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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-27914
RIBOZYME PHARMACEUTICALS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
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DELAWARE 34-1697351
(State of incorporation) (I.R.S. Employer Identification No.)
2950 WILDERNESS PLACE
BOULDER, COLORADO 80301
(Address of principal executive offices)
Company's telephone number: (303) 449-6500
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT::
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Check whether the issuer (1) filed all reports required to be filed by
Section 15 or 15(d) of the Exchange Act during the past 12 months (or for such
period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year ending December 31, 1997 were $2,778,110.
The aggregate market value of the voting stock held by non-affiliates of the
Company, as of March 13, 1998, was approximately $39,358,740.
The number of shares of the Company's common stock, par value $.01 per share,
outstanding as of March 13, 1998, was 8,608,731.
DOCUMENTS INCORPORATED BY REFERENCE:
<TABLE>
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DOCUMENT PART(s) INTO WHICH INCORPORATED
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Proxy Statement to be used in connection with the Annual meeting of Stockholders Part III
to be held May 22, 1998 (the "Proxy Statement"), to be filed with the Commission
prior to April 30, 1998, pursuant to Regulation 14A of the General Rules
and Regulations of the Commission is incorporated by reference herein.
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PART I
ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Report. Certain statements in this Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions; competition; technological
advances; ability to obtain rights to technology; ability to obtain and enforce
patents; ability to commercialize and manufacture products; ability to obtain
collaborators for its target validation programs; ability to manufacture
ribozymes in adequate amounts for its collaborations; results of clinical
studies; results of research and development activities; business abilities and
judgment of personnel; availability of qualified personnel; changes in, or
failure to comply with, governmental regulations; ability to obtain adequate
financing in the future; and other factors referenced in this Report. See "Risk
Factors."
GENERAL
Ribozyme Pharmaceuticals, Inc. ("RPI" or the "Company") was founded to
capitalize on the broad potential of ribozymes for use in the development of
human therapeutics and therapeutic target validation services. The Company's
technology is based on Professor Thomas R. Cech's discovery of "ribozymes," for
which he shared a Nobel Prize in 1989. Ribozymes are a form of ribonucleic acid
("RNA") that have the ability to selectively inhibit gene expression and protein
production. Because many disease states are the result of abnormal protein
production, ribozymes are potentially applicable to a wide range of human
diseases. RPI believes that its ribozyme technology may provide a new paradigm
for drug design and disease treatment and may be a significant tool for the
identification of gene function and target validation. The Company has entered
into a collaboration with Chiron Corporation ("Chiron") to develop ribozyme
products for specific therapeutic targets in human health, a second
collaboration with Chiron in the target validation area, and collaborations with
Schering AG, Berlin ("Schering AG") and the Parke-Davis Division of
Warner-Lambert Company ("Parke-Davis") to validate new therapeutic targets from
gene sequence data using the Company's functional genomics technology. The
Company has also licensed its technology to DowElanco for certain agricultural
applications and IntelliGene, Ltd. ("IntelliGene") for certain diagnostic
applications.
The Company believes that its proprietary ribozyme technology platform
has the potential to address many of the issues associated with traditional
pharmaceuticals and drug discovery. Ribozymes perform functions that are
different from those performed by ordinary RNA in that, after binding
selectively to their specific messenger RNA ("mRNA") target, ribozymes act
catalytically to cut, or cleave, the target mRNA molecule whereupon the mRNA is
destroyed. Once the mRNA target is destroyed, the particular protein for which
the mRNA molecule carries information will not be produced, indicating that
ribozymes may be broadly applicable in the control of protein production or gene
expression. In general, a large number of diseases involve either inappropriate
expression of proteins or RNA viruses. In addition, ribozymes can be designed to
select for a single specific target genetic sequence. The Company believes this
highly selective mechanism of action has the potential to minimize the side
effects of its therapeutic products. Also, because ribozymes are not consumed in
the act of cleaving the target mRNA, a single ribozyme may cleave multiple
targets, thus potentially leading to lower ribozyme dosing requirements.
RPI's business strategy is to utilize its ribozyme technology to
develop a new and novel class of human therapeutic products and a service
business for therapeutic target validation. Additionally, RPI will continue to
seek partners to license the technology in areas such as agriculture, animal
health and diagnostics. The Company plans to develop therapeutic products
through both internal programs and collaborations. In addition to using
ribozymes to develop therapeutic products, RPI believes that its ribozyme
technology may be used as a drug discovery
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technology to characterize the function of potential target genes. Since
ribozymes can be designed to select for a single target genetic sequence,
ribozymes may be used to identify the function of that sequence. As a result,
links between gene dysfunction and disease can be validated. The Company has
entered into collaborations with Chiron, Schering AG and Parke-Davis to use the
Company's ribozyme technology to determine the function of selected genes and
gene sequences, and plans to enter into additional partnerships in this area in
the future.
The Company is working with Chiron on the development of a number of
products targeted at viral diseases, cancer, restenosis and ocular diseases. In
April 1996, RPI and collaborators were granted National Institute of Health
("NIH") Recombinant DNA Advisory Committee exemption for a proposed clinical
trial of a retroviral vector containing two ribozymes to treat blood progenitor
cells from HIV-infected individuals. In January 1997, RPI and collaborators
received approval of their Investigational New Drug Application with the U.S.
Food and Drug Administration, and a Phase I/IIa clinical trial was initiated in
March 1997. The physician-sponsored study seeks first to demonstrate the safety
of reinfusion of the ribozyme containing cells and second to measure the ability
of ribozyme-expressing cells to engraft and survive after reinfusion into
HIV-infected patients. This study is part of a collaboration between RPI,
Chiron, the City of Hope, and Childrens Hospital in Los Angeles.
RPI believes that its patents and proprietary technology provide a
significant competitive advantage in the field of ribozymes. At the core of
RPI's technology are inventions and patents of Dr. Cech and various of his
associates. RPI believes that licenses to these patents, together with those
filed by RPI, grant the Company the exclusive right to control the manufacture,
use and sale of ribozymes and any products that incorporate ribozymes.
BACKGROUND
Many disease states are characterized by abnormal production of gene
products such as proteins. The abnormality may be due to a defective gene or to
over-production of a protein by a "normal" gene. Such abnormal or excessive
production of protein may have direct effects on cells within the body or may
initiate a cascade of events involving other proteins within the body, thereby
producing disease.
Production of proteins from genes, called protein "expression,"
involves two steps. First, the information from the DNA of the gene is
"transcribed" to mRNA. The second step involves "translation" of the mRNA and
its information into a protein. This process by which genetic information is
"expressed" in the form of a protein is highly selective; production of a
particular protein requires its own specific DNA which leads to a specific mRNA
molecule.
DRUG DISCOVERY
Traditional drug discovery and development is difficult, time
consuming and extremely costly. Historically, diseases have been treated using
therapeutic agents, or drugs, based on clinical observation of symptoms which
were correlated with abnormal physiological processes and, where possible,
biochemical changes. Most drugs are chemicals designed to inhibit or induce the
function of the target molecule with as few unwanted side effects as possible.
These drugs generally have been discovered through a complex, lengthy and
expensive process of elimination. The process begins by selecting a possible
target (usually a protein), developing a screening assay, chemically
synthesizing large numbers of different molecules which are tested in cell
cultures and in animal models for their effect on the target, using those
results to narrow the number of molecules down to a few possible lead molecules,
and then refining the lead molecules through additional chemical synthesis and
testing, including testing in humans. Unfortunately, drugs produced from this
process are typically molecules whose desired effect on the target is
accompanied by undesirable side effects on non-targeted molecules, also referred
to as a "toxicity" or "lack of selectivity," which can limit effective use of
the drug.
Pharmaceutical companies are under intense pressure to find
alternatives to traditional drug discovery and development in an effort to
identify and commercialize novel drugs more quickly and cost effectively and
with fewer side effects. The Company also believes that pricing pressures from
managed care organizations,
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governmental agencies and third party payers, coupled with the proliferation of
technologies that offer revolutionary approaches to drug design and development,
are causing major shifts in the paradigms of drug discovery and development.
ADVANTAGES OF RIBOZYMES
The Company believes that ribozymes may offer certain advantages over
other therapeutic approaches for the treatment of diseases.
Potential Broad Applicability. Some genes and their corresponding RNA
or proteins have already been identified as having causative roles in human
disease pathology, animal health, and agriculture. In addition, identification
of new genes is rapidly increasing in both the public and private sector, and it
is expected that all of the genes which comprise the human genome will be
identified within the current decade. Once a gene has been sequenced, ribozymes
can be designed to inhibit the production of a protein from the associated mRNA.
Therefore, all diseases for which a causative protein or gene target can be
identified present a potential application for the Company's ribozyme
technology. The Company believes that its ribozyme technology is an important
bridge between the growing body of knowledge of the human genome and the
development of human therapeutics.
High Selectivity. The mechanism by which traditional drugs act on a
target gene or protein often is not well understood. Consequently, side effect
profiles of such drugs are difficult to predict and characterize. Other
therapeutic approaches may result in interactions with non-targeted molecules
that cause unintended side effects. The Company believes these side effects may
be reduced or avoided with ribozymes because of their selectivity in binding and
cleaving the target mRNA. The Company believes that ribozymes may be constructed
with a nucleotide binding sequence that will match only one corresponding target
mRNA, and the target mRNA sequence is expected to appear, on a statistical
basis, only once in the entire human genome.
Catalytic Action. Since ribozymes act catalytically, they are not
consumed in the act of cleaving the target mRNA. Therefore, a single ribozyme
may cleave multiple target mRNA molecules. The Company believes that dosage
requirements for ribozymes may be lower than traditional pharmaceuticals due to
their catalytic activity.
Target is Destroyed. Instead of temporarily preventing expression of a
target gene, ribozymes cut the target mRNA into fragments, which are
subsequently degraded by cellular nucleases. Since the target mRNA is destroyed
in the process, expression of the disease-causing protein can be controlled. By
contrast, most other therapeutics do not destroy their target molecule.
RPI'S BUSINESS STRATEGY
RPI's objectives are to develop human therapeutics, to exploit its
ribozyme technology platform as a functional genomic tool for target validation
and gene function identification and to license animal health, agricultural and
other applications of the technology. The Company's strategy for achieving these
objectives includes the following elements:
Develop Human Therapeutic Products. RPI plans to exploit its ribozyme
technology to develop a broad range of human therapeutic products through
alliances with collaborators and licensees directed at target-specific products
and internal product development programs. The Company has established a
collaboration with Chiron to pursue the development of ribozyme based products
which are targeted at specific mRNA molecules, and is also conducting an
internal drug development program.
Pursue Additional Collaborations in Therapeutic Target Validation. The
Company believes that application of its ribozyme technology can accelerate
identification of gene function and validate gene "targets" leading to highly
selective therapeutic compounds. The Company has entered into collaborative
agreements with Chiron, Schering AG and Parke-Davis to determine the validity of
selected genes and gene sequences as therapeutic
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targets. The Company will continue to pursue additional partners in the
pharmaceutical and biotechnology industries for the purpose of further
exploiting this commercial opportunity with its ribozyme technology.
License Non-Human Health Applications. RPI plans to exploit additional
opportunities in diagnostics, agriculture and animal health by licensing the
ribozyme technology to partners. The Company has completed a feasibility study
for certain agricultural applications with DowElanco and has licensed its
technology to DowElanco for certain agricultural applications. Additionally, the
Company has licensed its technology to IntelliGene for certain diagnostic
applications.
Maintain and Expand Patent Portfolio and Proprietary Technology. RPI
has sought and will continue to seek to strengthen its proprietary position for
its ribozyme technology by aggressively pursuing patent protection and defending
its patents and proprietary technology.
RPI'S RIBOZYME TECHNOLOGY
The RPI approach to drug discovery and development begins by
identifying a target gene. Ribozymes are designed by analyzing the nucleotide
sequences of the target gene and creating complementary ribozyme nucleotide
sequences. The next step is to synthesize ribozymes that are targeted
specifically to sites in the target gene. Next, the ribozymes are delivered to
the target cell either as a synthesized chemical or by encoding the ribozymes
into a DNA sequence for delivery by a "vector."
Upon delivery, the cell or animal is analyzed to determine whether
ribozyme inhibition of the potential target gene has affected the progression of
the disease (i.e., expression of the disease-causing gene or protein has been
inhibited). If the action of the ribozyme stops progression of the disease, then
not only has the causative role of the gene been validated, but a drug candidate
has also been identified. If not, the potential target gene may be eliminated as
a target for therapeutic intervention.
Once a target gene and ribozyme lead are identified, the delivery
method and the delivery vehicle are chosen. In addition, the ribozyme is
optimized by techniques such as variation of binding arm length and additional
serum stabilization. The Company believes that these techniques can be used to
accelerate the drug discovery process. The Company's successful
commercialization of ribozyme technology for therapeutic applications will
require that a number of technical issues be satisfactorily addressed, including
ribozyme design, stability, selectivity, synthesis and scale-up, drug delivery
and cell uptake, safety and efficacy. To date, RPI has achieved a number of
significant milestones related to the development of ribozymes, including the
following:
Stability. In order to be useful as a therapeutic, a ribozyme must
remain stable in human serum long enough to have the desired effect. While
unmodified RNA is stable in human serum for only a few seconds, the Company has
successfully produced chemically-modified ribozymes that are stable in human
serum for more than 10 days and fully active in vitro. The Company believes that
this level of stability may be sufficient to achieve therapeutic effects.
Design. The Company has developed a proprietary computer program that
can design ribozymes against sites in a target mRNA sequence. This gives the
Company the ability to accelerate the identification of both lead ribozymes and
multiple back-ups.
Selectivity. Based on third party studies and internal work performed
by RPI, the Company believes that a ribozyme with a binding region of
approximately 15 nucleotides will be optimal. A binding region of this length is
expected to match, on a statistical basis, only one corresponding target mRNA
nucleotide sequence in the entire human genome. Since the ribozyme should only
interact with the target mRNA, it should not impact non-targeted molecules. The
high degree of selectivity of ribozymes has been demonstrated through the use of
inactive ribozyme controls in both cell culture and animal studies.
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Synthesis and Scale-Up. To meet the Company's needs for pre-clinical
and clinical trials and the eventual commercialization of ribozymes, the Company
needs large scale ribozyme synthesis capabilities. The Company has developed
proprietary technology that allows it to routinely synthesize several thousand
stabilized ribozymes on a monthly basis in milligram quantities, permitting RPI
to perform direct cell-based screening of multiple potential target sites in
short periods of time. The Company also has the capability of synthesizing
multi-gram quantities of ribozymes, as it has done for in vivo studies. In that
regard, RPI has designed and constructed its facilities to meet cGMP standards.
RPI has implemented quality assurance and quality control procedures that are
used for large scale synthesis. RPI synthesizes ribozymes using commercially
available synthesizers. In addition, the Company has established a collaboration
with Pharmacia Biotech to develop technology for reducing the cost of
synthesizing the modified amidites that are used to manufacture chemically
synthesized ribozymes, and with Protogene Laboratories, Inc. ("Protogene") for
parallel, automated synthesis of large numbers of different ribozymes. See
"Business--Collaborative Relationships and License Agreements."
Drug Delivery and Cellular Uptake. Successful development of any
therapeutic requires that it be delivered to the desired site in the body and
remain active long enough to have a therapeutic effect. The Company is exploring
local and systemic delivery of chemically synthesized ribozymes as well as
vector delivery. For example, the Company has shown that local delivery of a
chemically stabilized ribozyme to a rat cornea can significantly inhibit
angiogenesis. In addition, the Company is exploring the use of lipids and other
carriers to enhance cellular uptake and for systemic delivery. The Company has
identified several different formulations of carriers which, when complexed to
chemically synthesized ribozymes, have shown significant increases in the
delivery of ribozymes (relative to ribozymes without a carrier) to a variety of
different cell types. The Company also is working on chemically modifying
ribozymes to be preferentially taken up by certain tissues and/or by specific
intracellular compartments.
The Company has demonstrated that the formulation of ribozymes with
various lipid based carriers increases the in vivo circulation time of the
formulated ribozyme in plasma to days. The Company has demonstrated similar
formulations of ribozymes also result in significantly longer tissue exposure
when administered locally. The Company believes that the use of such
technologies will allow for a significant dose reduction of ribozymes that have
currently shown efficacy when unformulated.
The Company has also developed proprietary retroviral vector
constructs containing ribozymes that produce high ribozyme accumulation in cells
compared to standard vector constructs. The expression of fully-active ribozymes
utilizing these constructs has been demonstrated in vitro for periods greater
than 90 days. The Company has also demonstrated transduction of multiple cell
types (e.g., T-cells, CD34+ cells and others). RPI is pursuing ribozyme vector
development internally and manufacturing through its collaboration with Chiron.
The Company believes that vector delivery of ribozymes may have several
potential therapeutic advantages, including high target specificity, lack of
activity against other genes, long term, high expression levels of ribozymes and
infrequent dosing. Vector delivery of ribozymes may be particularly useful for
the chronic treatment of diseases, where the therapy is needed over long periods
of time and frequent dosing is not desirable or feasible.
Efficacy and Ribozyme Mechanism. In collaboration with its strategic
partners, the Company has demonstrated that its ribozymes can inhibit gene
expression and affect cellular function in vitro and in vivo. Ribozymes
targeting several specific mRNAs have demonstrated specific reduction of the
levels of their corresponding mRNAs. This inhibition of gene expression requires
target binding and ribozyme catalysis: inactive and irrelevant ribozyme controls
have no specific effect. Ribozyme-mediated reductions in mRNA correlate with
reductions in protein expression and changes in cellular function. In addition,
the Company has shown efficacy of a ribozyme in an animal model of angiogenesis,
while inactive ribozymes showed essentially no effect. Similar studies have been
performed by the Company and others that have demonstrated inhibition of gene
expression in vitro and in vivo by ribozymes expressed from vectors.
Safety. The Company has completed an initial animal safety study to
test the toxicity of chemically stabilized ribozymes. This study was a five-day,
intravenous single dose, acute toxicology study in rats and monkeys. The
Company's study included extensive follow up procedures, including body weight,
ECG/BP, haemolysis, complement activation, clinical chemistry and urinalysis. In
the study, while there was significant
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systemic exposure of serum and tissues to the ribozyme, no drug-related
toxicities were found at any dose. In particular, there were no deaths, no blood
clotting abnormalities, no activation of complement and no evidence of
hypotension.
Continuing Technology Development. The Company is continuing to improve
its ribozyme technology for its potential products, including increased
stability and catalytic activity, synthesis and scale-up, drug delivery and
cellular uptake. For systemic applications, the Company may need to refine the
ribozyme technology to improve the delivery of ribozymes to specific tissues and
improve cellular uptake. See "Risk Factors--Technological Uncertainty."
PRODUCT DEVELOPMENT PROGRAMS
The Company is developing products through a combination of internal
programs and collaborative research and development relationships. The current
product development programs for human therapeutic applications apply chemically
synthesized and vector delivered ribozymes to both acute and chronic diseases in
areas of significant medical need and market opportunity. The following table
summarizes the current status of the Company's human therapeutic and
agricultural product development programs.
PRODUCTS UNDER DEVELOPMENT
RPI-PARTNER PRODUCT AREA DEVELOPMENT STATUS(1)
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Chiron HIV Phase I and Phase II clinical
trials
Retinopathy Pre-clinical development
Macular degeneration Pre-clinical development
Tumor angiogenesis Pre-clinical development
Oncogenes Research
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(1) "Pre-clinical development" includes pharmacology and toxicology testing in
animal and in vitro models, product formulation, dosage studies and
manufacturing scale-up for submission of the necessary data to comply with
applicable regulations prior to commencement of human testing. "Research"
includes the identification of target proteins, synthesis of an
appropriate ribozyme to block expression of such protein, and testing the
activity of such ribozyme in a specific cell population.
CHIRON
The Company is working with Chiron on the development of a number of
products targeted at viral diseases, cancer, restenosis and ocular diseases.
Chiron is a public biotechnology company located in Emeryville, California, that
develops and commercializes products for human diagnostic, prophylactic and
therapeutic use. Under their collaboration, the Company and Chiron are pursuing
research and development of drugs for the following indications:
Human Immunodeficiency Virus (HIV). The Company believes that
ribozymes may provide a new approach to the treatment and prevention of HIV
infection and replication. The Company has sought to identify target sites that
are present throughout the replication life cycle of HIV and are conserved in
known clinical strains of HIV. The Company is directing ribozymes at several
sites in HIV that are being incorporated into a single vector, so that the
ribozyme therapy may avoid emergence of resistance due to viral mutations.
In collaboration with Chiron, the City of Hope and Children's Hospital
(Los Angeles), the Company initiated a physician-sponsored Phase I/IIa clinical
trial for HIV in March 1997. This study uses a retroviral vector containing two
ribozymes, one against a site in the tat region and the other against a site in
the tat/rev region of the
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HIV virus. This construct has demonstrated protection against HIV challenge in
monocyte cells derived from "stem cells" (CD34+ cells) transduced with the
retroviral construct. This demonstrates a number of important results, including
successful retroviral transduction of CD34+ cells, transmission of the ribozyme
into cell progeny derived from CD34+ cells (i.e., monocytes), and protection of
the monocytes against HIV challenge. An IND with the FDA was filed in December
1996 and approved in January 1997 for a physician-sponsored clinical trial
including five HIV-infected subjects. Chiron Technologies Center for Gene
Therapy was responsible for master cell bank development and production of the
ribozyme construct. The primary clinical endpoints for this study are general
safety and tolerance, although re-engraftment efficiency and selected survival
data of ribozyme expressing cells may be obtained. The treatment phase of this
trial was completed in December 1997. Five patients were treated and no
drug-related toxicities were observed.
Tumor Angiogenesis and Oncogenes. Angiogenesis and oncogenes have been
linked to the formation, growth and maintenance of cancerous tumors. The Company
has initiated several research programs in collaboration with Chiron in both
oncogene and angiogenesis inhibition. In studies performed in collaboration with
Chiron, lead ribozymes targeting Vascular Endothelial Growth Factor (VEGF)
receptors have demonstrated dose dependent cell culture efficacy in the
inhibition in human endothelial cell proliferation. In a mouse model using
Lewis Lung Carcinoma implants in vivo efficacy has been shown in a dose
dependent manner using continuous intravenous administration of a ribozyme. The
Company has conducted pre-clinical studies in collaboration with Chiron and
believes its VEGF ribozymes may also be applicable as therapeutic agents for
solid tumor growth and metastases as well as several ocular indications such as
retinopathy and age-related macular degeneration.
Retinopathy. Diabetic retinopathy is a degenerative ocular disease
resulting in blindness and, according to The New England Journal of Medicine, is
the most common cause of blindness in adults aged 25 to 74 in the United States.
Proliferative diabetic retinopathy is characterized by the proliferation of
blood vessels, known as angiogenesis, in the retina resulting in blindness.
According to the Incidence and Prevalence Database (the "IPD"), as of 1994, this
disorder affected approximately one million people in the United States.
According to The American Academy of Ophthalmology, there are 65,000 new cases
of proliferative diabetic retinopathy every year in the United States. Current
proliferative diabetic retinopathy treatments, including surgery and laser
photocoagulation, are not believed to be optimum long-term solutions.
Age-Related Macular Degeneration. Age-related macular degeneration
(ARMD) is the leading cause of blindness in people over 60 years of age. It is
caused when the choroid vessels invade the macula through disruptions in Bruch's
membrane. This is referred to as choroidal neovascularization and accounts for
the vast majority of legal blindness, according to the Survey of Ophthalmology
journal. Thirteen million persons over the age of 40 are afflicted with ARMD,
and 1.2 million are in the later, vision-threatening stage of the disease. The
British Journal of Ophthalmology reported that ARMD is the most common cause of
blindness in most Western communities. Despite some efficacy of laser
photocoagulation in the treatment of ARMD, only a small percentage of all
patients with the disease are eligible for laser treatment.
The Company has prepared a development plan for the VEGF Ribozyme and
intends to proceed with development either with a partner or on its own. There
can be no assurance that the Company will be permitted to undertake additional
human clinical testing of the Company's potential products or, if permitted,
that such products will be demonstrated to be safe and efficacious or will be
determined to be marketable. See "Risk Factors--Uncertainty of Product
Development."
COLLABORATIVE RELATIONSHIPS AND LICENSE AGREEMENTS
An element of the Company's strategy is to enter into collaborative
research and development agreements, joint ventures, licensing agreements or
other arrangements to exploit its technology as broadly as possible. The Company
seeks partners whose interests, development and marketing capabilities are
complementary to those of the Company or partners who wish to pursue areas which
otherwise would not be developed by the Company. See "Risk Factors--Dependence
on Collaborative Relationships."
The Company's current collaborations are described below.
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SCHERING AG
In April 1997, the Company entered into a research collaboration with
Schering AG focusing on the use of ribozymes for therapeutic target validation,
as well as the development of ribozymes as therapeutic agents.
The collaboration will utilize the special selectivity of ribozymes
and related technologies to validate new molecular therapeutic targets, and to
discover new therapeutic agents based on those targets. RPI will provide its
expertise in ribozyme design, synthesis and delivery, and Berlex Laboratories,
Inc., a U.S. subsidiary of Schering AG ("Berlex"), will provide candidate
targets, cell culture screens, animal models and development and
commercialization expertise to the collaboration. The Company anticipates that
hundreds of potential targets may be examined over a five year period, and
Berlex will have options to commercialize products from any validated targets.
Schering AG made an equity investment in May 1997 of $2.5 million in
exchange for 212,766 shares of common stock, and will make an additional equity
investment of $2.5 million in 1998. Separately, Schering AG provided a loan of
$2.0 million in 1997, and subsequently $1.0 million in January 1998. Schering AG
will continue to provide loans of up to $2 million annually for each of the next
four years, provided that the collaboration is continued in each of those years.
The loans, which carry an interest rate of 8% per annum, are convertible into
equity at the option of Schering AG under certain circumstances. At December 31,
1997, the outstanding borrowings of $2.1 million were convertible into
approximately 257,000 shares of the Company's common stock. Principal and
interest payments are deferred until maturity of the loans which is in April
2004. In addition, Schering AG made research payments of $1.5 million in 1997
and, provided that the collaboration is continued, will make research payments
of $2 million a year for the next four years. The Company may earn success fees
upon product development milestones and will manufacture synthetic ribozyme
products and receive royalties on sales of both ribozyme and non-ribozyme
products resulting from the collaboration. All such payments are subject to some
restrictions, including receipt of certain third party consents. Upon payment of
termination fees to the Company, the research collaboration may be terminated at
Schering AG's option any time after April 8, 1998.
CHIRON
In July 1994, RPI entered into a collaborative agreement with Chiron
under which RPI and Chiron have agreed to collaborate in the research,
development and marketing of ribozyme products directed toward certain genetic
targets. In connection with the collaboration, the Company and Chiron will each
contribute intellectual property and other resources to the development of the
targeted ribozyme products. As of the date of this filing, the designated
genetic targets and their associated clinical indications are HIV, VEGF
receptors (retinopathy/corneal transplant rejection/cancer), ras and c-myb
(proliferative diseases) and a potential cancer target. The field of the
agreement includes diagnostic, prophylactic and therapeutic applications of
ribozymes directed toward these genetic targets. The term of the research
program is five years, renewable with the consent of both parties. RPI and
Chiron have agreed to exclusively collaborate on up to five specific targets
and to reserve up to four other potential targets at any one time during the
term of the agreement. The parties have concentrated their initial
collaborative research efforts on the VEGF receptor and HIV targets.
The agreement provides that each party must pay its own pre-clinical
research costs. The parties generally will share equally in the development
costs and net profits of any jointly developed products. However, either RPI or
Chiron may elect not to participate in the clinical development of any
particular product. If both parties elect not to continue development, then a
third party may be sought to develop the product under license to both parties.
In the event either RPI or Chiron elects to continue funding clinical
development alone, then the non-developing party would not share in the profits
derived from the sale of that product but would receive a royalty based on net
sales. However, the non-developing party may elect to retain its interest in the
profits of a particular product in which it has shared funding through Phase I
clinical trials, but has declined to fund Phase II or Phase III clinical trials,
at either the commencement of Phase III testing or the filing of a New Drug
Application ("NDA") or Product License Application ("PLA"). Upon such an
election, the non-developing party must pay its share of the development costs
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<PAGE> 10
to date, plus a predetermined risk premium. Under certain circumstances, RPI may
pay up to 50% of such payment in shares of its Common Stock. See "Risk
Factors--Future Capital Needs; Uncertainty of Additional Funding."
If either party declines to fund clinical development for a product
which subsequently fails to receive regulatory approval or is otherwise
abandoned, then the developing party may offset its development costs for one
such failed product with the profits otherwise allocable to the other party from
successful products.
RPI retains the right to manufacture chemically synthesized ribozyme
products resulting from the collaboration, whether jointly developed, or
developed by Chiron or RPI individually. Chiron and RPI will collaborate for the
manufacture of retroviral vector applications (gene therapy).
Chiron holds exclusive marketing rights for all jointly developed
products, subject to a co-promotion agreement for sales in North America and
Europe. In the Far East, Chiron has exclusive marketing rights with the right to
sublicense, although RPI retains the right to share in 50% of the profits. The
collaborative term for jointly developed products is 30 years. The license for
solely developed products is 15 years after first commercial sale or the
duration of patent protection, whichever is longer.
As part of the collaboration, Chiron made an equity investment of
$4.36 million in the Company. In addition, Chiron purchased from the Company
377,202 shares of Common Stock with an aggregate purchase price of $3.64 million
in 1996 at the time of the Company's initial public offering. Also at the time
of the Company's initial public offering, the Company issued Chiron a warrant to
purchase 444,444 shares of the Company's Common Stock which is exercisable at a
price of $22.50 per share, for an aggregate purchase price of $4.50 per warrant
share. In 1994, Chiron paid the Company $0.45 per warrant share, or $200,000 and
the balance of the warrant purchase price, $4.05 per warrant share, or $1.8
million, was paid to the Company upon completion of its initial public offering.
In May 1996, the Company entered into a target validation
collaboration with Chiron for the use of ribozymes to characterize gene
function. The collaboration gives Chiron the right to develop and commercialize
products that result from the collaboration, and would entitle RPI to receive
product development milestone payments and royalties on sales of any such
commercial products. Chiron and RPI each pay a portion of the research and
development expenses of the collaboration and the Company agreed to pay Chiron
$1.8 million, which was paid in 1996, for research funding related to the
collaboration.
DOWELANCO
In September 1993, RPI entered into a two-year collaborative research
feasibility study with DowElanco. The parties extended the study through April
1, 1996. The goal of the feasibility study was to demonstrate the ability of
ribozymes to alter corn. Under the agreement, DowElanco provided support of
research for the feasibility study conducted at RPI. The feasibility study was
completed in April 1997 and the Company entered into a long term
commercialization agreement with DowElanco. As consideration for the long-term
license agreement, 41,666 shares of common stock held by DowElanco were returned
to the Company. The Company canceled 33,333 of the shares and reissued the
remaining 8,333 shares to CTI as a consideration of royalty, due to the license
payment. The agreement provides DowElanco with a world-wide, non-exclusive
license to commercialize oil, meal and starch products in corn and several other
crops. RPI will receive royalties on products sold. The Company does not expect
to receive royalties, if any, from such license for a substantial period of
time.
INTELLIGENE
In March 1997, the Company granted a worldwide exclusive license to
IntelliGene to develop and sell diagnostics for several target diseases using
ribozymes in amplified nucleic acid formats. IntelliGene is a private,
venture-backed biotechnology company located primarily in Jerusalem, Israel with
an office in Sudbury, Massachusetts. IntelliGene is developing diagnostic
products using ribozymes created using a process called in vitro evolution. The
agreement provides for IntelliGene to develop diagnostic tests initially against
six infectious diseases in their laboratories in Jerusalem and elsewhere, and to
develop, make and sell diagnostic products based
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on these tests, either alone or through sublicenses. RPI received a license fee
and will receive royalties on product sales as part of this agreement, and may
assist in the research and development efforts.
PARKE-DAVIS
In March 1998, the Company entered into a Target Validation agreement
with Parke-Davis. The agreement gives Parke-Davis access to the Company's
proprietary ribozyme technology which will assist Parke-Davis in determining
which genes are valid therapeutic targets. Under the terms of the contract, the
Company will design and synthesize ribozymes against target genes designated by
Park-Davis and perform various studies to determine the level of gene expression
inhibition achieved. Parke-Davis will fund the research and may provide
milestone payments or success fees to the Company if Parke-Davis uses the
information to derive compounds to take into development.
MANUFACTURING AND MARKETING STRATEGY
In order to support its pre-clinical and clinical trial manufacturing
requirements, the Company has constructed manufacturing facilities that it
believes comply with applicable regulatory requirements and has established
operational Quality Assurance and Quality Control procedures. The Company
believes that its existing facilities will be satisfactory for production of
ribozymes needed through Phase II clinical trials for the Company's current
product portfolio.
The Company currently does not have the facilities or means to
manufacture on a commercial scale, market, distribute or sell any of its
potential products, including its drug development candidates. RPI will need to
develop its own facilities or contract with third parties for the manufacture of
products for Phase III clinical trials and commercial quantities for any
products that it may develop for its own account or in connection with
collaborative arrangements in which it has retained manufacturing rights.
The Company has expanded its quality control and quality assurance
program internally, including a set of standard operating procedures designed to
assure that the Company's products manufactured by or for it are made in
accordance with cGMP and other applicable domestic and foreign regulations. See
"Risk Factors--Uncertainty of Governmental Regulation" and "--Lack of
Manufacturing Experience; Reliance on Contract Manufacturers."
The Company has entered into strategic partnerships with Chiron and
Schering AG that include the right for RPI to manufacture chemically synthesized
ribozyme products.
The Company expects to market and sell certain of its products, if
successfully developed, directly and through co-promotion or other licensing
arrangements with third parties, including its collaborators and licensees. In
certain markets, the Company may enter into distribution or partnership
agreements with pharmaceutical or biotechnology companies that have large,
established sales organizations. See "Risk Factors--Lack of Sales and Marketing
Experience; Dependence on Third Parties."
In connection with the establishment of its manufacturing
capabilities, the Company has entered into collaborations with Pharmacia Biotech
and Protogene. In November 1995, the Company and Pharmacia Biotech agreed to
collaborate on the development of better synthesis and purification methods for
the preparation of modified amidites and chimeric oligonucleotides. The goal of
the collaboration is to reduce the cost of manufacturing ribozymes and other
oligonucleotide products that use amidites. Pharmacia Biotech, which is a
subsidiary of Pharmacia & Upjohn, Inc., has expertise in the manufacture of
oligonucleotide synthesis and purification instrumentation and software. Under
the terms of the collaboration, Pharmacia Biotech is providing RPI with
synthesis instrumentation and software, research funding and milestone payments,
a portion of which may be set-off against future royalties payable to RPI.
In December 1996, the Company entered into an agreement with
Protogene, a private biotechnology company, to develop an instrument which
allows high throughput synthesis of non-DNA oligonucleotides. Under
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the terms of the collaboration, RPI is supporting research and development, has
made an equity investment in Protogene and will have the option to buy the
instrument.
COMPETITION
RPI is engaged in the rapidly developing field of gene modulation.
Competition among entities attempting to develop gene modulation products for
the treatment of diseases is intense and is expected to increase. The Company
faces specific competition from other companies engaged in the research,
development and commercialization of ribozyme-based technology as well as
competition from companies attempting other methods of gene expression control,
such as antisense and triplex. In addition, the Company competes with large
pharmaceutical companies and established biotechnology firms, many of whom are
developing new products for the treatment of the same diseases targeted by the
Company. In some cases, those companies have already commenced clinical trials
for their products. Many of these companies have significantly greater financial
resources and expertise in research and development, manufacturing, pre-clinical
studies and clinical trials, obtaining regulatory approvals and marketing than
the Company. The Company's collaborators and licensees may be conducting
research and development programs directed at the same diseases that the Company
is targeting. In particular, the Company is aware that Chiron is conducting
product development programs that may be competitive with certain of the
RPI/Chiron collaborative programs. Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large pharmaceutical and biotechnology companies. In addition, companies that
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their products before their competitors may achieve a
significant competitive advantage. Academic institutions, governmental agencies
and other public and private research organizations also conduct research, seek
patent protection and establish collaborative arrangements for products and
clinical development and marketing. These companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel. In addition to the above factors, RPI faces competition
based on product efficacy, safety, the timing and scope of regulatory approvals,
availability of supply, marketing and sales capability, reimbursement coverage,
price and patent position. See "Risk Factors--Dependence on Collaborative
Relationships" and "--Intense Competition; Rapid Technological Change."
PATENTS AND PROPRIETARY TECHNOLOGY
RPI believes that patents and other proprietary rights are crucial to
the development of its business. In addition to patents, the Company relies upon
trade secrets, know-how and continuing technological innovations in the design,
synthesis, and purification of ribozymes and in nucleic acid chemistry. The
Company also relies on licensing opportunities to develop and maintain its
competitive position. It is the Company's policy to file patent applications
when appropriate to protect technology, inventions, and improvements that are
considered important in the development of its business.
At the core of RPI's technology are inventions and patents of the
University of Colorado ("CU") which were developed by Dr. Thomas R. Cech and
various associates of Dr. Cech. Pursuant to the policies of CU, these
inventions and the patents issued thereon (the "Cech Technology") became the
property of CU. The Cech Technology was assigned to CU's affiliate, University
Research Corporation ("URC"), which in turn assigned the rights to license
certain of the Cech Technology to Competitive Technologies, Inc. ("CTI"),
formerly known as University Patents, Inc. United States Biochemical
Corporation ("USB") licensed the Cech Technology pursuant to two sublicenses.
One of these sublicenses was for the Cech Technology held by CTI. In November
1996 USB assigned to RPI its rights under the sublicense from CTI and RPI
entered into an amended and restated license with CTI. RPI also has obtained a
license from URC and a sublicense from USB for other Cech Technology held by
URC. The CTI license, URC license and USB sublicense together grant RPI the
exclusive (except for non-commercial academic research) worldwide right, among
other things, to make, use and sell RNA enzymes covered by licensed patents and
products incorporating them. The URC license and USB sublicense are fully paid.
The CTI license provides for the payment of a royalty on sales of products
incorporating RNA enzymes, covered by licensed patents, and for certain minimum
annual royalties. RPI may grant sublicenses to the licensed technology subject
to the payment to CTI of a share of
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<PAGE> 13
royalty income from such sublicenses or a royalty on sales from sublicensed
products, methods or services, depending on the particular licensed patents
involved. In addition, RPI must pay CTI a share of any option fee, license fee,
prepaid royalty or other "front-end" fee other than research and development
funding paid in connection with such sublicense.
In September 1993, RPI was granted a right of first refusal to license
any new inventions, improvements and patents related to ribozyme technology
developed by Dr. Cech or others at CU, in exchange for certain payments. In
order to maintain this right, RPI has agreed to fund research at CU through an
unrestricted grant of $750,000 payable in various installments over a five year
period commencing in September 1993. As of December 31, 1997, $113,000 of the
unrestricted grant is still payable. In addition, RPI has agreed to pay CU a fee
for each invention disclosure accepted by RPI under the license.
As part of the Company's overall intellectual property strategy, it
enters selectively into agreements with academic institutions either to license
pre-existing technology or to support the development of new technologies and
gain the commercial rights to such new technologies. The Company has a number of
these agreements in place with institutions such as Duke University, Georgetown
University, Massachusetts Institute of Technology, University of Florida,
University of Toronto, University of Vermont, and Yale University.
In January 1996, the Company entered into a License Agreement with the
City of Hope for an HIV therapeutic based upon ribozyme technology. Under the
agreement, the Company has the exclusive right to, among other things, develop
and commercialize a particular combination of ribozymes using a retroviral
vector for an HIV/AIDS therapeutic. The Company must pay certain minimum
royalties prior to commercialization, and other royalties upon sales of product.
As a result of these licenses and sublicenses, and RPI's own internal
research, RPI has exclusive worldwide rights to at least 37 issued patents in
the United States, 3 patents granted in Europe, 1 patent granted in Japan and 3
issued patents in Australia. In addition, Notices of Allowance have been
received for at least 16 patents from the United States Patent and Trademark
Office, for a total of at least 60 patents issued or allowed in the United
States and abroad. Six of the 37 United States issued patents, 1 European patent
and 1 Japanese patent cover the use of an enzymatic RNA to cleave a single
stranded RNA (the "Cech Patents"). The Company believes that the Cech Patents
grant the right to exclude others from practicing ribozyme technology as it is
currently known to the Company in the United States, Europe and Japan
irrespective of the application, the method of production, the method of
purification, or the ribozyme motif used. Unless extended, the Ribozyme Patents
will expire in December 2008 in the United States and December 2007 in Europe
and in Japan. The additional issued patents cover both ribozyme technology
(e.g., ribozyme design, synthesis, chemical modifications, delivery, ribozyme
motifs, vector production, target site selection) as well as application to
specific therapeutic targets.
In addition, RPI has filed or holds exclusive licenses to more than
100 pending United States and related foreign applications. The Company's patent
portfolio includes approximately 40 United States applications for various areas
of interest in human therapeutics and diagnostics and certain agricultural uses.
The portfolio also includes approximately 80 United States applications related
to the chemistry, design, optimization, manufacture, and delivery of ribozyme
products.
The Company has filed opposition documents against two patents granted
to a competitor in Europe. Opposition proceedings against certain European and
Japanese patents of the Company have been initiated by its competitors. The
Japanese Opposition Division has issued notification to maintain RPI's Japanese
patent. The opposition proceedings against the Company's European patent is
still ongoing. In addition, interference proceedings against certain of the
Company's other patents and patent applications are anticipated in the U.S. The
Company believes that its patents and applications are soundly based, but the
extent of protection may vary in different countries and no assurance can be
given that any patent will provide commercially significant protection or will
not be challenged, invalidated, or circumvented. However, litigation could be
necessary to protect the Company's patent position, which would result in
substantial cost to, and diversion of efforts by, the Company.
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Competitors or other patent holders could bring legal actions against
the Company involving the Company's patents, patent applications or rights to
use proprietary technology. If any actions are successful, in addition to any
potential liability for damages, the Company could be enjoined from selling the
affected product, or be required to obtain a license in order to continue to
manufacture or market the product. There can be no assurance that the Company
would prevail in any such action or that any license required under any such
patent would be made available on acceptable terms, if at all. There has been,
and the Company believes that there will continue to be, significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights. Any additional litigation could consume a substantial portion of the
Company's resources regardless of the outcome.
It is the Company's policy to require its employees, consultants,
members of its Scientific Advisory Board and parties to collaborative agreements
to execute confidentiality agreements upon the commencement of employment or
consulting relationships or a collaboration with the Company. These agreements
provide that all confidential information developed or made known during the
course of the relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions resulting from work
performed for the Company, utilizing property of the Company or relating to the
Company's business and conceived or completed by the individual during
employment shall be the exclusive property of the Company to the extent
permitted by applicable law. There can be no assurance, however, that these
agreements will provide meaningful protection of the Company's trade secrets or
adequate remedies in the event of unauthorized use or disclosure of such
information. See "Risk Factors--Uncertainty of Protection of Patents and
Proprietary Rights."
GOVERNMENT REGULATION
The production and marketing of the Company's products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous government authorities in the United States and
other countries. In the United States, drugs are subject to rigorous FDA
regulation. The Federal Food, Drug and Cosmetic Act, as amended and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of the Company's human therapeutic products. Product development and approval
within this regulatory framework takes a number of years and involves the
expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in
the United States include (i) pre-clinical laboratory tests, in vivo
pre-clinical trials and formulation studies, (ii) the submission to the FDA of
an IND, which must become effective before human clinical trials commence, (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug, (iv) the submission of an NDA to the FDA and (v) FDA
approval of the NDA prior to any commercial sale or shipment of the drug. In
addition to obtaining FDA approval for each product, each drug manufacturing
establishment must be registered with, and approved by, the FDA. Domestic
manufacturing establishments are subject to biennial inspections by the FDA and
must comply with cGMP for both drugs and devices. To supply products for use in
the US, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
In addition to FDA requirements, the National Institutes of Health
("NIH") has established guidelines for research involving recombinant DNA
molecules, which are utilized by the Company and certain of its collaborators
and licensees in their research. These guidelines apply to all recombinant DNA
research within the United States or its territories which is conducted at or
supported by the NIH. Under current guidelines, proposals to conduct clinical
research involving gene therapy which is supported by the NIH must be reviewed
by the NIH Recombinant DNA Advisory Committee. The Company's vector delivery of
ribozymes will need to be reviewed by this Committee.
The FDA has also initiated procedures designed to provide broader
access to certain investigational drugs prior to marketing approval. In 1987,
the FDA adopted regulations authorizing "treatment INDs" for investigational
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drugs designed to treat serious and life-threatening diseases where no
satisfactory alternate therapies exist. The sponsor of a treatment IND is
required to comply with the regular IND requirements, including institutional
review board approval and patient informed consent. In addition, the sponsor
must be actively pursuing marketing approval for the investigational drug, and
may not promote the drug prior to marketing approval.
Pre-clinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
efficacy of the product. Compounds must be formulated according to cGMP and
pre-clinical safety tests must be conducted by laboratories that comply with FDA
regulations regarding Good Laboratory Practices ("GLP"). The results of the
pre-clinical tests are submitted to the FDA as part of an IND and are reviewed
by the FDA prior to the commencement of human clinical trials. Additional
pharmacology and toxicology studies are generally conducted concurrently with
human clinical trials.
Clinical trials involve the administration of the investigational new
drug to healthy volunteers or to patients, under the supervision of qualified
principal investigators. Initial clinical trials are conducted in accordance
with Good Clinical Practices under protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria to
be evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. The IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases,
but the phases may overlap. In Phase I, the initial introduction of the drug
into healthy human subjects, the drug is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and pharmacokinetics
(clinical pharmacokinetics and pharmacology). Phase II involves studies in a
limited patient population to (i) determine the efficacy of the drug for
specific, targeted indications, (ii) determine optimal dosage and (iii) identify
possible adverse effects and safety risks. When a compound appears to be
effective and to have an acceptable safety profile in Phase II clinical trials,
Phase III clinical trials are undertaken to further evaluate and confirm
clinical efficacy and to further test for safety within an expanded patient
population at geographically dispersed clinical study sites. There can be no
assurance that Phase I, Phase II or Phase III clinical trials will be completed
successfully within any specified time period, if at all, with respect to any of
the Company's products subject to such testing. Furthermore, the Company or the
FDA may delay or suspend clinical trials at any time if it is felt that the
subjects or patients are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, pre-clinical trials and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny an NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, or require extensive post marketing testing
and surveillance to monitor the safety or efficacy of the Company's products if
they do not view the NDA as containing adequate evidence of the safety and
efficacy of the drug. Notwithstanding the submission of such data, the FDA may
ultimately decide that the application does not satisfy its regulatory criteria
for approval. Moreover, if regulatory approval of a drug is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
Among the conditions for NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP, which must be followed at all times. In complying with standards set
forth in these regulations, manufacturers (including a drug sponsor's third
party contract manufacturers) must continue to expend time, money and effort in
the area of production and quality control to ensure full technical compliance.
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations.
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The Company's research and development involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company.
For marketing outside the United States, the Company will be subject
to foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. The Company does not currently have any facilities or
personnel outside the United States. See "Risk Factors--Uncertainty of
Governmental Regulation" and "--Hazardous Materials."
EMPLOYEES
As of December 31, 1997, the Company had 91 full-time employees,
including a technical scientific staff of 71. There can be no assurance that the
Company will be able to continue to attract and retain qualified personnel in
sufficient numbers to meet its needs. None of the Company's employees is covered
by collective bargaining arrangements and management considers relations with
its employees to be good.
ITEM 2. PROPERTIES
RPI currently leases approximately 30,000 square feet of laboratory
and office space at 2950 Wilderness Place, Boulder, Colorado. The Company
leases this space under an operating lease that lasts through June 2007. The
Company believes that the existing facility will be sufficient to meet its
needs through 1998. The Company is currently attempting to finance the
construction of a build to suit facility in the Boulder area. If financing is
obtained, of which there is no assurance, the facility is scheduled to be
completed in the beginning of 1999.
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings described under "Business--Patents and
Proprietary Technology," RPI is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote by the Company's security
holders during the fourth quarter of the Company's fiscal year.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
(Symbol: RZYM). The following table sets forth, for the periods indicated, the
high and low closing sales prices per share of the Company's common stock as
reported on the NASDAQ National Market. Ribozyme Pharmaceuticals, Inc. conducted
its initial public offering on April 11, 1996 and all prices for the common
stock are subsequent to such date.
<TABLE>
<CAPTION>
1996 High Low
- ---- ---- ---
<S> <C> <C>
Second Quarter......................................... $ 21.25 $ 10.00
Third Quarter.......................................... 14.75 8.81
Fourth Quarter......................................... 13.13 8.38
1997
First Quarter.......................................... $ 16.50 $ 9.88
Second Quarter......................................... 12.38 8.63
Third Quarter.......................................... 12.00 7.38
Fourth Quarter......................................... 11.38 7.00
</TABLE>
As of March 13, 1998, there were approximately 171 stockholders of
record of the Company.
The Company has never declared or paid cash dividends and currently
intends to retain any future earnings to finance the growth and development of
its business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
RPI was founded to capitalize on the broad potential of ribozymes for
use in the development of human therapeutics and therapeutic target validation
services. The Company's technology is based on Professor Thomas R. Cech's
discovery of "ribozymes," for which he shared a Nobel Prize in 1989. Ribozymes
are a form of ribonucleic acid that have the ability to selectively inhibit
protein production. Because many disease states are the result of abnormal
protein production, ribozymes are potentially applicable to a wide range of
human diseases. RPI believes that its ribozyme technology may provide a new
paradigm for drug design and disease treatment and may be a significant tool for
the identification of gene function and target validation. The Company has
entered into a collaboration with Chiron to develop ribozyme products for
specific therapeutic targets in human health, a second collaboration with Chiron
in the target validation area, and collaborations with Schering AG and
Parke-Davis to validate new therapeutic targets from gene sequence data using
the Company's functional genomics technology. The Company has also licensed its
technology to DowElanco for certain agricultural applications and IntelliGene
for certain diagnostic applications.
The Company completed its initial public offering in April 1996
resulting in net proceeds of approximately $20.6 million. Concurrent with the
closing of the offering, Chiron purchased common stock at an aggregate purchase
price of $3.6 million and paid the Company an additional $1.8 million to
complete the purchase of a warrant issued to Chiron upon the closing. In October
1997, the Company completed a secondary offering resulting in net proceeds of
approximately $10.5 million.
The Company does not anticipate revenues from product sales in the
foreseeable future. The Company has incurred losses since inception and, as of
December 31, 1997, had an accumulated deficit of $62.5 million. The Company
anticipates incurring additional losses over at least the next several years as
it expands its research and development programs, including pre-clinical studies
and clinical trials. Such expansion will result in increases in both research
and development and general and administrative expenses. The Company's sources
of funds for the next several years will be payments from strategic
collaborations and licensing arrangements, if any, sale of equity and interest
income. Certain payments under strategic collaborations are contingent upon the
Company meeting certain milestones. Payments under strategic collaborations and
licensing arrangements will be subject to significant fluctuation in both timing
and amount and therefore the Company's results of operations for any period may
not be comparable to the results of operations for any other period.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and December 31, 1996
Revenues from collaborative agreements and grants increased $1.2
million to $1.9 million for the year ended December 31, 1997, compared to
$773,000 for the year ended December 31, 1996. The increase is primarily due to
$1.5 million in quarterly research payments made by Schering AG in 1997. The
1997 payments from Schering AG were the first in the collaboration which
includes $2.0 million in annual research funding over the five year term of the
collaboration, provided the agreement is extended for each of those years. Upon
payment of termination fees to the Company, the research collaboration may be
terminated at Schering AG's option any time after April 8, 1998. Collaborative
agreements and contract revenue fluctuations are generally the result of changes
in the number of funded research projects as well as the timing and completion
of contract milestones.
Interest income for the year ended December 31, 1997 decreased
$141,000 to $795,000 from $936,000 for the year ended December 31, 1996, due to
decreased average invested cash balances. The higher interest income in 1996 was
the result of increased cash balances due to the Company's initial public
offering in April 1996. Interest income generally fluctuates as a result of cash
available for investment and prevailing interest rates.
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Research and development expenses for the year ended December 31, 1997
increased $1.0 million to $15.2 million from $14.2 million for the year ended
December 31, 1997. The increase was primarily due to the hiring of additional
personnel and the overall scale-up of product development. Research and
development expenses consist primarily of salaries and benefits for scientific,
regulatory, quality control and pilot manufacturing personnel, consultants,
supplies, occupancy costs and depreciation for laboratory equipment and
facilities. The Company expects research and development expenses to continue to
increase as personnel and research and development facilities are expanded.
General and administrative expenses decreased slightly to $1.89 million
for the year ended December 31, 1997 compared to $1.9 million for the year ended
December 31, 1996. The slight decrease in general and administrative expense in
1997 is primarily due to higher expenses in 1996 which included one-time cash
and stock bonus payments made to the Company's executive officers in connection
with the initial public offering in April 1996. The Company expects general and
administrative expenses to increase as a result of hiring additional management
and administrative personnel and the incurring of legal and other professional
fees in connection with the overall expansion of the Company's operations and
business development efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed it operations since inception through public
offerings in April 1996 and October 1997, private placements of preferred stock,
and funds received under the Company's collaborative agreements with Schering
AG, Chiron, Parke-Davis and DowElanco. As of December 31, 1997 the research
collaborations with Parke-Davis and DowElanco have been completed. From
inception through December 31, 1997, the Company has received approximately
$29.0 million in net proceeds from private placements, $31.1 million in net
proceeds from public offerings and $23.5 million from its collaborations.
The Company had cash, cash equivalents and securities
available-for-sale of $16.1 million at December 31, 1997 compared with $17.6
million at December 31, 1996. The $1.5 million decrease in cash, cash
equivalents and securities available-for-sale was primarily the result of cash
used for research and development, investment in equipment, payments under loan
facilities and for general corporate purposes, offset by net proceeds from the
sale of common stock, loan proceeds and research payments from collaborations.
The Company invests its cash, cash equivalents and securities
available-for-sale in interest-bearing investment grade securities.
Total additions for property, plant and equipment during 1997 were $2.2
million, most all of which additions were financed through the Company's
existing equipment loan facilities.
As of December 31, 1997, up to $2.0 million in loans are available to
the Company in each calendar year through the year 2001, from Schering AG. The
Company received the first loan of $2.0 million in September 1997. The loans are
related to the Schering AG research collaboration entered into in April 1997.
Amounts not used in any calendar year may be carried forward to future years.
According to the terms of the Company's agreement with Schering AG, 50% of any
borrowings on the line of credit must be collateralized by equipment purchases.
In addition to the line of credit, Schering AG has agreed to provide $2.0
million in annual research funding for each year through April 2001 and will
make an additional equity investment of $2.5 million in May 1998. All such
payments are subject to certain restrictions, including receipt of certain third
party consents, and are subject to the termination of the research collaboration
at Schering AG's option at any time after April 8, 1998. See
"Business--Collaborative Relationships and License Agreements."
The Company estimates that its existing capital resources, together
with facility and equipment financing and expected revenues from its
collaborative agreements, will be sufficient to fund its current and planned
operations at least until mid 1999. There can be no assurance, however, that
changes in the Company's research and development plans, funding of technology
development, or other changes affecting the Company's operating
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expenses will not result in the expenditure of such resources before such time
and, in any event, the Company will need to raise substantial additional capital
to fund its operations in future periods. Such additional capital may be raised
through public or private financing, as well as collaborative relationships,
borrowing and other available sources. See "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."
At December 31, 1997, the Company had available net operating loss
carryforwards, research and development credit carryforwards and state
investment credit carryforwards of $62.5 million, $1.1 million and $31,000,
respectively, for income tax purposes. The Company's ability to utilize its net
operating loss carryforwards is subject to an annual limitation in future
periods pursuant to the "change in ownership" rules under Section 382 of the
Internal Revenue Code of 1986 .
YEAR 2000 ISSUE
Until recently most computer programs were written to store only two
digits of date-related information in order to more efficiently handle and store
data. Thus the programs were unable to properly distinguish between the year
1900 and the year 2000. This is referred to as the "Year 2000 Issue." During
1997, the Company reviewed all internal, external and third-party computer
applications and determined that there is no significant exposure to the Year
2000 Issue. Management does not believe the Company will have to modify or
replace any significant portions of its computer applications in order for the
computer systems to function properly with respect to the dates in the year 2000
and thereafter.
ITEM 7. FINANCIAL STATEMENTS
Submitted as part of Item 13(a) in this Form 10-KSB and incorporated
herein by reference.
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RISK FACTORS
The following risk factors should be read in conjunction with
information appearing elsewhere in this Report.
Except for the historical information contained herein, the discussion
in this Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the sections
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as those discussed elsewhere in
this Report.
EARLY STAGE OF DEVELOPMENT
RPI is at a very early stage of development and must be evaluated in
light of the uncertainties and complications present in an early stage
biotechnology company. Since the Company's inception in 1992, substantially all
of the Company's resources have been dedicated to the research and development
of potential products and services based on ribozyme technology. Therapeutic
products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a substantial number of years.
No revenues have been generated from product sales to date. There can be no
assurance that any therapeutic products will be successfully developed and
proven to be safe and effective. The development of new products and services is
highly uncertain and subject to a number of significant risks. There can be no
assurance that any of the Company's product development efforts or those of its
collaborators and licensees will be successfully completed, that regulatory
approvals will be obtained or will be as broad as sought, that any of the
Company's potential products will be capable of being produced in commercial
quantities at reasonable cost or that any products or services, if introduced,
will achieve market acceptance.
TECHNOLOGICAL UNCERTAINTY
Drug discovery and development methods based upon ribozymes are
relatively new, and there can be no assurance that these methods will lead to
the discovery or development of commercial pharmaceutical products, that the
Company will be able to employ these methods of drug development successfully,
or that ribozyme products will be deliverable, safe or efficacious in humans.
While the Company has demonstrated the utility of ribozyme technology in model
systems in vitro and in animals, and has identified a number of ribozymes worthy
of additional testing, none of these potential products nor, to the Company's
knowledge, any other ribozyme-based compound has been shown to be efficacious in
humans. A significant amount of additional research and development, requiring
many years and substantial resources, will be required to determine the
potential of the Company's ribozyme technology for therapeutic products. The
Company's technology may, during the course of further research, prove to be
ineffective in the treatment of human disease or in other areas. The Company
must conduct significant additional research and development on determining safe
and effective methods of delivering ribozymes into the human body for each
indication for the Company's potential therapeutic products, and must overcome a
number of other technological challenges, such as enhancing the delivery
activity and stability of ribozymes and manufacturing ribozyme-based therapeutic
products on a commercial scale. In particular, a significant amount of
additional research and development is required to determine whether ribozymes
can be delivered effectively in vivo, including research and development
directed toward improving the delivery of ribozymes to specific tissues and
improving cellular uptake. There can be no assurance that effective delivery of
ribozyme-based products can be achieved. In addition, the Company's use of
vector delivery of ribozymes will require that the Company overcome concerns
relating to potential serious side effects associated with vector delivery, such
as mutagenicity (permanent DNA alteration). Many of these technological and
developmental challenges may be significantly greater than those typically
associated with traditional drug development, and may never be overcome. The use
of ribozymes in animal health, agricultural applications and therapeutic target
validation is subject to similar developmental and technological uncertainties
which may never be overcome. There can be no assurance that even if the
Company's potential products are found to be safe and effective, or otherwise
have utility, that the Company will be able to
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manufacture them on a large commercial scale or market them in an economical
way. Further, it is possible that the proprietary rights of third parties will
preclude the Company or its collaborators and licensees from marketing products
or that third parties will market superior or equivalent products. As a result,
there can be no assurance that the Company's research and development activities
will result in any commercially viable products.
UNCERTAINTY OF PRODUCT DEVELOPMENT
Before obtaining regulatory approval for the commercial sale of any of
its potential products the Company must demonstrate, through pre-clinical
studies and clinical trials or corresponding animal health or agricultural
studies, that a potential product is safe and efficacious for use in each target
indication. There can be no assurance that results generated by pre-clinical
animal testing will be indicative of results of clinical testing in humans when,
and if, those tests are conducted. There can be no assurance that potential
products will be demonstrated to be safe and efficacious or will receive
necessary regulatory approvals. The Company may also experience delays from its
anticipated commencement dates for human clinical trials due to a variety of
factors including pre-clinical study results, delays or difficulties in patient
enrollment, delays in regulatory approvals and other factors. The Company's
potential products may prove to have undesirable and unintended side effects or
other characteristics that may prevent or limit their commercial use. In
addition, there can be no assurance that any of the Company's potential products
will ultimately obtain United States Food and Drug Administration ("FDA"), other
regulatory or foreign marketing approval for any indication, that an approved
product will be capable of being produced in commercial quantities at reasonable
cost or that any approved product will achieve market acceptance.
HISTORY OF OPERATING LOSSES
RPI has experienced significant operating losses since its inception in
1992. As of December 31, 1997, the Company had an accumulated deficit of
approximately $62.5 million. The Company expects to incur additional operating
losses over the next several years and expects cumulative losses to increase
substantially as the Company's research and development efforts and pre-clinical
and clinical testing expand. The Company's revenues to date have been derived
primarily from payments under collaborative arrangements. The Company's ability
to achieve profitability is dependent on its ability, alone or with others,
successfully to complete the development of products, conduct clinical trials,
obtain the required regulatory approvals and manufacture and market products.
There can be no assurance as to if or when the Company will achieve
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
RPI's success will depend in part on its ability to obtain patents,
maintain trade secrets and operate without infringing on the proprietary rights
of others, both in the United States and other countries. Patent matters in
biotechnology are highly uncertain and involve complex legal and factual
questions. Accordingly, the breadth of claims allowed in biotechnology and
pharmaceutical patents cannot be predicted. As of December 31, 1997, RPI held
exclusive rights to at least 37 issued United States patents and 7 issued
foreign patents. In addition, as of December 31, 1997, RPI had on file
approximately 100 United States and related foreign applications. There can be
no assurance that the Company will develop products or processes that are
patentable, that patents will issue from any of these applications or that
claims allowed on issued patents will be sufficient to protect the Company's
technology. There can be no assurance that the Company's issued patents or
patent applications, if issued, are enabled, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company. Competitors have filed
applications, have been issued patents and may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company or which could affect the Company's issued patents or efforts to
obtain issued patents. Although the Company has filed patent applications
covering, among other things, a number of improvements and modifications to
ribozymes, the basic patents exclusively licensed to the Company that cover the
use of an enzymatic RNA to cleave a single stranded RNA unless extended expire
in 2008 in the United States and in 2007 in
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Europe. There can be no assurance that any product developed by the Company or
its collaborators and licensees will be commercially available by the expiration
date of such patents. Furthermore, changes in United States patent laws resulted
from the General Agreement on Tariffs and Trade (the "GATT Agreement"). Most
notably, the GATT Agreement resulted in United States law being amended to
change the term of patent protection, for certain patent applications filed
after June 7, 1995, from 17 years from patent issuance to 20 years from the
earliest effective filing date of the application. Because the time from filing
to issuance of biotechnology applications is often more than three years, a
20-year patent term from the date of filing may result in a substantially
shortened term of patent protection, which may adversely affect the Company's
patent position.
A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received issued patents relating to ribozymes. The commercial success of the
Company will depend in part on RPI not infringing patents issued to competitors
and not breaching the technology licenses upon which any potential products are
based. It is uncertain whether the issuance of any third-party patents would
require the Company to alter its products or processes, obtain licenses or cease
certain activities. Some of these applications or patents may conflict with the
Company's issued patents or pending applications. Further, RPI is aware that
other companies have filed patent applications and have been granted patents in
the United States and other countries claiming subject matter that may be useful
to the Company for some of its potential products. Such conflict could result in
a significant reduction of the coverage of the Company's issued or licensed
patents. In addition, if patents exist or are issued to other companies which
contain competitive or conflicting claims and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable terms, if at all. If such licenses are
not obtained, the Company might be prevented from pursuing the development of
certain of its potential products. The Company's breach of an existing license
or failure to obtain a license to any technology that it may require to
commercialize its products may have a material adverse impact on the Company.
Litigation, interference proceedings in the United States Patent and Trademark
Office, oppositions in non-United States countries or reexaminations, which
could result in substantial costs to and diversion of efforts by the Company,
may also be necessary to enforce or defend any patents issued or licensed to the
Company or to determine the scope and validity of third-party proprietary
rights. If competitors of the Company prepare and file patent applications in
the United States that claim technology also claimed by the Company, the Company
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office to determine priority of invention, which
could result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. The Company has filed opposition documents against two
patents granted to a competitor in Europe. Opposition proceedings against
certain European and Japanese patents of the Company have been initiated by its
competitors. The Japanese Opposition Division has issued notification to
maintain RPI's Japanese patent. The opposition proceedings against the Company's
European patent is still ongoing. In addition, interference proceedings against
certain of the Company's other patents and patent applications are anticipated
in the U.S. There can be no assurance that the Company's issued or licensed
patents would be held valid by a court of competent jurisdiction. An adverse
outcome could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require the Company
to cease using such technology.
RPI relies on trade secrets to protect its technology in addition to
patent protection, especially where patent protection is not believed to be
appropriate or obtainable. RPI attempts to protect its proprietary technology
and processes in part by confidentiality agreements and assignment of invention
agreements with its employees and confidentiality agreements with its
consultants, collaborators and licensees. There can be no assurance that these
agreements will provide meaningful protection, that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that the Company or its consultants,
collaborators or licensees use intellectual property owned by others in their
work for the Company, disputes may also arise as to the rights in related or
resulting know-how and inventions. See "Business--Patents and Proprietary
Technology."
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DEPENDENCE ON COLLABORATIVE RELATIONSHIPS
The Company's strategy for the development, clinical testing,
manufacturing and commercialization of its potential products includes
collaborating with corporate partners, licensors, licensees and others and is
dependent upon the performance of responsibilities by these outside parties. The
Company is currently engaged in a number of corporate collaborations, including
product development and target validation service agreements and technology
licenses. Although the Company believes its collaborators and licensees and any
future collaborators and licensees have or will have a motivation to perform
their contractual responsibilities, the amount and timing of resources to be
devoted to collaborative activities by the Company's collaborators and licensees
are not within the control of the Company. There can be no assurance that any
collaborative relationship will be extended or renewed, that the Company's
collaborators and licensees will perform their obligations as expected or that
the Company will derive any additional revenue or other benefits from such
arrangements. There can be no assurance that the Company's current or future
collaborators and licensees will not pursue existing or alternative technologies
in preference to those being developed in collaboration with the Company. In
particular, the Company is aware that Chiron is conducting product development
programs that may be competitive with certain of the RPI/Chiron collaborative
programs. In addition, there can be no assurance that the Company's
collaborators and licensees will pay any additional option or license fees to
the Company or that they will develop and market any products under the
agreements. The Company's collaboration with Chiron provides that the parties
will share equally in the development costs and profits of any jointly developed
product. The Company will be required to provide substantial funds to pay for
its share of any such development costs, and to the extent the Company is
unwilling or unable to fund its share and Chiron chooses to fund the entire
development costs, the Company will forfeit its interest in such product except
for the right to manufacture and receive a predetermined royalty. There can be
no assurance that Chiron will commit to fund product development costs if the
Company declines to participate. The Company has prepared a development plan
for the VEGF ribozyme and intends to proceed with development either with a
partner or on its own. Furthermore, there can be no assurance that the Company
will be able to negotiate additional collaborative arrangements in the future
on acceptable terms, if at all, or that such collaborative arrangements will be
successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it would require substantially greater capital to
undertake research, development and marketing of its proposed products at its
own expense. In addition, the Company may encounter significant delays in
introducing its proposed products into certain markets or find that the
development, manufacture or sale of its proposed products in such markets is
adversely affected by the absence of such collaborative agreements. See
"Business--Product Development Programs," "--Collaborative Relationships and
License Agreements," and "--Manufacturing and Marketing Strategy."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
RPI is engaged in a rapidly changing, highly competitive field. Other
products and therapies that may compete directly with the products that the
Company is seeking to develop and market currently exist or are being developed.
Many other companies are actively seeking to develop products, including
ribozymes and other products designed to modulate gene expression, such as
antisense oligonucleotides, that have disease targets similar to those being
pursued by the Company. Some of these competitive products are in clinical
trials. There can be no assurance that the Company's competitors will not
succeed in developing products based on ribozyme or other technologies, existing
or new, that are more effective than any that are being developed by the Company
or that would render the Company's ribozyme technologies obsolete and
noncompetitive. Moreover, there currently are commercially available products
for the treatment of certain disease targets being pursued by the Company.
Competition from fully integrated pharmaceutical and biotechnology
companies and more established biotechnology companies is intense and is
expected to increase. Most of these companies have significantly greater
financial resources and expertise in research and development, manufacturing,
pre-clinical studies and clinical trials, obtaining regulatory approvals and
marketing than the Company. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and biotechnology companies. Many of these competitors have
products that have been approved or are in development and operate large, well
funded research and development programs. Academic institutions, governmental
agencies
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and other public and private research organizations also conduct research, seek
patent protection and establish collaborative arrangements for products and
clinical development and marketing. These companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel. In addition to the above factors, RPI faces competition
based on product efficacy, safety, the timing and scope of regulatory approvals,
availability of supply, marketing and sales capability, reimbursement coverage,
price and patent position. There can be no assurance that the Company's
competitors will not develop more effective or more affordable products, or
achieve earlier patent protection or product commercialization than the Company.
See "Business--Competition."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Development of the Company's products will require a commitment of
substantial additional funds to conduct the costly and time consuming research,
pre-clinical and clinical testing necessary to bring its potential products to
market and to establish manufacturing and marketing capabilities. The Company's
future capital requirements will depend on many factors, including, among
others, the progress of the Company's research, development and drug discovery
efforts, the ability of the Company to establish collaborative arrangements for
clinical testing, progress with pre-clinical studies and clinical trials, the
time and costs involved in obtaining regulatory approvals, the costs involved in
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims, competing technological and market developments, changes in the
Company's collaborative relationships, costs associated with the acquisition of
technology, if any, evaluation of the commercial viability of the potential
products, effective commercialization activities and arrangements, and the cost
and availability of third-party financing for capital expenditures. Based on
current projections, the Company estimates that its existing capital resources,
together with facility and equipment financing and expected revenues from its
collaborations, will be sufficient to fund the Company's requirements until
mid-1999 (assuming that the Company exercises its option to defer paying the
costs of any Phase II or subsequent clinical trials conducted under its
collaboration with Chiron until after such date). There can be no assurance that
the underlying assumed levels of revenue and expense will prove to be accurate.
Whether or not these assumptions prove to be accurate, the Company will need to
raise substantial additional capital to fund its operations. The Company intends
to seek such additional funding through collaborative arrangements, public or
private equity or debt financing, capital lease transactions or other financing
sources that may be available. However, there can be no assurance that
additional financing will be available on acceptable terms or at all. If
additional funds are raised through the sale of equity or convertible debt
securities, substantial dilution to existing stockholders may result. In the
event that additional funds are obtained through arrangements with collaborators
and licensees, such arrangements may require the Company to relinquish rights to
certain of its technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize itself. If adequate funds are
not available, the Company may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Collaborative Relationships and License Agreements."
UNCERTAINTY OF GOVERNMENTAL REGULATION
The FDA and comparable agencies in federal, state and local
jurisdictions and in foreign countries impose substantial requirements upon the
manufacturing and marketing of products such as those proposed to be developed
by the Company or its collaborators and licensees. The process of obtaining FDA
and other required regulatory approvals is lengthy and expensive. The time
required for FDA and other regulatory approvals is uncertain and typically takes
a number of years, depending on the type, complexity and novelty of the product.
The Company or its collaborators and licensees may encounter significant delays
or excessive costs in their efforts to secure necessary approvals or licenses.
Because certain of the products that may result from the Company's research and
development programs involve the application of new technologies and will be
based on a new therapeutic approach, such products may be subject to substantial
additional review by various governmental regulatory authorities and as a
result, regulatory approvals may be obtained more slowly than for products using
more conventional technologies. There can be no assurance that FDA and other
regulatory approvals will be obtained in
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a timely manner, if at all. Any delay in obtaining, or the failure to obtain,
such approvals would adversely affect the Company's ability to generate product
or royalty revenues. Even if FDA and other regulatory approvals are obtained,
the marketing and manufacturing of products are subject to continuing FDA and
other regulatory review, and later discovery of previously unknown problems with
a product, manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market. Additional
governmental regulations may be promulgated that could delay regulatory approval
of the Company's or a corporate partner's potential products. The Company cannot
predict the impact of adverse governmental regulation which might arise from
future legislative or administrative action. See "Business--Government
Regulation."
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on its corporate officers and other
principal members of its scientific and management staff, the loss of any of
whose services might significantly delay or prevent the achievement of the
Company's research, development or business objectives. In addition, the Company
relies on consultants and advisors, including the members of its Scientific
Advisory Board, to assist the Company in formulating its research and
development strategy. Retaining and attracting qualified personnel, consultants
and advisors is critical to the Company's success. In order to pursue its
product development and marketing plans, the Company may be required to hire
additional qualified scientific personnel to perform research and development,
as well as personnel with expertise in clinical testing, government regulation,
manufacturing, and marketing. These requirements are also expected to demand the
addition of management personnel and the development of additional expertise by
existing management personnel. The Company faces competition for qualified
individuals from numerous pharmaceutical and biotechnology companies,
universities and other research institutions. There can be no assurance that the
Company will be able to attract and retain such individuals on acceptable terms,
if at all, and the failure to do so could have a material adverse effect on the
Company, including its ability to conclude collaborations with additional
collaborators and licensees.
LACK OF MANUFACTURING EXPERIENCE; RELIANCE ON CONTRACT MANUFACTURERS
The Company currently has manufacturing facilities to produce limited
quantities of some of its compounds for research and development, pre-clinical
and some clinical purposes. The potential pharmaceutical products under
development by the Company and its collaborators and licensees have never been
manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. If the Company or its collaborators or licensees is unable
to manufacture or contract for a sufficient supply of its potential products on
acceptable terms, or if it or they should encounter delays or difficulties in
its relationships with manufacturers, the Company and its collaborators and
licensees' pre-clinical and human clinical testing schedule would be delayed,
resulting in a delay in the submission of products for regulatory approval or
the market introduction and subsequent sales of such products, which would have
a material adverse effect on the Company. Moreover, if a vector delivery
approach is required, a viral or non-viral vector that contains the ribozyme
must be obtained. There can be no assurance that the Company or its
collaborators or licensees will be able to obtain licenses to, or the
appropriate manufacturing of, such a vector with sufficient quality and
quantity, and such potential difficulty would have a material adverse effect on
the Company. Furthermore, RPI or contract manufacturers must adhere to current
Good Laboratory Practices and current Good Manufacturing Practices ("cGMP")
regulations enforced by the FDA through its facilities inspection program. If
these facilities cannot pass a pre-approval plant inspection, the FDA pre-market
approval of the products will not be granted. See "Business--Manufacturing and
Marketing Strategy."
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LACK OF SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
The Company currently has no sales, marketing or distribution
capability. The Company intends to rely on relationships with pharmaceutical and
biotechnology companies with established distribution systems and direct sales
forces to market certain of its products and may decide to market other products
directly. To market any of its products directly, the Company must develop a
marketing and sales force with technical expertise and with supporting
distribution capability. There can be no assurance that the Company will be able
to establish in-house sales, marketing and distribution capabilities or
relationships with third parties, or that it will be successful in gaining
market acceptance for its products. To the extent that the Company enters into
co-promotion or other licensing arrangements, any revenues received by the
Company will depend upon the efforts of third parties, and there can be no
assurance that such efforts will be successful. See "Business--Manufacturing and
Marketing Strategy."
UNCERTAINTY OF PHARMACEUTICAL PRICING, THIRD-PARTY REIMBURSEMENT AND HEALTH CARE
REFORM MEASURES
The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
governmental and third party payors to contain or reduce the costs of health
care. In the United States and in certain foreign jurisdictions there have been,
and the Company expects that there will continue to be, a number of legislative
and regulatory proposals aimed at changing the health care system. While the
Company cannot predict whether any such legislative or regulatory proposals will
be adopted or the effect that such proposals may have on its business, the
pendency or approval of such proposals could have a material adverse effect on
the Company's ability to raise capital or to obtain additional collaborators or
licensees, and the adoption of such proposals could have a material adverse
effect on the Company.
In both domestic and foreign markets, sales of the Company's potential
products will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. Future legislation and regulations affecting the pricing
of pharmaceuticals could further limit reimbursement for medical products and
services. There can be no assurance that any of the Company's potential products
will be considered cost effective or that adequate third-party reimbursement
would be available to enable RPI to maintain price levels sufficient to realize
an appropriate return on its investment in product development. In addition, the
trend toward managed health care in the United States and the concurrent growth
of organizations, such as health maintenance organizations, which could control
or significantly influence the purchase of health care services and products, as
well as legislative proposals to reduce government insurance programs, may all
result in pricing pressure for any products that might be developed by the
Company. See "Business--Government Regulation."
RISK OF PRODUCT LIABILITY; POSSIBLE INABILITY TO OBTAIN INSURANCE
The Company's business will expose it to potential product liability
risks that are inherent in the testing, manufacturing and marketing of human
therapeutic products. The Company currently has no clinical trial liability
insurance and there can be no assurance that it will be able to obtain and
maintain such insurance for any of its clinical trials. In addition, there can
be no assurance that the Company will be able to obtain or maintain product
liability insurance in the future on acceptable terms or with adequate coverage
against potential liabilities. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products developed by the Company or its collaborators and
licensees. Further, the Company's collaborative agreement with Chiron requires
that the Company obtain certain insurance coverage in the future. Failure to
obtain such coverage could result in a breach by the Company of such agreement,
which could give rise to rights of termination on the part of Chiron. A product
liability claim or recall would have a material adverse effect on the business
and financial condition of the Company.
27
<PAGE> 28
HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations if the Company develops manufacturing capacity. See
"Business--Government Regulation."
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market price of the shares of Common Stock, like that of the common
stock of many other early-stage biopharmaceutical companies, is highly volatile.
Factors such as announcements of technological innovations or new commercial
products by the Company or its competitors, progress with clinical trials,
governmental regulation, changes in reimbursement policies, developments in
patent or other proprietary rights of the Company or its competitors, including
litigation, developments in the Company's relationships with current or future
collaborators and licensees, if any, public concern as to the safety and
efficacy of drugs developed by the Company and its competitors, changes in
estimates of the Company's performance by securities analysts, fluctuations in
the Company's operating results and general market conditions may have a
significant effect on the market price of the Common Stock. The Company has
never paid any cash dividends and does not anticipate paying cash dividends in
the foreseeable future.
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock and to fix the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of and the voting and
other rights of the holders of the Common Stock. The Company has no present
plans to issue shares of preferred stock. In addition, certain provisions of the
Company's Bylaws and of Delaware law applicable to the Company could have the
effect of discouraging certain attempts to acquire the Company which could
deprive the Company's stockholders of the opportunities to sell their shares of
Common Stock at prices higher than prevailing market prices.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
28
<PAGE> 29
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers
Ralph E. Christoffersen, Ph.D.(1) 60 Chief Executive Officer, President and Director
Lawrence E. Bullock 42 Vice President, Administration and Finance, Chief
Financial Officer and Secretary
Thomas H. Rossing, M.D. 48 Vice President of Product Development
Alene A. Holzman 40 Vice President of Business Development and General
Manager of Target Validation and Discovery Business
Nassim Usman, Ph.D. 38 Vice President of Research
Directors
David T. Morgenthaler (1),(2) 78 Chairman of the Board
Jeremy L. Curnock Cook (3) 48 Director
Anthony B. Evnin, Ph.D. (1),(3) 57 Director
Charles M. Hartman (2) 56 Director
Anders P. Wiklund (2),(3) 57 Director
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
RALPH E. CHRISTOFFERSEN, PH.D. has served as Chief Executive Officer,
President and Director of RPI since June 1992. Prior to joining the Company, Dr.
Christoffersen was Senior Vice President and Director of U.S. Research at
SmithKline Beecham Pharmaceuticals from 1989 to June 1992, and prior to that,
held senior management positions in research at The Upjohn Company from 1983 to
1989. Prior to joining The Upjohn Company, Dr. Christoffersen served as a
Professor of Chemistry and Vice Chancellor for Academic Affairs at the
University of Kansas, and as President of Colorado State University. He received
his Ph.D. in physical chemistry from Indiana University.
LAWRENCE E. BULLOCK has served as Vice President of Administration and
Finance, Chief Financial Officer and Secretary, since January 1996. Prior to
joining RPI, Mr. Bullock was Chief Financial Officer, Director of Finance and
Administration and Secretary of La Jolla Pharmaceutical Company, a
biopharmaceutical company, from December 1990 to January 1996. Mr. Bullock
received his M.B.A. from the University of Utah.
THOMAS H. ROSSING, M.D. has served as Vice President of Product
Development since July 1997. Prior to joining the Company, Dr. Rossing was Vice
President of Clinical Development and Regulatory Affairs at Gene Medicine, Inc.
from July 1996 to July 1997. Prior to that, Dr. Rossing was Director of
International Respiratory Clinical Research at Glaxo Wellcome from March 1993 to
July 1996, Director of Clinical Pharmacology and Worldwide Regulatory Liaison at
Merck Research Laboratories and a staff physician at Brigham and Women's
Hospital in Boston, Massachusetts. He received his M.D. degree from Harvard
University.
29
<PAGE> 30
ALENE A. HOLZMAN has served as Vice President of Business Development
and General Manager of Target Validation and Discovery Business since April
1997. Prior to joining the Company, Ms. Holzman was Vice President of ChemTrak
Corporation, a medical technology firm, from January 1990 to March 1997 where
she was responsible for Finance, Business Development and Marketing and Sales.
From 1987 to 1990, she was Vice President of CytoSciences, Inc., a biomedical
company and from 1981 to 1987 she was Vice President of Marketing and Sales for
Hana Biologics, Inc. (now Cell Genesys Corporation), a publicly held
biotechnology firm. Ms. Holzman received her M.B.A. from the University of
California at Berkeley.
NASSIM USMAN, PH.D. has served as Vice President of Research of RPI
since May 1996. From April 1994 until May 1996 Dr. Usman served as Director of
Chemistry and Biochemistry Research at the Company and from September 1992 until
April 1994, Dr. Usman served as Senior Scientist in Chemistry and Biochemistry
of RPI. Prior to joining RPI, Dr. Usman was a Postdoctoral Fellow and Scientist
in the Departments of Biology and Chemistry at the Massachusetts Institute of
Technology from January 1987 to September 1992. Dr. Usman received his Ph.D. in
chemistry from McGill University.
DAVID T. MORGENTHALER has served as a director of RPI since February
1992 and was elected Chairman of the Board in December 1995. Mr. Morgenthaler
was a founder of, and has been Managing Partner of Morgenthaler Ventures, a
private venture capital firm, since 1968. He has been a director of a
substantial number of public and private companies. Mr. Morgenthaler received
his M.S. degree from the Massachusetts Institute of Technology.
JEREMY L. CURNOCK COOK has served as a Director of RPI since July
1995. Mr. Cook is a Director of Rothschild Asset Management and has been
responsible for the Rothschild Bioscience Unit since 1987. Mr. Cook founded the
International Biochemicals Group in 1975 which he subsequently sold to Royal
Dutch Shell in 1985, remaining as Managing Director until 1987. He is also a
director of the International Biotechnology TrustCreative BioMolecules Inc.,
Targeted Genetics Inc., Cantab Pharmaceuticals plc, and Biocompatibles
International plc. Mr. Cook holds an M.A. in Natural Sciences from Trinity
College Dublin.
ANTHONY B. EVNIN, PH.D. has served as a Director of RPI since February
1992. Dr. Evnin has been a General Partner of Venrock Associates, a venture
capital partnership, since 1975. He is also a director of AxyS Pharmaceutical
Corporation, Centocor, Inc., Opta Food Ingredients, Inc., and Triangle
Pharmaceuticals, Incorporated. Dr. Evnin received his Ph.D. from the
Massachusetts Institute of Technology.
CHARLES M. HARTMAN has served as a Director of RPI since February
1992. He has been a General Partner of CW Group, a venture capital partnership,
since 1983. From 1965 to 1983 Mr. Hartman held a number of positions with
Johnson & Johnson. He is a director of Geron Corporation and SUGEN, Inc.
ANDERS P. WIKLUND has served as a Director of RPI since August 1994.
Mr. Wiklund has been with Biacore Holdings Inc., since January 1997, where he is
Senior Vice President. Previously, from 1967 through 1996, Mr. Wiklund served in
numerous executive positions for the Kabi and Pharmacia group of companies,
including President and CEO of Kabi Vitrum Inc., and Kabi Pharmacia,
Incorporated. Mr. Wiklund is also a director of Trega Bioscience, Inc., Medivir,
A.B., InSite Vision, Inc., and Vascular Therapeutics, Incorporated. Mr. Wiklund
graduated from the Pharmaceutical Institute in Stockholm, where he received a
Master of Pharmacy degree.
Additional information regarding these persons and compliance with
Section 16(a) of the Exchange Act is incorporated herein by reference to the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 22, 1998, to be filed with the Commission pursuant to Regulation
14A.
ITEM 10. EXECUTIVE COMPENSATION
The information with respect to executive compensation is incorporated
herein by reference to the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 22, 1998, to be filed with the
Commission pursuant to Regulation 14A.
30
<PAGE> 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 22, 1998, to be filed with the Commission pursuant to Regulation
14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions is incorporated herein by reference to the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 22,
1998, to be filed with the Commission pursuant to Regulation 14A.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors F-1
Balance Sheets F-2
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-7
Notes to Financial Statements F-8
31
<PAGE> 32
2. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 (5) Amended and Restated Certificate of Incorporation dated April 17, 1996.
3.2 (1) By-laws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (1) Specimen Stock Certificate.
10.1 (1) Form of Indemnity Agreement entered into between the Company and its directors and
officers, with related schedule.
10.2 (1) Company's Incentive Stock Option Plan (the "ISO Plan"), including form of Incentive
Stock Option Agreement under the ISO Plan.
10.3 (1) Company's Non-Qualified Stock Option Plan (the "NQSO Plan"), including form of
Non-Qualified Stock Option under the NQSO Plan.
10.4 (1) Company's 1996 Stock Option Plan (the "Option Plan"), including forms of Incentive
Stock Option and Nonstatutory Stock Option under the Option Plan.
10.5 (1) Company's 1996 Employee Stock Purchase Plan.
10.6 (5) Employment Agreement, dated January 1, 1997 between the Company and Ralph
Christoffersen.
10.7 (1) Incentive Stock Option Agreement between the Company and Ralph E. Christoffersen,
dated as of December 23, 1992.
10.8 (1) Incentive Stock Option Agreement between the Company and Ralph E. Christoffersen,
dated as of September 23, 1994.
10.9 (1) Warrant Purchase Agreement, dated as of March 15, 1995 between the Company and
Hambrecht & Quist Guaranty Finance, L.P.
10.10 (1) Warrant to Purchase Common Stock, dated as of March 15, 1995 issued to Hambrecht &
Quist Guaranty Finance, L.P.
10.11 (1) Warrant to Purchase Common Stock, dated as of February 22, 1993 issued to LINC
Scientific Leasing.
10.12 (1) Warrant to Purchase Common Stock, dated as of July 30, 1993 issued to Douglas
E. Olson.
10.13 (1) Warrant to Purchase Common Stock, dated as of July 30, 1993 issued to Richard
J. Warburg and Ruth P. Warburg.
10.14 (1) Warrant to Purchase Common Stock, dated as of December 28, 1994 issued to Competitive
Technologies, Inc.
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------
<S> <C>
10.15 (1) Warrant to Purchase Common Stock, dated as of December 29, 1995 issued to Silicon Valley Bank.
10.16 (1) Warrant to Purchase Common Stock, dated July 26, 1996 issued to Silicon Valley Bank.
10.17 (1) Warrant to Purchase Common Stock, dated April 17, 1996, issued to Chiron Corporation.
10.18 (1) Collaborative Research, Development and Commercialization Agreement, dated July 15, 1994
between the Company and Chiron Corporation.
10.19 (1) Research Collaboration and Licensing Agreement, dated as of November 1, 1995 between the
Company and Pharmacia Biotech, AB
10.20 (1) Research and Development Collaboration Agreement, dated as of April 19, 1993 between the
Company and Parke-Davis Division of Warner-Lambert Company.
10.21 (1) First Amendment to the Research and Development Collaboration Agreement, dated April 19, 1993,
dated as of April 17, 1995 between the Company and Parke-Davis Division of Warner-Lambert
Company.
10.22 (1) Second Amendment to the Research and Development Collaboration Agreement, dated April 19,
1993, dated as of February 8, 1996 between the Company and Parke-Davis Division of
Warner-Lambert Company.
10.23 (1) Financing Agreement, dated March 16, 1995 among Wilderness Place Holdings L.L.C., Hambrecht &
Quist Guaranty Finance, L.P. and the Company.
10.24 (1) Negotiable Promissory Note, dated October 7, 1992 between the Company and Ralph Christoffersen
and Addendum dated June 25, 1993.
10.25 (1) Employment Agreement, dated January 8, 1996 between the Company and Lawrence E. Bullock.
10.26 (1) Promissory Note, dated February 8, 1996 between the Company and Lawrence E. Bullock.
10.27 (1) Lease for Real Property, dated May 20, 1992 between Aero-Tech Investments and the Company.
10.28 (1) Non-Disturbance and Attornment Agreement, dated March 31, 1995 among General American Life
Insurance Company, Aero-Tech Investments, Wilderness Place Holdings L.L.C. and the Company.
10.29 (1) Master Lease Agreement, dated September 2, 1992 between the Company and LINC Scientific
Leasing.
10.30 (1) Loan and Security Agreement, dated February 28, 1994 between the Company and Silicon Valley
Bank.
10.31 (1) Loan Modification Agreement, dated December 21, 1994 between the Company and Silicon Valley
Bank.
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.32 (1) Loan and Security Agreement, dated December 29, 1995 between the Company and Silicon Valley
Bank and MMC/GATX Partnership No. 1.
10.33 (1) Warrant to Purchase Common Stock, dated as of December 29, 1995 issued to MMC/GATX Partnership
No. 1
10.34 (1) Agreement, dated February 29, 1996 between the Company and Chiron Corporation relating to
research and development funding.
10.35 (3) Amendments to original Employment Agreements between the Company and Ralph E. Christoffersen,
Lawrence E. Bullock and Nassim Usman, pursuant to letters dated November 14, 1996, November
22, 1996 and December 15, 1996.
10.36 (3) Promissory Note, dated June 4, 1996 between the Company and Nassim Usman.
10.37 (3) Amendment to Lease for Real Property, dated March 13, 1997 between Aero-Tech Investments and
the Company.
10.38 (2) Employment Agreement, dated May 2, 1996 between the Company and Nassim Usman.
10.39 (2) Collaboration Agreement Regarding Use of Ribozymes to Determine Gene Function, dated May 13,
1996 between the Company and Chiron Corporation.
10.40 (3)* Amended and Restated License Agreement, dated November
20, 1996, between the Company, University Research
Corporation, University of Colorado and United States
Biochemical Corporation.
10.41 (3)* Amended and Restated Sublicense Agreement, dated November 20, 1996, between the Company and
United States Biochemical Corporation.
10.42 (3)* Amended and Restated License Agreement, dated November 20, 1996, between the Company and
Competitive Technologies, Incorporated.
10.43(1) Memorandum of Understanding, dated March 1, 1996 between the Company and DowElanco.
10.44 (3)* Stock Subscription Agreement, dated September 1996, between the Company and University of
Research Corporation.
10.45 (3)* Stock Subscription Agreement, dated November 20, 1996, between the Company and United States
Biochemical Corporation.
10.46 (3)* Assignment of License and Restated License Agreement,
dated November 20, 1996, among the Company, United States
Biochemical Corporation and Competitive Technologies.
10.47 (3)* Letter Agreement dated May 22, 1996, between the Company and ALZA Corporation.
10.48 (3)* Research and Development Collaboration Agreement dated December 2, 1996, between the Company
and Protogene Laboratories.
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.49 (3)* License Agreement dated February 14, 1997, between the Company and IntelliGene, Ltd.
10.50(1) Subscription Agreement, dated as of April 17, 1995, between the Company and Parke-
Davis Division of Warner-Lambert Company.
10.51(1) Stock Purchase Agreement, dated as of June 28, 1995, among the Company and certain
investors.
10.52(1) Agreement dated March 1, 1996, between the Company and
DowElanco Corporation relating to the conversion of preferred
stock.
10.53(1) Stock Subscription Agreement dated as of October 30, 1995, between the Company and
Gewestelijke Investeringsmaatschappij voor Vlaanderon n.v.
10.54(4)* Research, License, Supply and Royalty Agreement between Schering Aktiengesellschaft
and the Company, dated April 9, 1997.
10.55(4)* Purchase Agreement dated as of April 9, 1997 among the
Company, Schering Berlin Venture Corporation and Schering
Aktiengesellschaft.
10.56 (5) Employment Agreement dated February 27, 1997 between the Company and Alene Holzman.
10.57 (5) Employment Agreement dated July 5, 1997 between the Company and Thomas Rossing.
10.58 Executive Bonus Plan dated March 27, 1998.
21.1 The Company has no subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------------
* The Company has applied for and received confidential treatment with
respect to portions of these Exhibits.
(1) Incorporated by reference to the Company's Form SB-2 Registration
Statement, File No. 333-1908-D.
(2) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended June 30, 1996.
(3) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1996.
(4) Incorporated by reference to the Company's Form 8-K dated June 12,
1997.
(5) Incorporated by reference to the Company's Form SB-2 Registration
Statement, dated September 5, 1997, File No. 333-34981.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1997.
35
<PAGE> 36
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RIBOZYME PHARMACEUTICALS, INC.
By:/s/ RALPH E. CHRISTOFFERSEN
----------------------------
Ralph E. Christoffersen, Ph.D.
Chief Executive Officer and
President
Date: March 27 , 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Company and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RALPH E. CHRISTOFFERSEN Chief Executive Officer and President (Principal March 27, 1998
- ------------------------------------------- Executive Officer)
Ralph E. Christoffersen, Ph.D.
/s/ LAWRENCE E. BULLOCK Vice President, Administration and March 27, 1998
- ------------------------------------------- Finance, Chief Financial Officer and Secretary
Lawrence E. Bullock (Principal Financial and Accounting Officer)
/s/ DAVID T. MORGENTHALER Chairman of the Board of Directors March 27, 1998
- -------------------------------------------
David T. Morgenthaler
/s/ JEREMY C. COOK Director March 27, 1998
- -------------------------------------------
Jeremy C. Cook
/s/ ANTHONY B. EVNIN Director March 27, 1998
- -------------------------------------------
Anthony B. Evnin, Ph.D.
/s/ CHARLES M. HARTMAN Director March 27, 1998
- -------------------------------------------
Charles M. Hartman
/s/ ANDERS WIKLUND Director March 27, 1998
- -------------------------------------------
Anders Wiklund
</TABLE>
36
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Ribozyme Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Ribozyme Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ribozyme Pharmaceuticals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
Denver, Colorado
February 13, 1998
F-1
<PAGE> 38
Ribozyme Pharmaceuticals, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,302,775 $ 13,050,678
Securities available-for-sale 799,616 4,543,470
Restricted cash 52,669 242,733
Accounts receivable 8,044 74,022
Notes receivable--related parties 127,341 157,341
Prepaid expenses and other 175,549 213,717
------------ ------------
Total current assets 16,465,994 18,281,961
Property, plant, and equipment:
Machinery and equipment 5,673,115 3,652,794
Leasehold improvements 3,567,106 3,539,437
Office furniture and equipment 1,007,104 857,920
------------ ------------
10,247,325 8,050,151
Accumulated depreciation (5,290,160) (3,639,779)
------------ ------------
4,957,165 4,410,372
Restricted cash -- 52,669
Notes receivable--related parties 231,932 122,398
Deferred patent costs, net of accumulated
amortization (1997--$171,039;
1996--$105,916) 2,510,705 2,008,804
Other assets 684,245 415,366
------------ ------------
Total assets $ 24,850,041 $ 25,291,570
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 39
Ribozyme Pharmaceuticals, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade $ 904,681 $ 552,904
Accrued liabilities 245,956 216,616
Current portion of long-term debt 2,077,771 1,572,189
Current portion of capital lease obligations -- 152,093
------------ ------------
Total current liabilities 3,228,408 2,493,802
Long-term debt 698,633 2,430,432
Convertible debt 2,052,889 --
Deferred gain -- 5,515
Commitments
Stockholders' equity:
Voting convertible preferred stock, $.01 par value;
5,000,000 shares authorized; no shares
outstanding -- --
Common stock, $.01 par value; 20,000,000
shares authorized; 8,607,022 and
6,948,304 shares issued and outstanding in
1997 and 1996, respectively 86,070 69,483
Additional paid-in capital 81,424,341 67,873,284
Accumulated deficit (62,504,924) (47,382,830)
Unrealized loss on securities available-
for-sale (5,064) (9,214)
Deferred compensation (130,312) (188,902)
------------ ------------
Total stockholders' equity 18,870,111 20,361,821
============ ============
Total liabilities and stockholders' equity $ 24,850,041 $ 25,291,570
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 40
Ribozyme Pharmaceuticals, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
---------------------------------
<S> <C> <C>
Revenues:
Collaborative agreements $ 1,976,500 $ 759,122
Grant and other income 6,642 13,981
Interest income 794,968 936,397
------------ ------------
Total revenues 2,778,110 1,709,500
Expenses:
Research and development 15,169,731 14,188,836
General and administrative 1,886,108 1,943,583
Interest expense 844,365 844,661
------------ ------------
Total expenses 17,900,204 16,977,080
------------ ------------
Net loss $(15,122,094) $(15,267,580)
============ ============
Net loss per share $ (2.04) $ (2.61)
Shares used in computing net loss per share 7,419,650 5,844,987
</TABLE>
See accompanying notes.
F-4
<PAGE> 41
Ribozyme Pharmaceuticals, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 982,501 $ 9,825 666,664 $ 6,667 761,897 $ 7,619
Conversion of preferred stock in
connection with initial public
offering 2,231,960 22,321 (666,664) (6,667) (761,897) (7,619)
Issuance of common stock relating
to certain antidilution rights in
connection with initial public
offering 841,279 8,412 -- -- -- --
Issuance of common stock for cash
--initial public offering, net of
issuance costs of $816,990 2,300,000 23,000 -- -- -- --
Issuance of common stock for cash
-- other 510,829 5,108 -- -- -- --
Payment on warrants -- -- -- -- -- --
Issuance of common stock for
employee bonus 18,810 188 -- -- -- --
Issuance of common stock under
employee stock purchase plan 15,842 158 -- -- -- --
Compensation for issuance of
common stock and options -- -- -- -- -- --
Issuance of common stock
for services 2,083 21 -- -- -- --
Issuance of common stock relating
to certain royalty agreements 45,000 450 -- -- -- --
Net loss -- -- -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- -- -- --
---------------------------------------------------------------------------------------
Balance at December 31, 1996 6,948,304 69,483 -- -- -- --
Issuance of common stock for cash
--public offering, net of
issuance costs of $634,796 1,400,000 14,000 -- -- -- --
Issuance of common stock for cash 212,766 2,128 -- -- -- --
Issuance of common stock for cash
-- under stock option plan 30,001 300 -- -- -- --
Issuance of common stock under
employee stock purchase plan 29,875 298 -- -- -- --
Issuance of common stock under
401(k) plan-stock match 19,409 194 -- -- -- --
Cancellation of common stock
relating to license agreement (33,333) (333) -- -- -- --
Compensation for issuance of
common stock and options -- -- -- -- -- --
Net loss -- -- -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- -- -- --
---------------------------------------------------------------------------------------
Balance at December 31, 1997 8,607,022 $ 86,070 -- $ -- -- $ --
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 127,877 $ 1,279 41,666 $ 417
Conversion of preferred stock in
connection with initial public
offering (127,877) (1,279) (41,666) (417)
Issuance of common stock relating
to certain antidilution rights in
connection with initial public
offering -- -- -- --
Issuance of common stock for cash
--initial public offering, net of
issuance costs of $816,990 -- -- -- --
Issuance of common stock for cash
-- other -- -- -- --
Payment on warrants -- -- -- --
Issuance of common stock for
employee bonus -- -- -- --
Issuance of common stock under
employee stock purchase plan -- -- -- --
Compensation for issuance of
common stock and options -- -- -- --
Issuance of common stock
for services -- -- -- --
Issuance of common stock relating
to certain royalty agreements -- -- -- --
Net loss -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- --
-----------------------------------------------------
Balance at December 31, 1996 -- -- -- --
Issuance of common stock for cash
--public offering, net of
issuance costs of $634,796 -- -- -- --
Issuance of common stock for cash -- -- -- --
Issuance of common stock for cash
-- under stock option plan -- -- -- --
Issuance of common stock under
employee stock purchase plan -- -- -- --
Issuance of common stock under
401(k) plan-stock match -- -- -- --
Cancellation of common stock
relating to license agreement -- -- -- --
Compensation for issuance of
common stock and options -- -- -- --
Net loss -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- --
-----------------------------------------------------
Balance at December 31, 1997 -- $ -- -- $ --
=====================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 42
Ribozyme Pharmaceuticals, Inc.
Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES E SERIES F SERIES G ADDITIONAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------- ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 107,095 $ 1,071 40,160 $ 402 486,601 $ 4,866 $ 40,725,061
Conversion of preferred stock in
connection with initial public
offering (107,095) (1,071) (40,160) (402) (486,601) (4,866) --
Issuance of common stock relating
to certain antidilution rights in
connection with initial public
offering -- -- -- -- -- -- (8,412)
Issuance of common stock for cash
--initial public offering, net of
issuance costs of $816,990 -- -- -- -- -- -- 20,550,010
Issuance of common stock for cash
-- other -- -- -- -- -- -- 3,762,048
Payment on warrants -- -- -- -- -- -- 1,800,000
Issuance of common stock for
employee bonus -- -- -- -- -- -- 187,912
Issuance of common stock under
employee stock purchase plan -- -- -- -- -- -- 131,172
Compensation for issuance of
common stock and options -- -- -- -- -- -- 162,530
Issuance of common stock
for services -- -- -- -- -- -- 23,413
Issuance of common stock relating
to certain royalty agreements -- -- -- -- -- -- 539,550
Net loss -- -- -- -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- -- -- -- -- 67,873,284
Issuance of common stock for cash
--public offering, net of
issuance costs of $634,796 -- -- -- -- -- -- 10,551,204
Issuance of common stock for cash -- -- -- -- -- -- 2,497,872
Issuance of common stock for cash
-- under stock option plan -- -- -- -- -- -- 51,404
Issuance of common stock under
employee stock purchase plan -- -- -- -- -- -- 310,303
Issuance of common stock under
401(k) plan-stock match -- -- -- -- -- -- 155,078
Cancellation of common stock
relating to license agreement -- -- -- -- -- -- 333
Compensation for issuance of
common stock and options -- -- -- -- -- -- (15,137)
Net loss -- -- -- -- -- -- --
Unrealized loss on securities
available-for-sale -- -- -- -- -- -- --
------------------------------------------------------------------------------------
Balance at December 31, 1997 -- $ -- -- $-- $ -- $ -- $ 81,424,341
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
ACCUMULATED LOSS ON DEFERRED
DEFICIT SECURITIES COMPENSATION TOTAL
-------------- ------------ ------------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $(32,115,250) $ -- $(163,989) $ 8,477,968
Conversion of preferred stock in
connection with initial public
offering -- -- -- --
Issuance of common stock relating
to certain antidilution rights in
connection with initial public
offering -- -- -- --
Issuance of common stock for cash
--initial public offering, net of
issuance costs of $816,990 -- -- -- 20,573,010
Issuance of common stock for cash
-- other -- -- -- 3,767,156
Payment on warrants -- -- -- 1,800,000
Issuance of common stock for
employee bonus -- -- -- 188,100
Issuance of common stock under
employee stock purchase plan -- -- -- 131,330
Compensation for issuance of
common stock and options -- -- (24,913) 137,617
Issuance of common stock
for services -- -- -- 23,434
Issuance of common stock relating
to certain royalty agreements -- -- -- 540,000
Net loss (15,267,580) -- -- (15,267,580)
Unrealized loss on securities
available-for-sale -- (9,214) -- (9,214)
------------------------------------------------------------------------------------
Balance at December 31, 1996 (47,382,830) (9,214) (188,902) 20,361,821
Issuance of common stock for cash
--public offering, net of
issuance costs of $634,796 -- -- -- 10,565,204
Issuance of common stock for cash -- -- -- 2,500,000
Issuance of common stock for cash
-- under stock option plan -- -- -- 51,704
Issuance of common stock under
employee stock purchase plan -- -- -- 310,601
Issuance of common stock under
401(k) plan-stock match -- -- -- 155,272
Cancellation of common stock
relating to license agreement -- -- -- --
Compensation for issuance of
common stock and options -- -- 58,590 43,453
Net loss (15,122,094) -- -- (15,122,094)
Unrealized loss on securities
available-for-sale -- 4,150 -- 4,150
------------------------------------------------------------------------------------
Balance at December 31, 1997 $(62,504,924) $ (5,064) $(130,312) $ 18,870,111
=====================================================================================
</TABLE>
See accompanying notes. F-6
Ribozyme Pharmaceuticals, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(15,122,094) $(15,267,580)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation 1,665,044 1,648,435
Amortization 74,051 40,747
Write-off of deferred patent costs 93,557 --
Compensation related to common stock and options 280,177 889,151
Compensation for forgiveness of notes
receivable--related parties 92,466 92,466
Loss on sale of securities available-for-sale -- 13,140
Gain on sale of equipment (1,126) --
Changes in operating assets and liabilities:
Accounts receivable 65,978 (55,962)
Prepaid expenses and other 38,168 (55,882)
Other assets (277,807) (29,260)
Accounts payable--trade 351,777 3,866
Accrued liabilities 82,229 130,226
Deferred gain (5,515) (27,130)
------------ ------------
Net cash used by operating activities (12,663,095) (12,617,783)
INVESTING ACTIVITIES
Additions to property, plant, and equipment (2,213,311) (1,541,412)
Additions to deferred patent costs (660,581) (558,895)
Investment in corporate partner -- (250,000)
Proceeds from sale of equipment 2,600 --
Net sales (purchases) of securities available-for-sale 3,748,005 (1,058,590)
Transfer of restricted cash 242,733 914,528
Loan repayments--related parties 3,000 56,625
Loan advances--related parties (175,000) (156,500)
------------ ------------
Net cash provided (used) by investing activities 947,446 (2,594,244)
FINANCING ACTIVITIES
Net proceeds from sale of shares of common stock
and of warrants 13,346,056 26,271,496
Payments under loan facilities (1,480,677) (1,316,027)
Borrowings under loan facilities 2,254,460 1,162,242
Payments on capital lease obligations (152,093) (768,014)
------------ ------------
Net cash provided by financing activities 13,967,746 25,349,697
------------ ------------
Net increase in cash and cash equivalents 2,252,097 10,137,670
Cash and cash equivalents at beginning of year 13,050,678 2,913,008
------------ ------------
Cash and cash equivalents at end of year $ 15,302,775 $ 13,050,678
============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 43
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Ribozyme Pharmaceuticals, Inc. ("RPI" or the "Company") was founded in 1992 to
capitalize on the broad potential of ribozymes for use in the development of
human therapeutics and therapeutic target validation services. To date, the
Company has engaged in the research and development of its ribozyme technology
and has experienced significant operating losses in each fiscal year since
inception. The Company has not generated any revenue from the commercialization
of its ribozyme technology and it expects to continue to incur significant
operating losses over at least the next several years.
CAPITAL REQUIREMENTS AND MANAGEMENT'S PLANS
The Company incurred a net loss of $15,122,094 for the year ended December 31,
1997 and has an accumulated deficit of $62,504,924 at December 31, 1997.
Development of the Company's products will require a commitment of substantial
additional funds to conduct the costly and time-consuming research, preclinical
and clinical testing necessary to bring its proposed products to market and to
establish manufacturing and marketing capabilities. The Company's future capital
requirements will depend on many factors, including, among others, the progress
of the Company's research, development and drug discovery efforts, the ability
of the Company to establish collaborative arrangements for clinical testing,
progress with preclinical studies and clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining, defending and enforcing patent claims,
competing technological and market developments, changes in the Company's
existing research relationships, determination as to the commercial potential of
the Company's potential products, effective commercialization activities and
arrangements, and the cost and availability of third-party financing for capital
expenditures.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE> 44
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, Earnings per Share (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
potentially dilutive securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. No restatement of
prior periods is necessary as the potentially dilutive securities have been
excluded from the computation as their effect is antidilutive, except as
required pursuant to Securities and Exchange Commission Staff Accounting
Bulletins and Staff Policy (as discussed below).
Prior to April 11, 1996, pursuant to Securities and Exchange Commission Staff
Accounting Bulletins and Staff Policy, all convertible securities issued prior
to the Company's initial public offering, even if antidilutive, have been
included in the basic loss per share calculation as if they were outstanding.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company's cash equivalents are
comprised of certificates of deposit, money market funds, and investment
securities with maturities of three months or less.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and equipment subject to financing obligations are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the lease term.
DEFERRED PATENT COSTS
The Company capitalizes legal costs directly incurred in pursuing patent
applications as deferred patent costs. When such application results in an
issued patent, the related costs are amortized over the remaining legal life of
the patents, using the straight-line method. On a quarterly basis, the Company
reviews its issued patents and pending patent applications, and if it determines
to abandon a patent application or that an issued patent no longer has economic
value, the unamortized balance in deferred patent costs relating to that patent
is immediately expensed.
It is possible the above estimates of future economic life of the Company's
commercialization revenues, the amount of anticipated future commercialization
revenues, or both, will be reduced significantly in the near term due to
alternative technologies developed by other biotechnology or pharmaceutical
companies. As a result, the carrying amount of deferred patent costs may be
reduced in the future.
F-9
<PAGE> 45
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, the FASB issued 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), which requires impairment losses to be
recorded on long-lived assets used in operations when indications of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted the provisions of SFAS 121 in the first quarter of 1996 with no
material effect to its financial statements.
REVENUE RECOGNITION
Revenues recognized under the Company's collaborative research agreements and
grants are recorded as earned ratably over the term of the agreements. Payments
received in advance under these agreements are recorded as deferred revenue
until earned.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income, and Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related Information,
both of which are required to be adopted by the Company during 1998. The Company
does not expect any significant changes in its financial reporting or related
disclosures as a result of adoption of these Statements.
2. SECURITIES AVAILABLE-FOR-SALE
Management has determined that all marketable securities held by the Company at
December 31, 1997 and 1996 were available-for-sale. Securities
available-for-sale are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income. Realized gains and losses and declines in value judged to be
other-than-temporary on securities available-for-sale are included in investment
income. Interest and dividends on securities available-for-sale are included in
investment income. The cost of securities sold is based on the specific
identification method.
F-10
<PAGE> 46
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
2. SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The following is a summary of securities available-for-sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST BASIS GAINS LOSSES FAIR VALUE
----------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
At December 31, 1997:
Backed by government securities
(maturing in 1999) $ 804,680 $ -- $ (5,064) $ 799,616
========== ============= ========== ==========
At December 31, 1996:
Backed by government securities
(maturing in 1999 and 2025) $4,552,684 $ -- $ (9,214) $4,543,470
========== ============= ========== ==========
</TABLE>
The gross realized losses on sales of securities available-for-sale totaled $0
and $13,140 in 1997 and 1996, respectively.
3. LONG-TERM DEBT
Long-term debt as of December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Tenant improvement loan (I) $ -- $ 304,951
Equipment loan (I) 263,301 714,728
Tenant interest loan (II) 496,066 710,800
Tenant improvement and equipment loan (II) 972,703 1,240,191
Equipment loan (III) 1,044,334 1,031,951
Convertible debt (IV) 2,052,889 --
---------- ----------
$4,829,293 $4,002,621
========== ==========
</TABLE>
I. During 1994, the Company obtained a tenant improvement loan of $1,000,000
for leasehold improvements and an equipment loan to purchase up to
$1,500,000 of equipment. The interest rate on borrowings under these loan
facilities is 10.00% at December 31, 1997 and December 31, 1996. The
agreement requires monthly principal and interest payments through August
1998.
II. In April 1995, the Company obtained a loan of $1,000,000 collateralized by
its tenant interest and certain existing leasehold improvements, and an
additional loan to purchase up to $1,500,000 of leasehold improvements and
equipment. The terms of the agreement call for fixed monthly principal and
interest payments through October 1998, assuming the Company exercises a
prepayment option. If the Company does not exercise the option, reduced
fixed payments will continue through June 2002.
F-11
<PAGE> 47
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT (CONTINUED)
III. In December 1995, the Company negotiated an additional equipment credit
facility of $2,000,000 with a financial institution. The facility
commitment was terminated on June 30, 1997. The agreement requires monthly
principal and interest payments through April 2000, at which time a final
payment of $283,328 is due in full.
IV. In April 1997, the Company entered into a collaboration agreement with a
corporate partner whereby, among other items, the Company may borrow from
the partner up to $2.0 million annually for each of the next five years.
The loans are collaterallized 50% by equipment purchases. The loans carry
an interest rate of 8% per annum and under certain circumstances are
convertible into equity at the option of the corporate partner. Principal
and interest payments on the loans are deferred until maturity of the
loans which is in April 2004. The collaboration and loan facility may be
terminated at the option of the partner any time after April 8, 1998.
Interest expense for the years ended December 31, 1997 and 1996 relating to the
Company's long-term debt approximates the interest paid during the respective
periods. At December 31, 1997 the carrying amounts of the Company's long-term
debt approximates fair value as all borrowings bear interest rates which are
comparable to the current market rate for such borrowings.
All assets acquired under the above loan facilities represent collateral for the
amounts outstanding. In addition, the Company is required to maintain minimum
cash balances in the form of certificates of deposit with a financial
institution, in the amount of $52,669 and $295,402 at December 31, 1997 and
1996, respectively. These amounts are presented as restricted cash in the
accompanying balance sheets.
As of December 31, 1997, maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
1998 $ 2,077,770
1999 498,180
2000 200,454
2001 -
2002 -
Thereafter 2,052,889
-----------
$ 4,829,293
===========
</TABLE>
4. LEASES
During 1992 and 1993, the Company sold and simultaneously leased back certain
property and equipment in connection with various lease agreements. All assets
under such leases consisted of general laboratory and scientific equipment,
office equipment, furniture, fixtures, and certain leasehold improvements. The
interest rate on borrowings under these leases was approximately 11%. During
1996 and 1997, the various lease schedules terminated and the Company acquired
the leased assets for fair market value.
F-12
<PAGE> 48
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
4. LEASES (CONTINUED)
Assets and the related accumulated amortization included in the above leases are
as follows as of December 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Machinery and equipment $ -- $ 926,297
Office furniture and equipment -- 205,256
---------- ----------
-- 1,131,553
Less accumulated amortization -- 1,019,680
---------- ---------
$ -- $ 111,873
========== ==========
</TABLE>
The Company leases office space under a noncancelable operating lease which was
due to expire in June 1997; however, in March 1997 the Company extended the term
of the operating lease until June 2002. Total rent expense was $281,939 and
$265,732 in 1997 and 1996, respectively.
The Company's lease commitments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
-------------
<S> <C>
1998 $ 354,710
1999 303,432
2000 288,876
2001 288,876
2002 288,876
2003 and thereafter 1,299,942
------------
$ 2,824,712
============
</TABLE>
5. STOCKHOLDERS' EQUITY
In April 1996, the Company completed an initial public offering of its common
stock, whereby 2,300,000 shares of the Company's common stock were sold at
$10.00 per share, resulting in net proceeds of approximately $20.6 million. As a
result of the Company's initial public offering, all preferred shares
outstanding were converted into an aggregate of 2,231,960 shares of common
stock.
Upon consummation of the initial public offering the Company sold 377,202 shares
of common stock to Chiron Corporation ("Chiron") for $3,640,000. Additionally,
the Company received $1,800,000 from Chiron to complete the purchase of warrants
to purchase 444,444 shares of common stock, issued concurrently with the IPO.
F-13
<PAGE> 49
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In March 1996, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"), authorizing the issuance of 300,000 shares pursuant to
purchase rights granted to employees of the Company. The Purchase Plan provides
a means by which employees purchase common stock of the Company through payroll
deductions. The Purchase Plan is implemented by offerings of rights to eligible
employees. Generally, each offering is twenty-four months' duration with
purchases occurring on each October 31 and April 30 during each offering (except
that April 30, 1996 was not a purchase date). Common stock is purchased for
accounts of employees participating in the Purchase Plan at a price per share
equal to the lower of (i) 85% of the fair market value of a share of common
stock on the date of commencement of participation in the offering or (ii) 85%
of the fair market value of a share of common stock on the date of purchase.
Generally all regular employees, including executive officers, may participate
in the Purchase Plan and may authorize payroll deduction of up to 15% of their
base compensation for the purchase of stock under the plan. The Company's Board
of Directors has the authority to terminate the Purchase Plan at its discretion.
Shares are deemed issued for accounting purposes in the year the shares are
purchased.
Pursuant to an antidilution agreement (the "Antidilution Agreement") with a
founder of the Company, the Company agreed to issue additional shares to this
individual so that he would maintain a 5% interest in the fully diluted equity
of the Company until the occurrence of one of several events, including the
Company's initial public offering. Accordingly, effective April 11, 1996,
115,506 shares were issued related to the Antidilution Agreement which
represented the founder's 5% interest in the Company. No additional rights under
the Antidilution Agreement exist.
Below is a summary of common stock reserved by the Company at December 31, 1997
for issuance upon the exercise of the various options, warrants and the 401(k)
and purchase plans.
<TABLE>
<CAPTION>
SHARES
------------
<S> <C>
Stock option plans 1,500,862
Employee stock purchase plan 254,283
Employee 401(k) stock match 280,591
Warrants at $15.75 per share 10,793
Warrants at $40.50 per share 11,111
Warrants at $22.50 per share 465,554
---------
2,523,194
=========
</TABLE>
The Company's ability to pay dividends is restricted by the terms of its tenant
improvement and equipment loan facility agreements.
F-14
<PAGE> 50
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS
The Company has established a Non-Qualified Stock Option Plan and an Incentive
Stock Option Plan (collectively, the "Plans"), under which it is authorized to
grant stock options to purchase up to 1,317,154 shares of the Company's common
stock to eligible employees, consultants, and other individuals, as defined in
the Plans. In May 1997, the Company's shareholders approved an additional
350,000 shares of the Company's common stock to be reserved for issuance
pursuant to the Plans. Options to purchase the Company's common stock are
exercisable at a price as determined by the Board of Directors at the time the
option is granted, which shall not be less than 100% of the fair market value
(110% in the case of 10 percent shareholders) at the date of grant. Vesting
rights are determined by the Board of Directors at the time the option is
granted and generally the options become exercisable at twenty percent at the
end of each of years one through five. If not exercised, the options expire
after ten years. The Board of Directors has also granted certain employees
options vesting upon achievement of certain contingent milestone events.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. During 1997 and
1996, the Company recorded $43,453 and $137,617, respectively, of compensation
relating to the grant of stock options and the Antidilution Agreement.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options under the fair value method
of SFAS 123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 6.4%
and 6.3%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock of .638 and .566; and a weighted-average
expected life of the option of 6 years. The weighted average fair value of stock
options granted during 1997 and 1996 was $5.88 and $6.59, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-15
<PAGE> 51
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Pro forma net loss $(16,153,548) $(15,554,890)
Pro forma loss per share (2.18) (2.66)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma net loss may not be
representative of that to be expected in future years.
Changes in stock options for the years ended December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
---------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 367,838 $ .45 - $ 5.40
Options granted 508,652 $ 2.70 - $19.00
Options exercised/canceled (197,067) $ .45 - $ 5.40
---------------------------------
Outstanding at December 31, 1996 679,423 $ .45 - $ 19.00
Options granted 604,300 $ 7.50 - $ 13.50
Options exercised/canceled (64,833) $ .45 - $ 19.00
---------------------------------
Outstanding at December 31, 1997 1,218,890 $ .45 - $ 15.25
=================================
</TABLE>
The weighted average exercise price of options outstanding at December 31, 1997
and 1996 was $9.31 and $8.93, respectively.
Stock options vest as follows:
<TABLE>
<CAPTION>
OPTIONS
-----------
<S> <C>
Currently exercisable 233,759
1998 201,570
1999 169,232
2000 159,772
2001 138,642
2002 and thereafter 61,860
Contingent vesting 254,055
-----------
Total 1,218,890
===========
</TABLE>
F-16
<PAGE> 52
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
7. COLLABORATIVE AGREEMENTS
Parke-Davis
In April 1993, the Company entered into a research and development collaboration
agreement with the Parke-Davis division of the Warner-Lambert Corporation
("Parke-Davis"), whereby Parke-Davis was to partially fund the research and
development costs incurred by the Company in developing and commercializing
ribozyme-based products for application to the treatment of osteoarthritis and
other diseases. Pursuant to the Parke-Davis agreement, Parke-Davis purchased
100,100 shares of Series C preferred stock at a price of $29.97 per share in
1993, 27,777 shares of Series C preferred stock at a price of $36.00 per share
in 1994, and 40,160 shares of Series F preferred stock at $37.35 per share in
1995, for a total equity investment of $5,500,000. All preferred shares were
converted into 168,037 shares of common stock upon the Company's initial public
offering.
Also pursuant to the collaboration agreement, through December 31, 1996,
Parke-Davis provided $1,700,000 research and development funding to the Company.
As of June 30, 1997, the collaboration agreement has been completed.
In March 1998, the Company entered into a Target Validation agreement with
Parke-Davis. The agreement gives Parke-Davis access to the Company's proprietary
ribozyme technology which will assist Parke-Davis in determining which genes are
valid therapeutic targets. Under the terms of the contract, the Company will
design and synthesize ribozymes against target genes designated by Park-Davis
and perform various studies to determine the level of gene expression inhibition
achieved. Parke-Davis will fund the research and may provide milestone payments
or success fees to the Company if Parke-Davis uses the information to derive
compounds to take into development.
Dow Elanco
In September 1993, the Company entered into a research and development study
with DowElanco (the "Feasibility Study") to demonstrate the stable integration
and the effective use of ribozymes to alter corn composition. Pursuant to the
terms of the Feasibility Study, DowElanco reimbursed the Company for all of its
expenses related to the Feasibility Study and, in 1994, purchased 41,666 shares
of Series D preferred stock at a price of $36.00 per share, for a total equity
investment of $1,500,000. All preferred shares were converted into 41,666 shares
of common stock upon completion of the Company's initial public offering.
The Feasibility Study was completed in 1997 and the parties entered into a
long-term license agreement for the development and commercialization of
ribozymes to the targets of interest. As consideration for the long-term license
agreement, 41,666 shares of common stock held by DowElanco were returned to the
Company. The Company canceled 33,333 of the shares and reissued the remaining
8,333 shares to CTI as a consideration of royalty, due to the license
transaction.
Chiron
In July 1994, the Company entered into a research and development collaboration
agreement with Chiron to research, develop and market products directed towards
five genetic targets, and all human clinical indications associated with those
targets. The Company and Chiron will share equally in the costs and profits of
any jointly developed products. In addition, Chiron may, at its option, finance
the Company's portion of its Phase II and Phase III drug development costs for
mutually approved programs. The Company retains the option to reacquire its
rights by reimbursing Chiron
F-17
<PAGE> 53
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
7. COLLABORATIVE AGREEMENTS (CONTINUED)
for such development costs plus a predetermined risk premium. The term of the
research program is five years, with the terms of the agreement to be extended
if products are jointly developed. As part of this agreement, Chiron committed
to make a $10,000,000 equity investment in the Company. The components of this
investment are:
In 1994, Chiron purchased 100,000 shares of the Company's common
stock at a price of $3.60 per share, or $360,000; also in 1994
Chiron purchased 107,095 shares of Series E preferred stock at a
price of $37.35 per share, or $4,000,000. In 1996, the Company
issued Chiron immediately upon the closing of the Company's
initial public offering a warrant to purchase 444,444 shares of
the Company's common stock which is exercisable at a price of
$22.50 per share, for an aggregate purchase price of $4.50 per
warrant share. In 1994, Chiron paid the Company $0.45 per warrant
share, or $200,000. The balance of the warrant purchase price,
$1,800,000, or $4.05 per warrant share, was paid to the Company
upon completion of its initial public offering. Further, Chiron
purchased 377,202 common shares with an aggregate value of
$3,640,000 upon completion of the Company's initial public
offering, at the initial public offering price less one-half of
the underwriting discount. Chiron also has a designated Board
member on the Company's Board of Directors. All preferred shares
were converted into 142,222 shares of common stock upon
completion of the Company's initial public offering.
In May 1996, the Company entered into a collaboration with Chiron for the use of
ribozymes to characterize gene function. The collaboration gives Chiron the
right to develop and commercialize products that result from the collaboration,
and would entitle RPI to receive product development milestone payments and
royalties on sales of any such commercial products. Chiron and RPI each pay a
portion of the research and development expenses of the collaboration, and the
Company provided Chiron $1,800,000 in 1996 for research funding related to the
collaboration.
Pharmacia Biotech AB
In November 1995, the Company and Pharmacia Biotech AB entered into a
collaboration and license agreement for the improvement of production scale
synthesis of RNA and chimeric oligonucleotides. The goal of the collaboration is
to reduce the cost of manufacturing ribozymes and other oligonucleotide
products. Pharmacia Biotech AB will provide research funding, synthesis support
and instrumentation, while RPI will receive royalties on the sales of modified
RNA oligonucleotides and non-DNA primer support. As of December 31, 1997, the
Company has received $731,500 in funding pursuant to the agreement.
Schering AG, Berlin
On April 9, 1997, the Company entered into a research collaboration with
Schering AG, Berlin, ("Schering AG") focusing on the use of ribozymes for
therapeutic target validation, as well as the development of ribozymes as
therapeutic agents. The collaboration will utilize the special selectivity of
ribozymes to validate new molecular therapeutic targets and to discover new
therapeutic agents based on those targets. The Company will provide its
expertise in ribozyme design, synthesis and delivery, and Berlex Laboratories,
Inc., a U.S. subsidiary of Schering AG ("Berlex") will provide candidate
targets, cell culture screens, animal models and development and
commercialization expertise to the collaboration. The Company anticipates that
hundreds of potential targets may be examined over a five year period with
Berlex having the option to commercialize products from any validated targets.
F-18
<PAGE> 54
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
7. COLLABORATIVE AGREEMENTS (CONTINUED)
Schering AG made an equity investment in May 1997 of $2.5 million in exchange
for 212,766 shares of common stock, and will make an additional equity
investment of $2.5 million in 1998. Separately, Schering AG provided a loan of
$2.0 million in 1997, and subsequently $1.0 million in January 1998. Schering AG
will continue to provide loans of up to $2 million annually for each of the next
four years, provided that the collaboration is continued in each of those years.
The loans, which carry an interest rate of 8% per annum, are convertible into
equity at the option of Schering AG under certain circumstances. At December 31,
1997, the outstanding borrowings of $2.1 million were convertible into
approximately 257,000 shares of the Company's common stock. Principal and
interest payments are deferred until maturity of the loans which is in April
2004. In addition, Schering AG made research payments of $1.5 million in 1997
and, provided that the collaboration is continued, will make research payments
of $2 million a year for the next four years. The Company may earn success fees
upon product development milestones and will manufacture synthetic ribozyme
products and receive royalties on sales of both ribozyme and non-ribozyme
products resulting from the collaboration. All such payments are subject to some
restrictions, including receipt of certain third party consents. Upon payment of
termination fees paid to the Company, the research collaboration may be
terminated at Schering AG's option any time after April 8, 1998.
8. COMMITMENTS AND CONTINGENCY
At the core of the Company's technology are inventions and patents of the
University of Colorado ("CU") which were developed by Dr. Thomas R. Cech and
various associates of Dr. Cech. Pursuant to the policies of CU, these inventions
and the patents issued thereon, (the "Cech Technology") became the property of
CU. The Cech Technology was assigned to CU's affiliate, University Research
Corporation ("URC"), which in turn assigned the rights to license certain of the
Cech Technology to Competitive Technologies, Inc. ("CTI"), formerly known as
University Patents, Inc. United States Biochemical Corporation ("USB") licensed
the Cech Technology pursuant to two sublicenses. One of these sublicenses was
for the Cech Technology held by CTI. In November 1996, USB assigned to the
Company its rights under the sublicense from CTI and the Company entered into an
amended and restated license with CTI. The Company also has obtained a license
from URC and a sublicense from USB for other Cech Technology held by URC. The
CTI license, URC license and USB sublicense together grant the Company the
exclusive (except for non-commercial academic research) worldwide right, among
other things, to make, use and sell RNA enzymes covered by licensed patents and
products incorporating them. The URC license and USB sublicense are fully paid.
The CTI license provides for the payment of a royalty on sales of products
incorporating RNA enzymes, covered by licensed patents, and for certain minimum
annual royalties. The Company may grant sublicenses to the licensed technology
subject to the payment to CTI of a share of royalty income from such sublicenses
or a royalty on sales from sublicensed products, methods or services, depending
on the particular licensed patents involved. In addition, the Company must pay
CTI a share of any option fee, license fee, prepaid royalty or other "front-end"
fee other than research and development funding paid in connection with such
sublicense.
During 1993, the Company was granted the right of first refusal to license any
new inventions, improvements and patents related to ribozyme technology
developed by Dr. Cech or others at CU, in exchange for certain payments. In
order to maintain the right of first refusal, the Company agreed to fund
research at CU through an unrestricted grant of $750,000 payable in various
installments over a five year period commencing in September 1993. URC made an
investment of approximately $41,000 for 46,188 shares of the Company's common
stock upon entering into the agreement.
F-19
<PAGE> 55
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCY (CONTINUED)
During 1996, the Company eliminated the royalty arrangement in exchange for
45,000 shares of its common stock. The Company recognized expense related to the
exchange of $540,000 during 1996. The Company's remaining commitment under the
above unrestricted grant is $113,000, which is payable in 1998.
The Company is involved in legal proceedings which have arisen in the ordinary
course of business. In the opinion of management the outcome of these legal
proceedings will not have a material adverse impact on the Company's financial
position or operations.
9. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company has a total of $320,000 and $225,000,
respectively, of non-interest bearing loans due from officers. The balances may
be forgiven by the Company under certain employment agreement provisions. The
loan balances are forgivable or payable to the Company under various terms not
to exceed 5 years. The Company forgave $80,000 and $85,000 of these loans during
each of the years ending December 31, 1997 and 1996, respectively.
10. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes (SFAS 109). Under the
provisions of SFAS 109, a deferred tax liability or asset (net of a valuation
allowance) is provided in the financial statements by applying the provisions of
applicable tax laws to measure the deferred tax consequences of temporary
differences that will result in net taxable or deductible amounts in future
years as a result of events recognized in the financial statements in the
current or preceding years.
At December 31, 1997, the Company has the following net operating loss and tax
credit carryforwards for income tax purposes:
<TABLE>
<CAPTION>
NET RESEARCH AND STATE
OPERATING DEVELOPMENT INVESTMENT
EXPIRATION DATE LOSSES CREDITS CREDITS
--------------- ----------- ---------- -------
<S> <C> <C> <C>
1999 $ - $ - $14,000
2000 - - 11,000
2001 - - 6,000
2007 3,506,000 101,000 -
2008 7,363,000 185,000 -
2009 9,239,000 316,000 -
2010 11,923,000 139,000 -
2011 15,155,000 181,000 -
2012 15,346,000 149,000 -
----------- ---------- -------
Total $62,532,000 $1,071,000 $31,000
=========== ========== =======
</TABLE>
F-20
<PAGE> 56
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carryforwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carryforwards, and could have been triggered by the
Company's initial public offering or by subsequent sales of securities by the
Company or its shareholders.
The components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 23,324,000 $ 17,548,000
Research and development and state
investment credit carryforwards 1,102,000 953,000
Depreciation 618,000 619,000
Other 12,000 6,000
------------ ------------
25,056,000 19,126,000
Valuation allowance (24,097,000) (18,348,000)
------------ ------------
Net deferred tax assets 959,000 778,000
Deferred tax liabilities:
Deferred patent costs 936,000 749,000
Other 23,000 29,000
------------ ------------
Total deferred tax liabilities 959,000 778,000
------------ ------------
$ -- $ --
============ ============
</TABLE>
11. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) plan which allows participating employees to contribute
1% to 15% of their salary, subject to eligibility requirements and annual
limits. The Board may, at its sole discretion, approve matching contributions
with the Company's common stock. In 1997, the Board approved a 50% common
stock match equal to total employee deferrals made in 1997. The Company
stock match is subject to vesting restrictions.
F-21
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 (5) Amended and Restated Certificate of Incorporation dated April 17, 1996.
3.2 (1) By-laws of the Company, as amended.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (1) Specimen Stock Certificate.
10.1 (1) Form of Indemnity Agreement entered into between the Company and its directors and
officers, with related schedule.
10.2 (1) Company's Incentive Stock Option Plan (the "ISO Plan"), including form of Incentive
Stock Option Agreement under the ISO Plan.
10.3 (1) Company's Non-Qualified Stock Option Plan (the "NQSO Plan"), including form of
Non-Qualified Stock Option under the NQSO Plan.
10.4 (1) Company's 1996 Stock Option Plan (the "Option Plan"), including forms of Incentive
Stock Option and Nonstatutory Stock Option under the Option Plan.
10.5 (1) Company's 1996 Employee Stock Purchase Plan.
10.6 (5) Employment Agreement, dated January 1, 1997 between the Company and Ralph
Christoffersen.
10.7 (1) Incentive Stock Option Agreement between the Company and Ralph E. Christoffersen,
dated as of December 23, 1992.
10.8 (1) Incentive Stock Option Agreement between the Company and Ralph E. Christoffersen,
dated as of September 23, 1994.
10.9 (1) Warrant Purchase Agreement, dated as of March 15, 1995 between the Company and
Hambrecht & Quist Guaranty Finance, L.P.
10.10 (1) Warrant to Purchase Common Stock, dated as of March 15, 1995 issued to Hambrecht &
Quist Guaranty Finance, L.P.
10.11 (1) Warrant to Purchase Common Stock, dated as of February 22, 1993 issued to LINC
Scientific Leasing.
10.12 (1) Warrant to Purchase Common Stock, dated as of July 30, 1993 issued to Douglas
E. Olson.
10.13 (1) Warrant to Purchase Common Stock, dated as of July 30, 1993 issued to Richard
J. Warburg and Ruth P. Warburg.
</TABLE>
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ------------------------
<S> <C>
10.14 (1) Warrant to Purchase Common Stock, dated as of December 28, 1994 issued to Competitive
Technologies, Inc.
10.15 (1) Warrant to Purchase Common Stock, dated as of December 29, 1995 issued to Silicon Valley Bank.
10.16 (1) Warrant to Purchase Common Stock, dated July 26, 1996 issued to Silicon Valley Bank.
10.17 (1) Warrant to Purchase Common Stock, dated April 17, 1996, issued to Chiron Corporation.
10.18 (1) Collaborative Research, Development and Commercialization Agreement, dated July 15, 1994
between the Company and Chiron Corporation.
10.19 (1) Research Collaboration and Licensing Agreement, dated as of November 1, 1995 between the
Company and Pharmacia Biotech, AB
10.20 (1) Research and Development Collaboration Agreement, dated as of April 19, 1993 between the
Company and Parke-Davis Division of Warner-Lambert Company.
10.21 (1) First Amendment to the Research and Development Collaboration Agreement, dated April 19, 1993,
dated as of April 17, 1995 between the Company and Parke-Davis Division of Warner-Lambert
Company.
10.22 (1) Second Amendment to the Research and Development Collaboration Agreement, dated April 19,
1993, dated as of February 8, 1996 between the Company and Parke-Davis Division of
Warner-Lambert Company.
10.23 (1) Financing Agreement, dated March 16, 1995 among Wilderness Place Holdings L.L.C., Hambrecht &
Quist Guaranty Finance, L.P. and the Company.
10.24 (1) Negotiable Promissory Note, dated October 7, 1992 between the Company and Ralph Christoffersen
and Addendum dated June 25, 1993.
10.25 (1) Employment Agreement, dated January 8, 1996 between the Company and Lawrence E. Bullock.
10.26 (1) Promissory Note, dated February 8, 1996 between the Company and Lawrence E. Bullock.
10.27 (1) Lease for Real Property, dated May 20, 1992 between Aero-Tech Investments and the Company.
10.28 (1) Non-Disturbance and Attornment Agreement, dated March 31, 1995 among General American Life
Insurance Company, Aero-Tech Investments, Wilderness Place Holdings L.L.C. and the Company.
10.29 (1) Master Lease Agreement, dated September 2, 1992 between the Company and LINC Scientific
Leasing.
</TABLE>
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<S> <C>
10.30 (1) Loan and Security Agreement, dated February 28, 1994 between the Company and Silicon Valley
Bank.
10.31 (1) Loan Modification Agreement, dated December 21, 1994 between the Company and Silicon Valley
Bank.
10.32 (1) Loan and Security Agreement, dated December 29, 1995 between the Company and Silicon Valley
Bank and MMC/GATX Partnership No. 1.
10.33 (1) Warrant to Purchase Common Stock, dated as of December 29, 1995 issued to MMC/GATX Partnership
No. 1
10.34 (1) Agreement, dated February 29, 1996 between the Company and Chiron Corporation relating to
research and development funding.
10.35 (3) Amendments to original Employment Agreements between the Company and Ralph E. Christoffersen,
Lawrence E. Bullock and Nassim Usman, pursuant to letters dated November 14, 1996, November
22, 1996 and December 15, 1996.
10.36 (3) Promissory Note, dated June 4, 1996 between the Company and Nassim Usman.
10.37 (3) Amendment to Lease for Real Property, dated March 13, 1997 between Aero-Tech Investments and
the Company.
10.38 (2) Employment Agreement, dated May 2, 1996 between the Company and Nassim Usman.
10.39 (2) Collaboration Agreement Regarding Use of Ribozymes to Determine Gene Function, dated May 13,
1996 between the Company and Chiron Corporation.
10.40 (3)* Amended and Restated License Agreement, dated November 20, 1996, between the Company, University
Research Corporation, University of Colorado and United States Biochemical Corporation.
10.41 (3)* Amended and Restated Sublicense Agreement, dated November 20, 1996, between the Company and
United States Biochemical Corporation.
10.42 (3)* Amended and Restated License Agreement, dated November 20, 1996, between the Company and
Competitive Technologies, Incorporated.
10.43 (1) Memorandum of Understanding, dated March 1, 1996 between the Company and DowElanco.
10.44 (3)* Stock Subscription Agreement, dated September 1996, between the Company and University of
Research Corporation.
10.45 (3)* Stock Subscription Agreement, dated November 20, 1996, between the Company and United States
Biochemical Corporation.
</TABLE>
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.46 (3)* Assignment of License and Restated License Agreement, dated November 20, 1996, among the
Company, United States Biochemical Corporation and Competitive Technologies.
10.47 (3)* Letter Agreement dated May 22, 1996, between the Company and ALZA Corporation.
10.48 (3)* Research and Development Collaboration Agreement dated December 2, 1996, between the Company
and Protogene Laboratories.
10.49 (3)* License Agreement dated February 14, 1997, between the Company and IntelliGene, Ltd.
10.50 (1) Subscription Agreement, dated as of April 17, 1995, between the Company and Parke-
Davis Division of Warner-Lambert Company.
10.51 (1) Stock Purchase Agreement, dated as of June 28, 1995, among the Company and certain
investors.
10.52 (1) Agreement dated March 1, 1996, between the Company and DowElanco Corporation relating to the
conversion of preferred stock.
10.53 (1) Stock Subscription Agreement dated as of October 30, 1995, between the Company and
Gewestelijke Investeringsmaatschappij voor Vlaanderon n.v.
10.54 (4)* Research, License, Supply and Royalty Agreement between Schering Aktiengesellschaft
and the Company, dated April 9, 1997.
10.55 (4)* Purchase Agreement dated as of April 9, 1997 among the
Company, Schering Berlin Venture Corporation and Schering
Aktiengesellschaft.
10.56 (5) Employment Agreement dated February 27, 1997 between the Company and Alene Holzman.
10.57 (5) Employment Agreement dated July 5, 1997 between the Company and Thomas Rossing.
</TABLE>
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10.58 Executive Bonus Plan dated March 27, 1998.
21.1 The Company has no subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------------
* The Company has applied for and received confidential treatment with
respect to portions of these Exhibits.
(1) Incorporated by reference to the Company's Form SB-2 Registration
Statement, File No. 333-1908-D.
(2) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended June 30, 1996.
(3) Incorporated by reference to the Company's Form 10-KSB for the year ended
December 31, 1996.
(4) Incorporated by reference to the Company's Form 8-K dated June 12, 1997.
(5) Incorporated by reference to the Company's Form SB-2 Registration
Statement, dated September 5, 1997, File No. 333-34981.
<PAGE> 1
EXHIBIT 10.58
RIBOZYME PHARMACEUTICALS, INC.
EXECUTIVE BONUS PLAN
1. Purpose. The Ribozyme Pharmaceuticals, Inc. ("RPI") Executive Bonus Plan
("Plan") provides RPI's executive officers the opportunity to earn an
annual bonus contingent upon an executive officer's satisfactory
performance as determined by RPI's Compensation Committee of the Board of
Directors (the "Committee"), the key elements of which are tied to each
executive achieving certain pre-established goals.
2. Administration. The Plan shall be administered by the Committee which shall
have complete authority in its discretion to establish the goals for each
executive officer, interpret all provisions of the Plan and to make all
other determinations necessary or advisable for the administration of the
Plan.
3. Components. The Committee may award each executive officer of RPI an annual
bonus comprised of one or more of the following:
a) Cash payment;
b) Stock options pursuant to RPI's stock option plans; or
c) Forgiveness of any portion of the principle of interest-free loans
provided to the executive officer.
4. Goals. The Committee may award an annual bonus to an executive officer of
RPI based upon that executive officer's fulfillment of annual goals
previously established by the Committee. The Committee shall determine in
its sole discretion whether an executive officer has fulfilled the
pre-established goals.
5. Term. This Executive Bonus Plan is effective as of March 27, 1998, and
shall continue in effect until terminated by the Committee of the Board of
Directors of RPI.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 333-07135 and No. 333-28991) pertaining to the Employee Stock
Purchase Plan, the 1996 Stock Option Plan and the 401(k) Salary Reduction Plan
and Trust of Ribozyme Pharmaceuticals, Inc., of our report dated February 13,
1998 with respect to the financial statements of Ribozyme Pharmaceuticals, Inc.
included in the Annual Report (Form 10-KSB) for the year ended December 31,
1997.
/s/ ERNST & YOUNG LLP
Denver, Colorado
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RIBOZYME PHARMACEUTICALS, INC. FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,302,775
<SECURITIES> 799,616
<RECEIVABLES> 8,044
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,465,994
<PP&E> 10,247,325
<DEPRECIATION> 5,290,160
<TOTAL-ASSETS> 24,850,041
<CURRENT-LIABILITIES> 3,228,408
<BONDS> 0
0
0
<COMMON> 86,070
<OTHER-SE> 18,784,041
<TOTAL-LIABILITY-AND-EQUITY> 24,850,041
<SALES> 0
<TOTAL-REVENUES> 2,778,110
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,169,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 844,365
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