<PAGE>
As filed with the Securities and Exchange Commission on March 3, 2000
Registration No. 333-30978
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
TULARIK INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 8731 94-3148800
(State or other
jurisdiction of
incorporation or
organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification No.)
---------------
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)
---------------
David V. Goeddel
Chief Executive Officer
Tularik Inc.
Two Corporate Drive
South San Francisco, California 94080
(650) 825-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Suzanne Sawochka Hooper, Esq. David A. Hahn, Esq.
Cooley Godward LLP Christopher L. Kaufman, Esq.
Five Palo Alto Square Latham & Watkins
3000 El Camino Real 701 B Street
Palo Alto, California 94306-2155 Suite 2100
(650) 843-5000 San Diego, CA 92101
(619) 236-1234
---------------
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
It this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Securities Amount to be Offering Price Offering Registration
to be Registered Registered(1) Per Share(2) Price(2) Fee(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value ................ 6,900,000 $83.03 $572,907,000 $151,248
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes 900,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee based on the high and low trading price for the common
stock on March 1, 2000, pursuant to Rule 457(c) under the Securities Act of
1933, as amended.
(3) $99,338 was paid on February 22, 2000 in connection with the initial filing
of this Registration Statement and $51,910 is being paid in connection with
this Amendment No. 1.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine. Information contained herein is subject to completion or
amendment.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with +
+the Securities and Exchange Commission is effective. This prospectus is not +
+an offer to sell these securities and we are not soliciting offers to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated March 2, 2000
6,000,000 Shares
[TULARIK INC. LOGO]
Common Stock
- --------------------------------------------------------------------------------
We are offering 4,500,000 shares of our common stock and the selling
stockholders are offering 1,500,000 shares. We will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
"TLRK." On March 1, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $85.00 per share.
Investing in the shares involves risks. "Risk Factors" begin on page 7.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discount............................................... $ $
Proceeds to Tularik................................................. $ $
Proceeds to Selling Stockholders.................................... $ $
</TABLE>
We and the selling stockholders have granted the underwriters a 30-day option
to purchase up to 900,000 additional shares of common stock solely to cover
over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
- --------------------------------------------------------------------------------
Lehman Brothers
J.P. Morgan & Co.
Chase H & Q
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
, 2000
<PAGE>
Inside Front Cover
Most human diseases are linked to the inappropriate activation of genes, which
causes over-production of harmful proteins or under-production of beneficial
proteins. Tularik is committed to the discovery of novel drugs that can be
administered orally to treat disease by blocking or amplifying the activation
of genes.
Graphic Description: Graphic depicting how pills amplify beneficial activation
of genes or block harmful activation of genes.
Developing drugs to treat human disease by regulating genes.
Example: Inflammatory diseases/Immune system protein binds to cell surface and
causes inflammation.
Tularik's drug discovery platform is directed toward identifying numerous novel
proteins within a cell that are linked to disease--enabling us to identify
multiple drug targets and to focus on those that are optimal.
Graphic Description: Graphic depicting an example of the activation of genes
and the multiple protein components inside the cell that could be potential
drug targets.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 7
Special Note Regarding Forward-
Looking Statements.................. 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Price Range of Common Stock.......... 18
Capitalization....................... 19
Dilution............................. 20
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................. 28
Management........................... 53
Related Party Transactions........... 66
Principal and Selling Stockholders... 68
Description of Capital Stock......... 71
Shares Eligible for Future Sale...... 73
Underwriting......................... 75
Legal Matters........................ 78
Experts.............................. 78
Where You Can Find More Information.. 78
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
----------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should" or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
"Tularik" and the Tularik logo are trademarks of Tularik Inc. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes appearing
elsewhere in this prospectus. Unless otherwise indicated, information in this
prospectus assumes that the underwriters do not exercise their over-allotment
option.
Tularik
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address 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.
Gene regulation is the selective activation and deactivation of genes within
a cell and is fundamental to the development or progression of most diseases.
Our drug discovery approach, which is based on gene regulation, is amenable to
the discovery of orally available drugs. These drugs are well suited for the
treatment of chronic diseases that require the daily administration of
medications over many years. We also selectively pursue drug candidates with
mechanisms of action other than gene regulation.
Our drug discovery and development expertise includes molecular biology,
biochemistry, structural biology, chemistry, pharmacology and human testing. To
complement our internal capabilities, we collaborate with world-renowned
scientists and clinicians and with leading pharmaceutical companies. We believe
that our integration of biology, chemistry and pharmacology enhances our
ability to find novel gene regulating drugs and that our drug discovery and
development efforts are highly efficient and productive. To date, we have:
. identified numerous novel proteins that regulate the expression of
disease-causing genes;
. established more than 80 automated drug testing systems, known as high
throughput screening assays, that mimic the diseases addressed by our
programs;
. conducted more than 15 million drug screens using a library of more than
500,000 distinct compounds and natural products;
. identified 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.
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. To date,
we have enrolled 42 patients in phase 1 clinical trials of T67. 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
4
<PAGE>
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.
The utility of cancer drugs like T64 has been proven by methotrexate, a drug
used extensively in the treatment of several tumor types. We expect to commence
phase 2 clinical trials of T64 in 2000.
We intend to commercialize drugs independently and through collaborations
with pharmaceutical partners. To assist in the commercialization of some of our
products, and to fund research and development activities, we have established
and will continue to pursue collaborations with selected pharmaceutical and
biotechnology companies. We currently have corporate collaborations in five of
our research programs: with Knoll relating to obesity; with Japan Tobacco
relating to orphan nuclear receptors; with Roche Bioscience relating to
inflammation; with Japan Tobacco relating to obesity/diabetes; and with Taisho
relating to allergy/asthma. We have been notified by Taisho that Taisho will
exercise its contractual right to terminate its agreement with us in March
2000. We have retained significant rights to independently market products
resulting from most of our programs, including worldwide commercialization
rights to our cancer, bacterial diseases and cytomegalovirus programs and North
American commercialization rights in three of our externally funded programs.
As of December 31, 1999, we had received a total of $124.0 million from our
current and former corporate collaborators, including $111.0 million in
research funding and $13.0 million from equity purchases.
To date, we have funded our operations primarily through the sale of equity
securities, non-equity payments from collaborators and interest income. We
expect our sources of revenue, if any, for the next several years to consist
primarily of payments under corporate collaborations and interest income.
To date, 49 U.S. patents based on our discoveries had been issued or allowed.
In addition, we have 53 patent applications pending in the United States and
have filed several corresponding foreign patent applications.
Tularik was incorporated in California in 1991 and reincorporated in Delaware
in 1997. Our principal office is located at Two Corporate Drive, South San
Francisco, California 94080, and our telephone number is (650) 825-7000.
The Offering
<TABLE>
<CAPTION>
<C> <S>
Common stock offered by Tularik.................... 4,500,000 shares
Common stock offered by the selling stockholders... 1,500,000 shares
Common stock to be outstanding after the offering.. 49,335,844 shares
Use of proceeds.................................... Research and development
and general corporate
purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol...................... "TLRK"
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of December 31, 1999 and excludes:
. 4,282,640 shares of common stock underlying options outstanding as of
December 31, 1999 at a weighted average exercise price of $2.80 per
share;
. 890,119 shares of common stock underlying warrants outstanding as of
December 31, 1999 at a weighted average exercise price of $10.91 per
share;
. 2,242,210 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
5
<PAGE>
Summary Consolidated Financial Data
The following tables summarize our consolidated financial data. The as
adjusted column of the consolidated balance sheet data reflects the sale by us
of 4,500,000 shares of our common stock at an assumed public offering price of
$85.00 per share, after deducting the estimated underwriting discount and
offering expenses payable by us.
<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:
Collaborative research and
development revenue........... $11,124 $15,297 $ 20,009 $ 21,362 $ 23,806
Total operating expenses(1).... 15,980 22,252 49,468 38,297 54,565
Net loss(1).................... (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(2)............. $ (0.31) $ (0.73)
Weighted-average shares used in
computing pro forma basic and
diluted net loss per share.... 33,687 34,829
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------
Actual As Adjusted
----------- --------------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.. $ 203,029 $ 566,913
Working capital.................................... 184,553 548,437
Total assets....................................... 230,438 594,322
Long-term obligations, less current portion........ 10,097 10,097
Deferred compensation.............................. (4,586) (4,586)
Accumulated deficit................................ (87,395) (87,395)
Total stockholders' equity......................... 197,569 561,453
</TABLE>
- --------
(1) Total operating expenses in 1997 include a non-cash charge of $18.9 million
for acquired in-process research and development in connection with our
acquisition of Amplicon Corp. You should read Note 6 of notes to
consolidated financial statements for information about this acquisition.
(2) Assumes that our outstanding preferred stock was converted into common
stock at the beginning of each of the periods presented.
6
<PAGE>
RISK FACTORS
An investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm
our business. If any of these additional risks or uncertainties occur, the
trading price of our common stock could decline, and you might lose all or part
of your investment.
RISKS RELATED TO TULARIK
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations.
We have generated operating losses since we began operations in November
1991. The extent of our future losses and the timing of profitability are
highly uncertain, and we may never achieve profitable operations. We have been
engaged in discovering and developing drugs since inception, which requires
significant research and development expenditures. To date, we have no products
that have generated any revenue. As of 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
7
<PAGE>
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. Commercialization of our product candidates depends upon
successful completion of clinical trials. We must provide the FDA and foreign
regulatory authorities with clinical data that demonstrates the safety and
efficacy of our products before they can be approved for commercial sale. While
we have recently licensed a product candidate that is ready for the stage of
human testing designed to determine efficacy, known as phase 2 clinical trials,
none of the product candidates that we have internally developed have advanced
beyond the stage of human testing designed to determine safety, known as phase
1 clinical trials.
Any clinical trial may fail to produce results satisfactory to the FDA. 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;
8
<PAGE>
. 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
9
<PAGE>
discoveries have been developed and commercialized by drug manufacturers. Even
if we are successful in identifying the pathways that cells use to control the
expression of genes associated with specific diseases, these discoveries may
not lead to the development of drugs. Furthermore, our drug discovery efforts
are focused on a number of target genes, the functions of which have not yet
been fully identified. As a result, the safety and efficacy of drugs that alter
the expression of these genes have not yet been established. As a result, we
cannot assure you that our research and development activities will result in
any commercially viable products. We expect to continue to in-license or
acquire additional product candidates to augment the results of our internal
research activities, and in-licensed candidates may not prove to be successful.
If we cannot maintain our current corporate collaborations and enter into new
corporate collaborations, our product development could be delayed.
We rely, to a significant extent, on our corporate collaborators to provide
funding in support of our research and to jointly conduct some research and
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 and our collaboration with Sumitomo expired
in January 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. We have been
notified by Taisho that Taisho will terminate its current agreement with us in
March 2000. If funding from one or more of our corporate collaborations were
reduced or terminated, including the termination of the Taisho collaboration,
we would be required to devote additional internal resources to product
development or scale back or terminate some development programs or seek
alternative corporate collaborators.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. If business combinations involving
our corporate collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our corporate collaborations.
Until recently, our corporate collaboration strategy focused on partnering
with pharmaceutical companies to fund our research in gene regulation. Over the
past two years, as our partnered and unpartnered research has led to product
candidates, our corporate collaboration strategy has evolved. In addition to
seeking collaborations for our research-stage programs, we also seek to enter
into collaborations for the development of compounds discovered through our
research and development efforts. The timing of these collaborations may be
linked to clinical results of our product candidates. As a result, we expect
our net spending on research and development to increase significantly and that
our corporate collaborators will fund a smaller percentage of our expenses than
historically.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not be successful.
Our quarterly operating results may fluctuate significantly
10
<PAGE>
depending on the initiation of new corporate collaboration agreements or the
termination of existing corporate collaboration agreements.
If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. For a
description of programs for which we have retained commercialization rights,
see "Business--Corporate Collaborations." We may take advantage of these
currently retained rights directly or may exploit retained rights through
collaborations with others. The value of these rights, if any, will be largely
derived from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain.
The exploitation of retained commercialization rights requires sufficient
capital; technological, product development, manufacturing and regulatory
expertise and resources; and marketing and sales personnel. We may not be able
to develop or obtain these resources in sufficient quantity or of a sufficient
quality level to enable us to achieve our objectives. To the extent that we are
required to rely on third parties for these resources, failure to establish and
maintain our relationships will affect our ability to realize value from our
retained commercialization rights. If we seek to commercialize products for
which we have retained rights through joint ventures or collaborations, we may
be required to relinquish material rights on terms that may not be favorable to
us. We do not know whether we will be able to enter into any agreements on
acceptable terms, if at all, or 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.
11
<PAGE>
Because it is difficult and costly to protect our proprietary rights, we cannot
ensure their protection.
Our commercial success will depend in part on obtaining patent protection on
our products and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in these companies' patents.
The degree of future protection for our proprietary rights is uncertain and
we cannot ensure that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
Others may have filed and in the future are likely to file patent
applications covering genes, gene products or therapeutic products that are
similar or identical to ours. We cannot assure you that any patent application
will not have priority over patent applications filed by us. Any legal action
against our collaborators or us claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in
addition to subjecting us to potential liability for damages, require our
collaborator or us to obtain a license to continue to manufacture or market the
affected products and processes. We cannot predict whether we or our
collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be 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
12
<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
13
<PAGE>
coverage for uses of approved products for disease indications for which the
FDA has not granted labeling approval. Third-party insurance coverage may not
be available to patients for any products we discover and develop, alone or
with collaborators. If government and other third-party payors do not provide
adequate coverage and reimbursement levels for our products, the market
acceptance of these products may be reduced.
If conflicts arise between our collaborators, advisors or directors and us,
they may act in their self-interest, which may be adverse to your best
interests.
If conflicts arise between us and our corporate or academic collaborators or
scientific advisors, the other party may act in its self-interest and not in
the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with others.
Our collaborators, however, may develop, either alone or with others, products
in related fields that are competitive with the products or potential products
that are the subject of these collaborations. Competing products, either
developed by the collaborators or to which the collaborators have rights, may
result in their withdrawal of support for our product candidates.
Genentech, Inc. is a potential competitor of ours and is also one of our
investors. David V. Goeddel, our Chief Executive Officer and a member of our
Board of Directors, is a consultant to Genentech. Mark J. Levin, a member of
our Board of Directors, is Chairman, President and Chief Executive Officer of
Millennium Pharmaceuticals, Inc. and 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 at least 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 to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an
14
<PAGE>
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.
RISKS RELATED TO THE OFFERING
If our officers, directors and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.
Following completion of this offering, our directors, executive officers and
holders of 5% or more of our outstanding common stock and their affiliates will
beneficially own approximately 37.8% of our common stock based on their
beneficial ownership as of December 31, 1999. Accordingly, they collectively
will have the ability to determine the election of all of our directors and to
determine the outcome of most corporate actions requiring stockholder approval.
They may exercise this ability in a manner that advances their best interests
and not necessarily those of other stockholders.
In particular, Pharma Vision 2000 AG, a closed-end mutual fund investing in
pharmaceutical companies such as Roche, Glaxo and Hoechst, currently owns
approximately 22.7% of our outstanding common stock, and will beneficially own
20.6% after the offering. Peter J. Sjostrand, a member of our Board of
Directors, and David V. Goeddel, our Chief Executive Officer and a member of
our Board of Directors, are members of the board of directors of Pharma Vision.
Pharma Vision is not a party to any standstill or other agreement limiting its
ability to acquire additional shares of our capital stock and may in the
future, through open market purchases or otherwise, acquire additional shares
of our common stock.
Our stock price may be volatile, and your investment in our stock could decline
in value.
The market prices for securities of biotechnology companies, including our
stock price, have been highly volatile and may continue to be highly volatile
in the future. The following factors, in addition to other risk factors
described in this section, may have a significant impact on the market price of
our common stock:
. announcements of technological innovations or new commercial products
by our competitors or us;
. developments concerning proprietary rights, including patents;
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disasters or crises; or
. period-to-period fluctuations in financial results.
15
<PAGE>
If our stockholders sell substantial amounts of our common stock, the market
price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock after this
public offering, including shares issued upon the exercise of outstanding
options and warrants, the market price of our common stock may fall. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions of our amended and restated certificate of incorporation and
bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
These provisions:
. establish that members of the board of directors may be removed only
for cause upon the affirmative vote of stockholders owning at least
two-thirds of our capital stock;
. authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. limit who may call a special meeting of stockholders;
. prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
. establish advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon
at stockholder meetings.
In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.
The offering will cause dilution in net tangible book value.
Purchasers in the public offering will experience immediate and substantial
dilution in the net tangible book value of the common stock from the public
offering price. Additional dilution will occur upon exercise of options and
warrants granted by us.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus are forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, are included, for example, in the
discussions about:
. our strategy;
. sufficiency of our cash resources;
. revenues from existing and new collaborations;
. product development;
. our research and development and other expenses; 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."
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the 4,500,000
shares of common stock offered by us in this offering of $363,884,375
($418,605,781 if the underwriters' over-allotment option is exercised in full),
based on an assumed public offering price of $85.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses.
We intend to use the net proceeds for research and development and general
corporate purposes. We may also use a portion of the net proceeds to acquire or
invest in businesses, products and technologies that are complementary to our
own, although no acquisitions are planned or being negotiated as of the date of
this prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending these uses, the net proceeds will be invested in
investment-grade, interest-bearing securities. We will not receive any proceeds
from the shares sold by the selling stockholders in this offering.
The principal purposes of this offering are to increase our capitalization
and our operating and financial flexibility. As of the date of this prospectus,
we cannot specify with certainty all of the particular uses for the net
proceeds we will have upon completion of this offering. Accordingly, our
management will have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.
PRICE RANGE OF COMMON STOCK
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 periods
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
Year Ending December 31, 2000
First Quarter (through March 1, 2000)........................ $98.63 $27.38
</TABLE>
On March 1, 2000, the last reported sale price on the Nasdaq National Market
for our common stock was $85.00 per share. As of December 31, 1999, there were
approximately 495 stockholders of record of our common stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization on an actual basis as of
December 31, 1999 and on an as adjusted basis to reflect our receipt of the net
proceeds from our sale of 4,500,000 shares of common stock in this offering at
an assumed public offering price of $85.00 per share, after deducting the
estimated underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
As of
December 31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands,
except
share amounts)
<S> <C> <C>
Long-term obligations, less current portion................ $ 10,097 $ 10,097
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding, actual; and
none issued and outstanding, as adjusted................ -- --
Common stock, $0.001 par value; 65,000,000 shares
authorized; 44,835,844 shares issued and outstanding,
actual; and 49,335,844 shares issued and outstanding, as
adjusted................................................ 45 49
Additional paid-in capital............................... 291,114 654,994
Notes receivable from stockholders....................... (1,609) (1,609)
Deferred compensation.................................... (4,586) (4,586)
Accumulated deficit...................................... (87,395) (87,395)
-------- --------
Total stockholders' equity............................. 197,569 561,453
-------- --------
Total capitalization................................. $207,666 $571,550
======== ========
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of December 31, 1999 and excludes:
. 4,282,640 shares of common stock underlying options outstanding as of
December 31, 1999 at a weighted average exercise price of $2.80 per
share;
. 890,119 shares of common stock underlying warrants outstanding as of
December 31, 1999 at a weighted average exercise price of $10.91 per
share;
. 2,242,210 shares available for issuance or future grant under our stock
option plans; and
. 500,000 shares available for issuance under our employee stock purchase
plan.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included in this prospectus.
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<PAGE>
DILUTION
The net tangible book value of the common stock as of December 31, 1999 was
$197.6 million, or $4.41 per share. After giving effect to our sale of
4,500,000 shares of common stock in this public offering at an assumed public
offering price of $85.00 per share, assuming that the underwriters' over-
allotment option is not exercised, and after deducting the estimated
underwriting discount and offering expenses, the adjusted net tangible book
value as of December 31, 1999 would have been $561.5 million, or $11.38 per
share.
Net tangible book value per share before this offering has been determined by
dividing net tangible book value (total tangible assets less total liabilities)
by the number of shares of common stock outstanding as of December 31, 1999.
This offering will result in an increase in net tangible book value per share
of $6.97 to existing stockholders and dilution in net tangible book value per
share of $73.62 to new investors who purchase shares in this offering. Dilution
is determined by subtracting net tangible book value per share after this
offering from the assumed public offering price of $85.00 per share. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price.................................. $85.00
Net tangible book value per share as of December 31, 1999..... $4.41
-----
Increase attributable to new investors ....................... 6.97
-----
Net tangible book value per share after this offering.......... 11.38
------
Dilution in net tangible book value to new investors........... $73.62
======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the net
tangible book value per share after the offering would be $12.32 per share, the
increase in net tangible book value per share to existing stockholders would be
$7.91 per share and the dilution in net tangible book value to new investors
would be $72.68 per share.
The following table summarizes, as of December 31, 1999, the differences
between the total consideration paid and the average price per share paid by
the existing stockholders and the new investors with respect to the number of
shares of common stock purchased from us based on an assumed public offering
price of $85.00 per share:
<TABLE>
<CAPTION>
Shares Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
New investors................. 4,500,000 9.1% $382,500,000 56.9% $85.00
Existing stockholders......... 44,835,844 90.9 290,149,000 43.1 6.47
---------- ----- ------------ -----
Total....................... 49,335,844 100.0% $672,649,000 100.0%
========== ===== ============ =====
</TABLE>
These tables assume no exercise of stock options and warrants outstanding as
of December, 31 1999 and include 724,722 shares subject to repurchase by us as
of December 31, 1999 at a weighted average price of $2.59.
As of December 31, 1999, there were 4,282,640 shares of common stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $2.80 per share and 890,119 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $10.91 per share.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our historical consolidated financial data. You should
read carefully the consolidated financial statements included in this
prospectus, including the notes to the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected data in this section is not intended to replace the
consolidated financial statements.
We derived the consolidated statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1998 and 1999 from the audited consolidated financial statements
included in this prospectus. Ernst & Young LLP, our independent auditors,
audited these consolidated financial statements. The consolidated statement of
operations data for the years ended December 31, 1995 and 1996 and the
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited financial statements that are not included in this
prospectus. Historical results are not necessarily indicative of future
results. See notes to the consolidated financial statements for an explanation
of the method used to determine the number of shares used in computing pro
forma basic and diluted loss per share.
<TABLE>
<CAPTION>
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>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
"Selected Consolidated Financial Data," consolidated financial statements and
related notes included elsewhere in this prospectus.
Overview
Since our founding in November 1991, we have been engaged in the discovery
and development of a broad range of novel, orally available drugs, most of
which act through gene regulation. Our research programs include cancer,
cytomegalovirus, diabetes, obesity, inflammation, 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:
Collaborator Research Program Commencement Date
Knoll Obesity November 1998
Japan Tobacco Orphan Nuclear Receptors September 1998
Roche Bioscience Inflammation July 1997
Japan Tobacco Obesity/Diabetes September 1996
Taisho Allergy/asthma April 1995
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 Ending 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>
22
<PAGE>
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, ended in March 1999) and
with Sumitomo related to hypercholesterolemia (commenced in January 1995, ended
in January 2000). Our collaboration with Taisho is scheduled to end in
accordance with its terms during 2001. However, Taisho has the right to
terminate its agreement with us in March 2000, prior to the scheduled
expiration of the agreement in 2001, and we have been notified by Taisho that
Taisho will exercise its contractual right to terminate its agreement with us
in March 2000. During 1999, we received an aggregate of $6.9 million from these
agreements and from our prior collaborations with Merck and Sumitomo. 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
23
<PAGE>
in-process research and development was $21.4 million at the date of
acquisition. Accordingly, the purchase price was allocated to the tangible and
intangible net assets acquired and $18.9 million was expensed as acquired in-
process research and development. We believe this amount did not exceed the
amount a third party would have paid for the project.
License Agreement
On September 24, 1999, we executed a license agreement with Eli Lilly under
which we obtained an exclusive, worldwide, royalty-bearing license to make, use
and sell pharmaceutical products containing a compound 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 as existing
collaborations expire at the end of their terms. Our Sumitomo
24
<PAGE>
collaboration expired in January 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 arrangement was $4.0 million. Cash used for purchases of equipment
and leasehold
25
<PAGE>
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 together with
the net proceeds of this public offering will be sufficient to support our
current operating plan through at least 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.
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.
26
<PAGE>
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.
Disclosure 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.
27
<PAGE>
BUSINESS
Overview
Tularik engages in the discovery and development of a broad range of novel
and superior orally available drugs based on gene regulation. Building on our
scientific strengths, we intend to become a world-class pharmaceutical company.
Our research programs, all of which address 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 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.
28
<PAGE>
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 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;
29
<PAGE>
. 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 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
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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, four corporate
partners fund significant portions of five of our programs. We have retained
worldwide commercialization rights to our cancer, bacterial diseases 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:
<TABLE>
<CAPTION>
Program Status(1) Key Achievements
- ------------------------------------------------------------------------------
<C> <C> <S>
Cancer
T67 Phase 1 clinical Discovered an agent that binds to
trials a clinically proven cancer target
and inhibits growth of multiple
drug resistant tumors in animals.
T607 Phase 1 clinical Generated second-generation analog
trials of T67 that may have advantages
for treating particular types of
tumors.
T64 (lometrexol) Preparing for phase Licensed from Eli Lilly a drug
2 candidate with phase 1 clinical
clinical trials responses in a range of human
tumors.
- ------------------------------------------------------------------------------
Cytomegalovirus Pre-clinical Discovered compounds that are
Development orally active in animal models of
human cytomegalovirus infection
and plan to file an
Investigational New Drug
application in 2000.
- ------------------------------------------------------------------------------
Diabetes Pre-clinical Identified compounds with activity
Development in animal models predictive of
anti-diabetic efficacy.
- ------------------------------------------------------------------------------
Obesity Lead Optimization Discovered a series of compounds
that increase the circulating
level of a protein that causes
weight loss in animals.
- ------------------------------------------------------------------------------
Inflammation Lead Optimization Elucidated key gene regulation
pathways and discovered numerous
proteins involved in inflammatory
gene regulation. Identified a lead
compound that inhibits expression
of inflammatory response genes in
animal models.
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
Hypercholesterolemia Lead Optimization Identified lead compounds that
lower cholesterol in animals.
Discovered regulatory pathways
involved in cholesterol
metabolism.
- ------------------------------------------------------------------------------
Bacterial Diseases Lead Optimization Identified a series of compounds
that demonstrate antibacterial
activity and confirmed protein
target using genetic techniques.
- ------------------------------------------------------------------------------
Orphan Nuclear Lead Optimization Discovered two nuclear receptors.
Receptor Developed novel biochemical
screening technology to identify
nuclear receptor modulators.
Identified lead series and
initiated chemistry.
</TABLE>
- --------
(1) "Lead Ongoing chemistry effort to improve potency, toxicity,
Optimization" specificity and/or other properties of drug leads.
Evaluation of drug leads in relevant models.
"Pre-clinical Pharmacology and toxicology testing in pre-clinical
Development" 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 in one
patient and neuropathy in two patients. 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
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with melanoma, breast cancer, soft tissue sarcoma, ovarian cancer and non-small
cell lung cancer. Despite the fact that it is unusual to see complete responses
in phase 1 clinical trials because patients enrolling in these trials tend to
be heavily pre-treated and are typically at an advanced stage in the
progression of their disease, Eli Lilly noted a complete response lasting more
than 18 months in a patient with head and neck cancer.
We anticipate that we will commence phase 2 clinical trials of 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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<PAGE>
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 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,
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<PAGE>
rheumatoid arthritis and septic shock. In 1998, a total of approximately 28
million individuals in the United States suffered from these diseases.
Worldwide sales of non-steroidal anti-inflammatory drugs totaled approximately
$6.0 billion in 1998 and are expected to grow at a 4% compound annual growth
rate. An estimated 400,000 individuals in the United States and Europe have
Crohn's disease, a serious chronic inflammatory disease of the small and large
intestine.
Inflammatory messengers act by binding to specific cell surface receptors
that, in turn, set off signaling events culminating in the expression of many
inflammatory response genes. The crucial roles played by particular
inflammatory messengers in several inflammatory disease states have been
clearly demonstrated by studies utilizing antibodies and soluble receptors that
neutralize the activities of particular inflammatory messengers. The efficacy
demonstrated by Enbrel, a soluble inflammatory messenger receptor, has
validated this concept for the treatment of rheumatoid arthritis. We believe
that an orally available drug of comparable efficacy would represent formidable
competition for drugs that must be injected, such as Enbrel.
Several key inflammatory response genes are regulated by a single
transcription factor, NF-(kappa)B. 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-(kappa)B 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-(kappa)B
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-(kappa)B 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.
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We have collaborated with Taisho in allergy/asthma research since April 1995.
This collaboration will end in 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 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
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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.
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 PPAR(gamma).
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:
[FLOW CHART APPEARS HERE]
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Target Identification and Validation
A key focus of our scientists is to establish a link between specific genes
and diseases. Following the identification of such a link, we seek to identify
and characterize important proteins and regulatory pathways responsible for the
expression of these genes. Our ability to identify multiple targets within a
gene regulatory pathway or subpathway that regulates genes increases the
likelihood that we will be able to identify the optimal target for therapeutic
intervention.
Our scientists use a combination of biochemical, molecular biological and
genetic approaches to discover novel regulatory proteins. Once a regulatory
protein has been identified, we clone and express the gene that encodes that
protein. Cloning the regulatory protein allows us to conduct target validation,
which is the biological evaluation of the protein's specific function in the
disease process. We evaluate the physiological function of potential drug
targets we discover by manipulating their expression in cells, by mapping the
pathways by which they interact with other regulatory proteins to regulate
genes and by understanding the cell types in which they are expressed. This
information can be critical to assessing the suitability of a gene regulatory
protein as a target for pharmaceutical intervention.
In our target discovery efforts, we also search publicly available genome
databases, including data derived from the Human Genome Project. In the cancer
area, we seek to discover novel cancer genes using Representational Difference
Analysis. Some of these cancer genes may be targets for small molecule
intervention.
Where the target validation process indicates that a particular regulatory
protein may not be the most appropriate molecular target for assay development,
we use cellular and molecular biology studies to identify other proteins
involved in the same biochemical pathway(s) that may be better molecular
targets for drug discovery and therapeutic intervention. The target validation
process also provides us with opportunities to discover additional components
of the cellular pathway that may lead to identification of additional drug
discovery targets.
Primary Assays
We use primary assays specific to each target or program to rapidly search
our compound screening library for chemical structures that hold promise for
further study, or hits. We design and implement two main types of primary
assays, as described below.
Biochemical Assays. Our scientists use the results of target identification
efforts to craft specialized biochemical assays in which one or more target
proteins are reconstituted in a system that closely mimics their native
environment. At this stage, we adapt the assay to an automated format to allow
for high throughput screening. Biochemical assays provide several advantages in
the search for new drugs. In a biochemical assay, the components and mechanism
of action of the drug candidates are already known. This precision minimizes
inaccurate results and false-positive readings, thereby accelerating the
discovery process. Additionally, the identification of lead compounds using
biochemical assays bypasses the potential problems of false-negative readings
associated with the ability of a compound to penetrate a cell or the intrinsic
ability of cells to break down chemicals before they reach a target. Once hits
are identified, these properties can be subsequently manipulated through
chemistry. Since biochemical assays are usually highly amenable to high
throughput screening, results can be obtained rapidly and reproduced
consistently. We 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 and ability to penetrate
into the cell can be assessed. In contrast to biochemical assays, where the
target protein for a drug is known, cell-based assays offer an additional
opportunity to
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discover drugs interacting with novel, previously unknown, target proteins. We
performed high throughput screening with approximately ten cell-based assays
during 1999.
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.
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Structural Biology. Structural biology techniques aid in drug design and
optimization by providing molecular "snapshots" that allow scientists to
visualize the interactions between a drug or lead and its protein target. These
interactions are analogous to the fit between a lock and a key. Nuclear
magnetic resonance, spectroscopy and X-ray crystallography comprise the
essential techniques of structural biology. We have 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; and Taisho relating to allergy/asthma. We have been notified
by Taisho that Taisho will exercise its contractual right to terminate its
agreement with us in March 2000. 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
and a prior alliance with Sumitomo that expired in January 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 targets) Japan Tobacco Profit split Profit split Profit split
- ----------------------------------------------------------------------------------------------------
Obesity (certain targets) Japan Tobacco Profit split Profit split Profit split
- ----------------------------------------------------------------------------------------------------
Obesity (certain targets) Knoll Knoll (Royalties Knoll (Royalties Profit split
shared with shared with (with Japan
Japan Tobacco) Japan Tobacco) Tobacco)
- ----------------------------------------------------------------------------------------------------
Inflammation
Inflammatory bowel Roche Bioscience Tularik Tularik Tularik
disease, skin diseases (Royalties to (Royalties to (Royalties to
and eye diseases Roche Bioscience) Roche Bioscience) Roche Bioscience)
Other indications Roche Bioscience Roche Bioscience Roche Bioscience Roche Bioscience
(Royalties to (Royalties to (Royalties to
Tularik) Tularik) Tularik)
- ----------------------------------------------------------------------------------------------------
Asthma/Allergy Taisho Tularik Tularik Taisho
(certain targets) (Royalties to
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
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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.
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
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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 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.
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. The goals of the research collaboration are to identify and develop
compounds that inhibit or promote the activity of STAT6.
Taisho has the right to terminate the collaboration with notice before the
commencement of the sixth year. We have been notified by Taisho that Taisho
will exercise its contractual right to terminate its current agreement with us
in March 2000. After the termination, we will have exclusive, worldwide,
royalty-free rights to all products identified in the collaboration.
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If the research collaboration had continued for the full six-year term,
Taisho would have had exclusive rights to manufacture and sell products
resulting from the collaboration for therapeutic modulation of immune function
in Japan and in specified other Asian countries. Taisho would have been
required to make benchmark payments to us based on clinical progress and
royalty payments based on sales in Taisho's territory. We would have had
exclusive rights in the rest of the world, without any payment obligation to
Taisho, unless the research collaboration were to terminate prior to the full
six-year term due to our default under the agreement or bankruptcy.
Taisho had paid Tularik $15.0 million in research payments through December
31, 1999.
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.
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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.
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.
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 believe that we have developed proprietary technology for use in gene
discovery, regulatory pathway identification and assay design and have filed a
number of patent applications in these areas. In addition, an increasing
percentage of our recent patent applications have been related to potential
product candidates, or compounds, that we have discovered.
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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 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.
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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 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.
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Any of our contract manufacturers and we also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in
commercial manufacturing of our products. Our contract manufacturers or we may
not be able to comply with the applicable good manufacturing practice
requirements and other FDA regulatory requirements. If our contract
manufacturers or we fail to comply, our business, financial condition and
results of operations may be materially adversely affected.
Outside the United States, our ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Community registration procedures
are available to companies wishing to market a product in more than one EC
member state. If the regulatory authority is satisfied that adequate evidence
of safety, quality and efficacy has been presented, a marketing authorization
will be granted. This foreign regulatory approval process involves all of the
risks associated with FDA clearance discussed above.
Employees
As of 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.
Facilities
Our facilities consist of approximately 146,000 square feet of research and
office space located at Two Corporate Drive, South San Francisco, California
that is leased to us until 2011. We have options to renew these leases for two
additional periods of five years each. We have leased approximately 14,500
square feet of research and office space located at 266 Pulaski Road,
Greenlawn, New York that is leased to us until 2005. We believe that the space
needed to accommodate our growth through the year 2003 is available.
Scientific Advisory Boards
We utilize scientists and physicians to advise us on scientific and medical
matters as part of our Scientific Advisory Board including experts in human
genetics, mouse genetics, molecular biology, biochemistry, cell biology,
chemistry, infectious diseases, immunology and structural biology. Generally,
each of our scientific and medical advisors and consultants has received our
common stock or an option to purchase our common stock.
Robert Tjian, Ph.D. is one of our founders and has been the Chairman of the
Scientific Advisory Board since its inception. Dr. Tjian is an investigator of
the Howard Hughes Medical Institute at the University of California, Berkeley.
Dr. Tjian is one of the world leaders in the field of transcription factor
biochemistry and was the first to clone and characterize a promoter-selective
human transcription factor (Sp1 in 1986). He has been a member of the National
Academy of Sciences since 1991. Dr. Tjian received the California Scientist of
the Year Award in 1994.
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,
50
<PAGE>
Berkeley. Dr. Allison is a leader in the field of cellular immunology. Dr.
Allison was elected to the National Academy of Sciences in 1997.
Paul A. Bartlett, Ph.D. is Professor of the Chemistry Department at the
University of California, Berkeley. Dr. Bartlett is an expert in the field of
bioorganic molecules, medicinal chemistry and combinatorial chemistry. He is
one of the founders of Pharmacopoeia, Inc.
Michael S. Brown, M.D. is Professor of Medicine and Genetics and Joseph L.
Goldstein, M.D. is Professor and Chairman of the Department of Molecular
Genetics at University of Texas Southwestern Medical Center at Dallas. Working
as a team, Drs. Brown and Goldstein pioneered a multidisciplinary approach to
the study of hypercholesterolemia by using a combination of biochemistry,
somatic cell genetics, molecular biology and, most recently, gene regulation
and cell biology. In 1985, Drs. Brown and Goldstein were awarded the Nobel
Prize in Medicine for their work in the regulation of cholesterol metabolism,
and in 1988 they received the National Medal of Science. They were elected to
the National Academy of Sciences in 1980.
E.J. Corey, Ph.D. is Sheldon Emery Professor of Organic Chemistry in the
Chemistry Department at Harvard University. Dr. Corey is a leader in organic
synthetic chemistry, including applications for manufacturing of
pharmaceuticals and applying computers to organic chemical problems. In 1988,
Dr. Corey received the National Medal of Science and in 1990, he was awarded
the Nobel Prize in Chemistry for his development of the theory and methodology
of organic synthesis.
Donald E. Ganem, M.D. is Professor of Microbiology and Medicine at the
University of California, San Francisco. Dr. Ganem is a leader in the area of
human viruses and microbial infectious agents.
Richard M. Losick, Ph.D. is Professor and Chairman of the Department of
Molecular & Cellular Biology at Harvard University. Dr. Losick is a leader in
the field of microbial development and gene regulation. Dr. Losick was elected
to the National Academy of Sciences in 1992 and to the American Academy of Arts
and Sciences in 1996.
Brian W. Matthews, Ph.D., D.Sc. is Professor of Physics and Molecular Biology
and an investigator of the Howard Hughes Medical Institute at the University of
Oregon, Eugene. He is one of the world's leaders in structural biology and
biophysics, with a special expertise in X-ray crystallography and is a pioneer
in the study of protein folding, protein:protein interactions and protein:DNA
interactions. Dr. Matthews was elected to the National Academy of Sciences in
1986.
Kim Nasmyth, Ph.D. is a Professor and Director of the Research Institute of
Molecular Pathology in Vienna. Dr. Nasmyth is an expert in the area of yeast
genetics, cell cycle regulation and cancer biology.
Bruce W. Stillman, Ph.D. is Director of the Cold Spring Harbor Laboratory on
Long Island, New York. Dr. Stillman is an expert in the area of DNA
replication, cell cycle control and tumor biology. He is a fellow of the Royal
Society.
James Wells, Ph.D. is co-founder and chief scientific officer of Sunesis,
Inc. Dr. Wells is a leader in the field of biomolecular design, protein
structure and function as well as molecular biology and phage display
technology. Dr. Wells was elected to the National Academy of Sciences in 1999.
Keith R. Yamamoto, Ph.D. is Chairman of the Department of Cellular and
Molecular Pharmacology at the University of California, San Francisco. Dr.
Yamamoto is a leader in the field of steroid receptors, a special class of
inducible transcriptional regulators. Dr. Yamamoto was elected to the National
Academy of Sciences in 1990.
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.
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<PAGE>
David Botstein, Ph.D. is a Professor at Stanford University and is the
chairman of the Stanford Department of Genetics. Dr. Botstein is a member of
the National Academy of Sciences.
Larry Norton, M.D. heads the Division of Solid Tumor Oncology at Memorial
Sloan Kettering Cancer Center. Dr. Norton is a leading clinical oncologist and
an expert in the treatment of breast cancer.
Bruce W. Stillman, Ph.D.--See above.
Michael Wigler, Ph.D. is an Investigator at Cold Spring Harbor Laboratory.
Dr. Wigler focuses his research on cancer genes, such as the ras oncogene and
tumor suppressor genes. Dr. Wigler is a member of the National Academy of
Sciences.
Clinical Oncology Scientific Advisory Board
A global oncology advisory panel guides our clinical oncology program.
Members include:
Dr. Hilary Calvert, University of Newcastle, UK
Dr. Ross Donehower, Johns Hopkins Hospital, Baltimore, USA
Dr. Axel Hanauske, Munich, Germany
Dr. David Newell, University of Newcastle, UK
Dr. Larry Norton, Memorial Sloan Kettering Cancer Center, New York, USA
Dr. Eric Rowinsky, Institute of Drug Development, San Antonio, Texas, USA
52
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of February 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
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..................... 40 Vice President, Chief Financial
Officer
William J. Rieflin ................. 39 Vice President, General Counsel and
Secretary
Terry J. Rosen, Ph.D. .............. 40 Vice President, Research Operations
Pieter B.M.W.M. Timmermans, Ph.D. .. 50 Vice President, Pharmacology and
Preclinical 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, 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.
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.
53
<PAGE>
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.
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.
54
<PAGE>
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.
Board Committees
Audit Committee. The Audit Committee meets with Tularik's independent
auditors at least annually to review the results of the annual audit and
discuss the financial statements; recommends to the Board the independent
auditors to be retained; and receives and considers the accountants' comments
as to controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls. The Audit Committee is composed
of two non-employee directors: Mr. Heidrich and Mr. Levin.
Compensation Committee. The Compensation Committee makes recommendations
concerning salaries and incentive compensation, awards stock options to
employees and consultants under the 1991 Stock Plan, which we refer to as the
1991 Plan, and the 1997 Equity Incentive Plan, which we refer to as the 1997
Plan, and otherwise determines compensation levels and performs such other
functions regarding compensation as the Board may delegate. The Compensation
Committee is composed of three non-employee directors: Messrs. Heidrich and
McCracken and Dr. Marks.
Compensation Committee Interlocks and Insider Participation
During 1999, our compensation committee consisted of Robert A. Swanson, Mr.
Heidrich and Mr. McCracken. None of the members of our compensation committee
was at any time during 1999 an officer or employee of Tularik. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Compensation of Directors
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In April 1998 and
in April 1999, each of our non-employee directors received an option to
purchase 8,000 shares of common stock at an exercise price of $3.00 per share
under the 1997 Non-Employee Directors' Stock Option Plan. In consideration for
consulting services, we granted Dr. McKnight additional options to purchase an
aggregate of 50,000 shares of common stock, 25,000 shares in each of June 1998
and in June 1999, at an exercise price of $3.00 per share. The $3.00 per share
exercise price for these options was equal to the fair market value of the
common stock on the date of grant as determined by our compensation committee.
These options vest in a series of equal annual installments beginning on the
grant date of the option and extending through the next four years of service.
For more information, see "Benefit Plans--1997 Non-Employee Directors' Stock
Option Plan."
In consideration for consulting services, in addition to the options
described above, we pay Dr. McKnight $85,000 per year. Dr. McKnight spends
approximately 20% of his time providing consulting services to Tularik.
Between January 1995 and February 1998, we forgave $165,968 of the principal
and $24,780 of the interest due on a loan of $240,000 we provided to Dr.
McKnight in June 1992 to cover housing differential
55
<PAGE>
costs in connection with his move to California from another state. In
addition, we have paid $153,082 to Dr. McKnight to offset taxable income to him
arising as a consequence of our loan forgiveness. No amounts are due by Dr.
McKnight on this loan.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during 1999 to our Chief Executive Officer, each of the four other most
highly compensated executive officers that earned more than $100,000 during
1999 and the individual who served as our President until September 30, 1999.
All option grants were made under the 1997 Plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary Bonus(1) Compensation(2) Options Compensation(3)
- ------------------ ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Dr. David V. Goeddel.... 1999 $349,135 -- -- 150,000 $1,535
Chief Executive Officer 1998 $324,077 -- -- 150,000 1,629
and Director
Dr. Andrew J. Perlman... 1999 $249,481 -- -- 50,000 $2,777
Executive Vice
President 1998 $234,231 -- -- 50,000 3,738
Dr. Pieter B.M.W.M.
Timmermans............. 1999 $244,481 -- -- 50,000 $1,874
Vice President, 1998 $229,538 -- -- 50,000 1,626
Pharmacology and
Preclinical Development
Dr. Terry Rosen......... 1999 $239,135 $20,000 75,000 $1,936
Vice President, 1998 $214,077 $20,000 -- 50,000 950
Research Operations
William J. Rieflin...... 1999 $234,308 $23,533 50,000 $970
Vice President, General 1998 $214,538 $23,533 -- 50,000 950
Counsel & Secretary
John P. McLaughlin(4)... 1999 $229,904 -- $74,823 100,000 $1,299
Former President 1998 $275,000 -- -- 500,000 1,413
</TABLE>
- --------
(1) Amounts reflect forgiveness of loans given in connection with relocations
to the San Francisco Bay area. See "Related Party Transactions."
(2) As permitted by rules promulgated by the Securities and Exchange
Commission ("SEC"), no amounts are shown with respect to certain
"perquisites" where such amounts do not exceed the lesser of 10% of the
sum of the amount in the salary and bonus columns or $50,000.
(3) Includes term-life insurance premiums paid by us on behalf of these named
executive officers, wellness benefits and taxable travel reimbursement.
Also includes our matching payments in stock under our 401(m) plan. The
value of the stock awarded under this plan to each of Drs. Goeddel,
Perlman, Timmermans and Rosen and Messrs. McLaughlin and Rieflin in 1999
was $750.
(4) Mr. McLaughlin resigned as President of Tularik as of September 30, 1999.
The following table sets forth summary information regarding the option
grants made during 1999 to our Chief Executive Officer, each of our four other
most highly paid executive officers during 1999 and the individual who served
as our President until September 30, 1999. Options granted to purchase shares
of our
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<PAGE>
common stock under the 1997 Plan are generally immediately exercisable by the
optionee but are subject to a right of repurchase according to the vesting
schedule of each specific grant. In the event that a purchaser ceases to
provide service to us and our affiliates, we have the right to repurchase any
of that person's unvested shares of common stock at the original option
exercise price. The exercise price per share is equal to the fair market value
of our common stock on the date of grant as determined by our board of
directors. The percentage of total options was calculated based on options to
purchase an aggregate of 1,593,250 shares of common stock granted to employees
under the 1997 Plan in 1999. The potential realizable value was calculated
based on the ten-year term of the options and assumed rates of stock
appreciation of 5% and 10%, compounded annually from the date the options were
granted to their expiration date based on the fair market value of the common
stock on the date of grant. See "Benefit Plans" for a description of the
material terms of these options.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price Appreciation
for Option Term(3)
------------------
% of Total
Number of Options
Securities Granted
Underlying to Employees Exercise
Options in Fiscal Price Expiration
Name Granted(1) Year(2) (per share) Date 5% 10%
- ---- ---------- ------------ ----------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dr. David V.Goeddel..... 150,000 9.41% $ 3.00 3/11/09 $282,000 $ 717,185
Chief Executive Officer
and
Director
Dr. Andrew J. Perlman... 30,000 1.88% $ 3.00 6/17/09 $ 56,610 $ 143,437
Executive Vice
President 20,000 1.26% $ 3.00 11/5/09 $ 37,740 $ 95,625
Dr. Pieter B.M.W.M.
Timmermans............. 40,000 2.51% $ 3.00 3/11/09 $ 75,480 $ 191,249
Vice President,
Pharmacology and 10,000 0.63% $ 3.00 6/17/09 $ 18,870 $ 447,812
Preclinical Development
Dr. Terry Rosen......... 50,000 3.14% $ 3.00 3/11/09 $ 94,350 $ 239,062
Vice President,
Research 25,000 1.57% $18.50 12/15/09 $290,875 $ 737,106
Operations
William J. Rieflin...... 50,000 3.14% $ 3.00 6/17/09 $ 94,350 $ 239,062
Vice President, General
Counsel
& Secretary
John P. McLaughlin(4)... 100,000 6.28% $ 3.00 12/31/99 $ 8,100 $ 15,900
Former President
</TABLE>
Option Grants in 1999
- --------
(1) Options generally vest over a four-year period, 25% after one year and
2.083% per month thereafter. The options will fully vest upon a change of
control, as defined in our option plans, unless the acquiring company
assumes the options or substitutes similar options. In the event of a
merger of Tularik with or into another corporation or a consolidation,
acquisition of assets or other change-in-control transaction involving
Tularik, each option either will continue in effect, if Tularik is the
surviving entity, or will be assumed or an equivalent option will be
substituted by the successor corporation, if Tularik is not the surviving
entity.
(2) Based on options to purchase 1,593,250 shares granted in 1999.
(3) The potential realizable value is based on the term of the option at its
time of grant. It is calculated by assuming that the stock price on the
date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. These amounts represent certain assumed rates of appreciation only,
in accordance with the rules of the SEC, and do not reflect our estimate
or projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of our common stock and no gain
to the optionee is possible unless the stock price increases over the
option term, which will benefit all stockholders. For example, a
stockholder who purchased one share of stock on December 9, 1999 at
$14.00, held the stock for ten years and sold it on December 8, 2009 while
the stock appreciated at 5% and 10% per year would have profits of $8.80
and $22.31, respectively on her $14.00 investment.
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<PAGE>
(4) In connection with Mr. McLaughlin's resignation, the expiration date for
12,500 of these options was December 31, 1999. The potential realizable
value calculations are based upon this expiration date. 87,500 of these
options were not vested as of September 30, 1999 and may not be exercised.
Aggregated Option Exercises in Fiscal 1999 and
Value of Options at End of Fiscal 1999
The following tables show for the fiscal year ended December 31, 1999,
certain information regarding options granted to, exercised by, and held at
year end by, our Chief Executive Officer, each of our four other most highly
paid executive officers during 1999 and the individual who served as our
President until September 30, 1999.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999 December 31, 1999(2)
Shares Acquired Value ------------------------ -------------------------
Name on Exercise Realized(1) Vested Unvested Exercisable Unexercisable
- ---- --------------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. David V. Goeddel.... 933,334 $1,287,500 16,667 49,999 $1,958,314 --
Dr. Andrew J. Perlman... 151,667 $ 318,750 43,750 89,583 $3,916,657 --
Dr. Pieter B.M.W.M.
Timmermans............. -- -- 49,306 84,027 $3,916,657 --
Dr. Terry Rosen......... 157,334 $ 223,750 40,104 94,562 $3,568,314 --
William J. Rieflin...... 50,001 -- 37,500 62,499 $2,937,471 --
John P. McLaughlin...... 262,501 -- -- -- -- --
</TABLE>
- --------
(1) Value realized is based on the fair market value of our common stock on
the date of exercise minus the exercise price without taking into account
any taxes that may be payable in connection with the transaction.
(2) Fair market value of our common stock at December 31, 1999 ($32.375) minus
the exercise price of the options.
Benefit Plans
Since 1991, we have established four plans under which employees, officers,
non-employee directors and consultants may purchase or receive common stock
through incentive stock options, nonstatutory stock options, restricted stock
and stock bonuses. These plans are the 1991 Plan, the 1997 Plan, 1997 Non-
Employee Directors' Stock Option Plan and the 1999 Employee Stock Purchase
Plan. In addition, we have established two defined contribution plans that are
intended to be qualified under Section 401(a) of the Internal Revenue Code, as
amended. They are the Tularik Salary Savings Plan and the Tularik Matching
Plan.
Long Term Incentive Plans
1991 Stock Plan. In November 1991, we adopted the 1991 Plan. Our board
subsequently amended the 1991 Plan in 1991, 1992, 1993, 1994, 1995 and 1996,
and the stockholders approved these amendments. The 1991 Plan will terminate in
November 2001 unless it is terminated earlier by our board.
The 1991 Plan provides for the grant of stock awards, including:
. incentive stock options, as defined by Section 422 of the Code that may
be granted solely to employees (including officers); and
. nonstatutory stock options (stock options other than incentive stock
options) and restricted stock purchase awards that may be granted to
employees (including officers) and consultants.
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of
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<PAGE>
grant. The exercise price for a nonstatutory stock option cannot be less than
85% of the fair market value of the common stock on the date of grant. Options
granted under the 1991 Plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1991 Plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
12 months after the date this service relationship ends. If an optionee's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionee may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
up to ninety days from cessation of service.
Acceptable consideration for the purchase of common stock issued under the
1991 Plan is determined by our board of directors and may include cash, common
stock previously owned by the optionee, a deferred payment arrangement,
surrender of a portion of the option covering common stock having a fair market
value equal to the exercise price of all of the option, directions to a broker
to sell the common stock and deliver the exercise price from the sale proceeds,
an irrevocable subscription agreement obligating the optionee to pay for the
common stock within twelve months, and any other legal consideration approved
by our board.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and prior to our stock being
publicly traded, no nonstatutory stock option) may be granted to any person
who, at the time of the grant, owns or is deemed to own stock possessing more
than 10% of the total combined voting power of Tularik or any affiliate unless
the following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Restricted Stock Awards. The purchase price for each restricted stock award
granted must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. The restricted stock
award may be exercised for a period not to exceed 30 days from the date of the
grant of the right. The restricted stock awards may be subject to a right of
repurchase given to Tularik under the terms of the restricted stock award
grant.
Changes in Control. Upon specified changes in control of Tularik as provided
under the 1991 Plan, all outstanding options under the 1991 Plan either will be
assumed or substituted for by any surviving entity or its parent or subsidiary
corporation, if any. For stock options granted prior to January 4, 1992, if the
surviving entity or its parent or subsidiary corporation, if any, determines
not to assume or substitute the options, the board of directors shall provide
for the options to be fully exercisable for a period of 15 days from the date
of notice. If the board of directors makes the options fully exercisable for
this 15-day period, the options will terminate at the end of this period.
Authorized Shares. An aggregate of 11,576,667 shares of common stock were
authorized for issuance under the 1991 Plan. As of December 31, 1999, options
to purchase a total of 1,313,510 shares of our common stock were held by all
participants under the 1991 Plan. As of December 31, 1999, a total of 2,100,000
shares of our common stock were purchased under restricted stock awards. No
shares of our common stock remained available for grant. Shares subject to
stock options that have expired or otherwise terminated without having
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been exercised in full again become available for the grant of awards under the
1991 Plan. Shares issued under the 1991 Plan may be previously unissued shares
or reacquired shares of common stock.
Plan Administration. Our board of directors administers the 1991 Plan. Our
board of directors may delegate authority to administer the 1991 Plan to a
committee of our board of directors. Subject to the terms of the plan, our
board of directors or its authorized committee determines recipients, the
numbers and types of stock awards to be granted, and the terms and conditions
of the stock awards including the period of their exercisability and vesting.
Subject to the plan limitations, our board of directors or its authorized
committee also determines the exercise price of options granted and the right
to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1991 Plan that are not inconsistent with the 1991 Plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1991 Plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new lower priced
options.
1997 Equity Incentive Plan. In March 1997, we adopted the 1997 Plan. The 1997
Plan will terminate in March 2007 unless our board of directors terminates it
sooner.
The 1997 Plan provides for the grant of stock awards, including:
. incentive stock options, as defined in Section 422 of the Code, that may
be granted solely to employees (including officers); and
. nonstatutory stock options, restricted stock purchase awards and stock
bonuses that may be granted to employees (including officers), non-
employee directors and consultants.
Stock Options. Stock options are granted subject to stock option agreements.
The exercise price for an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of grant. The exercise
price for a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. Options granted under
the 1997 Plan vest at the rate specified in the option agreement.
In general, the term of stock options granted under the 1997 Plan may not
exceed ten years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability or
death, the optionee (or his beneficiary) may exercise any vested options up to
twelve months (eighteen months in the event of death) after the date this
service relationship ends. If an optionee's relationship with us, or any
affiliate of ours, ceases for any reason other than disability or death, the
optionee may (unless the terms of the stock option agreement provide for
earlier termination) exercise any vested options up to 90 days from cessation
of service.
Acceptable consideration for the purchase of common stock issued under the
1997 Plan is determined by our board of directors and may include cash, common
stock previously owned by the optionee, a deferred payment arrangement and
other legal consideration approved by our board of directors.
Generally, an optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides otherwise. However, an optionee may designate a
beneficiary who may exercise the option following the optionee's death.
Tax Limitations on Stock Option Grants. Under current tax laws, incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionee during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock option (and
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prior to our stock being publicly traded, no nonstatutory stock option) may be
granted to any person who, at the time of the grant, owns or is deemed to own
stock possessing more than 10% of the total combined voting power of Tularik or
any affiliate unless the following conditions are satisfied:
. the option exercise price must be at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
. the term of any incentive stock option award must not exceed five years
from the date of grant.
Section 162(m). No person may be granted options under the 1997 Plan covering
more than 1,000,000 shares of common stock in any calendar year. In the event
that our board of directors exercises its authority to reprice outstanding
options or to offer optionees the opportunity to replace outstanding options
with new options for the same or a different number of shares, then both the
original and new options will count toward the Section 162(m) limitation.
Restricted Stock and Stock Bonus Awards. Prior to our stock being publicly
traded, the purchase price for each restricted stock award granted must be at
least 85% of the fair market value of the stock on the date of the award or at
the time the purchase is consummated. For restricted stock awards made on or
after the date that our stock is publicly traded, the purchase price for these
awards must be at least 50% of the fair market value of the stock on the date
of the award or at the time the purchase is consummated. Rights to acquire
shares under a stock bonus or restricted stock bonus agreement may not be
transferred other than by will or by the laws of descent and distribution and
are exercisable during the life of the optionee only by the optionee. Some
restricted stock awards made following the completion of this offering may be
otherwise transferable if the stock bonus agreement so provides. Restricted
stock purchase awards granted under the 1997 Plan may include a repurchase
option in favor of Tularik that varies according to a service vesting schedule
determined by our board of directors. Stock bonuses may be awarded in
consideration for past services without a purchase payment.
Changes in Control. Under specified changes in control, all outstanding
options under the 1997 Plan either will be assumed, continued or substituted
for by any surviving entity. If the surviving entity does not assume, continue
or substitute for these awards, the vesting provisions of these stock awards
will be accelerated and these stock awards will be terminated upon the change
in control if not previously exercised.
Authorized Shares. An aggregate of 6,232,632 shares of common stock currently
are authorized for issuance under the 1997 Plan. As of December 31, 1999,
options to purchase a total of 2,792,681 shares of our common stock were held
by all participants under the 1997 Plan. A total of 2,096,210 shares of our
common stock remain available for grant. Shares subject to stock options that
have expired or otherwise terminated without having been exercised in full
again become available for the grant of awards under the 1997 Plan. The share
reserve automatically will increase on December 31 every year through 2002 by a
number equal to 3.5% of the issued and outstanding shares of our common stock.
Shares issued under the 1997 Plan may be previously unissued shares or
reacquired shares bought on the market or otherwise. No more than 2,000,000
shares of our common stock may be issued on the exercise of incentive stock
options during the term of the 1997 Plan.
Plan Administration. Our board of directors administers the 1997 Plan. Our
board of directors may delegate authority to administer the 1997 Plan to a
committee. Subject to the terms of the plan, our board of directors or its
authorized committee determines recipients, the numbers and types of stock
awards to be granted, and the terms and conditions of the stock awards
including the period of their exercisability and vesting. Subject to the plan
limitations, our board or its authorized committee also determines the exercise
price of options granted and the right to purchase restricted stock.
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1997 Plan that are not inconsistent with the 1997 Plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or
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<PAGE>
extend the date or dates on which all or any particular option or options
granted under the 1997 Plan may be exercised. In the event of a decline in the
value of our common stock, our board of directors or its designated committee
has the authority to offer optionees the opportunity to replace outstanding
higher priced options with new lower priced options.
1997 Non-Employee Directors' Stock Option Plan. In January 1997, the
compensation committee of our board of directors adopted the 1997 Non-Employee
Directors' Stock Option Plan to provide for the automatic grant of options to
purchase shares of common stock to non-employee directors of Tularik. Our board
of directors administers the directors' plan, unless it delegates
administration to a committee. The maximum number of shares of common stock
that may be issued following exercise of options granted under the directors'
plan is 300,000.
Initial Grants. Under the terms of the directors' plan, each person serving
as a director of Tularik who is not an employee of Tularik and not already a
holder of one or more options to purchase stock of Tularik, is automatically
granted an option to purchase 25,000 shares of common stock effective on the
later of the approval of the directors' plan by the stockholders or the date
the director first becomes a member of our board.
Annual Grants. In addition, on the date of Tularik's annual meeting of
stockholders, each non-employee director who was a director on the last day of
the prior calendar year will automatically be granted an option to purchase
8,000 shares of common stock.
Vesting and Exercise Terms. Options under the directors' plan vest within
four years from the date of grant. The exercise price of options granted under
the directors' plan must equal the fair market value of the common stock on the
date of grant. No option granted under the directors' plan may be exercised
after the expiration of ten years from the date it was granted. Generally,
options granted under the directors' plan may only be transferable by will, the
laws of descent and distribution or for specified estate planning purposes. The
directors' plan will terminate at the discretion of our board of directors.
Change in Control. Under specified changes in control, all outstanding
options under the directors' plan either will be assumed or substituted for by
any surviving entity. If the surviving entity does not assume or substitute for
these awards, the vesting provisions of the options will be accelerated and the
options will be terminated upon the change in control if not previously
exercised.
1999 Employee Stock Purchase Plan. In November 1999, we adopted our 1999
Employee Stock Purchase Plan, authorizing the issuance of common stock through
purchase rights granted to our employees or to employees of our affiliates, if
any. The purchase plan is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Code. As of the date hereof, no
shares of common stock had been issued or purchased under the purchase plan.
The terms of the purchase plan are set forth in the purchase plan document and
each offering under the purchase plan.
The purchase plan provides a means by which employees may purchase our common
stock through payroll deductions. The purchase plan is implemented by offering
of rights to eligible employees. Generally, all employees of Tularik or one of
its affiliates, including executive officers, who are not part-time or seasonal
employees whose customary employment is less than 20 hours per week or whose
customary employment is less than 5 months per calendar year, may participate
in the purchase plan and may authorize payroll deductions of up to 15% of their
earnings for the purchase of common stock under the purchase plan. Under the
plan, we may specify an offering with a duration of not more than 27 months,
and may specify shorter purchase periods within each offering. The first
offering began on December 9, 1999 and will end on January 31, 2002. Subsequent
offering periods will begin on each February 1 and continue for a duration of
24 months. Purchases will occur each February 1 and August 1.
The purchase plan provides that employees may generally be required to
complete at least 90 days and not more than 2 years of employment with Tularik
or one of its affiliates in order to participate in the plan.
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Initially, eligible employees may generally participate in the purchase plan
only after completing 90 days of employment with Tularik or one of its
affiliates. However, otherwise eligible employees who have not completed 90
days of employment but are employed with Tularik or one of its affiliate as of
the effective date of the initial shall be eligible to participate on the
effective date of the initial provided they remain in employment through the
first purchase date under the purchase plan.
Unless otherwise determined by our board of directors, common stock is
purchased for accounts of employees participating in the purchase plan at a
price per share equal to the lower of:
. 85% of the fair market value of a share of our common stock on the date
of commencement of participation in the offering; or
. 85% of the fair market value of a share of our common stock on the date
of purchase.
On the first day of an offering period, we will grant to each eligible
employee who has elected to participate in the purchase plan an option to
purchase shares of common stock as follows: the employee may authorize an
amount (a whole percentage from 1% to 15% of the employee's regular pay) to be
deducted by Tularik from his or her pay during the offering period. On the last
day of the offering period, the employee is deemed to have exercised the
option, at the option exercise price, to the extent of accumulated payroll
deductions. For this purpose, an employee's regular pay shall include his or
her base salary, contributions to the Tularik Salary Savings Plan, overtime
pay, commissions and bonuses, but shall exclude other remuneration paid
directly to the employee, profit-sharing payments, employee benefits, imputed
income on employee benefits, employee expense reimbursements and income
received in connection with stock options.
If an employee is not a participant on the last day of the offering period,
the employee is not entitled to exercise any option, and the amount of the
employee's accumulated payroll deductions will be refunded. An employee's
rights under the purchase plan terminate upon voluntary withdrawal from the
purchase plan at any time, or when this employee ceases employment for any
reason, except that upon termination of employment because of death, the
employee's beneficiary has specified rights to elect to exercise the option to
purchase the shares that the accumulated payroll deductions in the
participant's account would purchase at the date of death.
Limitations. Eligible employees may be granted rights only if the rights,
together with any other rights granted under any other employee stock purchase
plans, do not permit the employee to purchase our common stock at a rate which
exceeds $25,000 of the fair market value of this stock for each calendar year
in which these rights are outstanding. No employee shall be eligible for the
grant of any rights under the purchase plan if immediately after these rights
are granted, the employee has voting power over 5% or more of our outstanding
capital stock (measured by vote or value).
Authorized shares. The purchase plan authorizes the issuance of a total of
500,000 shares of common stock under the purchase plan. This reserve amount
will be increased each January 1 beginning January 1, 2001 by the lesser of
500,000 shares of common stock or 1% of the number of shares of common stock
outstanding on that date. However, our board of directors has the authority to
designate a smaller number of shares by which the authorized number of shares
of common stock will be increased on that date.
Administration. Our board of directors administers the purchase plan. Our
board of directors may delegate authority to administer the purchase plan to a
committee that shall have the authority of our board of directors to adopt
resolutions governing the purchase plan.
Tax Qualified Plans. We sponsor the Tularik Salary Savings Plan and Matching
Plan as discussed below:
Savings Plan. Our savings plan, effective October 1, 1993, is intended to be
a tax-qualified defined contribution plan under Subsections 401(a) and 401(k)
of the Code. All employees are eligible to participate and may enter the 401(k)
plan as of their date of hire and on the first day of any month thereafter.
Each participant may contribute up to 20% of his or her pre-tax compensation to
the savings plan, subject to statutorily prescribed annual limits. Each
participant's contributions, and the corresponding investment
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earnings, are generally not taxable to the participants until withdrawn.
Employee contributions are held in trust and invested by the savings plan
trustee as required by law. Individual participants may direct the trustee to
invest their accounts in authorized investment alternatives.
Matching Plan. Our matching plan, effective January 1, 1998, is intended to
be a tax-qualified defined contribution plan under Subsections 401(a) and
401(m) of the Code. All employees are eligible to participate and may enter the
matching plan as of the date they become eligible to participate in the savings
plan. Each participant who makes pre-tax contributions to the savings plan is
eligible to have a matching contribution in common stock made by Tularik to his
or her matching plan account in an amount up to 50% of the participant's
savings plan contribution with a maximum employee contribution of $1,500 per
year, subject to statutorily prescribed annual limits. We may make additional
discretionary contributions for all participants to the matching plan. Each
participant's contributions, and the corresponding investment earnings, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Limitations of Liability; Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law;
or
. for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation further provides that we must indemnify our
directors to the fullest extent permitted by Delaware law.
In addition, our amended and restated bylaws provide that:
. we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
. we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by
law, our amended and restated certificate of incorporation, our bylaws
or agreements;
. we are required to advance expenses to our directors and executive
officers as incurred in connection with legal proceedings against them
for which they may be indemnified; and
. the rights conferred in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors
and officers. These agreements, among other things, require us to indemnify
each director and officer to the fullest extent permitted by Delaware law,
including indemnification for expenses such as attorneys' fees, judgments,
fines and settlement amounts incurred by the director or officer in any action
or proceeding, including any action by or in the right of Tularik, arising out
of the person's services as a director or officer of Tularik, any subsidiary of
ours or any other company or enterprise to which the person provides services
at our request. At present, we are not aware of any pending or threatened
litigation or proceeding involving any of our directors, officers, employees or
agents in which indemnification would be required or permitted. We believe that
our charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
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Employment Agreements and Termination of Employment Agreements
At the time of commencement of employment, our employees generally sign offer
letters specifying basic terms and conditions of employment. In general, our
employees are not subject to written employment agreements. Each officer and
employee has entered into a standard form confidential information and
invention assignment agreement that provides that the employee will not
disclose any confidential information of Tularik received during the course of
employment and that, with some exceptions, the employee will assign to Tularik
any and all inventions conceived or developed during the course of employment.
In October 1999, we entered into an agreement with John P. McLaughlin, our
former President. Under the terms of the agreement, Mr. McLaughlin received his
salary and health benefits through December 31, 1999 and is receiving a portion
of his salary and health benefits through June 30, 2000. In addition, the
vesting of options to purchase 37,500 shares of common stock was accelerated.
We provided Mr. McLaughlin with a one-year loan in the principal amount of
$787,503 at an annual interest rate of 5.54%, in exchange for a promissory note
secured by a pledge of 262,501 shares of common stock.
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RELATED PARTY TRANSACTIONS
Stock option grants to our executive officers and directors are described in
this prospectus under the heading "Management--Compensation of Directors, --
Executive Compensation and --Employment Agreements."
From January 1, 1996 through December 31, 1999, the following executive
officers, directors and holders of more than 5% of our voting securities
purchased securities in the amounts and as of the dates shown below.
<TABLE>
<CAPTION>
Series F Series G
Preferred Preferred
Purchaser Common Stock Stock(1) Stock(1)
- --------- -------------- ---------- ----------
<S> <C> <C> <C>
Directors and Executive Officers(2)
David V. Goeddel, Ph.D.................... 1,033,334 -- --
John P. McLaughlin........................ 262,501 -- --
Yasunori Kaneko, M.D...................... 250,001 -- --
Corinne H. Lyle........................... 63,335 -- --
Andrew J. Perlman, M.D., Ph.D............. 191,667 -- --
William J. Rieflin........................ 200,001 -- --
Terry J. Rosen............................ 215,334 -- --
Pieter B.M.W.M. Timmermans, Ph.D.......... 116,667 -- --
A. Grant Heidrich, III.................... -- -- --
Mark J. Levin............................. -- -- --
Paul A. Marks, M.D........................ 33,000 -- --
Edward R. McCracken....................... -- -- --
Steven L. McKnight, Ph.D.................. -- -- --
Peter J. Sjostrand, M.D................... -- -- --
Entities Affiliated with Directors(2)
Mayfield Fund(3).......................... -- -- --
Pharma Vision 2000 AG(4).................. -- 3,280,000 5,000,000
Price Per Share(5)........................ $0.50 to $3.00 $ 10.00 $ 10.25
Date(s) of Purchase....................... 1/96-11/99 10/96 12/97
</TABLE>
- --------
(1) These shares were converted into the same number of shares of our common
stock in connection with our initial public offering.
(2) See "Principal and Selling Stockholders" for more detail on shares held by
these purchasers.
(3) The entities affiliated with Mayfield Fund are Mayfield Associates,
Mayfield Medical Partners and Mayfield VI. Mr. Heidrich, one of our
directors, is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general partner
of Mayfield VI. Mayfield VI is a general partner of Mayfield Medical
Partners. Mr. Levin, one of our directors, is a general partner of Mayfield
Medical Partners.
(4) Dr. Goeddel, our Chief Executive Officer and one of our directors, is a
director of Pharma Vision. Dr. Sjostrand, a member of our board of
directors, is a director of Pharma Vision.
(5) The weighted average price per share for these purchases of our common
stock as of December 31, 1999 was $2.48.
We have entered into an amended and restated registration rights agreement
with each of the purchasers of preferred stock shown above. This agreement and
additional similar agreements provide that these and other stockholders will
have registration rights with respect to the shares of common stock issued upon
conversion of their preferred stock in connection with our initial public
offering.
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Pharma Vision, which is our largest stockholder and owned 22.7% of our
outstanding stock as of December 31, 1999, purchased directly from us
concurrently with our initial public offering 1,878,238 shares of our common
stock.
We have entered into indemnification agreements with our directors and
certain officers for the indemnification and advancement of expenses to these
persons to the fullest extent permitted by law. We also intend to enter into
those agreements with our future directors and officers. See "Limitation of
Liability; Indemnification of Directors and Officers."
In May 1997, we loaned Mr. Rieflin $250,000 that he used in connection with
relocating to California from another state. Mr. Rieflin has repaid the full
amount that was due on this loan. The loan was interest free and was secured by
a pledge of Mr. Rieflin's shares of our common stock.
At December 31, 1999, we had loans outstanding in the principal amount of
$94,312 to Mr. Rieflin and $200,000 to Dr. Rosen, both of whom are executive
officers of Tularik. Each of such loans was entered into for the purpose of
providing housing assistance to such officers. Mr. Rieflin's loan was entered
into in November 1997 and Dr. Rosen's loan was entered into in January 1994.
Each such loan is evidenced by a full recourse promissory note secured by
shares of our common stock. We have forgiven $47,066 of the principal of
Mr. Rieflin's loan and will forgive an additional $23,533 in November 2000 and
2001 if Mr. Rieflin continues as an employee of Tularik through those dates. We
have forgiven $126,044 of the principal of Dr. Rosen's loan and will forgive an
additional $26,044 in January 2001-2004 if Dr. Rosen continues as an employee
of Tularik through those dates. Neither Mr. Rieflin nor Dr. Rosen has repaid
any principal amount due on their loans, which are due on November 14, 2001 and
January 5, 2004, respectively. The annual interest rate on Mr. Rieflin's loan
is 6.1% and on Dr. Rosen's loan is 5.0%. Since the commencement of fiscal 1999,
the largest aggregate indebtedness of Mr. Rieflin and Dr. Rosen under such
loans was $80,716 and $150,149, respectively, including principal and accrued
interest.
We believe that all of the transactions discussed above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides summary information regarding the beneficial
ownership of our outstanding common stock as of December 31, 1999 for:
. each person or group who beneficially owns more than 5% of our common
stock;
. each of the executive officers and the former executive officer named in
the Summary Compensation Table;
. each of our directors;
. all of our directors and executive officers (and the former executive
officer named in the Summary Compensation Table) as a group; and
. each selling stockholder.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options or warrants currently exercisable or exercisable within 60
days of December 31, 1999 and not subject to repurchase as of that date are
deemed outstanding for calculating the percentage of outstanding shares of the
person holding these options or warrants, but are not deemed outstanding for
calculating the percentage of any other person. Applicable percentage ownership
in the following table is based on 44,835,844 shares of common stock
outstanding as of December 31, 1999 and 49,335,844 shares of common stock
outstanding immediately following the completion of this offering. Unless
otherwise indicated, the address of each of the named individuals is c/o
Tularik Inc., Two Corporate Drive, South San Francisco, California 94080.
<TABLE>
<CAPTION>
Shares Issuable
Shares Under Options Number
Shares Beneficially Subject to a or Warrants of Shares Beneficially
Owned Before the Right of Exercisable Shares Owned After the
Offering(1) Repurchase within 60 to be Offering
--------------------- as of Days of Sold in ---------------------
Number of December 31, December 31, the
Beneficial Owner Shares Percentage 1999(2) 1999 Offering Number Percentage
- ---------------- ---------- ---------- ------------ --------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Five Percent
Stockholders, Directors
and Executive Officers:
Pharma Vision 2000 AG... 10,158,238 22.7% -- -- -- 10,158,238 20.6%
Spielhof 3
8750 Glaris Switzerland
Entities Affiliated with
Mayfield Fund.......... 3,966,474 8.9% -- 49,000 -- 3,966,474 8.1%
2800 Sand Hill Road,
Suite 250
Menlo Park, CA 94025(3)
David V. Goeddel,
Ph.D.(4)............... 11,917,071 27.3% 275,001 66,666 -- 11,917,071 24.8%
Andrew J. Perlman, M.D.,
Ph.D.(5)............... 346,542 1.1% 15,625 133,333 -- 346,542 1.0%
Pieter B.M.W.M.
Timmermans, Ph.D....... 85,570 * 31,597 133,333 -- 85,570 *
Terry J. Rosen,
Ph.D.(6)............... 191,752 * 34,084 134,666 -- 191,752 *
William J. Rieflin(7)... 124,252 * 56,251 99,999 -- 124,252 *
A. Grant Heidrich,
III(8)................. 3,966,474 8.9% -- 49,000 -- 3,966,474 8.1%
Mark J. Levin(9)........ 479,818 1.3% -- 99,000 -- 479,818 1.2%
Edward R. McCracken..... -- * -- 89,000 -- -- *
Steven L. McKnight,
Ph.D.(10).............. 583,313 2.2% 4,687 399,000 -- 583,313 2.0%
Paul A. Marks,
M.D.(11)............... 65,875 * 7,125 16,000 -- 65,875 *
Peter J. Sjostrand,
M.D.(12)............... 10,158,238 22.7% -- 49,000 -- 10,158,238 20.7%
All executive officers
and directors as a
group (12
persons)(13)........... 17,343,433 41.5% 425,621 1,435,662 -- 17,343,433 37.8%
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Shares Issuable
Shares Under Options Number
Shares Beneficially Subject to a or Warrants of Shares
Owned Before the Right of Exercisable Shares Beneficially Owned
Offering(1) Repurchase within 60 to be After the Offering
-------------------- as of Days of Sold in ------------------
Number December 31, December 31, the
of Shares Percentage 1999(2) 1999 Offering Number Percentage
--------- ---------- ------------ --------------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selling Stockholders:
Artal Luxembourg S.A.... 270,270 * -- -- 47,586 222,684 *
Auber Investments Ltd... 216,194 * -- 32,757 43,833 172,361 *
Barany, Francis......... 10,269 * -- 1,556 1,808 8,461 *
Bin-Lun Ho and Fuhuan
Tjian Ho Trust......... 42,000 * -- -- 1,500 40,500 *
BioCentive Ltd.......... 695,000 1.6% -- -- 122,368 572,632 1.2%
Botstein, David......... 10,269 * -- 1,556 1,030 9,239 *
Broadview Limited....... 152,093 * -- -- 26,779 125,314 *
Celox S.A............... 100,000 * -- -- 17,607 82,393 *
Charter Ventures........ 135,135 * -- -- 23,793 111,342 *
Cold Spring Harbor
Laboratory............. 304,676 * -- -- 30,468 274,208 *
Dann, Kevin............. 10,000 * -- -- 1,000 9,000 *
Delphi BioInvestments
II, L.P................ 2,902 * -- -- 511 2,391 *
Delphi Ventures, II
L.P.................... 537,639 1.2% -- -- 94,662 442,977 *
Feramisco, James R...... 10,269 * -- -- 1,808 8,461 *
Frazier & Company L.P... 128,718 * -- -- 22,663 106,055 *
Frazier Healthcare
Investments, L.P....... 405,406 * -- -- 71,380 334,026 *
Geigy, Juerg F.......... 25,000 * -- -- 4,402 20,598 *
H&Q Healthcare
Investors.............. 270,270 * -- -- 47,586 222,684 *
H&Q Life Sciences
Investors.............. 135,135 * -- -- 23,793 111,342 *
Hare & Co. c/o The Bank
of New York............ 128,700 * -- -- 10,000 118,700 *
Heritage Finance & Trust
Company................ 51,000 * -- -- 8,979 42,021 *
Investment Enterprise
Partnership NIF 10-A... 135,000 * -- -- 13,500 121,500 *
Investment Enterprise
Partnership NIF 10-B... 135,000 * -- -- 13,500 121,500 *
Investment Enterprise
Partnership NIF 11..... 135,000 * -- -- 13,500 121,500 *
Investment Enterprise
Partnership NIF 9...... 136,000 * -- -- 13,600 122,400 *
Investment Enterprise
Partnership YNED....... 135,135 * -- -- 23,793 111,342 *
K&E Management, Ltd..... 142,195 * -- -- 25,036 117,159 *
Kiley, Thomas D......... 142,195 * -- -- 25,036 117,159 *
Lisitsyn, Nikolai....... 49,292 * -- 7,468 9,993 39,299 *
Lombard, Odier & Cie.... 744,967 1.7% -- -- 131,166 613,801 1.2%
Long Island Venture
Fund, LP............... 479,919 1.1% -- -- 84,498 395,421 *
Maroney, John........... 24,646 * -- 3,734 4,997 19,649 *
McGrath, Barbara........ 2,567 * -- 389 250 2,317 *
Medicus Venture Partners
1992................... 715,609 1.6% -- -- 125,997 589,612 1.2%
Northwood Capital
Partners LLC........... 59,560 * -- -- 9,284 50,276 *
Northwood Ventures LLC.. 178,676 * -- -- 27,851 150,825 *
Pharma /w Health Fund... 200,000 * -- -- 35,214 164,786 *
Quaestus SA............. 25,000 * -- -- 4,402 20,598 *
RS & Co. IV, L.P........ 459,459 1.0% -- -- 45,946 413,513 *
S7 Associates, LLC...... 121,285 * -- -- 21,354 99,931 *
S-E-Banken Fonder AB.... 250,000 * -- -- 44,017 205,983 *
S-E-Banken Luxembourg
S.A.................... 50,000 * -- -- 8,803 41,197 *
Singapore Bio-
Innovations Pte. Ltd... 270,270 * -- -- 47,586 222,684 *
Stena Forvaltning AB.... 100,000 * -- -- 17,607 82,393 *
Stiftelser.............. 31,500 * -- -- 5,546 25,954 *
Svenska Handelsbanken
Fonder AB.............. 145,100 * -- -- 25,547 119,553 *
Svenska Handelsbanken
Luxembourg S.A......... 142,600 * -- -- 10,000 132,600 *
Verdad S.A.............. 160,000 * -- -- 28,171 131,829 *
Wilson, Henry T......... 1,739 * -- -- 306 1,433 *
Yamanouchi
Pharmaceutical Co.,
Ltd.................... 400,000 * -- -- 70,427 329,573 *
Zimmerman, Kenneth...... 54,054 * -- -- 9,517 44,537 *
</TABLE>
69
<PAGE>
- --------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, we believe that each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated
as beneficially owned. Applicable percentages are adjusted as required by
rules promulgated by the SEC.
(2) The unvested portion of the shares of common stock is subject to a right of
repurchase by us, at the original option exercise price, in the event the
holder ceases to provide service to us and our affiliates. The option
exercise prices range from $0.025 to $3.00. See "Executive Compensation"
for more detail on our right to repurchase.
(3) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held by
Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI.
Mayfield VI Management Partners is the general partner of Mayfield VI and
Mayfield VI is a general partner of Mayfield Medical Partners. Mr. Heidrich
is a general partner of Mayfield Associates and of Mayfield VI Management
Partners. Mr. Levin is a general partner of Mayfield Medical Partners.
(4) Includes 10,158,238 shares held by Pharma Vision. Dr. Goeddel is a director
of Pharma Vision 2000 AG and disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in these shares. Does not
include 240,000 shares held in trust for Dr. Goeddel's children, for which
Dr. Goeddel is not the trustee and disclaims beneficial ownership. Includes
500 shares issued pursuant to our 401(m) plan.
(5) Includes 195,000 shares held in a revocable trust of which Dr. Perlman and
his wife, Dr. Phyllis Gardner, are sole trustees. Drs. Perlman and Gardner,
each acting alone, have the power to vote and dispose of such shares. Does
not include 30,000 shares held in trust for Dr. Perlman's minor children,
for which Dr. Perlman is not the trustee and disclaims beneficial
ownership. Includes 500 shares issued pursuant to our 401(m) plan.
(6) Includes 70,336 shares held in a revocable trust of which Dr. Rosen and his
wife are sole trustees. Dr. and Mrs. Rosen, each acting alone, have the
power to vote and dispose of such shares. Does not include 39,998 shares
held in trust for Dr. Rosen's minor children, for which Dr. Rosen is not
the trustee and disclaims beneficial ownership. Includes 500 shares issued
pursuant to our 401(m) plan.
(7) Does not include 19,998 shares held in trust for Mr. Rieflin's minor
children, for which Mr. Rieflin is not the trustee and disclaims beneficial
ownership. Includes 500 shares issued pursuant to our 401(m) plan.
(8) Includes 158,659 shares held by Mayfield Associates, 479,818 shares held by
Mayfield Medical Partners and 3,327,997 shares held by Mayfield VI. Mr.
Heidrich is a general partner of Mayfield Associates and of Mayfield VI
Management Partners. Mayfield VI Management Partners is the general partner
of Mayfield VI and Mayfield VI is a general partner of Mayfield Medical
Partners. Mr. Heidrich disclaims beneficial ownership of these shares
except to the extent of his proportionate partnership interest in these
shares.
(9) Includes 479,818 shares held by Mayfield Medical Partners. Mr. Levin is a
general partner of Mayfield Medical Partners and disclaims beneficial
ownership of these shares except to the extent of his proportionate
partnership interest in these shares.
(10) Does not include 200,000 shares held in trust for Dr. McKnight's children,
for which Dr. McKnight is not the trustee and disclaims beneficial
ownership. Includes 206,000 shares held in trust for the Steven L.
McKnight Exempt Family Trust. Dr. and Mrs. McKnight, each acting alone,
have the power to vote and dispose of such shares. Dr. McKnight disclaims
beneficial ownership of these shares.
(11) Includes 65,354 shares held in trust for the Paul A. Marks 1999 Grantor
Annuity Trust. Dr. and Mrs. Marks, each acting alone, have the power to
vote and dispose of such shares family. Dr. Marks disclaims beneficial
ownership of these shares.
(12) Includes 10,158,238 shares held by Pharma Vision 2000 AG. Dr. Sjostrand is
a director of Pharma Vision and disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in these shares.
(13) Includes shares described in the notes above, as applicable.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 65 million shares of common stock,
$0.001 par value, and five million shares of preferred stock, $0.001 par value.
Common Stock
As of December 31, 1999, there were 44,835,844 shares of common stock
outstanding that were held of record by approximately 495 stockholders. There
will be 49,335,844 shares of common stock outstanding (assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
or warrants after December 31, 1999) after giving effect to the sale of the
shares of common stock offered by us in this offering.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets
legally available therefor as our board of directors may from time to time
determine. Upon liquidation, dissolution or winding up of Tularik, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of any then outstanding
shares of preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable.
Preferred Stock
According to our amended and restated certificate of incorporation, our board
of directors has the authority, without further action by the stockholders, to
issue up to five million shares of preferred stock, in one or more series. Our
board shall determine the rights, preferences, privileges and restrictions of
the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and
the number of shares constituting any series or the designation of any series.
The issuance of preferred stock could diminish voting power of holders of
common stock, and the likelihood that holders of preferred stock will receive
dividend payments and payments upon liquidation may have the effect of
delaying, deferring or preventing a change in control of Tularik, which could
depress the market price of our common stock. We have no present plan to issue
any shares of preferred stock.
Registration Rights of Stockholders
Holders of approximately 26.6 million shares of common stock, including
shares issuable upon exercise of outstanding warrants to purchase shares of
common stock, or their transferees, are entitled to rights to register these
shares under the Securities Act. These rights are provided under an Investor
Rights Agreement, dated October 31, 1997, under an Amended and Restated
Registration Rights Agreement, dated August 15, 1999, and under agreements with
similar registration rights. If we propose to register any of our securities
under the Securities Act, either for our own account or for the account of
others, the holders of these shares are entitled to notice of the registration
and are entitled to include, at our expense (other than applicable underwriting
discounts and commissions), their shares of common stock in the registration
and any related underwriting, provided, among other conditions, that the
underwriters may limit the number of shares to be included in the registration.
In addition, the holders of these shares may require us, at our expense (other
than applicable underwriting discounts and commissions) and on not more than
two occasions at any time beginning on June 9, 2000 to file a registration
statement under the Securities Act with respect to their shares of common
stock, and we will be required to use our best efforts to effect the
registration. Further, the holders may require us at our expense (other than
applicable underwriting discounts and commissions) to register their shares on
Form S-3 when this form becomes available.
71
<PAGE>
Anti-Takeover Provisions of Delaware Law and Charter Provisions
Until November 2000, we are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder unless:
. prior to that date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers, and by employee stock plans in which
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to that date, the business combination is approved by
our board of directors and is authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Our amended and restated certificate of incorporation requires that any
action required or permitted to be taken by our stockholders must be effected
at a duly called annual or special meeting of stockholders and may not be
effected by a consent in writing. Additionally, our certificate of
incorporation:
. substantially limits the use of cumulative voting in the election of
directors;
. provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
. authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed by our amended and restated certificate of
incorporation. Our board of directors currently consists of eight members, who
will be elected at each annual meeting of our stockholders. Our board of
directors may appoint new directors to fill vacancies or newly created
directorships. Our bylaws also limit who may call a special meeting of
stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Norwest Bank Minnesota
N.A.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the effective date of our initial public offering on December 9,
1999, there was no public market for our common stock. Future sales of
substantial amounts of our common stock in the public market could reduce
prevailing market prices.
Upon completion of this public offering, we will have outstanding an
aggregate of 49,335,844 shares of common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants after December 31, 1999. Of these shares, the 6,000,000 shares sold by
us and the selling stockholders in this public offering, together with the
7,992,500 shares sold in the underwritten portion of our initial public
offering in December 1999, will be freely tradable without restriction or
further registration under the Securities Act, unless these shares are or were
purchased by affiliates. The remaining 35,343,344 shares of common stock held
by existing stockholders are restricted securities. Restricted securities may
be sold in the public market only if registered or if they qualify for an
exemption from registration described below under Rules 144, 144(k) or 701
promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
. unless held by affiliates, 2,086,627 shares are currently eligible for
sale;
. 31,579,799 shares will be eligible for sale upon the expiration of the
lock-up agreements described below; and
. 1,676,418 shares will become eligible for sale from time to time upon the
expiration of applicable holding periods.
Lock-Up Agreements. In connection with our initial public offering, all of
our officers, directors and some of our stockholders and option holders agreed
not to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exercisable or exchangeable for
shares of our common stock, until at least June 7, 2000. Transfers or
dispositions can be made sooner only with the prior written consent of Lehman
Brothers Inc.
Rule 144. In general, under Rule 144 as currently in effect, beginning March
8, 2000, a person or persons whose shares are aggregated, who has beneficially
owned restricted securities for at least one year, including the holding period
of any prior owner except an affiliate, would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 493,358 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
Tularik.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors, other than affiliates,
who purchases or receives shares from us in connection with a compensatory
stock purchase plan or option plan or other written agreement will be eligible
to resell their shares beginning March 8, 2000, subject only to the manner of
sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
73
<PAGE>
Registration Rights. The holders of approximately 26.6 million shares of our
common stock, including shares issuable upon exercise of outstanding warrants
to purchase shares of our common stock, or their transferees, are entitled to
rights with respect to the registration of their shares under the Securities
Act. Registration of their shares under the Securities Act would result in
these shares becoming freely tradeable without restriction under the Securities
Act, except for shares purchased by affiliates, immediately upon the
effectiveness of this registration.
Stock Options. We have filed a registration statement on Form S-8 under the
Securities Act covering 7,200,800 shares of common stock reserved for issuance
under the 1991 Plan, 1997 Plan and 1999 Employee Stock Purchase Plan. We have
also filed a registration statement on Form S-8 under the Securities Act
covering 263,001 shares of our common stock issued to our former President
under our employee equity plans. Shares registered under these registration
statements are subject to Rule 144 volume limitations applicable to affiliates,
available for sale in the open market, except those shares subject to lockup
agreements and unvested shares.
74
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., J.P. Morgan Securities Inc., Chase
Securities Inc., Thomas Weisel Partners LLC and Warburg Dillon Read LLC are
acting as representatives, has agreed to purchase from us and the selling
stockholders the number of shares of common stock shown opposite its name
below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Lehman Brothers Inc.......................................
J.P. Morgan Securities Inc................................
Chase Securities Inc......................................
Thomas Weisel Partners LLC................................
Warburg Dillon Read LLC...................................
---------
Total..................................................... 6,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock that the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement
that: the representations and warranties made by us and the selling
stockholders to the underwriters are true; there is no material change in the
financial markets; and we deliver to the underwriters customary closing
documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
shown on the cover page of this prospectus. The representatives have also
advised us that the underwriters propose to offer the shares of common stock to
dealers, who may include the underwriters, at the public offering price less a
selling concession not in excess of $ per share. The underwriters may allow,
and the dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.
We and the selling stockholders have granted the underwriters an option to
purchase on a pro rata basis up to 900,000 additional shares of common stock,
exercisable solely to cover over-allotments, if any, at the public offering
price less the underwriting discount shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
table above and we and the selling stockholders will be obligated, under the
over-allotment option, to sell the shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of common stock or any securities that may be converted into or
exchanged for any shares of common stock for a period of 90 days from the date
of this prospectus. In connection with our initial public offering in December
1999, all of our executive officers, directors and holders of substantially all
of our outstanding capital stock agreed under lock-up agreements that, without
the prior written consent of Lehman Brothers Inc., they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock or
any securities that may be converted into or exchanged for any shares of common
stock until at least June 7, 2000. See "Shares Eligible for Future Sale."
75
<PAGE>
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead manager or
co-manager on 131 filed public offerings of equity securities, of which 99 have
been completed, and has acted as a syndicate member in an additional 69 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering and except that a principal of Thomas Weisel Partners LLC is the
spouse of our Vice President, Chief Financial Officer.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
Our common stock is quoted on the Nasdaq National Market under the symbol
"TLRK."
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement. We and the selling stockholders have
also agreed to contribute to payments that the underwriters may be required to
make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering. This means that they may sell more shares than
are shown on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The representatives also may impose a penalty bid on underwriters and
selling group members. This means that, if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members that
sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering. Neither we, any of the underwriters or any of the selling
stockholders makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, neither we, any of the underwriters or
any of the selling stockholders makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
76
<PAGE>
As permitted by Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission under the Exchange Act, the underwriters, if any, that are
market makers, referred to as passive market makers, in the common stock, may
make bids for or purchases of the common stock on the Nasdaq National Market
until the time, if any, when a stabilizing bid for the securities has been
made. Rule 103 generally provides that: a passive market maker's net daily
purchases of the common stock may not exceed 30% of its average daily trading
volume in the securities for the two full consecutive calendar months (or any
60 consecutive days ending within 10 days) immediately preceding the filing
date of the registration statement of which this prospectus forms a part; a
passive market maker may not effect transactions or display bids for the common
stock at a price that exceeds the highest independent bid for the common stock
by persons who are not passive market makers; and bids made by passive market
makers must be identified as such.
A principal of Thomas Weisel Partners LLC is the spouse of our Vice
President, Chief Financial Officer. Under Rule 2720 of the Conduct Rules of the
NASD, Thomas Weisel Partners LLC may be deemed to have a "conflict of interest"
with us. The offering is being conducted in accordance with Rule 2720, which
provides that, among other things, when an NASD member participates in the
underwriting of the equity securities of a company with which it has a deemed
"conflict of interest," the public offering price per share can be no higher
than that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Lehman Brothers has assumed the
responsibilities of acting as QIU. In its role as QIU, Lehman Brothers has
performed a due diligence investigation and reviewed and participated in the
preparation of this prospectus and the registration statement of which this
prospectus is a part. We, the selling stockholders and the other underwriters
have agreed to indemnify Lehman Brothers in its capacity as QIU against certain
liabilities, including liabilities under the Securities Act.
77
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California, will provide us with an opinion as
to the validity of the common stock offered under this prospectus. Latham &
Watkins, San Diego, California, will pass upon certain legal matters related to
the offering for the underwriters. As of the date of this prospectus, certain
partners and associates of Cooley Godward LLP own an aggregate of 13,514 shares
of our common stock through investment partnerships.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999 as set forth in their report. We
have included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission registration
statements on Form S-1 under the Securities Act with respect to the shares of
common stock offered under this prospectus. This prospectus does not contain
all of the information in the registration statements and the exhibits and
schedule to the registration statements. For further information with respect
to us and our common stock, we refer you to the registration statements and to
the exhibits and schedule to registration statements. Statements contained in
this prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we refer you to
the copy of the contract or other document filed as an exhibit to the
registration statements. Each of these statements is qualified in all respects
by this reference. You may inspect a copy of the registration statements
without charge at the SEC's principal office in Washington, D.C., and copies of
all or any part of the registration statements may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of fees prescribed by the SEC. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the Web site is http://www.sec.gov. The SEC's toll free investor
information service can be reached at 1-800-SEC-0330. Information contained on
our website does not constitute part of this prospectus.
We are subject to the information reporting requirements of the Securities
Exchange Act of 1934, as amended, and we file reports, proxy statements and
other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(650) 825-7000.
78
<PAGE>
TULARIK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Tularik Inc.
We have audited the accompanying consolidated balance sheets of Tularik Inc.
as of December 31, 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
F-2
<PAGE>
TULARIK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
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
-------- --------
$136,778 $230,438
======== ========
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
Commitments
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
-------- --------
$136,778 $230,438
======== ========
</TABLE>
See accompanying notes.
F-3
<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, net..................... 4,085 6,396 5,221
---------- ----------- -----------
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.
F-4
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Total
------------------- ----------------- Paid-In From Deferred Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
----------- ------ ---------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. 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)
----------- ----- ---------- ---- -------- ------- ------- -------- --------
Balance at
December 31,
1997............. 26,858,823 27 7,432,729 7 173,000 (860) -- (51,318) 120,856
Issuance of Series
H convertible
preferred stock
upon exercise of
stock options.... 7,802 -- -- -- 6 -- -- -- 6
Conversion of
warrant, net..... 37,260 -- -- -- -- -- -- -- --
Issuance of common
stock, net of
repurchases...... -- -- 127,874 1 319 80 -- -- 400
Repayment of notes
receivable....... -- -- -- -- -- 144 -- -- 144
Deferred
compensation..... -- -- -- -- 710 -- (710) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- 31 -- 31
Net loss.......... -- -- -- -- -- -- -- (10,539) (10,539)
----------- ----- ---------- ---- -------- ------- ------- -------- --------
Balance at
December 31,
1998............. 26,903,885 27 7,560,603 8 174,035 (636) (679) (61,857) 110,898
Conversion of
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)
----------- ----- ---------- ---- -------- ------- ------- -------- --------
Balance at
December 31,
1999............. -- $ -- 44,835,844 $ 45 $291,114 $(1,609) $(4,586) $(87,395) $197,569
=========== ===== ========== ==== ======== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
TULARIK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
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)
-------- -------- --------
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)
-------- -------- --------
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.
F-6
<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 completes clinical trials, obtains regulatory
approval and successfully commercializes one or more of the Company's products.
In order to accelerate product commercialization and finance research
activities, Tularik has entered into collaborations with leading pharmaceutical
companies. The Company has ongoing collaborations with Knoll AG ("Knoll")
relating to obesity (commenced in November 1998); Japan Tobacco Inc. ("Japan
Tobacco") relating to orphan nuclear receptors (commenced in September 1998);
Roche Bioscience ("Roche Bioscience") relating to inflammation (commenced in
July 1997); Japan Tobacco relating to obesity (commenced in September 1996) 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.
F-7
<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, generally three to four years, or the
lease term. Leasehold improvements are amortized over the term of the related
lease, which does not exceed their estimated useful lives.
Long-lived Assets
The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"). Consistent
with SFAS 121, the Company identifies and records impairment losses, as
circumstances dictate, on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. No one of these events have occurred with respect to
the Company's long-lived assets, which consist primarily of machinery and
equipment and leasehold improvements.
Revenue Recognition
Collaborative research and development agreements provide for periodic
payments in support of the Company's research activities. Collaboration revenue
is recognized as earned based on actual costs incurred or as milestones are
achieved. 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 effective January 1, 2000 to recognize such fees over the term of
the related research agreement. The
F-8
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-9
<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
F-10
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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. JT retains exclusive marketing and sales rights in Japan and Korea.
Japan Tobacco has the right to terminate the collaboration at the end of the
third or fourth years of the five year collaboration. Japan Tobacco is
committed to pay Tularik up to $29.0 million in research payments related to
the orphan nuclear receptor collaboration, of which $12.0 million 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
F-11
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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
F-12
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement, Merck terminated the collaboration. Merck had paid Tularik $18.4
million in research payments as of December 31, 1999.
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
Corporate debt securities................................ 50,739 79,430
------- --------
$53,398 $ 95,269
======= ========
Short-term investments:
Obligations of domestic governmental agencies............ $12,999 $ --
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
F-13
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-14
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
Year ended Long-Term Capital Operating
December 31, Debt Leases Leases
- ------------ --------- ------- ---------
(In thousands)
<S> <C> <C> <C>
2000............................................... $ 4,113 $ 1,954 $ 4,710
2001............................................... 3,769 1,289 4,627
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
=======
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.
F-15
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In connection with the sublease of space in the
Company's facilities, Tularik is entitled to receive minimum lease payments of
$512,000 in 2000, and $257,000 in 2001. The Company did not receive 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.
Common Stock
Warrants
A summary of warrants to purchase common stock at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Number of Exercise Term 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
F-16
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 1998
-------- -------- --------
(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-
Number of Average
Options Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding at December 31, 1996............. 2,972,750 0.61
Granted............................................ 1,401,300 3.00
Exercised.......................................... (648,422) 1.21
Forfeited.......................................... (40,520) 1.40
----------
Options outstanding at December 31, 1997............. 3,685,108 1.41
Granted............................................ 2,065,700 3.00
Exercised.......................................... (273,894) 1.32
Forfeited.......................................... (143,567) 2.76
----------
Options outstanding at December 31, 1998............. 5,333,347 1.99
Granted............................................ 1,712,750 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>
F-17
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of options outstanding at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Options Weighted Options Weighted
Outstanding at Weighted Average Average Vested at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Price 1999 Contractual Life Price 1999 Price
-------- -------------- ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.03-$0.93 1,190,157 4.91 $ 0.50 968,899 $ 0.52
2.50-2.50 53,000 6.92 2.50 41,542 2.50
3.00-3.00 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.
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.
F-18
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserved Shares
Shares of common stock reserved for future issuance were as follows at
December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Warrants:
Outstanding warrants.................................. 1,078,382 890,119
Reserved for future issuance.......................... 3,051 2,961
Stock plans:
Outstanding options................................... 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, 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.
F-19
<PAGE>
TULARIK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Interest paid........................................ $ 549 $ 508 $1,136
======= ====== ======
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>
F-20
<PAGE>
6,000,000 Shares
[TULARIK INC. LOGO]
Common Stock
------------
PROSPECTUS
, 2000
------------
Lehman Brothers
J.P. Morgan & Co.
Chase H & Q
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
<PAGE>
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us, in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 151,248
NASD filing fee................................................... 30,500
Nasdaq National Market listing fee................................ 25,000
Blue Sky Fees and Expenses........................................ 10,000
Transfer Agent and Registrar fees................................. 10,000
Accounting fees and expenses...................................... 100,000
Legal fees and expenses........................................... 300,000
Printing and engraving costs...................................... 200,000
Miscellaneous expenses............................................ 98,252
---------
Total........................................................... $925,000
=========
</TABLE>
Item 14. Indemnification of Directors and Officers
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of duty of loyalty to us or to our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that
we must indemnify our directors and executive officers and may indemnify our
other officers and employees and agents to the fullest extent permitted by
Delaware law. We believe that indemnification under our amended and restated
certificate of incorporation covers negligence and gross negligence on the part
of indemnified parties.
We have entered into indemnification agreements with each of our directors
and certain officers. These agreements, among other things, require us to
indemnify each director and officer for certain expenses including attorneys'
fees, judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Tularik,
arising out of the person's services as our director or officer, any subsidiary
of ours or any other company or enterprise to which the person provides
services at our request.
The underwriting agreement (Exhibit 1.1) will provide for indemnification by
the underwriters of Tularik, our directors, our officers who sign the
registration statement, and our controlling persons for some liabilities,
including liabilities arising under the Securities Act.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1997, Tularik has sold and issued unregistered securities to
a limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and Tularik believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. We believe that all recipients had adequate access
to information about Tularik, through their relationships with Tularik.
From January 1, 1997 through December 31, 1999, Tularik sold and issued the
following unregistered securities:
(1) From January 1, 1997 through December 31, 1999, we granted incentive
stock options and nonstatutory stock options to purchase an aggregate of
5,179,750 shares of Tularik's common stock at exercise prices ranging from
$1.00 to $18.50 per share to employees, directors and consultants under the
1991 Plan, 1997 Plan and 1997 Non-Employee Directors' Stock Option Plan and
issued an aggregate of 3,152,236 shares upon the exercise of these and
previously granted options. Options to purchase 384,650 shares of common stock
have been canceled, and 756,073 of these options have lapsed without being
exercised.
(2) In October 1997, we issued an aggregate of 1,620,004 shares of Series H
preferred stock to 22 former stockholders of Amplicon Corp. in exchange for
outstanding shares of Amplicon stock and issued 22 warrants to purchase 245,456
shares of Series H preferred stock at an exercise price of $13.00 per share.
These shares were issued as consideration for the acquisition of Amplicon.
(3) In October 1997, we issued a warrant to purchase 50,000 shares of Series
H preferred stock to Broadview Limited at an exercise price of $10.00 per
share.
(4) In November 1997, we sold an aggregate of 285,634 shares of Series G
preferred stock to three purchasers at a purchase price of $10.25 per share.
(5) In December 1997, we sold an aggregate of 5,002,000 shares of Series G
preferred stock to two purchasers at a purchase price of $10.25 per share.
(6) In March 1998, we issued an aggregate of 37,260 shares of Series C
preferred stock to Frazier & Company L.P. upon cashless exercise of a warrant
to purchase shares of Series C preferred stock.
(7) In June 1999, we issued an aggregate of 49,654 shares of Series B
preferred stock to Comdisco, Inc. upon cashless exercise of a warrant to
purchase shares of Series B preferred stock.
(8) In August 1999, we issued three warrants to purchase an aggregate of
139,570 shares of Series H preferred stock at an exercise price of $13.00 per
share. Warrants to purchase 125,613 shares were issued to Slough Estates USA
Inc., warrants to purchase 11,166 shares were issued to Bristow Investments,
L.P. and warrants to purchase 2,791 shares were issued to Laurence Shushan and
Magdalena Shushan, Trustees of the Laurence and Magdalena Shushan Family Trust.
(9) From November 1997 to December 31, 1999, we issued an aggregate of 9,855
shares of Series H preferred stock to six former stockholders of Amplicon Corp.
upon the exercise of outstanding Amplicon options at exercise prices ranging
from $0.70 to $0.95 per share. In connection with the issuance of these 9,855
shares of Series H preferred stock, we issued seven warrants to purchase an
aggregate of 1,493 shares of Series H preferred stock at an exercise price of
$13.00 per share.
II-2
<PAGE>
Item 16. (a)Exhibits and Financial Statement Schedules
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
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.
5.1** Opinion of Cooley Godward LLP.
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*+ Research, Collaboration and License/Development Agreement between
Registrant and Taisho
Pharmaceutical Co., Ltd., dated March 20, 1996, as amended on January
1, 1998 and January 1, 1999.
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.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
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.
23.2** Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1*** Power of Attorney.
27.1*** Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment has been granted as to specific portions.
** Filed herewith.
*** Previously filed.
+ 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.
(b)Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
The registrant hereby undertakes that:
(1) or purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) or the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment #1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of South San Francisco, State of California, on the 1st day of March, 2000.
TULARIK INC.
By: /s/ Corinne H. Lyle
__________________________________
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment #1 to Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer March 1, 2000
______________________________________ and Director (Principal
David V. Goeddel Executive Officer)
/s/ Corinne H. Lyle Chief Financial Officer March 1, 2000
______________________________________ (Principal Finance and
Corinne H. Lyle Accounting Officer)
* Director March 1, 2000
______________________________________
A. Grant Heidrich, III
______________________________________ Director
Mark J. Levin
* Director March 1, 2000
______________________________________
Paul A. Marks
______________________________________ Director
Edward R. McCracken
* Director March 1, 2000
______________________________________
Steven L. McKnight
* Director March 1, 2000
______________________________________
Peter J. Sjostrand
</TABLE>
<TABLE>
<S> <C> <C>
/s/ Corinne H. Lyle
*By: _________________________________
Corinne H. Lyle
attorney-in-fact
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
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.
5.1** Opinion of Cooley Godward LLP.
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*+ Research, Collaboration and License/Development Agreement between
Registrant and Taisho Pharmaceutical Co., Ltd., dated March 20, 1996,
as amended on January 1, 1998 and January 1, 1999.
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.
10.18+ Sublease between Registrant and AGY Therapeutics, Inc., dated January
25, 1999.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
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.
23.2** Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1*** Power of Attorney.
27.1*** Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment has been granted as to specific portions.
** Filed herewith.
*** Previously filed.
+ 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.
<PAGE>
EXHIBIT 1.1
FORM OF UNDERWRITING AGREEMENT
6,000,000 Shares
TULARIK INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
March __, 2000
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
Chase Securities Inc.
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Tularik Inc., a Delaware corporation (the "Company"), and certain
stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders"), propose to sell an aggregate of 6,000,000 shares (the "Firm
Stock") of the Company's Common Stock, par value $0.001 per share (the "Common
Stock"). Of the 6,000,000 shares of the Firm Stock, 4,500,000 are being sold by
the Company and 1,500,000 by the Selling Stockholders. In addition, the Company
and the Selling Stockholders propose to grant to the Underwriters named in
Schedule 1 hereto (the "Underwriters") an option to purchase up to an aggregate
of 900,000 additional shares of the Common Stock on the terms and for the
purposes set forth in Section 3 (the "Option Stock"). The Firm Stock and the
Option Stock, if purchased, are hereinafter collectively called the "Stock."
This is to confirm the agreement concerning the purchase of the Stock from the
Company and the Selling Stockholders by the Underwriters.
1. Representations, Warranties and Agreements of the Company. The Company
represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the Stock
has (i) been prepared by the Company in conformity with the requirements of
the United States Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations (the "Rules and Regulations") of the
United States Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the Securities Act
and (iii) become effective under the Securities
<PAGE>
Act. Copies of such registration statement have been delivered by the
Company to you as the representatives (the "Representatives") of the
Underwriters. As used in this Agreement, "Effective Time" means the date
and the time as of which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared effective by the
Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became effective
under the Securities Act and any prospectus filed with the Commission by
the Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 5 hereof and deemed to be a part of the registration statement as
of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules
and Regulations, and including any registration statement registering
additional shares of Common Stock filed with the Commission pursuant to
Rule 462(b) of the Rules and Regulations; and "Prospectus" means such final
prospectus, as first filed with the Commission pursuant to paragraph (1) or
(4) of Rule 424(b) of the Rules and Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do not
and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus or any further amendments or supplements to the Registration
Statement or Prospectus, in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(c) The Company and Amplicon Corp., a Delaware corporation (the
"Subsidiary"), have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are
in good standing as foreign corporations in each jurisdiction in which
their respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, except where the failure
to be so qualified would not have a material adverse effect on the
business, financial condition or results of operations of the Company, and
have all power and
2
<PAGE>
authority necessary to own or hold their respective properties and to
conduct business as described in the Registration Statement and Prospectus;
and the Subsidiary of the Company is not a "significant subsidiary," as
such term is defined in Rule 405 of the Rules and Regulations. The Company
has no subsidiaries (as defined in Section 17), other than the Subsidiary.
(d) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or
claims.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein,
will be duly and validly issued, fully paid and non-assessable; and the
Stock will conform to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or the Subsidiary is a party or by which the Company or
the Subsidiary is bound or to which any of the property or assets of the
Company or the Subsidiary is subject, nor will such actions result in any
violation of the provisions of the charter or bylaws of the Company or the
Subsidiary or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or the
Subsidiary or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and applicable state securities laws in connection with
the purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the execution,
delivery and performance of this by the Company and the consummation of the
transactions contemplated hereby.
3
<PAGE>
(h) There are no contracts, agreements or understandings between
the Company and any person granting such person the right (other than
rights which have been waived or satisfied), with respect to any securities
of the Company owned by such person, to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement. Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to register or include
securities pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to Rule
144A under, or Regulations D or S of, the Securities Act, other than shares
issued pursuant to employee benefit plans, qualified stock options plans or
other employee compensation plans or pursuant to outstanding options,
rights or warrants.
(j) Neither the Company nor the Subsidiary has sustained, since
the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since
such date, there has not been any material change in the capital stock or
long-term debt of the Company and the Subsidiary, taken as a whole, or any
material adverse change in, or any development involving a prospective
material adverse change in the business, financial condition or results of
operations of the Company and the Subsidiary, taken as a whole, otherwise
than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
(l) Ernst & Young LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who
have delivered the initial letter referred to in Section 9(h) hereof, are
independent public accountants as required by the Securities Act and the
Rules and Regulations.
(m) The Company and the Subsidiary have good and marketable title
to all personal property owned by them, free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
materially interfere with the use made
4
<PAGE>
and proposed to be made of such property by the Company and the Subsidiary;
and all real property and buildings held under lease by the Company and the
Subsidiary are held by them under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the Company
and the Subsidiary.
(n) The Company and the Subsidiary carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar businesses
in similar industries.
(o) The Company owns or possesses adequate licenses or other
rights to use all patents, patent applications, inventions, trademarks,
trade names, applications for registration of trademarks, service marks,
service mark applications, copyrights, know-how, manufacturing processes,
formulae, trade secrets, licenses and rights in any thereof and any other
intangible property and assets (herein called the "Proprietary Rights")
necessary to conduct its business in the manner described in the
Prospectus, except where the failure to so own or possess such Proprietary
Rights would not, singularly or in the aggregate, have a material adverse
effect on the financial position, stockholders' equity, results of
operations, business or prospects of the Company. The Company takes
security measures to provide adequate trade secret protection in its non-
patented technology. Except as disclosed in the Prospectus, the Company has
not received any notice of infringement or conflict with asserted rights of
others with respect to any Proprietary Rights which could result in any
material adverse effect on the Company, and except as specifically
identified and described in the Prospectus, no action, suit, arbitration,
or legal, administrative or other proceeding, or investigation is pending,
or, to the knowledge of the Company, threatened, which involves any
Proprietary Rights. Except as disclosed in the Prospectus, the Proprietary
Rights of the Company referred to in the Prospectus do not, to the
knowledge of the Company, infringe or conflict with any right or valid and
enforceable patent of any third party, or any discovery, invention, product
or process which is the subject of a patent application filed by any third
party, known to the Company which could have a material adverse effect on
the Company. The Company is not subject to any judgment, order, writ,
injunction or decree of any court or any Federal, state, local, foreign or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or any arbitrator, nor, except as
described in the Prospectus, has it entered into or is a party to any
contract which restricts or impairs the use of any such Proprietary Rights
in a manner which would have a material adverse effect on the use of any of
the Proprietary Rights. The Company has complied, in all material respects,
with its respective contractual obligations relating to the protection of
the Proprietary Rights used pursuant to licenses. To the knowledge of the
Company, no person is infringing on or violating the Proprietary Rights
owned or used by the Company.
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(p) There are no legal or governmental proceedings pending to
which the Company or the Subsidiary is a party or of which any property or
assets of the Company or the Subsidiary is the subject which, if determined
adversely to the Company or the Subsidiary, are reasonably likely to have a
material adverse effect on the financial position, stockholders' equity,
results of operations, business or prospects of the Company and the
Subsidiary, taken as a whole, and to the knowledge of the Company, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists
or, to the knowledge of the Company, is imminent which would reasonably be
expected to have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business or
prospects of the Company and the Subsidiary, taken as a whole.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or the Subsidiary which has had (nor does the
Company have any knowledge of any tax
6
<PAGE>
deficiency which, if determined adversely to the Company or the Subsidiary,
would reasonably be expected to have) a material adverse effect on the
financial position, stockholders' equity, results of operations, business
or prospects of the Company and the Subsidiary, taken as a whole.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in
the ordinary course of business, (iii) entered into any transaction not in
the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(x) Neither the Company nor the Subsidiary (i) is in violation of
its charter or bylaws, (ii) is in default in any material respect, and no
event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which it
is a party or by which it is bound or to which any of its properties or
assets is subject or (iii) is in violation in any material respect of any
law, ordinance, governmental rule, regulation or court decree to which it
or its property or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to
the conduct of its business.
(y) Neither the Company nor the Subsidiary, nor any director or
officer associated with or acting on behalf of the Company or the
Subsidiary, has used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment to any foreign or
domestic government official or employee from corporate funds; violated or
is in violation of any provision of the Foreign Corrupt Practices Act of
1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or the
Subsidiary (or, to
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<PAGE>
the knowledge of the Company, any of their predecessors in interest) at,
upon or from any of the property now or previously owned or leased by the
Company or the Subsidiary in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial
action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial
actions, a material adverse effect on the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and the Subsidiary, taken as a whole; there has been no material
spill, discharge, leak, emission, injection, escape, dumping or release of
any kind onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes, hazardous
wastes or hazardous substances due to or caused by the Company or the
Subsidiary or with respect to which the Company or the Subsidiary have
knowledge, except for any such spill, discharge, leak, emission, injection,
escape, dumping or release which would not have or would not be reasonably
likely to have, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings and releases, a
material adverse effect on the general affairs, management, financial
position or results of operations of the Company and the Subsidiary, taken
as a whole; and the terms "hazardous wastes," "toxic wastes," "hazardous
substances" and "medical wastes" shall have the meanings specified in any
applicable local, state and federal laws or regulations with respect to
environmental protection.
(aa) Neither the Company nor the Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940, as amended, and the rules and regulations of the Commission
thereunder.
2. Representations, Warranties and Agreements of the Selling Stockholders.
Each Selling Stockholder severally represents, warrants and agrees that:
(a) The Selling Stockholder has, and immediately prior to the
First Delivery Date (as defined in Section 5 hereof) the Selling
Stockholder will have, good and valid title to the shares of Stock to be
sold by the Selling Stockholder hereunder on such date, free and clear of
all liens, encumbrances, equities or claims; and upon delivery of such
shares and payment therefor pursuant hereto, good and valid title to such
shares, free and clear of all liens, encumbrances, equities or claims, will
pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody
Agreements") with Norwest Bank Minnesota N.A., as custodian (the
"Custodian"), for delivery under this Agreement, certificates in negotiable
form (with signature guaranteed by a commercial bank or trust company
having an office or correspondent in the United
8
<PAGE>
States or a member firm of the New York or American Stock Exchanges)
representing the shares of Stock to be sold by the Selling Stockholder
hereunder.
(c) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney" and, together with
all other similar agreements executed by the other Selling Stockholders,
the "Powers of Attorney") appointing the Custodian and one or more other
persons, as attorneys-in-fact, with full power of substitution, and with
full authority (exercisable by any one or more of them) to execute and
deliver this Agreement and to take such other action as may be necessary or
desirable to carry out the provisions hereof on behalf of the Selling
Stockholder.
(d) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement;
the execution, delivery and performance of this Agreement, the Power of
Attorney and the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, nor will such actions result
in any violation of the provisions of the charter or by-laws of the Selling
Stockholder, the articles of partnership of the Selling Stockholder or the
deed of trust of the Selling Stockholder, as applicable, or any statute or
any order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Selling Stockholder or the property or assets
of the Selling Stockholder; and, except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange Act
and applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby.
(e) All information furnished by or on behalf of the Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus, including, without limitation, information concerning the
shares of Common Stock of the Company held by the Selling Stockholder, as
set forth in the Prospectus under the caption "Principal and Selling
Stockholders," is true and correct in all material respects and does not
contain any untrue statement of material fact or omit to state any material
fact necessary to make such information not misleading. The Selling
Stockholder has no reason to believe that the Registration Statement and
the
9
<PAGE>
Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will, when they become effective or are filed
with the Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(f) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 4,500,000 shares of
the Firm Stock and each Selling Stockholder hereby agrees to sell the number of
shares of the Firm Stock set opposite its name in Schedule 2 hereto, severally
and not jointly, to the several Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. Each
Underwriter shall be obligated to purchase from the Company, and from each
Selling Stockholder, that number of shares of the Firm Stock which represents
the same proportion of the number of shares of the Firm Stock to be sold by the
Company, and by each Selling Stockholder, as the number of shares of the Firm
Stock set forth opposite the name of such Underwriter in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to purchase
up to 675,000 shares of Option Stock and the Selling Stockholders severally, and
not jointly, grant to the Underwriters an option to purchase up to 225,000
shares of Option Stock. The Option Stock to be sold by each such Selling
Stockholder hereunder shall be equal to the number of shares of Option Stock set
forth opposite each such Selling Stockholder's name in Schedule 2 hereto. Such
option is granted for the purpose of covering over-allotments in the sale of
Firm Stock and is exercisable as provided in Section 5 hereof. Shares of Option
Stock shall be purchased severally for the account of the Underwriters in
proportion to the number of shares of Firm Stock set opposite the name of such
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no Underwriter
10
<PAGE>
shall be obligated to purchase Option Stock other than in 100 share amounts. The
price of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Cooley Godward LLP, Five Palo
Alto Square, 3000 El Camino Real, Palo Alto, California 94306 at 10:00 A.M., New
York City time, on the [fourth] full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company. This date and time are sometimes
referred to as the "First Delivery Date." On the First Delivery Date, the
Company and the Selling Stockholders shall deliver or cause to be delivered
certificates representing the Firm Stock to the Representatives for the account
of each Underwriter against payment to or upon the order of the Company and the
Selling Stockholders of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall
be registered in such names and in such denominations as the Representatives
shall request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company and the Selling Stockholders shall
make the certificates representing the Firm Stock available for inspection by
the Representatives in New York, New York, not later than 2:00 P.M., New York
City time, on the business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company and the Selling Stockholders by the
Representatives. If the option is exercised in part, the Underwriters shall
purchase on a pro rata basis from the Company and each Selling Stockholder that
number of shares of Option Stock offered by the Company and each Selling
Stockholder, as the case may be, pursuant to Section 3 hereof. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes
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<PAGE>
referred to as a "Second Delivery Date" and the First Delivery Date and any
Second Delivery Date are sometimes each referred to as a "Delivery Date."
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company and each
Selling Stockholder shall deliver or cause to be delivered the certificates
representing the Option Stock to the Representatives for the account of each
Underwriter against payment of the purchase price by wire transfer in
immediately available funds to or upon the order of the Company, and in the case
of the Selling Stockholders, to a bank account designated by the Custodian
pursuant to the Power of Attorney and Custody Agreement. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Representatives shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company and each Selling Stockholder
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than the Commission's close of
business on the second business day following the execution and
delivery of this Agreement or, if applicable, such earlier time as may
be required by Rule 430A(a)(3) under the Securities Act; to make no
further amendment or any supplement to the Registration Statement or
to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish the Representatives
with copies thereof; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration
Statement as originally filed
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<PAGE>
with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto (in
each case including exhibits other than this Agreement and the
computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus;
and, if the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock or
any other securities relating thereto and if at such time any event
shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to amend
or supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to file
such amended or supplemented prospectus and to prepare and furnish
without charge to each Underwriter and to any dealer in securities as
many copies as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing;
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to deliver
to the Representatives an earnings statement of the Company and the
Subsidiary (which need not be audited) complying with Section 11(a) of
the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by
the Company to its stockholders and all public reports and all reports
and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange
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<PAGE>
or to the Commission pursuant to the Exchange Act or any rule or
regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock; provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(i) For a period of 90 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock (other
than the Stock and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding
options, warrants or rights), or sell or grant options, rights or
warrants with respect to any shares of Common Stock or securities
convertible into or exchangeable for Common Stock (other than the
grant of options pursuant to option plans existing on the date
hereof), or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether
any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman
Brothers Inc.;
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance and
evidence of satisfactory distribution, prior to the First Delivery
Date; and
(k) To take such steps as shall be necessary to ensure that
neither the Company nor the Subsidiary shall become an "investment
company" within the meaning of such term under the Investment Company
Act of 1940, as amended, and the rules and regulations of the
Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) That the Stock to be sold by the Selling Stockholder
hereunder, which is represented by the certificates held in custody
for the Selling Stockholder, is subject to the interest of the
Underwriters and the other Selling Stockholders thereunder,
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<PAGE>
that the arrangements made by the Selling Stockholder for such custody
are to that extent irrevocable, and that the obligations of the
Selling Stockholder hereunder shall not be terminated by any act of
the Selling Stockholder, by operation of law, by the death or
incapacity of any individual Selling Stockholder or, in the case of a
trust, by the death or incapacity of any executor or trustee or the
termination of such trust, or the occurrence of any other event.
(b) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States Treasury
Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States
person.)
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement and
any other related documents in connection with the offering, purchase, sale and
delivery of the Stock; (e) the costs of delivering and distributing the Custody
Agreements and the Powers of Attorney; (f) the filing fees incident to securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Stock; (g) any applicable listing or other fees; (h)
the fees and expenses of qualifying the Stock under the securities laws of the
several jurisdictions as provided in Section 6(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the Underwriters); and (i) all other costs and expenses incident to
the performance of the obligations of the Company and the Selling Stockholders
under this Agreement; provided that, except as provided in this Section 8 and in
Section 13, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters, and the Selling Stockholders shall pay the fees and expenses
of their counsel (other than as paid by the Company pursuant to existing
contractual arrangements), the Custodian (and any other attorney-in-fact), and
any transfer taxes payable in connection with their respective sales of Stock to
the Underwriters.
9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholders contained herein, to the performance by the Company
and the Selling Stockholders of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding
15
<PAGE>
for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus
or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto
contains any untrue statement of a fact which, in the opinion of
Latham & Watkins, counsel for the Underwriters, is material or omits
to state any fact which, in the opinion of such counsel, is material
and is required to be stated therein or is necessary to make the
statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration
Statement and the Prospectus, and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for the
Underwriters, and the Company and the Selling Stockholders shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Cooley Godward LLP shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
(i) The Company and the Subsidiary have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation, and to our knowledge, are duly qualified to do
business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of
property or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified
would not have a material adverse effect on the business,
financial condition or results of operations of the Company, and
have all corporate power and authority necessary to own or hold
their respective properties and conduct the businesses in which
they are engaged; and to such counsel's knowledge, other than the
Subsidiary, the Company has no subsidiaries;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the
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Prospectus; and all of the issued shares of capital stock of the
Subsidiary have been duly and validly authorized and issued and
are fully paid, non-assessable and are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting
or transfer of, any shares of the Stock pursuant to the Company's
Amended and Restated Certificate of Incorporation (the
"Charter"), the Company's bylaws, any agreement filed as an
exhibit to the Registration Statement and Prospectus or, to such
counsel's knowledge, any other agreement to which the Company is
a party;
(iv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or overtly threatened to which
the Company or the Subsidiary is a party or of which any property
or assets of the Company or the Subsidiary is the subject which
are required to be described in the Prospectus by the Securities
Act or the Rules and Regulations;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations as of the date specified in such opinion and, to such
counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement has been issued and, to such
counsel's knowledge, no proceeding for that purpose is pending or
threatened by the Commission;
(vi) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements,
financial data and related schedules therein, as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and
the Rules and Regulations;
(vii) To such counsel's knowledge, there are no contracts
or other documents that are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by
the Securities Act or by the Rules and Regulations that have not
been described or filed as exhibits to the Registration Statement
or incorporated therein by reference as permitted by the Rules
and Regulations;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
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(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company with all of the provisions of this Agreement and
the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, or other
agreement material to the Company's business as described in the
Registration Statement and Prospectus, or other instrument known
to such counsel to which the Company or the Subsidiary is a party
or by which the Company or the Subsidiary is bound or to which
any of the property or assets of the Company or the Subsidiary is
subject, nor will such actions result in any violation of the
provisions of the charter or bylaws of the Company or the
Subsidiary or any statute or any order, rule or regulation known
to such counsel of any court or governmental agency or body
having jurisdiction over the Company or the Subsidiary or any of
their properties or assets (except the securities or Blue Sky
laws of the various U.S. states and the rules of the NASD
governing underwriting compensation, as to which we express no
opinion); and, except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act, applicable state securities laws and the rules of
the NASD governing underwriting compensation, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby;
(x) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940, as
amended and the rules and regulations of the Commission
thereunder; and
(xi) To such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right (other than rights which have been
waived or satisfied) to require the Company to include securities
in the securities registered pursuant to the Registration
Statement. To such counsel's knowledge, except as described in
the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to register or include
securities pursuant to any other registration statement filed by
the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the federal laws of the United States
of America, the laws of the State of California and the General
Corporation Law of the State of Delaware and that such counsel is not
admitted in the State of Delaware. Such counsel shall
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also have furnished to the Representatives a written statement,
addressed to the Underwriters and dated such Delivery Date, in form
and substance satisfactory to the Representatives, to the effect that:
"In connection with the preparation of the Registration Statement, we
have participated in conferences with officers and other
representatives of the Company, representatives of the independent
public or certified public accountants for the Company and with
representatives of the Underwriters. We have not independently
verified and accordingly are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
(other than the statements made in the Prospectus under the captions
"Description of Capital Stock" and "Shares Eligible for Future Sale,"
insofar as such statements relate to the Stock and concern legal
matters), and any supplements or amendments thereto. On the basis of
the foregoing and in our capacity as counsel to the Company, nothing
has come to our attention which has caused us to believe that either
the Registration Statement or any amendments thereto (except as to the
financial statements and schedules, and other financial data and
statistical data derived therefrom), at the time the Registration
Statement or such amendments became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (except as to the
financial statements and schedules, and other financial data and
statistical data derived therefrom), as of its date or as of the date
hereof contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in light of the circumstances in which they were made, not
misleading."
(e) The respective counsel for each of the Selling Stockholders
shall each have furnished to the Representatives its written opinion,
as counsel to each of the Selling Stockholders for whom it is acting
as counsel, addressed to the Underwriters and dated the First Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
(i) The Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and
the Custody Agreement; to its knowledge, the execution, delivery
and performance of this Agreement, the Power of Attorney and the
Custody Agreement by or on behalf of the Selling Stockholder and
the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any statute, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument
known to such counsel to which the Selling Stockholder is a party
or by which the Selling Stockholder is bound or to which any of
the property or assets of the Selling Stockholder is subject, nor
will such actions result in
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<PAGE>
any violation of the provisions of either the charter or by-laws
of the Selling Stockholder, the articles of partnership of the
Selling Stockholder or the deed of trust of the Selling
Stockholder, as applicable, or any statute or any order, rule or
regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Selling Stockholder
or the property or assets of the Selling Stockholder, except for
breaches or violations which would not have a material adverse
effect on the Selling Stockholder; and, to the best of our
knowledge, except for the registration of the Selling
Stockholder's Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may
be required under the Exchange Act and applicable state
securities laws in connection with the purchase and distribution
of the Selling Stockholder's Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by the
Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby;
(ii) This Agreement has been duly authorized, executed
and delivered by or on behalf of the Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement have
been duly authorized, executed and delivered by or on behalf of
the Selling Stockholder and constitute valid and binding
agreements of the Selling Stockholder, enforceable in accordance
with their respective terms, except as rights to indemnity under
Section 10 of this Agreement may be limited by applicable laws
and except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium
or other similar laws affecting creditors' rights, and subject to
general equity principles and to limitations on availability of
equitable relief, including specific performance; and
(iv) Upon delivery of and payment for the shares of Stock
to be sold by the Selling Stockholder as provided in this
Agreement and upon registration of such shares of Stock in the
names of the Underwriters (or their nominees) in the stock
records of the Company, good and valid title to the shares of
Stock to be sold by each Selling Stockholder under this
Agreement, free and clear of all liens, encumbrances, equities or
claims, has been transferred to each of the several Underwriters,
assuming for the purpose of this opinion that the Underwriters
are purchasing such shares of Stock in good faith and without
notice of any defect in the title of any Selling Stockholders, or
any adverse claim, to the shares of Stock being purchased from
such Selling Stockholder.
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<PAGE>
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United
States of America, the laws of the State of California and the General
Corporation Law of the State of Delaware and (ii) in rendering the
opinions in Section 9(e) above, rely upon a certificate of the Selling
Stockholder in respect of matters of fact underlying the above
opinions, provided that such counsel shall furnish copies thereof to
the Representatives and state that it believes that both the
Underwriters and it are justified in relying upon such certificate.
(f) (i) Townsend and Townsend and Crew LLP shall have furnished
to the Representatives a written opinion, as intellectual property
counsel to the Company, addressed to the Underwriters and dated such
Delivery Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that it serves as intellectual property
counsel to the Company with respect to the Proprietary Rights, and
that:
Such counsel has carefully read and analyzed the following
portions of the Registration Statement and Prospectus relating to
patents or patent rights: the disclosure appearing under the caption
"Prospectus Summary - Tularik," under the caption "Risk Factors--
Because it is difficult and costly to protect our proprietary rights,
we cannot ensure their protection," under the caption "Patents and
Proprietary Rights," under the caption "Business - Product
Development," under the caption "Business - Corporate Collaborations"
and under the caption "Business - Patents and Proprietary Rights,"
(the "Patent Information"). Such counsel has considered the
statements contained in the Patent Information and, without
independent verification of the accuracy, completeness or fairness of
such statements, nothing has come to such counsel's attention, as of
the date of the Prospectus and the date of such opinion, that leads
such counsel to believe that the Patent Information contains an untrue
statement of material fact or omits to state a material fact necessary
to make the statements therein not misleading, in light of the
circumstances in which they are made. As of the date of the
Prospectus and the date of such opinion, such counsel has no reason to
believe that the Patent Information is not in all material respects a
fair and accurate summary of the legal matters, documents and
proceedings relating thereto.
(1) Attached as Schedule A to such opinion is a list of the
Company's U.S. patents and pending U.S. patent applications (the
"U.S. Patent Rights") which, to the best of such counsel's
knowledge, are either owned or co-owned by the Company, as
indicated on such Schedule A. Where the Company is listed on
Schedule A to such opinion as the owner or co-owner of any U.S.
Patent Right, either (a) an assignment from the inventors to the
Company has been recorded or is being recorded in the United
States Patent and Trademark Office, or (b) an assignment from the
inventors to an intervening assignee and then to the Company has
been recorded or is being recorded in the United States Patent
and Trademark
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<PAGE>
Office. To the best of such counsel's knowledge, there are no
claims to any ownership interests or liens on any of the U.S.
Patent Rights by any party other than the Company or the other
co-owners.
(2) Attached as Schedule B to such opinion is a list of the
Company's non-U.S. patents and pending non-U.S. patent
applications (the "Non-U.S. Patent Rights") which, to the best of
such counsel's knowledge, are either owned or co-owned by the
Company, as indicated on such Schedule B. Where the Company is
listed on Schedule B to such opinion as the owner or co-owner of
any Non-U.S. Patent Right, the named inventors of the Non-U.S.
Patent Rights have either (a) executed an assignment to the
Company or the other co-owner or (b) are under an obligation to
execute an assignment to the Company or the other co-owner. To
the best of such counsel's knowledge, there are no claims to any
ownership interests or liens on any of the Non-U.S. Patent Rights
by any party other than the Company or the other co-owners.
(3) To the best of such counsel's knowledge, for each of the
United States patents and patent applications reflected on
Schedule A to such opinion, the Company has disclosed or intends
to disclose to the United States Patent and Trademark Office all
information known and believed to be material to patentability
under the extant 37 C.F.R. (S)1.56.
(4) Such counsel has reviewed portions of certain patent
estates, as set forth in such opinion, and is unaware of any
facts that would lead it to believe that the Company lacks any
patent rights or licenses under such patent estates necessary to
conduct the current or prospective business of the Company as
specified in the Registration Statement and Prospectus.
(5) Except as described in the Prospectus under the caption
"Patent and Proprietary Rights," to the best of such counsel's
knowledge, the Company has not received any claim of infringement
of any patents held by others, and to the best of such counsel's
knowledge, there is no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing a
patent.
(6) To the best of such counsel's knowledge, there are no
pending or threatened legal or governmental proceedings relating
to the U.S. Patent Rights, other than proceedings before the
United States Patent and Trademark Office that are carried out
during the course of prosecution.
(ii) Science & Technology Law Group shall have furnished to the
Representatives a written opinion, as intellectual property counsel to
the Company, addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that it
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<PAGE>
serves as intellectual property counsel to the Company with respect to
the Proprietary Rights, and that:
Such counsel has carefully read and analyzed the following
portions of the Registration Statement and Prospectus relating to
patents or patent rights: the disclosure appearing under the caption
"Prospectus Summary - Tularik," under the caption "Risk Factors--
Because it is difficult and costly to protect our proprietary rights,
we cannot ensure their protection," under the caption "Patents and
Proprietary Rights," under the caption "Business - Product
Development," under the caption "Business - Corporate Collaborations"
and under the caption "Business - Patents and Proprietary Rights,"
(the "Patent Information"). Such counsel has considered the
statements contained in the Patent Information and, without
independent verification of the accuracy, completeness or fairness of
such statements, nothing has come to such counsel's attention, as of
the date of the Prospectus and the date of such opinion, that leads
such counsel to believe that the Patent Information contains an untrue
statement of material fact or omits to state a material fact necessary
to make the statements therein not misleading, in light of the
circumstances in which they are made. As of the date of the
Prospectus and the date of such opinion, such counsel has no reason to
believe that the Patent Information is not in all material respects a
fair and accurate summary of the legal matters, documents and
proceedings relating thereto.
(1) Attached as Schedule A to such opinion is a list of the
Company's U.S. patents and pending U.S. patent applications (the
"U.S. Patent Rights") which, to the best of such counsel's
knowledge, are either owned or co-owned by the Company, as
indicated on such Schedule A. Where the Company is listed on
Schedule A to such opinion as the owner or co-owner of any U.S.
Patent Right, either (a) an assignment from the inventors to the
Company has been recorded or is being recorded in the United
States Patent and Trademark Office, or (b) an assignment from the
inventors to an intervening assignee and then to the Company has
been recorded or is being recorded in the United States Patent
and Trademark Office. To the best of such counsel's knowledge,
there are no claims to any ownership interests or liens on any of
the U.S. Patent Rights by any party other than the Company or the
other co-owners.
(2) Listed on Schedule A to such opinion is also a list of
the Company's non-U.S. patents and pending non-U.S. patent
applications (the "Non-U.S. Patent Rights") which, to the best of
such counsel's knowledge, are either owned or co-owned by the
Company, as indicated on such Schedule B. Where the Company is
listed on Schedule A to such opinion as the owner or co-owner of
any Non-U.S. Patent Right, the named inventors of the Non-U.S.
Patent Rights have either (a) executed an assignment to the
Company or the other co-owner, or (b) are under an obligation to
execute an assignment to the Company or the other co-
23
<PAGE>
owner. To the best of such counsel's knowledge, there are no
claims to any ownership interests or liens on any of the Non-U.S.
Patent Rights by any party other than the Company or the other
co-owners.
(3) To the best of such counsel's knowledge, for each of the
United States patents and patent applications reflected on
Schedule A to such opinion, the Company has disclosed or intends
to disclose to the United States Patent and Trademark Office all
information known and believed to be material to patentability
under the extant 37 C.F.R. (S)1.56.
(4) Such counsel has reviewed portions of certain patent
estates, as set forth in such opinion, and is unaware of any
facts that would lead it to believe that the Company lacks any
patent rights or licenses under such patent estates necessary to
conduct the current or prospective business of the Company as
specified in the Registration Statement and Prospectus.
(5) Except as described in the Prospectus under the caption
"Patent and Proprietary Rights," to the best of such counsel's
knowledge, the Company has not received any claim of infringement
of any patents held by others, and to the best of such counsel's
knowledge, there is no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing a
patent.
(6) To the best of such counsel's knowledge, there are no
pending or threatened legal or governmental proceedings relating
to the U.S. Patent Rights, other than proceedings before the
United States Patent and Trademark Office that are carried out
during the course of prosecution.
(g) The Representatives shall have received from Latham &
Watkins, counsel for the Underwriters, such opinion or opinions, dated
such Delivery Date, with respect to the issuance and sale of the
Stock, the Registration Statement, the Prospectus and other related
matters as the Representatives may reasonably require, and the Company
shall have furnished to such counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(h) At the time of execution of this Agreement, the
Representatives shall have received from Ernst & Young LLP a letter,
in form and substance reasonably satisfactory to the Representatives,
addressed to the Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five days prior
to the date hereof), the conclusions and findings of such
24
<PAGE>
firm with respect to the financial information and other matters
ordinarily covered by accountants' "comfort letters" to Underwriters
in connection with registered public offerings.
(i) With respect to the letter of Ernst & Young LLP referred to
in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial
letter"), the Company shall have furnished to the Representatives a
letter (the "bring-down letter") of such accountants, addressed to the
Underwriters and dated such Delivery Date (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down letter
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date of the bring-down letter), the conclusions and findings of
such firm with respect to the financial information and other matters
covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(j) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its Chief Financial Officer
stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 9(a) and 9(l)
have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and Prospectus did not
include any untrue statement of a material fact and did not omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(k) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the Delivery Date a certificate,
dated the Delivery Date, signed by, or on behalf of, the Selling
Stockholder (or the Custodian or one or more attorneys-in-fact)
stating that the representations, warranties and agreements of the
Selling Stockholder contained herein are true and correct as of the
Delivery Date
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<PAGE>
and that the Selling Stockholder has complied with all agreements
contained herein to be performed by the Selling Stockholder at or
prior to the Delivery Date.
(l) (i) Neither the Company nor the Subsidiary shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus or (ii) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or
the Subsidiary or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and the Subsidiary, taken as a whole, otherwise than as
set forth or contemplated in the Prospectus, the effect of which, in
any such case described in clause (i) or (ii), is, in the judgment of
the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(m) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any
other regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities
involving the United States or there shall have been a declaration of
a national emergency or war by the United States or (iv) there shall
have occurred such a material adverse change in general economic,
political or financial conditions (or the effect of international
conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of a majority in interest of the
several Underwriters, impracticable or inadvisable to proceed with the
public offering or delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(n) The National Market System shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution.
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<PAGE>
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein, which
information consists solely of the information specified in Section 10(h). The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
(b) The Selling Stockholders, severally and not jointly, shall
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited to, any
loss, claim, damage, liability or action relating to purchases and sales of
Stock), to which that Underwriter, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state in any Preliminary Prospectus, Registration Statement or the Prospectus,
or in any amendment or supplement thereto, any material fact required
27
<PAGE>
to be stated therein or necessary to make the statements therein not misleading,
and shall reimburse each Underwriter, its officers and employees and each such
controlling person for any legal or other expenses reasonably incurred by that
Underwriter, its officers and employees or controlling persons in connection
with investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Underwriters agree that for indemnity obligations not covered
by Section 10(c), the Underwriters shall not seek indemnification under this
Section 10(b) from a Selling Stockholder unless the Underwriters shall first
have sought indemnity from the Company under Section 10(a) and the Company has
not agreed to satisfy such request for indemnification in full within 30 days;
provided further, that the Selling Stockholders shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment or supplement
in reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein, which information
consists solely of the information specified in Section 10(h). The foregoing
indemnity agreement is in addition to any liability which the Selling
Stockholders may otherwise have to any Underwriter or any officer, employee or
controlling person of that Underwriter.
(c) The Selling Stockholders, severally and not jointly, shall
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
that Underwriter, officer, employee or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state in any
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
each Underwriter, its officers and employees and each such controlling person
for any legal or other expenses reasonably incurred by that Underwriter, its
officers and employees or controlling persons in connection with investigating
or defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred, in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in the Registration Statement,
Prospectus or Preliminary Prospectus in reliance upon and in conformity with
written information furnished to the Company and the Representatives by such
Selling Stockholder expressly for use in the Registration Statement, Prospectus
or Preliminary Prospectus, as the case may be; provided, however, that the
Selling Stockholders shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the Prospectus
or in any such amendment or supplement in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any
28
<PAGE>
Underwriter specifically for inclusion therein which information consists solely
of the information specified in Section 10(h). The foregoing indemnity agreement
is in addition to any liability which the Selling Stockholders may otherwise
have to any Underwriter or any officer, employee or controlling person of that
Underwriter under applicable law.
(d) The Company and the Selling Stockholders shall not be liable in
any case arising under Section 10(a), (b) or (c) with respect to any Preliminary
Prospectus if at or prior to written confirmation of the sale of the Stock a
copy of the Prospectus (or the Prospectus as amended or supplemented) was not
sent or delivered to such person making the claim and the untrue statement or
omission or alleged untrue statement or omission in the Preliminary Prospectus
was corrected in the Prospectus (or the Prospectus as amended or supplemented),
unless the failure is the result of noncompliance by the Company with Section
6(c) hereof.
(e) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, each Selling Stockholder, the Company's and each
Selling Stockholder's directors, officers and employees, and each person,
if any, who controls the Company or a Selling Stockholder within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which the
Company or any such director, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is based upon,
(i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or (B) in any
Blue Sky Application or (ii) the omission or alleged omission to state in
any Preliminary Prospectus, the Registration Statement or the Prospectus,
or in any amendment or supplement thereto, or in any Blue Sky Application
any material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer, employee or controlling person for any legal or other expenses
reasonably incurred by the Company or any such director, officer, employee
or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or
action as such expenses are incurred. The foregoing indemnity agreement is
in addition to any liability which any Underwriter may otherwise have to
the Company or a Selling Stockholder or any such director, officer,
employee or controlling person under applicable law.
(f) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and,
29
<PAGE>
provided further, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have to an indemnified party
otherwise than under this Section 10. If any such claim or action shall be
brought against an indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party
under this Section 10 for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that the Representatives
shall have the right to employ counsel to represent jointly the Representatives
and those other Underwriters and their respective officers, employees and
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by the Underwriters against the Company
or any Selling Stockholder under this Section 10 if, in the reasonable judgment
of the Representatives, it is advisable for the Representatives and those
Underwriters, officers, employees and controlling persons to be jointly
represented by separate counsel, and in that event the fees and expenses of such
separate counsel shall be paid by the Company or the Selling Stockholders. No
indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld), settle
or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party or if there
be a final judgment for the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(g) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a) or 10(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from
30
<PAGE>
the offering of the Stock purchased under this Agreement (before deducting
expenses) received by the Company and the Selling Stockholders, on the one hand,
and the total underwriting discounts and commissions received by the
Underwriters with respect to the shares of the Stock purchased under this
Agreement, on the other hand, bear to the total gross proceeds from the offering
of the shares of the Stock under this Agreement, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company , the Selling Stockholders or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section 10(g) were
to be determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
damage or liability, or action in respect thereof, referred to above in this
Section 10(g) shall be deemed to include, for purposes of this Section 10(g),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 10(g), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Stock underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. Notwithstanding the provisions
of this Section 10, the aggregate liability of each of the Selling Stockholders
under the indemnity and contribution provisions of this Section 10 and for any
breach of representations and warranties under Section 2 shall be limited to an
amount equal to the net proceeds of the offering (before deducting expenses)
received by such Selling Stockholder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 10(g) are several in proportion to their respective
underwriting obligations and not joint.
(h) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
forth opposite the name of each remaining non-defaulting Underwriter in Schedule
1 hereto bears to the total
31
<PAGE>
number of shares of the Firm Stock set forth opposite the names of all the
remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however,
that the remaining non-defaulting Underwriters shall not be obligated to
purchase any of the Stock on such Delivery Date if the total number of shares of
the Stock which the defaulting Underwriter or Underwriters agreed but failed to
purchase on such date exceeds 9.09% of the total number of shares of the Stock
to be purchased on such Delivery Date, and any remaining non-defaulting
Underwriter shall not be obligated to purchase more than 110% of the number of
shares of the Stock which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 3. If the foregoing maximums are exceeded, the remaining
non-defaulting Underwriters, or those other underwriters satisfactory to the
Representatives who so agree, shall have the right, but shall not be obligated,
to purchase, in such proportion as may be agreed upon among them, all the Stock
to be purchased on such Delivery Date. If the remaining Underwriters or other
Underwriters satisfactory to the Representatives do not elect to purchase the
shares which the defaulting Underwriter or Underwriters agreed but failed to
purchase on such Delivery Date, this Agreement (or, with respect to the Second
Delivery Date, the obligation of the Underwriters to purchase, and of the
Company to sell, the Option Stock) shall terminate without liability on the part
of any non-defaulting Underwriter or the Company or the Selling Stockholders,
except that the Company will continue to be liable for the payment of expenses
to the extent set forth in Sections 8 and 13. As used in this Agreement, the
term "Underwriter" includes, for all purposes of this Agreement unless the
context requires otherwise, any party not listed in Schedule 1 hereto who,
pursuant to this Section 11, purchases Firm Stock which a defaulting Underwriter
agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
12. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholders prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 9(l)
or 9(m) shall have occurred or if the Underwriters shall decline to purchase the
Stock for any reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If the Company or any
Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholders is
not fulfilled, the Company and the Selling Stockholders will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Stock, and upon demand the Company
and the Selling Stockholders shall pay the full amount thereof to the
32
<PAGE>
Representative(s). If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 10(f), to the Director of Litigation, Office of
the General Counsel, Lehman Brothers Inc., Three World Financial
Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: William J. Rieflin, General
Counsel (Fax: 650/825-7303);
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at
the address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(f)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian or the Attorney-in-fact appointed pursuant to the Power of Attorney.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 10(e) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration statement, employees of the Company and any person controlling the
Company within the meaning of Section 15 of the Securities Act and for persons
related to the Selling Stockholders (as specified in Section 10(e)). Nothing in
this Agreement is intended or shall be construed to give
33
<PAGE>
any person, other than the persons referred to in this Section 15, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Stockholders and the
Underwriters contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
34
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company, the Selling Stockholders and the Underwriters, please indicate your
acceptance in the space provided for that purpose below.
Very truly yours,
Tularik Inc.
By________________________________
William J. Rieflin
Vice President, General Counsel and Secretary
The Selling Stockholders named in Schedule 2 to
this Agreement:
By________________________________
Attorney-in-Fact
Accepted:
LEHMAN BROTHERS INC.
J.P. MORGAN SECURITIES INC.
CHASE SECURITIES INC.
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ LLC
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By __________________________________
Authorized Representative
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Shares of
Underwriters Firm Stock
- ------------ -----------
<S> <C>
Lehman Brothers Inc.
J.P. Morgan Securities Inc.
Chase Securities Inc.
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
Total 4,500,000
===========
</TABLE>
<PAGE>
SCHEDULE 2
<TABLE>
<CAPTION>
Number of Shares Number of Shares
Selling Stockholders of Firm Stock of Option Stock
- -------------------- ---------------- ----------------
<S> <C> <C>
Total 1,500,000 225,000
========= ========
</TABLE>
<PAGE>
[LETTERHEAD OF COOLEY GODWARD LLP GOES HERE]
March 2, 2000
Tularik Inc.
Two Corporate Drive
South San Francisco, CA 94080
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Tularik Inc. (the "Company") of a Registration Statement on
Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission covering an underwritten public offering of up to 6,000,000 shares of
common stock, including 4,500,000 shares to be sold by the Company, plus any
shares to be sold by the Company upon exercise of the over-allotment option (the
"Company Shares") and 1,500,000 shares to be sold by certain selling
stockholders, plus any shares to be sold by selling stockholders upon exercise
of the over-allotment option (the "Selling Stockholder Shares"). The Company
Shares and the Selling Stockholder Shares are collectively referred to herein as
"Common Stock."
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and By-laws, as amended, and such other
documents, records, certificates, memoranda and other instruments as we deem
necessary as a basis for this opinion. We have assumed the genuineness and
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as copies thereof, and the due
execution and delivery of all documents where due execution and delivery are a
prerequisite to the effectiveness thereof. We have also assumed that the shares
of Common Stock will be sold by the Underwriters at a price established by the
Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Company Shares, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
<PAGE>
[LETTERHEAD OF COOLEY GODWARD LLP GOES HERE]
March 2, 2000
Page Two
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward llp
By:
/s/ Suzanne Sawochka Hooper
---------------------------
Suzanne Sawochka Hooper
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 27, 2000, in Amendment #1 to the Registration Statement (Form S-1 No.
333-30978) and related Prospectus of Tularik Inc. for the registration of
6,900,000 shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
March 2, 2000
