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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934 for the year ended December 31, 1996.
OR
- -------- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number:
0-24814
-----------------------------
SUGEN, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3629196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
351 Galveston Drive, Redwood City, California 94063
(address of principal executive offices)
(415) 306-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Preferred Share Purchase Rights
-----------------------------
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 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the of the Common Stock of the registrant held by
non-affiliates as of March 14, 1997 was $92,674,953.
The number shares of Common Stock outstanding at March 14, 1997 was 13,039,822
shares.
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Portions of Registrant's Definitive Proxy Statement which will be filed with the
Commission pursuant to Regulation 14A in connection with the 1997 Annual Meeting
are incorporated herein by reference in Part III of this Report.
This report on Form 10-K, including all exhibits, contains ___ pages. The
exhibit index is located on page 54 of this report.
- --------
(1) Excludes 5,067,783 shares of the Registrant's Common Stock held by executive
officers, directors and stockholders whose ownership exceeds 5% of the Common
Stock outstanding at March 14, 1997.
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<PAGE>
PART I
Item 1. BUSINESS
Overview
SUGEN is a biopharmaceutical company focused on the discovery and
development of small molecule drugs which target specific cellular signal
transduction pathways. Signal transduction is the process by which a signal from
the exterior of a cell is transmitted to the cell nucleus, resulting in the
activation or suppression of specific genes. Dysfunctional signal transduction
pathways have been implicated in disease areas such as cancer and diabetes as
well as dermatology, ophthalmology and in disorders of the cardiovascular,
immune and neurological systems. The main focus of SUGEN's research and drug
development programs is on specific signalling pathways regulated by tyrosine
kinases ("TKs"), tyrosine phosphatases ("TPs") and serine-threonine kinases
("STKs"). TKs, TPs and STKs can take the form of cell-surface receptors or
intra-cellular signalling molecules. Cell surface receptor TKs, receptor TPs and
receptor STKs are three of the largest known families of receptors in the body
and are key regulators of critical cellular functions including growth,
maturation, migration, metabolism and survival. Aberrant signalling of TKs, TPs
and STKs has been shown to result in a variety of chronic and acute pathological
disorders. SUGEN's founding scientists, Dr. Axel Ullrich of the
Max-Planck-Institut fur Biochemie ("MPI") and Dr. Joseph Schlessinger of New
York University Medical Center ("NYU"), are pioneers in the discovery and
characterization of TKs, TPs and their signalling pathways.
SUGEN is pursuing two separate business models for commercialization of
its products and technologies, one for oncology and one for applications outside
of cancer. In the cancer field, SUGEN is committed to building a vertically
integrated oncology business in North America, with the objective of bringing to
market a family of target-specific signal transduction inhibitors that are
proprietary to SUGEN. In cancer, the Company believes that it will become
standard practice eventually to classify tumors by their molecular trigger,
thereby enabling physicians to prescribe the appropriate signal transduction
inhibitor drug as part of a treatment regimen. SUGEN believes it is a leader in
the research and discovery of novel signal transduction targets for cancer drug
development.
In December 1994, the Company filed its first Investigational New Drug
("IND") application with the U.S. Food and Drug Administration ("FDA") for
SU101, a platelet-derived growth factor receptor ("PDGF TK") signalling
antagonist. Imbalances in the PDGF TK signalling pathway have been implicated by
SUGEN and others in subsets of several cancers including brain, ovarian,
prostate, lung and melanoma. The Company currently is sponsoring several Phase
I/II and Phase II clinical trials. As of March 3, 1997 over 100 patients have
been treated with SU101.
SUGEN currently is pursuing six additional proprietary cancer-related
drug development programs. The most advanced of these includes the Flk-1 TK
angiogenesis inhibitor program that addresses patients with solid tumors and may
also have applications as an anti-metastasis agent. The Company currently plans
to select an IND candidate or candidates in the Flk-1 TK program and to begin
human safety studies mid-year 1997, and currently plans to initiate efficacy
studies during the fourth quarter of 1997. The Company is also pursuing GRB-2,
Raf and orally available PDGF TK inhibitor programs, in which lead compounds are
now undergoing in vivo pharmacology studies.
SUGEN's cancer drug development strategy is designed to facilitate the
rapid progression from Phase I clinical studies to FDA approval and product
launch, and thus the Company is targeting fast track entry indications for
clinical development even where these constitute a relatively small subset of
the potentially addressable patient population. Once a product has been
introduced to the clinic, SUGEN expects to work with the oncology community on
additional clinical studies to extend the labeling of the drug to other
applications. In order to market its products effectively, the Company intends
to build a U.S. sales force of approximately 50 representatives who would target
the major cancer treatment centers. The Company also expects to seek to
in-license and market additional late-stage cancer assets that serve to
complement SUGEN products, and intends to work with a partner to develop
genomic-based cancer diagnostics.
SUGEN is committed to pursuing in parallel the clinical development of
a number of target-specific cancer drugs in North America, concentrating each
clinical development program on entry indications in which patients have very
poor prognoses and no satisfactory alternative therapies. For each of its cancer
development
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programs, the Company seeks to find partners for European and Asian territories
in order to share development costs. This strategy is exemplified by the
collaboration with ASTA Medica Aktiengesellschaft ("ASTA Medica") with respect
to the Pan-Her and Raf inhibitor programs, in which ASTA Medica is the Company's
collaboration partner in Europe and South America.
Separate from this strategy, the Company is funding a portion of its
ongoing cancer research through a collaboration with Zeneca Limited ("Zeneca"),
a major international pharmaceutical company. Zeneca is the Company's
collaboration partner and worldwide licensee with respect to five undisclosed
cancer drug discovery and development programs, on which SUGEN will receive
milestone payments and royalties on worldwide sales and will also have the
opportunity to earn profit participation in the North American market by
contributing to clinical development costs.
SUGEN is also applying its drug discovery platform to areas outside
oncology, including diabetes, dermatology, ophthalmology, neurological disorders
and immunology. In December 1996, the Company filed an IND application with the
FDA for SU5271, an epidermal growth factor receptor ("EGF TK") signalling
antagonist. SU5271 is a synthetic small molecule signal transduction inhibitor
that blocks keratinocyte growth. Hyperproliferating keratinocytes are a major
constituent of psoriatic lesions which can be blocked by selectively inhibiting
signalling of the EGF TK.
In the areas outside cancer, SUGEN intends to pursue the
commercialization of its technology through joint ventures or collaborations in
which SUGEN contributes validated targets, screening technologies and drug leads
while the partner provides the disease and clinical expertise as well as funding
to bring potential products to market. This strategy is exemplified by the
October 1996 collaboration agreement with Vision Pharmaceuticals L.P., an
affiliate of Allergan, Inc. and Allergan, Inc. (collectively, "Allergan").
Through this collaboration, Allergan became SUGEN's exclusive corporate partner
in the ophthalmic neovascularization field, with the aim of utilizing SUGEN's
proprietary small molecule signal transduction inhibition technology to develop
novel therapies for the treatment of such major ophthalmic diseases as macular
degeneration and diabetic retinopathy.
Overview of Cellular Signal Transduction Pathways
The last decade of research has led to an increased understanding of
how cells communicate with each other to coordinate the growth and maintenance
of the multitude of tissues within the human body. A key element of this
communication network is the transmission of a signal from the exterior of a
cell to its nucleus, which results in the activation or suppression of specific
genes. This process is called signal transduction. An integral part of signal
transduction is the interaction of ligands, receptors and intracellular signal
transduction molecules ("downstream signalling molecules").
Ligands are chemical messengers, usually released by one cell to
communicate with a target cell by binding to specific receptors on the target
cell's surface. A receptor generally takes the form of a protein that straddles
a cell's membrane, with its "ligand binding domain" protruding out of the cell
and its "intracellular domain" anchored inside the cell. When a ligand binds to
its receptor, the newly formed receptor/ligand complex triggers the activation
of a cascade of downstream signalling molecules, thereby transmitting the
message from the exterior of the cell to its nucleus. When the message is
received in the nucleus, it dictates the activation or suppression of specific
genes, resulting in the production of proteins that carry out a specific
biological response. Depending on the specific ligand, receptor and downstream
signalling molecules, the resulting signalling cascade controls diverse and
distinct cellular processes. For example, metabolic changes can be effected by a
ligand such as insulin which, after binding to the insulin receptor, activates a
specific set of downstream signalling molecules within the cell, ultimately
leading to the regulation of glucose uptake and other insulin-associated
functions.
Tyrosine Kinases, Tyrosine Phosphatases and Serine-Threonine Kinases in Signal
Transduction
TKs, TPs and STKs are classes of signalling molecules that are central
to the healthy functioning of all tissues. Some well known TKs include Her2,
PDGF TK, insulin receptor ("insulin TK"), EGF TK, macrophage colony stimulating
factor receptor and nerve growth factor receptor. At present, there are
approximately 100 known human TKs, all of which have been cloned over the last
twelve years. TPs were not discovered until 1988, and at present there are
approximately 50 known human TPs.
3
<PAGE>
Generally, when a ligand binds to receptor TKs, the receptors must
dimerize (join in pairs at the cell surface) to become activated. This coupling
activates a specific enzyme activity which resides within the intracellular
domain of each TK. Upon activation, the TKs commence cross-phosphorylation, a
process whereby phosphates (highly charged particles) are enzymatically added to
specific sites on each of the TKs. These phosphates serve as attachment sites at
which specific downstream signalling molecules interact with the TKs. Many of
these downstream signalling molecules in turn become phosphorylated themselves,
enabling them to recruit their own substrates and thus pass on the signal.
Depending on the specific ligand and receptor, the resulting signalling cascade
leads to changes in gene expression or affects other cellular systems that
ultimately determine if the cell is to grow, mature, migrate, metabolize or
survive.
Complementing TKs are TPs, which were first characterized in detail by
Dr. Edmond H. Fisher, a 1992 Nobel Laureate, SUGEN collaborator and member of
SUGEN's Science Advisory Board. While the TKs phosphorylate target proteins to
exert their activity, the TPs remove phosphates ("dephosphorylate") from target
proteins, thereby regulating the activity of the TKs. Generally, when a receptor
TK is activated by its ligand, a given biologic response is triggered.
Conversely, when a TP is activated, there is usually down regulation of a given
biologic response. In this manner, TKs can be visualized as the "gas pedal" and
TPs as the "brake pedal" for numerous biological processes. Many cellular
responses are thus regulated by the balance between specific TKs and TPs.
The most abundant kinases in the cell are STKs which phosphorylate
serine and threonine residues. These enzymes control an array of processes in
the cell. Many STKs act downstream in signal transduction cascades initiated by
TKs, while others integrate signals originating from other classes of receptors
(e.g., G protein-coupled receptors). STKs are involved in controlling the cell
cycle, the response of the cell to environmental stress, the development of
certain cells and tissues, and other processes such as metabolism.
Diseases and Disorders Related to TK, TP and STK Signalling Pathways
TKs, TPs, STKs and their signalling pathways play key roles in a
variety of normal cellular functions involving virtually every cell type in the
body. Examples include the growth of epithelial cells (skin and lining tissues
of internal organs), angiogenesis, hematopoiesis, proliferation of connective
tissue cells (fibroblasts), survival and differentiation of nerve cells,
regeneration of tissues during wound healing and regulation of the energy
metabolism of all cells. While normal cellular function involves a balance
between kinase and phosphatase activity, imbalances between these molecules have
been shown to result in a variety of chronic and acute pathological conditions,
including cancer and diabetes as well as in dermatologic, ophthalmic, neurologic
and immunologic disorders.
The close association of TKs, TPs and STKs with disease, coupled with
structural characteristics of these molecules, make them attractive targets for
drug discovery and therapeutic intervention. The intracellular domains of these
receptors can be targeted with great selectivity by drugs that inhibit enzyme
activity or that prevent the binding of downstream signalling molecules to the
phosphorylated receptor. Critical points further downstream in the signalling
cascade may also be viable targets since selective intervention at these points
can prevent the message from reaching its final destination in the nucleus.
Cancer
Research over the past 20 years has reinforced the view that cancer is
a disease involving damage, loss or amplification of specific genes. Moreover,
of the numerous oncogenes identified to date, many appear to be abnormal
versions of TK and STK signalling pathway components, such as ligands, TKs or
STKs or downstream signalling molecules. These discoveries have led to the
realization that dysfunctional TK or STK signalling pathways play an integral
role in cancer. More recently, as TPs have been shown to counteract the activity
of TKs, TPs have been implicated as potential tumor suppressor genes.
In 1986, Dr. Ullrich and Dr. Dennis Slamon of the University of
California at Los Angeles Medical Center, a researcher, clinical oncologist and
member of SUGEN's Science Advisory Board, established the clinical relevance of
overexpression of a receptor TK known as Her2 in human breast and ovarian
cancers. In their study of approximately 200 patients it was found that almost
30% of breast and ovarian cancer patients overexpress Her2 and that high levels
of Her2 in a patient's tumor correlated with reduced survival time. Since that
time, subsets of other types of human tumors have been shown to express high
levels of Her2, including gastric and lung cancers. Animal data from several
laboratories has demonstrated that the suppression of Her2 activity has a
4
<PAGE>
significant inhibitory effect on tumor growth, validating Her2 as a target for
cancer therapy in the subset of patients that overexpress this TK. Similarly,
aberrant PDGF TK signalling has been implicated in studies at SUGEN and
elsewhere in subsets of brain, ovarian and other solid tumors, and
overexpression of the EGF TK has been implicated in subsets of breast, brain,
head and neck, lung and gastric cancers.
As a result of the close linkage between TK, TP and STK aberrations and
cancer, SUGEN believes that certain cancers can be recategorized according to
specific TK, TP and STK signalling pathway defects rather than merely by
physical location in the body (e.g., breast, lung, brain). Several observations
support this approach. For example, TK overexpression is not a transient
phenomenon. Cancer cells that exhibit TK overexpression do so continuously. In
addition, in many cases a cancer cell exhibits heavy overexpression of only one
TK. For instance, when cancer cells metastasize from a Her2-dependent tumor and
establish themselves at a remote site in the body, the distal tumor has also
been observed to overexpress Her2. Furthermore, SUGEN has shown that certain
tumor cells that overexpress a TK are more sensitive to TK inhibitors than
normal cells, thus reducing the likelihood of a TK inhibitor affecting normal
cells and causing problematic side effects. The Company believes that these
observations are the basis for a new approach to cancer therapy which might
commence with a sample of biopsy material being sent to a pathology lab for gene
expression profiling in order to determine the nature of the cellular
abnormality, such as overexpression of a TK. This diagnosis could then be used
to select the appropriate target-specific signal transduction inhibitor for
treatment.
Angiogenesis
Studies conducted by SUGEN in mice have shown that small molecule drug
candidates targeting the Flk-1 pathway can block the formation of blood vessels
("angiogenesis") essential to the growth and spread of most solid tumors. Flk-1
TK receptors, present on endothelial cells which make up blood vessel walls, act
as regulators of cell growth and angiogenesis. Tumors secrete vascular
endothelial growth factor ("VEGF") which binds to Flk-1 TK receptors resulting
in the sprouting of capillaries from the blood vessel toward the tumor. Blocking
Flk-1 TK activity blocks the ability of most tumors to stimulate formation of
blood vessels and thus deprives the tumor of necessary nutrients. In preclinical
studies conducted by researchers at SUGEN and collaborating labs, small molecule
inhibitors of the Flk-1 receptor tyrosine kinase blocked VEGF-dependent
angiogenesis, as well as vascular permeability, and human endothelial cells were
prevented from undergoing cell division that is required for the formation of
new blood vessels. Other studies by the Company suggest that a tumor's ability
to form metastases depends on the degree of vascularization of the primary
tumor. A high degree of vascularization generally correlates with a poorer
prognosis. SUGEN has demonstrated that by blocking Flk-1 TK activity in a
metastasis model it can block the formation of metastases to the liver and also
prolong life in animals. Flk-1 TK inhibitors thus are potentially useful to
treat metastatic disease in defined patient populations. Currently, SUGEN
researchers are testing in advanced preclinical studies a number of potential
drug candidates that inhibit the activity of Flk-1 TK. The Company currently
plans to initiate human safety studies mid-year 1997 and to initiate human
efficacy trials by the fourth quarter of 1997.
Flk-1 TK may also be an effective therapeutic for treating other
diseases associated with angiogenesis. These include psoriasis, rheumatoid
arthritis and ocular neovascularization. Potential ophthalmic applications are
in diabetic retinopathy and macular degeneration.
Diabetes
SUGEN has determined that certain TPs appear to be the body's natural
down regulators of the insulin TK signalling pathway. A drug which selectively
blocks these TPs may restore signalling through the insulin TK pathway, thereby
increasing glucose uptake and metabolism, and may constitute a novel therapeutic
approach to both Type I and Type II diabetes. Such a drug may also offer the
advantage of being orally available.
Psoriasis
Hyperproliferation of keratinocytes contributes to psoriasis, and work
by SUGEN and its collaborators has demonstrated that EGF TK signalling is
required for the growth of keratinocytes. These studies suggest that a drug
which blocks the EGF TK may be useful in treating psoriasis. Psoriasis is a
chronic skin disorder that affects approximately four million people in the
United States, and annual treatment costs in this country are estimated at over
$1.5 billion. There are few currently available drugs for this disease that
offer satisfactory efficacy and safety. SUGEN's work in psoriasis is based in
part on research done by its collaborators at Hebrew University of Jerusalem
("HUJ").
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Neurobiology
TKs, TPs and their signalling pathways are known to play key roles in
the maintenance of the central and peripheral nervous systems. SUGEN has
identified novel TKs and TPs whose expression is restricted to the nervous
system and which may serve as therapeutic targets for intervention in
neurodegenerative diseases.
Immunology
The role of TKs and STKs in the generation and maintenance of the human
immune system has been well established by a number of research teams around the
world. Signal transduction molecules in the immune system represent potential
drug discovery targets for identifying novel immunosuppressive and
immuno-stimulative drugs.
SUGEN's Drug Discovery Technology
SUGEN's goal is to discover and develop drugs that target specific TKs,
TPs, STKs or related downstream signalling molecules. SUGEN's drug discovery
effort is focused primarily on the discovery of small molecule drugs derived
from synthetic compound libraries and collections of natural product extracts,
including microbes, fungi and plants. As compared to biologic pharmaceuticals
such as proteins, peptides and carbohydrates, small molecules often offer
advantages as potential drugs. Small molecules can more easily penetrate cell
membranes and the blood brain barrier, can often be delivered orally, and can be
less immunogenic. These molecules also tend to involve substantially lower
process development and manufacturing costs. Using inhibition of TK
phosphorylation in a whole cell environment as an initial screening criterion,
SUGEN has been able to identify lead compounds in a number of its programs that
penetrate the cell easily, show minimal cytotoxicity and demonstrate potent and
selective activity on given targets.
At SUGEN, the process of drug discovery includes the following steps,
regardless of disease area: (1) target identification; (2) target validation;
(3) assay design and screening of compounds for leads; and (4) lead
optimization, including crystallography and medicinal chemistry. The Company's
in-house research teams also work closely with NYU, MPI and Max-Planck-Institut
fur Physiologische und Klinische Forschung ("MPP") in target identification and
target validation. In this case, the remaining steps of this process are
conducted primarily by SUGEN or by its corporate partners.
Target Identification
SUGEN's genomics efforts are focused exclusively on certain families of
signal transduction genes, which make up approximately one percent of the entire
human genome. These families include the TKs, TPs, STKs, adaptor molecules and
certain other important molecules involved in cellular signalling. Within this
specific area of focus, SUGEN identifies and defines the function of novel genes
and their protein products, and in turn assesses their utility as targets for
therapeutic intervention against diseases of interest to the Company.
SUGEN believes that substantially the entire human genome will be
sequenced within a few years, and most of that sequence data will be available
on public databases. SUGEN's target identification effort, therefore, is focused
on determining the function of novel genes. In this regard, SUGEN has made a
strategic commitment to its bioinformatics platform, representing a bridge
between abundant gene sequence data and disease-relevant discoveries.
SUGEN's bioinformatics program starts with a physical repository of the
approximately 200 known signal transduction genes in addition to numerous other
genes discovered by SUGEN but not published to date. SUGEN also has a
proprietary panel of oligonucleotide primers capable of recognizing genes that
are minimally related to genes already in the SUGEN library. All of this
information is supported by an in-house massively parallel computer processing
platform capable of 68,000 million instructions per second (mips) throughput.
Using sophisticated pattern recognition algorithms, SUGEN is able to mine the
public databases on a daily basis looking for new sequence material of interest,
for the complete sequences of gene fragments identified from cells of interest,
for additional members of newly discovered families of signal transduction
genes, or for homologs of human genes in non-human genome databases that could
provide quick insights into the function of the new human gene.
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SUGEN has used this bioinformatics platform to develop a proprietary
technology called transcript imaging, for which the Company has filed for patent
protection. This technology enables SUGEN researchers to take a small sample of
cells or tissue of interest and to obtain rapidly a systematic analysis of the
expression levels in the sample of every TK, TP and STK in SUGEN's library.
Transcript imaging allows SUGEN to identify quickly the signalling pathways that
play key roles in specific cell types and, more importantly, to compare diseased
cells to healthy cells in order to determine where aberrant signalling may play
a causative role in a disease. For example, if a particular signal transduction
gene is heavily overexpressed in a significant proportion of samples of a
specific tumor type, that gene becomes a potential target for drug development.
If the gene can subsequently be validated as playing a causative role in these
tumors, it may be adopted as a target for drug discovery. SUGEN believes that
transcript imaging also has the potential to become an important diagnostic
tool, but SUGEN will seek to pursue this opportunity in partnership with an
established diagnostics company.
Target Validation
A primary challenge in SUGEN's target driven drug discovery is to
progress as efficiently as possible from identifying a potential new target to
verifying that a drug which specifically acts on that target could have a
significant therapeutic benefit in the treatment of a given disease. SUGEN terms
this process "target validation," and it is a crucial step before committing
resources to assay development and screening for target-specific drug leads. The
first step in validating a novel target usually involves developing a battery of
proprietary reagents, including truncated or point-mutated genes, anti-sense
constructs and antibodies. In the case of novel receptors, where the natural
ligands and signalling substrates initially may be unknown, the Company employs
a variety of advanced methods for identifying and cloning these molecules. Using
these reagents, the Company then engineers cell lines in which it has clearly
characterized the expression levels and activity of the target gene. These cell
lines can then be used to establish in vitro and in vivo whether down-regulating
the target will block the disease cascade. If so, the target is considered
validated.
Assay Design/Screening
From its inception, SUGEN has committed significant resources to
building a strong assay development capability, and the Company regards this
capability as an important component of its proprietary position in the
discovery and development of target specific signal transduction inhibitor
drugs. Assay quality is the most important determinant of any screening
program's productivity, and this becomes even more important in target driven
drug discovery. SUGEN primarily employs engineered whole cell assays rather than
biochemical assays. A majority of SUGEN's assays are designed for
high-throughput robotics screening, and its core assay technologies are broadly
applicable to TKs, TPs and STKs and related signalling molecule targets.
SUGEN's drug discovery process employs a battery of proprietary assays
and models engineered specifically to ensure that the target is present and
functional in a consistent fashion at each step of the screening cascade.
SUGEN's assays are designed to answer the following four questions:
Screen 1 Can a compound block the signalling of the target in
question, within the context of a living cell?
Screen 2 Is the compound sufficiently selective in blocking the
desired target's signalling (i.e., can it block the target
without blocking closely related targets)?
Screen 3 Does the compound exert the desired biological effect on a
living cell (e.g., block cell growth)?
Screen 4 Does the compound exert the desired biological effect within
the context of an in vivo disease model?
By employing this proprietary screening cascade, SUGEN hopes to
identify lead compounds which are active in a whole cell environment, are
sufficiently potent and specific to a given target, and are active in an in vivo
disease model which is driven by the given target.
Once targets are validated by SUGEN and the assays have been developed
and validated, diverse libraries of synthetic small molecules and natural
product extracts are screened in order to identify potential drug leads. SUGEN
currently has a number of targets moving through its screening assays, and as
new targets are validated
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SUGEN continues to add to its panels of assays. Each additional assay enhances
the Company's ability to determine the specificity of lead compounds. Along with
assay design and screening, SUGEN has devoted significant resources to acquiring
libraries of structurally diverse compounds from a variety of sources around the
world.
Chemical Compound Libraries. SUGEN has entered into a number of agreements
designed to obtain chemical compounds for screening. These agreements cover a
broad range of chemical entities from sources across the world. The Company
currently has over 25,000 chemical compounds available in-house for screening
and has access to a portion of Zeneca's and ASTA Medica's libraries for
collaboration targets.
Natural Product Sources. SUGEN has gained access to commercial and
non-commercial sources of natural products, including microbial, plant and
fungal extracts. These sources represent a worldwide collection network
providing substantial diversity of material, including extracts from Japan,
China, Europe and North America. The Company is currently negotiating to gain
access to additional sources of extracts from different parts of the world. The
Company currently has over 16,000 natural product extracts available in-house
for screening.
Lead Optimization
The objective of SUGEN's lead optimization program is to increase the
potency, specificity and pharmacologic properties of lead compounds by designing
and synthesizing analogs. Lead optimization uses an iterative process employing
panels of assays to test for TK activity, TK specificity, and in vivo
pharmacologic endpoints of lead molecules in order to derive compounds with
clinical utility. All results are entered into a database that allows for
determination of structure and activity relationships leading to synthetic
chemistry efforts that follow important parameters for drug development. This
growing database represents a proprietary source of information on relationships
between small molecules, their specific targets, and the pharmacologic
properties of the compounds which the Company believes will accelerate the
optimization of lead compounds in several SUGEN programs.
SUGEN has recently added crystallographic analysis and computational
chemistry to its drug discovery infrastructure. Work being done in Dr.
Schlessinger's lab at NYU will allow SUGEN scientists to direct synthetic
chemistry efforts in a manner that relies upon information derived from models
that use SUGEN compounds in association with the catalytic core of TKs. With
this information in hand, the Company believes that the lead optimization
process can be pursued in a more rational manner since chemistry efforts will be
better directed. In this regard, SUGEN is collaborating with ArQule, Inc.
("ArQule") in certain of its programs, in order to use ArQule's combinatorial
chemistry technology to rapidly synthesize large numbers of analog compounds
around SUGEN's lead compounds, using crystallography information to direct these
efforts. The crystallographic analysis also provides a rationale to identify
novel chemical templates that would provide a cache of novel compounds with
application to the inhibition of TKs and STKs with broad application.
The Company believes that its ability to improve potency and
specificity in the early stages of drug discovery process and pharmacologic
features in the later stages of lead optimization may reduce the incidence and
severity of side effects and thus may reduce the cost, time and risk associated
with bringing potential products to market.
Preclinical Development
Wherever possible, SUGEN's in vitro and animal models utilize cell
lines, reagents and techniques developed during target validation; therefore,
the appropriateness of the model system is already known prior to drug testing.
In addition, many other tools used during target validation are used again at
this stage of testing. Typically, additional cell lines and animal models will
need to be developed in order to enable the accurate assessment of a compound's
target-specific activity in an in vivo environment.
Product Development Programs
The breadth of involvement of TKs, TPs, STKs and their signalling
pathways in biological functions makes it impractical for the Company to
establish drug discovery programs in all disease areas in which opportunities
may emerge. SUGEN currently is focusing on disease areas that represent
significant market opportunities and where the underlying science is relatively
mature. Therefore, SUGEN concentrates its drug development resources on cancer,
diabetes and psoriasis, with additional focused efforts on cardiovascular,
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immunologic and neurologic disorders. The Company believes that these disease
areas offer opportunities for the development of novel pharmaceuticals that will
represent major advances in efficacy and safety over currently available
therapies.
<TABLE>
The following table outlines SUGEN's research and development programs.
Certain of these programs are being pursued independently, while others are
being undertaken with SUGEN's collaborators.
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Program Indication Status (1) Rights
Oncology
- --------------------------------------------------------------------------------------------------------------------
SU101
<S> <C> <C> <C>
PDGF TK Antagonist Malignant glioma and other Phase I/II, Phase II SUGEN
solid tumors
- --------------------------------------------------------------------------------------------------------------------
Flk-1 TK Antagonist Angiogenesis inhibition Preclinical SUGEN
- Solid tumors
- --------------------------------------------------------------------------------------------------------------------
GRB2 Antagonist Multiple TK-driven tumors Lead compounds SUGEN
- --------------------------------------------------------------------------------------------------------------------
Pan-Her Antagonist Breast, ovarian, gastric, lung Lead compounds ASTA Medica
(formerly Her2 Antagonist) head and neck, prostate cancers Europe and South
America
SUGEN
United States and
rest of world
- --------------------------------------------------------------------------------------------------------------------
Orally available PDGF TK Solid tumors Lead compounds SUGEN
Antagonists
- --------------------------------------------------------------------------------------------------------------------
Raf Antagonist Pancreatic, bladder cancers Lead compounds ASTA Medica
Europe and South
America
SUGEN
United States and
rest of world
- --------------------------------------------------------------------------------------------------------------------
Met TK Antagonist Stomach, colorectal and lung Screening SUGEN
cancers
- --------------------------------------------------------------------------------------------------------------------
Five undisclosed cancer targets Certain major cancers Research and screening Zeneca
- --------------------------------------------------------------------------------------------------------------------
Other Programs
- --------------------------------------------------------------------------------------------------------------------
SU5271 Psoriasis Phase I SUGEN
EGF TK Antagonist
- --------------------------------------------------------------------------------------------------------------------
Flk-1 TK Antagonist Angiogenesis inhibition in Lead compounds Allergan
(and other targets) ophthalmology
- Diabetic Retinopathy
- Macular Degeneration
- --------------------------------------------------------------------------------------------------------------------
PDGF TK Antagonist Cardiovascular diseases Lead compounds SUGEN
(and other targets)
- --------------------------------------------------------------------------------------------------------------------
Insulin TP Antagonist Diabetes Lead compounds SUGEN
Type I/Type II
- --------------------------------------------------------------------------------------------------------------------
Neurology targets Neurodegenerative diseases Research, screening SUGEN
and lead compounds
- --------------------------------------------------------------------------------------------------------------------
Immunology targets Immune suppression, asthma Research and screening SUGEN
- --------------------------------------------------------------------------------------------------------------------
<FN>
- -----------
(1)"Research"............. Cloning and characterization of novel TKs, TPs,
STKs and related downstream signalling
molecules (Target Identification) and
validation of the role, if any, of those
molecules in a given disease (Target
Validation).
"Screening"............ Screening to identify lead compounds.
"Lead Compounds"....... Evaluating drug leads and/or natural product
extracts in relevant in vitro cellular models
including genetically engineered cell lines, as
well as ex vivo human tissues and in vivo
animal models.
"Preclinical".......... Pharmacology and toxicology testing in
preclinical models, drug formulation and
manufacturing scale-up to gather necessary data
to comply with applicable regulatory protocols
prior to submission of an IND with the FDA.
See "Business Risks" for a discussion of certain risks related to the
development of potential products.
</FN>
</TABLE>
9
<PAGE>
Cancer
Many of the cancers that SUGEN's programs are addressing have patient
subsets with extremely poor prognosis and no alternative for effective
treatment. For example, in certain cancers of the brain, breast, ovary and
pancreas, patient subsets can be defined in advance for which the average
survival time is short. By focusing on these patients initially, the Company
believes that it may be able to demonstrate statistically significant efficacy
with relatively small patient numbers and possibly shortened trial duration if
the compounds prove to be active.
SU101/PDGF TK Antagonist. SU101 is a small synthetic molecule which inhibits the
PDGF TK signalling pathway. PDGF is a growth factor ligand that stimulates the
growth of a variety of cell types through binding to the PDGF TK. The PDGF TK
was first cloned by a group of collaborators led by Dr. Ullrich in 1983.
Imbalances in the PDGF TK signalling pathway have been implicated by SUGEN and
others in subsets of several cancers including brain, ovarian, prostate, lung
and melanoma.
To expedite the commercialization of SU101, the Company is focusing its
initial development efforts on malignant glioma, a highly aggressive brain
tumor, and selected other solid tumor patient populations with very poor
prognosis. A subset of each of these cancers appears to be correlated with
aberrant PDGF TK signalling. Malignant glioma patients and refractory ovarian
patients have a mean survival time of approximately nine months and less than 12
months, respectively. Given the poor prognosis for these patients, the Company
believes that establishing clinical efficacy may not require large trials if the
compound is active.
In December 1994, the Company filed its first IND application with FDA for
SU101, a platelet-derived growth factor receptor ("PDGF TK") signalling
antagonist. The Company currently is sponsoring several Phase I/II and Phase II
clinical trials. As of March 3, 1997 over 100 patients have been treated with
SU101.
SUGEN believes SU101 may have applications in other cancers that
involve aberrant PDGF TK signalling. The PDGF TK also appears to be involved in
both restenosis of blood vessels after clearance by angioplasty, and more
broadly in atherosclerosis. The Company is currently in discussions with
potential corporate partners regarding cardiovascular applications of PDGF TK
antagonists. There can be no assurance that the Company will be able to conclude
a cardiovascular collaboration on acceptable terms or at all.
The Company has filed patent applications in the United States and
abroad claiming the method of treating PDGF TK driven cancers with SU101. While
the Company believes at this time that it will receive method of use patent
protection on SU101, there can be no assurance that any such patent protection
will be issued. In March 1997, the U.S. patent office issued to SUGEN a patent
on the formulation of SU101. Patents have been issued in the United States to a
large pharmaceutical company covering the use of leflunomide and structurally
related compounds for the treatment of cancer. The Company presently does not
know if commercialization of SU101 will infringe these patents but believes that
these patents may be subject to claims of invalidity as they relate to SU101.
Flk-1 TK Antagonist. Formation of the body's network of blood vessels, or
angiogenesis, occurs throughout early human development. This process generally
stops once a person reaches adulthood. Exceptions include wound healing and
during the menstrual cycle. Angiogenesis is re-triggered in adults, however,
during certain pathological conditions including tumor formation and metastasis,
and in certain ophthalmic disorders, including diabetic retinopathy and macular
degeneration. The pharmaceutical industry has long sought inhibitors of
angiogenesis for cancer because, theoretically, inhibiting angiogenesis would
starve tumors with few side effects. The potential markets for such a product
include all patients with solid tumors where an angiogenesis inhibitor could be
an important adjunctive therapy, and in patients with metastatic disease.
SUGEN and its collaborators have identified the Flk-1 TK as a receptor
VEGF and as a major regulator of angiogenesis. Experiments in mice have
confirmed that eliminating Flk-1 TK activity effectively disables the ability of
the majority of tumors to stimulate formation of blood vessels to nourish
themselves, resulting in inhibition of tumor growth. Most recently, the Company
has identified several small molecule inhibitors of the Flk-1 receptor that meet
its preclinical profile for an IND candidate in this program, and the Company
has proceeded into pharmacology and pharmaceutical development.
The Company has established an exclusive research and licensing
agreement with the MPP to support the work of Dr. Werner Risau, a SUGEN
consultant and a director of MPP, and his laboratory. Dr. Risau is one of the
leading researchers in the field of angiogenesis. In collaboration with the
laboratories of Dr. Risau and Dr.
10
<PAGE>
Ullrich, SUGEN is conducting further studies into the mechanisms of
angiogenesis, including the identification of additional TK and TP related
signalling pathways involved in angiogenesis.
GRB2 Antagonist. Growth factor receptor binding protein 2 ("GRB2"), a downstream
signalling adaptor molecule, was originally cloned by Dr. Schlessinger's
laboratory. GRB2 has been shown to be an essential element in the signal
transduction pathway of many TKs, particularly as a link between TKs and Ras.
(See "Raf Antagonist" below). SUGEN is investigating the role of GRB2 in linking
TK signalling to Ras activation in certain TK induced cancers, with the belief
that inhibition of GRB2 might be of therapeutic benefit for a broad range of
cancers typified by an activation of the TK-Ras pathway.
SUGEN has developed proprietary assays for high throughput screening
for GRB2 inhibitors and has now identified a novel class of signal transduction
inhibitors that act by blocking the function of the GRB2 adaptor protein. In
vitro studies indicate that SUGEN's GRB2 inhibitors act as cytostatic agents,
causing cancerous cells to cease multiplying or enter programmed cell death
(apoptosis). Preliminary in vivo studies indicate efficacy in tumor growth
inhibition.
Pan-Her Antagonist (formerly Her2 Antagonist). Her2 is a TK, first cloned by Dr.
Ullrich, which is believed to play an important role in certain aggressive
breast, ovarian, gastric and lung cancers. Monoclonal antibodies targeting Her2,
including one developed by Dr. Ullrich, are currently in human clinical trials
by others for certain cancers. While the Company believes that these trials may
serve to validate the concept of targeting aberrant TKs in cancer, SUGEN
believes that a small molecule inhibitor of Her2 which also blocks the closely
related Her1 and Her4 receptors (thus, a Pan-Her Antagonist), has the potential
to be a more attractive therapy. SUGEN believes it has identified a number of
highly potent and specific small molecule inhibitors of Pan-Her. The Company is
currently testing several of these molecules in animal models. The Company is
pursuing its Pan-Her Antagonist program in collaboration with ASTA Medica.
Orally active PDGF TK Antagonist. SUGEN is committed to developing an orally
active small molecule inhibitor of the PDGF TK signalling pathway. From a
commercialization standpoint, an orally active compound may be complementary to
SU101 in that it may be developed as a chronic oral dosage form. The Company
currently has several small molecule inhibitors of the PDGF TK signalling
pathway which in in vivo animal studies appear to be orally available and may
have the potential to treat numerous PDGF TK driven proliferative disorders,
especially cancers. The Company has delayed commencement of clinical trials with
respect to SU102, one of these small molecule inhibitors, while it evaluates
safety, efficacy and pharmacokinetic parameters of certain alternative
compounds.
Raf Antagonist. Raf, an STK, is a downstream signalling molecule through which
numerous signalling pathways have been found to converge. Raf is known to
interact with the oncogene Ras, and is required in order for Ras to relay its
signals. The Ras oncogene has long been known to play an integral role in
certain cancers, and may be involved in over 20% of all tumors including
approximately 90% of pancreatic tumors. Moreover, Ras has drawn the attention of
the pharmaceutical industry for many years because of its frequent mutational
activation in tumor cells. However, since its biochemical activity and upstream
activators were not well defined, the search for Ras inhibitors has proved
difficult.
Dr. Ulf Rapp, Director of Molecular Biology at the University of
Wurzburg, Germany, a SUGEN consultant and the discoverer of Raf, has
demonstrated that inhibition of Raf blocks the tumor forming potential of Ras.
SUGEN has developed proprietary Raf-based assays and is screening for small
molecule inhibitors of Raf. The Company believes that drugs that inhibit Raf
signalling may arrest tumors driven by excessive Ras activity. The Company is
pursuing its Raf Antagonist program in collaboration with ASTA Medica.
Met TK Antagonist. Recent reports have shown that overexpression of Met TK may
be implicated in a significant portion of tumors of the lung, stomach and colon.
Moreover, Met TK may play a role in the metastasis of solid tumors. SUGEN has
recently completed target validation studies on Met TK and has commenced
screening against this target.
Psoriasis
Psoriasis is a chronic skin disorder that affects approximately four
million people in the United States, and annual treatment costs in this country
are estimated at over $1.5 billion. There are few currently available drugs for
this disease that offer satisfactory efficacy and safety. Hyperproliferation of
keratinocytes contributes to
11
<PAGE>
psoriasis, and work by SUGEN and others has demonstrated that EGF TK signalling
is required for the growth of keratinocytes. SUGEN's work in psoriasis is based
in part on research done by its collaborators at HUJ.
SU5271/EGF TK Antagonist. SUGEN filed an IND application in late 1996
with FDA for the clinical testing of SU5271 in the treatment of psoriasis.
SU5271 is a synthetic small molecule signal transduction inhibitor that blocks
keratinocyte growth. Hyperproliferating keratinocytes are a major constituent of
psoriatic lesions which can be blocked by selectively inhibiting signalling of
the EGF Receptor. The Company has initiated a Phase I study to evaluate the
safety of the topical use of SU5271 in psoriatic patients at Mount Sinai
Hospital in New York, New York.
SU5271, a potent and highly selective inhibitor of EGF-R signalling,
represents the first extension of SUGEN's drug discovery platform into the field
of dermatology. SUGEN received an exclusive, worldwide license from Zeneca for
the dermatologic uses of SU5271 and has also filed its own method of treatment
and other patent claims with respect to this compound.
Angiogenesis Inhibition in Ophthalmology
A number of ophthalmological disorders involve neovascularization of
different regions of the eye. Since Flk-1 TK is known to be important in other
neovascularization processes (such as in tumors), it may also play a crucial
role in ocular neovascularization. Thus, Flk-1 TK inhibitors might be
therapeutically beneficial for treating ophthalmic disorders. In October 1996,
the Company signed a collaboration agreement with Allergan to identify, develop
and commercialize novel angiogenesis inhibitors for the treatment of ophthalmic
diseases. Target validation strategies are now being initiated for Flk-1 TK and
other angiogenesis targets.
Diabetes
Both Type I and Type II diabetes are characterized by pathologically
high levels of blood glucose due to lack of efficient cellular uptake and
metabolism of glucose. Type I diabetics produce low levels of insulin and is
thought to be caused by the autoimmune destruction of the pancreatic cells that
make insulin. In contrast, Type II diabetics often produce elevated levels of
insulin, although this insulin does not seem to have sufficient effect. All Type
I and some Type II diabetics are treated with insulin. The long-term side
effects of diabetes and of insulin therapy can be severe.
Dr. Ullrich was the first to clone both insulin and the TK receptor to
which insulin binds. In a normal state, the body secretes insulin which in turn
binds to the insulin TK. These events activate the insulin TK signalling
pathway, resulting in cellular uptake of glucose and glucose metabolism. In Type
I and Type II diabetes, the TK signalling mechanism is impaired. Certain TPs
appear to be involved in down regulating (dephosphorylating) the insulin TK
signalling pathway. SUGEN believes that a small molecule which specifically
inhibits these TPs may increase insulin TK signalling, thereby increasing
glucose uptake and metabolism.
The Company recently achieved reproducible proof of principle with its
lead phosphatase inhibitor compounds in animal models of Type II diabetes.
SUGEN's animal studies have demonstrated the ability of its initial lead
compounds to lower blood glucose levels with efficacy comparable to currently
available drugs. These compounds will serve as the starting point for medicinal
chemistry and drug development with the aim of producing an optimized drug
candidate to go forward into clinical development. Based on the mechanism of
action of these compounds and their oral availability, the Company believes that
it now has the opportunity to develop drug candidates for the treatment of both
Type II (non-insulin dependent) and Type I (insulin dependent) diabetes.
Neurobiology
TKs, TPs and their signalling pathways are known to play key roles in
the maintenance of the central and peripheral nervous systems. Several known
neurotrophic factors bind to TKs, and thereby regulate differentiation and
survival of neurons. SUGEN has identified novel TKs and TPs whose expression is
restricted to the nervous system and which may serve as therapeutic targets for
intervention in neurological diseases. SUGEN has also identified lead compounds
that act as selective TP inhibitors and are able to stimulate neuron
differentiation in in vitro models. This program is SUGEN's independent
continuation of the Amgen collaboration which was terminated in early 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
<PAGE>
Immunology
The role of TKs in the generation and maintenance of the human immune
system has been clearly established by a number of researchers in different
laboratories around the world. SUGEN has developed a number of immunology
related assays which it is screening against its library of compounds and
extracts. For example, ZAP-70, an intracellular TK, appears to be a primary
regulator of the generation and function of the T-lymphocyte cell population of
the immune system. This TK and other signal transduction molecules in the immune
system represent potential drug discovery targets for identifying novel
immunosuppressive and immuno-modulating drugs. The primary clinical indications
that the Company is focusing on in immunology are immune suppression and asthma.
Corporate and Clinical Development Collaborations
The Company's approach to corporate partnering is different in cancer
than it is in other disease areas. Since the Company's goal is to build a
vertically integrated cancer business in North America, it seeks to retain
market rights to its proprietary cancer programs with respect to the core North
American cancer market concentrated in the major cancer centers, but to find
European and Asian partners willing to contribute substantially to the
development effort in these programs as part of a geographical licensing
arrangement. The Company's collaboration with Zeneca in cancer (see below) is
the exception in that Zeneca gained world-wide rights to certain early stage
programs in return for significant funding of SUGEN's cancer research efforts.
Outside cancer, the Company aims to establish global collaborations focused on
specific disease areas with partners that have strong preclinical and clinical
development capabilities in the relevant disease area, in addition to the
ability to fund the programs.
Zeneca Limited
In January 1995, the Company established a research collaboration with
Zeneca. In this collaboration, Zeneca and the Company seek to discover and
develop novel small molecule signal transduction inhibitors that address certain
substantial oncology markets. The collaboration covers five undisclosed cancer
programs, but excludes all programs upon which the Company is currently building
its own cancer business. The two companies have agreed upon specific programs to
be included initially in the collaboration, with Zeneca supporting SUGEN's work
on these programs for an initial term of five years. SUGEN performs target
identification, target validation, assay development and screening for initial
leads, while Zeneca scientists will concentrate on lead identification and
optimization and preclinical and clinical development activities. Zeneca will
market collaboration products worldwide. SUGEN has also granted Zeneca a right
of first negotiation to expand this collaboration in order to encompass
additional SUGEN cancer research projects, but has specifically excluded the
cancer related projects that SUGEN already has in development.
Under the terms of the agreement, Zeneca purchased 789,141 shares of
Common Stock at a price of $15.84 per share. This $12.5 million equity
investment, combined with Zeneca's $7.5 million participation in SUGEN's October
1994 initial public offering, increased Zeneca's ownership in the Company to
approximately 20%. Zeneca has committed not to increase its holdings above this
level without the approval of SUGEN's Board of Directors. Zeneca participated in
the Company's September 1995 and October 1996 financings, purchasing an
additional 281,875 and 509,000 shares, respectively, of Common Stock in order to
maintain its ownership position. To date, Zeneca has invested approximately
$29.5 million in the Company's Common Stock.
In addition to its equity purchases and annual research funding, Zeneca
paid a $5 million technology set-up fee to SUGEN, and will make milestone
payments (which may be offset against royalties over time) tied to the progress
of compounds in the collaboration, and royalties on worldwide sales of any
collaboration products. SUGEN will also have the right to contribute to clinical
development costs on each program, thereby earning participation in the North
American profits from successful products coming out of such programs over and
above its royalty entitlement. Apart from this option, Zeneca will be
responsible for all development expenses. If a third party acquires 35% or more
of SUGEN's voting stock, Zeneca may terminate the collaboration agreement but
retain exclusive royalty-bearing license rights to any collaboration products
for which IND filing preparations are complete and a separate license agreement
has been executed. There can be no assurance that this collaboration will result
in any milestones being achieved or any products being successfully developed.
The agreement provides for SUGEN to be granted access to Zeneca's large
proprietary collection of characterized chemical structures for screening
against SUGEN's signal transduction targets, both within and
13
<PAGE>
outside this collaboration, subject to certain restrictions and a right of first
licensing negotiation on Zeneca's part. Zeneca has granted to SUGEN the right of
first negotiation to license from Zeneca oncology products (other than those
specifically excluded under the agreement) which Zeneca decides to license to a
third party.
In January 1996, SUGEN licensed a small molecule inhibitor of the EGF
TK from Zeneca. The compound, SU5271, was licensed from Zeneca as an extension
of the original collaboration agreement SUGEN signed with Zeneca. Under the
terms of this license agreement, Zeneca granted to SUGEN an exclusive, worldwide
license, with right to sublicense the compound, in exchange for milestone and
royalty payments. The agreement provides that SUGEN shall have overall control
and responsibility for the preclinical and clinical development, regulatory
strategy, process development and commercialization of SU5271.
National Cancer Institute
In August 1995, the Company entered into a Collaborative Research and
Development Agreement ("CRADA") with the National Cancer Institute (the "NCI")
under which the NCI may participate in the clinical development of SU101, the
Company's lead anti-cancer compound. In April 1996, SUGEN entered into a second
CRADA with the NCI for the application of SUGEN's proprietary transcript imaging
technology in order to identify the differences in expression patterns of signal
transduction genes that characterize each of the sixty tumor cell lines which
constitute the NCI's screening panel. Following this transcript imaging analysis
of the panel, the results will be correlated to the data generated over several
decades at the NCI from the screening each year of many thousands of compounds
and natural extracts against the panel. Interesting lead compounds from the
NCI's open repository collection will be tested in SUGEN's target-specific
signal transduction assays, and lead compounds from SUGEN will also be tested
against the NCI panel. SUGEN will have the option to license discoveries made
through this process for adoption into SUGEN's drug discovery programs.
ASTA Medica Aktiengesellschaft
In December 1995, SUGEN and ASTA Medica entered into a collaboration to
research, develop, manufacture, market and distribute potential oncology
products based upon the Company's Pan-Her Antagonist and Raf Antagonist
programs. Under the terms of the collaboration, ASTA Medica will undertake the
medicinal chemistry and pharmaceutical development work on SUGEN's drug
candidates, and will perform preclinical and clinical development in Europe in
accordance with FDA standards. ASTA Medica paid SUGEN a $4 million technology
set-up fee and is providing additional consideration in the form of contract
services for non-collaboration work. Additionally, ASTA Medica purchased $9
million of Common Stock at a price of $20.88 per share. In due course, SUGEN may
receive milestone payments in the two programs if they are successful. The
agreement provides for ASTA Medica to receive exclusive marketing rights to
collaboration products in Greater Europe (including countries and territories
located in the former Soviet Union) and South America, subject to an obligation
to pay royalties on net sales in such territories to SUGEN. ASTA Medica also has
the right of first offer to manufacture for SUGEN territories. SUGEN retains
market rights in the rest of the world, subject to a royalty payable to ASTA
Medica in most circumstances.
ASTA Medica is an international pharmaceutical company headquartered in
Germany. The Company's research and development is focused on cancer,
respiratory diseases/allergies, pain, inflammation and disorders of the central
nervous system/epilepsy. ASTA Medica employs approximately 5,900 individuals
worldwide. The company is owned by Degussa, a German manufacturer of fine
chemicals and precious metals.
Allergan
In October 1996, SUGEN entered into a collaboration with Allergan to
identify, develop and commercialize novel angiogenesis inhibitors for the
treatment of ophthalmic diseases. The collaboration will also establish a
comprehensive effort to identify and validate signal transduction targets for
choroidal and retinal neovascularization. Allergan will be the exclusive
corporate partner for SUGEN in ocular diseases of neovascularization and will
have exclusive rights to all ophthalmic uses of collaboration products and
collaboration know-how world-wide. In return, Allergan paid SUGEN a $2 million
initial fee for past research services and will fund collaboration research and
drug discovery at SUGEN for at least three years. Allergan initially purchased
$4 million of Common Stock at $20.88 per share and purchased an additional
250,000 shares of Common Stock at $12.00 per share in SUGEN's October 1996
follow-on offering. SUGEN will also receive payments upon achievement of certain
milestones and royalties with respect to worldwide sales of collaboration
products. In addition, SUGEN will have the right to contribute to clinical
development costs on each program, thereby earning participation in the North
American and European profits from successful products coming out of
14
<PAGE>
such programs over and above its royalty entitlement. Apart from this option,
Allergan will be responsible for all development expenses.
Research Collaborations
SUGEN's scientific founders are Dr. Joseph Schlessinger, Chairman of
the Department of Pharmacology at NYU, and Dr. Axel Ullrich, Director of the
Department of Molecular Biology at MPI in Martinsreid, Germany. In the fall of
1991, the Company entered into research collaboration agreements with both
institutions. More recently the Company has established additional research
collaborations in the target identification and screening areas. Overall,
SUGEN's collaborations encompass over 150 researchers, the majority of whom are
with MPI, MPP or NYU.
New York University Medical Center
In September 1991, SUGEN entered into a research and license agreement
with NYU granting the Company an exclusive worldwide license to the commercial
uses of all the TK and TP technology being developed under the leadership of Dr.
Schlessinger. The research program being conducted at NYU centers on an
investigation of the mechanisms underlying the action of TKs and TPs and their
physiological role, as well as identifying, isolating and cloning new TKs and
TPs and the components of the signal transduction pathways emanating from these
proteins. The research program is scheduled to expire in 1997, but is expected
to be extended in modified form for additional periods of time. SUGEN's license
to technology developed before or during the research program will survive
indefinitely unless NYU terminates the agreement upon insolvency of the Company
or due to a material breach by the Company. Upon such termination of the
agreement, NYU will own the rights to the technology it has developed under the
agreement. The Company is obligated to pay royalties to NYU on sales of any
products using the NYU technology. As part of this arrangement, NYU purchased
200,000 shares of SUGEN Common Stock at the Company's formation.
Max-Planck Society
SUGEN has formed research collaborations with two institutes of the
Max- Planck Society in Germany. These collaborations include licenses from
Garching Innovation GmbH ("Garching"), the licensing arm of the Max-Planck
Society.
Max-Planck-Institut fur Biochemie ("MPI"). The Company entered into a research
and license agreement with MPI and Garching which expires in 1997 but is
expected to be extended in modified form. This agreement grants SUGEN an
exclusive worldwide license to the commercial uses of all the TK and TP
technology being developed under the leadership of Dr. Ullrich. The scope of the
research program includes identification, isolation and cloning of novel TKs and
TPs, characterization of signal transduction pathway components and
investigation of the normal biological role of these proteins as well as their
role in disease. SUGEN's license to technology developed before or during the
research program will survive indefinitely unless MPI terminates the agreement
upon insolvency of the Company or due to a material breach by the Company. Upon
such termination of the agreement, MPI will own the rights to the technology it
has developed under the agreement. As with the NYU agreement, the Company is
obligated to pay royalties on sales of any products using this technology. As
part of this arrangement, MPS currently owns 200,000 shares of SUGEN Common
Stock purchased at the Company's formation.
Max-Planck-Institut fur Physiologische und Klinische Forschung (MPP). In October
1993, SUGEN entered into an agreement with MPP and Garching to support the work
of Dr. Werner Risau, a leading researcher in the area of angiogenesis. This
agreement grants SUGEN the exclusive worldwide right to commercialize Dr.
Risau's research on the inhibition of angiogenesis, vasculogenesis, vascular
permeability, chemotaxis and neurite outgrowth. This research collaboration will
terminate in October 1999. SUGEN's license to technology developed before or
during the research program will survive indefinitely unless MPP terminates the
agreement upon insolvency of the Company or due to a material breach by the
Company. Upon termination of the agreement, MPP will own the rights to the
technology it has developed under the agreement. The Company is obligated to pay
royalties on sales of any products embodying this technology.
The Hebrew University of Jerusalem
SUGEN is the exclusive licensee of research being carried out by Dr.
Alexander Levitzki at the HUJ under an agreement entered into in September 1993
and amended in March 1995 and May 1996. The Company's
15
<PAGE>
license includes exclusive rights in certain fields to a series of issued
patents and patent applications and other proprietary know-how covering
synthetic small molecule TK inhibitors, including compounds and methods of
treatment, as well as all new compounds which result from the ongoing work of
Dr. Levitzki's team at the HUJ during the research program. SUGEN's research
scientists work closely with Dr. Levitzki and the chemists in his laboratory,
providing activity data on compounds, which in turn supports the iterative
process of lead optimization. SUGEN's rights to the licensed products that are
of continued interest to the Company survive, subject to certain diligence
requirements, upon expiration of the research period or termination for
convenience. SUGEN retains rights to all the licensed products should the
agreement be terminated due to a breach by or insolvency of HUJ. Upon
termination of the agreement due to insolvency of the Company or due to a breach
by the Company, HUJ will own the rights to the technology developed under the
agreement and the Company will be obligated to return all material relating to
the technology. The Company is obligated to make milestone payments and pay
royalties on any sales of licensed products. This research program terminates in
June 1997 and is extendible by the Company for additional periods.
In addition, SUGEN has also entered into sponsored research and
exclusive license agreements with HUJ providing SUGEN with commercial rights to
compounds emanating from programs focused on clinical development of tyrosine
kinase inhibitors in therapeutic areas outside SUGEN's main areas of focus. The
aim of these programs is to develop small molecules for the treatment of
psoriasis and human papilloma virus infection. The sponsored research programs
are currently scheduled to continue through September 1997. The programs require
120 days notice for cancellation. The contracts provide for limitations on the
amount payable by SUGEN for sponsored research under all of these programs after
notice of cancellation. SUGEN's rights to the licensed products that are of
continued interest to the Company survive, subject to certain diligence
requirements, upon expiration of the research period or termination for
convenience. SUGEN retains rights to all the licensed products should the
agreement be terminated due to a breach by or insolvency of HUJ.
ArQule
In September 1996, SUGEN entered into a collaboration agreement with
ArQule to develop a proprietary collection of compounds designed to target
binding sites common to many signal transduction molecules found in
cell-signalling pathways. SUGEN provides lead chemical structures and new
chemical structure scaffolds to enable ArQule to use its Directed ArrayTM
combinatorial synthesis technologies to build a novel collection of compounds
with potentially broad applications for the pharmaceutical industry. SUGEN
retains exclusive rights to this collection with respect to TK and STK targets,
subject to certain payments and royalties to ArQule. ArQule retains
responsibility for commercializing the collection for targets in other areas,
subject to royalty-sharing arrangements with SUGEN.
Other Sources of Materials for Screening
The Company has entered into a number of agreements designed to obtain
novel biochemical and biological compounds and extracts for screening in its
proprietary assay systems. These agreements cover a broad range of chemical
entities from sources across the world. SUGEN also has an agreement with
Panlabs, Inc. of Bothell, Washington for the supply of microbial and fungal
extracts and the isolation and identification of active components from these
extracts. The original agreement was entered into in March 1993, and is
renewable for successive one year periods. The agreement most recently was
amended in early 1997, under which Panlabs will supply the Company with a
significant number of extracts from which the Company can select a portion to be
designated as "selected organisms." SUGEN will own all rights to the selected
organisms and the active compounds produced by them, including any derivatives.
Panlabs is supplying other companies with similar extracts under similar
conditions. In June 1995, SUGEN and Toyama Prefectural University of Tokyo
initiated a collaboration to discover new drugs for the treatment of cancer and
other diseases by inhibiting TKs and TPs and related molecules. A research team
headed by Professor Toshikazu Oki in the University's Biotechnology Research
Center is providing to SUGEN compounds from Toyama's microbial strain libraries
for testing of potential biological activity. In July 1996, SUGEN and the
Institutes of Botany and Microbiology of the Chinese Academy of Sciences
initiated exclusive collaborations to discover novel signal transduction
inhibitor candidates and pharmacophores. The Institute of Botany and the
Institute of Microbiology are providing to SUGEN extracts from the Institutes'
plant and microbial collections for testing of potential biological activity
against SUGEN's signal transduction targets. Other SUGEN compound sources
include natural product libraries from around the globe, including microbial,
fungal and plant extracts, as well as additional sources of small organic
compounds.
16
<PAGE>
Patents and Proprietary Technology
The Company's success will depend in part on its ability to obtain
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others, both in the United States and in other countries.
Patent matters in biotechnology, and in particular with respect to receptors as
screening tools and/or the DNA encoding them, are highly uncertain and involve
complex legal and factual questions. Accordingly, the availability of and
breadth of claims allowed in biotechnology and pharmaceutical patents cannot be
predicted. As of March 3, 1997, SUGEN held exclusive rights to at least 11
issued U.S. patents and had filed and/or held exclusive licenses to
approximately 132 United States patent applications, as well as related foreign
patent applications. While the Company believes at this time that it will
receive method of use patent protection on SU101, there can be no assurance that
any such patent protection will issue. There can be no assurance that the
Company will develop products or processes that are patentable, that patents
will issue from any of the pending applications, or that claims allowed will be
sufficient to protect the Company's technology. There can be no assurance that
the Company's patents, if issued, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company. Competitors have been
issued patents, may have filed applications or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company or which could block the Company's efforts to obtain patents.
A number of pharmaceutical companies, biotechnology companies,
universities and research institutions have filed patent applications or
received patents in the field of TKs, TPs and STKs and related downstream
signalling molecules. The commercial success of the Company will depend in part
on SUGEN not infringing patents issued to competitors and not breaching the
technology licenses upon which any Company products are based. The Company in
the past has been, and from time to time in the future may be, notified of
claims that the Company may be infringing patents or other intellectual property
rights owned by third parties. Certain patent applications or patents of the
Company's competitors may conflict with the Company's patents and patent
applications, and SUGEN is aware that other companies have filed patent
applications and have been granted patents in the United States and other
countries claiming subject matter potentially useful or necessary to the
Company. Such conflicts could result in a significant reduction in the scope of
the coverage of the Company's issued or licensed patents. In addition, if
patents are issued to other companies which contain competitive or conflicting
claims and such claims are ultimately determined to be valid, the Company may be
required to obtain licenses to these patents or to develop or obtain alternative
technology. If any licenses are required, there can be no assurance that the
Company will be able to obtain any such license on commercially favorable terms,
if at all, and if these licenses are not obtained, the Company might be
prevented from pursuing the development of certain of its potential products.
The Company's breach of an existing license or failure to obtain a license to
any technology that it may require to commercialize its products may have a
material adverse impact on the Company. Litigation, which could result in
substantial costs to the Company, may also be necessary to enforce any patents
issued or licensed to the Company or to determine the scope and validity of
third party proprietary rights. There can be no assurance that the Company's
issued or licensed patents would be held valid by a court of competent
jurisdiction. Even if the outcome of such litigation is favorable, the cost of
such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company. An adverse
outcome could subject the Company to significant liabilities to third parties,
require disputed rights to be licensed from third parties or require the Company
to cease using such technology, any of which could have a material adverse
effect on the Company. If competitors of the Company prepare and file patent
applications in the United States that claim technology also claimed by the
Company, the Company may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company.
SU101, a compound generally known by the name leflunomide, is a member
of the isoxazole family of compounds. Leflunomide was discovered more than 15
years ago. A large pharmaceutical company holds a number of United States and
foreign patents and has filed applications in the United States and abroad
covering compositions of matter and pharmaceutical uses of leflunomide and
structurally related compounds. SUGEN believes its research and development and
its clinical trials with SU101 in the United States are protected from claims of
infringement of the United States patents because such activities are being
conducted solely for uses reasonably related to development and submission of
information to the FDA for regulatory approval. Although the Company cannot
predict whether or when SU101 will be approved by the FDA for marketing in the
United States, it believes that certain of the pharmaceutical company's patents
in the United States may have expired when marketing does begin and that the
remaining United States patents are either invalid or will not be infringed by
the manufacture and sale of SU101. However, the Company has learned that
additional patents have been issued in the United States to the pharmaceutical
company covering the use of leflunomide and structurally related
17
<PAGE>
compounds for the treatment of named cancers. The Company presently does not
know if commercialization of SU101 will infringe these additional patents but
believes that the additional patents may be subject to claims of invalidity as
they relate to SU101. If the additional patents were determined to be valid with
respect to SU101, the Company may be required to obtain a license from the
pharmaceutical company in order to manufacture and sell SU101 in the United
States. The Company presently does not intend to commercialize SU101 outside the
United States. There can be no assurance that SU101 will not infringe the issued
patents, that the term of the pharmaceutical company's other existing patents
will not be extended, that the claims of the pharmaceutical company's pending
patent applications will not be modified prior to issuance so as to enhance
their validity or scope, or that a court will agree with the Company's beliefs
regarding invalidity and non-infringement of the patents. To date, the
pharmaceutical company has not threatened or commenced legal proceedings against
the Company concerning possible patent infringement. There can be no assurance
that the pharmaceutical company in the future will not assert claims against
SUGEN or that the Company could reach agreement with the pharmaceutical company
for a license for SU101 upon favorable terms or at all, if required. The
inability of the Company to resolve this matter on favorable terms or at all
could have a material adverse effect on the Company. In any event, the assertion
of such claims, even if resolved favorably to the Company, could result in
substantial costs to the Company.
SUGEN also relies on trade secrets to protect technology, especially
where patent protection is not believed to be appropriate or obtainable. SUGEN
attempts to protect its proprietary technology and processes in part by
confidentiality agreements with its employees, consultants and certain
contractors. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that the Company or its consultants or
research collaborators use intellectual property owned by others in their work
for the Company, disputes may also arise as to the rights in related or
resulting know-how and inventions.
Competition
SUGEN is engaged in a rapidly changing field. Other products and
therapies that will compete directly with the products that the Company is
seeking to develop and market currently exist or are being developed.
Competition from fully integrated pharmaceutical companies and more established
biotechnology companies is intense and is expected to increase. Most of these
companies have significantly greater financial resources and expertise in
research and development, manufacturing, preclinical and clinical testing,
obtaining regulatory approvals and marketing than the Company. Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and established biotechnology companies.
Many of these competitors have significant products that have been approved or
are in development and operate large, well funded research and development
programs. Academic institutions, governmental agencies and other public and
private research organizations also conduct research, seek patent protection and
establish collaborative arrangements for products and clinical development and
marketing. These companies and institutions compete with the Company in
recruiting and retaining highly qualified scientific and management personnel.
In addition to the above factors, SUGEN will face competition based on product
efficacy and safety, the timing and scope of regulatory approvals, availability
of supply, marketing and sales capability, reimbursement coverage, price and
patent position. There is intense competition for access to libraries of
compounds to use for screening and any inability of the Company to maintain
access to sufficiently broad libraries of compounds for screening potential
targets would have a material adverse effect on the Company. There is no
assurance that the Company's competitors will not develop more effective or more
affordable products, or achieve earlier patent protection or product
commercialization than the Company.
Government Regulation
The manufacturing and marketing of the Company's potential products and
its ongoing research and development activities are subject to extensive
regulation by numerous governmental authorities in the United States and other
countries. Failure to comply with applicable FDA or other applicable regulatory
requirements may result in criminal prosecution, civil penalties, recall or
seizure of products, total or partial suspension of production or injunction, as
well as other regulatory action against the Company or its potential products.
Prior to marketing in the United States, any drug developed by the
Company must undergo rigorous preclinical and clinical testing and an extensive
regulatory clearance process implemented by the FDA under the federal Food, Drug
and Cosmetic Act. Satisfaction of such regulatory requirements, which includes
satisfying the FDA that the product is both safe and effective, typically takes
several years or more depending upon the type,
18
<PAGE>
complexity and novelty of the product and requires the expenditure of
substantial resources. Preclinical studies must be conducted in conformance with
the FDA's good laboratory practice ("GLP") regulations. Before commencing
clinical investigations in humans, the Company must submit to and receive
approval from the FDA of an IND. There can be no assurance that submission of an
IND would result in FDA authorization to commence clinical trials. Clinical
testing must meet requirements for institutional review board oversight,
informed consent and good clinical practice requirements and is subject to
continuing FDA oversight. The Company does not have extensive experience in
conducting and managing the clinical testing necessary to obtain regulatory
approval. Clinical trials may require large numbers of test subjects.
Furthermore, the Company or the FDA may suspend clinical trials at any time if
they believe that the subjects participating in such trials are being exposed to
unacceptable health risks or if the FDA finds deficiencies in the IND or the
conduct of the trials.
Before receiving FDA clearance to market a product, the Company will
have to demonstrate that the product is safe and effective on the patient
population that will be treated. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory clearances. In addition, delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of product
development, clinical trials and FDA regulatory review. Similar delays also may
be encountered in foreign countries. There can be no assurance that even after
such time and expenditures, regulatory clearance will be obtained for any
products developed by the Company. If regulatory clearance of a product is
granted, such clearance will be limited to those disease states and conditions
for which the product is useful, as demonstrated through clinical studies.
Marketing or promoting a drug for an unapproved indication is prohibited.
Furthermore, clearance may entail ongoing requirements for postmarketing
studies. Even if such regulatory clearance is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA. Discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including costly recalls or even withdrawal of the
product from the market. There can be no assurance that any compound developed
by the Company alone or in conjunction with others will prove to be safe and
efficacious in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance.
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied for
at a national level, although within the European Community ("EC") certain
registration procedures are available to companies wishing to market a product
in more than one EC member state. If the regulatory authority is satisfied that
adequate evidence of safety, quality and efficacy has been presented, a
marketing authorization will be granted. This foreign regulatory approval
process includes all of the risks associated with FDA clearance set forth above.
Manufacturing
The Company has no manufacturing facilities and relies on other
manufacturers to produce its compounds for research and development, preclinical
and clinical purposes. The products under development by the Company have never
been manufactured on a commercial scale and there can be no assurance that such
products can be manufactured at a cost or in quantities necessary to make them
commercially viable. If the Company were unable to contract for a sufficient
supply of its compounds on acceptable terms, or if it should encounter delays or
difficulties in its relationships with manufacturers, the Company's preclinical
and clinical testing schedule would be delayed, resulting in delay in the
submission of products for regulatory approval or the market introduction and
subsequent sales of such products, which could have a material adverse effect on
the Company. Moreover, contract manufacturers that the Company may use must
adhere to current Good Manufacturing Practices regulations enforced by the FDA
through its facilities inspection program. If these facilities cannot pass a
pre-approval plant inspection, the FDA pre-market approval of the products will
not be granted.
Business Risks
The Company is at an early stage of development and must be evaluated
in light of the uncertainties and complications present in a biotechnology
company. The Company has been in existence only since 1991 and to date two drug
candidates (SU101 and SU5271) have entered human clinical testing. To achieve
profitable operations on a continuing basis, the Company, alone or with
collaborative partners, must successfully develop,
19
<PAGE>
manufacture, introduce and market its proposed products. Products, if any,
resulting from the Company's research and development programs are not expected
to be commercially available for a number of years, even if they are developed
successfully and proven to be safe and effective. Before obtaining regulatory
clearance for the commercial sale of any of its products under development, the
Company must demonstrate through preclinical studies and clinical trials that
the potential product is safe and efficacious for use in humans for each target
indication. The failure to adequately demonstrate the safety and efficacy of a
product under clinical development could delay or prevent regulatory clearance
of the potential product and could have a material adverse effect on the
Company. In addition, many of the Company's currently proposed products are
subject to development and licensing arrangements with the Company's
collaborators. Therefore, the Company is dependent on the research and
development efforts of these collaborators with respect to some of its proposed
products and is entitled only to a portion of the revenues, if any, realized
from the commercial sale of any of the potential products covered by the
collaborations in many jurisdictions. The Company has experienced significant
operating losses since its inception. The Company expects to incur significant
operating losses at least for the next several years and expects cumulative
losses to increase as the Company's research and development efforts, including
preclinical and clinical testing, are expanded. Substantially all of the
Company's revenues to date have been received pursuant to the Company's
collaborations. Should the Company or its collaborators fail to perform in
accordance with the terms of any of their agreements, any consequent loss of
revenue under the agreements could have a material adverse effect on the
Company's results of operations. The foregoing risks reflect the Company's early
stage of development and the nature of the Company's industry and potential
products. Also inherent at the Company's stage of development are a range of
additional risks, including manufacturing uncertainties, the Company's lack of
sales and marketing capabilities, competition, uncertainties regarding
protection of patents and proprietary rights, government regulation and
uncertainties regarding pharmaceutical pricing and reimbursement.
Facilities
SUGEN currently leases approximately 60,000 square feet of laboratory
and office space in Redwood City, California. The Company leases this space
under operating leases which last through November and December 1998.
Approximately 48,000 square feet of the laboratory and office space currently
under lease have three and five year renewal options at the end of the leases.
The Company believes that its current facilities plus anticipated additions are
sufficient to meet its needs for the next few years. The Company plans to expand
its facilities to support growth in its operations and will be evaluating
alternative space options. There can be no assurances, however, that such space
will be available on favorable terms, if at all.
Employees
As of March 3, 1997 , the Company had 160 full-time employees,
including a technical scientific staff of 120. The Company places an emphasis on
obtaining the highest available quality of staff. The Company has selected and
assembled a group of experienced scientists and managers with skills in a wide
variety of disciplines, including molecular biology, medicinal chemistry and
pharmaceutical development. None of the Company's employees are covered by
collective bargaining arrangements and management considers relations with its
employees to be good.
20
<PAGE>
Item 2. PROPERTIES
SUGEN currently leases approximately 60,000 square feet of laboratory and office
space in Redwood City, California. The Company leases this space under operating
leases which last through November and December 1998. Approximately 48,000
square feet of the laboratory and office space currently under lease have three
and five year renewal options at the end of the leases. The Company believes
that its current facilities plus anticipated additions are sufficient to meet
its needs for the next few years. The Company plans to expand its facilities to
support growth in its operations and will be evaluating alternative space
options. There can be no assurances, however, that such space will be available
on favorable terms, if at all.
Item 3. LEGAL PROCEEDINGS
SUGEN is not a party to any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
21
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since the Company's initial public offering of its common stock in October 1994,
the Company's Common Stock has traded on the Nasdaq Stock Market under the
symbol SUGN. The following table lists the high and low sales prices for the
Company's Common Stock for each quarter since October 1994. These prices do not
include retail markups, markdowns or commissions.
--------------------------------
High Low
-----------------------------------------------------------------------
1996
Fourth Quarter $ 14.50 $ 11.25
Third Quarter 12.75 9.38
Second Quarter 15.25 11.25
First Quarter 15.88 11.75
-----------------------------------------------------------------------
1995
Fourth Quarter 16.00 9.25
Third Quarter 13.88 6.88
Second Quarter 8.38 4.63
First Quarter 7.75 4.63
-----------------------------------------------------------------------
1994
Fourth Quarter (from October 4, 1994) $ 8.00 $ 4.75
-----------------------------------------------------------------------
As of March 14, 1997 there were approximately 235 holders of record of the
Company's Common Stock. On March 14, 1997, the last sale price reported on the
Nasdaq National Market System for the Company's Common Stock was $11.63 per
share.
The Company has not paid any dividends since its inception and does not intend
to pay any dividends on its Common Stock in the foreseeable future.
22
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
Statement of Operations Data:
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Contract revenue (1) $ 13,650 $ 13,843 $ 6,270 $ 5,470 $ 1,080
Costs and expenses:
Research and development 29,792 23,226 17,079 10,251 4,531
General and administrative 5,529 5,086 3,106 2,169 1,591
------------- ----------------- -------------- -------------- ------------
Total costs and expenses 35,321 28,312 20,185 12,420 6,122
------------- ----------------- -------------- -------------- ------------
Operating loss (21,671) (14,469) (13,915) (6,950) (5,042)
Other income and expense:
Interest income 2,481 1,988 529 339 131
Interest expense (691) (494) (278) (56) (45)
Gain on sale of investment
in Selectide Corporation - 1,006 - - -
------------- ----------------- -------------- -------------- ------------
Other income, net 1,790 2,500 251 283 86
------------- ----------------- -------------- -------------- ------------
Net loss $ (19,881) $ (11,969) $ (13,664) $ (6,667) $ (4,956)
============= ================= ============== ============== ============
Net loss per share ($1.81) ($1.32) ($4.15) ($3.89) ($3.00)
============= ================= ============== ============== ============
Shares used in computing net
loss per share 10,966 9,085 3,296 1,712 1,649
============= ================= ============== ============== ============
Pro forma net loss per share (2) ($2.22) ($1.39) ($1.37)
============== ============== ============
Shares used in computing pro
forma net loss per share (2) 6,143 4,786 3,618
============== ============== ============
Balance Sheet Data:
(in thousands)
December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------------- -------------- -------------- ------------
Cash, cash equivalents and
short-term investments $ 56,334 $ 53,253 $ 22,414 $ 16,984 $ 12,315
Total assets $ 61,936 $ 59,243 $ 28,455 $ 20,812 $ 15,306
Capital lease obligations -
non-current portion $ 2,938 $ 3,651 $ 2,087 $ 441 $ 291
Accumulated deficit $ (57,997) $ (37,964) $ (26,270) $ (12,451) $ (5,784)
Stockholders' equity $ 48,530 $ 43,441 $ 18,319 $ 13,230 $ 11,127
<FN>
(1) Includes amounts from related party
(2) Pro forma net loss per share information gives effect to the conversion of
all preferred stock outstanding from the date of issuance. See Note 1 of
Notes to Financial Statements.
</FN>
</TABLE>
23
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include the factors discussed below as well as the factors discussed
in other sections of this Annual Report. The Company undertakes no obligation to
release the results of any revision to these forward-looking statements which
may be made to reflect events or circumstances occurring after the date hereof
or to reflect the occurrence of unanticipated events.
Overview
SUGEN was founded in July 1991 to discover and develop small molecule
drugs that target specific cellular signal transduction pathways. These pathways
have been implicated in diseases such as cancer and diabetes as well as in
dermatologic, immunologic, cardiovascular and neurologic disorders. Through
December 31, 1996, substantially all of the Company's revenue has been earned
pursuant to collaborations with Zeneca, ASTA Medica, Allergan and Amgen. The
Company intends to pursue its drug discovery programs independently and in
collaboration with established pharmaceutical companies.
In January 1995, the Company established an oncology research
collaboration with Zeneca. The Company received a $5.0 million technology set-up
fee, receives annual research funding and will receive additional fees upon the
achievement of specified milestones. In addition, Zeneca purchased 789,141
shares of Common Stock at a price of $15.84 per share. In December 1995, the
Company established an oncology product development collaboration with ASTA
Medica. The Company received a $4.0 million technology set-up fee and will
receive additional fees upon the achievement of specified milestones as well as
additional consideration in the form of contract services for non-collaboration
work. In addition, ASTA Medica purchased 431,137 shares of Common Stock for $9.0
million, or $20.88 per share. In January 1996, the Company and Amgen terminated
their research collaboration one year prior to the scheduled expiration. In
connection with the termination, Amgen paid SUGEN $2.5 million, forgave amounts
previously advanced, and purchased from SUGEN, for $200,000, a warrant for the
purchase of 200,000 shares of Common Stock with an exercise price of $15.50 per
share. In addition, SUGEN repurchased 235,000 of the 387,878 shares of SUGEN
Common Stock held by Amgen at $11.48 per share. The termination arrangement
further provides that the Company will make royalty and certain other payments
to Amgen in the event that designated potential products are developed and
marketed. In October 1996, the Company established an ophthalmology research
collaboration with Allergan. The Company received a $2.0 million initial payment
for past research services, receives annual research funding and expects to
receive additional fees upon the achievement of specified milestones and
royalties on any product sales. In addition, Allergan purchased 191,571 shares
of Common Stock at a price of $20.88 per share.
In October and November 1996, the Company completed a follow-on
offering of 2,070,000 shares of Common Stock at a price of $12.00 per share. The
net proceeds to the Company were approximately $22.7 million. Zeneca purchased
509,000 shares and Allergan purchased 250,000 shares of Common Stock,
respectively, in the offering.
The Company has not been profitable since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
expansion of preclinical and clinical development activities as more of its
proprietary cancer-related programs progress toward and into the clinic. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. As of December 31, 1996, the Company's
accumulated deficit was $58.0 million.
Results of Operations
The Company's revenues for the years ended December 31, 1996, 1995 and
1994 were $13.7 million, $13.8 million and $6.3 million, respectively. Revenues
for the year ended December 31, 1996 included an up-front fee and contract
revenue from the Allergan collaboration, contract revenue from the Zeneca
collaboration, the recognition of the balance of the $4.0 million technology
set-up fee received in connection with the ASTA Medica collaboration and the
$4.3 million wind-down fee associated with the Amgen termination. The Company
recognizes revenues from set-up and wind-down fees as the related activities are
performed, which is generally over a twelve-month period or less. Through
December 31, 1996, the set-up and wind-down fees from the ASTA
24
<PAGE>
Medica and Amgen collaborations, respectively, had been fully recognized as
revenue. Going forward, the Company will not recognize any additional revenue
under the Amgen collaboration, and will recognize additional revenue under the
ASTA Medica collaboration only upon the achievement of specified milestones and
for contract services provided by ASTA Medica for non-collaboration work. As a
result, collaboration revenue will be lower in 1997 than in 1996 in the absence
of additional collaboration agreements during the year. The Company is actively
pursuing additional collaborations, but no assurance can be given as to the
ability of the Company to enter such collaborations on a timely basis or at all.
Revenues for 1995 included the recognition of a $5.0 million
non-recurring technology set-up fee received upon the execution of the
collaboration agreement with Zeneca and the partial recognition of the $4.0
million technology set-up fee received in connection with the ASTA Medica
collaboration. The increase in revenues in 1995 over the preceding year was
primarily due to revenue from the Zeneca collaboration.
Research and development expenses for the years ended December 31,
1996, 1995 and 1994 were $29.8 million, $23.2 million and $17.1 million,
respectively. The increase during 1996 was primarily due to higher personnel
related costs associated with the expansion of the Company's research and
development programs. In addition, the progression of clinical activities,
including expanded Phase I studies of the Company's lead anti-cancer compound,
SU101, contributed to higher expenses during 1996. Further, the advancement of
multiple programs through preclinical development, including activities
associated with the December 1996 filing of the Company's Investigational New
Drug ("IND") with the U.S. Food and Drug Administration ("FDA") for the clinical
testing of SU5271 in the treatment of psoriasis, led to higher expenses in 1996.
The increase during 1995 was also driven by expenses associated with additional
personnel dedicated to the Company's research and development programs. In
addition, the initiation of Phase I clinical activities contributed to the
growth in 1995 expenses. The Company expects that its research and development
expenses will continue to grow in future years due to the hiring of personnel,
additional preclinical studies, the progression of SU101 clinical trials, the
initiation of new clinical trials on additional drug candidates and pursuant to
requirements under the Company's anticipated future collaborations.
General and administrative expenses for the years ended December 31,
1996, 1995 and 1994 were $5.5 million, $5.1 million and $3.1 million,
respectively. The increase in 1996 was primarily due to additional
administrative staffing, the related recruiting and relocation expenses and
costs associated with the resignation of an officer. The increase in 1995 was
primarily due to increased administrative staffing, additional costs incurred in
connection with corporate development activities and higher expenses associated
with the Company's reporting requirements as a result of becoming a publicly
held company. The Company expects that its general and administrative expenses
will continue to increase in order to support the Company's research and
development efforts.
Interest income for the years ended December 31, 1996, 1995 and 1994
were $2.5 million, $2.0 million and $529,000, respectively. These increases were
due to higher investment balances arising primarily from issuances of the
Company's capital stock. Interest expense for the years ended December 31, 1996,
1995 and 1994 were $691,000, $494,000 and $278,000, respectively. These
increases were primarily due to the Company's continued use of capital lease
financing for equipment and property improvements related to the expansion of
its facilities. The Company expects that interest expense will continue to
increase in future years due to the continued use of capital lease financing for
equipment and facility improvements. A $1.0 million gain on the sale of the
Company's investment in Selectide Corporation was included in other income
during the twelve month period ended December 31, 1995.
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 in ownership" as described in Section 382 of the Internal Revenue
Code. Such a change in ownership may have arisen as a result of the Company's
initial public offering or subsequent sales of securities.
Liquidity and Capital Resources
The Company had cash, cash equivalents and short-term investments of
approximately $56.3 million at December 31, 1996 compared with approximately
$53.3 million at December 31, 1995. The increase in cash and investments during
the year ended December 31, 1996 was primarily due to the $27.4 million
generated from issuances of Common Stock, partially offset by the net loss for
the year, after adjustments for non cash items and the repurchase of the
Company's Common Stock from Amgen as discussed above.
25
<PAGE>
Through December 31, 1996, the Company's principal sources of financing
have been its initial and follow-on public offerings of Common Stock, placements
of the Company's Preferred and Common Stock and funds received under the
Company's corporate collaborations. The Company's current principal sources of
liquidity are its research and development collaborations with ASTA Medica,
Zeneca and Allergan, its cash, cash equivalents and short-term investments and
capital lease financing. The Company has a capital lease line of $3.5 million
available through June 1997 for the purchase of equipment and facility
improvements, of which $663,000 was available at December 31, 1996. In March
1997, the Company entered into a lease financing Commitment Letter for an
additional capital lease line in the amount of $3.5 million for the purchase of
equipment and facilities improvements.
The Company has entered into license and research agreements whereby
the Company funds research projects performed by others or in-licenses compounds
from third parties. Some of the agreements may require the Company to make
milestone and royalty payments. Under these programs, commitments for external
research funding are approximately $2.3 million in 1997. A number of these
agreements expire in late 1997. However, the Company anticipates renewing these
agreements which may increase future commitments of the Company. Most of these
commitments are cancelable within a three to six month period and limit the
amounts payable by the Company for sponsored research under the programs after
notice of cancellation by the Company.
From time to time, the Company evaluates potential investments in
complementary businesses, products or technologies. Currently, the Company is
considering modest investments in such complementary businesses during 1997. The
Company has no other present undertakings, commitments or agreements with
respect to investments in other businesses.
Net additions of equipment and leasehold improvements for the years
ended December 31, 1996, 1995 and 1994 were $1.7 million, $2.6 million and $2.4
million, respectively, which included $1.3 million, $2.6 million and $2.7
million, respectively, of equipment and leasehold improvements financed through
the Company's master lease agreements. In general, additions for 1996, 1995 and
1994 included facility expansion costs, the continued enhancement of the
Company's laboratory capabilities and the costs associated with the Company's
ongoing effort to maintain an up-to-date technology base. Additions in 1996 and
1995 also included a significant investment in state of the art computer
hardware and software to support the Company's genomics and bioinformatics
programs. Under these capital leases and certain operating lease arrangements,
the Company has lease commitments of $8.6 million through 2001. The Company
intends to fund future capital expenditures principally through lease financing
or other debt arrangements, although there can be no assurance that such
financing will be available. The Company expects that its capital additions for
1997 will be higher than that of the prior year primarily due to anticipated
facility improvements to its laboratory and office space. Accordingly, it is
expected that the Company's capital lease obligations and related interest
expense as well as its depreciation expense will increase in future periods.
The Company estimates that its existing capital resources, together
with facility and equipment financing, anticipated revenues from its current
collaborations and net income from investment activities, will be sufficient to
fund its planned operations into the second half of 1998. The Company
anticipates that the funds from future collaborations will extend this time
period. However, there can be no assurance that the Company will enter into any
such collaborations. In addition, there can be no assurance that the underlying
assumed levels of revenue and expense will prove accurate. Whether or not these
assumptions prove to be accurate, the Company will need to raise substantial
additional capital to fund its operations. The Company intends to seek such
additional funding through collaborative arrangements, public or private equity
or debt financings and capital lease transactions; however, there can be no
assurance that additional financing will be available on acceptable terms or at
all. If additional funds are raised by issuing equity securities, further
dilution to stockholders may result. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners, such
arrangements may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself. If adequate funds are not available,
the Company may be required to delay, reduce the scope of or eliminate one or
more of its research or development programs, which could have a material
adverse effect on the Company.
The Company is at an early stage of development and must be evaluated
in light of the uncertainties and complications present in a biotechnology
company. The Company has been in existence only since 1991 and to date two drug
candidates (SU101 and SU5271) have entered human clinical testing. To achieve
profitable operations on a continuing basis, the Company, alone or with
collaborative partners, must successfully develop, manufacture, introduce and
market its proposed products. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially available
for a number of years, even if
26
<PAGE>
they are developed successfully and proven to be safe and effective. Before
obtaining regulatory clearance for the commercial sale of any of its products
under development, the Company must demonstrate through preclinical studies and
clinical trials that the potential product is safe and efficacious for use in
humans for each target indication. The failure to adequately demonstrate the
safety and efficacy of a product under clinical development could delay or
prevent regulatory clearance of the potential product and could have a material
adverse effect on the Company. In addition, many of the Company's currently
proposed products are subject to development and licensing arrangements with the
Company's collaborators. Therefore, the Company is dependent on the research and
development efforts of these collaborators with respect to some of its proposed
products and is entitled only to a portion of the revenues, if any, realized
from the commercial sale of any of the potential products covered by the
collaborations in many jurisdictions. The Company has experienced significant
operating losses since its inception. The Company expects to incur significant
operating losses at least for the next several years and expects cumulative
losses to increase as the Company's research and development efforts, including
preclinical and clinical testing, are expanded. Substantially all of the
Company's revenues to date have been received pursuant to the Company's
collaborations. Should the Company or its collaborators fail to perform in
accordance with the terms of any of their agreements, any consequent loss of
revenue under the agreements could have a material adverse effect on the
Company's results of operations. The foregoing risks reflect the Company's early
stage of development and the nature of the Company's industry and potential
products. Also inherent at the Company's stage of development are a range of
additional risks, including manufacturing uncertainties, the Company's lack of
sales and marketing capabilities, competition, uncertainties regarding
protection of patents and proprietary rights, government regulation and
uncertainties regarding pharmaceutical pricing and reimbursement.
27
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The response to this Item is submitted in a separate section of this report
beginning on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Not applicable.
28
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the captions "ELECTION OF DIRECTORS" and "MANAGEMENT"
contained in the Company's definitive proxy statement to be filed no later than
April 30, 1997 in connection with the solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held May 21, 1997 (the "Proxy Statement").
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "EXECUTIVE COMPENSATION" of the Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT" in the Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "CERTAIN TRANSACTIONS" in the Proxy Statement.
29
<PAGE>
PART IV
<TABLE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
<CAPTION>
1. Financial Statements Page
----
<S> <C>
The following financial statements of SUGEN, Inc. are included in a separate section of this report:
Balance Sheets at December 31, 1996 and 1995 F-3
Statements of Operations for each of the three years in the period
ended December 31, 1996 F-4
Statement of Stockholders' Equity for each of the three years in the
period ended December 31, 1996 F-5
Statements of Cash Flows for each of the three years in the period
ended December 31, 1996 F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules
</TABLE>
All schedules have been omitted as they are not required, not applicable,
or the required information is included in the financial statements or
notes thereto.
30
<PAGE>
<TABLE>
3. Exhibits
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 Restated Certificate of Incorporation, filed February 23, 1995. (2)
3(ii).2 Bylaws of the Registrant. (1)
3.3 Certificate of Designation of Series A Junior Participating Preferred Stock
of the Registrant. (5)
4.1 Reference is made to Exhibits 3.1 through 3(ii).2.
4.2 Specimen Stock Certificate. (1)
10.1 Form of Investor Rights Agreement, dated December 23, 1992, among the
Registrant and certain investors. (1)
10.2 Registrant's 1992 Amended and Restated Stock Option Plan (the "Option
Plan"), as amended. (11)
10.3 Form of Incentive Stock Option under the Option Plan. (1)
10.4 Form of Nonstatutory Stock Option under the Option Plan. (1)
10.5 Warrant to Purchase 2,666 Shares of Series A Preferred Stock, dated December 7,
1991, granted by the Registrant to Sanwa Business Credit Corp. (1)
10.6 Warrant to Purchase 2,666 Shares of Series A Preferred Stock, dated December 7,
1991, granted by the Registrant to Silicon Valley Bancshares. (1)
10.7 Warrant to Purchase 5,333 Shares of Series A Preferred Stock, dated December 7,
1991, granted by the Registrant to Western Technology Investment. (1)
10.8 Warrant to Purchase 133,333 Shares of Common Stock, dated July 13, 1992, granted by
the Registrant to Genentech, Inc. (1)
10.9 Warrant Agreement to Purchase 40,000 Shares of Series D Preferred Stock, dated October 30, 1992,
between the Registrant and Comdisco, Inc. (1)
10.10 Warrant Agreement to Purchase Shares of Series G(F) Preferred Stock, dated July 23,
1993, between the Registrant and Comdisco, Inc. (1)
10.11 Warrant Agreement to Purchase Shares of Series G(F) Preferred Stock, dated July 23,
1993, between the Registrant and Comdisco, Inc. (1)
10.12 Stock Swap Agreement, dated July 27, 1992, as amended, between the Registrant and
Selectide Corporation. (1)
10.13++ Amended and Restated Research and License Agreement, dated August 16, 1991, among the Registrant,
Max-Planck-Gesellschaft, Max-Planck-Institut and Garching Innovation GmbH; and
Extension, dated March 31, 1993. (1)
10.14++ Amended and Restated Research and License Agreement, dated September 1, 1991,
between the Registrant and New York University. (1)
10.15++ Services and Supply Agreement, dated January 1, 1992, between the Registrant and
BioSignal, Ltd. (1)
10.15(i) Exhibit A to Services and Supply Agreement, dated January 1, 1992, between the
Registrant and BioSignal, Ltd. (1)
10.16++ Collaboration and License Agreement, dated November 17, 1992, between the Registrant
and Selectide Corporation. (1)
10.17++ Collaboration Agreement, dated December 18, 1992, between the Registrant and Amgen,
Inc. (1)
10.17(i)++ Amendment Number One to Collaboration Agreement between the Registrant and Amgen,
Inc., dated June 15, 1995. (3)
10.18 Letter of Intent, dated May 27, 1993, among the Registrant, the State Science & Technology
Commission of the Peoples Republic of China, and International Technology Investment Managers
(Asia), Inc. (1)
10.19++ Amended and Restated Research and License Agreement, between the Registrant and
Yissum Research Development Company of The Hebrew University of Jerusalem, dated
March 27, 1995. (2)
31
<PAGE>
Exhibit
Number Exhibit
- ------ -------
10.20++ Research and License Agreement, dated October 1, 1993, among the Registrant, Max-Planck-Gesellschaft,
Max-Planck-Institut and Garching Innovation GmbH. (1)
10.21++ Exclusive License Agreement, dated January 21, 1994, between the Registrant and
Washington Research Foundation. (1)
10.22 Purchase Agreement between the Registrant and Zeneca Limited, dated October 4, 1994.
(2)
10.23++ Amended and Restated Research and License Agreement between the Registrant and
Yissum Research Development Company of The Hebrew University of Jerusalem (labeled "Psoriasis"). (8)
10.24++ Amended and Restated Research and License Agreement between the Registrant and
Yissum Research Development Company of The Hebrew University of Jerusalem (labeled
"Papilloma"). (8)
10.25++ Amended and Restated Research and License Agreement between the Registrant and
Yissum Research Development Company of The Hebrew University of Jerusalem (labeled
"Sepsis/Inflammation"). (8)
10.26++ Amended and Restated Research and License Agreement between the Registrant and
Yissum Research Development Company of The Hebrew University of Jerusalem (labeled
"Restenosis"). (8)
10.27 Consulting Agreement, dated August 16, 1991, between the Registrant and Dr. Joseph
Schlessinger. (1)
10.28 Consulting Agreement, dated August 16, 1991, between the Registrant and Dr. Axel
Ullrich. (1)
10.29 Seaport Centre Standard Lease and Addendum I, dated November 12, 1991, between the
Registrant and Seaport Center Venture Phase I. (1)
10.29(i) First Amendment, dated July 8, 1993, to Seaport Centre Standard Lease between the
Registrant and Seaport Center Venture Phase I. (1)
10.29(ii) Second Amendment, dated June 2, 1995, to Seaport Centre Standard Lease between the
Registrant and Seaport Centre Venture Phase I. (3)
10.29(iii) Construction Addendum, dated June 2, 1995, to Second Amendment to Seaport Centre
Standard Lease between the Registrant and Seaport Centre Venture Phase I. (3)
10.30 Registrant's 1994 Employee Stock Purchase Plan. (1)
* 10.31 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended. (11)
10.32 Form of Indemnity Agreement to be entered into between the Registrant and its
officers and directors. (1)
10.33 Warrant Agreement to Purchase 7,200 Shares of Series G Preferred Stock, dated May 5, 1994,
between the Registrant and Financing for Science International, Inc. (1)
10.34++ Research and License Agreement, dated August 1, 1994, between the Company
and the Hospital for Sick Children. (1)
10.34(i) Amendment to Research and License Agreement between the Registrant and the
Hospital for Sick Children, dated August 1, 1995. (4)
10.35 Research and Technology Agreement, dated March 3, 1993, between the Registrant and
PanLabs, Inc., as amended. (1)
10.36++ Collaboration Agreement, between the Registrant and Zeneca Limited, dated
March 22, 1995. (2)
10.37 Agreement for the Purchase of Common Stock of the Registrant by Zeneca Limited,
dated January 6, 1995. (2)
10.38 Loan Agreement and Promissory Note between the Registrant and James L. Tyree, dated
August 29, 1994. (3)
10.39 Deferred Compensation Agreement between the Registrant and James L. Tyree,
dated August 29, 1994. (3)
32
<PAGE>
Exhibit
Number Exhibit
- ------ -------
10.40++ Cooperative Research and Development Agreement between the Registrant and the
National Cancer Institute, dated August 14, 1995. (4)
*10.41 Registrant's 1995 Long-Term Objectives Stock Option Plan for Senior Management, as
amended. (12)
10.42 Form of Nonstatutory Stock Option under the Long-Term Objectives Stock Option Plan
for Senior Management. (6)
10.43 Rights Agreement, dated as of August 1, 1995 between the Registrant and The First
National Bank of Boston, as Rights Agent. (5)
10.44 Form of Agreement for the Purchase of Common Stock of the Registrant and list of
participants thereto, dated September 21, 1995. (4)
10.45 Lease Financing Commitment Letter, dated September 12, 1995 between the Registrant
and Financing for Science International, Inc. (4)
10.46++ Collaboration Agreement, between the Registrant and ASTA Medica Aktiengesellschaft,
dated December 5, 1995. (7)
10.47 Agreement for the Purchase of Common Stock of the Registrant by ASTA Medica
Aktiengesellschaft, dated December 5, 1995. (7)
10.48++ Termination and Redemption Agreement between the Registrant and Amgen Inc., dated
January 9, 1996. (8)
10.49++ Warrant to purchase 200,000 shares of Common Stock of the Registrant, dated January
19, 1996, issued by the Registrant to Amgen Inc. (8)
10.50++ License Agreement between the Registrant and Zeneca Limited, dated January 19, 1996.
(8)
10.51++ Cooperative Research and Development Agreement between the Registrant and the
National Cancer Institute, dated April 12, 1996. (9)
10.52++ Termination notice, dated May 24, 1996, between the Registrant and Yissum Research
Development Company of The Hebrew University of Jerusalem (labeled
"Sepsis/Inflammation"). (9)
10.53++ Termination notice, dated May 24, 1996. between the Registrant and Yissum Research
Development Company of The Hebrew University of Jerusalem (labeled "Restenosis").
(9)
10.54+ Research and Development Agreement between the Registrant and Arqule, Inc. (10)
10.55+ Extension of Research and License Agreement between the Registrant and the Max
Planck Institut. (10)
10.56 Promissory Note received by the Registrant from Stephen Evans-Freke. (10)
10.57 Agreement for the purchase of Common Stock of the Registrant by Vision
Pharmaceuticals L.P. (10)
10.58+ Collaboration Agreement by and between the Registrant and Vision Pharmaceuticals
L.P. and Allergan, Inc. (10)
10.59+ Extension of Research Agreement between the Registrant and Yissum Development
Company of the Hebrew University. (10)
10.60 James L. Tyree Separation Agreement. (10)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (incorporated in the signature page of the Form 10-K).
27 Financial Data Schedule.
<FN>
- --------------
* Compensatory Plan.
+ Confidential Treatment has been requested with respect to portions of this Exhibit.
++ Confidential treatment has previously been granted for portions of this Exhibit.
(1) Incorporated by reference to identically numbered exhibits filed in response to Item
16 "Exhibits" of the Company's Registration Statement on
Form S-1, as amended (File Number 33-77074), which became
effective October 4, 1994.
(2) Incorporated by reference to identically numbered exhibits filed in response to Item
14 "Exhibits" of the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
33
<PAGE>
(3) Incorporated by reference to identically numbered exhibits
filed in response to Item 6 "Exhibits" of the Company's Form
10-Q for the quarter ended June 30, 1995.
(4) Incorporated by reference to identically numbered exhibits
filed in response to Item 6 "Exhibits" of the Company's Form
10-Q for the quarter ended September 30, 1995.
(5) Filed as an exhibit to the Form 8-K Current Report dated July 26, 1995 and
incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No.
33-99152), dated November 9, 1995, and incorporated herein by reference.
(7) Incorporated by reference to identically numbered exhibits filed in response to Item
14 "Exhibits" of the Company's Annual Report on Form 10-K as amended, for the year
ended December 31, 1995.
(8) Incorporated by reference to identically numbered exhibits
filed in response to Item 6 "Exhibits" of the Company's Form
10-Q for the quarter ended March 31, 1996.
(9) Incorporated by reference to identically numbered exhibits
filed in response to Item 6 "Exhibits" of the Company's Form
10-Q for the quarter ended June 30, 1996.
(10) Incorporated by reference to identically numbered exhibits
filed in response to Item 6 "Exhibits" of the Company's Form
10-Q for the quarter ended September 30, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No.
333-09323), dated August 1, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No.
333-09321), dated August 1, 1996, and incorporated herein by reference.
</FN>
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
34
<PAGE>
Annual Report on Form 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
Financial Statements and Supplementary Data
Certain Exhibits
Year Ended December 31, 1996
SUGEN, Inc.
Redwood City, California
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SUGEN, Inc.
We have audited the accompanying balance sheets of SUGEN, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 SUGEN, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 7, 1997
F-2
<PAGE>
SUGEN, Inc.
BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,852 $ 8,226
Short-term investments 31,482 45,027
Accounts receivable 264 288
Prepaid expenses and other current assets 468 746
--------- ---------
Total current assets 57,066 54,287
Property and equipment, net 4,095 4,513
Other assets 775 443
--------- ---------
$ 61,936 $ 59,243
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 852 $ 652
Accrued liabilities 7,406 3,587
Deferred revenue 375 6,558
Capital lease obligations - current portion 1,835 1,354
--------- ---------
Total current liabilities 10,468 12,151
Capital lease obligations - non-current portion 2,938 3,651
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000
shares authorized, issuable in
series; 300,000 shares designated
as Series A Junior Participating
Preferred Stock; none
issued and outstanding -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; shares issued and outstanding:
12,993,450 and 10,634,917 in 1996 and 1995,
respectively 130 106
Additional paid-in capital 107,990 81,696
Deferred compensation (710) (397)
Note receivable from stockholder (883) --
Accumulated deficit (57,997) (37,964)
--------- ---------
Total stockholders' equity 48,530 43,441
--------- ---------
$ 61,936 $ 59,243
========= =========
See accompanying notes.
F-3
<PAGE>
SUGEN, Inc.
<TABLE>
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Contract revenue (includes amounts from $ 13,650 $ 13,843 $ 6,270
related party)
Costs and expenses:
Research and development 29,792 23,226 17,079
General and administrative 5,529 5,086 3,106
------------ ------------ ------------
Total costs and expenses 35,321 28,312 20,185
------------ ------------ ------------
Operating loss (21,671) (14,469) (13,915)
Other income and expenses:
Interest income 2,481 1,988 529
Interest expense (691) (494) (278)
Gain on sale of investment in
Selectide Corporation -- 1,006 --
------------ ------------ ------------
Other income, net 1,790 2,500 251
============ ============ ============
Net loss $ (19,881) $ (11,969) $ (13,664)
============ ============ ============
Net loss per share $ (1.81) $ (1.32) $ (4.15)
============ ============ ============
Shares used in computing net loss
per share 10,966,000 9,085,000 3,296,000
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
Sugen, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital
---------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 14,263,943 $ 143 1,462,312 $ 15 $ 25,888
Issuance of Common Stock upon exercise of stock options -- -- 115,652 1 75
Issuance of Common Stock for cash in connection with
initial public offering, net of issuance costs of $2,188 -- -- 2,780,117 28 18,635
Conversion of Preferred Stock into Common Stock in
connection with initial public offering
(net of $1 paid for fractional shares (14,263,943) (143) 3,803,619 38 104
Deferred compensation related to grant of certain options -- -- -- -- 392
Amortization of deferred compensation -- -- -- -- --
Change in net unrealized losses on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances at December 31, 1994 -- -- 8,161,700 82 45,094
Issuance of Common Stock upon exercise of stock options
and in connection with an employee stock purchase plan -- -- 141,824 1 302
Placement of Common Stock for cash, net of issuance costs
of $450 -- -- 1,396,875 14 16,299
Issuance of Common Stock for cash to Zeneca Limited, net of
issuance costs of $150 -- -- 789,141 8 12,342
Issuance of Common Stock for cash to ASTA Medica
Aktiengesellschaft, net of issuance costs of $50 -- -- 431,137 4 8,946
Issuance of Common Stock for services -- -- 15,000 -- 139
Repurchase of Common Stock for cash from Selectide
Corporation -- -- (300,760) (3) (1,426)
Amortization of deferred compensation -- -- -- -- --
Change in net unrealized losses on available-for-sale
securities -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances at December 31, 1995 -- -- 10,634,917 106 81,696
Issuance of Common Stock upon exercise of stock options and
in connection with an employee stock purchase plan, net -- -- 194,195 2 717
Issuance of Common Stock for cash and note in connection
with the exercise of stock options -- -- 132,333 1 883
Issuance of Common Stock for cash to Allergan, net of
issuance costs of $32 -- -- 191,571 2 3,966
Issuance of Common Stock for cash in connection with the
follow-on public offering, net of offering costs of $2,133 -- -- 2,070,000 21 22,686
Issuance of Common Stock upon exercise of warrants, net 5,434 -- --
Repurchase of Common Stock for cash from Amgen, Inc. -- -- (235,000) (2) (2,696)
Issuance of warrants for cash to Amgen Inc. -- -- -- -- 200
Deferred compensation related to grant of certain
stock options -- -- -- -- 538
Amortization of deferred compensation -- -- -- -- --
Change in net unrealized losses on a variable-for-sale
securities -- -- -- -- --
Net loss -- -- -- -- --
---------- ------------ ---------- ------------ ------------
Balances at December 31, 1996 -- $ -- 12,993,450 $ 130 $ 107,990
========== ============ ========== ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
Sugen, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
CONTINUED ....
<CAPTION>
Note
Receivable Total
Deferred From Accumulated Stockholders'
Compensation Stockholder Deficit Equity
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ (365) $ -- $ (12,451) $ 13,230
Issuance of Common Stock upon exercise of stock options -- -- -- 76
Issuance of Common Stock for cash in connection with
initial public offering, net of issuance costs of $2,188 -- -- -- 18,663
Conversion of Preferred Stock into Common Stock in
connection with initial public offering
(net of $1 paid for fractional shares -- -- -- (1)
Deferred compensation related to grant of certain options (392) -- -- --
Amortization of deferred compensation 170 -- -- 170
Change in net unrealized losses on available-for-sale
securities -- -- (155) (155)
Net loss -- -- (13,664) (13,664)
-------- ----- ----------- -------------
Balances at December 31, 1994 (587) -- (26,270) 18,319
Issuance of Common Stock upon exercise of stock options
and in connection with an employee stock purchase plan -- -- -- 303
Placement of Common Stock for cash, net of issuance costs
of $450 -- -- -- 16,313
Issuance of Common Stock for cash to Zeneca Limited, net of
issuance costs of $150 -- -- -- 12,350
Issuance of Common Stock for cash to ASTA Medica
Aktiengesellschaft, net of issuance costs of $50 -- -- -- 8,950
Issuance of Common Stock for services -- -- -- 139
Repurchase of Common Stock for cash from Selectide
Corporation -- -- -- (1,429)
Amortization of deferred compensation 190 -- -- 190
Change in net unrealized losses on available-for-sale
securities -- -- 275 275
Net loss -- -- (11,969) (11,969)
-------- ----- ----------- -------------
Balances at December 31, 1995 (397) -- (37,964) 43,441
Issuance of Common Stock upon exercise of stock options and
in connection with an employee stock purchase plan, net -- -- -- 719
Issuance of Common Stock for cash and note in connection
with the exercise of stock options -- (883) -- 1
Issuance of Common Stock for cash to Allergan, net of
issuance costs of $32 -- -- -- 3,968
Issuance of Common Stock for cash in connection with the
follow-on public offering, net of offering costs of $2,13 -- -- -- 22,707
Issuance of Common Stock upon exercise of warrants, net -- -- -- --
Repurchase of Common Stock for cash from Amgen, Inc. -- -- -- (2,698)
Issuance of warrants for cash to Amgen Inc. -- -- -- 200
Deferred compensation related to grant of certain
stock options (538) -- -- --
Amortization of deferred compensation 225 -- -- 225
Change in net unrealized losses on a variable-for-sale
securities -- -- (152) (152)
Net loss -- -- (19,881) (19,881)
-------- ---- ----------- -------------
Balances at December 31, 1996 $ (710) $(883) $ (57,997) $ 48,530
======== ===== =========== =============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
SUGEN, Inc.
<TABLE>
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(19,881) $(11,969) $(13,664)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,308 1,629 1,009
Deferred revenue (6,183) 1,922 (395)
Issuance of Common Stock for services -- 139 --
Gain on sale of investment in Selectide Corporation -- (1,006) --
Changes in operating assets and liabilities:
Accounts receivable 24 35 (23)
Prepaid expenses and other current assets 278 (200) (431)
Other assets (332) (39) (204)
Accounts payable 200 (420) 296
Accrued liabilities 3,819 1,996 474
-------- -------- --------
Net cash used in operating activities (19,767) (7,913) (12,938)
-------- -------- --------
Cash flows from investing activities
Purchases of short-term investments (27,998) (57,118) (11,917)
Maturities of short-term investments 36,973 15,308 1,643
Sales of short-term investments 4,418 6,873 998
Purchases of property and equipment, net (1,665) (2,042) (1,304)
Proceeds from sale of investment in Selectide Corporation -- 2,923 --
-------- -------- --------
Net cash provided by (used in) investing activities 11,728 (34,056) (10,580)
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of Common Stock, net 27,395 37,916 18,738
Repurchase of Common Stock (2,698) (1,429) --
Proceeds from issuance of warrant 200 -- --
Proceeds from lease financing of property and equipment 1,247 2,109 1,580
Payments under capital lease obligations (1,479) (1,000) (491)
-------- -------- --------
Net cash provided by financing activities 24,665 37,596 19,827
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 16,626 (4,373) (3,691)
Cash and cash equivalents at beginning of year 8,226 12,599 16,290
======== ======== ========
Cash and cash equivalents at end of year $ 24,852 $ 8,226 $ 12,599
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 691 $ 494 $ 278
======== ======== ========
Supplemental schedule of noncash investing and
financing activities:
Equipment acquired under capital leases $ -- $ 1,059 $ 1,090
======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
F-6
<PAGE>
SUGEN, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
SUGEN, Inc. (the "Company"), a Delaware corporation founded in July
1991, is a biopharmaceutical company focusing on the discovery and development
of a small molecule drugs which target specific cellular signal transduction
pathways. Dysfunctional signal transduction pathways have been implicated in
diseases such as cancer and diabetes, as well as in dermatologic, immunologic,
cardiovascular and neurologic disorders. The Company pursues its drug discovery
programs independently and in collaboration with other pharmaceutical companies.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. All other
liquid investments are classified as short-term investments. The Company limits
its concentration of risk by diversifying its investments among a variety of
industries and issuers.
All debt securities are designated as available-for-sale and are
carried at fair value, with the unrealized gains and losses reported in
stockholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are also included in interest income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities are included in interest income.
Revenue Recognition
Revenue from collaborative agreements is recorded when earned as
defined under the terms of the agreements. Non-refundable fees received upon
contract signing or terminations are recorded as deferred revenue and recognized
as income when the related start-up or wind-down activities are performed, which
is generally over a twelve month period or less. Non-refundable up-front fees
received for previous research and development work performed is recognized in
full upon contract execution. Periodic research funding payments are recognized
as income when earned. All of the Company's revenue is derived from its
collaborations.
Research and Development Expense
Research and development expense consists of independent research and
development costs, the costs associated with work performed under collaborations
and the Company's sponsored funding of research projects performed by others.
Research and development costs include direct and research-related overhead
expenses.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease.
F-7
<PAGE>
1. Organization and Significant Accounting Policies (Continued)
Stock Based Compensation
The Company generally grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
employs the intrinsic-value method to value stock option grants.
Net Loss Per Share
Net loss per share is computed using the weighted average number of
common shares outstanding. Common equivalent shares from stock options,
convertible preferred stock, and warrants are excluded from the computation as
their effect is antidilutive, except that through June 30, 1994, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued during the 12-month period prior to the initial filing
of the registration statement for the initial public offering at prices
substantially below the public offering price have been included in the
calculation as if they were outstanding (using the treasury stock method and the
public offering price for stock options and warrants and the if-converted method
for convertible preferred stock).
The following pro forma per share data is provided to present the
calculation on a consistent basis for all periods presented. It has been
computed as described above and also gives retroactive effect from the date of
issuance to the conversion of convertible preferred stock which automatically
converted to common shares upon the closing of the Company's initial public
offering in October 1994.
Year Ended
December 31,
---------------
1994
---------------
Pro forma net loss per share $ (2.22)
===============
Shares used in computing pro forma net loss per share 6,143,000
===============
2. Investments
<TABLE>
The following is a summary of available-for-sale securities as of
December 31 (in thousands):
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------------
Unrealized Estimated Unrealized Estimated
Gains/ Fair Gains/ Fair
Cost (Losses) Value Cost (Losses) Value
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
Government agencies $ 13,348 $ (21) $ 13,327 $ 20,617 $ 54 $ 20,671
U.S. corporate notes 16,409 (8) 16,401 19,177 59 19,236
Foreign debt securities 1,726 (1) 1,725 7,073 8 7,081
U.S. corporate
commercial paper 11,534 (2) 11,532 2,689 (1) 2,688
Repurchase agreements 8,036 -- 8,036 850 -- 850
Money market funds,
certificates of deposit
and other 5,313 -- 5,313 2,727 -- 2,727
-------- -------- -------- -------- -------- --------
$ 56,366 $ (32) $ 56,334 $ 53,133 $ 120 $ 53,253
======== ======== ======== ======== ======== ========
Amounts included in:
Cash equivalents $ 24,853 $ (1) $ 24,852 $ 8,227 $ (1) $ 8,226
Short-term investments 31,513 (31) 31,482 44,906 121 45,027
-------- -------- -------- -------- -------- --------
$ 56,366 $ (32) $ 56,334 $ 53,133 $ 120 $ 53,253
======== ======== ======== ======== ======== ========
</TABLE>
F-8
<PAGE>
2. Investments (Continued)
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
As of December 31, 1996 the average portfolio duration was approximately four
months and the longest contractual maturity did not exceed two years. Gross
realized gains and losses were immaterial during 1996 and 1995.
3. Investment in Selectide Corporation
In 1992, the Company signed a three-year collaborative agreement with
Selectide Corporation ("Selectide"), a privately-held corporation. In connection
with this agreement, the Company issued 300,760 shares of stock for junior
preferred shares of Selectide valued at $1,917,000, which shares represented
approximately 5% of the voting shares of Selectide as of December 31, 1994.
In January 1995, the Company received approximately $2.9 million from
the sale of its 5% ownership in Selectide to Marion Merrell Dow, Inc., resulting
in a gain of approximately $1.0 million. The Company simultaneously repurchased
the 300,760 shares of SUGEN Common Stock formerly held by Selectide for
approximately $1.43 million, or $4.75 per share. The net proceeds to the Company
from these transactions was approximately $1.5 million.
4. Property and Equipment
Property and equipment consists of the following at December 31 (in thousands):
1996 1995
------------- -------------
Leasehold improvements $ 3,168 $ 2,731
Office and computer equipment 2,320 1,675
Laboratory equipment 2,896 2,313
------------- -------------
8,384 6,719
Accumulated depreciation and amortization (4,289) (2,206)
------------- -------------
Net property and equipment $ 4,095 $ 4,513
============= =============
Property and equipment under capital leases amounted to $7.5 million
and $6.2 million as of December 31, 1996 and 1995 with related accumulated
amortization of $3.9 million and $1.9 million, respectively.
5. Accrued Liabilities
The components of accrued liabilities consist of the following at December 31
(in thousands):
1996 1995
------------- -------------
Accrued research and development services $ 3,724 $ 1,381
Accrued compensation 883 657
Accrued professional fees 524 344
Other 2,275 1,205
------------- -------------
$ 7,406 $ 3,587
============= =============
F-9
<PAGE>
6. Research and Development Collaboration Agreements
Allergan, Inc.
In October 1996, the Company established a research and development
collaboration with Vision Pharmaceuticals L.P., an affiliate of Allergan, Inc.
and Allergan, Inc. (collectively, "Allergan"), to identify, develop and
commercialize novel angiogenesis inhibitors for the treatment of ophthalmic
diseases. The collaboration will also establish a comprehensive effort to
identify and validate signal transduction targets for choroidal and retinal
neovascularization. Allergan will have exclusive rights to all ophthalmic uses
of collaboration products and know-how world-wide. In return, the Company
received a $2.0 million initial payment for past research services, is receiving
annual research funding and expects to receive additional fees upon the
achievement of specified milestones and royalties on any product sales. In
addition, the Company will have the right to contribute to clinical development
costs on each program, thereby earning participation in the North American and
European profits from successful products coming out of such programs over and
above its royalty entitlement. Allergan also purchased 191,571 shares of SUGEN
Common Stock at a price of $20.88 per share and participated in the Company's
October 1996 financing (see Note 9), purchasing an additional 250,000 shares of
Common Stock, thereby increasing its cumulative equity investment in SUGEN to
$7.0 million.
ASTA Medica Aktiengesellschaft
In December 1995, the Company established an oncology product
development collaboration with ASTA Medica Aktiengesellschaft ("ASTA Medica") to
develop, manufacture and bring to market SUGEN's oncology products based upon
the cell signal transduction targets known as Pan-Her and Raf. The Company
received a $4.0 million technology set-up fee, is receiving additional
consideration in the form of contract services for non-collaboration work and
will receive certain milestone payments tied to the success of the programs and
royalty payments on sales in certain territories. The agreement provides for
ASTA Medica to receive exclusive marketing rights to collaboration products in
Greater Europe (including the former Soviet Union) and South America, subject to
royalties to SUGEN. The Company retains market rights in the rest of the world,
subject to royalties payable to ASTA Medica in most circumstances. Additionally,
ASTA Medica purchased 431,137 shares of SUGEN Common Stock for $9.0 million, or
$20.88 per share.
Zeneca Limited - Related Party
In January 1995, the Company established a collaboration with Zeneca
Limited ("Zeneca") to pursue the research, development and commercialization of
novel anti-cancer drugs targeting cell-surface receptors and intra-cellular
signal transduction pathways. In connection with this agreement, the Company
received an initial $5.0 million technology set-up fee, is receiving additional
cash payments for annual research funding and will receive certain milestone
payments (which may be offset against royalties over time) tied to the progress
of compounds in the collaboration and royalties on worldwide sales of any
collaboration products. The Company will also have the right to contribute to
clinical development costs on each program, thereby earning participation in the
North American profits from successful products coming out of such programs over
and above its royalty entitlement.
As a part of the collaboration agreement, Zeneca purchased 789,141
shares of the Company's Common Stock for $12.5 million, or $15.84 per share.
This $12.5 million equity investment, combined with Zeneca's $7.5 million
participation in SUGEN's October 1994 initial public offering, increased
Zeneca's equity investment in SUGEN to $20.0 million and brought Zeneca's
ownership in the Company to approximately 20%.
Zeneca participated in the Company's October 1996 and September 1995
financings (see Note 9), purchasing an additional 509,000 and 281,875 shares of
the Company's Common Stock, respectively. These additional investments
maintained Zeneca's ownership level in SUGEN at approximately 20% and increased
its cumulative equity investment in the Company to $29.5 million. Zeneca has
committed not to increase its holdings above this level without the approval of
SUGEN's Board of Directors.
Amgen Inc.
In December 1992, the Company established a research and development
collaboration with Amgen Inc. ("Amgen") to discover and develop therapeutic and
diagnostic products in neurobiology and a subset of hematopoiesis. As part of
this collaboration, Amgen made a $4.0 million equity investment, which converted
into 387,878 shares of the Company's Common Stock at the time of the Company's
initial public offering. For the three year period ended December 31, 1995, the
Company received approximately $18.1 million of research funding from Amgen.
F-10
<PAGE>
6. Research and Development Collaboration Agreements (Continued)
In January 1996, the Company and Amgen reached an agreement to conclude
their research collaboration one year earlier than originally planned due to
their changed research priorities. Under the terms of this wind-down agreement,
Amgen made a final cash payment to the Company of $2.5 million (of which $1.1
million was advanced in December 1995) and forgave certain advance payments
already made to the Company for future research work which was recorded as
wind-down revenue in 1996. Amgen also granted back to SUGEN exclusive worldwide
rights to 22 propriety signal transduction targets discovered in the course of
the collaboration, subject to royalty payments back to Amgen with respect to
potential future product sales. In addition, in January 1996 the Company
redeemed 235,000 shares of its Common Stock from Amgen at a price of $11.48 per
share, thereby reducing Amgen's current holdings of the Company's Common Stock
to 152,878 shares. Amgen also purchased in January 1996 for $200,000 a
seven-year warrant to purchase 200,000 shares of Common Stock at an exercise
price of $15.50 per share.
7. Leases
In September 1995, the Company secured a $3.5 million capital lease
line to fund facility improvements and equipment associated with the Company's
research, development and administrative facilities. As of December 31, 1996,
the Company had approximately $663,000 available under this lease line.
The Company leases its office and laboratory facilities under operating
leases through 1998 having renewal options ranging from three to five years.
Rent expense for this and other operating leases amounted to $1.6 million, $1.4
million and $1.1 million for 1996, 1995 and 1994, respectively.
Future minimum payments under capital and operating leases at December
31, 1996 are as follows (in thousands):
Capital Operating
Leases Leases
---------- ----------
Year ended December 31:
1997 $ 2,414 $ 1,531
1998 1,969 1,198
1999 1,048 21
2000 378 --
---------- ----------
Total minimum lease payments 5,809 $ 2,750
==========
Amount representing interest (1,036)
----------
Present value of minimum lease payments 4,773
Less current portion (1,835)
----------
Non-current portion $ 2,938
==========
8. Commitments Under Research and Development Programs
The Company enters from time to time into license and research
agreements whereby the Company funds research projects performed by others or
in-licenses compounds from third parties. Some of the agreements may require the
Company to make milestone and royalty payments.
Under these programs, commitments for research funding are
approximately $2.3 million in 1997. A number of these agreements expire in late
1997, however, the Company anticipates renewing these agreements which will
increase the future commitments of the Company. Most of these commitments are
cancelable within a three to six month period and limit the amounts payable by
the Company for sponsored research under the programs after notice of
cancellation. Related research and development expenses under these programs
were $3.5 million, $4.2 million and $3.7 million for 1996, 1995 and 1994,
respectively.
F-11
<PAGE>
9. Stockholders' Equity
Preferred Share Purchase Rights Plan
In July 1995, the Board of Directors approved a Preferred Share
Purchase Rights Plan ("Rights Plan"). The Rights Plan provides for the
distribution of a preferred stock purchase right as a dividend for each share of
the Company's Common Stock. This right entitles stockholders to purchase stock
in the Company or in an acquirer of the Company at a discounted price in the
event of certain hostile efforts to acquire control of the Company. The rights
may only be exercised, if at all, until the earlier of July 31, 2000, or the
occurrence of certain events, and may be redeemed by the Company. At December
31, 1996, the rights were not exercisable.
In connection with the Rights Plan, 300,000 shares of the authorized
Preferred Stock were designated as Series A Junior Participating Preferred Stock
("Junior Preferred Stock"), of which one share is equivalent to 100 shares of
Common Stock. Each share of Junior Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders and
shall rank, with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the Company's Preferred
Stock. Subject to the rights of the holders of any shares of Preferred Stock
with respect to dividends, the holders of shares of Junior Preferred Stock, in
preference to the holders of Common Stock, shall be entitled to receive, when,
as and if declared by the Board of Directors quarterly dividends. As of December
31, 1996, no dividends had been declared and no shares were outstanding.
Common Stock
In October and November 1996, the Company completed a follow-on public
offering of 2,070,000 shares of Common Stock at a price of $12.00 per share. The
net proceeds to the Company were approximately $22.7 million.
In September 1995, the Company sold 1,396,875 shares of its Common
Stock at a price of $12.00 per share, resulting in net proceeds of approximately
$16.3 million.
In October and November 1994, the Company completed its initial public
offering of 2,780,117 shares of Common Stock. The net proceeds to the Company
were approximately $18.7 million. Upon effectiveness of the registration
statement relating to the offering, all of the Preferred Stock outstanding
automatically converted into 3,803,619 shares of Common Stock.
The total number of shares of Common Stock outstanding was 12,993,450
as of December 31, 1996, of which 76,874 were subject to repurchase. At December
31, 1996, the Company has reserved 3,021,660 shares of Common Stock for issuance
upon exercise of warrants and options and 136,188 common shares for issuance
under the Employee Stock Purchase Plan.
Warrants
The following warrants to purchase shares of common stock were issued
in connection with various license and equipment lease financing arrangements
(also see Note 6):
Warrants Outstanding at December 31, 1996
- ------------------------------------------------------------------------------
Number of Shares Price Per Aggregate Price Expiration Date
Share
- ----------------- --------------- ----------------- ----------------------
200,000 $ 15.50 $3,100,000 January 2003
133,333 11.25 1,499,996 July 1997
40,000 3.75 150,000 December 1999
36,847 10.31 379,985 July 2000
13,598 12.87 175,006 December 2001
7,200 11.25 81,000 December 1999
2,666 4.69 12,497 December 2001
F-12
<PAGE>
9. Stockholders' Equity (Continued)
Note Receivable from Stockholder
In August 1996, an officer of the Company exercised options to purchase
132,333 shares of common stock at prices ranging from $6.00 to $7.50 per share.
As consideration for the purchase, the officer issued a full recourse Promissory
Note (the "Note") to the Company. The Note bears interest of 6.84% per annum and
is due and payable on August 29, 2001. However, in the event that the officer's
continuous status as an employee, director or consultant with the Company is
terminated for any reason prior to the payment in full of the Note, the Note
shall be accelerated and all remaining unpaid principal and interest shall
become due and payable on the 90th day following such termination. In addition,
the officer has pledged the shares purchased with this Note as collateral.
10. Stock Option and Purchase Plans
Employee Stock Purchase Plan
In April 1994, the Company adopted an Employee Stock Purchase Plan
("ESPP") under which 200,000 shares of Common Stock were reserved for issuance.
All employees of the Company, except those having a 5% or greater ownership
stake in the Company, are eligible to participate in the ESPP provided that on
the first day of an offering period they have been employed by the Company for
at least 30 days and are customarily employed by the Company at least twenty
hours per week and at least five months per calendar year. Offerings will
generally be for six months, with the purchase price per share equal to the
lower of 85% of the market value on the date granted (the beginning of the
offering period) or on the date purchased. The next offering period ends on
March 31, 1997. As of December 31, 1996, 63,812 shares had been issued under the
ESPP.
1992 Stock Option Plan
The 1992 Stock Option Plan (the "Plan") provides for the grant of
options to purchase shares of Common Stock to employees, including officers,
directors, and consultants, upon terms determined by the Board of Directors. The
options granted under this Plan may be either incentive stock options or
nonstatutory stock options. As of December 31, 1996, an aggregate of 2.75
million shares of Common Stock had been reserved for issuance under this Plan,
of which 650,000 shares are subject to stockholders' approval.
Options granted under this Plan expire no later than ten years from the
date of grant. The option price shall be at least 100% of the fair market value
on the date of grant for incentive stock options. Nonstatutory options, may be
granted as low as 85% of the fair market value on the date of grant. The options
generally become exercisable over a period of four years from the date of grant.
Options may be granted with different vesting terms from time to time as
approved by the Board of Directors. The Plan has been amended to provide for
automatic vesting of options granted upon a change of control, as defined.
As of December 31, 1996 options to purchase 681,096 shares of Common
Stock were exercisable, of which 109,929 shares would be subject to repurchase
if all were exercised.
Through December 31, 1994 the Company recorded deferred compensation
expense for the difference between the exercise price and the deemed fair value
for financial statement presentation purposes of the Company's Common Stock for
certain options granted in 1994 and 1993. This deferred compensation expense
aggregated $757,000 and is being amortized over the related vesting period.
1994 Non-Employee Directors' Stock Option Plan
In April 1994, the Board of Directors approved the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") to provide for the
automatic grant of options to purchase shares of Common Stock to each person who
is elected as a director of the Company and who is not otherwise employed by the
Company (a "Non-Employee Director").
F-13
<PAGE>
10. Stock Option and Purchase Plans (Continued)
Options granted under the Directors' Plan to Non-Employee Directors
upon their initial election to the Board will vest and be exercisable in five
equal annual installments commencing on the date one year after the date of the
grant. Vesting is contingent upon the continuous service of the director. The
Directors' Plan has been amended to provide for automatic vesting of options
granted upon a change of control, as defined. Options granted annually to
existing Non-Employee Directors vest in full on the date ten days prior to the
date of the first annual meeting of stockholders of the Company subsequent to
the date of the grant. The exercise price of options granted under the
Directors' Plan must equal or exceed the fair market value of the Common Stock
on the date of grant. Under this plan, 230,000 shares of Common Stock have been
reserved for issuance. As of December 31, 1996, options for 128,000 shares had
been issued and were outstanding, of which 122,000 and 61,000 shares were
exercisable and subject to repurchase if exercised, respectively.
Long-Term Objectives Stock Option Plan for Senior Management
In July 1995, the Board of Directors adopted the Long-Term Objectives
Stock Option Plan for Senior Management (the "Long-Term Plan"). The Long-Term
Plan provides for the grant of options to purchase shares of Common Stock to
certain senior employee officers, upon terms determined by the Board of
Directors. The options granted under this Plan may be either incentive stock
options or nonstatutory stock options. Options granted under this Plan expire no
later than ten years from the date of grant. The option price shall be at least
100% of the fair market value on the date of grant for incentive stock options.
Under this plan, 270,000 shares of Common Stock have been authorized for
issuance.
In August 1996, the Company amended the terms of the then outstanding
options on 180,000 shares of Common Stock to modify the vesting provisions. The
amendment resulted in $538,000 of deferred compensation which will be amortized
over the remaining vesting period of approximately five years, or such shorter
period as described below. The options, as amended in August 1996, vest over a
period of approximately six years, but may be fully or partially accelerated if,
in the opinion of the Board of Directors, certain specific performance
objectives are met by December 31, 1997.
As of December 31, 1996, options for 180,000 shares were outstanding,
of which 135,000 shares and 128,250 shares were exercisable and subject to
repurchase if exercised, respectively.
Accounting for Stock Based Compensation
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 No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options generally equals the market price of the
underlying stock on the date of grant, generally no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.7%
and 5.9%; dividend yields of 0%; volatility factors of the expected market price
of the Company's Common Stock of .57; and a weighted-average expected life of
the option of 3 years.
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 that 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-14
<PAGE>
10. Stock Option and Purchase Plans (Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
1996 1995
----------- ------------
Pro forma net loss $ (21,813) $(12,846)
=========== ============
Pro forma net loss per share $ (1.99) $ (1.41)
=========== ============
The weighted average fair value of options granted during 1996 and 1995
was $5.39 and $3.55, respectively. Because FAS 123 is applicable only to options
granted subsequent to December 31, 1994, its pro forma effects will not be fully
reflected until 1997.
<TABLE>
A summary of the Company's stock option activity under the Company's
option plans which include the 1992 Stock Option Plan, the 1994 Non-Employee
Directors' Plan and the Long-Term Objectives Stock Option Plan for Senior
Management is as follows:
<CAPTION>
Outstanding Stock Options
-----------------------------------
Weighted
Shares Available Average
For Grant of Number of Price per
Options Shares Share
----------------- -------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1993 155,516 515,485 $0.83
Shares authorized 500,000
Options granted (413,703) 413,703 5.06
Options exercised (115,652) 0.66
Options forfeited 29,614 (29,614) 1.02
----------------- --------------
Balance at December 31, 1994 271,427 783,922 3.08
Shares authorized 1,300,000
Options granted (1,131,137) 1,131,137 8.31
Options exercised (112,261) 1.22
Options forfeited 16,370 (16,370) 5.11
----------------- --------------
Balance at December 31, 1995 456,660 1,786,428 6.49
Shares authorized 650,000
Options granted (a) (652,066) 652,066 12.08
Options exercised (305,072) 4.60
Options forfeited 235,559 (235,559) 7.85
----------------- --------------
Balance at December 31, 1996 690,153 1,897,863 $8.54
================= ==============
<FN>
Note:
(a) Of the 652,066 options granted in 1996, options for 151,847 shares
are subject to stockholder approval.
</FN>
</TABLE>
F-15
<PAGE>
10. Stock Option and Purchase Plans (Continued)
<TABLE>
The following table summarized information concerning currently
outstanding options:
<CAPTION>
Exercisable
Outstanding Stock Options Stock Options
---------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Price Per
Exercise Prices of Shares Life Price of Shares Share
----------------- -------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$0.38 - $ 2.44 262,778 6.6 $1.35 201,593 $1.24
5.00 - 5.75 56,929 8.3 5.38 34,882 5.50
6.00 - 8.13 626,644 7.3 6.96 444,606 7.14
9.67 - 11.88 752,192 9.2 11.30 195,481 11.46
12.00 - 15.00 199,320 9.1 13.49 61,534 13.55
----------------- -------------- -------------- ------------- ------------ -------------
$0.38 - $15.00 1,897,863 8.2 $8.54 938,096 $7.13
================= ============== ============== ============= ============ =============
</TABLE>
11. Income Taxes
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $55 million. The federal net operating loss
carryforwards will expire at various dates beginning on 2006 through 2011.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets for federal
and state income taxes as of December 31 are as follows (in thousands):
1996 1995
-------- --------
Net operating loss carryforwards $ 19,300 $ 10,300
Research credits (expires 2006-2011) 2,100 1,500
Capitalized R&D 1,100 600
Deferred revenue 200 800
Other - net 800 2,300
-------- --------
Total deferred tax assets 23,500 15,500
Valuation allowance for deferred tax assets (23,500) (15,500)
-------- --------
Net deferred tax assets $ 0 $ 0
======== ========
Due to the Company's history of losses, the deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased by
$5.1 million and $5.4 million during 1995 and 1994, respectively.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
12. Related Party Transactions
In 1992, the Company entered into a collaboration and licensing
agreement with Selectide. The chairman of the Board of Directors and chief
executive officer of the Company was also the chairman of the Board of Directors
of Selectide (see Note 3).
F-16
<PAGE>
12. Related Party Transactions (Continued)
In 1996, the Company made a $100,000 investment in a China joint
venture. The chairman of the Board of Directors and chief executive officer of
the Company is also the Chairman and a director of the China joint venture.
In 1995, the Company entered into a collaboration agreement with Zeneca
(see Note 6). As of December 31, 1996, Zeneca owned approximately 20% of the
Company's outstanding Common Stock.
In January 1996, the Company entered into a license agreement with
Zeneca for the dermatological use of a synthetic small molecule inhibitor. In
connection with the Company's filing of an Investigational New Drug ("IND")
application with the Food and Drug Administration ("FDA") for the clinical
testing of this compound, SU5271, the Company paid Zeneca $200,000.
In connection with the resignation of an officer in June 1996, the
Company recorded approximately $500,000 in connection with the forgiveness of
loans and salary continuation.
In August 1996, an officer and director of the Company exercised
options to purchase 132,333 shares of Common Stock (See Note 9). As
consideration for the purchase of these shares and related tax liability upon
the exercise of the options, the officer issued a full recourse promissory note
in the amount of $1.1 million to the Company, of which approximately $883,000 is
included in stockholder's equity. In addition, the Company provided secured
loans to certain key employees and officers to assist in the down payments for
the purchase of their personal residences, all of which are forgivable after
specified years of employment. Included in Other Assets are approximately
$330,000 of loans receivable from certain key employees and officers at December
31, 1996.
F-17
<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 undersigned, thereunto duly authorized, in the City of Redwood
City, State of California, on March 26, 1997.
SUGEN, INC.
By: /s/ Stephen Evans-Freke
---------------------------
Stephen Evans-Freke
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen Evans-Freke and Christine E.
Gray-Smith, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments to
this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen Evans-Freke Chief Executive Officer and March 26, 1997
- ----------------------------- Chairman of the Board
(Stephen Evans-Freke) (Principal Executive Officer)
/s/ Christine Gray-Smith Vice President, Finance March 26, 1997
- ----------------------------- (Principal Financial and
(Christine Gray-Smith) Accounting Officer)
<PAGE>
/s/ Axel Ullrich Director March 26, 1997
- ------------------------------
(Axel Ullrich)
/s/ Richard D. Spizzirri Director and Secretary March 26, 1997
- ------------------------------
(Richard D. Spizzirri)
/s/ Jeremy L. Curnock Cook Director March 26, 1997
- ------------------------------
(Jeremy L. Curnock Cook)
/s/ Anthony B. Evnin Director March 26, 1997
- ------------------------------
(Anthony B. Evnin)
/s/ Charles M. Hartman Director March 26, 1997
- ------------------------------
(Charles M. Hartman)
/s/ Heinrich Kuhn Director March 26, 1997
- ------------------------------
(Heinrich Kuhn)
/s/ Donald E. Nickelson Director March 26, 1997
- ------------------------------
(Donald E. Nickelson)
/s/ Bruce R. Ross Director March 26, 1997
- ------------------------------
(Bruce R. Ross)
/s/ Glenn S. Utt, Jr. Director March 26, 1997
- ------------------------------
(Glenn S. Utt, Jr.)
/s/ Michael A. Wall Director March 26, 1997
- ------------------------------
(Michael A. Wall)
<PAGE>
SUGEN, Inc.
<TABLE>
EXHIBIT INDEX
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
<S> <C>
3.1 Restated Certificate of Incorporation, filed February 23, 1995. (2)
3(ii).2 Bylaws of the Registrant. (1)
3.3 Certificate of Designation of Series A Junior Participating Preferred Stock
of the Registrant. (5)
4.1 Reference is made to Exhibits 3.1 through 3(ii).2.
4.2 Specimen Stock Certificate. (1)
10.1 Form of Investor Rights Agreement, dated December 23, 1992, among the
Registrant and certain investors. (1)
10.2 Registrant's 1992 Amended and Restated Stock Option Plan (the "Option
Plan"), as amended. (11)
10.3 Form of Incentive Stock Option under the Option Plan. (1)
10.4 Form of Nonstatutory Stock Option under the Option Plan. (1)
10.5 Warrant to Purchase 2,666 Shares of Series A Preferred Stock, dated
December 7, 1991, granted by the Registrant to Sanwa Business Credit
Corp. (1)
10.6 Warrant to Purchase 2,666 Shares of Series A Preferred
Stock, dated December 7, 1991, granted by the Registrant to
Silicon Valley Bancshares.
(1)
10.7 Warrant to Purchase 5,333 Shares of Series A Preferred Stock, dated
December 7, 1991, granted by the Registrant to Western Technology
Investment. (1)
10.8 Warrant to Purchase 133,333 Shares of Common Stock, dated July 13, 1992,
granted by the Registrant to Genentech, Inc. (1)
10.9 Warrant Agreement to Purchase 40,000 Shares of Series D Preferred Stock,
dated October 30, 1992, between the Registrant and Comdisco, Inc. (1)
10.10 Warrant Agreement to Purchase Shares of Series G(F) Preferred Stock, dated
July 23, 1993, between the Registrant and Comdisco, Inc. (1)
10.11 Warrant Agreement to Purchase Shares of Series G(F) Preferred Stock, dated
July 23, 1993, between the Registrant and Comdisco, Inc. (1)
10.12 Stock Swap Agreement, dated July 27, 1992, as amended, between the
Registrant and Selectide Corporation. (1)
10.13++ Amended and Restated Research and License Agreement, dated August 16, 1991,
among the Registrant, Max-Planck-Gesellschaft, Max-Planck-Institut and
Garching Innovation GmbH; and Extension, dated March 31, 1993. (1)
10.14++ Amended and Restated Research and License Agreement, dated September 1,
1991, between the Registrant and New York University. (1)
10.15++ Services and Supply Agreement, dated January 1, 1992, between the
Registrant and BioSignal, Ltd. (1)
10.15(i) Exhibit A to Services and Supply Agreement, dated January 1, 1992, between
the Registrant and BioSignal, Ltd. (1)
10.16++ Collaboration and License Agreement, dated November 17, 1992, between the
Registrant and Selectide Corporation. (1)
10.17++ Collaboration Agreement, dated December 18, 1992, between the Registrant
and Amgen, Inc. (1)
10.17(i)++ Amendment Number One to Collaboration Agreement between the Registrant and
Amgen, Inc., dated June 15, 1995. (3)
10.18 Letter of Intent, dated May 27, 1993, among the Registrant, the State
Science & Technology Commission of the Peoples Republic of China, and
International Technology Investment Managers (Asia), Inc. (1)
10.19++ Amended and Restated Research and License Agreement, between the Registrant
and Yissum Research Development Company of The Hebrew University of
Jerusalem, dated March 27, 1995. (2)
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
10.20++ Research and License Agreement, dated October 1, 1993, among the
Registrant, Max-Planck-Gesellschaft, Max-Planck-Institut and Garching
Innovation GmbH. (1)
10.21++ Exclusive License Agreement, dated January 21, 1994, between the Registrant
and Washington Research Foundation. (1)
10.22 Purchase Agreement between the Registrant and Zeneca Limited, dated October
4, 1994. (2)
10.23++ Amended and Restated Research and License Agreement between the Registrant
and Yissum Research Development Company of The Hebrew University of Jerusalem
(labeled "Psoriasis"). (8)
10.24++ Amended and Restated Research and License Agreement between the Registrant
and Yissum Research Development Company of The Hebrew University of
Jerusalem (labeled "Papilloma"). (8)
10.25++ Amended and Restated Research and License Agreement between the Registrant
and Yissum Research Development Company of The Hebrew University of
Jerusalem (labeled "Sepsis/Inflammation"). (8)
10.26++ Amended and Restated Research and License Agreement between the Registrant
and Yissum Research Development Company of The Hebrew University of
Jerusalem (labeled "Restenosis"). (8)
10.27 Consulting Agreement, dated August 16, 1991, between the Registrant and Dr.
Joseph Schlessinger. (1)
10.28 Consulting Agreement, dated August 16, 1991, between the Registrant and Dr.
Axel Ullrich. (1)
10.29 Seaport Centre Standard Lease and Addendum I, dated November 12, 1991,
between the Registrant and Seaport Center Venture Phase I. (1)
10.29(i) First Amendment, dated July 8, 1993, to Seaport Centre Standard Lease
between the Registrant and Seaport Center Venture Phase I. (1)
10.29(ii) Second Amendment, dated June 2, 1995, to Seaport Centre Standard Lease
between the Registrant and Seaport Centre Venture Phase I. (3)
10.29(iii) Construction Addendum, dated June 2, 1995, to Second Amendment to Seaport
Centre Standard Lease between the Registrant and Seaport Centre Venture
Phase I. (3)
10.30 Registrant's 1994 Employee Stock Purchase Plan. (1)
* 10.31 Registrant's 1994 Non-Employee Directors' Stock Option Plan, as amended.
(11)
10.32 Form of Indemnity Agreement to be entered into between the Registrant and
its officers and directors. (1)
10.33 Warrant Agreement to Purchase 7,200 Shares of Series G Preferred Stock,
dated May 5, 1994, between the Registrant and Financing for Science
International, Inc. (1)
10.34++ Research and License Agreement, dated August 1, 1994, between the Company
and the Hospital for Sick Children. (1)
10.34(i) Amendment to Research and License Agreement between the Registrant and the
Hospital for Sick Children, dated August 1, 1995. (4)
10.35 Research and Technology Agreement, dated March 3, 1993, between the
Registrant and PanLabs, Inc., as amended. (1)
10.36++ Collaboration Agreement, between the Registrant and Zeneca Limited, dated
March 22, 1995. (2)
10.37 Agreement for the Purchase of Common Stock of the Registrant by Zeneca
Limited, dated January 6, 1995. (2)
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
10.38 Loan Agreement and Promissory Note between the Registrant and James L.
Tyree, dated August 29, 1994. (3)
10.39 Deferred Compensation Agreement between the Registrant and James L. Tyree,
dated August 29, 1994. (3)
10.40++ Cooperative Research and Development Agreement between the Registrant and
the National Cancer Institute, dated August 14, 1995. (4)
*10.41 Registrant's 1995 Long-Term Objectives Stock Option Plan for Senior
Management, as amended. (12)
10.42 Form of Nonstatutory Stock Option under the Long-Term Objectives Stock
Option Plan for Senior Management. (6)
10.43 Rights Agreement, dated as of August 1, 1995 between the Registrant and The
First National Bank of Boston, as Rights Agent. (5)
10.44 Form of Agreement for the Purchase of Common Stock of the Registrant and
list of participants thereto, dated September 21, 1995. (4)
10.45 Lease Financing Commitment Letter, dated September 12, 1995 between the
Registrant and Financing for Science International, Inc. (4)
10.46++ Collaboration Agreement, between the Registrant and ASTA Medica
Aktiengesellschaft, dated December 5, 1995. (7)
10.47 Agreement for the Purchase of Common Stock of the Registrant by ASTA Medica
Aktiengesellschaft, dated December 5, 1995. (7)
10.48++ Termination and Redemption Agreement between the Registrant and Amgen Inc.,
dated January 9, 1996. (8)
10.49++ Warrant to purchase 200,000 shares of Common Stock of the Registrant, dated
January 19, 1996, issued by the Registrant to Amgen Inc. (8)
10.50++ License Agreement between the Registrant and Zeneca Limited, dated January
19, 1996. (8)
10.51++ Cooperative Research and Development Agreement between the Registrant and
the National Cancer Institute, dated April 12, 1996. (9)
10.52++ Termination notice, dated May 24, 1996, between the Registrant and Yissum
Research Development Company of The Hebrew University of Jerusalem
(labeled "Sepsis/Inflammation"). (9)
10.53++ Termination notice, dated May 24, 1996. between the Registrant and Yissum
Research Development Company of The Hebrew University of Jerusalem
(labeled "Restenosis"). (9)
10.54+ Research and Development Agreement between the Registrant and Arqule, Inc.
(10)
10.55+ Extension of Research and License Agreement between the Registrant and the
Max Planck Institut. (10)
10.56 Promissory Note received by the Registrant from Stephen Evans-Freke. (10)
10.57 Agreement for the purchase of Common Stock of the Registrant by Vision
Pharmaceuticals L.P. (10)
10.58+ Collaboration Agreement by and between the Registrant and Vision
Pharmaceuticals L.P. and Allergan, Inc. (10)
10.59+ Extension of Research Agreement between the Registrant and Yissum
Development Company of the Hebrew University. (10)
10.60 James L. Tyree Separation Agreement. (10)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (incorporated in the signature page of the Form 10-K).
27 Financial Data Schedule.
<FN>
- --------------
* Compensatory Plan.
+ Confidential Treatment has been requested with respect to portions of this
Exhibit.
++ Confidential treatment has previously been granted for portions of this
Exhibit.
<PAGE>
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16 "Exhibits" of the Company's Registration Statement on
Form S-1, as amended (File Number 33-77074), which became effective
October 4, 1994.
(2) Incorporated by reference to identically numbered exhibits
filed in response to Item 14 "Exhibits" of the Company's
Annual Report on Form 10-K for the year ended December 31,
1994.
(3) Incorporated by reference to identically numbered exhibits filed in
response to Item 6 "Exhibits" of the Company's Form 10-Q for the quarter ended June 30, 1995.
(4) Incorporated by reference to identically numbered exhibits filed in
response to Item 6 "Exhibits" of the Company's Form 10-Q for the quarter
ended September 30, 1995.
(5) Filed as an exhibit to the Form 8-K Current Report dated July 26, 1995 and
incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 33-99152), dated November 9, 1995, and incorporated herein by
reference.
(7) Incorporated by reference to identically numbered exhibits
filed in response to Item 14 "Exhibits" of the Company's
Annual Report on Form 10-K as amended, for the year ended
December 31, 1995.
(8) Incorporated by reference to identically numbered exhibits filed in
response to Item 6 "Exhibits" of the Company's Form 10-Q for the quarter
ended March 31, 1996.
(9) Incorporated by reference to identically numbered exhibits filed in
response to Item 6 "Exhibits" of the Company's Form 10-Q for the quarter
ended June 30, 1996.
(10) Incorporated by reference to identically numbered exhibits filed in
response to Item 6 "Exhibits" of the Company's Form 10-Q for the quarter
ended September 30, 1996.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-09323), dated August 1, 1996, and incorporated herein by
reference.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-09321), dated August 1, 1996, and incorporated herein by
reference.
</FN>
</TABLE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-09323) pertaining to the SUGEN, Inc. 1992 Stock Option Plan, the
SUGEN, Inc. 1994 Non-Employee Directors' Stock Option Plan and the SUGEN, Inc.
1994 Employee Stock Purchase Plan and in the Registration Statement (Form S-8
No. 333-09321) pertaining to the SUGEN, Inc. Long-Term Objectives Stock Option
Plan for Senior Management of our report dated February 7, 1997 with respect to
the financial statements of SUGEN, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Palo Alto, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,852
<SECURITIES> 31,482
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,066
<PP&E> 8,384
<DEPRECIATION> 4,289
<TOTAL-ASSETS> 61,936
<CURRENT-LIABILITIES> 10,468
<BONDS> 2,938
<COMMON> 130
0
0
<OTHER-SE> 48,400
<TOTAL-LIABILITY-AND-EQUITY> 61,936
<SALES> 0
<TOTAL-REVENUES> 13,650
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 691
<INCOME-PRETAX> (19,881)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,881)
<EPS-PRIMARY> (1.81)
<EPS-DILUTED> (1.81)
</TABLE>
