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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 000-28347
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TULARIK INC.
(Exact Name of Registrant as In Its Charter)
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DELAWARE 94-3148800
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
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Two Corporate Drive
South San Francisco, California 94080
(650) 825-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing price of the Common Stock listed on the
Nasdaq Stock Market on March 17, 2000 was $1,309,405,170*
The total number of shares outstanding of the Registrant's Common Stock was
45,427,190 as of February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Definitive Proxy Statement filed with the
Commission pursuant to Regulation 14A in connection with the 2000 Annual
Meeting are incorporated herein by reference into Part III of this Report.
Certain Exhibits filed with the Registrant's Registration Statement on Form
S-1 (Registration No. 333-30978), are incorporated herein by reference into
Part IV of this Report.
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* Based on a closing price of $46 5/8 per share. Excludes 17,343,433 shares of
the Registrant's Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
March 17, 2000. Exclusion of such shares should not be construed to indicate
that any such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the Registrant or that
such person is controlled by or under common control with the Registrant.
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 37
Item 3. Legal Proceedings............................................. 37
Item 4. Submission of Matters to a Vote of Security Holders........... 37
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters........................................... 38
Item 6. Selected Consolidated Financial Data.......................... 39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 45
Item 8. Financial Statements and Supplementary Data................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant............ 65
Item 11. Executive Compensation........................................ 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 67
Item 13. Certain Relationships and Related Transactions................ 67
PART IV
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-
K............................................................. 68
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Part I
Item 1. Business
Forward Looking Statements and Risk Factors
This report on Form 10-K contains 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; and
. our operational and legal risks.
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."
Overview
Tularik Inc. ("Tularik" or the "Company") 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 attractive commercial markets, include cancer, cytomegalovirus,
diabetes, obesity, inflammation, allergy/asthma, 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
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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.
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.
The 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
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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;
. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 18 drug leads, ten of which are being optimized by chemists;
. identified drug candidates in two of our programs that are undergoing
pre-clinical testing consisting of animal studies designed to determine
the feasibility of human testing;
. identified two cancer drug candidates that are 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: T138067, which we refer to as T67; T900607,
which we refer to as T607; and T904064, formerly known as lometrexol and which
we refer to as T64. 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 42 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. 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 commenced phase 1 clinical trials
of T607. We recently licensed from Eli Lilly our most advanced drug candidate,
T64. The utility of cancer drugs like T64 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 T64 in 2000.
Attractive Commercial Opportunities. Our programs address cancer,
cytomegalovirus, diabetes, obesity, inflammation, allergy/asthma, 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 attractive 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
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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 pre-clinical 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 attractive market opportunities with
significant unmet medical needs. Our drug discovery efforts generally target
diseases that represent attractive commercial opportunities and that are
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 pre-clinical
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, three
corporate partners fund significant portions of four of our programs. We have
retained worldwide commercialization rights to our cancer, bacterial diseases,
allergy/asthma and cytomegalovirus programs and North American
commercialization rights in three 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
attractive markets with significant patient populations that are underserved
by current therapeutic products. Our pipeline includes three cancer drug
candidates in clinical testing, pre-clinical drug candidates in two of our
programs and 18 drug leads in various programs. The following table summarizes
key information in our nine programs:
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Program Status(1) Key Achievements
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Cancer
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 Phase 1 clinical trials Generated second-
generation analog of T67
that may have advantages
for treating particular
types of tumors.
T64 (lometrexol) Preparing for phase 2 clinical trials Licensed from Eli Lilly
a drug candidate with
phase 1 clinical
responses in a range of
human tumors.
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Cytomegalovirus Pre-clinical 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.
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Diabetes Pre-clinical Development Identified compounds
with activity in animal
models predictive of
anti-diabetic efficacy.
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Obesity Lead Optimization Discovered a series of
compounds that increase
the circulating level of
a protein that causes
weight loss in animals.
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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.
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Allergy/Asthma Lead Optimization Discovered and validated
a human transcription
factor as a target for
allergy/asthma and
identified a series of
compounds that inhibit
this human transcription
factor.
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Hypercholesterolemia Lead Optimization Identified lead
compounds that lower
cholesterol in animals.
Discovered regulatory
pathways involved in
cholesterol metabolism.
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Bacterial Diseases Lead Optimization Identified a series of
compounds that
demonstrate
antibacterial activity
and confirmed protein
target using genetic
techniques.
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Orphan Nuclear Receptor Lead Optimization Discovered two nuclear
receptors. Developed
novel biochemical
screening technology to
identify nuclear
receptor modulators.
Identified lead series
and initiated chemistry.
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(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.
"Pre-clinical Development"-- Pharmacology and toxicology testing in pre-
clinical 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 were diagnosed with cancer, and more than
550,000 patients died 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.
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 42 patients and have observed dose-limiting toxicities of
myelosuppression and neuropathy. We expect to continue to enroll additional
patients at lower dose levels with various dosing schedules. These doses are
sufficient to induce anti-tumor activity in animals. We have also observed a
partial response in a patient with liver cancer. 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 repeat administration, we expect to initiate a number of phase
2 clinical trials to determine anti-tumor activity. 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 February 2000, we commenced phase 1 clinical trials of 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 it 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 conducted in Canada, the United Kingdom and the United States.
T64 (formerly known as lometrexol). We have licensed from Eli Lilly a
cancer drug candidate that we refer to as T64. T64 is an antifolate, a class
of drugs that disrupt the synthesis of DNA and have been validated for use in
the treatment of cancer. For example, methotrexate, which acts by a mechanism
of action similar to that of T64, has been used extensively in the treatment
of breast, bladder and head and neck cancers. Eli Lilly conducted phase 1
trials of T64 both with and without folic acid supplementation. Several deaths
were observed in phase 1 trials of T64. However, patients treated with T64 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
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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 T64 in 2000.
We have not yet selected the five or six tumor types to be treated during
phase 2 clinical trials, but we expect that the trials will include melanoma
and soft tissue sarcoma patients. The primary endpoint of these studies will
be efficacy, as assessed by response rate.
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 pre-clinical testing of T902611, our lead candidate in
this area. We anticipate filing an Investigational New Drug application on
this 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
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 drugs Actos and Avandia, have proven to be efficacious for the
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treatment of type II diabetes but have also been associated with undesirable
side effects, such as weight gain. These side effects may 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 Actos and Avandia. 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 an improved profile relative to existing agents.
With our partner Japan Tobacco, we have commenced pre-clinical testing of
several advanced candidates.
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. During 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 PPAR(gamma) 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, rheumatoid arthritis and septic
shock. In 1998, a total of approximately 28 million individuals in the United
States suffered from these
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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.
Allergy/Asthma
Many diseases result from defects in the immune system, including allergic
rhinitis and asthma. 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 a human transcription factor, STAT6, that is
a key protein involved in allergy/asthma. When overstimulated, this protein is
instrumental in the development of allergy and asthma. Experiments in animals
have demonstrated that disabling this protein is safe and blocks inappropriate
immune responses. These results demonstrate that STAT6 is an excellent drug
discovery target. Our goal is to discover drugs capable of selectively
blocking STAT6 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 collaborated with Taisho in allergy/asthma research from April 1995
until March 2000.
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
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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.
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 fecalis. 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.
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.
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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 leads are undergoing
functional characterization in both cell-based assays 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:
[TULARIK DRUG DISCOVERY AND DEVELOPMENT CHART]
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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 performed 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 of the drug and its
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 performed 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
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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 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 Pre-clinical Development
We believe that the rapid characterization and optimization of lead
compounds identified in high throughput screening will generate high-quality
pre-clinical development candidates. Our pharmacology and pre-clinical
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 pre-clinical 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 $42.9 million in 1999, $33.3
million in 1998 and $26.5 million in 1997.
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 five 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. As of December 31, 1999, we had received a total of $124.0
million, including $111.0 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, a prior
alliance with Merck that was terminated by Merck in March 1999, a prior
alliance with Sumitomo that expired in January 2000 and a prior alliance with
Taisho that was terminated in March 2000. 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(1)
- ------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cancer(2) -- Tularik Tularik Tularik
Cytomegalovirus -- Tularik Tularik Tularik
Diabetes (certain Japan Tobacco Profit split Profit split Profit split
targets)
Obesity (certain Japan Tobacco Profit split Profit split Profit split
targets)
Obesity (certain Knoll Knoll Knoll Profit split
targets) (Royalties (Royalties (with Japan
shared with shared with Tobacco)
Japan Tobacco) Japan Tobacco)
Inflammation
Inflammatory bowel Roche Tularik Tularik Tularik
disease, skin diseases Bioscience (Royalties to (Royalties to (Royalties to
and eye diseases Roche Roche Roche
Bioscience) Bioscience) Bioscience)
Other indications Roche Roche Roche Roche
Bioscience Bioscience Bioscience Bioscience
Asthma/Allergy -- Tularik Tularik Tularik
Hypercholesterolemia -- Tularik Tularik Sumitomo(3)
Bacterial Diseases -- Tularik Tularik Tularik
Orphan Nuclear Receptors Japan Tobacco Profit split Profit split Profit split
</TABLE>
- --------
(1) Composition of Asian territory varies by agreement.
(2) We have agreed to pay Eli Lilly a royalty and to make milestone payments
on sales of T64, as described Below.
(3) Option to license certain compounds.
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 pre-clinical 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.
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 $6.5 million had been paid through December 31, 1999.
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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 pre-clinical 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 had been paid through December 31, 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 pre-
clinical 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 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 pre-clinical 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 pre-clinical 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
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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 $17.5 million had been paid through December
31, 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 pre-clinical 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. We will jointly
determine with Japan Tobacco a sales and marketing strategy for those
countries in which Knoll does not 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 had been paid through December 31, 1999.
Under the terms of a related stock purchase agreement, Japan Tobacco
purchased 600,000 shares of Series F Preferred Stock, which were converted
into the same number of shares of our common stock in connection with our
initial public offering, at $10.00 per share in September 1996, for an
aggregate purchase price of $6.0 million.
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Other Agreements
Eli Lilly (T64)
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 that we
refer to as T64 and was formerly known as lometrexol, and purchased related
inventory. We would owe Eli Lilly milestones and royalties upon successful
commercialization of T64. Eli Lilly filed an Investigational New Drug
application for T64, 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 T64 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 T64 and also a sublicense under the exclusive license
granted to Eli Lilly by Princeton University relating to T64. 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 T64 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 T64 products in these countries, and may
terminate the agreement if we fail to use appropriate diligence to develop T64
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 T64.
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. Merck has waived its
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, which were converted into the same
number of shares of our common stock in connection with our initial public
offering, at $5.00 per share in January 1994 for an aggregate purchase price
of $2.0 million.
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. This research collaboration ended in
January 2000.
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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 pre-clinical 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 each continue following expiration of the
research portion of the collaboration. 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 paid Tularik $15.0 million
in research payments through December 31, 1999.
Under the terms of a related stock purchase agreement, Sumitomo purchased
400,000 shares of our Series E Preferred Stock, which were converted into the
same number of shares of our common stock in connection with our initial
public offering, at $7.50 per share in February 1995 for an aggregate purchase
price of $3.0 million.
Taisho Pharmaceutical Co. (Allergy/Asthma)
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. This research collaboration was terminated by Taisho in March
2000. We have exclusive, worldwide, royalty-free rights to all products
identified in the collaboration. Taisho had paid Tularik $15.0 million in
research payments through December 31, 1999.
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 elements of
our business. To date, 49 U.S. patents based on our discoveries have been
issued or allowed. In addition, we have 53 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 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 0.75% on net sales of products covered by the claims of these patents. OSI
has indicated that after March 31, 2000 the offered terms would become less
favorable to Tularik, including a royalty rate of 1.0% 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
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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 pre-clinical 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;
. obtain required regulatory approvals; and
. manufacture, market and sell any products 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 pre-clinical 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
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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 pre-clinical testing
and clinical trials of each product candidate, is lengthy, expensive and
uncertain. Securing FDA approval requires the submission of extensive pre-
clinical 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 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 are also 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
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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 December 31, 1999, we had approximately 207 full-time employees, of
whom 100 hold Ph.D. and/or M.D. degrees and 38 hold other advanced degrees. Of
our total workforce as of December 31, 1999, 175 were engaged in research and
development activities and 32 were 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.
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.
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
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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.
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.
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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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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 annual
report on Form 10-K. 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 additional risks or
uncertainties occur, the trading price of our common stock could decline, and
you might lose all or part of your investment.
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 December 31, 1999, we had an
accumulated deficit of approximately $87.4 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 stage 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 T67, T607 and T64,
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 pre-clinical 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 pre-clinical 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.
Pre-clinical 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 pre-clinical testing and early
clinical trials does not ensure that later clinical trials will be successful.
A number of companies in the pharmaceutical industry, including biotechnology
companies, have suffered significant
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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.
Pre-clinical 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 clinical trials with anti-cancer drugs, because drugs for the
treatment of cancer are typically dangerous and cancer patients are critically
ill. Several deaths occurred during Eli Lilly's phase 1 clinical trials of
T64.
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 pre-clinical
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;
. must meet requirements for informed consent;
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. 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 pre-clinical 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 and had approximately 207 employees as of December
31, 1999. 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 are 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 identifying the
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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. Therefore, 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
pre-clinical 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 pre-clinical
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 was
terminated by Yamanouchi in November 1996, our collaboration with Merck was
terminated by Merck in March 1999, our collaboration with Sumitomo expired in
January 2000 and our collaboration with Taisho was terminated by Taisho in
March 2000. 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. If funding from one
or more of our corporate collaborations were reduced or terminated, 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 depending on the
initiation of new corporate collaboration agreements or the termination of
existing corporate collaboration agreements.
31
<PAGE>
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 whether we will be able
to realize any value from our retained commercialization rights.
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 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
32
<PAGE>
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 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 pre-
clinical, clinical and commercial
33
<PAGE>
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 manufacturing delays 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 T64 is limited and is not sufficient for completion of all phases
of clinical development. The manufacture of T64 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.
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
34
<PAGE>
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 A. Grant Heidrich, III, Chairman 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.
If we fail to obtain the capital necessary to fund our operations, we will be
unable to successfully develop products.
We expect that 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 to us from this offering, existing cash
and investment securities and anticipated cash flow from existing
collaborations will be sufficient to support our current operating plan
through the end of 2003. 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 dilution. To the extent that we raise additional
funds through collaboration and licensing arrangements, it may be necessary 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 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
35
<PAGE>
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. We or our corporate collaborators 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.
36
<PAGE>
Item 2. Properties
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 until 2005. We believe that the space needed to
accommodate our growth through the year 2003 is available.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
In November 1999, stockholders representing in excess of 51% of the
outstanding capital stock of the Company, in an action by written consent,
approved the following items: (i) the amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation following the
Company's initial public offering; (ii) the amendment and restatement of the
Bylaws following the Company's initial public offering; (iii) the amendment
and restatement of the Company's 1997 Equity Incentive Plan; (iv) the approval
of the Company's 1999 Employee Stock Purchase Plan; and (v) the election not
to be governed by Section 203 of the Delaware General Corporation Law.
37
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Our common stock has traded on the Nasdaq National Market under the symbol
"TLRK" since December 10, 1999. The following table sets forth, for the period
indicated, the high and low bid quotations for the common stock as reported by
the Nasdaq National Market.
<TABLE>
<CAPTION>
Common Stock
Price
-------------
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1999
Fourth Quarter (commencing December 10, 1999)............. $39.06 $17.00
</TABLE>
On March 17, 2000, the last reported sale price on the Nasdaq National
Market for our common stock was $46.625 per share.
Holders
As of February 29, 2000 there were approximately 575 stockholders of record
of the Company's Common Stock.
Dividends
The Company has not paid dividends on its common stock, and currently does
not plan to pay any cash dividends in the foreseeable future.
Use of Proceeds from the Sale of Registered Securities
The Company's Registration Statement on Form S-1 (Registration No. 333-
89177) with respect to our initial public offering was declared effective on
December 9, 1999. In (i) a public offering lead managed by Lehman Brothers,
Hambrecht & Quist (now Chase H&Q), J.P. Morgan & Co. and Warburg Dillon Read
in the United States and Lehman Brothers, Hambrecht & Quist (now Chase H&Q),
J.P. Morgan & Co., Warburg Dillon Read and BZ Bank Limited outside of the
United States and (ii) a registered direct offering, the Company registered
and sold and aggregate of 7,992,500 shares of our common stock at a public
offering price of $14.00 per share for an aggregate offering of $111,895,000.
The Company received net proceeds of approximately $104,903,000 after
deducting offering expenses of $6,992,000, including underwriting discounts
and commissions of $5,992,000 and other offering expenses of $1,000,000.
None of the offering expenses represented direct or indirect payments to
directors, officers or general partners of the Company or their associates, to
persons owning 10% or more of any class of equity securities of the Company or
to affiliates of the Company.
The Company intends to use the net proceeds of the offering for research
and development and general corporate purposes and is currently assessing the
specific uses and allocations for these funds. None of the net proceeds of the
offering is expected to be paid directly or indirectly to directors, officers
or general partners of the Company or their associates, to persons owning 10%
or more of any class of equity securities of the Company or to affiliates of
Company.
38
<PAGE>
Item 6. Selected Consolidated Financial Data
The following Selected Financial Data should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Financial Statements and Supplementary
Data" included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue:
Collaborative research and
development.............. $ 11,124 $ 15,297 $ 20,009 $ 21,362 $ 23,806
Operating expenses:
Research and development.. 13,473 18,622 26,546 33,264 42,877
Acquired in-process
research and
development.............. -- -- 18,902 -- 3,000
General and
administrative........... 2,507 3,630 4,020 5,002 6,037
Amortization of deferred
stock compensation....... -- -- -- 31 2,651
-------- -------- -------- -------- --------
15,980 22,252 49,468 38,297 54,565
-------- -------- -------- -------- --------
Loss from operations........ (4,856) (6,955) (29,459) (16,935) (30,759)
Interest income, net........ 1,249 1,475 4,085 6,396 5,221
-------- -------- -------- -------- --------
Net loss.................... $ (3,607) $ (5,480) $(25,374) $(10,539) $(25,538)
======== ======== ======== ======== ========
Basic and diluted net loss
per share.................. $ (0.91) $ (1.09) $ (4.19) $ (1.55) $ (2.70)
======== ======== ======== ======== ========
Weighted-average shares used
in computing basic and
diluted net loss per
share...................... 3,957 5,034 6,063 6,791 9,451
======== ======== ======== ======== ========
Pro forma basic and diluted
net loss per share......... $ (0.31) $ (0.73)
======== ========
Weighted-average shares used
in computing pro forma
basic and diluted net loss
per share.................. 33,687 34,829
======== ========
<CAPTION>
As of December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments..... $ 25,181 $ 77,078 $124,406 $119,324 $203,029
Working capital............. 15,193 69,394 116,527 94,535 184,553
Total assets................ 29,617 83,409 133,522 136,778 230,438
Long-term obligations, less
current portion............ 1,712 2,128 3,456 4,734 10,097
Deferred compensation....... -- -- -- (679) (4,586)
Accumulated deficit......... (20,464) (25,944) (51,318) (61,857) (87,395)
Total stockholders' equity.. 17,753 72,905 120,856 110,898 197,569
</TABLE>
39
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
"Item 6. Selected Consolidated Financial Data," and "Item 8. Financial
Statements and Supplementary Data" included elsewhere in this Annual Report on
Form 10K.
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, allergy/asthma, 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 December 31, 1999, our accumulated deficit was approximately
$87.4 million. We received aggregate research funding under research and
development collaborations between 1995 and 1999 as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
(in millions)
<S> <C> <C> <C> <C> <C>
Research funding received................... $13.5 $12.5 $20.0 $29.8 $23.7
</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, pre-clinical 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:
<TABLE>
<CAPTION>
Commencement
Collaborator Research Program Date
------------ ---------------- ------------
<S> <C> <C>
Knoll Obesity November 1998
Japan Tobacco Orphan Nuclear Receptors September 1998
Roche Bioscience Inflammation July 1997
Japan Tobacco Obesity/Diabetes September 1996
</TABLE>
Under the terms of the collaborations identified above, as of December 31,
1999, our partners had agreed to provide future research funding of up to
approximately $48.0 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 receivable in the future under existing collaborations was as
follows as of December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
2000 2001 2002 2003
----- ----- ----- ----
(in millions)
<S> <C> <C> <C> <C>
Contractual future research funding................ $18.0 $14.5 $12.0 $3.5
</TABLE>
Previously, we also had collaborations with Yamanouchi relating to
inflammation (commenced in November 1993, ended in November 1996), with Merck
relating to viral disease (commenced in December 1993,
40
<PAGE>
ended in March 1999), with Sumitomo related to hypercholesterolemia (commenced
in January 1995, ended in January 2000) and with Taisho related to
allergy/asthma (commenced in April 1995, ended March 2000). During 1999, we
received an aggregate of $6.9 million from these agreements and from our prior
collaborations with Merck, Sumitomo and Taisho. We do not expect to receive
any funding from Sumitomo, Merck or 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. Our outstanding preferred stock converted into common stock
in connection with our initial public offering. 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 December 31, 1999, we incurred
$7.2 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 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
41
<PAGE>
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 that we refer to as
T64 and that was formerly 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 T64. Under the agreement, Eli Lilly granted us a license
to its proprietary technology relating to T64 and also a sublicense under an
exclusive license granted to Eli Lilly by Princeton University relating to
T64. Eli Lilly has specified obligations under the agreement to maintain the
license from Princeton University. 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 T64 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 T64 products in these countries and may terminate the agreement if we
fail to use appropriate diligence to develop T64 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 T64.
At the date of the license agreement, T64 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 T64 as a treatment for any type of cancer.
These trials, necessary to establish the technological feasibility of T64,
will not be completed for at least several years. In addition, T64 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 years ended December 31, 1998 and 1999, in connection with the
grant of stock options to employees, we recorded deferred stock compensation
totaling $7.3 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 $2.7 million
for the year ended December 31, 1999. At December 31, 1999, we had a total of
$4.6 million remaining to be amortized over the vesting periods of the stock
options. You should read Note 9 of notes to consolidated financial statements.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
Collaborative research and development revenue. Collaborative research and
development revenue was $23.8 million in 1999 compared with $21.4 million in
1998 and $20.0 million in 1997. 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 Tobacco in the
area of orphan nuclear receptors and with Knoll in obesity. In addition, we
entered into a screening agreement with Japan Tobacco that contributed to the
revenue increase in 1999. The effect of these new agreements was partially
offset by lower revenue from the collaboration with Merck, which ended in
March 1999. The increase in 1998 was principally attributable to revenue from
the new collaboration agreements signed in 1998 with Japan Tobacco in the area
of orphan nuclear receptors and Knoll in obesity. We expect collaborative
research and development revenue to decline for the foreseeable future
42
<PAGE>
as existing collaborations expire at the end of their terms. Our Sumitomo
collaboration expired in January 2000 and Taisho exercised its contractual
right to terminate its current agreement with us in March 2000, and 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
$42.9 million in 1999 compared with $33.3 million in 1998 and $26.5 million in
1997. The increase was primarily attributable to increases in employee costs,
pre-clinical and clinical costs and higher occupancy costs associated with our
second building at our South San Francisco facility that we occupied in
January 1999. We also incurred a $3.0 million expense for in-process research
and development in the fourth quarter of 1999 in connection with the license
agreement we executed with Eli Lilly for T64 in September 1999. The increase
in 1998 was primarily attributable to increases in employee costs and pre-
clinical and clinical costs 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. 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. 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.
General and administrative expenses. General and administrative expenses
were $6.0 million in 1999, $5.0 million in 1998 and $4.0 million in 1997.
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 50% compared with a 62% growth in research and
development expenses. 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 the demands associated with operating
as a public company.
Amortization of deferred stock compensation. Amortization of deferred stock
compensation was $2.7 million in 1999 and $31,000 in 1998. There was no
amortization of deferred stock compensation in 1997. We recorded deferred
stock compensation of approximately $6.6 million in 1999 and $710,000 in 1998
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 $5.2 million in 1999, $6.4
million in 1998 and $4.1 million in 1997. The 1999 decrease was due primarily
to lower interest-bearing balances and lower interest rates as compared to
1998. The 1998 increase was due primarily to sequentially higher interest-
bearing balances as a result of a preferred stock financing in 1997.
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
December 31, 1999, we had received net proceeds of $269.3 million from the
sale of equity securities, including $13.0 million from collaborators and
$104.7 million from our initial public offering in December 1999, and received
$111.0 million in non-equity payments from collaborators. Aggregate interest
income earned since our inception was $23.4 million through December 31, 1999.
We had cash, cash equivalents and short-term investments of $203.0 million
at December 31, 1999, an increase of $90.7 million from December 31, 1998.
Cash used in operations during the year ended December 31, 1999 was $20.7
million. Cash used to purchase a restricted investment in connection with a
secured financing
43
<PAGE>
arrangement was $4.0 million. Cash used for purchases of equipment and
leasehold improvements totaled $9.3 million during the year ended December 31,
1999. Cash received from equipment financing during the year ended December
31, 1999 was $11.7 million. The annual interest rates of these financings
ranged from 9.0% to 12.0% and the financing arrangements have terms of
approximately four years each. As of December 31, 1999, we had $1.4 million
available under equipment financing arrangements, which we expect to utilize
in 2000. Repayments of long-term obligations totaled $3.6 million during the
year ended December 31, 1999. Cash received from stock option exercises during
the year ended December 31, 1999 was $4.9 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, 1999, cash used in
operating and investing activities was $25.4 million and $87.2 million,
respectively. Uses of cash in operating activities were primarily to fund net
losses, excluding noncash charges. Uses of cash in investing activities
included $63.3 million used for net purchases of available-for-sale
securities, $17.3 million for capital expenditures, $6.1 million for purchases
of long-term and restricted investments and $538,000 related to the
acquisition of Amplicon. Financing activities provided cash of $175.2 million
during the three-year period ended December 31, 1999. This amount largely
represented 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 will be
sufficient to support our current operating plan through the end of 2003. 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 pre-clinical 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.
44
<PAGE>
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 December 31, 1999, we had federal net operating loss carryforwards of
approximately $59.6 million to offset future taxable income. We also had
federal research and development tax credit carryforwards of approximately
$2.3 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 12 of notes to
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is principally limited 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 December 31, 1999
levels, the fair value of our portfolio would decline by approximately
$292,000. 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.
45
<PAGE>
Item 8. Financial Statements and Supplementary Data
TULARIK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... 47
Consolidated Balance Sheets................................................ 48
Consolidated Statements of Operations...................................... 49
Consolidated Statements of Stockholders' Equity............................ 50
Consolidated Statements of Cash Flows...................................... 51
Notes to Consolidated Financial Statements................................. 52
</TABLE>
46
<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, 1998 and 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, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tularik Inc.
at December 31, 1998 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 27, 2000
47
<PAGE>
TULARIK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 53,398 $ 95,269
Short-term investments................................... 58,926 107,760
Prepaid expenses and other current assets................ 1,582 3,103
-------- --------
Total current assets................................... 113,906 206,132
Property and equipment, net................................ 11,950 15,434
Other investments.......................................... 9,050 2,050
Restricted investments..................................... -- 4,000
Other assets............................................... 1,872 2,822
-------- --------
Total assets........................................... $136,778 $230,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 1,570 $ 807
Accrued compensation and related liabilities............. 1,170 1,769
Accrued liabilities...................................... 1,377 2,724
Accrued construction costs............................... 2,076 --
Current portion of long-term debt and capital lease
obligations............................................. 2,330 5,052
Deferred revenue......................................... 10,848 11,227
-------- --------
Total current liabilities.............................. 19,371 21,579
Long-term debt and capital lease obligations............... 4,734 10,097
Other non-current liabilities.............................. 1,775 1,193
-------- --------
Total liabilities...................................... 25,880 32,869
======== ========
Commitments (Note 8)
Stockholders' equity:
Convertible preferred stock, $0.001 par value, issuable
in series: 33,000,000 and 5,000,000 shares authorized at
December 31, 1998 and 1999; 26,903,885 and none shares
issued and outstanding at December 31, 1998 and 1999
(aggregate liquidation preference of $173,424 in 1998).. 27 --
Common stock, $0.001 par value, 55,000,000 and 65,000,000
shares authorized; 7,560,603 and 44,835,844 shares is
sued and outstanding at December 31, 1998 and 1999...... 8 45
Additional paid-in capital............................... 174,035 291,114
Notes receivable from stockholders....................... (636) (1,609)
Deferred compensation.................................... (679) (4,586)
Accumulated deficit...................................... (61,857) (87,395)
-------- --------
Total stockholders' equity............................. 110,898 197,569
-------- --------
Total liabilities and stockholders' equity............. $136,778 $230,438
======== ========
</TABLE>
See accompanying notes.
48
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Collaborative research and development.... $ 20,009 $ 21,362 $ 23,806
Operating expenses:
Research and development.................. 26,546 33,264 42,877
Acquired in-process research and
development.............................. 18,902 -- 3,000
General and administrative................ 4,020 5,002 6,037
Amortization of deferred stock
compensation............................. -- 31 2,651
--------- ---------- ----------
49,468 38,297 54,565
--------- ---------- ----------
Loss from operations........................ (29,459) (16,935) (30,759)
Interest income............................. 4,634 5,906 6,357
Interest expense............................ (549) (510) (1,136)
--------- ---------- ----------
Net loss.................................... $ (25,374) $ (10,539) $ (25,538)
========= ========== ==========
Basic and diluted net loss per share........ $ (4.19) $ (1.55) $ (2.70)
========= ========== ==========
Weighted average shares used in computing
basic and diluted net loss per share....... 6,062,651 6,790,512 9,450,934
========= ========== ==========
Pro forma basic and diluted net loss per
share...................................... $ (0.31) $ (0.73)
========== ==========
Weighted average shares used in computing
pro forma basic and diluted net loss per
share...................................... 33,686,853 34,828,772
========== ==========
</TABLE>
See accompanying notes.
49
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS 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>
Balances at
January 1, 1997.. 19,917,132 $ 20 6,794,567 $ 7 $ 99,480 $ (658) $ -- $(25,944) $ 72,905
Issuance of common
stock, net of
repurchases...... -- -- 638,162 -- 779 (263) -- -- 516
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
Repayment of notes
receivable....... -- -- -- -- -- 61 -- -- 61
Net loss.......... -- -- -- -- -- -- -- (25,374) (25,374)
----------- ---- ---------- --- -------- ------- ------- -------- --------
Balances 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)
----------- ---- ---------- --- -------- ------- ------- -------- --------
Balances at
December 31,
1998............. 26,903,885 27 7,560,603 8 174,035 (636) (679) (61,857) 110,898
Conversion of
warrants, net.... 49,654 -- 62,599 -- -- -- -- -- --
Issuance of common
stock, net of
repurchases...... -- -- 2,266,603 2 5,854 (1,405) -- -- 4,451
Payment of notes
receivable....... -- -- -- -- -- 432 -- -- 432
Issuance of common
stock in initial
public offering
net of offering
costs of $7,220.. -- -- 7,992,500 8 104,667 -- -- -- 104,675
Conversion of
preferred stock
to common stock
conjunction with
Initial Public
Offering......... (26,953,539) (27) 26,953,539 27 -- -- -- -- --
Deferred
compensation..... -- -- -- -- 6,558 -- (6,558) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- 2,651 -- 2,651
Net loss.......... -- -- -- -- -- -- -- (25,538) (25,538)
----------- ---- ---------- --- -------- ------- ------- -------- --------
Balances at
December 31,
1999............. -- $ -- 44,835,844 $45 $291,114 $(1,609) $(4,586) $(87,395) $197,569
=========== ==== ========== === ======== ======= ======= ======== ========
</TABLE>
See accompanying notes.
50
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss..................................... $ (25,374) $ (10,539) $ (25,538)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 1,918 2,423 3,873
Amortization of deferred stock
compensation.............................. -- 31 2,651
Noncash stock compensation................. -- 188 --
Write-off of in-process research and
development............................... 18,902 -- --
Changes in assets and liabilities, net of
Acquisition:
Other assets............................. (240) (1,578) (2,642)
Accounts payable and accrued
liabilities............................. 1,002 827 1,183
Deferred revenue......................... (340) 7,873 (639)
Other liabilities........................ 141 52 436
--------- --------- ---------
Net cash used in operating activities.. (3,991) (723) (20,676)
--------- --------- ---------
Cash flows from investing activities
Maturities of available-for-sale securities.. 103,693 140,982 95,300
Purchases of available-for-sale securities... (109,132) (157,047) (137,134)
Capital expenditures......................... (1,970) (6,057) (9,262)
Purchases of long-term and restricted
investments................................. (1,000) (1,050) (4,000)
Acquisition, net of cash received............ (538) -- --
--------- --------- ---------
Net cash used in investing activities.. (8,947) (23,172) (55,096)
--------- --------- ---------
Cash flows from financing activities
Proceeds from long-term obligations.......... 1,268 3,905 11,706
Payments of long-term obligations............ (1,490) (1,519) (3,621)
Net proceeds from issuance of preferred
stock....................................... 54,472 6 --
Proceeds from issuances of common stock,
net......................................... 577 356 109,558
--------- --------- ---------
Net cash provided by financing
activities............................ 54,827 2,748 117,643
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 41,889 (21,147) 41,871
Cash and cash equivalents at beginning of
period...................................... 32,656 74,545 53,398
--------- --------- ---------
Cash and cash equivalents at end of period... $ 74,545 $ 53,398 $ 95,269
========= ========= =========
</TABLE>
See accompanying notes.
51
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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. In connection with the Company's initial public
offering in December 1999, Tularik amended its certificate of incorporation to
decrease the number of authorized shares of preferred stock to 5,000,0000 and
to increase the number of authorized shares of common stock to 65,000,000.
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 complete clinical trials,
obtain regulatory approval and successfully commercialize 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) and Taisho Pharmaceutical Co., Ltd. ("Taisho") relating to
immune disorders (commenced in April 1995). Previously, Tularik also had
collaborations with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi")
relating to inflammation (commenced in November 1993, ended in November 1996);
Merck & Co., Inc., ("Merck") relating to viral disease (commenced in December
1993, ended in March 1999) and Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo")
relating to hypercholesterolemia (commenced in January 1995, expired in
January 2000). As of December 31, 1999, the Company has received $13.0 million
in equity investments and $111.0 million in research funding from its
collaborators.
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.
52
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 3 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, 1998 and 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, 1998 and
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, 1998 and 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 of three years for software and computers
and 4 years for laboratory equipment and furniture, 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. Research support payments received in advance of work
performed are recorded as deferred revenue.
The Company has recognized nonrefundable technology access fees received in
connection with collaboration agreements as revenue when received, when the
technology has been transferred and when all contractual obligations of the
Company relating to the fees had been fulfilled. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101--
Revenue Recognition in Financial Statements ("SAB 101") which, among other
things, describes the SEC Staff's position on the recognition of certain
nonrefundable upfront fees received in connection with research
collaborations. The Company is currently evaluating the applicability of SAB
101 to its existing collaboration agreements. Should the Company conclude that
the approach described in SAB 101 is more appropriate, it will change its
method of accounting
53
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective January 1, 2000 to recognize such fees over the term of the related
research agreement. The cumulative effect of this change in accounting
principle, if made, would be approximately $4.8 million as of January 1, 2000
and would be recognized as a charge in the quarter ended March 31, 2000. The
cumulative effect would be recorded as deferred revenue and would be
recognized as revenue over the remaining contractual terms of the
collaborative research and development agreements.
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.
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, 1998 and 1999.
Net Loss Per Share
Net loss per share has been computed in accordance with 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.
54
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
---------- --------- ---------
(in thousands, except share
and
per share amounts)
<S> <C> <C> <C>
Net loss.................................... $ (25,374) $ (10,539) $ (25,538)
========== ========= =========
Weighted average shares of common stock
outstanding................................ 7,292,476 7,495,576 9,931,112
Less: weighted average shares subject to
repurchase................................. (1,229,825) (705,064) (480,178)
---------- --------- ---------
Weighted average shares used in computing
basic and diluted net loss per share....... 6,062,651 6,790,512 9,450,934
========== ========= =========
Basic and diluted net loss per share........ $ (4.19) $ (1.55) $ (2.70)
========== ========= =========
</TABLE>
The Company's preferred stock converted into common stock upon the closing
of the Company's initial public offering in December 1999. For information
purposes, the following pro forma net loss per share data reflects the assumed
conversion of the Company's preferred stock into common stock at the beginning
of each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Pro forma:
Shares used above.................................... 6,790,512 9,450,934
Pro forma adjustment to reflect weighted average
effect of assumed conversion of preferred stock..... 26,896,341 25,377,838
Total weighted average shares of common stock
outstanding pro forma............................... 33,686,853 34,828,772
Basic and diluted pro forma loss per share........... $ (0.31) $ (0.73)
</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. Such outstanding securities consist of the
following at December 31:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Convertible preferred stock.................... 26,858,823 26,903,885 --
Outstanding options............................ 3,710,872 5,351,309 4,244,191
Warrants....................................... 999,235 1,078,382 890,119
---------- ---------- ---------
Total........................................ 31,568,930 33,333,576 5,134,310
========== ========== =========
Weighted average exercise price of options..... $ 1.41 $ 1.99 $ 2.80
========== ========== =========
Weighted average exercise price of warrants.... $ 8.88 $ 9.71 $ 10.91
========== ========== =========
</TABLE>
The information above does not include 13,449 options granted to employees
in connection with the Acquisition and 25,000 options granted outside of the
Company's stock option plans.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133, as amended, establishes methods for derivative financial instruments
and hedging activities related to those instruments, as well as other hedging
activities. Tularik is required to adopt SFAS 133 effective January 1, 2001.
Because Tularik currently does not hold any
55
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
derivative instruments and does not engage in hedging activities, Tularik does
not currently believe that the adoption of SFAS 133, as amended, will have a
significant impact on its financial position or results of operations.
3. Research and Development Collaborations
The Company has entered into multi-year research and development
collaborations in five of its research programs. Tularik received aggregate
research payments, including technology access fees, of $20.0 million, $29.8
million and $23.7 million and recognized collaboration revenue of $20.0
million, $21.4 million and $23.8 million in 1997, 1998, and 1999,
respectively. Under the terms of existing collaborations at December 31, 1999,
the Company's partners have agreed to provide future research funding of up to
approximately $48.0 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 $6.5 million had
been paid as of December 31, 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. Japan Tobacco 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 had been
paid as of December 31, 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 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 $17.5
million had been paid as of December 31, 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,
56
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Series F preferred stock converted into common
stock upon the closing of the Company's initial public offering. 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 had been paid as of December 31, 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 had paid Tularik $15.0 million in research payments
as of December 31, 1999.
In January 1995, the Company entered into a five-year collaboration with
Sumitomo to fund research and development in the field of
hypercholesterolemia. This research collaboration ended in January 2000. 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. The Series E preferred stock
converted into common stock upon the closing of the Company's initial public
offering. 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. The license to Tularik
and the license to Sumitomo continues following expiration of the research
portion of the collaboration. Any compound conceived during the research
period and reduced to practice within a year of termination will revert to the
Company if not licensed by Sumitomo within the specified period after the
termination of the research collaboration. Sumitomo had paid Tularik $15.0
million in research payments as of December 31, 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. The Series D preferred stock
converted into common stock upon the close of the Company's initial public
offering. 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 had paid Tularik $18.4 million in research payments under
this agreement.
57
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Investments
The following is a summary of available-for-sale securities at cost, which
approximates fair market value at December 31:
<TABLE>
<CAPTION>
1998 1999
------- --------
(In thousands)
<S> <C> <C>
Cash equivalents:
Money market funds.......................................... $ 2,659 $ 15,839
U.S. corporate debt securities.............................. 50,739 79,430
------- --------
$53,398 $ 95,269
======= ========
Short-term investments:
Obligations of domestic governmental agencies............... $12,999 $ --
U.S. corporate debt securities.............................. 45,927 107,760
------- --------
$58,926 $107,760
======= ========
</TABLE>
As of December 31, 1998 and 1999, the average portfolio duration was
approximately five months.
5. Property and Equipment
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Laboratory and office equipment............................... $15,063 $19,057
Leasehold improvements........................................ 5,376 8,804
Construction in progress...................................... 235 --
------- -------
20,674 27,861
Less accumulated depreciation and amortization................ (8,724) (12,427)
------- -------
Property and equipment, net................................... $11,950 $15,434
======= =======
</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 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. Upon the
completion of the Company's initial public offering in December 1999, all
outstanding preferred stock converted into common stock, and all warrants and
options to purchase preferred stock became exercisable for shares of common
stock on a one-for-one basis. 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
58
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
7. 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 that we refer to as
T64 and that was formerly 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 T64. Under the agreement, Eli Lilly granted us a license
to its proprietary technology relating to T64, and also a sublicense under an
exclusive license granted to Eli Lilly by Princeton University relating to
T64. 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 T64 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 T64 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 T64.
59
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the date of the license agreement, T64 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 T64 as a treatment for any type of cancer.
These trials, necessary to establish the technological feasibility of T64,
will not be completed for at least several years. In addition, T64 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 Debt and Leases
At December 31, 1999, the Company's aggregate commitments under long-term
debt and noncancelable lease arrangements are as follows:
<TABLE>
<CAPTION>
Operating
Long-Term Capital Operating Sublease
Debt Leases Leases Income
--------- ------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
2000.................... $ 4,113 $ 1,954 $ 4,710 $(512)
2001.................... 3,769 1,289 4,627 $(257)
2002.................... 2,888 906 4,710
2003.................... 2,269 656 4,710
2004.................... -- -- 4,797
Thereafter.............. -- -- 40,093
------- ------- ------- -----
Total minimum payment
required............... 13,039 4,805 $63,647 $(769)
======= =====
Less amount representing
interest............... (1,869) (826)
------- -------
Present value of future
payments............... 11,170 3,979
Less current portion.... (3,232) (1,820)
------- -------
$ 7,938 $ 2,159
======= =======
</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 transactions. The leases are classified as capital leases.
The cost of assets under secured financing arrangements was $10.2 million and
$20.6 million and the related accumulated depreciation and amortization was
$5.0 million and $9.2 million at December 31, 1998 and 1999, respectively.
The Company has purchased $4.0 million of corporate debt securities to
secure the long-term debt facility. Accordingly, the Company has classified
these investments as a restricted investment in the accompanying balance
sheet.
Rent expense, principally for leased facilities under long-term operating
lease commitments, was $2.3 million, $2.4 million and $4.4 million for 1997,
1998, and 1999, respectively. The Company received $666,000 in sublease income
in 1999, but did not receive any sublease income in 1997 and 1998.
9. Stockholders' Equity
Preferred Stock
Concurrent with the closing of the Company's initial public offering in
December 1999, all outstanding shares of preferred stock converted into
26,953,539 shares of common stock of the Company.
60
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock
Warrants
A summary of warrants to purchase common stock at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Number Terms
of Exercise in
Description Warrants Price Years Expiration
----------- -------- ------------ ----- ----------
<S> <C> <C> <C> <C>
Related to the Issuance of Series F
preferred stock....................... 253,600 $10.00 10 2006
Acquisition of Amplicon................ 296,949 $13.00 10 2007
Facility lease agreements.............. 339,570 $7.50-$13.00 10 2005-2008
-------
890,119
=======
</TABLE>
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 years ended December 31, 1998 and 1999, in connection with the
grant of certain share options to employees, the Company recorded deferred
stock compensation of $710,000 and $6.6 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 years ended
December 31, 1998 and 1999, the Company recorded amortization of deferred
stock compensation expense of approximately $31,000 and $2.7 million,
respectively. At December 31, 1999, the Company had a total of approximately
$4.6 million remaining to be amortized over the corresponding vesting period
of each respective option, generally four years.
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 market value method of that statement. The
fair value for these options and the purchase rights was estimated at the date
of grant using the minimum value method, for employee stock options granted
prior to the Company's initial public offering in December 1999. For employee
stock option granted subsequent to the Company's initial public offering the
value was estimated at the date of grant using a Black-Scholes option pricing
model. The following weighted-average assumptions were used for 1997, 1998 and
1999, respectively: risk free interest rates of 6.0%, 5.5% and 6.0%;
volatility factors of the expected market price of the Company's common stock
of 0.70 (for periods following the initial public offering); no
61
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividend yield; and a weighted-average expected life of the options of 5
years. Pro forma information follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net loss:
As reported.................................... $(25,374) $(10,539) $(25,538)
Pro forma...................................... $(25,692) $(11,179) $(27,571)
Net loss per share (basic and diluted):
As reported.................................... $ (4.19) $ (1.55) $ (2.70)
Pro forma...................................... $ (4.24) $ (1.65) $ (2.92)
</TABLE>
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Options Price
---------- ---------
<S> <C> <C>
Options outstanding at January 1, 1997.................... 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................................................. 1,712,750 4.27
Exercised............................................... (2,229,920) 1.99
Forfeited............................................... (571,986) 2.91
----------
Options outstanding at December 31, 1999.................. 4,244,191 $2.80
==========
</TABLE>
An analysis of options outstanding at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Exercise Options Contractual Exercise Options Exercise
Price Outstanding Life Price Vested Price
-------- ----------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.03--$ 0.93 1,190,157 4.91 $0.50 968,899 $0.52
$ 2.50 53,000 6.92 2.50 41,542 2.50
$ 3.00 2,790,284 8.63 3.00 579,567 3.00
$9.90--$18.50 210,750 9.94 13.12 291 12.83
--------- ---------
$0.03--$18.50 4,244,191 7.62 $2.80 1,590,299 $1.48
========= =========
</TABLE>
The weighted-average fair value of options granted during 1997, 1998 and
1999 was $0.76, $0.70 and $5.22 respectively.
The information above does not include 13,449 options with exercise prices
from $0.70 to $0.95 granted to employees in connection with the Acquisition
and 25,000 options with exercise prices from $0.50 to $3.00 granted outside of
the Company's stock option plans.
62
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Subject to Repurchase
As of December 31, 1998 and 1999, the Company had 1,004,050, and 724,722
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.
1999 Employee Stock Purchase Plan
In November 1999, the Company adopted its 1999 Employee Stock Purchase Plan
(the "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, the 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. As of December 31, 1999, no common stock had been issued under the
Purchase Plan.
Reserved Shares
Shares of common stock reserved for future issuance were as follows at
December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Warrants:
Warrants outstanding..................................... 1,078,382 890,119
Reserved for future issuance............................. 3,051 2,961
Stock plans:
Options outstanding...................................... 5,351,447 4,244,191
Reserved for future grants............................... 1,737,772 2,242,210
Stock Purchase Plan...................................... -- 500,000
Convertible preferred stock:
Issued and outstanding................................... 26,903,885 --
---------- ---------
35,074,537 7,879,481
========== =========
</TABLE>
The information above does not include 13,449 options granted to employees
in connection with the Acquisition and 25,000 options granted outside of the
Company's stock option plans.
10. Related Party Transactions
During the years ended December 31, 1997, 1998 and 1999, the Company loaned
stockholders $194,000, $357,000 and $650,000, respectively. The loans were
made in connection with relocation and housing. The loans bear interest rates
that 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. These amounts
exclude loans made in connection with stock option exercises which have been
recorded in stockholders' equity in the accompanying financial statements.
11. 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,
63
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 39,931 shares of common stock to employee
savings accounts and recognized compensation expense of $188,000 and $309,000
in 1998 and 1999, respectively.
12. Income Taxes
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $59.6 million and $7.8 million. The
Company also had federal and state research and other tax credit carryforwards
of approximately $2.3 million and $1.7 million, respectively. The federal net
operating loss and credit carryforwards will expire at various dates beginning
in the year 2007 through 2019, if not utilized. The state of California net
operating loss carryforwards will expire in the year 2000 through 2004, if not
utilized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets are as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards.......................... $ 13,200 $ 20,700
Research and other credits................................ 3,000 3,800
Capitalized research expenses............................. 3,200 2,400
Depreciation.............................................. 1,200 1,100
Other..................................................... -- 1,600
-------- --------
Total Deferred Tax Assets............................... 20,600 29,600
Valuation Allowance......................................... (20,600) (29,600)
-------- --------
Net Deferred Taxes...................................... $ -- $ --
======== ========
</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 $7.1 million and $9.0 million during the years ended December 31,
1998 and 1999, respectively.
Utilization of the net operating loss and credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.
13. Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------- ---- ------
(In thousands)
<S> <C> <C> <C>
Cash paid during the period for interest.................. $ 549 $508 $1,136
Supplemental disclosure of noncash investing and
financing:
Equipment and leasehold improvements financed under
capital leases........................................... $ 1,185 $ -- $ --
Common stock issued for notes receivable.................. $ 263 $149 $1,405
Issuance of preferred stock and warrants in connection
with Acquisition......................................... $18,276 $ -- $ --
</TABLE>
64
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent events (unaudited)
In January 2000, the collaboration with Sumitomo to fund research and
development in the field of hypercholesterolemia expired. In March 2000,
Taisho terminated its collaboration with Tularik. Tularik will receive
exclusive, worldwide, royalty-free rights to all products identified in the
collaboration.
In March 2000, Tularik issued 1,875,000 shares of common stock at a net
price of $33.50 per share raising approximately $62.8 million.
65
<PAGE>
Item 9. Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to our Annual Meeting of
Stockholders will be contained in our definitive Proxy Statement, under the
captions "Election of Directors--Nominees," and "Security Ownership of Certain
Beneficial Owners and Management--Compliance with the Reporting Requirement of
Section 16(a)," and is incorporated by reference.
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors as of December 31, 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....................... 52 Executive Vice President
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, Vice President, Pharmacology and Preclinical
Ph.D....................... 50 Development
A. Grant Heidrich, III...... 47 Chairman of the Board of Directors
Mark J. Levin............... 49 Director
Paul A. Marks, M.D.......... 73 Director
Edward R. McCracken......... 56 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 the Board 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 Genentech
Fellow, 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.
66
<PAGE>
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.
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 and as Chairman since February 2000. Mr. Heidrich joined
Mayfield Fund in 1982 and is currently a general partner of Mayfield Fund. Mr.
Heidrich is a member of the board of directors of Millennium Pharmaceuticals,
Inc. 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. Mr.
Levin serves on the board of directors of CytoTherapeutics Inc. He received an
M.S. in Biomedical Engineering from Washington University, St. Louis.
Paul A. Marks, M.D. has served as a member of our board of directors since
December 1993. He is currently President Emeritus and Member, Memorial Sloan-
Kettering Cancer Center. From July 1980 to December 1999, Dr. Marks was the
President and Chief Executive Officer of Memorial Sloan-Kettering Cancer
Center, a member of the Sloan-Kettering Institute for Cancer Research, and
Attending Physician of Memorial Hospital for Cancer and Allied Diseases.
Previously, Dr. Marks was 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 as a
director of several Dreyfus Funds and is Director-Emeritus of Pfizer Inc. He
received his M.D. from the College of Physicians and Surgeons, Columbia
University in 1949.
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. Prior to 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 PRASAD Project, a charitable foundation, and serves on the board of
National Semiconductor Corporation and Minnesota Mining and Manufacturing
Company. Mr. McCracken holds an M.B.A. from Stanford University.
67
<PAGE>
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. Dr.
McKnight has been a part-time employee of, or a consultant to, Tularik since
January 1996. He now serves 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 Association of Arts and Sciences.
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
and is a member of the Board of Pharma Vision 2000 AG. Before joining the BZ
Group, Dr. Sjostrand held various senior level positions with Astra AB from
1975 to 1993, including Executive Vice President, Chief Financial Officer and
Regional Director, Americas. Dr. Sjostrand received his M.D. from Karolinska
Institute in Stockholm, Sweden. Dr. Sjostrand also serves on the board of AGA
AB.
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.
Item 11. Executive Compensation
The information required by this item will be contained in our definitive
Proxy Statement with respect our Annual Meeting of Stockholders, under the
caption "Executive Compensation," and is hereby incorporated by reference
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders,
under the captain "Security Ownership of Certain Beneficial Owners and
Management," and is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders, under the
caption "Certain Transactions," and is hereby incorporated by reference.
68
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements--See Index to Consolidated Financial Statements
in Item 8 of the report.
2. Financial Statement Schedules. None.
3. Exhibits.
<TABLE>
<C> <S>
3.1+ Amended and Restated Certificate of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
4.1+ Specimen Common Stock Certificate.
4.2+ Amended and Restated Registration Rights Agreement, dated August 15,
1999, between Registrant and holders of Registrant's Series A, Series
B, Series C, Series D, Series E, Series F and Series G preferred
stock and holders of warrants to purchase Registrant's common stock
or Series H preferred stock.
4.3+ Investor Rights Agreement, dated October 31, 1997, between Registrant
and holders of Registrant's Series H preferred stock.
10.1+*** Form of Indemnity Agreement.
10.2+*** 1991 Stock Plan and related documents.
10.3+*** 1997 Equity Incentive Plan and related documents.
10.4+*** 1997 Non-Employee Directors' Stock Option Plan and related documents.
10.5+*** 1999 Employee Stock Purchase Plan.
10.6*+ Collaboration Agreement between Registrant and Sumitomo
Pharmaceuticals Co., Ltd., dated January 31, 1995, as amended March
13, 1997.
10.7 Reserved.
10.8*+ Amended and Restated Collaboration and License Agreement between
Registrant and Merck & Co., Inc., dated December 22, 1996.
10.9*+ Research Collaboration and License Agreement between Registrant and
the Roche Bioscience division of Syntex (U.S.A.) Inc., dated July 8,
1997, as amended on December 19, 1997.
10.10*+ Research Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
10.11*+ License Agreement between Registrant and Cold Spring Harbor
Laboratory, dated October 3, 1997.
10.12*+ Collaboration Agreement between Registrant and Knoll AG, dated
November 1, 1998.
10.13*+ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 8, 1998.
10.14*+ Preliminary Research, Development and Marketing Agreement between
Registrant and Japan Tobacco Inc., dated September 20, 1998.
10.15*+ Screening Agreement between Registrant and Japan Tobacco Inc., dated
August 23, 1999.
10.16*+ Licensing Agreement between Registrant and Eli Lilly and Company,
dated September 24, 1999.
10.17+ Stock Purchase Agreement between Registrant and the 1987 Swanson
Family Trust, dated June 20, 1996, as amended August 17, 1996.
</TABLE>
69
<PAGE>
<TABLE>
<C> <S>
10.18+ Sublease between Registrant and AGY Therapeutics, Inc., dated January
25, 1999.
10.19+ Sublease between Registrant and Coulter Pharmaceuticals, Inc., dated
May 1, 1999.
10.20+ Sublease between Registrant and IGEN International, Inc., dated August
20, 1999.
10.21+ Lease Agreement between Leonard Racanelli and The Rosa Racanelli 1998
Trust, dated July 23, 1998
10.22+ Sublease between Registrant and GeneSoft Inc., dated November 16,
1998.
10.23+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated April 20, 1995.
10.24+ Lease Agreement between Registrant and Brittania Developments, Inc.,
dated February 10, 1998.
10.25+ Agreement and General Release between Registrant and John P.
McLaughlin, dated September 30, 1999.
10.26++ Amplicon Corp. Stock Option Plan.
10.27++ Tularik Matching Plan.
22.1+ List of Subsidiaries.
23.1** Consent of Ernst & Young LLP, Independent Auditors.
24.1** Power of Attorney (included on signature pages hereto).
27.1+++ Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment has been granted as to specific portions.
** Filed herewith.
*** Management contract or arrangement.
+ Filed as an exhibit to the registrant's Registration Statement on Form S-1
No. 333-89177, and incorporated herein by reference.
++ Filed as an exhibit to the registrant's Registration Statement on Form S-8
No. 333-95605 and incorporated herein by reference.
+++ Filed as an exhibit to the registrant's Registration Statement on Form S-1
No. 333-30978, and incorporated therein by reference.
(b) The Company did not file any reports on Form 8-K during 1999.
(c) Exhibits
See Item 14(a) above.
(d) Financial Statement Schedule
See Item 14(a) above.
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on March
29, 2000.
Tularik Inc.
/s/ David V. Goeddel
By: _________________________________
David V. Goeddel
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the persons whose signatures appear
below each severally constitutes and appoints David V. Goeddel and Corinne H.
Lyle, and each of them, as true and lawful attorneys-in-fact and agents, with
full powers of substitution and resubstitution, for them in their name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all which said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
71
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David V. Goeddel Chief Executive Officer And March 29, 2000
____________________________________ Director (Principal
David V. Goeddel Executive Officer)
/s/ Corinne H. Lyle Chief Financial Officer March 29, 2000
____________________________________ (Principal Finance and
Corinne H. Lyle Accounting Officer)
/s/ A. Grant Heidrich, III Director March 29, 2000
____________________________________
A. Grant Heidrich, III
/s/ Mark J. Levin Director March 29, 2000
____________________________________
Mark J. Levin
/s/ Paul A. Marks Director March 29, 2000
____________________________________
Paul A. Marks
/s/ Edward R. McCracken Director March 29, 2000
____________________________________
Edward R. McCracken
/s/ Steven L. McKnight Director March 29, 2000
____________________________________
Steven L. McKnight
/s/ Peter J. Sjostrand Director March 29, 2000
____________________________________
Peter J. Sjostrand
</TABLE>
72
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-95605 and 333-30384) pertaining to the 1991 Equity
Incentive Plan, the 1997 Equity Incentive Plan, the 1997 Non-Employee
Directors' Stock Option Plan, the Amplicon Corp. Stock Option Plan, the
Tularik Matching Plan, and the 1999 Employee Stock Purchase Plan of Tularik
Inc. of our report dated January 27, 2000, with respect to the consolidated
financial statements of Tularik Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Palo Alto, California March 27,2000
