event that a purchaser ceases to provide service to Tularik and its affiliates,
we have the right to repurchase any of that person's unvested shares of common
stock at the original option exercise price. The exercise price per share is
equal to the fair market value of our common stock on the date of grant as
determined by our board of directors. The percentage of total options was
calculated based on options to purchase an aggregate of 1,849,700 shares of
common stock granted to employees under our 1997 Equity Incentive Plan in 1998.
The potential realizable value was calculated based on the ten-year term of the
options and assumed rates of stock appreciation of 5% and 10%, compounded
annually from the date the options were granted to their expiration date based
on the fair market value of the common stock on the date of grant. Twenty-five
percent of the initial option vests on the one year anniversary of employment
and the remainder vest in a series of equal monthly installments beginning on
the one year anniversary of employment and
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<PAGE>
continuing over the next three years of service. Options granted after the one
year anniversary of employment vest in a series of equal monthly installments
beginning from the vesting start date and continuing over the next four years
of service. See "Benefit Plans" for a description of the material terms of
these options.
Option Grants in 1998
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration -----------------
Name Granted Fiscal Year (per share) Date 5% 10%
- ---- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David V. Goeddel,
Ph.D................... 150,000 8.1% $3.00 6/17/08 $283,003 $717,185
John P. McLaughlin...... 500,000 27.0% $3.00 1/21/08(1) $149,219 $305,507
Yasunori Kaneko, M.D.... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
Andrew J. Perlman, M.D.,
Ph.D................... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
Pieter B.M.W.M.
Timmermans, Ph.D....... 50,000 2.7% $3.00 6/17/08 $ 94,334 $239,062
</TABLE>
- --------
(1) In connection with Mr. McLaughlin's resignation, the expiration date for
250,001 of these options is December 31, 1999. The potential realizable
value calculations are based upon this expiration date. 249,999 of these
options were not vested as of September 30, 1999 and may not be exercised.
The following table sets forth summary information regarding the number and
value of options held as of December 31, 1998 for our Chief Executive Officer
and each of our four most highly compensated executive officers. Our Chief
Executive Officer and each of our four most highly compensated executive
officers did not acquire any shares upon exercise of options in 1998. Amounts
shown in the value of unexercised in-the-money options at December 31, 1998
column are based on an initial public offering price of $14.00, without taking
into account any taxes that may be payable in connection with the transaction,
multiplied by the number of shares underlying the option, less the aggregate
exercise price payable for these shares.
1998 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Name Vested Unvested Exercisable Unexercisable
- ---- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
David V. Goeddel,
Ph.D. ................. 493,750 356,250 $10,637,500 --
John P. McLaughlin...... 125,001 374,999 $ 5,500,000 --
Andrew J. Perlman, M.D.,
Ph.D. ................. 129,792 105,208 $ 2,903,750 --
Yasunori Kaneko, M.D. .. 118,750 131,250 $ 3,087,500 --
Pieter B.M.W.M.
Timmermans, Ph.D. ..... 22,223 61,110 $ 916,663 --
</TABLE>
Benefit Plans
Since 1991, we have established four plans under which employees, officers,
non-employee directors and consultants may purchase or receive common stock
through incentive stock options, nonstatutory stock options, restricted stock
and stock bonuses. These plans are the 1991 Stock Plan, the 1997 Equity
Incentive Plan, 1997 Non-Employee Directors' Stock Option Plan and the 1999
Employee Stock Purchase Plan. In addition, we have established two defined
contribution plans that are intended to be qualified under Section 401(a) of
the Internal Revenue Code, as amended. They are the Tularik Salary Savings Plan
and the Tularik Matching Plan.
Long Term Incentive Plans
1991 Stock Plan. In November 1991, we adopted our 1991 Stock Plan. Our board
subsequently amended the 1991 plan in 1991, 1992, 1993, 1994, 1995 and 1996,
and the stockholders approved these amendments. The 1991 plan will terminate in
November 2001 unless it is terminated earlier by our board.
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<PAGE>
The 1991 plan provides for the grant of stock awards, including:
. incentive stock options, as defined by Section 422 of the Code that may
be granted solely to employees (including officers); and
. nonstatutory stock options (stock options other than incentive stock
options) and restricted stock purchase awards that may be granted to
employees (including officers) and consultants.
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the 1991 plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1991 plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
12 months after the date this service relationship ends. If an optionee's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionee may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
up to ninety days from cessation of service.
Acceptable consideration for the purchase of common stock issued under the
1991 plan is determined by our board of directors and may include cash, common
stock previously owned by the optionee, a deferred payment arrangement,
surrender of a portion of the option covering common stock having a fair market
value equal to the exercise price of all of the option, directions to a broker
to sell the common stock and deliver the exercise price from the sale proceeds,
an irrevocable subscription agreement obligating the optionee to pay for the
common stock within twelve months, and any other legal consideration approved
by our board.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and prior to our stock being
publicly traded, no nonstatutory stock option) may be granted to any person
who, at the time of the grant, owns or is deemed to own stock possessing more
than 10% of the total combined voting power of Tularik or any affiliate unless
the following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Restricted Stock Awards. The purchase price for each restricted stock award
granted must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. The restricted stock
award may be exercised for a period not to exceed 30 days from the date of the
grant of the right. The restricted stock awards may be subject to a right of
repurchase given to Tularik under the terms of the restricted stock award
grant.
Changes in Control. Upon specified changes in control of Tularik as provided
under the 1991 plan, all outstanding options under the 1991 plan either will be
assumed or substituted for by any surviving entity or its parent or subsidiary
corporation, if any. For stock options granted prior to January 4, 1992, if the
surviving entity or its parent or subsidiary corporation, if any, determines
not to assume or substitute the options, the
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<PAGE>
board of directors shall provide for the options to be fully exercisable for a
period of 15 days from the date of notice. If the board of directors makes the
options fully exercisable for this 15-day period, the options will terminate at
the end of this period.
Authorized Shares. An aggregate of 11,576,667 shares of common stock were
authorized for issuance under the 1991 plan. As of September 30, 1999, options
to purchase a total of 1,961,729 shares of our common stock were held by all
participants under the 1991 plan. As of September 30, 1999, a total of
2,100,000 shares of our common stock were purchased under restricted stock
awards. No shares of our common stock remained available for grant. Shares
subject to stock options that have expired or otherwise terminated without
having been exercised in full again become available for the grant of awards
under the 1991 plan. Shares issued under the 1991 plan may be previously
unissued shares or reacquired shares of common stock.
Plan Administration. Our board of directors administers the 1991 plan. Our
board of directors may delegate authority to administer the 1991 plan to a
committee of our board of directors. Subject to the terms of the plan, our
board of directors or its authorized committee determines recipients, the
numbers and types of stock awards to be granted, and the terms and conditions
of the stock awards including the period of their exercisability and vesting.
Subject to the plan limitations, our board of directors or its authorized
committee also determines the exercise price of options granted and the right
to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1991 plan that are not inconsistent with the 1991 plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1991 plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.
1997 Equity Incentive Plan. In March 1997, we adopted our 1997 Equity
Incentive Plan. The 1997 plan will terminate in March 2007 unless our board of
directors terminates it sooner.
The 1997 plan provides for the grant of stock awards, including:
. incentive stock options, as defined in Section 422 of the Code, that may
be granted solely to employees (including officers); and
. nonstatutory stock options, restricted stock purchase awards and stock
bonuses that may be granted to employees (including officers), non-
employee directors and consultants.
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the 1997 plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1997 plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
twelve months (eighteen months in the event of death) after the date this
service relationship ends. If an optionee's relationship with us, or any
affiliate of ours, ceases for any reason other than disability or death, the
optionee may (unless the terms of the stock option agreement provide for
earlier termination) exercise any vested options up to 90 days from cessation
of service.
Acceptable consideration for the purchase of common stock issued under the
equity 1997 plan is determined by our board of directors and may include cash,
common stock previously owned by the optionee, a deferred payment arrangement
and other legal consideration approved by our board of directors.
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<PAGE>
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and prior to our stock being
publicly traded, no nonstatutory stock option) may be granted to any person
who, at the time of the grant, owns or is deemed to own stock possessing more
than 10% of the total combined voting power of Tularik or any affiliate unless
the following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Section 162(m). When we become subject to Section 162(m) of the Code (which
generally denies a corporate tax deduction to publicly held corporations for
some compensation paid to specified employees in a taxable year to the extent
that the compensation exceeds $1,000,000 and is not paid based on performance),
no person may be granted options under the 1997 plan covering more than
1,000,000 shares of common stock in any calendar year. In the event that our
board of directors exercises its authority to reprice outstanding options or to
offer optionees the opportunity to replace outstanding options with new options
for the same or a different number of shares, then both the original and new
options will count toward the Section 162(m) limitation.
Restricted Stock and Stock Bonus Awards. Prior to our stock being publicly
traded, the purchase price for each restricted stock award granted must be at
least 85% of the fair market value of the stock on the date of the award or at
the time the purchase is consummated. For restricted stock awards made on or
after the date that our stock is publicly traded, the purchase price for these
awards must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. Rights to acquire
shares under a stock bonus or restricted stock bonus agreement may not be
transferred other than by will or by the laws of descent and distribution and
are exercisable during the life of the optionee only by the optionee. Some
restricted stock awards made following the completion of this offering may be
otherwise transferable if the stock bonus agreement so provides. Restricted
stock purchase awards granted under the 1997 plan may include a repurchase
option in favor of Tularik that varies according to a service vesting schedule
determined by our board of directors. Stock bonuses may be awarded in
consideration for past services without a purchase payment.
Changes in Control. Under specified changes in control, all outstanding
options under the 1997 plan either will be assumed, continued or substituted
for by any surviving entity. If the surviving entity does not assume, continue
or substitute for these awards, the vesting provisions of these stock awards
will be accelerated and these stock awards will be terminated upon the change
in control if not previously exercised.
Authorized Shares. An aggregate of 4,618,038 shares of common stock currently
are authorized for issuance under the 1997 plan. As of September 30, 1999,
options to purchase a total of 3,824,274 shares of our common stock were held
by all participants under the 1997 plan. A total of 304,112 shares of our
common stock remain available for grant. Shares subject to stock options that
have expired or otherwise terminated without having been exercised in full
again become available for the grant of awards under the 1997 plan. The share
reserve automatically will increase on December 31 every year through 2002 by a
number equal to 3.5% of the issued and outstanding shares of our common stock.
Shares issued under the 1997 plan may be previously unissued shares or
reacquired shares bought on the market or otherwise. No more than 2,000,000
shares of our common stock may be issued on the exercise of incentive stock
options during the term of the 1997 plan.
Plan Administration. Our board of directors administers the 1997 plan. Our
board of directors may delegate authority to administer the 1997 plan to a
committee. Subject to the terms of the plan, our board of
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<PAGE>
directors or its authorized committee determines recipients, the numbers and
types of stock awards to be granted, and the terms and conditions of the stock
awards including the period of their exercisability and vesting. Subject to the
plan limitations, our board or its authorized committee also determines the
exercise price of options granted and the right to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1997 plan that are not inconsistent with the 1997 plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1997 plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.
1997 Non-Employee Directors' Stock Option Plan. In January 1997, the
compensation committee of our board of directors adopted our 1997 Non-Employee
Directors' Stock Option Plan to provide for the automatic grant of options to
purchase shares of common stock to non-employee directors of Tularik. Our board
of directors administers the directors' plan, unless it delegates
administration to a committee. The maximum number of shares of common stock
that may be issued following exercise of options granted under the directors'
plan is 300,000.
Initial Grants. Under the terms of the directors' plan, each person serving
as a director of Tularik who is not an employee of Tularik and not already a
holder of one or more options to purchase stock of Tularik, is automatically
granted an option to purchase 25,000 shares of common stock effective on the
later of the approval of the directors' plan by the stockholders or the date
the director first becomes a member of our board.
Annual Grants. In addition, on the date of Tularik's annual meeting of
stockholders, each non-employee director who was a director on the last day of
the prior calendar year will automatically be granted an option to purchase
8,000 shares of common stock.
Vesting and Exercise Terms. Options under the directors' plan vest within
four years from the date of grant. The exercise price of options granted under
the directors' plan must equal the fair market value of the common stock on the
date of grant. No option granted under the directors' plan may be exercised
after the expiration of ten years from the date it was granted. Generally,
options granted under the directors' plan may only be transferable by will, the
laws of descent and distribution or for specified estate planning purposes. The
directors' plan will terminate at the discretion of our board of directors.
Change In Control. Under specified changes in control, all outstanding
options under the directors' plan either will be assumed or substituted for by
any surviving entity. If the surviving entity does not assume or substitute for
these awards, the vesting provisions of the options will be accelerated and the
options will be terminated upon the change in control if not previously
exercised.
1999 Employee Stock Purchase Plan. In November 1999, we adopted our 1999
Employee Stock Purchase Plan, authorizing the issuance of common stock through
purchase rights granted to our employees or to employees of our affiliates, if
any. The purchase plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Code. As of the date hereof, no
shares of common stock had been issued or purchased under the purchase plan.
The terms of the purchase plan are set forth in the purchase plan document and
each offering under the purchase plan.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. The purchase plan is implemented by offerings
of rights to eligible employees. Generally, all employees of Tularik or one of
its affiliates, including executive officers, who are not part-time or seasonal
employees whose customary employment is less than 20 hours per week or whose
customary employment is
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<PAGE>
less than 5 months per calendar year, may participate in the purchase plan and
may authorize payroll deductions of up to 15% of their earnings for the
purchase of common stock under the purchase plan. Under the plan, we may
specify offerings with a duration of not more than 27 months, and may specify
shorter purchase periods within each offering. The first offering will begin on
the effective date of this offering and be approximately 25 1/2 months in
duration. Subsequent offering periods will begin on each February 1st and
continue for a duration of 24 months. Purchases will occur each February 1st
and August 1st.
The purchase plan provides that employees may generally be required to
complete at least 90 days and not more than 2 years of employment with Tularik
or one of its affiliates in order to participate in the plan. Initially,
eligible employees may generally participate in the purchase plan only after
completing 90 days of employment with Tularik or one of its affiliates.
However, otherwise eligible employees who have not completed 90 days of
employment but are employed with Tularik or one of its affiliate as of the
effective date of the initial public offering shall be eligible to participate
on the effective date of the initial public offering provided they remain in
employment through the first purchase date under the purchase plan.
Unless otherwise determined by our board of directors, common stock is
purchased for accounts of employees participating in the purchase plan at a
price per share equal to the lower of:
. 85% of the fair market value of a share of our common stock on the date
of commencement of participation in the offering; or
. 85% of the fair market value of a share of our common stock on the date
of purchase.
On the first day of an offering period, we will grant to each eligible
employee who has elected to participate in the purchase plan an option to
purchase shares of common stock as follows: the employee may authorize an
amount (a whole percentage from 1% to 15% of the employee's regular pay) to be
deducted by Tularik from his or her pay during the offering period. On the last
day of the offering period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. For this purpose, an employee's regular pay shall include his or
her base salary, contributions to the Tularik Salary Savings Plan, overtime
pay, commissions and bonuses, but shall exclude other remuneration paid
directly to the employee, profit-sharing payments, employee benefits, imputed
income on employee benefits, employee expense reimbursements and income
received in connection with stock options.
If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the purchase plan terminate upon voluntary withdrawal from the
purchase plan at any time, or when this employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has specified rights to elect to exercise the option to
purchase the shares that the accumulated payroll deductions in the
participant's account would purchase at the date of death.
Limitations. Eligible employees may be granted rights only if the rights,
together with any other rights granted under any other employee stock purchase
plans, do not permit the employee to purchase our common stock at a rate which
exceeds $25,000 of the fair market value of this stock for each calendar year
in which these rights are outstanding. No employee shall be eligible for the
grant of any rights under the purchase plan if immediately after these rights
are granted, the employee has voting power over 5% or more of our outstanding
capital stock (measured by vote or value).
Authorized shares. The purchase plan authorizes the issuance of a total of
500,000 shares of common stock under the purchase plan. This reserve amount
will be increased each January 1 beginning January 1, 2001 by the lesser of
500,000 shares of common stock or 1% of the number of shares of common stock
outstanding on that date. However, our board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares
of common stock will be increased on that date.
Administration. Our board of directors administers the purchase plan. Our
board of directors may delegate authority to administer the purchase plan to a
committee that shall have the authority of our board of directors to adopt
resolutions governing the purchase plan.
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Tax Qualified Plans. We sponsor the Tularik Salary Savings Plan and Matching
Plan as discussed below:
Savings Plan. Our savings plan, effective October 1, 1993, is intended to be
a tax-qualified defined contribution plan under Subsections 401(a) and 401(k)
of the Code. All employees are eligible to participate and may enter the 401(k)
plan as of their date of hire and on the first day of any month thereafter.
Each participant may contribute up to 20% of his or her pre-tax compensation to
the savings plan, subject to statutorily prescribed annual limits. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Employee
contributions are held in trust and invested by the savings plan trustee as
required by law. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
Matching Plan. Our matching plan, effective January 1, 1998, is intended to
be a tax-qualified defined contribution plan under Subsections 401(a) and
401(m) of the Code. All employees are eligible to participate and may enter the
matching plan as of the date they become eligible to participate in the savings
plan. Each participant who makes pre-tax contributions to the savings plan is
eligible to have a matching contribution in common stock made by Tularik to his
or her matching plan account in an amount up to 50% of the participant's
savings plan contribution with a maximum employee contribution of $1,500 per
year, subject to statutorily prescribed annual limits. We may make additional
discretionary contributions for all participants to the matching plan. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Limitations of Liability; Indemnification of Directors and Officers
In connection with the consummation of the offerings, we will adopt and file
an amended and restated certificate of incorporation and amended and restated
bylaws. As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we must indemnify our
directors to the fullest extent permitted by Delaware law.
In addition, our amended and restated bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law,
our amended and restated certificate of incorporation, our bylaws or
agreements;
. we are required to advance expenses to our directors and executive
officers as incurred in connection with legal proceedings against them
for which they may be indemnified; and
. the rights conferred in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify
each director and officer to the fullest extent permitted by Delaware law,
including indemnification for expenses such as attorneys' fees, judgments,
fines and
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settlement amounts incurred by the director or officer in any action or
proceeding, including any action by or in the right of Tularik, arising out of
the person's services as a director or officer of Tularik, any subsidiary of
ours or any other company or enterprise to which the person provides services
at our request. At present, we are not aware of any pending or threatened
litigation or proceeding involving any of our directors, officers, employees or
agents in which indemnification would be required or permitted. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
Employment Agreements and Termination of Employment Agreements
At the time of commencement of employment, our employees generally sign offer
letters specifying basic terms and conditions of employment. In general, our
employees are not subject to written employment agreements. Each officer and
employee has entered into a standard form confidential information and
invention assignment agreement that provides that the employee will not
disclose any confidential information of Tularik received during the course of
employment and that, with some exceptions, the employee will assign to Tularik
any and all inventions conceived or developed during the course of employment.
In October 1999, we entered into an agreement with John P. McLaughlin, our
former President. Under the terms of the agreement, Mr. McLaughlin will receive
his salary and health benefits through December 31, 1999 and may receive his
salary and health benefits through June 30, 2000 if he does not secure
alternate employment prior to that date. In addition, the vesting of options to
purchase 37,500 shares of common stock was accelerated. We provided Mr.
McLaughlin with a one-year loan in the principal amount of $787,503 at an
annual interest rate of 5.54%, in exchange for a promissory note secured by a
pledge of 262,501 shares of common stock.
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RELATED PARTY TRANSACTIONS
Stock option grants to our executive officers and directors are described in
this prospectus under the heading "Management--Compensation of Directors, --
Executive Compensation and --Employment Agreements."
From January 1, 1996 through September 30, 1999, the following executive
officers, directors and holders of more than 5% of our voting securities
purchased securities in the amounts and as of the dates shown below.
<TABLE>
<CAPTION>
Series F Series G
Preferred Preferred
Purchaser Common Stock Stock Stock
- --------- ------------ --------- ---------
<S> <C> <C> <C>
Directors and Executive Officers(1)
David V. Goeddel, Ph.D. .................... 550,001 -- --
John P. McLaughlin.......................... -- -- --
Yasunori Kaneko, M.D. ...................... 200,000 -- --
Corinne H. Lyle............................. -- -- --
Andrew J. Perlman, M.D., Ph.D. ............. 100,000 -- --
William J. Rieflin.......................... 183,334 -- --
Terry J. Rosen.............................. 63,000 -- --
Pieter B.M.W.M. Timmermans, Ph.D. .......... 116,667 -- --
A. Grant Heidrich, III...................... -- -- --
Mark J. Levin............................... -- -- --
Paul A. Marks, M.D. ........................ 33,000 -- --
Edward R. McCracken......................... -- -- --
Steven L. McKnight, Ph.D. .................. -- -- --
Peter J. Sjostrand, M.D. ................... -- -- --
Entities Affiliated with Directors(1)
Mayfield Fund(2)............................ -- -- --
Pharma Vision 2000 AG(3).................... -- 3,280,000 5,000,000
Price Per Share(4).......................... $0.40 to $3.00 $ 10.00 $ 10.25
Date(s) of Purchase......................... 1/96-9/99 10/96 12/97
</TABLE>
- --------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) The entities affiliated with Mayfield Fund are Mayfield Associates,
Mayfield Medical Partners and Mayfield VI. Mr. Heidrich, one of our
directors, is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general partner
of Mayfield VI. Mayfield VI is a general partner of Mayfield Medical
Partners. Mr. Levin, one of our directors, is a general partner of Mayfield
Medical Partners.
(3) Dr. Goeddel, our Chief Executive Officer and one of our directors, is a
director of Pharma Vision. Dr. Sjostrand, a member of our board of
directors, is a director of Pharma Vision.
(4) The weighted average price per share for these purchases of our common
stock as of September 30, 1999 was $1.75.
We have entered into an amended and restated registration rights agreement
with each of the purchasers of preferred stock shown above. This agreement and
additional similar agreements provide that these and other stockholders will
have registration rights with respect to their shares of common stock issuable
upon conversion of their preferred stock following the offerings.
We have entered into indemnification agreements with our directors and
certain officers for the indemnification and advancement of expenses to these
persons to the fullest extent permitted by law. We also
67
<PAGE>
intend to enter into those agreements with our future directors and officers.
See "Limitation of Liability; Indemnification of Directors and Officers."
In May 1997, we loaned Mr. Rieflin $250,000 that he used in connection with
relocating to California from another state. Mr. Rieflin has repaid the full
amount that was due on this loan. The loan was interest free and was secured by
a pledge of Mr. Rieflin's shares of our common stock.
In November 1997, we loaned Mr. Rieflin $94,132 that he used to cover housing
differential costs in his move to California from another state. We have
forgiven $23,533 of the principal of this loan and will forgive an additional
$23,533 each November if Mr. Rieflin continues as an employee of Tularik
through that date. Mr. Rieflin has not repaid any amount due on this loan. The
loan bears interest at a rate of 6.10% per year, is secured by a pledge of Mr.
Rieflin's shares of our common stock and is due on November 14, 2001.
We believe that all of the transactions discussed above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
Pharma Vision, which is our largest stockholder and owns 23.5% of our
outstanding stock, has agreed, subject to conditions, to purchase directly from
us concurrently with the offerings additional shares of common stock that would
allow it to maintain its percentage ownership. Pharma Vision would purchase
1,633,250 shares of common stock, and if the underwriters exercised the over-
allotment options in full, Pharma Vision would purchase an additional 244,988
shares of common stock. Any sales of shares by us to Pharma Vision would be
made under the separate purchase agreement between us and Pharma Vision
containing customary terms. All shares to be sold to Pharma Vision under this
agreement would be sold at the public offering price shown on the cover page of
this prospectus. These shares would be sold through the registration statement
of which this prospectus is a part and would not be subject to any lock-up
agreement with us or the underwriters. The underwriters would not receive any
discounts or commissions on the sale of these shares.
BZ Bank Limited, an affiliate of Pharma Vision, is one of the international
managers of the offering. Please see discussion under "Underwriting."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides summary information regarding the beneficial
ownership of our outstanding common stock as of September 30, 1999 for:
. each person or group who beneficially owns more than 5% of our common
stock;
. our chief executive officer;
. each of our four other most highly compensated executive officers whose
compensation exceeded $100,000 during 1998;
. each of our directors; and
. all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
September 30, 1999 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Applicable percentage ownership in the
following table is based on 35,271,375 shares of common stock outstanding as of
September 30, 1999, after giving effect to the conversion of all outstanding
shares of preferred stock into common stock upon the closing of the offerings,
and 42,221,375 shares of common stock outstanding immediately following the
completion of the public offerings and the direct offering to Pharma Vision.
Unless otherwise indicated, the address of each of the named individuals is c/o
Tularik Inc., Two Corporate Drive, South San Francisco, California 94080.
<TABLE>
<CAPTION>
Amount and Nature of Shares Beneficially Owned as of September 30, 1999
-------------------------------------------------------------------------------
Percent of Total Outstanding
Shares Issuable Shares Beneficially Owned
Shares Subject to Under Options ---------------------------------
Outstanding a Right of Exercisable Before the After the
Shares of Repurchase as of within 60 Days Public Offerings Public Offerings
Common September 30, of September and the and the
Name Stock(1) 1999(2) 30, 1999 Direct Offering Direct Offering
- ---- ----------- ----------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Pharma Vision 2000 AG(3)........... 8,280,000 -- -- 23.5 23.5
Spielhof 3
8750 Glaris Switzerland
Entities affiliated with Mayfield
Fund(4)........................... 3,966,474 -- -- 11.2 9.4
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
David V. Goeddel, Ph.D.(5)......... 9,658,125 171,876 549,999 29.0 28.1
John P. McLaughlin................. -- -- 225,001 * *
Yasunori Kaneko, M.D.(6)........... 395,000 -- 275,000 1.9 1.6
Andrew J. Perlman, M.D., Ph.D.(7).. 270,000 -- 205,000 1.3 1.1
Pieter B.M.W.M. Timmermans, Ph.D... 77,778 38,889 133,333 * *
A. Grant Heidrich, III(8).......... 3,966,474 -- 41,000 11.3 9.5
Mark J. Levin(9)................... 479,818 -- 99,000 1.6 1.4
Edward R. McCracken................ -- -- 89,000 * *
Steven L. McKnight, Ph.D.(10)...... 784,751 6,249 399,000 3.3 2.8
Paul A. Marks, M.D. ............... 64,313 8,687 16,000 * *
Peter J. Sjostrand, M.D.(11)....... 8,280,000 -- 49,000 23.6 23.6
All executive officers and
directors as a group (14
people)(12)....................... 15,434,649 278,827 2,689,999 48.5 41.0
</TABLE>
- --------
* Less than one percent (1%).
(1) Excludes shares of common stock subject to a right of repurchase as of
September 30, 1999.
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<PAGE>
(2) The unvested portion of the shares of common stock is subject to a right
of repurchase by us, at the original option exercise price, in the event
the holder ceases to provide service to us and our affiliates. The option
exercise prices range from $0.025 to $3.00. See "Management--Executive
Compensation" for more detail on our right to repurchase.
(3) Pharma Vision has agreed, subject to conditions, to purchase directly from
us concurrent with the public offerings additional shares of common stock
that would allow it to maintain its percentage ownership. The percentage
of total outstanding shares beneficially owned by Pharma Vision after the
public offerings and the direct offering includes 1,633,250 shares that
may be purchased by Pharma Vision in the direct offering. See "Related
Party Transactions" for more detail on the direct offering.
(4) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held
by Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI.
Mayfield VI Management Partners is the general partner of Mayfield VI and
Mayfield VI is a general partner of Mayfield Medical Partners. Mr.
Heidrich is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mr. Levin is a general partner of Mayfield Medical
Partners.
(5) Includes 8,280,000 shares held by Pharma Vision. The percentage of total
outstanding shares beneficially owned by Pharma Vision after the public
offerings and the direct offering includes 1,633,250 shares that may be
purchased by Pharma Vision in the direct offering. Dr. Goeddel is a
director of Pharma Vision and disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
Does not include 240,000 shares held in trust for Dr. Goeddel's children,
for which Dr. Goeddel is not the trustee and disclaims beneficial
ownership.
(6) Includes 200,000 shares held in trust for the Kaneko Family Trust for
which Dr. Kaneko disclaims beneficial ownership. Does not include 40,000
shares held in trust for Dr. Kaneko's minor children, for which Dr. Kaneko
is not the trustee and disclaims beneficial ownership.
(7) Includes 195,000 shares held in trust for the Perlman/Gardner Family Trust
for which Dr. Perlman disclaims beneficial ownership. Does not include
30,000 shares held in trust for Dr. Perlman's minor children, for which
Dr. Perlman is not the trustee and disclaims beneficial ownership.
(8) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held
by Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI. Mr.
Heidrich is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general
partner of Mayfield VI and Mayfield VI is a general partner of Mayfield
Medical Partners. Mr. Heidrich disclaims beneficial ownership of these
shares except to the extent of his proportionate partnership interest in
these shares.
(9) Includes 479,818 shares held by Mayfield Medical Partners. Mr. Levin is a
general partner of Mayfield Medical Partners and disclaims beneficial
ownership of these shares except to the extent of his proportionate
partnership interest in these shares.
(10) Includes 200,000 shares held in trust for Dr. McKnight's minor children
and 206,000 shares held in trust for the Steven L. McKnight Exempt Family
Trust. Dr. McKnight disclaims beneficial ownership of these shares.
(11) Includes 8,280,000 shares held by Pharma Vision. The percentage of total
outstanding shares beneficially owned by Pharma Vision after the public
offerings and the direct offering includes 1,633,250 shares that may be
purchased by Pharma Vision in the direct offering. Dr. Sjostrand is a
director of Pharma Vision and disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
(12) Includes shares described in the notes above, as applicable.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the offerings and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of 65
million shares of common stock, $0.001 par value, and five million shares of
preferred stock, $0.001 par value.
Common Stock
As of September 30, 1999, there were 35,271,375 shares of common stock
outstanding that were held of record by approximately 374 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be 42,221,375 shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment options and no
exercise of outstanding options) after giving effect to the sale of the shares
of common stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets
legally available therefor as our board of directors may from time to time
determine. Upon liquidation, dissolution or winding up of Tularik, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
shares of preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable.
Preferred Stock
According to our amended and restated certificate of incorporation, our board
of directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, in one or
more series. Our board shall determine the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of any series. The issuance of preferred stock could diminish voting power of
holders of common stock, and the likelihood that holders of preferred stock
will receive dividend payments and payments upon liquidation may have the
effect of delaying, deferring or preventing a change in control of Tularik,
which could depress the market price of our common stock. We have no present
plan to issue any shares of preferred stock.
Registration Rights of Stockholders
Upon completion of the offerings, holders of an aggregate of 26,953,539
shares of common stock and warrants to purchase an aggregate of 1,015,091
shares of common stock will be entitled to rights to register these shares
under the Securities Act. These rights are provided under an Investor Rights
Agreement, dated October 31, 1997, under an Amended and Restated Registration
Rights Agreement, dated August 15, 1999, and under agreements with similar
registration rights. If we propose to register any of our securities under the
Securities Act, either for our own account or for the account of others, the
holders of these shares are entitled to notice of the registration and are
entitled to include, at our expense, their shares of common stock in the
registration and any related underwriting, provided, among other conditions,
that the underwriters may limit the number of shares to be included in the
registration and in some cases, including this offering, exclude these shares
entirely. In addition, the holders of these shares may require us, at our
expense and on not more than two occasions at any time beginning six months
from the date of the closing of the offerings, to file a registration statement
under the Securities Act with respect to their shares of common stock, and we
will be required to use our best efforts to effect the registration. Further,
the holders may require us at our expense to register their shares on Form S-3
when this form becomes available.
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<PAGE>
Anti-Takeover Provisions of Delaware Law and Charter Provisions
Until November 2000, we are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless:
. prior to that date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to that date, the business combination is approved by
our board of directors and is authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our amended and restated certificate of incorporation requires that upon
completion of the public offerings, any action required or permitted to be
taken by our stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by a consent in writing.
Additionally, our certificate of incorporation:
. substantially limits the use of cumulative voting in the election of
directors;
. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed by our amended and restated certificate of
incorporation. Our board of directors currently consists of eight members, who
will be elected at each annual meeting of our stockholders. Our board of
directors may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit who may call a special meeting of
stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota N.A.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offerings, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could reduce prevailing market prices. Furthermore, since no shares will be
available for sale shortly after this offering because of contractual and legal
restrictions on resale as described below, sales of substantial amounts of our
common stock in the public market after these restrictions lapse could
adversely affect the prevailing market price and our ability to raise equity
capital in the future.
Upon completion of the public offerings and the direct offering to Pharma
Vision, we will have outstanding an aggregate of 42,221,375 shares of common
stock, assuming no exercise of the underwriters' over-allotment option and no
exercise of outstanding options or warrants after September 30, 1999. Of these
shares, all of the shares sold in the public offerings and the direct offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
35,271,375 shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described
below under Rules 144, 144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
. unless held by affiliates, the 5,316,750 shares sold in the public
offerings, the 1,633,250 shares sold to Pharma Vision in the direct
offering and an additional 2,086,627 shares will be freely tradable upon
completion of the offerings;
. 104,949 shares will be eligible for sale beginning 90 days after the date
of this prospectus;
. 33,079,799 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus; and
. 3,709,202 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
Lock-Up Agreements. All of our officers, directors and some of our
stockholders and option holders have agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of at least 180 days after the date of this prospectus. Transfers
or dispositions can be made sooner only with the prior written consent of
Lehman Brothers Inc. Shares purchased by Pharma Vision in the direct offering
would not be subject to any lock-up agreement with the underwriters or us.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus a person or persons whose shares are
aggregated, who has beneficially owned restricted securities for at least one
year, including the holding period of any prior owner except an affiliate,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 422,214 shares immediately after the offerings;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
Tularik.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions
73
<PAGE>
of Rule 144. 16,205,022 shares of our common stock will qualify as "144(k)
shares" within 180 days after the date of this prospectus.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory
stock purchase plan or option plan or other written agreement will be eligible
to resell their shares beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates
under Rule 144 without compliance with its holding period requirements.
Registration Rights. Upon completion of this offering, the holders of
26,953,539 shares of our common stock, or their transferees, will be entitled
to rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in
these shares becoming freely tradeable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of this registration.
Stock Options. Following the offerings, we intend to file a registration
statement on Form S-8 under the Securities Act covering the shares of common
stock reserved for issuance under our 1991 Stock Plan, 1997 Equity Incentive
Plan and 1999 Employee Stock Purchase Plan that will become effective upon
filing. Accordingly, shares registered under that registration statement will,
subject to Rule 144 volume limitations applicable to affiliates, be available
for sale in the open market after the filing, except those shares subject to
lockup agreements and unvested shares.
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<PAGE>
UNDERWRITING
Under the U.S. underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the U.S.
underwriters named below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC,
J.P. Morgan Securities Inc. and Warburg Dillon Read LLC are acting as U.S.
representatives, has agreed to purchase from us the number of shares of common
stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................ 733,550
Hambrecht & Quist LLC.............................................. 432,400
J.P. Morgan Securities Inc......................................... 496,200
Warburg Dillon Read LLC............................................ 496,200
BancBoston Robertson Stephens Inc.................................. 41,200
Bear, Stearns & Co. Inc............................................ 41,200
CIBC World Markets Corp............................................ 41,200
Credit Suisse First Boston Corporation............................. 41,200
Donaldson, Lufkin & Jenrette Securities Corporations............... 41,200
Fidelity Capital Markets
a division of National Financial Services Corp.................... 41,200
Goldman, Sachs & Co................................................ 41,200
ING Barings LLC.................................................... 41,200
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................... 41,200
Morgan Stanley & Co. Incorporated.................................. 41,200
SG Cowen Securities Corporation.................................... 41,200
Salomon Smith Barney Inc........................................... 41,200
Adams, Harkness & Hill, Inc........................................ 20,500
Arnhold and S. Bleichroeder, Inc................................... 20,500
Dain Rauscher Wessels
a Division of Dain Rauscher Incorporated.......................... 20,500
Fahnestock & Co. Inc............................................... 20,500
First Security Van Kasper.......................................... 20,500
Gerard Klauer Mattison & Co., Inc.................................. 20,500
Ragen MacKenzie Incorporated....................................... 20,500
U.S. Bancorp Piper Jaffray Inc..................................... 20,500
---------
Total............................................................ 2,816,750
=========
</TABLE>
Under the international underwriting agreement, which is filed as an exhibit
to the registration statement relating to this prospectus, the international
managers named below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC,
J.P. Morgan Securities Inc. and Warburg Dillon Read LLC are acting as lead
managers, have each agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
International Managers Shares
---------------------- ---------
<S> <C>
Lehman Brothers Inc................................................ 164,570
Hambrecht & Quist LLC.............................................. 164,560
J.P. Morgan Securities Inc......................................... 164,560
Warburg Dillon Read LLC............................................ 164,560
BZ Bank Limited.................................................... 1,841,750
---------
Total............................................................ 2,500,000
=========
</TABLE>
75
<PAGE>
We refer to the U.S. underwriters and international managers as the
underwriters and the U.S. representatives and international lead managers as
the representatives.
BZ Bank Limited, a licensed bank and broker-dealer in Switzerland, is one of
the international managers. BZ Bank is an affiliate of Pharma Vision 2000 AG,
which is our largest stockholder and currently owns 23.5% of our outstanding
common stock. Peter Sjostrand, a member of our Board of Directors is a member
of the Pharma Vision Board of Directors and is a partner of BZ Group, which
controls BZ Bank. David V. Goeddel, our Chief Executive Officer and a member of
our Board of Directors, is also a member of the Pharma Vision Board of
Directors. The representatives and we have agreed that BZ Bank shall have the
discretion to place approximately 26.5% of all shares of common stock to be
sold in the offerings, including the over-allotment options. BZ Bank has
advised us that it intends to sell these shares to investors in Switzerland and
other countries in Europe. BZ Bank will receive the selling concession on those
sales. The shares to be sold by BZ Bank will not be subject to any lock-up
agreement with the underwriters.
The U.S. and international underwriting agreements provide that the
obligations of the underwriters to purchase shares of common stock depend on
the satisfaction of the conditions contained in the U.S. and international
underwriting agreements, respectively. The U.S. and international underwriting
agreements also provide that if any of the shares of common stock are purchased
by the underwriters, then all of the shares of common stock which the
underwriters have agreed to purchase under their respective underwriting
agreements, must be purchased. The conditions contained in each underwriting
agreement include the requirement that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
shown on the cover page of this prospectus, and to dealers, who may include the
underwriters, at the public offering price less a selling concession not in
excess of $0.58 per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $0.10 per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted the U.S. underwriters and the international managers options
to purchase up to an aggregate of 797,512 additional shares of common stock, in
each case exercisable solely to cover over-allotments, if any, at the public
offering price less the underwriting discount shown on the cover page of this
prospectus. The U.S. underwriters and international managers may exercise these
options at any time until 30 days after the date of the underwriting
agreements. If these options are exercised, each U.S. underwriter and
international manager will be committed, so long as the conditions of the
underwriting agreements are satisfied, to purchase a number of additional
shares of common stock proportionate to the U.S. underwriter's or international
manager's initial commitment as indicated in the tables above, and we will be
obligated, under the over-allotment options, to sell the shares of common stock
to the U.S. underwriters and international managers.
We have agreed that, without the prior consent of Lehman Brothers, we will
not, directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities that may be converted into or exchanged for any
shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers, directors and holders of
substantially all of our outstanding capital stock have agreed under lock-up
agreements that, without the prior written consent of Lehman Brothers, they
will not, subject to limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for any shares of common stock for the period
ending 180 days from the date of this prospectus. See "Shares Eligible for
Future Sale."
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<PAGE>
The U.S. underwriters and the international managers have entered into an
agreement among U.S. underwriters and international managers. In this
agreement, each U.S. underwriter has agreed that,
. it is not purchasing any of these shares for the account of anyone other
than a U.S. Person (as defined below), and
. it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to anyone other than a U.S. Person.
In addition, under the agreement, each international manager has agreed
that,
. it is not purchasing any of these shares for the account of a U.S.
Person, and
. it has not offered or sold, and will not offer, sell, resell, or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to any U.S. Person.
The limitations described above do not apply to stabilization transactions or
to certain other transactions specified in the underwriting agreements and the
agreement among U.S. underwriters and international managers, including
. certain purchases and sales between U.S. underwriters and the
international managers,
. certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion,
. purchases, offers or sales by a U.S. underwriter who is also acting as an
international manager or by an international manager who is also acting
as a U.S. underwriter and
. other transactions specifically approved by the representatives.
As used in this section, the term "U.S. Person" means any resident or
national of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or
Canada, or any estate or trust the income of which is subject to United States
or Canadian federal income taxation regardless of the source. The term "United
States" means the United States of America (including the District of Columbia)
and its territories, its possessions and other areas subject to its
jurisdiction, and the term "Canada" means Canada, its provinces, its
territories, its possessions and other areas subject to its jurisdiction.
According to the agreement among the U.S. underwriters and international
managers, sales may be made between the U.S. underwriters and the international
managers of the number of shares of common stock as may be mutually agreed. The
price of any shares so sold shall be the public offering price as then in
effect for the shares of common stock being sold by the U.S. underwriters and
the international managers less an amount equal to the selling concession
allocable to those shares of common stock, unless otherwise determined by
mutual agreement. To the extent that there are sales between the U.S.
underwriters and the international managers under the agreement among the U.S.
underwriters and the international managers, the number of shares of common
stock available for sale by the U.S. underwriters or by the international
managers may be more or less than the amount specified in the tables above.
Before this offering, there has been no public market for shares of our
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions:
. our capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
77
<PAGE>
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "TLRK."
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as a selling group member in this offering and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreements. We
have also agreed to contribute to payments that the underwriters may be
required to make for these liabilities.
Until the distribution of the common stock is complete, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offerings. This means that they may sell more shares than
are shown on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Each international manager has represented and agreed that:
. it has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer to sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulation with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
78
<PAGE>
. it has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom these
documents may otherwise be issued or passed upon.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
At our request, the underwriters have reserved up to 369,750 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to our business associates. These shares
will be offered at the public offering price shown on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
BZ Bank Limited, a licensed bank and broker-dealer in Switzerland and an
international manager in the offering, is an affiliate of Pharma Vision 2000
AG, which is our largest stockholder and owns 23.5% of our outstanding common
stock. Given this relationship and BZ Bank's participation in the offerings,
Lehman Brothers has assumed the responsibilities of acting as qualified
independent underwriter of the offerings. In its role as qualified independent
underwriter, Lehman Brothers has performed a due diligence investigation and
reviewed and participated in the preparation of this prospectus and the
registration statement of which this prospectus is a part.
Pharma Vision has agreed, subject to conditions, to purchase directly from us
concurrently with the public offerings additional shares of common stock that
would allow it to maintain its percentage ownership in us. Please see the
discussion under the heading "Related Party Transactions."
79
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California, will provide us with an opinion as
to the validity of the common stock offered under this prospectus. Latham &
Watkins, San Diego, California, will pass upon certain legal matters related to
the offerings for the underwriters. As of the date of this prospectus, certain
partners and associates of Cooley Godward LLP own an aggregate of 13,514 shares
of our common stock through investment partnerships.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998 and for each of the three
years in the period ended December 31, 1998, and at September 30, 1999 and for
the nine months then ended as shown in their report. We have included our
financial statements in this prospectus and elsewhere in the registration
statements in reliance on Ernst & Young LLP's report, given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission registration
statements on Form S-1 under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain
all of the information in the registration statements and the exhibits and
schedule to the registration statements. For further information with respect
to us and our common stock, we refer you to the registration statements and to
the exhibits and schedule to registration statements. Statements contained in
this prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we refer you to
the copy of the contract or other document filed as an exhibit to the
registration statements. Each of these statements is qualified in all respects
by this reference. You may inspect a copy of the registration statements
without charge at the SEC's principal office in Washington, D.C., and copies of
all or any part of the registration statements may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of fees prescribed by the SEC. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the Web site is http://www.sec.gov. The SEC's toll free investor
information service can be reached at 1-800-SEC-0330. Information contained on
our website does not constitute part of this prospectus.
Upon completion of the offerings, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(650) 825-7000.
80
<PAGE>
TULARIK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Tularik Inc.
We have audited the accompanying consolidated balance sheets of Tularik Inc.
as of December 31, 1997 and 1998 and September 30, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998 and for the nine
months ended September 30, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Tularik Inc. at
December 31, 1997 and 1998 and September 30, 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 and for the nine months ended September 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
October 25, 1999
F-2
<PAGE>
TULARIK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ September 30, September 30,
1997 1998 1999 1999
-------- -------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 74,545 $ 53,398 $ 17,269
Short-term investments........ 49,861 58,926 86,919
Prepaid expenses and other
current assets............... 881 1,582 2,714
-------- -------- --------
Total current assets........ 125,287 113,906 106,902
Property and equipment, net.... 6,209 11,950 15,674
Other investments.............. 1,000 9,050 2,050
Restricted investment.......... -- -- 3,997
Other assets................... 1,026 1,872 2,403
-------- -------- --------
$133,522 $136,778 $131,026
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 1,154 $ 1,570 $ 1,671
Accrued compensation and
related liabilities.......... 1,084 1,170 1,011
Accrued liabilities........... 1,052 1,377 2,257
Accrued construction costs.... -- 2,076 --
Current portion of long-term
obligations.................. 1,222 2,330 4,402
Deferred revenue.............. 4,248 10,848 13,160
-------- -------- --------
Total current liabilities... 8,760 19,371 22,501
Long-term obligations, less
current portion............... 3,456 4,734 10,254
Other non-current liabilities.. 450 1,775 2,715
Commitments
Stockholders' equity:
Convertible preferred stock,
$0.001 par value; 33,000,000
shares authorized;
26,858,823, 26,903,885, and
26,953,539 shares issued and
outstanding in 1997, 1998 and
at September 30, 1999,
respectively, and none pro
forma, issuable in series;
aggregate liquidation
preference, $173,542 as of
September 30, 1999........... 27 27 27 $ --
Common stock, $0.001 par
value; 55,000,000 shares
authorized; 7,432,729,
7,560,603, and 8,317,836
shares issued and outstanding
in 1997, 1998 and at
September 30, 1999,
respectively, and 35,271,375
shares pro forma............. 7 8 8 35
Additional paid-in capital.... 173,000 174,035 182,356 182,356
Notes receivable from
stockholders................. (860) (636) (647) (647)
Deferred compensation......... -- (679) (5,377) (5,377)
Accumulated deficit........... (51,318) (61,857) (80,811) (80,811)
-------- -------- -------- -------
Total stockholders' equity..... 120,856 110,898 95,556 $95,556
-------- -------- -------- =======
$133,522 $136,778 $131,026
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
-------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative research and development.. $ 15,297 $ 20,009 $ 21,362 $ 13,664 $ 17,856
Operating expenses:
Research and development................ 18,622 26,546 33,264 24,149 31,855
Acquired in-process research and
development............................ -- 18,902 -- -- 3,000
General and administrative.............. 3,630 4,020 5,002 3,650 3,903
Amortization of deferred stock
compensation........................... -- -- 31 -- 1,720
--------- --------- ---------- --------- ----------
22,252 49,468 38,297 27,799 40,478
--------- --------- ---------- --------- ----------
Loss from operations...................... (6,955) (29,459) (16,935) (14,135) (22,622)
Interest income, net...................... 1,475 4,085 6,396 4,832 3,668
--------- --------- ---------- --------- ----------
Net loss.................................. $ (5,480) $ (25,374) $ (10,539) $ (9,303) $ (18,954)
========= ========= ========== ========= ==========
Basic and diluted net loss per share...... $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
========= ========= ========== ========= ==========
Weighted average shares used in computing
basic and diluted net loss per share..... 5,033,799 6,062,651 6,790,512 6,666,166 7,387,943
========= ========= ========== ========= ==========
Pro forma basic and diluted net loss per
share.................................... $ (0.31) $ (0.55)
========== ==========
Weighted average shares used in computing
pro forma basic and diluted net loss per
share.................................... 33,686,853 34,313,896
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Total
----------------- ---------------- Paid-In From Deferred Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
---------- ------ --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ 13,645,132 $14 4,970,855 $ 5 $ 38,329 $(131) $ -- $(20,464) $ 17,753
Issuance of Series F
convertible
preferred stock..... 6,272,000 6 -- -- 59,851 -- -- -- 59,857
Issuance of common
stock, net of
repurchases......... -- -- 1,823,712 2 1,300 (571) -- -- 731
Repayment of notes
receivable.......... -- -- -- -- -- 44 -- -- 44
Net loss............. -- -- -- -- -- -- -- (5,480) (5,480)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1996............ 19,917,132 20 6,794,567 7 99,480 (658) -- (25,944) 72,905
Issuance of Series G
convertible
preferred stock..... 5,319,634 5 -- -- 54,467 -- -- -- 54,472
Issuance of Series H
convertible
preferred stock and
warrants for
Acquisition......... 1,622,057 2 -- -- 18,274 -- -- -- 18,276
Issuance of common
stock, net of
repurchases......... -- -- 638,162 -- 779 (263) -- -- 516
Repayment of notes
receivable.......... -- -- -- -- -- 61 -- -- 61
Net loss............. -- -- -- -- -- -- -- (25,374) (25,374)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1997............ 26,858,823 27 7,432,729 7 173,000 (860) -- (51,318) 120,856
Issuance of Series H
convertible
preferred stock upon
exercise of stock
options............. 7,802 -- -- -- 6 -- -- -- 6
Conversion of
warrant, net........ 37,260 -- -- -- -- -- -- -- --
Issuance of common
stock, net of
repurchases......... -- -- 127,874 1 319 80 -- -- 400
Repayment of notes
receivable.......... -- -- -- -- -- 144 -- -- 144
Deferred
compensation........ -- -- -- -- 710 -- (710) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 31 -- 31
Net loss............. -- -- -- -- -- -- -- (10,539) (10,539)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at December
31, 1998............ 26,903,885 27 7,560,603 8 174,035 (636) (679) (61,857) 110,898
Conversion of
warrant, net........ 49,654 -- -- -- -- -- -- -- --
Issuance of common
stock, net of
repurchases......... -- -- 757,233 -- 1,903 (240) -- -- 1,663
Repayment of notes
receivable.......... -- -- -- -- -- 229 -- -- 229
Deferred
compensation........ -- -- -- -- 6,418 -- (6,418) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 1,720 -- 1,720
Net loss............. -- -- -- -- -- -- -- (18,954) (18,954)
---------- --- --------- --- -------- ----- ------- -------- --------
Balance at September
30, 1999............ 26,953,539 $27 8,317,836 $ 8 $182,356 $(647) $(5,377) $(80,811) $ 95,556
========== === ========= === ======== ===== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
------------------------------ --------------------
1996 1997 1998 1998 1999
-------- --------- --------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $ (5,480) $ (25,374) $ (10,539) $ (9,303) $(18,954)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 2,027 1,918 2,423 1,735 2,731
Amortization of
deferred stock
compensation........... -- -- 31 -- 1,720
Noncash stock
compensation........... -- -- 188 -- 515
Write-off of in-process
research and
development............ -- 18,902 -- -- --
Changes in assets and
liabilities, net of
Acquisition:
Other assets........... (596) (240) (1,578) (1,223) (1,663)
Accounts payable and
accrued liabilities... 1,351 1,002 827 127 822
Deferred revenue....... (3,127) (340) 7,873 5,527 2,312
Other liabilities...... -- 141 52 58 940
-------- --------- --------- --------- --------
Net cash used in
operating
activities........... (5,825) (3,991) (723) (3,079) (11,577)
-------- --------- --------- --------- --------
Investing activities
Maturities of available-
for-sale securities.... 8,981 103,693 140,982 100,911 74,699
Purchases of available-
for-sale securities.... (46,374) (109,132) (157,047) (115,995) (99,689)
Capital expenditures.... (1,189) (1,970) (6,057) (3,552) (8,531)
Purchases of long-term
investments............ -- (1,000) (1,050) (1,050) --
Acquisition, net of cash
received............... -- (538) -- -- --
-------- --------- --------- --------- --------
Net cash used in
investing
activities........... (38,582) (8,947) (23,172) (19,686) (33,521)
-------- --------- --------- --------- --------
Financing activities
Proceeds from long-term
debt.................... -- 1,268 3,905 2,028 10,087
Payments of long-term
debt.................... (1,721) (1,490) (1,519) (1,067) (2,495)
Net proceeds from
issuance of preferred
stock................... 59,857 54,472 6 6 --
Proceeds from issuances
of common stock, net.... 775 577 356 241 1,377
-------- --------- --------- --------- --------
Net cash provided by
financing
activities........... 58,911 54,827 2,748 1,208 8,969
-------- --------- --------- --------- --------
Net increase (decrease)
in cash and cash
equivalents............. 14,504 41,889 (21,147) (21,557) (36,129)
Cash and cash equivalents
at beginning of period.. 18,152 32,656 74,545 74,545 53,398
-------- --------- --------- --------- --------
Cash and cash
equivalents at end of
period............... $ 32,656 $ 74,545 $ 53,398 $ 52,988 $ 17,269
======== ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the nine-month period ended September 30, 1998 is unaudited)
1. Basis of Presentation
Organization and Business
Tularik Inc. ("Tularik" or the "Company") was incorporated in the state of
California in November 1991 and reincorporated in the state of Delaware in June
1997 to take advantage of the Delaware General Corporation Law. Upon the
reincorporation, the Company became authorized to issue 33,000,000 shares of
$0.001 par value convertible preferred stock and 55,000,000 shares of $0.001
par value common stock. All par value, share and per share amounts included in
the accompanying financial statements have been retroactively adjusted to
reflect the Company's reincorporation in Delaware.
Since its founding, the Company has been engaged in the discovery and
development of a broad range of novel, orally available drugs, most of which
act through gene regulation. Tularik has incurred net losses since inception
and is expected to incur substantial and increasing losses for at least the
next several years as research and development activities are expanded. To
date, the Company has funded its operations primarily through the sale of
equity securities, non-equity payments from collaborators and interest income.
Future revenue, if any, for at least the next several years is expected to
consist primarily of payments under corporate collaborations and interest
income. The process of developing products will require significant additional
research and development, preclinical testing and clinical trials, as well as
regulatory approval. These activities, together with general and administrative
expenses, are expected to result in substantial operating losses for the
foreseeable future. Tularik will not receive product revenue unless the Company
or its collaborative partners completes clinical trials, obtains regulatory
approval and successfully commercializes one or more of the Company's products.
In order to accelerate product commercialization and finance research
activities, Tularik has entered into collaborations with leading pharmaceutical
companies. The Company has ongoing collaborations with Knoll AG ("Knoll")
relating to obesity (commenced in November 1998); Japan Tobacco Inc. ("Japan
Tobacco") relating to orphan nuclear receptors (commenced in September 1998);
Roche Bioscience ("Roche Bioscience") relating to inflammation (commenced in
July 1997); Japan Tobacco relating to obesity (commenced in September 1996);
Taisho Pharmaceutical Co., Ltd. ("Taisho") relating to immune disorders
(commenced in April 1995); and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo")
relating to hypercholesterolemia (commenced in January 1995). Previously,
Tularik also had collaborations with Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi") relating to inflammation (commenced in November 1993, ended in
November 1996) and with Merck & Co., Inc., ("Merck") relating to viral disease
(commenced in December 1993, ended in March 1999). As of September 30, 1999,
the Company has received $13.0 million in equity investments and $108.3 million
in research funding from its collaborators, including $14.0 million from
Yamanouchi and $20.4 million from Merck.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Tularik and its
wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-7
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments in debt securities with a
remaining maturity from the date of purchase of 90 days or less to be cash
equivalents. Cash equivalents consist of money market funds and corporate debt
securities and exclude demand deposits. The Company's short-term investments
include obligations of governmental agencies and corporate debt securities with
original maturities ranging between three and 12 months. By policy, the Company
limits concentration of credit risk by diversifying its investments among a
variety of high credit-quality issuers.
All cash equivalents and short-term investments are classified as available-
for-sale. Available-for-sale securities are carried at amortized cost, which
approximated fair value at December 31, 1997 and 1998 and at September 30,
1999. Material unrealized gains and losses, if any, are reported in
stockholders' equity and included in other comprehensive loss. Fair value is
estimated based on available market information. The cost of securities sold is
based on the specific identification method. For the years ended December 31,
1997 and 1998 and for the nine-months ended September 30, 1999, gross realized
gains and losses on available-for-sale securities were immaterial. See Note 4
for a summary of available-for-sale securities at December 31, 1997 and 1998
and at September 30, 1999.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
equipment is calculated using the straight-line method over the lesser of the
estimated useful lives of the assets, generally three to four years, or the
lease term. Leasehold improvements are amortized over the term of the related
lease, which does not exceed their estimated useful lives.
Long-lived Assets
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"). Consistent
with SFAS 121, the Company identifies and records impairment losses, as
circumstances dictate, on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. No one of these events have occurred with respect to
the Company's long-lived assets, which consist primarily of machinery and
equipment and leasehold improvements.
Revenue Recognition
Collaborative research and development agreements provide for periodic
payments in support of the Company's research activities. Collaboration revenue
is recognized as earned based on actual costs incurred or as milestones are
achieved. Nonrefundable technology access fees are recognized immediately when
received and when all contractual obligations of the Company relating to the
fees have been fulfilled. Research support payments received in advance of work
performed are recorded as deferred revenue (see Note 3).
Research and Development
Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated with
collaborative research and development arrangements. In addition, the Company
funds research and development at other companies and research institutions
under agreements which are generally cancelable. All such costs are charged to
operations as incurred.
F-8
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Stock-Based Compensation
The Company accounts for grants of stock options and common stock purchase
rights according to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations ("APB No. 25"). Pro
forma net loss information, as required by Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), is
included in Note 9. Options granted to consultants are accounted for using the
Black-Scholes method prescribed by SFAS 123 in accordance with Emerging Issues
Task Force Consensus No. 96-18. These options are subject to periodic re-
valuation over their vesting terms. Any deferred stock compensation calculated
according to APB No. 25 is amortized over the vesting period of the individual
options, generally four years, using the graded vesting method. The graded
vesting method provides for vesting of portions of the overall award at interim
dates and results in higher vesting in earlier years than straight-line
vesting.
Comprehensive Loss
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net loss or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income, if material. The Company's comprehensive loss was not
materially different from the net loss for the years ended December 31, 1997
and 1998 and for the nine months ended September 30, 1999.
Net Loss Per Share
Net loss per share has been computed according to the Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. Diluted earnings per share includes the
impact of potentially dilutive securities. The Company's potentially dilutive
securities were antidilutive and therefore were not included in the computation
of weighted-average shares used in computing diluted loss per share. Following
the guidance given by the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and preferred stock that has been issued or
granted for nominal consideration prior to the anticipated effective date of
the initial public offering must be included in the calculation of basic and
diluted net loss per common share as if these shares had been outstanding for
all periods presented. To date, the Company has not issued or granted shares
for nominal consideration.
F-9
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
----------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.............. $ (5,480) $ (25,374) $ (10,539) $ (9,303) $ (18,954)
========== =========== ========== ========= ==========
Weighted average
shares of common
stock outstanding.... 5,627,770 7,292,476 7,495,576 7,439,137 7,856,192
Less: weighted average
shares subject to
repurchase........... (593,971) (1,229,825) (705,064) (772,971) (468,249)
---------- ----------- ---------- --------- ----------
Weighted average
shares used in
computing basic and
diluted net loss per
share................ 5,033,799 6,062,651 6,790,512 6,666,166 7,387,943
========== =========== ========== ========= ==========
Basic and diluted net
loss per share....... $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
========== =========== ========== ========= ==========
Pro forma basic and
diluted:
Shares used above..... 6,790,512 7,387,943
Pro forma adjustment
to reflect weighted
average effect of
assumed conversion of
preferred stock...... 26,896,341 26,925,953
---------- ----------
Total weighted average
shares of common
stock outstanding pro
forma................ 33,686,853 34,313,896
========== ==========
Basic and diluted pro
forma loss per
share................ $ (0.31) $ (0.55)
========== ==========
</TABLE>
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 19,917,132 26,858,823 26,903,885 26,903,885 26,953,539
Outstanding options..... 2,972,750 3,710,872 5,351,309 5,215,407 5,955,965
Warrants................ 702,674 999,235 1,078,382 1,078,382 1,015,091
---------- ---------- ---------- ---------- ----------
Total................. 23,592,556 31,568,930 33,333,576 33,197,674 33,924,595
========== ========== ========== ========== ==========
Weighted average
exercise price of
options................ $ 0.61 $ 1.41 $ 1.99 $ 1.93 $ 2.23
========== ========== ========== ========== ==========
Weighted average
exercise price of
warrants............... $ 7.15 $ 8.88 $ 9.71 $ 9.71 $ 10.17
========== ========== ========== ========== ==========
</TABLE>
F-10
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Unaudited Financial Statements
The accompanying unaudited financial statements for the nine months ended
September 30, 1998 have been prepared on substantially the same basis as the
audited financial statements and include all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
financial information set forth therein. Results for any interim period are not
necessarily indicative of results for the full fiscal period.
3. Research and Development Collaborations
The Company has entered into multi-year research and development
collaborations in six of its research programs. Tularik received aggregate
research payments, including technology access fees, of $12.5 million, $20.0
million, and $29.8 million and recognized collaboration revenue of $15.3
million, $20.0 million, and $21.4 million in 1996, 1997, and 1998,
respectively. For the nine months ended September 30, 1999, Tularik received
research funding of $21.0 million and recognized collaboration revenue of $17.9
million. Under the terms of existing collaborations at September 30, 1999, the
Company's partners have agreed to provide future research funding of up to
approximately $50.7 million over a five-year period, including $33.5 million
subject possible cancellation, as well as additional payments upon the
achievement of specific research and development milestones. Annual research
funding under these agreements ranges from $3.5 million to $6.0 million per
agreement. All research payments are non-refundable and the Company performs
research under these agreements on a "best efforts" basis. Costs incurred under
research and development collaborations approximate revenues earned and are
included in research and development expenses. In addition to providing the
research funding summarized above, certain of the Company's collaborators have
also purchased equity investments in Tularik. These equity purchases and other
significant terms of current and prior collaborations are described below.
In November 1998, Tularik and Knoll established a five-year collaboration to
discover, develop and market compounds that act on obesity-related targets.
Once a compound is selected for preclinical development, Knoll has the right to
enter into a separate license agreement granting it exclusive rights to
develop, manufacture and sell the compounds in countries other than Japan and
other specified Asian countries, subject to milestone and royalty obligations
to Tularik. The agreement grants Tularik exclusive rights to develop,
manufacture and sell these products in Japan and other specified Asian
countries, without payment obligation to Knoll. These retained rights are
subject to a collaboration agreement with Japan Tobacco in the area of obesity.
Knoll has the right to terminate the collaboration at the end of the third or
fourth years of the five-year agreement. Knoll is committed to pay Tularik up
to $20.5 million in research payments, of which $5.6 million has been paid as
of September 30, 1999.
In September 1998, Tularik and Japan Tobacco established a five-year
collaboration to discover, develop and market compounds that act by regulating
orphan nuclear receptors. Under the terms of the collaboration, Japan Tobacco
is funding the majority of research expenses and development and
commercialization costs and profits will be shared equally by the partners.
Tularik retains exclusive marketing and sales rights in the United States and
Canada. JT retains exclusive marketing and sales rights in Japan and Korea.
Japan Tobacco has the right to terminate the collaboration at the end of the
third or fourth years of the five year collaboration. Japan Tobacco is
committed to pay Tularik up to $29.0 million in research payments related to
the orphan nuclear receptor collaboration, of which $12.0 million has been paid
as of September 30, 1999.
In July 1997, Tularik and Roche Bioscience established a five-year
collaboration to discover, develop and market anti-inflammatory therapeutics.
Under the collaboration, Roche Bioscience has exclusive, worldwide
manufacturing and marketing rights to develop and commercialize drugs resulting
from the research program
F-11
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
for specified indications, subject to benchmark and royalty obligations to
Tularik. Tularik has exclusive, worldwide manufacturing and marketing rights to
develop and commercialize other compounds resulting from the research program,
subject to royalty obligations to Roche Bioscience. Roche Bioscience has the
right to terminate the collaboration at the end of the third year if the then
current research plan does not provide opportunities for new products or if
Tularik has not discharged its obligations under the agreement. Roche
Bioscience is committed to pay Tularik up to $30.0 million in research
payments, of which $16.3 million has been paid as of September 30, 1999.
In September 1996, the Company entered into a five-year collaboration with
Japan Tobacco to discover, develop and market compounds in the fields of
obesity and diabetes. Under a related stock purchase agreement, Japan Tobacco
purchased 600,000 shares of Tularik's Series F preferred stock for $10.00 per
share, on the same terms and conditions as other investors in the Series F
financing. In September 1998, Tularik and Japan Tobacco agreed to modify the
structure of the original collaboration. The collaboration is currently
structured as a joint venture in which both expenses and profits on a worldwide
basis will be split evenly between Tularik and Japan Tobacco. Tularik retains
exclusive marketing and sales rights in the United States and Canada. Japan
Tobacco retains exclusive marketing and sales rights in Japan and Korea. Japan
Tobacco will be required to make benchmark payments to Tularik based on
clinical progress. Japan Tobacco has the right to terminate the collaboration
at the end of the fourth year of the five year collaboration. Japan Tobacco is
committed to pay Tularik up to $18.5 million in research payments related to
the obesity and diabetes collaboration, of which $14.0 million has been paid as
of September 30, 1999.
In April 1995, Tularik established a five-year collaboration with Taisho
focused on therapeutic modulation of the human immune function. In January
1998, Tularik and Taisho extended the collaboration for an additional year. The
agreement gives Taisho the right to manufacture and sell products resulting
from the collaboration in Japan and in certain other Asian countries, subject
to milestone and royalty payments to Tularik. The Company retains exclusive
rights to manufacture and sell these products in the rest of the world, without
any payment obligation to Taisho. Taisho has the right to terminate the
collaboration prior to the commencement of sixth year. In the event of early
termination by Taisho, Tularik would have exclusive, worldwide, royalty-free
rights to all products identified in the collaboration. Taisho was committed to
pay, and has paid, Tularik $15.0 million in research payments as of September
30, 1999.
In January 1995, the Company entered into a five-year collaboration with
Sumitomo to fund research and development in the field of hypercholesterolemia.
Under a related stock purchase agreement, Sumitomo purchased 400,000 shares of
Tularik's Series E preferred stock in February 1995 for $7.50 per share, the
fair value of the preferred stock at that date. Upon the selection of a lead
compound for certain preclinical studies, Sumitomo has the right to enter into
a separate license agreement granting Sumitomo exclusive rights to develop,
manufacture and sell the compound in Japan and in certain other Asian
countries, subject to royalty obligations to the Company. The collaboration
agreement grants Tularik exclusive rights to develop, manufacture and sell
these products in the rest of the world, without payment obligation to
Sumitomo. Sumitomo has the right to terminate the collaboration at any time
after three years of the five-year term. Sumitomo was committed to pay, and has
paid, Tularik $15.0 million in research payments as of September 30, 1999.
In December 1993, Tularik established a collaboration with Merck to fund
research and development in specified fields of human viral disease. Under a
related stock purchase agreement, Merck purchased 400,000 shares of the
Company's Series D preferred stock in January 1994 for $5.00 per share, the
fair value of the preferred stock at that date. In December 1996, the companies
amended the original agreement, extending its term to December 1999. In March
1999, utilizing early termination rights under the amended agreement, Merck
terminated the collaboration. Merck was commited to pay, and has paid, Tularik
$18.4 million in research payments as of September 30, 1999.
F-12
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
In November 1993, the Company entered into a five-year collaboration
agreement with Yamanouchi to fund research and development in the field of
inflammation. Under a related stock purchase agreement, Yamanouchi purchased
400,000 shares of Tularik's Series D Preferred Stock in February 1994 for $5.00
per share, the fair value of the preferred stock at that date. In November
1996, utilizing early termination rights under the agreement, Yamanouchi
terminated the collaboration after three years of the five year term.
Yamanouchi was committed to pay, and has paid, Tularik $12.0 million in
research payments as of September 30, 1999.
4. Investments
The following is a summary of available-for-sale securities at cost, which
approximates fair value (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Cash equivalents:
Money market funds......................... $ 1,624 $ 2,659 $ 2,039
Corporate debt securities.................. 72,905 50,739 15,230
------- ------- -------
$74,529 $53,398 $17,269
======= ======= =======
Short-term investments:
Obligations of domestic governmental
agencies.................................. $10,000 $12,999 $12,004
Corporate debt securities.................. 39,861 45,927 74,915
------- ------- -------
$49,861 $58,926 $86,919
======= ======= =======
</TABLE>
As of December 31, 1997 and 1998 and September 30, 1999, the average
portfolio duration was approximately three, five and eight months,
respectively.
5. Property and Equipment
The following is a summary of property and equipment at (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Laboratory and office equipment............ $10,808 $15,063 $ 18,344
Leasehold improvements..................... 1,702 5,376 8,785
Construction in progress................... 31 235 --
------- ------- --------
12,541 20,674 27,129
Less accumulated depreciation and
amortization.............................. (6,332) (8,724) (11,455)
------- ------- --------
Property and equipment, net................ $ 6,209 $11,950 $ 15,674
======= ======= ========
</TABLE>
6. Acquisition
On October 31, 1997, the Company acquired Amplicon Corporation ("Amplicon"),
a research organization engaged principally in identifying and characterizing
human genes involved in certain cancers, whereby Amplicon became a wholly owned
subsidiary of Tularik (the "Acquisition"). Under the related Agreement and Plan
of Merger and Reorganization, Tularik issued a total of 1,620,004 shares of
Tularik
F-13
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Series H preferred stock and warrants to acquire an additional 245,456 shares
of Tularik Series H preferred stock in exchange for all of Amplicon's
outstanding capital stock. In addition, all outstanding stock options to
purchase Amplicon common stock were replaced with options to purchase 29,976
shares of Tularik Series H preferred stock and warrants to purchase 4,544
shares of Series H preferred stock. The acquisition was accounted for under the
purchase method. The purchase price was approximately $18.9 million including
the fair value of the Tularik Series H preferred stock and warrants as of the
effective date of the Acquisition, plus direct acquisition costs. The assets
and liabilities assumed by the Company were recorded based on their fair values
at the date of acquisition. The purchase price was allocated $18.9 million to
in-process research and development and $24,000 to net tangible assets.
Management is responsible for estimating the amount allocated to in-process
research and development, which was expensed at the time of acquisition. The
Company's results of operations include Amplicon's results from October 31,
1997.
At the date of the acquisition, Amplicon's sole activity was performing basic
research to identify genes that may result in the development of diagnostic and
therapeutic products for the treatment of cancer. Prior to the acquisition,
Amplicon had discovered over twenty novel genetic regions that are commonly
mutated in human cancers and was actively searching for genes within these
regions that play an important role in the development of cancer. Amplicon's
efforts to identify cancer genes relied heavily on a proprietary methodology,
Representational Difference Analysis, that is distinguished from other methods
by its ability to identify non-inherited genetic mutations. The
Representational Difference Analysis methodology is specifically applicable to
the discovery of cancer genes, acquired genetic mutations and pathogens and
does not have alternative future uses.
In order to estimate the value of the cancer gene discovery project and the
related methodology at the time of the acquisition, management considered a
wide range of estimates of the time and resources necessary to identify,
characterize, develop and obtain regulatory approval for potential cancer
diagnostics and therapeutics and the related market size and potential cash
flows from developed products. Management also considered the risks associated
with the development process, including the inherent difficulties and
uncertainties in successfully developing diagnostic and therapeutic products,
thereby achieving technological feasibility, and the risk related to changes in
target markets.
The Company's analysis, performed using the income method, assumed inception
of product revenues beginning in 2002. Given the high degree of uncertainty
inherent in the discovery and development of diagnostic and therapeutic
products, the analysis applied a risk adjusted discount rate of 40% to the
forecasted cash flows to estimate the present value of the acquired project and
related methodology. Using this approach, the Company concluded that the
estimated fair value of the acquired in-process research and development was
$21.4 million at the date of the acquisition. Management believes that this
amount did not exceed the amount a third party would have paid for the project.
Accordingly, the purchase price was allocated to the tangible and intangible
net assets acquired and $18.9 million was charged to acquired in-process
research and development. Had a lower value been assigned to the acquired in-
process research and development, the difference would have been recorded as
goodwill and amortized to operating expense over future periods.
To date, no products have been developed from this project, technological
feasibility has not been proven and no corporate collaborations have been
consummated based on the research at Amplicon. Accordingly, the future benefits
of the ongoing research remain uncertain and the value allocated to the
acquired in-process research and development was expensed at the time of
acquisition.
F-14
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
7. License Agreement
On September 24, 1999, the Company entered into a license agreement with Eli
Lilly under which it obtained an exclusive, worldwide, royalty-bearing license
to make, use and sell pharmaceutical products containing a compound known as
lometrexol. In connection with this agreement, the Company paid $3.0 million to
Eli Lilly as an initial license fee and agreed to pay certain milestones and
royalties upon successful commercialization of lometrexol. Under the agreement,
Eli Lilly granted the Company a license to its proprietary technology relating
to lometrexol, and also a sublicense under an exclusive license granted to Eli
Lilly by Princeton University relating to lometrexol. Eli Lilly has specified
obligations under the agreement to maintain the license from Princeton. Eli
Lilly has the right to match the material terms of any offer made by a third
party to Tularik for commercialization rights relating to lometrexol products.
The Company may terminate the agreement with Eli Lilly upon written notice and
Eli Lilly may terminate our license in specified major countries if we fail to
use reasonable diligence to develop lometrexol products in these countries, and
may terminate the agreement if we fail to use appropriate diligence to develop
lometrexol products in a predetermined number of major countries. If Eli Lilly
terminates the agreement, Eli Lilly obtains a nonexclusive, royalty-bearing,
worldwide license to our technical improvements to lometrexol.
At the date of the license agreement, lometrexol had completed the first of
three phases of clinical trials required to seek regulatory approval from the
FDA. No trials had been commenced that could have demonstrated, with
statistical significance, the effectiveness of lometrexol as a treatment for
any type of cancer. These trials, necessary to establish the technological
feasibility of lometrexol, will not be completed for at least several years. In
addition, lometrexol has no known alternative future uses. Accordingly, the
initial license payment was allocated to acquired in-process research and
development and expensed at the time of the agreement.
8. Long-Term Obligations
At September 30, 1999, the Company's aggregate commitments under long-term
debt and noncancelable lease arrangements are as follows:
<TABLE>
<CAPTION>
Year ended Long-Term Operating
September 30, Debt Capital Leases Leases
------------- --------- -------------- ---------
(In thousands)
<S> <C> <C> <C>
2000...................................... $ 3,661 $ 1,917 $ 4,614
2001...................................... 3,472 1,554 4,820
2002...................................... 2,640 764 4,762
2003...................................... 2,374 891 4,689
2004...................................... -- -- 4,776
Thereafter................................ -- -- 41,297
------- ------- -------
Total minimum payment required............ 12,147 5,126 $64,958
=======
Less amount representing interest......... (1773) (844)
-------
Present value of future payments 10,374 4,282
Less current portion...................... (2,642) (1,760)
------- -------
$ 7,732 $ 2,522
======= =======
</TABLE>
Equipment and leasehold improvements financed under these arrangements are
included in property and equipment and related amortization is included in
depreciation expense. In 1998, the Company entered into sale and leaseback
agreements covering certain laboratory equipment. No gain or loss was
recognized on these
F-15
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
transactions. The leases are classified as capital leases. The cost of assets
under secured financing arrangements was $6.7 million, $10.2 million and $18.9
million and the related accumulated depreciation and amortization was $3.7
million, $5.0 million and $7.8 million at December 31, 1997 and 1998 and at
September 30, 1999, respectively.
Rent expense, principally for leased facilities under long-term operating
lease commitments, was $2.0 million, $2.3 million, $2.4 million and $3.5
million for 1996, 1997, 1998 and for the nine months ended September 30, 1999,
respectively. In connection with the sublease of space in the Company's
facilities, Tularik is entitled to receive minimum lease payments of $502,000
in 1999, $512,000 in 2000, and $257,000 in 2001. The Company received sublease
income of $464,000 during the nine months ended September 30, 1999. The Company
did not receive sublease income in 1996, 1997 and 1998.
9. Convertible Preferred Stock
All series of preferred stock are convertible at the option of the holder at
any time into common stock on a one-for-one basis, subject to adjustment for
antidilution, and carry voting rights equivalent to common stock. Each share of
preferred stock automatically converts into one share of common stock in the
event of an initial public offering of the Company's common stock in which
gross offering proceeds exceed $10.0 million and the offering price is at least
$10.25 per share or upon the vote by holders of at least two-thirds of the
outstanding preferred stock. Holders of convertible preferred stock are
entitled to noncumulative dividends when and if declared by the board of
directors. No dividends have been declared through September 30, 1999.
In the event of a liquidation or winding up of the Company, holders of Series
A, B, C, D, E, F, G and H convertible preferred stock are entitled to a
liquidation preference of $1.00, $2.37, $3.70, $5.00, $7.50, $10.00, $10.25 and
$11.00 per share, respectively, together with any declared but unpaid
dividends. The preferred stock authorized, issued and outstanding at September
30, 1999 is as follows:
<TABLE>
<CAPTION>
Aggregate
Authorized Shares Issued and Liquidation
Shares Outstanding Preference
---------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Series A......................... 3,900,000 3,900,000 $ 3,900
Series B......................... 3,375,531 3,361,894 7,968
Series C......................... 5,400,000 5,270,152 19,500
Series D......................... 820,000 800,000 4,000
Series E......................... 440,000 400,000 3,000
Series F......................... 8,500,000 6,272,000 62,720
Series G......................... 7,500,000 5,319,634 54,526
Series H......................... 2,050,000 1,629,859 17,928
---------- ---------- --------
31,985,531 26,953,539 $173,542
========== ========
Undesignated..................... 1,014,469
----------
33,000,000
==========
</TABLE>
F-16
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
A summary of warrants to purchase preferred stock at September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Term
Number of Exercise in
Description Warrants Price Years Expiration
----------- --------- ------------- ----- ----------
<S> <C> <C> <C> <C>
Lease financing arrangements...... 124,972 $3.70-$7.50 7 1999-2002
Issuance of Series F preferred
stock............................ 253,600 $10.00 10 2006
Acquisition of Amplicon........... 296,949 $10.00-$13.00 10 2007
Facility lease agreement.......... 139,570 $13.00 10 2008
-------
815,091
=======
</TABLE>
10. Common Stock
Warrant
The Company issued a warrant to purchase 200,000 shares of common stock for
$7.50 per share in connection with a facility lease that was executed in 1995.
The warrant expires on the earlier of the five-year anniversary of the
Company's initial public offering or April 20, 2005. The value of the warrant
was determined to be immaterial at issuance. As of September 30, 1999, this
warrant has not been exercised.
Stock Awards
During 1997, the board of directors terminated the 1991 Stock Plan ("1991
Plan") and adopted the 1997 Equity Incentive Plan and the 1997 Non-Employee
Directors' Plan ("1997 Plans"). Termination of the 1991 Plan had no effect on
options outstanding under that plan. The 1997 Plans provide for stock options
and stock purchase rights to be granted to employees, directors and
consultants. Under the Equity Incentive Plan, shares available for grant are
increased by three and one-half percent of the total number of shares
outstanding at the end of each year from 1997 to 2002 up to a maximum of
2,000,000 shares per year. Options granted under the Equity Incentive Plan may
be incentive stock options or nonstatutory stock options. Exercise prices are
determined by the board of directors and may not be less than 100% of the fair
value of the Company's common stock (not less than 85% of fair value for
nonstatutory stock options granted under the Equity Incentive Plan) on the date
of grant. Options and purchase rights are exercisable upon grant, subject to
repurchase by the Company until vested and generally vest over four years. All
options expire no more than 10 years from the date of grant.
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options and stock purchase rights because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options and rights.
During the year ended December 31, 1998 and during the nine months ended
September 30, 1999, in connection with the grant of certain share options to
employees, the Company recorded deferred stock compensation of $710,000 and
$6.4 million, respectively, representing the difference between the exercise
price and the deemed fair value of the Company's common stock on the date these
stock options were granted. Deferred compensation is included as a reduction of
stockholders' equity and is being amortized to expense on a graded vesting
method. During the year ended December 31, 1998 and during the nine months
ended September 30, 1999, the Company recorded amortization of deferred stock
compensation expense of approximately $31,000 and $1.7 million, respectively.
At September 30, 1999, the Company had a total of approximately $5.4 million
remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
F-17
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
Pro forma net loss and net loss per share information is required by SFAS
123, which also requires that the information be determined as if the Company
had accounted for its employee stock options and rights granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
and the purchase rights was estimated at the date of grant using the minimum
value method with the following weighted-average assumptions for 1996, 1997,
1998 and for the nine months ended September 30, 1999, respectively: risk free
interest rates of 6.6%, 6.0%, 5.5% and 6.0%; no dividend yield; and a weighted-
average expected life of the options of 5 years. Pro forma information follows:
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(In thousands, except per
share amounts)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported................. $(5,480) $(25,374) $(10,539) $(9,303) $(18,954)
======= ======== ======== ======= ========
Pro forma................... $(5,576) $(25,692) $(11,179) $(9,783) $(20,340)
======= ======== ======== ======= ========
Net loss per share (basic and
diluted):
As reported................. $ (1.09) $ (4.19) $ (1.55) $ (1.40) $ (2.57)
======= ======== ======== ======= ========
Pro forma................... $ (1.11) $ (4.24) $ (1.65) $ (1.47) $ (2.75)
======= ======== ======== ======= ========
</TABLE>
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Options Exercise Price
---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995........ 2,928,125 $0.44
Granted....................................... 2,186,000 0.91
Exercised..................................... (1,851,877) 0.71
Forfeited..................................... (289,498) 0.51
----------
Options outstanding at December 31, 1996........ 2,972,750 0.61
Granted....................................... 1,401,300 3.00
Exercised..................................... (648,422) 1.21
Forfeited..................................... (40,520) 1.40
----------
Options outstanding at December 31, 1997........ 3,685,108 1.41
Granted....................................... 2,065,700 3.00
Exercised..................................... (273,894) 1.32
Forfeited..................................... (143,567) 2.76
----------
Options outstanding at December 31, 1998........ 5,333,347 1.99
Granted....................................... 1,501,500 3.00
Exercised..................................... (764,729) 1.95
Forfeited..................................... (132,115) 2.69
----------
Options outstanding at September 30, 1999....... 5,938,003 2.24
==========
</TABLE>
F-18
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
An analysis of options outstanding at September 30, 1999, is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average Weighted Options Weighted
Outstanding at Remaining Average Vested at Average
Exercise September 30, Contractual Exercise September 30, Exercise
Price 1999 Life Price 1999 Price
---------- -------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.45-0.99 1,828,896 5.44 $0.54 1,662,191 $0.52
1.00-1.99 2,000 6.93 1.00 1,542 1.00
2.00-3.00 4,107,107 8.78 2.99 1,162,588 2.98
--------- ---------
5,938,003 7.75 2.24 2,826,321 1.53
========= =========
</TABLE>
The weighted-average fair value of options granted during 1996, 1997, 1998
and the nine months ended September 30, 1999 was $0.27, $0.76, $0.70 and $5.39,
respectively.
The information above does not include 13,962 options with exercise price
from $0.70 to $0.95 granted to employees in connection with the Acquisition and
4,000 options with an exercise price of $0.50 granted to a third party outside
of the Company's stock option plans.
Stock Subject to Repurchase
As of December 31, 1997 and 1998 and September 30, 1999, the Company had
462,635, 1,004,050, and 515,432 shares of common stock outstanding,
respectively, which were subject to the Company's lapsing right of repurchase
in the event the holder's association with the Company terminates. These shares
are the result of the exercise of unvested stock options by employees and
shares of common stock sold to a board member which vest over the four-year
period of the board member's term. The shares which relate to the exercise of
unvested stock options will vest over the four-year vesting period of the
underlying exercised stock options.
Reserved Shares
Shares of common stock reserved for future issuance were as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Warrants:
Outstanding warrants............................ 1,078,382 1,015,091
Reserved for future issuance.................... 3,051 3,051
Stock option plans:
Outstanding options............................. 5,351,447 5,955,965
Reserved for future grants...................... 1,737,772 436,112
Convertible preferred stock:
Issued and outstanding.......................... 26,903,885 26,953,539
---------- ----------
35,074,537 34,363,758
========== ==========
</TABLE>
11. Related Party Transactions
During the years ended December 31, 1996, 1997 and 1998 and for the nine
months ended September 30, 1999, the Company loaned stockholders $200,000,
$194,132, $357,000 and $595,000, respectively. The loans
F-19
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
were made in connection with stock option exercises, relocation and housing.
The loans have interest rates
which range from interest-free to 6.1% and certain of the loans provide for
forgiveness based on continued employment. The loans are full-recourse and
amounts forgiven have been recorded as compensation expense. The loans made in
connection with stock option exercises have been recorded in stockholders'
equity in the accompanying financial statements.
12. Employee Savings Plan
The Company has an employee savings plan, which permits substantially all
employees to participate and to make contributions by salary reductions as
provided in section 401(k) of the Internal Revenue Code. In 1998, the Company
began matching a percentage of employee contributions up to a specified amount
in the form of Tularik common stock. Under this plan, the Company contributed
34,235 and 39,920 shares of common stock to employee savings accounts and
recognized compensation expense of $188,000 and $309,000 in 1998 and for the
nine months ended September 30, 1999, respectively.
13. Income Taxes
As of September 30, 1999, Tularik had federal net operating loss
carryforwards of approximately $54.2 million. The net operating loss
carryforwards will expire at various dates beginning on 2007 through 2019, if
not utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------ September 30
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 8,400 $ 13,200 $18,900
Research credits (expiring 2007 to 2019).. 1,700 3,000 3,900
Depreciation.............................. 2,500 1,200 1,100
Capitalized research and development...... 700 3,200 2,200
Other, net................................ 200 -- 2,300
-------- -------- --------
Total deferred tax assets................. 13,500 20,600 28,400
Valuation allowance for deferred tax
assets................................... (13,500) (20,600) (28,400)
-------- -------- --------
Net deferred tax assets................... $ -- $ -- $ --
======== ======== ========
</TABLE>
Because of the Company's lack of earnings history, the deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by approximately $1.7 million, $3.0 million, $7.1 million and $7.8
million during the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999, respectively.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to ownership change limitations provided by
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
F-20
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information for the nine-month period ended September 30, 1998 is unaudited)
14. Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December Nine months ended
31, September 30,
-------------------- -----------------
1996 1997 1998 1998 1999
------ ------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Interest paid....................... $ 556 $ 549 $ 508 $ 355 $ 670
====== ======= ===== ======== ========
Equipment and leasehold improvements
financed under capital leases...... $2,137 $ 1,185 $ -- $ -- $ --
====== ======= ===== ======== ========
Common stock issued for notes
receivable......................... $ 571 $ 263 $ 149 $ 149 $ 340
====== ======= ===== ======== ========
Issuance of preferred stock and
warrants in connection with
Acquisition........................ $ -- $18,276 $ -- $ -- $ --
====== ======= ===== ======== ========
</TABLE>
15. Subsequent Events
Initial Public Offering
In October 1999, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed Initial Public
Offering. If the offering contemplated by this prospectus is consummated, the
preferred stock outstanding as of the closing date will be converted into
shares of the Company's common stock. The pro forma stockholders' equity in the
accompanying consolidated balance sheet as of September 30, 1999 reflects
conversion of the outstanding preferred stock into 26,953,539 shares of common
stock. Pro forma net loss per share is computed as if the outstanding preferred
stock has been converted into common stock on the date of issuance.
1999 Employee Stock Purchase Plan
In November 1999, the Company adopted its 1999 Employee Stock Purchase Plan,
authorizing the issuance of common stock through purchase rights granted to
employees or to employees of affiliates, if any. The purchase plan authorizes
the issuance of a total of 500,000 shares of common stock. This reserve amount
will be increased each January 1 beginning January 1, 2001, by the lesser of
500,000 shares of common stock or 1% of the number of shares of common stock
outstanding on that date. However, our board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares
of common stock will be increased on that date.
F-21
<PAGE>
6,950,000 Shares
[TULARIK INC. LOGO]
Common Stock
------------
PROSPECTUS
December 9, 1999
------------
Lehman Brothers
Hambrecht & Quist
J.P. Morgan & Co.
Warburg Dillon Read LLC
