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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-27914
RIBOZYME PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 34-1697351
(State of incorporation) (I.R.S. Employer Identification No.)
2950 WILDERNESS PLACE, BOULDER, COLORADO 80301
(Address of principal executive offices)
(303) 449-6500
(Registrant's telephone number, including area code)
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of April 28, 1999, was approximately $27,006,673.
As of April 28, 1999, the registrant had 9,186,504 shares of common stock,
par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business. ................................................. 1
Item 2. Properties. ............................................... 21
Item 3. Legal Proceedings. ........................................ 21
Item 4. Submission of Matters to a Vote of Security Holders. ...... 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. ..................................... 22
Item 6. Selected Financial Data. .................................. 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. ............................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 29
Item 8. Financial Statements and Supplementary Data................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. ................................ 29
PART III
Item 10. Directors and Executive Officers of Registrant............ 30
Item 11. Executive Compensation.................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management. Changes in Control............................ 40
Item 13. Certain Relationships and Related Transactions. .......... 42
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K. .. 45
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PART I
ITEM 1. BUSINESS
An overview of our company
Ribozyme Pharmaceuticals was founded to develop commercial products and
services based upon the significant potential of "ribozymes," a discovery of
Professor Thomas R. Cech for which he shared a Nobel Prize. Ribozymes, a form of
ribonucleic acid can selectively inhibit the protein production and genetic
function associated with a specific messenger RNA molecule by binding with the
particular mRNA and cutting it apart. Ribozymes treat human disease in two
primary ways. First, ribozymes can be designed to inhibit abnormal gene function
that causes a disease or is essential to the growth or spread of the disease.
Second, ribozymes can be designed to target viruses and other infectious agents
causing disease in humans. Ribozymes also are useful in identifying the function
of specific genes (validating targets) and in diagnosing disease. Ribozymes can
also be designed to treat animal diseases and alter traits of plants.
Our primary business focus is to use our patented technology to develop a
new class of drugs containing ribozymes to treat or prevent human disease. To
accomplish this, we plan to develop our existing product candidates, identify
additional product candidates and partner with third parties to develop product
candidates demonstrating commercial potential as a result of preclinical studies
or clinical trials.
Currently, we are focusing on two potential products in preclinical
development or clinical trials:
. ANGIOZYME is a potential treatment for cancer and other diseases. We
have successfully completed Phase Ia clinical trials for ANGIOZYME in
healthy volunteers, have commenced Phase Ib trials in cancer patients,
and expect to begin Phase II trials before the end of the year.
. HEPTAZYME is a potential treatment for Hepatitis C, a viral liver
disease. HEPTAZYME is currently in preclinical testing, and before
the end of 1999 we expect to file an IND to obtain permission to begin
clinical trials in humans.
Internally, we are researching several product candidates and intend to
begin preclinical testing and development of one of these product candidates by
year-end.
ANGIOZYME is being developed in collaboration with Chiron Corporation.
HEPTAZYME is being developed in collaboration with Eli Lilly and Company.
From 1996 to 1998, we developed a gene identification and target validation
business and entered into target validation collaborations with Chiron, Parke-
Davis, Schering AG, Roche Biosciences and GlaxoWellcome. In 1998, we transferred
our gene and target
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validation technology to Atugen Biotechnology, GmbH in return for a substantial
equity interest. We expect research under our existing gene validation
agreements will continue with Atugen providing the services as our
subcontractor. In the future, Atugen will enter into gene validation agreements
directly with collaborators, but we will retain rights to (1) use the gene
identification and target validation technology for our own use and (2) develop
ribozymes and other oligonucleotides therapeutic agents against targets
validated by Atugen.
Our patents and proprietary technology provide a significant competitive
advantage in the field of ribozymes. In particular, the licenses to patents of
Dr. Cech and others, together with patents issued to and filed by us, give us
the exclusive rights to control the manufacture, use and sale of ribozymes. The
current patent portfolio includes 84 issued or allowed patents and over 100
applications. In addition, we have developed significant manufacturing
capabilities which, when combined with available contract manufacturers, are
expected to be able to produce those drugs currently under development in
sufficient quantities, and of the quality required by the FDA, for our
anticipated clinical trials.
We have also licensed our technology in the past to third parties to use in
agricultural and diagnostic applications.
The traditional process of drug discovery and development
Traditional drug discovery and development is difficult, time consuming and
extremely costly. Historically, diseases have been treated using drugs developed
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 the function of a targeted molecule with as few
unwanted side effects as possible. Drug discovery is a complex process of
elimination, including:
. selecting a target (usually a protein),
. developing a screening assay,
. chemically synthesizing large numbers of different molecules that are
tested in cell cultures and in animal models for their effect on the
target,
. using those test results to narrow down the number of molecules, and
. refining the molecules through additional chemical synthesis and
testing, including humans clinical trials.
Unfortunately, drugs produced from this traditional process may have undesirable
side effects due to interactions with non-targeted molecules. Side effects such
as "toxicity" or "lack of selectivity" can limit the effective use of a drug.
Pharmaceutical companies are under intense competitive pressure to identify
and commercialize novel drugs having fewer side effects more quickly and cost
effectively. Pricing pressures from managed care organizations, governmental
agencies and other third-party payors, coupled with the proliferation of new
technologies that offer revolutionary approaches to drug design and development,
are causing major changes in the drug development process.
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Genetic function and human disease
The abnormal production of proteins, which are products of genes, directly
causes many human diseases. The abnormality may be due to a defective gene or
to the over- or under-production of a protein by a "normal" gene. The abnormal
production of proteins may have direct effects on cells within the body or may
initiate a series of events involving other proteins within the body, thereby
producing disease. The gene functions of infectious agents, such as viruses,
allow replication and growth of infectious agents in the human body.
Production of proteins from genes, called protein "expression," involves
two steps. First, the sequence 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. The 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 sequence which leads to a
specific mRNA sequence. Blocking a gene's function, and hence the production of
its associated proteins, is an increasingly vital tool in the treating and
diagnosing human disease.
The potential advantages of ribozymes in treating a disease
We believe that ribozymes offer the following advantages over other
approaches to the treatment of diseases:
Potential Broad Applicability. Once a gene has been identified, a ribozyme
can be designed to target and destroy the associated mRNA to inhibit the related
gene function. Therefore, all diseases for which a gene can be identified as a
cause or an essential contributing factor are potentially treatable with a
ribozyme drug. In addition, identifying the essential genes of viruses and
other infectious agents that cause human disease creates the potential to
develop ribozyme products that stop these genes from functioning and,
consequently, prevent the targeted infectious agent from surviving or
reproducing.
High Selectivity. The mechanism by which traditional drugs act on a target
gene or protein often is not well understood. Consequently, the side effects of
such drugs are difficult to predict and characterize. These side effects may be
reduced or avoided by using ribozymes designed to attach to and cut only a
specific targeted mRNA, a significant advantage over traditional drug therapies.
We have observed the selectivity of ribozymes in both animal studies and human
clinical trials. Because of this selectivity, only the function of the targeted
genetic sequence is affected; other molecules and gene functions are not
altered.
Destruction of Target. Instead of temporarily preventing gene function like
traditional drugs, ribozymes destroy the target mRNA and stop the associated
protein production. By
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contrast, most drugs do not destroy their target. This inherent feature of the
ribozyme may offer significant advantage in the treatment of diseases caused by
infectious agents such as viruses. For example, cleavage of target viral mRNA by
ribozymes will inhibit the virus's ability to propagate, which may cause
significant reduction in viral load in the patient.
Our ribozyme technology
Our approach to drug discovery and development begins by either identifying
a gene in humans that causes or contributes to disease or identifying an
essential gene in a disease causing infectious agent. We analyze the nucleotide
sequence of the mRNA associated with the target gene and create a complementary
ribozyme nucleotide sequence.
A ribozyme is a sequence of nucleotides that has a catalytic core capable
of cleaving a specific mRNA molecule. Ribozymes act as "molecular scissors"
by cutting mRNA molecules into two ineffective strands. They prevent
translation of mRNA into proteins which may be associated with human disease.
Each ribozyme destroys only a specifically targeted mRNA molecule, thereby
minimizing the risk of unwanted side effects. In addition, ribozymes can be
used in identifying gene function and validating the disease contributing
formation of a specific gene. In this way, ribozymes can assist in the
identification of new drug candidates. Our ribozyme technology is an important
bridge between the growing body of knowledge regarding gene function and its
contribution to human diseases and the treatment or preventions of such
diseases.
We initially test the effectiveness of the ribozyme in cell cultures or in
animal models. If the ribozyme reduces or stops production of the protein
associated with the disease, or slows the associated growth or spread of the
disease, not only has the disease contributing function of the gene been
validated, but also a drug candidate has been identified.
Once we identify a target gene and related ribozyme, we optimize the
ribozyme's effectiveness by (1) varying the length of the portion of the
ribozyme which binds to the mRNA to maximize the ribozyme's selectivity and (2)
modifying the chemical structure to increase the ribozyme's stability in the
human body. To successfully commercialize ribozyme products to treat or prevent
human disease, we must successfully deal with technical issues such as:
. ribozyme design,
. stability,
. selectivity,
. drug delivery and cellular absorption,
. safety,
. effectiveness, and
. manufacturing synthesis and scale up.
To date, we have achieved a number of significant milestones important to the
development of ribozymes and related technical issues, including the following:
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Design. We have developed a proprietary computer program to design
ribozymes against sites in a target mRNA sequence. This program allows us to
accelerate the identification of potential ribozyme product candidates and
design multiple back-up candidates.
Stability. To be useful as a treatment, a ribozyme must remain stable in
human serum and cells long enough to destroy the targeted mRNA and ideally long
enough for each ribozyme molecule to destroy several mRNA molecules. Unmodified
ribozymes are stable and fully active in human serum for only a few seconds. We
have successfully produced chemically-modified ribozymes that are stable and
fully active in human serum and cells for more than 10 days. This level of
stability may be sufficient for ribozymes to be effective drugs.
Selectivity. Based on third-party studies and our internal work, we
believe that a ribozyme with a binding region of approximately 15 nucleotides is
optimal. A binding region of this length is expected to match, on a statistical
basis, only one specific mRNA sequence in the entire human genome. Since the
ribozyme should interact only with the target mRNA, it should not affect other
gene function and, therefore, should not have side effects when used as a drug.
The high degree of selectivity of ribozymes has been demonstrated, both by us
and by third parties.
Drug Delivery and Cellular Absorption. Successful development of any drug
requires that the drug be delivered to the desired site in the body. We are
exploring local and systemic delivery of chemically synthesized ribozymes, as
well as vector delivery. For example, we have demonstrated systemic delivery of
chemically synthesized ribozymes without any delivery vehicle using either
intravenous or subcutaneous delivery in several animal models and in humans.
Additionally, we have identified several proprietary carriers which, when
combined with chemically synthesized ribozymes, have shown significant increases
in the effective delivery of ribozymes to a variety of different cell types
relative to ribozymes without a carrier.
Safety. We have completed single and multiple dose animal safety studies
with several ribozymes which have confirmed the ribozymes' lack of toxicity.
For example, ANGIOZYME has shown a lack of toxicity in rodents and monkeys. As
a result, the FDA has allowed initial human clinical trials to be carried out in
healthy volunteers. A Phase Ia trial in healthy volunteers has now been
completed and has shown an excellent safety and tolerability profile.
Effectiveness. We have demonstrated through internal research and in
conjunction with our collaborators that our ribozymes reduce the amount of
target mRNA and the level of corresponding protein produced as well as inhibit
the spread of disease. Studies showing the effectiveness of ribozymes have been
conducted in multiple animal models for cancer in both models of solid tumor
growth and metastasis, and in cell cultures for viral replication.
Manufacturing Synthesis and Scale Up. To meet our needs for preclinical
studies, clinical trials and the eventual commercialization of ribozymes, we
must have the ability to manufacture a sufficient amount of ribozymes. We and
our collaborators have developed proprietary technology allowing us to
synthesize several thousand stabilized ribozymes in milligram quantities per
month. These quantities are sufficient to permit us to perform direct cell-
based
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screening of multiple potential target sites in short periods of time. We have
also developed the capability of manufacturing kilogram quantities under the
FDA's current good manufacturing practices. In addition, we have developed
significant manufacturing capabilities which, when combined with available
contract manufacturers, are expected to be able to produce those drugs currently
under development in sufficient quantities, and of the quality required by the
FDA, for our anticipated clinical trials.
Our business strategy
Our primary business objective is to use our technology to identify and
develop drugs containing ribozymes to treat or prevent human disease. Our
secondary objective is to license our technology to others on terms which could
provide us an economic benefit. Our strategy for achieving these objectives
includes the following goals:
Develop Identified Product Candidates. We are developing two products,
ANGIOZYME and HEPTAZYME. In collaboration with Chiron, we are developing
ANGIOZYME for the treatment of solid tumor cancers and metastasis, and possibly
for other diseases that require extensive new blood vessel formation. We have
completed a Phase Ia clinical trial for ANGIOZYME in healthy volunteers. We
have commenced Phase Ib clinical trials in cancer patients. In collaboration
with Eli Lilly, we are developing a second product, HEPTAZYME, for the treatment
of Hepatitis C. We are conducting preclinical testing for HEPTAZYME and we plan
to file an IND before year-end.
Identify New Product Candidates. We have developed a variety of sources to
identify additional product candidates. Internally, we are researching several
product candidates and intend to begin preclinical testing and development of
one of these product candidates by year-end. We believe that our relationship
with Atugen could provide an important source of new product candidates for us.
Atugen will seek additional partners in the pharmaceutical and biotechnology
industries using Atugen's gene function identification and validation
technology. We have retained rights to develop ribozymes against any targets
validated by Atugen on its own or for its partners. We are engaged in several
collaborations to validate selected genetic sequences as candidates for drugs
development. Under these collaborations, we have the right to develop ribozyme
products against validated targets not developed by our collaborators.
Partner with Others to Develop Products. We intend to develop our initial
products in collaboration with larger corporate partners. In the past, we have
entered into collaborations prior to identifying product candidates and
performing the research and preclinical testing necessary to bring such products
to development. In the future, we intend to demonstrate a product candidate's
commercial potential using internally funded research, preclinical testing and,
perhaps, early clinical trials. Entering into a development collaboration after
a product's potential has been demonstrated will increase the product's value.
Our development process with HEPTAZYME is an example of this new partnering
strategy.
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Focus on Human Therapeutics and License Other Applications of Our
Technology. We will look for opportunities to license our technology on terms
which provide a reasonable opportunity for significant business benefit. In
1998, we transferred our gene function identification and validation technology
to Atugen in exchange for an equity interest in Atugen. Atugen will continue to
build the gene identification and target validation business by actively
pursuing collaborations with new corporate partners. We will benefit from
Atugen's activities through our ownership interest in Atugen, as well as through
the rights we retained under the terms of the technology transfer.
Maintain and Expand Patent Portfolio and Proprietary Technology. To
maximize the value of our technology, we dedicate substantial resources to the
discovery of new inventions. We aggressively pursue patent protection. We
currently own, or have exclusive licenses to, 84 issued or allowed patents
worldwide and have over 100 patent applications pending worldwide.
Our product programs
The development process for our products starts with research and
preclinical development. Research includes identification of a target protein,
synthesis of an appropriate ribozyme to block expression of the target protein,
and testing the activity of the ribozyme in a specific cell population.
Preclinical testing includes pharmacology and toxicology testing in cell
cultures and animal models, product formulation, dosage studies and
manufacturing scale-up for submission of the necessary data to comply with
regulatory requirements of the FDA and similar agencies in other countries prior
to commencement of human trials. Regulatory requirements concerning the conduct
of clinical trials are described below in the section "--Government Regulation
of our drug development activities."
We are currently in various stages of development and clinical trials for
two products. ANGIOZYME is being developed to treat solid tumor cancers, but it
may also be applicable to other diseases such as diabetic retinopathy and
macular degeneration. HEPTAZYME is being developed to treat Hepatitis C.
ANGIOZYME. For cancerous tumors to grow, the body must generate new blood
vessels surrounding the tumor to supply the blood necessary for tumor growth, a
process known as angiogenesis. In many cases, the Vascular Endothelial Growth
Factor ("VEGF") molecule and its receptor are essential to angiogenesis.
ANGIOZYME was developed to inhibit the production of the VEGF receptor, thereby
slowing or stopping angiogenesis and related tumor growth and metastasis. Animal
studies conducted by us and by independent third parties showed dramatic
reduction in tumor growth and metastasis. Animal studies using ribozymes alone
and in conjunction with existing cytotoxic cancer therapies demonstrated the
elimination of metastasis of the cancer. As a result of our research and
preclinical studies, the FDA approved an IND allowing us to begin clinical
trials. We completed Phase Ia clinical trials in healthy volunteers in January
1999. These trials, conducted on 14 healthy volunteers, demonstrated safety and
tolerability and showed no drug related side effects. We have commenced Phase Ib
clinical trials testing safety and tolerability in approximately 16 cancer
patients with a broad spectrum of solid tumors and metastasis. We expect to
initiate Phase II clinical trials prior to the end of 1999.
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If the results of clinical trials are positive, ANGIOZYME could be
developed as a treatment of some solid tumor cancers such as cancers of the
lung, breast, prostate, colon and rectum. These cancers account for over
750,000 new cancer cases and over 200,000 deaths per year in the United States
alone. In addition, ANGIOZYME could also be used in products for the treatment
of other diseases in which angiogenesis is a contributor such as the eye
diseases, macular degeneration and diabetic retinopathy.
ANGIOZYME is being developed in collaboration with Chiron. We have control
of all development activities and decisions. We will share development costs
equally with Chiron for any commercial product developed and commercialized.
The material terms of the agreement with Chiron are discussed below.
HEPTAZYME. We are developing a potential product for the treatment of
Hepatitis C, a viral disease of the liver. There are over 4 million chronically
infected persons in the United States and over 175 million worldwide. Hepatitis
C infects approximately 50,000 people with over 10,000 deaths associated with
Hepatitis C each year in the United States. It is the most common blood borne
infection in the United States and has been identified as a "silent epidemic"
and "a daunting challenge to public health" by the United States Congress.
Current therapies for Hepatitis C are effective in less than 50% of
existing patients and they have serious side effects. Our research and
preclinical testing has indicated that HEPTAZYME selectively cuts Hepatitis C
RNA in a manner that significantly inhibits viral replication in cell culture.
These results were presented at a meeting of the American Association for the
Study of Liver Diseases in November 1998. It is also expected to be effective
against all known Hepatitis C sub-types, which now number over 90. We intend to
conduct toxicology and other preclinical studies commencing in the second
quarter of 1999 and file an IND with the FDA by the end of 1999. We are
developing HEPTAZYME in a collaboration with Eli Lilly. The material terms of
the agreement with Eli Lilly are described below.
Other Programs. In collaboration with Chiron, the City of Hope and
Children's Hospital (Los Angeles), we have successfully completed a gene therapy
HIV Phase I/IIa clinical trial. The treatment phase of this trial was completed
in December 1997. Five patients were treated, and no drug-related toxicities
were observed. In 1998, a proof-of-principle Phase II clinical trial in AIDS
Lymphoma patients was initiated. The pilot trial is intended to assess the
viability of the gene therapy approach for delivering anti-HIV ribozymes. The
commercial viability of current gene therapy technologies and thus the future of
this program will be decided during 1999.
Internally, we are researching several product candidates and intend to
begin preclinical testing and development of one of these product candidates by
year-end.
Chiron Corporation. In July 1994, we entered into an agreement with Chiron
to collaborate exclusively on up to five specific targets selected by Chiron.
Four targets are currently subject to the exclusivity provision, including
ANGIOZYME and the target of our HIV product, thus Chiron has the right to select
an additional exclusive target. From time to time during the term of the
collaboration, Chiron also has the right to reserve four potential targets. In
addition, Chiron may replace an exclusive or reserved target if the rights to
such target have been granted to a third party or such target is the subject of
an active internal development program.
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Unless otherwise mutually agreed, no target may be reserved for more than
18 months after its designation. During the 18-month period, we cannot develop,
or grant rights to third parties to develop, products against a reserved target.
Following such period, Chiron will not have any rights to a reserved target
unless during the 18-month period the reserved target replaces another target as
an exclusive target.
Pursuant to the collaboration, we commenced a five-year joint research
program which expires in July 1999. During the five-year program, each party
pays for its own research and preclinical development of products. Additional
collaborative research may be done on a product against targets by mutual
agreement and either party may research and conduct preclinical testing on its
own, at its own cost.
Either party may propose that an IND be submitted and Phase I clinical
trials be commenced for a product against exclusive targets. If the other party
does not agree to share equally in the development costs through Phase I
clinical trials, the party not sharing in the Phase I development cost forfeits
any rights to the proposed product.
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If, after jointly funded Phase I clinical trials have been completed, one
party discontinues funding its share of the costs of clinical development that
party would not share equally in the profits from product sales but would
receive a royalty based on net sales of that product. However, the non-
participating party may regain its interest in the profits of the product by
repaying the other party on-half of the development costs incurred solely by the
other party, plus a predetermined risk premium at either the commencement of
Phase III testing or the filing of a New Drug Application or Product License
Application. In some instances we may pay up to 50% of such payment in shares of
our common stock. The maximum number of shares we can issue to Chiron in lieu of
a cash payment is limited such that after issuance of these shares Chiron can
not own more than 19.9% of our outstanding common stock. If development of a
product is funded equally by the parties, we will share equally the profits from
product sales.
We have retained the right to manufacture chemically synthesized ribozyme
products resulting from the collaboration whether developed jointly or
individually by each party.
The collaboration terminates on the later of (1) 30 years after the first
commercial sale of the last jointly developed product arising out of the
collaboration or (2) upon the expiration of patents or 15 years after the first
commercial sale for a solely developed product.
As part of the collaboration, in 1994 Chiron made an equity investment of
$4.36 million in our stock. In addition, Chiron purchased 377,202 shares of our
common stock for $3.64 million in 1996. Also, in 1996, Chiron purchased warrants
for 444,444 shares of our common stock for $2.0 million, exercisable at a price
of $22.50 per share with an expiration date of December 30, 2004.
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We and Chiron could not reach agreement on a development plan for
ANGIOZYME. In consideration for the payment by Chiron of $5.0 million of our
research costs related to ANGIOZYME prior to the filing of the IND for
ANGIOZYME, we amended the collaboration agreement in the following manner. If
the parties do not agree as to the plans, any timing or budget for any
development activities, our proposed plans, timing and budget will be adopted
but we must then find 55% of the costs for such development activities. If the
total costs do not exceed our proposed budget, Chiron must pay us 5% of the
total costs incurred for such development activities.
Lilly Collaboration. In March 1999, we entered into a collaboration with Eli
Lilly and Company pursuant to which Lilly was granted the exclusive worldwide
right to develop and commercialize HEPTAZYME and any other ribozyme drug for the
treatment of HCV infection. If Lilly abandons or does not diligently pursue the
development of HEPTAZYME or another ribozyme drug for the treatment of HCV
infection, all rights to HEPTAZYME and such other ribozymes revert to us,
subject to the right of Lilly to receive royalty payments, if applicable, on the
sale of products developed by us on our third-party collaborators.
Lilly will pay us $9.2 million in 1999, which includes funding for
research, clinical trial materials and an equity investment. In April 1999,
Lilly purchased five shares of our Series L preferred stock for $7.5 million.
Separately, during 1999 Lilly will provide research revenue payments totaling
$1.7 million to be paid in three equal quarterly installments. Including
development milestones, which we will be entitled to receive if a commercial
product is offered for sale in the United States, Europe and Japan, we would
receive as much as $38 million including the $9.2 million. In addition we will
be entitled to royalties on the sale of products developed pursuant to the
collaborations. We could also realize increased revenues from product
manufacturing and research.
We have the right to manufacture all ribozymes for clinical trials. In
addition, we have the manufacturing rights for any commercial product developed
from the collaboration subject to Lilly's right to manufacture a portion of the
commercial product, in which event Lilly must pay us an increased royalty on
product sales.
Gene Validation
Development of Gene Identification and Target Validation Business. We
developed a gene function identification and target validation business
internally to generate revenues and accelerate the discovery of potential drugs
using ribozymes. We entered into gene function identification and target
validation agreements with Schering AG, Chiron, Parke-Davis, Roche and
GlaxoWellcome and developed with our collaborators additional technologies
helpful in gene identification and target validation. These technologies use
ribozymes and other oligonucleotides to block the function of genetic sequences
selected by our partners. The effect of the ribozyme or other oligonucleotides
in cell cultures or animal models is then analyzed to determine whether the
protein associated with the disease or the disease itself is reduced or
eliminated. Alternatively, a genetic sequence, the function of which is
unknown, can be analyzed using ribozyme inhibition in a collection of cell
culture assays or animal models that represent a broad range of biological
functions.
Gene Validation Collaborations. We entered into gene function
identification and target validation agreements with various collaborators and
granted licenses to these collaborators to use our technology to develop
products identified or validated under these collaborations.
. Schering AG. In April 1997, we entered into a research collaboration
with Schering AG focusing on the use of ribozymes and related technologies for
gene function validation. We provide our expertise in ribozyme design,
synthesis and delivery, and Berlex Laboratories, Inc., a United States
subsidiary of Schering AG, provides candidate gene or expressed sequence tag
targets, screening in cell culture and animal models as well as development and
commercialization expertise to the collaboration. We anticipate that hundreds
of potential targets may be examined over a five-year period.
Schering AG may reserve exclusive rights to a specified number of targets
at any time. Rights to a Schering AG target will revert to us, however, if
Schering AG is not developing or selling a product against such target.
Schering AG may not reserve exclusive rights to a target if we have granted a
third party license for products against that target or we are conducting an
active internal program for the development of a product against that target.
Schering AG has a license to commercialize both ribozyme and non-ribozyme
products from any validated targets subject to paying us certain milestone
success fees and royalties on product sales. We have the right to manufacture
ribozyme products developed by Schering AG and to independently develop any
ribozyme product not developed by Schering AG, unless Schering AG is developing
a non-ribozyme product against the same target and agrees to pay specified
milestone success payments to us in exchange for our relinquishing our right to
make ribozyme products against such target.
In May 1997, Schering AG purchased 212,766 shares of our common stock for
$2.5 million and in 1998 they purchased 465,117 shares of common stock for $2.5
million. Separately, Schering AG provided loans of $2.0 million in both 1997
and 1998. We received an
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additional $1.0 million on this loan facility in January 1999. Schering AG will
continue to provide loans of up to $2.0 million annually through 2001, provided
that the collaboration continues in each of those years. The loans, which carry
an interest rate of 8% per annum, are immediately convertible into equity at
Schering AG's option. At December 31, 1998, our outstanding borrowings of $4.3
million were convertible into approximately 992,000 shares of our 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 $2.0 million in 1998 and, provided that the collaboration is
continued, will make research payments of $2.0 million a year through 2002. All
payments are subject to some restrictions, including receipt of third-party
consents. Upon payment of termination fees to us, the research collaboration may
be terminated at Schering AG's option.
. Roche Bioscience. In May 1998, we entered into a gene function
identification and target validation collaboration with Roche. Roche may obtain
the exclusive right to up to a specified number of targets over approximately
five years if it requests and pays for validation research for such targets.
Roche may reserve the rights to all targets related to a particular disease for
up to three years. It may not obtain the rights to products for a target or
disease which we have granted to third parties or to targets which we have
patented or for which we have pending patent applications. We do not receive
periodic fees from Roche but rather Roche pays us a set amount for the specific
research activities conducted on its behalf and for materials used in the
research program.
Roche is also obligated to pay success payments for successful target
validations. Roche has the right to develop ribozyme or non-ribozyme products
against targets discovered or validated under the collaboration subject to the
payment to us of milestone success fees and royalties on product sales. We have
the right to manufacture ribozyme products developed by Roche and to
independently develop any ribozyme product not developed by Roche.
. GlaxoWellcome. In July 1998, we entered into an agreement with
GlaxoWellcome pursuant to which GlaxoWellcome will perform evaluation of our
gene function identification and validation technology on a limited number of
genes to determine whether GlaxoWellcome desires to enter into additional
collaboration or license agreements with us. GlaxoWellcome paid research fees
to us in connection with the evaluation program for reagents plus the cost of
any services or additional reagents requested by them. We will not be entitled
to any royalties or other payments in connection with products developed by
GlaxoWellcome against the initial targets covered by the evaluation agreement.
. Chiron. In May 1996, we entered into a target validation and discovery
collaboration with Chiron for the use of ribozymes to validate gene function. We
and Chiron each pay a portion of the research and development expenses of the
collaboration. We paid Chiron $1.8 million for research funding related to the
collaboration. We do not receive periodic fees but rather Chiron pays a
predetermined amount for materials actually used in the collaboration.
-12-
<PAGE>
Chiron has the option to reserve exclusive rights to a specified number of
targets for up to two and a half years as well as the exclusive right to any
products developed against the targets subject to the collaboration. We are
entitled to:
. receive success payments related to the development of any
products arising under the agreement,
. receive milestone success payments for the development of
ribozyme products and royalties on sales of any commercial
products containing ribozymes,
. manufacture synthetic ribozymes, and
. develop any ribozyme product not developed by Chiron subject to
the payment of royalties on product sales to Chiron. Chiron also
has the right to manufacture endogenously delivered ribozyme
products developed by us.
. Parke-Davis. In March 1998, we entered into a target validation and
discovery collaboration with Parke-Davis to use our technology to validate genes
as therapeutic targets. We do not receive periodic fees but rather Parke-Davis
pays for our research and for materials provided by us. The initial studies on
targets chosen by Parke-Davis have been successfully completed. Parke-Davis will
have the exclusive right to develop oligonucleotide products against targets
validated under the collaboration pursuant to a mutually satisfactory license
which we anticipate would provide for the payment of milestone success fees and
royalties on product sales. No work is ongoing at this time, but we will be
obligated to perform additional validations in the future if requested and paid
for by Parke-Davis.
The research under these agreements continues but most services are
expected to be performed by Atugen as a subcontractor. We may assign these
agreements to Atugen in the future, subject to the consent of our collaborators.
If an agreement is assigned to Atugen, we will retain any rights we have now
under the collaboration to:
. milestone success payments under the collaboration agreement,
. royalties on products developed by our collaborators, and
. develop ribozyme products which our collaborators choose not to
develop under the terms of the agreements subject to royalties
from product that may be payable to our collaborators. We expect
that these rights will be retained by us even if the agreements
are assigned to Atugen.
Atugen Biotechnology Formation. In 1998, we transferred our target
validation and discovery technologies to Atugen. This opportunity was attractive
to us because substantial funding was available from both outside investors and
the German government. This funding would not otherwise have been available to
us and should allow Atugen to expand the target validation business and
technology.
We will benefit from Atugen's activities in the future in several ways:
. we retain an interest in Atugen and held 49.5% of its equity
interest as of December 31, 1998,
. we will have the right to develop ribozymes or other oligonucleotides
against any targets validated by Atugen for its customers,
. we will be paid by Atugen for ribozymes and other material manufactured
by us pursuant to our exclusive manufacturing rights,
. we will be paid by Atugen for a portion of our costs of prosecuting
patents applicable to Atugen's business,
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<PAGE>
. we will be paid by Atugen for certain administrative and other services
rendered by us to Atugen, and
. we retain the right to use the gene identification and target validation
technology in non-high throughput applications for our own use and in
connection with limited research and development collaborations with
third parties.
Financing for Atugen was accomplished through a combination of venture
capital investment, an investment by us and German government grants and loans.
We contributed $2.0 million in cash to Atugen. On March 31, 1999, we owned a
49.5% equity interest in Atugen. Our equity interest in Atugen is subject to
dilution if additional equity is issued for any purpose, such as to raise
additional capital in connection with acquisitions or in connection with stock
option or similar incentive plans for Atugen employees.
We have the right to name two of six designees to Atugen's Board of
Directors and the Chairman of the Board for as long as we and BB BioVentures
together own a majority of Atugen's outstanding stock. Nonetheless, most
corporate actions taken by Atugen require a 75% vote or consent of the holders
of Atugen's outstanding stock.
Pursuant to a service agreement with Atugen, we provide a business
development team which devotes 50% of its time to support Atugen's business
development efforts for nine months beginning on September 1, 1998 and, at
Atugen's option, for an additional three months. Our CEO, CFO and Vice President
of Research, Dr. Christoffersen, Mr. Bullock and Dr. Usman, respectively,
devoted up to 25% of their time to Atugen activities for six months beginning on
September 1, 1998 to ensure a smooth transfer of technology. They are making
every reasonable attempt to accommodate any additional time needed by Atugen
during or after the six-month period.
As part of the formation, Atugen received exclusive royalty-free licenses
to our extensive patents and technologies for target validation and discovery.
We received a one-time $2.0 million license payment in 1999 for a portion of the
licensed technology. The initial technology base includes our entire gene
function identification and target validation technologies for both chemically
synthesized and expressed nucleic acids, including target site selection, cell
culture assays, RNA and other assays, optimized delivery vehicles and animal
pharmacology.
Atugen's primary goal is to accelerate discovery and validation of human
health therapeutic targets. It will provide a variety of technologies and
services to utilize information emerging from human genome sequencing efforts to
determine which genes are key factors causing human disease. The significant
technology base transferred from us to Atugen combined with the substantial
initial capitalization should allow Atugen to improve the speed and certainty of
identifying and validating new therapeutic targets both for corporate partners
and for internal use. As part of the formation, Atugen acquired Transgenics
Berlin-Buch in return for equity in Atugen. This transaction provides Atugen
with transgenic animal capabilities, allowing early and rapid animal model
assessment of the effect of inhibiting expression of a targeted gene sequence
using a ribozyme. Atugen formally opened its research and administrative
facilities in January 1999 on the Biomedical Research Campus of the Max Delbruck
Center in Berlin-Buch, Germany.
Other licenses
An element of our business strategy is to enter into licensing agreements
or other arrangements to exploit our technology as broadly as possible. We seek
licensing partners who pursue the development of drugs for human diseases and
other applications of our technology
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<PAGE>
which we cannot otherwise develop due to our limited resources. In the past, we
have entered into the following two licenses for such activities.
Dow Agrosciences. In September 1993, we entered into a collaborative
research feasibility study with Dow Agrosciences. The goal of the feasibility
study was to demonstrate the ability of ribozymes to alter corn oil traits.
Under the agreement, Dow Agrosciences provided research support for the
feasibility study conducted by us. The feasibility study was completed
successfully in April 1997 and we entered into a long-term license agreement
with Dow Agrosciences. The agreement provides Dow Agrosciences with a worldwide,
non-exclusive license to some of our technology to commercialize oil, meal and
starch products in corn and several other crops. As consideration for the long-
term license agreement, 41,666 shares of our common stock held by Dow
Agrosciences were returned to us. We will receive royalties on products sold. We
do not expect to receive royalties, if any, from this license for a substantial
period of time.
IntelliGene. In March 1997, we granted a worldwide exclusive license to
some of our technology to IntelliGene to develop and sell diagnostics for
several target diseases using ribozymes. 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 on these tests, either alone or
through sublicenses. We received a license fee and will receive royalties on
product sales as part of this agreement. We do not expect to receive royalties,
if any, from this license for a substantial period of time.
Our competition
We are engaged in the rapidly changing business of developing treatments
for human disease through gene modulation. Competition among entities
attempting to develop gene modulation products for disease treatment is intense
and is expected to increase. We face direct 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, we compete
with large pharmaceutical companies and established biotechnology firms, many of
whom are developing new products for the treatment of the same diseases targeted
by us. 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,
preclinical studies and clinical trials, obtaining regulatory approvals and
marketing than us. Our collaborators and licensees may be conducting research
and development programs directed at the same diseases that we are targeting.
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.
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<PAGE>
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 us in recruiting and
retaining highly qualified scientific and management personnel.
In addition to the above factors, we face 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.
Our patents and proprietary technology
Protecting patents and other proprietary rights are crucial to developing
our business. In addition to patents, we rely upon trade secrets, know-how and
continuing technological innovations in the design, synthesis, and purification
of ribozymes and in nucleic acid chemistry. We also rely on licensing
opportunities to develop and maintain our competitive position. It is our
policy to file patent applications when appropriate to protect technology,
inventions, and improvements that are considered important in the development of
our business.
At the core of our technology are inventions and patents of the University
of Colorado developed by Dr. Thomas R. Cech and various of his associates.
Pursuant to the University's policies, these inventions and the related patents
became the property of the University. The Cech Technology was assigned to the
University's affiliate, University Research Corporation ("URC"), which in turn
assigned the rights to license parts of the Cech Technology to Competitive
Technologies, Inc. United States Biochemical Corporation ("USB") licensed the
Cech Technology pursuant to two sublicenses. We have entered into a license with
URC and sublicenses with USB and Competitive Technologies pursuant to which we
have obtained the exclusive (except for non-commercial academic research)
worldwide right to the Cech Technology to, among other things, make, use and
sell ribozymes and ribozyme products covered by the licensed patents. The URC
license and USB sublicense are fully paid. The Competitive Technologies license
provides for the payment of a royalty on sales of ribozyme products covered by
the licensed patents. We may grant sublicenses to the licensed technology
subject to the payment to Competitive Technologies 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,
we must pay Competitive Technologies 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, we were 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 the University, in exchange for payments. To
maintain this right, we agreed to fund research at CU through an unrestricted
grant of $750,000 payable in various installments over a five year period.
This grant has been paid in full. In addition, we have agreed to pay CU a fee
for each invention accepted by us under the license.
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As part of our overall intellectual property strategy, we selectively enter
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. We entered into a number of these
agreements with institutions such as Duke University, Massachusetts Institute of
Technology and Yale University.
As a result of these licenses and sublicenses, and our own internal
research, we currently have the rights to 84 issued or allowed patents, and more
than 100 patent applications under consideration worldwide. This includes
exclusive worldwide rights to 61 patents issued in the United States, 3 patents
issued in Europe, 1 patent issued in Japan and 8 patents issued in Australia. In
addition, Notices of Allowance have been received for at least 11 patents from
the United States Patent and Trademark Office. Six of the 61 United States
issued patents, 1 European patent and 1 Japanese patent cover enzymatic RNA and
the use of an enzymatic RNA to cleave a single stranded RNA. The Cech Patents
grant us the right to exclude others from practicing ribozyme technology as it
is currently known to us 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 Cech 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, we have filed or hold exclusive licenses to more than 100
pending United States and related foreign applications. Our patent portfolio
includes approximately 40 United States applications for various areas of
interest in human therapeutics and diagnostics and agricultural uses. The
portfolio also includes approximately 80 United States applications related to
the chemistry, design, optimization, manufacture and delivery of ribozyme
products. These patents collectively extend our ribozyme patent coverage well
beyond the life of the Cech Patents.
We have filed opposition documents against two patents granted to a
competitor in Europe. Opposition proceedings against two of our European and
Japanese patents have been initiated by our competitors. The Japanese
Opposition Division has rejected competitor oppositions, and has issued
notification that it will maintain our Japanese patent without change. The
opposition proceedings against our European patent is still ongoing. In
addition, we anticipate interference proceedings against some of our patents and
patent applications in the United States. Our 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. Litigation
could prove necessary to protect our patent position, which would result in our
incurring substantial costs as well as diverting our efforts.
Competitors or other patent holders could bring legal actions against us
involving our patents, patent applications or rights to use proprietary
technology. If any actions succeed, in addition to any potential liability for
damages, we could be enjoined from selling the affected
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product, or be required to obtain a license in order to continue to manufacture
or market the product. There can be no assurance that we 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 there will likely
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 our resources regardless of the outcome.
Government regulation of our drug development activities
The development, manufacture and potential sale of therapeutics is subject
to extensive regulation by United States and foreign governmental authorities.
In particular, pharmaceutical products undergo rigorous preclinical and clinical
testing and to other approval requirements by the FDA in the United States under
the federal Food, Drug and Cosmetic Act and the Public Health Service Act and by
comparable agencies in most foreign countries.
Before testing of any agents with potential therapeutic value in healthy
human test subjects or patients may begin, stringent government requirements for
preclinical data must be satisfied. The data, obtained from studies in several
animal species, as well as from laboratory studies, are submitted in an IND
application or its equivalent in countries outside the United States where
clinical studies are to be conducted. The preclinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for
the initiation of clinical trials.
Clinical trials are typically conducted in three sequential phases,
although these phases may overlap. In Phase I, which frequently begins with
initial introduction of the compound into healthy human subjects prior to
introduction into patients, the product is tested for safety, adverse affects,
dosage, tolerance, absorption, metabolism, excretion and clinical pharmacology.
Phase II typically involves studies in a small sample of the intended patient
population to assess the efficacy of the compound for a specific indication to
determine dose tolerance and the optimal dose range as well as to gather
additional information relating to safety and potential adverse effects. Phase
III trials are undertaken to further evaluate clinical safety and efficacy in an
expanded patient population at geographically dispersed study sites to determine
the overall risk-benefit ratio of the compound and to provide an adequate basis
for product labeling. Each trial is conducted in accordance with certain
standards 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.
Data from preclinical and clinical trials are submitted to the FDA as an
NDA for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a new
drug is likely to take a number of years and requires the expenditure of
substantial resources. Preparing an NDA or marketing authorization application
involves considerable data collection, verification, analysis and expense.
There can be no assurance that FDA or any other health authority approval will
be granted on a timely basis, if at all. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny an NDA or
marketing
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authorization application if the authority's regulatory criteria are not
satisfied or may require additional testing or information.
Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or other
regulatory authorities may require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including changes in indication, manufacturing process or labeling or
a change in manufacturing facility, an application seeking approval of such
changes will be required to be submitted to the FDA or other regulatory
authority.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to commencing
commercial sales of the product in such countries. The requirements governing
the conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than that
required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country at this time
has its own procedures and requirements. Further, the FDA regulates the export
of products produced in the United States and may prohibit the export of such
products even if these are approved for sale in other countries.
In addition to FDA requirements, the National Institutes of Health has
established guidelines for research involving recombinant DNA molecules, which
are utilized by us and our collaborators and licensees. 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. Our
vector delivery of ribozymes will need to be reviewed by this Committee.
We are also subject to regulation under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resources Conservation and Recovery Act and other present and potential future
federal, state and local regulations.
Completing the multitude of steps necessary before marketing can begin
requires the expenditure of considerable resources and a lengthy period of time.
Delay or failure in obtaining the required approvals, clearances or permits by
us, our corporate partners or our licensees would have a material adverse affect
on our ability to generate sales or royalty revenue. The impact of new or
changed laws or regulations cannot be predicted with any accuracy.
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Our manufacturing and marketing strategies
To support our preclinical and clinical trial manufacturing requirements,
we constructed manufacturing facilities that we believe comply with applicable
regulatory requirements. We have also established operational quality assurance
and quality control procedures. We believe that our existing facilities and
those available from contract manufacturers will be satisfactory for production
of ribozymes needed through clinical trials for our products currently in
development.
We do not currently have the facilities or means to manufacture, market,
distribute or sell on a commercial scale any of products we may develop. We
will need to develop our own facilities or contract with third parties for the
manufacture of products. We have expanded our quality control and quality
assurance program internally, including adopting a set of standard operating
procedures designed to assure that any products manufactured by or for us are
made in accordance with cGMP and other applicable domestic and foreign
regulations.
In connection with establishing of our manufacturing capabilities, we have
entered into agreements with Pharmacia Biotech and Protogene. In November 1995,
we agreed to collaborate with Pharmacia Biotech on developing better synthesis
and purification methods for the preparation of modified amidites and chimeric
oligonucleotides on a large scale. The goal of the collaboration is to reduce
the cost of manufacturing ribozymes and other oligonucleotides products that use
amidites. Pharmacia Biotech, which is a subsidiary of Pharmacia & Upjohn, Inc.,
has expertise in the manufacture of oligonucleotides synthesis and purification
instrumentation and software. Under the terms of the collaboration, Pharmacia
Biotech is providing us with synthesis instrumentation and software, research
funding and milestone payments, a portion of which may be set-off against future
royalties payable to us.
In December 1996, we entered into an agreement with Protogene, a private
biotechnology company, to develop an instrument allowing high throughput
synthesis of non-DNA oligonucleotides. Under the terms of the agreement, we
have purchased an instrument manufactured by Protogene.
We expect to market and sell any products developed, at least initially,
directly and through co-promotion or other licensing arrangements with third
parties, including our collaborators. In some markets, we may enter into
distribution or partnership agreements with pharmaceutical or biotechnology
companies that have large, established sales organizations.
Our Employees
As of April 28, 1999, we had 66 full-time employees, including a technical
scientific staff of 50. Our future performance depends significantly on the
continued service of our key personnel. None of our employees are covered by
collective bargaining arrangements. We believe our employee relations are good.
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Our Scientific Advisory Board
We are assisted in our research and development activities by our
Scientific Advisory Board composed of leading scientists who meet with us
several times each year to review our research and development activities, and
to discuss technological advances and our business. We also have collaborative
relationships with several board members that further advance our product
development. Our current Scientific Advisory Board members are:
Thomas R. Cech, Ph.D. Distinguished Professor, Department of Chemistry &
Biochemistry, University of Colorado; Chairman, SAB
Gerald Joyce, M.D., Ph.D. Professor, Department of Molecular Biology,
Scripps Research Institute
Edward Mocarski, Ph.D. Professor and Chairman, Departments of Microbiology &
Immunology, Stanford University
Gary Nabel, M.D., Ph.D. Professor, Departments of Internal Medicine and
Biological Chemistry, University of Michigan
Bruce Sullenger, Ph.D. Assistant Professor, Departments of Experimental Surgery
and Genetics, Duke University
Olke C. Uhlenbeck, Ph.D. Professor, Department of Chemistry and Biochemistry,
University of Colorado
Each member has entered into an exclusive consulting agreement with
Ribozyme Pharmaceuticals in the field of ribozymes and signed confidentiality
and non-disclosure agreements. In 1998, they each received:
. an annual retainer of $4,000 paid quarterly (except Dr. Cech who
received $40,000),
. an honorarium of $1,500 per day for meetings attended, and
. options for 4,000 shares of our common stock, which vest ratably over
three years.
ITEM 2. PROPERTIES
We lease approximately 30,000 square feet of laboratory, manufacturing and
office space at 2950 Wilderness Place, Boulder, Colorado, under an operating
lease that lasts through June 2007. This facility will be sufficient to meet
our needs at least through 2000.
ITEM 3. LEGAL PROCEEDINGS
We are not actively involved in any litigation which could reasonably be
expected to have a material adverse effect on our business or the results of our
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"RZYM." The sale price of the common stock as reported on the Nasdaq National
Market on May 5, 1999, was $4.44 per share. At May 5, 1999, there were
approximately 148 holders of record of our common stock. The following table
sets forth, for the periods indicated, the high and low sales prices per share
of our common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
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
1998
First Quarter........................... $ 9.34 $5.13
Second Quarter.......................... $10.50 $4.88
Third Quarter........................... $ 6.25 $2.00
Fourth Quarter.......................... $ 7.63 $3.31
1999
First Quarter........................... $ 5.75 $4.06
Second Quarter (through May 5, 1999).... $ 5.38 $3.88
</TABLE>
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain future earnings, if any, to support the development
of our business and for general corporate purposes, and do not anticipate paying
any cash dividends in the foreseeable future. We are also party to agreements
restricting our payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following yearly selected financial data are derived from our audited
financial statements. Our financial statements for 1994, 1995, 1996, 1997 and
1998 have been audited by Ernst & Young LLP, independent auditors. These
historical results do not necessarily indicate future results. When you read
this data, it is important that you also read our financial statements and
related notes, as well as the section "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Collaborative
agreements.......... $ 1,145 $ 1,178 $ 759 $ 1,976 $ 8,963
Grant and other
income.............. 172 102 14 7 25
------- -------- -------- -------- --------
Total revenues...... 1,317 1,280 773 1,983 8,988
Expenses:
Research and
development......... 9,212 12,204 14,189 15,170 16,941
General and
administrative...... 1,291 1,397 1,943 1,886 1,813
------- -------- -------- -------- --------
Total operating
expenses........... 10,503 13,601 16,132 17,056 18,754
Operating loss........ (9,186) (12,321) (15,359) (15,073) (9,766)
------- -------- -------- -------- --------
Other income
(expense):
Interest income...... 270 395 936 795 634
Interest expense..... (334) (554) (845) (844) (704)
Equity in loss of
unconsolidated
affiliates.......... -- -- -- -- (1,082)
------- -------- -------- -------- --------
Total other income
(expense).......... (64) (159) 91 (49) (1,152)
------- -------- -------- -------- --------
Net loss.............. $(9,250) $(12,480) $(15,268) $(15,122) $(10,918)
======= ======== ======== ======== ========
Net loss per share
(basic and diluted).. $ (3.52) $ (3.86) $ (2.61) $ (2.04) $ (1.22)
Shares used in
computing net loss
per share (basic and
diluted)............. 2,627 3,230 5,845 7,420 8,978
Balance Sheet Data:
Cash, cash equivalents
and securities
available-for-sale... $ 7,734 $ 6,420 $ 17,594 $ 16,102 $ 6,512
Working capital....... 5,640 4,648 15,788 13,238 4,467
Total assets.......... 12,392 14,223 25,292 24,850 19,224
Capital lease
obligations and debt,
current portion...... 1,378 1,898 1,724 2,078 498
Capital lease
obligations and debt,
non-current portion.. 1,853 3,179 2,430 2,752 4,545
Accumulated deficit... (19,635) (32,115) (47,383) (62,505) (73,422)
Total stockholders'
equity............... 8,247 8,478 20,362 18,870 11,034
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with our audited
financial statements and related notes included in this report. Our discussion
contains forward-looking statements based upon our current expectations that
involve risks and uncertainties. Our actual results may differ materially from
the expectations we describe in our forward-looking statements.
Overview of our Business
Our primary business focus is to use our technology to develop a new class of
drugs consisting of ribozymes to treat or prevent human disease. We are in
various stages of preclinical development and clinical trials for two lead
product candidates: ANGIOZYME and HEPTAZYME. Chiron is our collaborator for the
development and commercialization of ANGIOZYME. Lilly is our collaborator for
the development and commercialization of HEPTAZYME. We have gene function
identification and target validation agreements with Schering AG, Roche
Biosciences and GlaxoWellcome. In addition, we have existing gene function
identification and target validation agreements with Chiron and Parke-Davis
which are substantially complete, but we may be obligated to perform additional
work.
To date, we have committed substantially all our resources to our research
and product development programs. We have not generated any revenues from
product sales, nor do we anticipate any in the foreseeable future. Revenue
recorded from our collaborative agreements may consist of:
.Research revenue is typically based on the fully burdened cost of a researcher
working on a collaboration. Rates are billed per employee, per year, pro
rated for time worked on a project. This revenue is typically invoiced on
a quarterly basis, either up front or in arrears. Revenue is recognized
ratably over the period, with the balance reflected as a deferred revenue
until earned. The revenue is typically recurring over the term of the
collaboration.
.License revenue is recognized ratably over the term of the license. Payments
received in advance are recorded as deferred revenue until earned.
.Milestone revenue is recognized in full when the related milestone performance
goal is achieved. Milestone revenue is typically not consistent or
recurring in nature.
.Up front revenue is fully recognized upon signing a collaboration and is
related to the value of the research at that point in time. Up front
revenue may also be a reimbursement to us of recent expenses which we
incurred related to product development.
Our revenue has consisted primarily of research revenue payments from our
collaborators. All revenues are either deferred as a liability or recognized
upon satisfying revenue criteria. We have no further research commitments from
our collaborators that have provided us with revenues. As of December 31, 1998,
all revenues recognized had been earned and no other obligation exist for this
revenue. We depend upon funding from external financing and corporate
collaborations for our research and product development programs and expect to
do so for the foreseeable future.
We expect to commit significant additional resources conducting clinical
trials for ANGIOZYME and HEPTAZYME, as well as for clinical trials for other
potential product candidates. In addition, although we believe our existing
manufacturing facilities and those available from contract manufacturers will
be satisfactory for the manufacture of our current product candidates through
clinical trials, we will need to commit significant resources in order to
support manufacture on a commercial scale. We have not been profitable since
inception and have an accumulated deficit of $73.4 million as of December 31,
1998. Losses
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<PAGE>
have resulted primarily from our research and development programs. We
anticipate incurring additional losses as ANGIOZYME, HEPTAZYME and other product
candidates advance through development. In addition, future milestone payments
under some of our collaborations are contingent upon our meeting particular
research or development goals. The amount and timing of future milestone
payments are contingent upon the terms of each agreement. Milestone performance
criteria is specific to each agreement and based upon our future performance. In
some instances, milestone payments may be forfeited if a goal is not
accomplished within a certain time frame. Therefore, we are subject to
significant variation in the timing and amount of our revenues and results of
operations from period to period.
In 1998, we transferred our gene function identification and target
validation technology to Atugen in exchange for a substantial equity interest.
We will continue our existing gene function identification and target validation
agreements with our collaborators by subcontracting services to be performed to
Atugen.
Our revenues are denominated in U.S. dollars, therefore, we have not been
exposed to foreign currency translation risks and have not engaged in any
hedging instruments.
Results of Operations for Years Ended December 31, 1998, 1997 and 1996
Revenues. Revenues from collaborative agreements increased from $2.0
million for the year ended December 31, 1997, to $9.0 million in 1998. The
increase was primarily due to $6.0 million recorded for Chiron partnership
payments related to the product development of ANGIOZYME. Of the $6.0 million
recorded for Chiron in 1998, $5.0 million was a nonrecurring payment for 50% of
past expenses incurred by us for the pre-clinical development of ANGIOZYME. The
payment became due when Chiron agreed to be our partner in the development of
ANGIOZYME. In addition, Chiron paid us $1.0 million for expenses incurred by us
for clinical development of ANGIOZYME during the fourth quarter of 1998. There
are no future obligations between us and Chiron for these revenues. In addition,
we received approximately $650,000 in collaborative revenue in 1998 due to new
target validation agreements with Roche, Parke-Davis and GlaxoWellcome.
Revenues from collaborative agreements increased from $759,000 in 1996 to
$2.0 million in 1997. The increase was 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.
Expenses. Research and development expenses increased from $14.2 million
in 1996 to $15.2 million in 1997, and increased to $16.9 million for the year
ended December 31, 1998. These increases were primarily due to the hiring of
additional personnel and the overall scale-up of research and product
development. Research and development expenses consist primarily of:
. clinical and preclinical supplies and related costs,
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<PAGE>
. salaries and benefits for scientific, regulatory, quality control and
pilot manufacturing personnel,
. consultants,
. supplies,
. occupancy costs, and
. depreciation for laboratory equipment and facilities.
In 1998, expenses were primarily related to ANGIOZYME development and target
validation service costs. We expect research and development expenses to
continue to increase as ANGIOZYME and HEPTAZYME proceed through clinical trials
and manufacturing.
General and administrative expense decreased slightly from $1.9 million in
1996 to $1.89 million in 1997, and decreased slightly again to $1.81 million for
the year ended December 31, 1998. The slight decrease in general and
administrative expense in 1997 was primarily due to higher expenses in 1996
which included one-time cash and stock bonus payments made to our executive
officers in connection with our initial public offering in April 1996. The
decrease in 1998 was due to reimbursements of $480,000 made to us from Atugen
related to management's time during closing and start-up of operations. We
expect 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 our
operations and business development efforts.
Other Income and Expense. Interest income was $936,000, $795,000 and
$635,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The
higher interest income in 1996 resulted from increased cash balances due to our
initial public offering in April 1996. Interest income has decreased over the
last three years due to declining cash balances. Interest income generally
fluctuates as a result of cash available for investment and prevailing interest
rates.
Interest expense has remained stable at $845,000 in 1996, $844,000 in 1997
and $704,000 in 1998. We expect interest expense to increase as we continue to
borrow cash to finance equipment purchases.
In 1998, in connection with our initial cash investment of $2.0 million
and the transfer of our target validation and discovery technology to the newly
formed affiliate, Atugen, we retained a 49.5% equity interest in the voting
stock of the company which includes both common and preferred stock. However, at
December 31, 1998, we owned 83.2% of the outstanding common stock of Atugen. We
do not meet the criteria for consolidation of the affiliate because:
. we own less than 50% of the Atugen voting stock, and
. the preferred shareholders retain significant participating rights.
Accordingly, we have accounted for our investment in Atugen under the equity
method. As a result, we have recorded our share of the unconsolidated
affiliate's 1998 net loss, or $1.1 million as equity in loss of unconsolidated
affiliate in our 1998 Statement of Operations. At December 31, 1998, our
remaining net investment in Atugen is $860,000, which we expect to be eliminated
entirely during 1999 as we share further in Atugen's anticipated losses.
Liquidity and Capital Resources
We have financed our operations since inception through public offerings in
April 1996 and October 1997, private placements of preferred stock, and funds
received under our collaborative agreements. From inception through December
31, 1998, we have received approximately:
. $29.0 million in net proceeds from private placements,
. $31.1 million in net proceeds from public offerings,
. $39.2 million from our collaborations, and
. $9.8 million from equipment financing.
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<PAGE>
We had cash, cash equivalents and securities available-for-sale of $6.5
million at December 31, 1998, compared with $16.1 million at December 31, 1997,
and $17.6 million at December 31, 1996. The $9.6 million decrease from 1997 to
1998 and the $1.5 million decrease from 1996 to 1997 were primarily the result
of cash used for research and development, investment in equipment, payments
under loan facilities and general corporate purposes, offset by net proceeds
from the sale of common stock, loan proceeds and research payments from
collaborations.
We invest our cash, cash equivalents and securities available-for-sale in
interest-bearing investment grade securities.
Accounts receivable at December 31, 1998 was $3.9 million compared to
$8,000 at December 31, 1997. The increase was a result of:
. $2.0 million due from Atugen for the license agreement,
. $730,000 due from Atugen for expenses related to the formation of
Atugen,
. $1.0 million due from Chiron for 1998 fourth quarter expenses related to
ANGIOZYME clinical development, and
. $115,000 due from Roche for research performed in the fourth quarter of
1998.
Total additions for property, plant and equipment during 1998 were
$936,000, most of which were financed through our existing equipment loan
facilities.
Schering AG made a $2.5 million equity investment in us in May 1997 in
exchange for 212,766 shares of common stock and made an additional equity
investment of $2.5 million for 465,117 shares in April 1998. Separately,
Schering AG provided loans of $2.0 million in each of 1997 and 1998. We
received an additional $1.0 million on this loan facility in January 1999.
Schering AG will continue to provide loans of up to $2.0 million annually for
each of the next three years, provided that the collaboration is continued, at
Schering AG's option, in each of those years. Amounts not used in any calendar
year may be carried forward to future years. According to the terms of our
agreement with Schering AG, 50% of any borrowings on the line of credit must be
collateralized by equipment purchases. The loans, which carry an interest rate
of 8.0% per annum, are convertible into equity at the option of Schering AG
under certain circumstances. At December 31, 1998, the outstanding borrowings
of $4.3 million were convertible into approximately 992,000 shares of our common
stock. Principal and interest payments are deferred until maturity of the loans
which is April 2004. In addition, Schering AG made research payments of $2.0
million and $1.5 million in 1998 and 1997, respectively. If the collaboration
is continued, Schering AG will make research payments of $2.0 million a year for
each year through April 2002. We may earn success fees upon product development
milestones and will manufacture synthetic ribozyme products and receive
royalties on sales of products resulting from the collaboration. Schering AG
may terminate the research collaboration at any time by paying us termination
fees.
We anticipate that our existing financial resources, expected revenues from
our collaborations and the estimated proceeds of expected offerings should be
adequate to satisfy our anticipated capital requirements through mid-2001. We
expect to incur substantial additional research and development costs,
including:
. costs related to our research, drug discovery and development programs,
. preclinical and clinical trials of our products, if developed,
. our acquisition of interests in products or services currently held by
third parties,
. prosecuting and enforcing patent claims,
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<PAGE>
. general administrative and legal items, and
. manufacturing and marketing of products, if any.
We may raise additional capital through public or private financing, as
well as collaborative relationships, borrowings and other available sources. We
cannot assure you that funds will be available on favorable terms, if at all.
If we raise additional funds by issuing equity securities, the holdings of
existing stockholders will be further diluted. In addition, future
collaborative relationships may not successfully reduce our funding requirements
which may require us to relinquish or reduce rights to our technologies or
products.
At December 31, 1998, we had available net operating loss carryforwards,
research and development credit carryforwards and state investment credit
carryforwards of $73.7 million, $1.5 million and $31,000, respectively, for
income tax purposes. Our ability to utilize our 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.
Year 2000 Affect on Computer Systems
Year 2000 issues result from the inability of some computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.
Based on our evaluations and remediation efforts, we do not anticipate that
we will incur any significant costs relating to the assessment and remediation
of year 2000 issues. To date, we estimate that we have spent approximately
$20,000 in reviewing and remediating year 2000 issues and that total
expenditures incurred in completing our review and remediation efforts will not
exceed $60,000. These expenditures are budgeted as part of our operating
expenses. However, expenditures for year 2000 remediation efforts may exceed
this amount if unforeseen complications arise. Also, we or our vendors,
suppliers and corporate partners may not be able to successfully identify and
remedy all potential year 2000 problems.
We have developed and are implementing a contingency plan including the
following:
. maintaining all data in hard copy that is generated or collected by our
vendors, suppliers and collaborators so any loss of data due to year
2000 problems could be re-entered manually,
. maintaining all of our accounting records in hard copy so that we can
continue to manually pay vendors, employees, consultants and
collaborators in the event that our accounting software or other
computer programs or systems malfunction,
. maintaining hard copies of all scientific and business related
electronic data,
. achieving critical business paperwork,
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<PAGE>
. scheduling manufacturing campaigns not to extend or overlap the year
2000 time change, and
. upgrading security systems.
We are continuing to review these requirements in order to complete our
contingency plan for noncritical business functions.
We do not believe that we will have to modify or replace any significant
portions of our computer applications in order for our computer systems to
continue to function properly in the year 2000. However, a "worst case"
scenario may include the temporary interruption of research, development and
business if we need to upgrade or replace computer systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Submitted as part of Item 14(a) of this Form 10-K and incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of Ribozyme Pharmaceuticals are as
follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ralph E. Christoffersen, Ph.D. (1) 61 Chief Executive Officer, President and
Director
Lawrence E. Bullock 43 Vice President of Administration and
Finance, Chief Financial Officer and
Secretary
Alene A. Holzman 42 Vice President of Business Development and
General Manager of Target Validation and
Discovery Business
Thomas H. Rossing, M.D. 49 Vice President of Product Development
Nassim Usman, Ph.D. 39 Vice President of Research
David T. Morgenthaler (1) (2) 79 Chairman of the Board
Jeremy L. Curnock Cook (1) (3) 49 Director
Anthony B. Evnin, Ph.D. (1) (2) 58 Director
David Ichikawa (3) 46 Director
Anders P. Wiklund (2) (3) 58 Director
</TABLE>
________________________
(1) Member of the executive committee of the Board of Directors.
(2) Member of the compensation committee of the Board of Directors.
(3) Member of the audit committee of the Board of Directors.
Ralph E. Christoffersen, Ph.D., has served as Chief Executive Officer,
President and Director of Ribozyme Pharmaceuticals since June 1992. From 1989
to June 1992, Dr. Christoffersen was Senior Vice President and Director of U.S.
Research at SmithKline Beecham Pharmaceuticals, a pharmaceutical company. From
1983 to 1989, he held senior management positions in research at The Upjohn
Company, a pharmaceutical company. 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. From
December 1990 to January 1996, Mr. Bullock was Chief Financial Officer, Director
of Finance and Administration and Secretary of La Jolla Pharmaceutical Company,
a biopharmaceutical company. Mr. Bullock received his M.B.A. from the
University of Utah.
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<PAGE>
Alene A. Holzman has served as Vice President of Business Development and
General Manager of Target Validation and Discovery Business since April 1997.
From January 1990 to March 1997, Ms. Holzman was Vice President of ChemTrak
Corporation, a medical technology firm, 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 biotechnology firm. Ms. Holzman received her M.B.A.
from the University of California at Berkeley.
Thomas H. Rossing, M.D., has served as Vice President of Product
Development since July 1997. From July 1996 to July 1997, Dr. Rossing was Vice
President of Clinical Development and Regulatory Affairs at GeneMedicine, Inc.,
a biotechnology company. From March 1993 to July 1996, Dr. Rossing was Director
of International Respiratory Clinical Research at GlaxoWellcome, a
pharmaceutical company. He has also served as Director of Clinical Pharmacology
and Worldwide Regulatory Liaison at Merck Research Laboratories, a
pharmaceutical company, and a staff physician at Brigham and Women's Hospital in
Boston, Massachusetts. He received his M.D. degree from Harvard University.
Dr. Rossing announced that he is retiring effective August 3, 1999.
Nassim Usman, Ph.D., has served as Vice President of Research since May
1996. From April 1994 until May 1996, Dr. Usman served as Director of Chemistry
and Biochemistry Research at Ribozyme Pharmaceuticals and from September 1992
until April 1994 Dr. Usman served as Senior Scientist in Chemistry and
Biochemistry. From January 1987 to September 1992, Dr. Usman was a Postdoctoral
Fellow and Scientist in the Departments of Biology and Chemistry at the
Massachusetts Institute of Technology. Dr. Usman received his Ph.D. in
chemistry from McGill University.
David T. Morgenthaler has served as a director 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 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 since July 1995. Mr. Cook
is a director of Rothschild Asset Management, an investment fund, 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 Trust, Creative 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 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.,
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<PAGE>
and Triangle Pharmaceuticals, Incorporated. Dr. Evnin received his Ph.D. from
the Massachusetts Institute of Technology.
David Ichikawa has served as a director since May 1998. Mr. Ichikawa has
been employed by Chiron Corporation, a biotechnology company, since September
1994 and is currently Vice President of Finance and Operations of Chiron
Technologies. He has also held management positions at Boehringer Mannhiem
Corporation and Chiron (Cetus) Corporation. Mr. Ichikawa received his M.B.A.
from the University of California at Berkeley.
Anders P. Wiklund has served as a director since August 1994. Since January
1997, Mr. Wiklund has been the principal of Wiklund International, an advisory
firm to the biotechnology and pharmaceutical industries. 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. and InSite Vision, Inc., as well as private company boards.
Mr. Wiklund received a Master of Pharmacy degree from the Pharmaceutical
Institute in Stockholm.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and our other four most highly compensated executive
officers whose annual compensation exceeded $100,000 in 1998 ("Named Executive
Officers"). The "All Other Compensation" column shows matching contributions in
common stock made by us under our 401(k) Salary Reduction Plan. The amounts
shown for 1998 under "Shares Underlying Options Granted" include shares granted
in connection with the stock option repricing in 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-term Compensation
------------------- ----------------------
Shares
Other Restricted Underlying All
Annual Stock Options Other
Name and Principal Position Year Salary($) Bonus($) Comp.($) Awards(#) Granted(#) Comp.($)
- ---------------------------------- ------- ------- -------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph E. Christoffersen, Ph.D. 1998 285,670 50,000 37,862(1) -- 198,748 4,998
Chief Executive Officer and 1997 269,520 50,000 45,000(1) -- 129,450 4,744
President 1996 247,248 -- 70,000(1) 188,100(2) 97,770 153,910(2)
Lawrence E. Bullock 1998 150,800 25,000 75,883(3) -- 85,957 4,998
Vice President of Administration 1997 136,254 25,000 35,524(3) -- 37,500 4,744
and Finance, CFO and Secretary 1996 118,433 15,000 24,993(3) -- 66,000 --
Alene A. Holzman(4) 1998 156,900 6,500 37,721(5) -- 100,000 4,998
Vice President of Business 1997 108,557 12,500 28,389(5) -- 80,000 3,494
Development and General
Manager of Target Validation
and Discovery Business
Thomas H. Rossing, M.D.(6) 1998 250,650 -- 34,000(7) -- 110,624 4,998
Vice President of Product 1997 105,859 22,000 84,008(7) -- 107,500 --
Development
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Nassim Usman, Ph.D. 1998 183,038(8) 23,000 25,841(9) 99,167 4,998
Vice President of Research 1997 158,004 -- 25,397(9) -- 45,000 4,744
1996 132,919 25,000 20,499(9) -- 53,892 --
</TABLE>
- -------------------
(1) Includes (a) $50,000 in 1996 and $25,000 in each of 1997 and 1998 for
forgiveness of a loan made to Dr. Christoffersen for relocation expenses;
and (b) $20,000 in each of 1996 and 1997 and $12,862 in 1998 to assist him
with the tax liability relating to the loan forgiveness.
(2) Dr. Christoffersen received a bonus of $342,010, payable $153,910 in cash
and $188,100 in shares of common stock (18,810 shares at our initial public
offering price of $10.00 per share), upon closing of our initial public
offering in April 1996.
(3) Includes (a) $9,058 and $9,641 in 1996 and 1997, respectively, representing
implied interest related to an interest-free loan made to Mr. Bullock for
relocation expenses; (b) $15,000 in each of 1997 and 1998 for partial
forgiveness of the loan; (c) $7,883 in each of 1997 and 1998 for taxes
relating to the loan; (d) $3,000 in each of 1997 and 1998 as reimbursements
for dependent day care expenses; and (e) $15,935 and $50,000, in 1996 and
1998, respectively, to reimburse Mr. Bullock for relocation expenses.
(4) Ms. Holzman joined Ribozyme Pharmaceuticals on April 1, 1997.
(5) Includes (a) $10,036 in 1997 representing implied interest related to an
interest-free loan made to Ms. Holzman for relocation expenses; (b) $15,853
and $9,721 in 1997 and 1998, respectively, to reimburse Ms. Holzman for
relocation expenses; (c) $25,000 in 1998 for partial forgiveness of the
loan; and (d)$2,500 and $3,000 in 1997 and 1998, respectively, as
reimbursements for dependent day care expenses.
(6) Dr. Rossing joined Ribozyme Pharmaceuticals on July 28, 1997.
(7) Includes (a) $14,901 in 1997 representing implied interest related to an
interest-free loan made to Dr. Rossing for relocation expenses; (b)
$34,000 in 1998 for partial forgiveness of the loan; and (c)$69,107 in 1997
to reimburse Dr. Rossing for relocation expenses.
(8) Includes $13,988 in additional salary for Dr. Usman's three month
temporary position as Vice President of Atugen.
(9) Includes (a) $20,499 in 1996 representing implied interest related to an
interest-free loan made to Dr. Usman for relocation expenses; (b) $15,000
in each of 1997 and 1998 for partial forgiveness of the loan; (d) $7,883 in
each of 1997 and 1998 for taxes relating to the loan; and (d) $2,496 in
each of 1997 and 1998 as reimbursements for dependent day care
expenses.
Stock Option Plan
In March 1996 we amended, restated and merged our stock option plans and
named the resulting plan the 1996 Stock Option Plan. Currently, 1,478,493 shares
of our common stock are reserved for issuance under the Plan. As of March 15,
1999, options to purchase 1,386,487 shares were outstanding under the Plan. The
Plan will terminate in January 2006, unless earlier terminated by the Board of
Directors. The purpose of the Plan is to:
. attract and retain qualified personnel,
. provide additional incentives to our employees, officers, directors and
consultants, and
. promote the success of our business.
Under the Plan, we may grant or issue incentive stock options and supplemental
(non-qualified) stock options to our consultants, employees, officers and
directors.
Administration. Our Board has delegated administration of the Plan to a
Compensation Committee comprised of three independent directors (see "Board
Committees"). Subject to the limitations set forth in the Plan, the Board or
the Compensation Committee has the authority to:
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<PAGE>
. select the persons to whom grants are to be made,
. designate the number of shares to be covered by each option,
. determine whether an option is to be an incentive stock option or a non-
statutory stock option,
. establish vesting schedules, and
. subject to restrictions, specify the type of consideration to be paid
upon exercise and to specify other terms of the options.
Terms. The maximum term of options granted under the Plan is ten years,
however, the maximum term is five years for incentive options granted to a
person who at that time owns 10% of the total combined voting power of all
classes of stock. The aggregate fair market value of the stock with respect to
which incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per optionee. Any portion in excess of $100,000 shall be
treated as non-statutory stock options. Options granted under the Plan are non-
transferable and generally expire upon the earlier of the stated expiration date
or three months after the termination of an optionee's service to Ribozyme
Pharmaceuticals. However, the expiration date would be 18 months in the event
the optionee's employment terminates by reason of death, or 12 months in the
event the optionee's employment terminates due to disability, or a longer or
shorter period as may be specified in the option agreement.
Our Board has discretion in connection with a merger, consolidation,
reorganization or similar corporate event where we are the surviving corporation
to prescribe the terms and conditions for the modifications of the options
granted under the Plan. If we are not the surviving corporation in the event of
our dissolution or liquidation, or our merger or consolidation, all outstanding
options will terminate unless assumed by another corporation.
No specific vesting schedule is required under the Plan. The exercise
price of incentive stock options must equal at least the fair market value of
the common stock on the date of grant, except that the exercise price of
incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the combined voting power of all classes of
stock must be at least 110% of the fair market value of the stock on the date of
grant. The exercise price on non-statutory stock options under the Plan may be
no less than 85% of the fair market value of the common stock on the date of
grant.
Repricing. In September 1998 our Board of Directors approved a repricing
of all employee stock options outstanding under the Plan. Pursuant to this
repricing, each Named Executive Officer holding options received 0.75 option for
each one option surrendered with a new vesting date and an exercise price of
$3.00 per share. All non-executive employees who were option holders received
one new option for each one option surrendered with a new vesting date and an
exercise price of $3.00 per share. As a result of this repricing offer, 890,921
options were canceled and 747,060 options were granted effective September 18,
1998.
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<PAGE>
The following table contains information about stock options granted to
each of the Named Executive Officers during 1998 under the Plan. All options,
other than performance-based options which are indicated by *, vest in
increments of 20% over a five year period and first become exerciseable on the
first anniversary of the grant date. Options granted in connection with the
stock option repricing first vest on September 18, 1999. The exercise price of
each option was equal to the fair market value of the common stock on the date
of the option grant as determined by the Board of Directors. The options are
granted for a term of ten years, subject to earlier termination in events
related to termination of employment. In 1998, we granted options representing
an aggregate of 1,139,560 shares of our common stock to our employees,
including the Named Executive Officers.
<TABLE>
<CAPTION>
Option Grants in 1998
Individual Grants
-------------------------------------------------------
% of Total Potential Realizable
Number of Options Value at
Shares Granted Annual Rate of Stock
Underlying to Price Appreciation
Options Employees Exercise for Option Term(1)
Granted in Price Expiration ---------------------
(#) 1998 ($/Share) Date 5%($) 10%($)
------- ------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ralph E. Christoffersen 76,874(2) 6.7% $3.00 09-18-08 145,037 367,552
*76,874(2) 6.7 3.00 09-18-08 145,037 367,552
22,500 2.0 5.63 12-02-08 79,665 201,887
*22,500 2.0 5.63 12-02-08 79,665 201,887
------- ----
198,748 17.4
Lawrence E. Bullock 39,395(2) 3.4 3.00 09-18-08 74,326 188,356
*21,562(2) 1.9 3.00 09-18-08 40,681 103,093
12,500 1.1 5.63 12-02-08 44,258 112,160
*12,500 1.1 5.63 12-02-08 44,258 112,160
------- ----
85,957 7.5
Alene A. Holzman 30,000(2) 2.6 3.00 09-18-08 56,601 143,437
*30,000(2) 2.6 3.00 09-18-08 56,601 143,437
20,000 1.8 5.63 12-02-08 70,814 179,455
*20,000 1.8 5.63 12-02-08 70,814 179,455
------- ----
100,000 8.8
Thomas H. Rossing 40,312(2) 3.5 3.00 09-18-08 76,056 192,741
*40,312(2) 3.5 3.00 09-18-08 76,056 192,741
15,000 1.3 5.63 12-02-08 53,110 134,592
*15,000 1.3 5.63 12-02-08 53,110 134,592
------- ----
110,624 9.6
Nassim Usman 44,542(2) 3.9 3.00 09-18-08 84,037 212,965
*29,625(2) 2.6 3.00 09-18-98 55,893 141,644
12,500 1.1 5.63 12-02-08 44,258 112,160
*12,500 1.1 5.63 12-02-08 44,258 112,160
------- ----
99,167 8.7
- ----------------------------
</TABLE>
* These options become 100% vested upon the completion of various research or
business performance milestones.
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<PAGE>
(1) Amounts reported in these columns show hypothetical gains that may be
realized upon exercise of the options, assuming the market price of common
stock appreciates at the specified annual rates of appreciation, compounded
annually over the term of the options. These numbers are calculated based
upon rules promulgated by the SEC. Actual gains, if any, depend on the
future performance of our common stock and overall market conditions.
(2) Shares granted in connection with the stock option repricing.
The following table contains information about the number and value of
stock options held by each Named Executive Officer as of December 31, 1998. No
other Named Executive Officer exercised any stock options during 1998. A stock
option is "in-the-money" if the closing market price of our common stock exceeds
the exercise price of the stock option. The value of "in-the-money" unexercised
stock options set forth in the table represents the difference between the
exercise price of these options and the closing sales price of our common stock
on December 31, 1998, as reported by the Nasdaq National Market, $4.38 per
share.
<TABLE>
<CAPTION>
1998 Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998(#) at December 31, 1998($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
Ralph E. Christoffersen 69,706 / 174,374 176,794 / 178,536
Lawrence E. Bullock 17,847 / 89,394 28,295 / 91,863
Alene A. Holzman 12,001 / 87,250 16,560 / 65,205
Thomas H. Rossing 9,000 / 101,624 12,420 / 98,841
Nassim Usman 28,265 / 85,885 47,537 / 84,288
</TABLE>
Employment agreements
Ralph E. Christoffersen. In May 1992, we entered into an employment
agreement with Ralph E. Christoffersen, Ph.D., our President and Chief Executive
Officer, which, as amended, currently provides for:
. an annual salary of $297,000,
. an annual performance-based cash bonus of up to $80,000 (a bonus of
$64,000 was received in January 1999 for 1998 performance),
. stock options for common stock as reflected in tables in this "Executive
Compensation" section.
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<PAGE>
Dr. Christoffersen's agreement may be terminated upon his death, disability or
for cause. If we terminate Dr. Christoffersen's employment, he is entitled to
receive all accrued salary and benefits up to his termination and, unless he has
been terminated for cause, nine months of severance pay at the same monthly rate
as in effect at the time of his termination. If termination occurs after
January 1, 2000, Dr. Christoffersen shall be paid a lump sum cash payment of up
to $27,500.
Lawrence E. Bullock. In January 1996, we entered into an employment
agreement with Lawrence E. Bullock, our Vice President of Administration and
Finance, Chief Financial Officer and Secretary, which, as amended, currently
provides for:
. an annual salary of $158,350,
. an annual performance-based cash bonus of up to 20% of his current
salary (a bonus of $26,850 was received in January 1999 for 1998
performance),
. stock options for common stock as reflected in the tables in this
"Excecutive Compensation" section, and
. repayment of relocation expenses, including an interest-free loan of
$75,000 made in 1996 and forgivable in five annual equal installments,
grossed-up for taxes, as long as Mr. Bullock remains employed by
us.
If we terminate Mr. Bullock's employment without cause, he is entitled to six
months' severance pay at his then current salary.
Nassim Usman, Ph.D. In May 1996, we entered into an employment agreement
with Nassim Usman, Ph.D., our Vice President of Research, which, as amended,
currently provides for:
. an annual salary of $177,925,
. an annual performance-based cash bonus of up to 20% of his current
salary (a bonus of $29,075 was received in January 1999 for 1998
performance),
. stock options for common stock as reflected in the tables in this
"Excecutive Compensation" section, and
. an interest-free loan of $75,000 made in May 1996 and forgivable in five
equal annual installments, grossed-up for taxes, as long as Dr. Usman
remains employed by us.
If we terminate Dr. Usman's employment without cause, he will be entitled to
six months' severance pay at his then current salary.
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<PAGE>
Alene A. Holzman. In February 1997, we entered into an employment
agreement with Alene A. Holzman, our Vice President of Business Development and
General Manager of Target Validation and Discovery Business, which, as amended,
currently provides for:
. an annual salary of $166,325,
. an annual performance-based cash bonus of up to 20% of her current
salary (a bonus of $24,175 was received in January 1999 for 1998
performance),
. stock options for common stock as reflected in the tables in this
"Executive Compensation" section, and
. an interest-free loan of $75,000 made in June 1997 and forgivable in
three equal annual installments as long as Ms. Holzman is employed by
us.
If we terminate Ms. Holzman's employment without cause, she is entitled to six
months' severance pay at her then current salary.
Thomas H. Rossing. In July 1997, we entered into an employment agreement
with Thomas H. Rossing, M.D., our Vice President of Product Development, which,
as amended, currently provides for:
. an annual salary of $258,175,
. an annual performance-based cash bonus of up to 15% of his current
salary (a bonus of $35,725 was received in January 1999 for 1998
performance),
. stock options for common stock as reflected in the tables in this
"Executive Compensation" section, and
. an interest-free loan of $100,000 made in September and 1997 forgivable
in three equal annual installments as long as Dr. Rossing is employed by
us.
Dr. Rossing has given notice that he will retire from Ribozyme Pharmaceuticals
on August 3, 1999. If we terminate Dr. Rossing's employment without cause
prior to that time, he will be entitled to six months' severance pay at his then
current salary.
Employee Benefits
Executive Bonus Plan. In March 1998, our Executive Bonus Plan was adopted
by the Board of Directors. This Bonus Plan provides our executive officers with
the opportunity to earn an annual bonus contingent upon their fulfillment of
annual goals as determined by our Compensation Committee comprised of three
independent directors. The Compensation Committee has complete authority to
establish the goals for each executive officer, to interpret all provisions of
the Bonus Plan and to make all other determinations necessary or advisable for
the administration of the Bonus Plan. The Compensation Committee may award each
of our executive officers with an annual bonus comprised of one or more of the
following:
. cash payment,
. stock options pursuant to our stock option plan, or
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<PAGE>
. forgiveness of any portion of the principal of interest-free loans
provided to the executive officer.
Section 401(k) Plan. As part of our effort to attract and maintain high
quality staff, we adopted a 401(k) Salary Reduction Plan and Trust on June 1,
1992. Our employees may make pre-tax elective contributions of up to 20% of
their salary, subject to limitations prescribed by law. All contributions are
paid to a trustee who invests for the benefit of members of the 401(k) Plan. In
March 1997, the 401(k) Plan was amended to provide that we may match the
employee's contributions with common stock. We may amend or terminate the
401(k) Plan at any time, subject to legal restrictions.
Employee Stock Purchase Plan. In March 1996, we adopted an Employee Stock
Purchase Plan which authorizes the issuance of up to 300,000 share of our common
stock to eligible employees. Generally, each offering lasts for twenty-four
months, and purchases are made on each October 31 and April 30 during each
offering. For example, the initial offering began on April 11, 1996, and
terminated on April 30, 1998. Common stock is purchased for accounts of
employees participating in the Purchase Plan at a price per share equal to the
lower of:
. 85% of the fair market value of a share of common stock on the date of
commencement of participation in the offering, or
. 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 deductions of up to 15% of their
base compensation for the purchase of common stock under the Purchase Plan. Our
Board of Directors has the authority to terminate the Purchase Plan at its
discretion. As of March 1, 1999, 99,832 shares had been issued pursuant to the
Purchase Plan.
Director Compensation
Fees. All non-employee directors receive a fee of:
. $1,000 per day for each Board or Committee meeting attended, and
. $500 per day for participating telephonically in a meeting of the Board
or a Committee.
Stock Options. Non-employee directors may also receive stock options for
5,000 shares of our stock annually under our stock option plan. In 1997 and
1998, each non-employee director was granted an option to purchase 5,000 shares.
The options vest after one year of service. In addition, Mr. Wiklund received
an option to purchase 4,444 shares in June 1994, of which 1,111 shares vested
immediately and the remaining 3,333 shares vest in increments of 20% over five
years starting in 1995.
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<PAGE>
Board Committees
The Board has established an Audit Committee, a Compensation Committee and
an Executive Committee. The Executive Committee, consisting of Messrs.
Morgenthaler (Chairman) and Cook and Drs. Christoffersen and Evnin, oversees
management and operation of our business.
The Compensation Committee, consisting of Dr. Evnin (Chairman) and Messrs.
Morgenthaler and Wiklund:
. reviews and recommends for Board approval grants of options pursuant to
our stock option plan,
. decides salaries and incentive compensation for our employees and
consultants, and
. recommends compensation for executive officers.
The Audit Committee, consisting of Messrs. Ichikawa (Chairman), Cook and
Wiklund:
. recommends to the Board the selection of independent auditors,
. reviews the results and scope of the audit and other services provided
by our independent auditors, and
. reviews and evaluates our audit and control functions.
Compensation Committee Interlocks
The members of our Compensation Committee have no interlocking
relationships as defined under SEC regulations.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table summarizes information regarding the beneficial
ownership of our outstanding securities as of April 28, 1999 (which includes
shares that may be acquired on the exercise of stock options vested or warrants
exercisable through June 27, 1999), by:
. each person or group that we know owns more than 5% of the outstanding
shares of common stock,
. each of our directors,
. each Named Executive Officer listed in the Summary Compensation Table,
and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and
includes shares over which the indicated beneficial owner exercises voting
and/or investment power. Shares of common stock subject to options or warrants
currently exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding the options but are not
deemed outstanding for computing the percentage ownership of any other
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<PAGE>
person. Except as otherwise indicated in the footnotes to this table, we believe
that each stockholder identified in the table has sole voting and investment
power with respect to all shares listed opposite their names. Unless otherwise
indicated, the following officers, directors and stockholders can be reached at
the principal offices of Ribozyme Pharmaceuticals.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name and Address Beneficially Owned Shares Outstanding
- --------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Schering Berlin Venture Corporation.......... 1,900,299(1) 18.3%
3400 Change Bridge Road
Monteville, New Jersey 07045
Chiron Corporation........................... 1,063,868(2) 11.0%
4560 Horton Street
Emeryville, California 94608
International Biotechnology Trust plc........ 1,012,633 11.0%
c/o Rothschild Asset Management, Ltd.
Five Arrows House
St. Swithin's Lane
London EC4N 8NR England
Ralph E. Christoffersen, Ph.D................ 159,434(3) 1.7%
Jeremy L. Curnock Cook....................... 1,022,633(4) 11.1%
Anthony B. Evnin, Ph.D....................... 325,773(5) 3.5%
David Ichikawa............................... 5,000(6) 0%
David T. Morgenthaler........................ 382,874(7) 4.2%
Anders P. Wiklund............................ 13,733(8) *
Lawrence E. Bullock.......................... 29,606(9) *
Alene Holzman................................ 15,799(10) *
Thomas H. Rossing, M.D....................... 9,899(11) *
Nassim Usman, Ph.D........................... 30,746(12) *
Executive officers and directors as a group
(10 persons)............................... 1,995,497(13) 21.1%
- ------------------------
</TABLE>
* Less than 1%.
(1) Includes 1,222,416 shares convertible from outstanding debt assuming a
conversion price of $4.44 per share.
(2) Includes 444,444 shares issuable upon exercise of warrants.
(3) Includes options to purchase 69,706 shares.
(4) Includes options to purchase 10,000 shares and 1,012,633 shares held by the
International Biotechnology Trust plc, for which Rothschild Asset
Management, Ltd. ("Rothschild") acts as investment advisor. Mr. Cook is a
director of Rothschild but disclaims beneficial ownership of these shares.
(5) Includes options to purchase 10,000 shares, 218,022 shares held by Venrock
Associates and 97,751 shares held by Venrock Associates II, L.P. Mr. Evnin
is a general partner of both partnerships and disclaims beneficial
ownership of these shares except to the extent of his general partnership
interests.
(6) Excludes 1,063,868 shares held by Chiron. Mr. Ichikawa is employed by
Chiron and disclaims beneficial ownership of those shares. Includes options
to purchase 5,000 shares.
(7) Includes options to purchase 10,000 shares, 362,874 shares held by
Morgenthaler Venture Partners III and 10,000 shares held by Morgenthaler
Family Partnership. Mr. Morgenthaler is a general partner of both
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<PAGE>
partnerships and disclaims beneficial ownership of these shares except to
the extent of his general partnership interests.
(8) Includes options to purchase 13,733 shares.
(9) Includes options to purchase 21,180 shares.
(10) Includes options to purchase 12,000 shares.
(11) Includes options to purchase 9,000 shares.
(12) Includes options to purchase 28,265 shares and 532 shares owned by Dr.
Usman's spouse to which Dr. Usman disclaims beneficial ownership.
(13) Includes options to purchase 188,884 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that the following transactions were in our best interests. As
a matter of policy, these transactions were, and all future transactions between
Ribozyme Pharmaceuticals and any of our officers, directors or principal
stockholders will be:
. approved by a majority of the independent members of our Board of
Directors,
. entered into on terms no less favorable to Ribozyme Pharmaceuticals than
could be obtained from unaffiliated third parties, and
. entered into in connection with bona fide business purposes.
Executive Loans. When we hired our executive officers we made interest-
free loans to each of them for relocation expenses. We have forgiven all or a
portion of the outstanding principal amount of each loan under the terms of each
officer's employment agreement. See "Management--Employment Agreements."
<TABLE>
<CAPTION>
Balance as of
Name Loan Amount April 28, 1999
---- ---------------- --------------
<S> <C> <C>
Ralph E. Christoffersen, Ph.D. $250,000(1) $ 0
Lawrence E. Bullock 75,000(2) 30,000
Nassim Usman, Ph.D. 75,000(3) 45,000
Alene A. Holzman 75,000(4) 25,000
Thomas H. Rossing 100,000(5) 66,000
- ------------------------
</TABLE>
(1) $50,000 forgiven in each of June 1993, January 1995, January 1996 and
January 1997, and $25,000 forgiven in each of January 1994 and January
1998.
(2) $15,000 forgiven in each of June 1997, January 1998 and January 1999.
(3) $15,000 forgiven in each of June 1997 and May 1998.
(4) $25,000 forgiven in each of March 1998 and March 1999.
(5) $34,000 forgiven in July 1998.
Chiron Transactions. Chiron and Ribozyme Pharmaceuticals granted each
other licenses to technologies and agreed to undertake research activities
pursuant to a collaboration agreement. Chiron purchased:
. 100,000 shares of our common stock for a purchase price of $3.60 per
share,
. 107,095 shares of our Series E Preferred Stock for a purchase price of
$37.35 per share, and
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<PAGE>
. a warrant at a price of $4.50 per warrant share, exercisable for 444,444
shares of our common stock for an exercise price of $40.50 per share.
In February 1996, we amended the warrant issuable to Chiron to reduce the
exercise price from $40.50 per share to $22.50 per share. When we closed our
initial public offering in April 1996, Chiron:
. purchased 377,202 shares of our common stock for $3,640,000 at the
initial public offering price less one-half of the underwriting
discount,
. paid us $1,800,000 to complete the purchase of its warrant, and
. received 35,127 additional shares of our common stock pursuant to anti-
dilutive provisions.
Chiron also has a representative on our Board of Directors.
In May 1996, we entered into a second collaboration with Chiron for the use
of ribozymes to characterize gene function. The collaborations give Chiron the
right to develop and commercialize products that result from the collaboration,
and entitle us to receive product development milestone payments and royalties
on sales of commercial products. Chiron and Ribozyme Pharmaceuticals each pay a
portion of the research and development expenses of the collaboration, and we
agreed to provide Chiron $1.8 million, which was paid in 1996, for research
funding related to the proposed collaboration.
Schering AG Transaction. In April 1997, we entered into a research
collaboration with Schering focusing on the use of ribozymes and related
technologies for gene function validation. Schering AG purchased:
. 212,766 shares of our common stock for $2.5 million in May 1997, and
. 465,117 shares of our common stock for $2.5 million in 1998.
Separately, Schering AG provided loans of $2.0 million in both 1997 and
1998. We received an additional $1.0 million on this loan facility in January
1999. Schering AG will continue to provide loans of up to $2 million annually
for each year through 2001, 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 Schering AG's option under certain circumstances.
Principal and interest payments are deferred until maturity of the loans in
April 2004.
In addition, Schering AG made research payments of $1.5 million in 1997 and
$2.0 million in 1998 and, provided that the collaboration is continued, will
make research payments of $2 million a year through 2001. All payments are
subject to some restrictions, including receipt of third party consents. Upon
payment of termination fees to us, the research collaboration may be terminated
at Schering AG's option at any time.
Atugen Transaction. In 1998, we and other investors formed Atugen.
Financing for Atugen was accomplished through a combination of venture capital,
an investment
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<PAGE>
by us and German government grants and loans. Atugen's initial capitalization
totaled more than $20 million in cash and commitments. We invested $2.0 million
and retained a 49.5% equity interest. All five of our executive officers and two
of our employees received shares of Atugen's common stock in the formation at no
cost to them, for which we will receive a one-time compensation expense of
approximately $81,000. As of December 31, 1998, these seven people held 5.5% of
Atugen's common stock.
As part of the formation, Atugen received exclusive royalty-free licenses
to our extensive patents and technologies for target validation and discovery.
We received a one-time $2.0 million up-front license payment in 1999. We also
will be compensated for providing management and other services to Atugen under
the terms of a services agreement.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) 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
(a)(2) EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of Ribozyme
Pharmaceuticals dated April 17, 1996 (5)
3.2 Bylaws of Ribozyme Pharmaceuticals, as amended (1)
4.1 Specimen Stock Certificate (1)
10.1 Form of Indemnity Agreement entered into between Ribozyme
Pharmaceuticals and its directors and officers, with related schedule
(1)
10.2 Ribozyme Pharmaceuticals' Incentive Stock Option Plan, including form of
Incentive Stock Option Agreement (1)
10.3 Ribozyme Pharmaceuticals' Non-Qualified Stock Option Plan, including
form of Non-Qualified Stock Option Agreement (1)
10.4 Ribozyme Pharmaceuticals' 1996 Stock Option Plan, including forms of
Incentive Stock Option and Nonstatutory Stock Option Agreements (1)
10.5 Ribozyme Pharmaceuticals' 1996 Employee Stock Purchase Plan (1)
10.6 Employment Agreement dated January 1, 1997, between Ribozyme
Pharmaceuticals and Ralph E. Christoffersen (5)
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<PAGE>
10.7 Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and
Ralph E. Christoffersen dated December 23, 1992 (1)
10.8 Incentive Stock Option Agreement between Ribozyme Pharmaceuticals and
Ralph E. Christoffersen dated September 23, 1994 (1)
10.9 Warrant Purchase Agreement dated March 15, 1995, between Ribozyme
Pharmaceuticals and Hambrecht & Quist Guaranty Finance (1)
10.10 Warrant to Purchase Common Stock dated March 15, 1995, issued to
Hambrecht & Quist Guaranty Finance (1)
10.11 Warrant to Purchase Common Stock dated February 22, 1993, issued to
LINC Scientific Leasing (1)
10.12 Warrant to Purchase Common Stock dated July 30, 1993, issued to Douglas
E. Olson (1)
10.13 Warrant to Purchase Common Stock dated July 30, 1993, issued to Richard
J. Warburg and Ruth P. Warburg (1)
10.14 Warrant to Purchase Common Stock dated December 28, 1994, issued to
Competitive Technologies, Inc. (1)
10.15 Warrant to Purchase Common Stock dated December 29, 1995, issued to
Silicon Valley Bank (1)
10.16 Warrant to Purchase Common Stock dated July 26, 1996, issued to Silicon
Valley Bank (1)
10.17 Warrant to Purchase Common Stock dated April 17, 1996, issued to Chiron
Corporation (1)
10.18 Collaborative Research, Development and Commercialization Agreement
dated July 15, 1994, between Ribozyme Pharmaceuticals and Chiron
Corporation (1)
10.19 Research Collaboration and Licensing Agreement dated November 1, 1995,
between Ribozyme Pharmaceuticals and Pharmacia Biotech, AB (1)
10.20 Research and Development Collaboration Agreement dated April 19, 1993,
between Ribozyme Pharmaceuticals and Parke-Davis Division of Warner-
Lambert Company (1)
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<PAGE>
10.21 First Amendment to the Research and Development Collaboration Agreement
dated April 17, 1995, between Ribozyme Pharmaceuticals and Parke-Davis
Division of Warner-Lambert Company (1)
10.22 Second Amendment to the Research and Development Collaboration
Agreement dated February 8, 1996, between Ribozyme Pharmaceuticals and
Parke-Davis Division of Warner-Lambert Company (1)
10.23 Financing Agreement dated March 16, 1995, among Wilderness Place
Holdings L.L.C., Hambrecht & Quist Guaranty Finance, L.P. and Ribozyme
Pharmaceuticals (1)
10.24 Negotiable Promissory Note dated October 7, 1992, between Ribozyme
Pharmaceuticals and Ralph Christoffersen and Addendum dated June 25,
1993 (1)
10.25 Employment Agreement dated January 8, 1996, between Ribozyme
Pharmaceuticals and Lawrence E. Bullock (1)
10.26 Promissory Note dated February 8, 1996, between Ribozyme
Pharmaceuticals and Lawrence E. Bullock (1)
10.27 Lease for Real Property dated May 20, 1992, between Aero-Tech
Investments and Ribozyme Pharmaceuticals (1)
10.28 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 Ribozyme Pharmaceuticals (1)
10.29 Master Lease Agreement dated September 2, 1992, between Ribozyme
Pharmaceuticals and LINC Scientific Leasing (1)
10.30 Loan and Security Agreement dated February 28, 1994, between Ribozyme
Pharmaceuticals and Silicon Valley Bank (1)
10.31 Loan Modification Agreement dated December 21, 1994, between Ribozyme
Pharmaceuticals and Silicon Valley Bank (1)
10.32 Loan and Security Agreement dated December 29, 1995, between Ribozyme
Pharmaceuticals and Silicon Valley Bank and MMC/GATX Partnership No. 1
(1)
10.33 Warrant to Purchase Common Stock dated December 29, 1995, issued to
MMC/GATX Partnership No. 1 (1)
10.34 Agreement dated February 29, 1996, between Ribozyme Pharmaceuticals and
Chiron Corporation relating to research and development funding (1)
-47-
<PAGE>
10.35 Amendments to original Employment Agreements between Ribozyme
Pharmaceuticals and Ralph E. Christoffersen, Lawrence E. Bullock and
Nassim Usman, pursuant to letters dated November 14, 1996, November
22, 1996, and December 15, 1996 (3)
10.36 Promissory Note dated June 4, 1996, between Ribozyme Pharmaceuticals
and Nassim Usman (3)
10.37 Amendment to Lease for Real Property dated March 13, 1997, between
Aero-Tech Investments and Ribozyme Pharmaceuticals (3)
10.38 Employment Agreement dated May 2, 1996, between Ribozyme
Pharmaceuticals and Nassim Usman (2)
10.39 Collaboration Agreement Regarding Use of Ribozymes to Determine Gene
Function dated May 13, 1996, between Ribozyme Pharmaceuticals and
Chiron Corporation (2)
10.40 Amended and Restated License Agreement dated November 20, 1996, between
Ribozyme Pharmaceuticals, University Research Corporation, University
of Colorado and United States Biochemical Corporation (3)*
10.41 Amended and Restated Sublicense Agreement dated November 20, 1996,
between Ribozyme Pharmaceuticals and United States Biochemical
Corporation (3)*
10.42 Amended and Restated License Agreement dated November 20, 1996, between
Ribozyme Pharmaceuticals and Competitive Technologies, Incorporated
(3)*
10.43 Memorandum of Understanding dated March 1, 1996, between Ribozyme
Pharmaceuticals and DowElanco (1)
10.44 Stock Subscription Agreement dated September 1996 between Ribozyme
Pharmaceuticals and University of Research Corporation (3)*
10.45 Stock Subscription Agreement dated November 20, 1996, between Ribozyme
Pharmaceuticals and United States Biochemical Corporation (3)*
10.46 Assignment of License and Restated License Agreement dated November 20,
1996, among Ribozyme Pharmaceuticals, United States Biochemical
Corporation and Competitive Technologies (3)*
10.47 Letter Agreement dated May 22, 1996, between Ribozyme Pharmaceuticals
and ALZA Corporation (3)*
-48-
<PAGE>
10.48 Research and Development Collaboration Agreement dated December 2,
1996, between Ribozyme Pharmaceuticals and Protogene Laboratories (3)*
10.49 License Agreement dated February 14, 1997, between Ribozyme
Pharmaceuticals and IntelliGene, Ltd. (3)*
10.50 Subscription Agreement dated April 17, 1995, between Ribozyme
Pharmaceuticals and Parke-Davis Division of Warner-Lambert Company (1)
10.51 Stock Purchase Agreement dated June 28, 1995, among Ribozyme
Pharmaceuticals and investors (1)
10.52 Agreement dated March 1, 1996, between Ribozyme Pharmaceuticals and
DowElanco Corporation relating to the conversion of preferred stock
(1)
10.53 Stock Subscription Agreement dated October 30, 1995, between Ribozyme
Pharmaceuticals and Gewestelijke Investeringsmaatschappij voor
Vlaanderon n.v. (1)
10.54 Research, License, Supply and Royalty Agreement between Schering
Aktiengesellschaft and Ribozyme Pharmaceuticals dated April 9, 1997
(4)*
10.55 Purchase Agreement dated April 9, 1997, among Ribozyme Pharmaceuticals,
Schering Berlin Venture Corporation and Schering Aktiengesellschaft
(4)*
10.56 Employment Agreement dated February 27, 1997, between Ribozyme
Pharmaceuticals and Alene Holzman (5)
10.57 Employment Agreement dated July 5, 1997, between Ribozyme
Pharmaceuticals and Thomas Rossing (5)
10.58 Executive Bonus Plan dated March 27, 1998 (6)
10.59 Research, Collaboration and License Agreement dated May 19, 1998,
between Ribozyme Pharmaceuticals and Roche Bioscience, a division of
Syntex (U.S.A.) Inc. (7)*
10.60 Employment Agreement dated September 8, 1998, between Ribozyme
Pharmaceuticals and Nassim Usman (8)
10.61 Participation Agreement dated August 31, 1998, as amended, and related
documents between Ribozyme Pharmaceuticals and Atugen Biotechnology
GmbH (9)**
10.62 Research Collaboration and License Agreement dated March 17, 1999,
between Ribozyme Pharmaceuticals and Eli Lilly and Company (10)**
23.1 Consent of Ernst & Young LLP, Independent Auditors
-49-
<PAGE>
27 Financial Data Schedule
________________________
* Ribozyme Pharmaceuticals has applied for and received confidential
treatment with respect to portions of these exhibits.
** Ribozyme Pharmaceuticals has applied for confidential treatment with
respect to portions of these exhibits.
(1) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form SB-2 Registration Statement, File No. 333-1908-D.
(2) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 10-QSB for the quarter ended June 30, 1996.
(3) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 10-KSB for the year ended December 31, 1996.
(4) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 8-K dated June 12, 1997.
(5) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form SB-2 Registration Statement, dated September 5, 1997,
File No. 333-34981.
(6) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 10-K for the year ended December 31, 1997.
(7) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 10-Q/A for the quarter ended June 30, 1998.
(8) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 10-Q for the quarter ended September 30, 1998.
(9) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form 8-K dated March 19, 1999.
(10) Documents incorporated by reference herein to certain exhibits to Ribozyme
Pharmaceuticals' Form S-1 Registration Statement, File No. 333-75079
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
-50-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undesigned, thereunto duly authorized in Boulder, Colorado, on
May 7, 1999.
RIBOZYME PHARMACEUTICALS, INC.
By: /s/ Ralph E. Christoffersen
---------------------------
Ralph E. Christoffersen, Ph.D.
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ---- ----
<S> <C> <C>
/s/ RALPH E. CHRISTOFFERSEN Chief Executive Officer and May 7, 1999
- ------------------------------------- President (Principal
Ralph E. Christoffersen, Ph.D. Executive Officer)
/s/ LAWRENCE E. BULLOCK Vice President, Administration May 7, 1999
- ------------------------------------- Finance, Chief Financial
Lawrence E. Bullock Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ DAVID T. MORGENTHALER Chairman of the Board of May 7, 1999
- ------------------------------------- Directors
David T. Morgenthaler
/s/ JEREMY C. COOK Director May 7, 1999
- -------------------------------------
Jeremy C. Cook
/s/ ANTHONY B. EVNIN Director May 7, 1999
- -------------------------------------
Anthony B. Evnin, Ph.D.
/s/ DAVID ICHIKAWA Director May 7, 1999
- -------------------------------------
David Ichikawa
/s/ ANDERS WIKLUND Director May 7, 1999
- -------------------------------------
Anders Wiklund
</TABLE>
-51-
<PAGE>
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. ("the Company") as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cashflows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Denver, Colorado
February 16, 1999
F-1
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,511,512 $15,302,775
Securities available-for-sale - 799,616
Restricted cash - 52,669
Accounts receivable 1,163,388 8,044
Accounts receivable--related parties 2,735,193 -
Notes receivable--related parties 118,466 127,341
Prepaid expenses and other 84,766 175,549
-----------------------------------------
Total current assets 10,613,325 16,465,994
Property, plant, and equipment:
Machinery and equipment 6,478,223 5,673,115
Leasehold improvements 3,582,664 3,567,106
Office furniture and equipment 1,065,049 1,007,104
-----------------------------------------
11,125,936 10,247,325
Accumulated depreciation (6,903,742) (5,290,160)
-----------------------------------------
4,222,194 4,957,165
Notes receivable--related parties 162,466 231,932
Deferred patent costs, net of accumulated
amortization (1998--$271,328;
1997--$171,039) 2,905,575 2,510,705
Investment in Atugen Biotechnology GmbH 860,216 -
Other assets 460,515 684,245
-----------------------------------------
Total assets $19,224,291 $24,850,041
=========================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable - trade $ 750,514 $ 904,681
Accrued liabilities 396,143 245,956
Deferred revenue, current portion--related parties 400,000 -
Current portion of long-term debt 498,179 2,077,771
------------------------------------------
Total current liabilities 2,044,836 3,228,408
Deferred revenue, long-term portion--related parties 1,600,000 -
Long-term debt 200,455 698,633
Convertible debt 4,344,612 2,052,889
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; 9,181,455 and
8,607,022 shares issued and outstanding in
1998 and 1997, respectively 91,815 86,070
Additional paid-in capital 84,434,213 81,424,341
Accumulated deficit (73,422,491) (62,504,924)
Unrealized loss on securities available-for-sale - (5,064)
Deferred compensation (69,149) (130,312)
------------------------------------------
Total stockholders' equity 11,034,388 18,870,111
------------------------------------------
Total liabilities and stockholders' equity $ 19,224,291 $ 24,850,041
==========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Collaborative agreements $ 8,962,813 $ 1,976,500 $ 759,122
Grant and other income 25,045 6,642 13,981
---------------------------------------------------------------
Total revenues 8,987,858 1,983,142 773,103
Expenses:
Research and development 16,941,652 15,169,731 14,188,836
General and administrative 1,812,860 1,886,108 1,943,583
---------------------------------------------------------------
Total expenses 18,754,512 17,055,839 16,132,419
Operating Loss (9,766,654) (15,072,697) (15,359,316)
Other income (expense):
Interest income 634,569 794,968 936,397
Interest expense (703,711) (844,365) (844,661)
Equity in loss of unconsolidated affiliate (1,081,771) - -
---------------------------------------------------------------
Total other income (expense) (1,150,913) (49,397) 91,736
Net loss $(10,917,567) $(15,122,094) $(15,267,580)
===============================================================
Net loss per share $(1.22) $(2.04) $(2.61)
Shares used in computing net loss per share 8,978,355 7,419,650 5,844,987
</TABLE>
See accompanying notes.
F-4
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unrealized
Common Stock Preferred Stock Paid-In Accumulated Loss on
Shares Amount Shares Amount Capital Deficit Securities
--------- -------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 982,501 $ 9,825 2,231,960 $ 22,321 $40,725,061 $(32,115,250) $ -
Conversion of preferred stock in
connection with initial public
offering 2,231,960 22,321 (2,231,960) (22,321) - - -
Issuance of common stock relating
to certain antidilution rights in
connection with initial public
offering 841,279 8,412 - - (8,412) - -
Issuance of common stock for
cash
--initial public offering, net of
issuance costs of $816,990 2,300,000 23,000 - - 20,550,010 - -
Issuance of common stock for
cash
-- other 510,829 5,108 - - 3,762,048 - -
Payment on warrants - - - - 1,800,000 - -
Issuance of common stock for
employee bonus 18,810 188 - - 187,912 - -
Issuance of common stock under
employee stock purchase plan 15,842 158 - - 131,172 - -
Compensation for issuance of
common stock and options - - - - 162,530 - -
Issuance of common stock
for services 2,083 21 - - 23,413 - -
Issuance of common stock relating
to certain royalty agreements 45,000 450 - - 539,550 - -
Unrealized loss on securities
available-for-sale - - - - - - (9,214)
Net loss - - - - - (15,267,580) -
Comprehensive income/(loss)
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,948,304 $69,483 - $ - $67,873,284 $(47,382,830) $(9,214)
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation Total
------------ ------------
<S> <C> <C>
Balance at December 31, 1995 $(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
Unrealized loss on securities
available-for-sale - (9,214)
Net loss - (15,267,580)
---------------
Comprehensive income/(loss) (15,276,794)
---------------------------
Balance at December 31, 1996 $(188,902) $ 20,361,821
</TABLE>
See accompanying notes.
F-5
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Unrealized
Common Stock Preferred Stock Paid-In Accumulated Loss On
Shares Amount Shares Amount Capital Deficit Securities
--------- ------- ------ ------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,948,304 $69,483 - - $67,873,284 $(47,382,830) $(9,214)
Issuance of common stock for
cash
--public offering, net of
issuance costs of $634,796 1,400,000 14,000 - - 10,551,204 - -
Issuance of common stock for 212,766 2,128 - - 2,497,872 - -
cash
Issuance of common stock for
cash
-- under stock option plan 30,001 300 - - 51,404 - -
Issuance of common stock under
employee stock purchase plan 29,875 298 - - 310,303 - -
Issuance of common stock under
401(k) plan-stock match 19,409 194 - - 155,078 - -
Cancellation of common stock
relating to license agreement (33,333) (333) - - 333 - -
Compensation for issuance of
common stock and options - - - - (15,137) - -
Net loss - - - - - (15,122,094) -
Change in unrealized loss on
securities available-for-sale - - - - - - 4,150
Comprehensive income/(loss) - - - - - -
--------------------------------------------------------------------------------------
Balance at December 31, 1997 8,607,022 86,070 - - 81,424,341 (62,504,924) (5,064)
Issuance of common stock for 465,117 4,651 2,495,349 - -
cash
Issuance of common stock for
cash
-- under stock option plan 21,689 217 - - 45,545 - -
Issuance of common stock under
employee stock purchase plan 54,115 542 - - 307,608 - -
Issuance of common stock under
401(k) plan-stock match 33,512 335 - - 190,371 - -
Compensation for issuance of
common stock and options - - - - (29,001) - -
Change in unrealized loss
on securities - - - - - - 5,064
available-for-sale
Net loss - - - - - (10,917,567) -
Comprehensive income/(loss)
--------------------------------------------------------------------------------------
Balance at December 31, 1998 9,181,455 $91,815 - $ - $84,434,213 $(73,422,491) $ -
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Deferred
Compensation Total
------------ ------------
<S> <C> <C>
Balance at December 31, 1996 $(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 - 2,500,000
cash
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)
Change in unrealized loss on
securities available-for-sale - 4,150
-------------
Comprehensive income/(loss) (15,117,944)
---------------------------
Balance at December 31, 1997 (130,312) 18,870,111
Issuance of common stock for - 2,500,000
cash
Issuance of common stock for
cash
-- under stock option plan - 45,762
Issuance of common stock under
employee stock purchase plan - 308,150
Issuance of common stock under
401(k) plan-stock match - 190,706
Compensation for issuance of
common stock and options 61,163 32,162
Change in unrealized loss
on securities - 5,064
available-for-sale
Net loss - (10,917,567)
-------------
Comprehensive income/(loss) (10,912,503)
---------------------------
Balance at December 31, 1998 $ (69,149) $ 11,034,388
===========================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(10,917,567) $(15,122,094) $(15,267,580)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation 1,670,825 1,665,044 1,648,435
Amortization 92,107 74,051 40,747
Equity in loss of unconsolidated affiliate 1,081,771 - -
Write-off of deferred patent costs 11,836 93,557
Compensation related to common stock and options 278,150 280,177 889,151
Compensation related to issuance of affiliate's stock 81,000 - -
Compensation for forgiveness of notes
receivable--related parties 126,466 92,466 92,466
Loss on sale of securities available-for-sale - - 13,140
Gain on sale of investment in corporate partner (25,045) - -
Loss (gain) on disposal of equipment 541 (1,126) -
Accrued interest included in convertible debt 291,723 52,889 -
Changes in operating assets and liabilities:
Accounts receivable (3,890,537) 65,978 (55,962)
Prepaid expenses and other 90,783 38,168 (55,882)
Other assets (18,087) (277,807) (29,260)
Accounts payable--trade (154,167) 351,777 3,866
Accrued liabilities 150,186 29,340 130,226
Deferred revenue 2,000,000
Deferred gain - (5,515) (27,130)
-----------------------------------------------
Net cash used by operating activities (9,130,015) (12,663,095) (12,617,783)
Investing activities
Additions to property, plant, and equipment (936,395) (2,213,311) (1,541,412)
Additions to deferred patent costs (506,994) (660,581) (558,895)
Sale (purchase) of investment in corporate partner 275,045 - (250,000)
Proceeds from sale of equipment - 2,600 -
Net sales of securities available-for-sale 804,680 3,748,005 (1,058,590)
Investment in unconsolidated affiliate (2,022,987) - -
Transfer of restricted cash 52,669 242,733 914,528
Loan repayments--related parties 1,875 3,000 56,625
Loan advances--related parties (50,000) (175,000) (156,500)
-----------------------------------------------
Net cash (used) provided by investing activities (2,382,107) 947,446 (2,594,244)
Financing activities
Net proceeds from sale of shares of common stock
and of warrants 2,798,630 13,346,056 26,271,496
Payments under loan facilities (2,077,771) (1,480,677) (1,316,027)
Borrowings under loan facilities 2,000,000 2,254,460 1,162,242
Payments on capital lease obligations - (152,093) (768,014)
-----------------------------------------------
Net cash provided by financing activities 2,720,859 13,967,746 25,349,697
-----------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,791,263) 2,252,097 10,137,670
Cash and cash equivalents at beginning of year 15,302,775 13,050,678 2,913,008
-----------------------------------------------
Cash and cash equivalents at end of year $ 6,511,512 $ 15,302,775 $ 13,050,678
===============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements
December 31, 1998
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.
During 1998, the Company formed Atugen Biotechnology GmbH ("Atugen"), a German
company located in Berlin. Atugen's primary goal is to utilize RPI's
proprietary ribozyme and related technologies and accelerate gene function
validation and discovery of human health therapeutic targets. Financing for
Atugen was accomplished through a combination of venture capital, an investment
by RPI and German government grants and loans. As part of the formation, Atugen
received exclusive licenses to RPI patents and technologies for target
validation and discovery. In addition, in 1998 Atugen acquired Transgenics
Berlin-Buch GmbH ("Transgenics") in exchange for Atugen common stock, which
allowed access to DNA "chip" technologies. As of December 31, 1998, the Company
owned 49.5% of the Atugen voting stock and accounts for its investment in Atugen
using the equity method. RPI plans to retain ownership in and have other on-
going business relationships with Atugen.
Capital Requirements and Management's Plans
The Company incurred a net loss of $10,917,567 for the year ended December 31,
1998 and has a accumulated deficit of $73,422,491 at December 31, 1998.
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.
F-8
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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.
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.
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. Useful
lives of laboratory equipment and furniture are estimated at five years and all
computer equipment is estimated at three years. 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 term of the lease.
Deferred Patent Costs
The Company capitalizes legal costs directly incurred in pursuing patent
applications as deferred patent costs. When such applications result 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>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition and Accounts Receivable
Revenue from collaborative agreements typically consist of nonrefundable up-
front fees, ongoing research and development funding and milestone, license fees
and other payments. Revenue from nonrefundable up-front fees is recognized upon
signing of the agreement. Revenue from ongoing research and development funding
is recorded as the expenses are incurred. Revenue from milestone, license fees
and other payments will be recognized as earned. Payments received in advance
under these agreements are recorded as deferred revenue until earned. The
Company's accounts receivable are predominately collaborative agreement
receivables, and to date, the Company has not experienced any losses with
respect to the collection of its accounts receivables.
In 1998 and 1997, Schering AG accounted for approximately 22% and 76% of
collaborative revenues, respectively. In 1998, Chiron accounted for
approximately 70% of collaborative revenues. Revenues from Schering AG and
Chiron were for nonrefundable, ongoing research and development fees.
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 were adopted by the Company during 1998. As a result of the
adoption of Statement 130, the Company has reported comprehensive income (loss)
as a component of the Statement of Stockholders' Equity. There was no change in
the Company's financial reporting as a result of the adoption of Statement 131.
Reclassifications
Certain amounts in the December 31, 1997 and 1996 financial statements were
reclassified to conform with the December 31, 1998 presentation. These
reclassifications had no impact on the reported results of operations.
2. Securities Available-for-Sale
Management has determined that at December 31, 1998 all marketable securities
held by the Company were cash and cash equivalents. At December 31, 1997
management determined that certain marketable securities held by the Company at
December 31, 1997 were available-for-sale. Securities available-for-sale are
carried at fair value, with unrealized gains and losses reported as a component
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. There were no
gross realized gains or losses on sales of securities available-for-sale in 1998
or 1997.
F-10
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
3. Long-Term Debt
Long-term debt as of December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
<S> <C> <C>
Equipment loan (I) $ - $ 263,301
Tenant interest loan (II) - 496,066
Tenant improvement and equipment loan (II) - 972,703
Equipment loan (III) 698,634 1,044,334
Convertible debt (IV) 4,344,612 2,052,889
---------------- ---------------
$5,043,246 $4,829,293
========================================
</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 was 10.00% at December 31, 1997. The agreement required monthly
principal and interest payments through August 1998, at which time the loan
was paid in full.
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 exercised a
prepayment option. In December 1998, the Company exercised the prepayment
option and paid off the loan at its carrying amount.
F-11
<PAGE>
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. The interest rate on these borrowings
was 12% at December 31, 1998 and 1997.
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.
Cash paid for interest for the years ended December 31, 1998, 1997 and 1996 was
$411,988, $791,476 and $844,661, respectively. At December 31, 1998 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 was required to maintain minimum
cash balances in the form of certificates of deposit with a financial
institution, in the amount of $0 and $52,669 at December 31, 1998 and 1997,
respectively. These amounts are presented as restricted cash in the
accompanying balance sheets.
As of December 31, 1998, maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Amount
--------------------
<S> <C>
1999 $ 498,179
2000 200,455
2001 -
2002 -
2003 -
Thereafter 4,344,612
--------------------
$5,043,246
====================
</TABLE>
4. Leases
The Company leases office space under a noncancelable operating lease which was
extended until June 2007. Total rent expense, including miscellaneous
laboratory equipment rentals, was $493,188, $443,796 and $496,774 in 1998, 1997
and 1996 respectively.
F-12
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
The Company's lease commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Lease
----------------------
<S> <C>
1999 $ 478,516
2000 363,480
2001 363,480
2002 363,480
2003 363,480
2004 and thereafter 1,272,180
----------------------
$3,204,616
======================
</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>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
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, 1998
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 1,479,173
Employee stock purchase plan 200,168
Employee 401(k) stock match 247,079
Warrants at $15.75 per share 10,793
Warrants at $40.50 per share 11,111
Warrants at $22.50 per share 465,554
--------------------
2,413,878
====================
</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>
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.
During the third quarter of 1998, the Company offered a repricing of existing
stock options to all of its current employees. Pursuant to the offer, all non-
executive employees were allowed to exchange each existing stock option for a
newly priced stock option one for one, with the new stock options having an
exercise price equal to the current market price of the underlying common stock.
If exchanged, the vesting term would start over beginning on the date of
exchange. A similar offer was given to all executives, except the options were
exchanged at a one for .75 ratio. As a result of the offer, 890,921 options
were canceled and 747,060 options were granted, effective September 18, 1998.
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 1998, 1997
and 1996, the Company recorded $32,162, $43,453 and $137,617, respectively, of
compensation relating to the grant of stock options and the Antidilution
Agreement, all of which relates to pre-IPO issuances which have been deferred
until vesting has been completed.
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 1998, 1997 and 1996, respectively: risk-free interest
rates of 4.7%, 6.4% and 6.3%; a dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .967, .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 1998, 1997 and 1996 was $4.04, $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>
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:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(11,948,280) $(16,153,548) $(15,554,890)
Pro forma loss per share (1.33) (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, 1998 and 1997 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
Options granted 1,174,560 $3.00 - $ 8.13
Options exercised/canceled (1,045,878) $ .45 - $ 15.25
---------------------------------------------
Outstanding at December 31, 1998 1,347,572 $ .45 - $ 12.78
=============================================
</TABLE>
The weighted average exercise price of options outstanding at December 31, 1998,
1997 and 1996 was $4.21 and $9.31 and $8.93, respectively.
Stock options vest as follows:
<TABLE>
<CAPTION>
Options
------------------------
<S> <C>
Currently exercisable 258,279
1999 219,492
2000 176,592
2001 159,938
2002 149,583
2003 and thereafter 172,160
Contingent vesting 211,528
------------------------
Total 1,347,572
========================
</TABLE>
F-16
<PAGE>
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
Parke-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 Agrosciences
In September 1993, the Company entered into a research and development study
with Dow Agrosciences (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, Dow Agrosciences 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 Dow Agrosciences 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.
F-17
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
7. Collaborative Agreements (continued)
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 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.
In 1998, the Company received $5.0 million from Chiron related to the joint
product development of ANGIOZYME. The non recurring payment was a reimbursement
for 50% of past expenses incurred by the Company for the preclinical development
of ANGIOZYME. In addition, the Company recorded revenue from Chiron of
$1,048,138 for 50% of ANGIOZYME clinical development expenses incurred by the
Company during the fourth quarter of 1998. There are no future obligations
between the Company and Chiron related to these revenues which were fully
recognized in 1998.
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, 1998, the
Company has received $731,500 in funding pursuant to the agreement.
F-18
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
7. Collaborative Agreements (continued)
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.
Schering AG made an equity investment in the Company in May 1997 of $2.5 million
in exchange for 212,766 shares of common stock, and made an additional equity
investment of $2.5 million for 465,117 shares in April 1998. Separately,
Schering AG provided a loan of $2.0 million in 1997, and subsequently $2.0
million in 1998. Schering AG will continue to provide loans of up to $2.0
million annually for each of the next three years, provided that the
collaboration is continued in each of those years. 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. 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, 1998, the outstanding
borrowings of $4.3 million were convertible into approximately 992,000 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 $2.0 million and $1.5 million in 1998 and 1997,
respectively. Provided that the collaboration is continued, Schering AG will
make research payments of $2 million a year for each year through April 2002.
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.
Roche Bioscience
In May 1998, the Company entered into a Target Validation agreement with Roche
Bioscience. The agreement gives Roche Bioscience access to the Company's
proprietary ribozyme technology which will assist Roche Bioscience 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 Roche Bioscience and perform various studies to determine the
level of gene expression inhibition achieved. Roche Bioscience will fund the
research and may provide milestone payments or success fees to the Company if
Roche Bioscience uses the information to derive compounds to take into
development.
F-19
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
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. At the Company's discretion, the payment may
be in either cash or equity.
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.
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 final payment under the
above unrestricted grant was $113,000, which was paid 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.
F-20
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
9. Related Party Transactions
At December 31, 1998, 1997 and 1996, the Company had a total of $280,932,
$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
$126,466, $80,000 and $85,000 of these loans during each of the years ending
December 31, 1998, 1997 and 1996, respectively.
10. Formation of Atugen, an unconsolidated German Affiliate
In 1998, the Company transferred its gene function and target validation
business and technology to Atugen, a separately funded German affiliate.
Financing for Atugen was accomplished through an equity investment of $2.0
million in cash from RPI in 1998, a venture capital investment of $7.0 million
and a commitment by the German government to provide grants and loans of up to
$10.0 million. As a result, at December 31, 1998, RPI retained a 49.5% ownership
in Atugen. In connection with its formation, Atugen received exclusive royalty
free licenses to RPI patents and technologies for target validation and
discovery in exchange for a one-time $2.0 million payment which was received by
RPI in January 1999. The entire amount of this one-time payment has been
deferred as of December 31, 1998 and will be amortized over the five year term
of the license agreement and reflected in the Company's equity in earnings or
loss of this unconsolidated affiliate.
According to a service agreement executed by both parties, RPI will provide
management support, technologies, facilities and reagents to Atugen for
reasonable fees. RPI will retain rights to develop ribozyme therapeutic agents
against targets validated by Atugen.
In 1998, RPI gave to its officers and certain other employees stock representing
a 5.5% interest in the newly formed Atugen at no personal cost to the
individuals. Atugen is a closely held private company, and accordingly, the
fair value of the share grants was by nature an estimate. The Company estimated
the fair market value of these share grants at the date of such grants to be
$81,000. As a result, the Company's 1998 Statements of Operations includes
$81,000 of compensation related to the share grants.
F-21
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
11. 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, 1998, 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 11,953,000 139,000 -
2011 15,125,000 181,000 -
2012 15,291,000 297,000 -
2018 11,248,000 298,000
------------------------------------------------------------------
Total $73,725,000 $1,517,000 $31,000
==================================================================
</TABLE>
F-22
<PAGE>
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 27,499,000 $ 23,324,000
Research and development and state
investment credit carryforwards 1,548,000 1,102,000
Depreciation 639,000 618,000
Other 30,000 12,000
-----------------------------------------------
29,716,000 25,056,000
Valuation allowance (28,610,000) (24,097,000)
-----------------------------------------------
Net deferred tax assets 1,106,000 959,000
Deferred tax liabilities:
Deferred patent costs 1,084,000 936,000
Other 22,000 23,000
-----------------------------------------------
Total deferred tax liabilities 1,106,000 959,000
-----------------------------------------------
$ - $ -
===============================================
</TABLE>
11. Employee Savings Plan
The Company has a 401(k) plan which allows participants 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 both 1998 and 1997, the Board approved a 50% common
stock match equal to total participant deferrals made in each respective year.
The Company stock match is subject to vesting restrictions.
F-23
<PAGE>
Ribozyme Pharmaceuticals, Inc.
Notes to Financial Statements (continued)
12. Subsequent Event (unaudited)
In March 1999, the Company entered into a collaboration with Eli Lilly and
Company ("Lilly") to conduct research, development and commercialization of
HEPTAZYME, the Company's ribozyme for the treatment of Hepatitis C virus ("HCV")
infection. Under the terms of the agreement, the Company will receive
approximately $9.2 million in 1999, which includes funding for research and
clinical trial expenses, and an equity investment. In April 1999, Lilly
purchased five shares of our Series L preferred stock for $7.5 million.
Separately, during 1999 Lilly will provide research revenue payments totaling
$1.7 million paid in three equal quarterly installments. In addition, the
Company may receive success fees related to various development milestones and
royalties on future sales of products developed related to the collaboration.
Lilly will receive the exclusive worldwide commercialization rights to products
that result from this collaboration, including the HEPTAZYME product. The
Company has retained certain rights to manufacture HEPTAZYME products resulting
from the collaboration.
F-24
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the use of our report dated February 16, 1999, included in the
Annual Report on Form 10-K of Ribozyme Pharmaceuticals, Inc. for the year ended
December 31, 1998, with respect to the financial statements, as amended,
included in this Form 10-K/A.
We also 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 16,
1999, with respect to the financial statements of Ribozyme Pharmaceuticals,
Inc., as amended, included in this Annual Report on Form 10-K/A for the year
ended December 31, 1998.
/s/ERNST & YOUNG LLP
Denver, Colorado
May 7, 1999
