================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
Amendment No. 1 to
FORM 10-K
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the fiscal year ended December 31, 1998.
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.)
230 East Grand Avenue, South San Francisco, California 94080
(address of principal executive offices)
(650) 553-8300
(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 15, 1999 was $180,348,242. (1)
The number shares of Common Stock outstanding at March 15, 1999 was 16,734,658
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 1999 Annual Meeting
are incorporated herein by reference in Part III of this Report.
- -----------------------------
(1) Excludes 6,007,944 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 15, 1999.
================================================================================
<PAGE>
PART I
Item 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 which are subject to the "safe harbor"
created by those sections. These forward-looking statements include, but are not
limited to, statements concerning the Company's plans to: continue development
of its current product candidates; conduct clinical trials with respect to
SU101, SU5416, SU6668 and other product candidates; utilize the Company's
capital resources and the time periods related thereto; seek regulatory
approvals; engage third-party manufacturers to supply its clinical trials and
commercial requirements; establish a marketing, sales and distribution
capability; and evaluate additional product candidates for subsequent clinical
and commercial development. These forward-looking statements may be found in the
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" sections of this Annual Report on Form 10-K.
Forward-looking statements not specifically set forth above may also be found in
these and other sections of the Annual Report on Form 10-K. Each statement is
based on the current expectations of the Company and is subject to the risks and
uncertainties inherent in the Company's business. In accordance with the Private
Securities Litigation Reform Act of 1995, the Company reminds investors that all
such "forward-looking statements" are necessarily only estimates of future
results and that the actual results achieved by the Company may differ
materially from these current expectations due to a number of factors, including
(i) the Company's technological success in developing lead compounds and
products; (ii) the availability and terms of financing of the Company's
operations; (iii) the actions of third parties, including collaborators and
competitors; (iv) the demonstration of the safety and efficacy of the Company's
products at each stage of clinical development; (v) the ability to obtain patent
and other proprietary rights protection for the Company's products; (vi) the
receipt of timely regulatory approval of the Company's products; (vii) the
ability to manufacture product candidates in commercial quantities at reasonable
costs and in a manner acceptable to various regulatory authorities; and (viii)
market acceptance of the Company's products. Factors creating uncertainty are
discussed in more detail in individual sections of this Annual Report on Form
10-K. In particular, see the "Liquidity and Capital Resources" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Overview
SUGEN is a biopharmaceutical company focused on the discovery and
development of small molecule drugs which target specific cellular signal
transduction pathways. These signalling pathways are regulated by cell-surface
receptors or intracellular signalling molecules known as tyrosine kinases
("TKs"), tyrosine phosphatases ("TPs") and serine-threonine kinases ("STKs"),
three of the largest known families of receptors in the body and key regulators
of critical cellular functions. Aberrant signalling of TKs, TPs and STKs has
been shown to result in a variety of chronic and acute pathological diseases,
including cancer and diabetes as well as in dermatologic, ophthalmic, neurologic
and immune disorders. The Company believes that compounds designed to target
certain kinases and phosphatases and inhibit enzyme activity or prevent the
binding of downstream signalling molecules make attractive therapeutic product
candidates. The Company's research and development efforts in signal
transduction are based in part upon the pioneering accomplishments of SUGEN's
founding scientists, Dr. Axel Ullrich of Max-Planck-Institut fur Biochemie
("MPI") and Dr. Joseph Schlessinger of New York University Medical Center
("NYU").
SU101, the Company's most advanced product candidate, is an inhibitor
of the platelet-derived growth factor receptor ("PDGF TK") signalling pathway.
Imbalances in the PDGF TK signalling pathway have been shown by SUGEN and others
to be implicated in significant subsets of certain types of cancers, including
brain, prostate, lung and ovarian. The Company initiated a Phase III clinical
trial in refractory glioblastoma (an aggressive type of brain cancer) in the
first quarter of 1998 and expects to conduct an interim analysis by year end. A
Phase II study of SU101 as single agent therapy for refractory anaplastic
astrocytoma, another type of malignant brain tumor, is also being conducted in
parallel with the Phase III trial, and at the same centers. A
2
<PAGE>
Phase II clinical trial of SU101 in combination with BCNU, the chemotherapy drug
that is part of the standard treatment regimen in newly diagnosed brain cancer
patients, was initiated in mid-1997, and is expected to be completed by
mid-year. The Company is also conducting a pilot study of SU101 in combination
with mitoxantrone, in preparation for a pivotal Phase III trial as combination
front-line therapy in hormone-refractory prostate cancer patients, set to begin
later this year. In addition, the Company has ongoing Phase II trials in ovarian
and non small cell lung cancers, set for completion in mid 2000. To date, over
400 patients have been treated with SU101 in 13 Company-sponsored clinical
trials.
The Company initiated Phase I clinical testing in September 1997 with
its lead angiogenesis inhibitor, SU5416, a Flk-1/KDR TK inhibitor, which is
designed to inhibit the growth and spread of cancer by preventing the formation
of new blood vessels (angiogenesis) required to nourish the tumor. To date,
SU5416 has shown an excellent safety profile in over 100 patients with a range
of solid tumors, including advanced colorectal, lung and renal cell cancers, and
AIDS-related Kaposi's sarcoma; anecdotal indications of activity have been
observed in a number of patients, including prolonged periods of stable disease
and some instances of tumor shrinkage. After extensive consultation with
numerous oncology opinion leaders, the Company announced plans to accelerate the
development of SU5416 with the initiation of Phase III clinical trials in non
small cell lung and colorectal cancers, and Phase II/III studies in AIDS-related
Kaposi's sarcoma in the U.S. and Europe this year. This strategy may expedite
the commercialization of SU5416, which has the potential to become the first
specific angiogenesis inhibitor to reach the U.S. market. Meanwhile, the Company
will be working with certain investigators on NCI-sponsored Phase II studies in
other cancer indications. There can be no assurance that this commercialization
strategy will result in accelerated commercialization of SU5416 or that other
angiogenesis inhibitors will not receive regulatory approval prior to any
approval of SU5416.
SUGEN's third novel anti-cancer drug candidate is SU6668, which
combines both angiogenic and cytostatic anti-tumor activity by selectively
blocking multiple targets involved in the growth and spread of tumors, including
the Flk-1/KDR, PDGF and fibroblast growth factor (FGF) receptors. SU6668 is
currently in Phase I clinical trials in Europe and in the U.S. using intravenous
and oral formulations, respectively. Both studies are expected to conclude in
the later half of 1999.
SUGEN is also pursuing additional cancer-related drug development
programs, including Pan-Her, Met-TK, CDK2, GRB2, Raf and other proprietary
programs, many of which have lead compounds now undergoing in vivo pharmacology
studies. The Company currently plans to select a lead compound for a small
molecule Pan-Her inhibitor this year, and expects to identify a clinical
candidate for either the Met-TK or CDK2 program in 1999. There can be no
assurance that lead compounds will emerge in any of these programs in 1999, or
at all.
SUGEN is also applying its drug discovery and development platform to
areas outside oncology, including ophthalmology, rheumatoid arthritis,
cardiovascular disease, diabetes, and immunology. The Company is still awaiting
final results of a Phase I/II clinical trial with SU5271, an epidermal growth
factor receptor ("EGF TK") antagonist, for the treatment of psoriasis; however,
the results seen to date have not been compelling, and given the Company's
prioritization on its cancer programs, the Company does not currently anticipate
moving forward into Phase II with SU5271.
SUGEN employs a target-driven approach to drug discovery and
development. The Company believes that the receptors and signal transduction
pathways that play a causative role in disease states are attractive targets for
drug design and development. SUGEN's drug discovery platform consists of:
(1) target identification, using advanced genomics techniques and
the Company's proprietary bioinformatics program;
(2) target validation in relevant in vivo disease models;
(3) whole cell or other assay design and target-driven screening
of compounds for leads; and
(4) lead optimization using crystallography and computational
chemistry.
The Company believes that its drug discovery and development platform may reduce
the cost, time and risk associated with bringing potential products to market by
rationally screening for potent and specific drug leads in the early stages of
discovery and optimizing pharmacologic features in the later stages of drug
development, thereby reducing the incidence and severity of side effects.
3
<PAGE>
SUGEN is concurrently pursuing two business strategies for
commercialization of its products and technologies. In the cancer field, SUGEN
intends to build a vertically integrated oncology business in North America,
with the objective of bringing to market a family of target-specific signal
transduction inhibitors proprietary to SUGEN. To market its products
effectively, the Company currently intends to build a focused U.S. sales force
to target the major cancer treatment centers and may explore alliances with
potential marketing and distribution partners to optimize sales. On the European
front, SUGEN recently established SUGEN Europe AG ("SUGEN Europe") as a
currently wholly owned subsidiary in Schaffhausen, Switzerland. This new entity
has become the European licensee for SUGEN's cancer pipeline, with a mission to
build a strong and profitable cancer business in Europe. While the Company had
initially planned to license European rights to its products to a fully
integrated pharmaceutical company, SUGEN has concluded that the available
financial terms of that route would not adequately reflect the market potential
of its products in such a potentially rapidly growing market. SUGEN Europe
expects to work with four or five national distribution partners who bring a
strong local presence on a pan-European scale to maximize product revenue. The
first of these distribution agreements has been concluded with Esteve S.A. of
Spain, and active negotiations are ongoing with respect to the other European
territories. The Company also plans to seek additional corporate partners to
fund product development and to commercialize its products in the rest of the
world. In Japan, the Company entered into an agreement with Taiho Pharmaceutical
Ltd. ("Taiho") for the development and commercialization of SUGEN's angiogenesis
inhibitors for the treatment of cancer. Under this agreement, Taiho contributes
to the worldwide development and clinical trials costs of SU5416 and SU6668,
pays certain milestones, and receives Japanese commercial rights; SUGEN, through
its affiliate, SUGEN International AG ("SUGEN International"), may provide
finished product to Taiho on prenegotiated terms. While the Company generally
intends to retain rights to its cancer programs in North America, SUGEN is
funding a portion of its ongoing cancer research through a collaboration with
Zeneca Limited ("Zeneca") for the development of five cancer targets including
the Aurora2, an oncogene overexpressed in more than 50% of primary colorectal
cancers. Pursuant to its agreement with Zeneca, the Company will have the
opportunity to obtain profit participation rights in the North American market
by contributing to clinical development costs as incurred and in addition will
receive milestone payments and royalties on worldwide sales. Finally, the
Company is collaborating with ASTA Medica Aktiengesellschaft ("ASTA Medica") of
Germany with respect to its Pan-Her and Raf programs currently in drug
discovery; ASTA Medica makes certain payments to SUGEN, and receives European
and Latin American commercial rights in cancer.
Outside of oncology, the Company's strategy is to seek corporate
collaborations or joint ventures to which SUGEN contributes validated targets,
screening technologies and drug leads while the partner provides the
disease-specific and drug development expertise as well as marketing experience,
in addition to providing funding to bring these potential products to market. As
part of this strategy, the Company entered into a collaboration with Vision
Pharmaceuticals, L.P., an affiliate of Allergan, Inc., and Allergan, Inc.
(collectively, "Allergan") for angiogenesis inhibition in ophthalmic
applications. The Company also has an agreement with ProChon Biotech Ltd.
("ProChon") for the development of drugs for the treatment of achondroplasia and
other growth disorders.
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").
4
<PAGE>
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 may affect different
cellular processes responsible for growth, differentiation, migration or
metabolism.
Tyrosine Kinases, Tyrosine Phosphatases and Serine-Threonine Kinases in Signal
Transduction
Kinases and phosphatases are classes of signalling molecules that are
central to the healthy functioning of all tissues. The Company's research focus
in this area has been on TKs, TPs and selected STKs. At present, there are
approximately 100 known human TKs, including Her2, PDGF TK, and EGF TK, all of
which have been cloned over the last 14 years. TPs were not discovered until
1988, and at present SUGEN believes there are approximately 95 known human TPs.
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 added to specific
sites on each of the TKs. These phosphates serve as attachment sites in
downstream signalling molecules. Many of these downstream signalling molecules
in turn become phosphorylated themselves, enabling them to recruit their own
substrates and thus pass on the signal.
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 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, enzymes which 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, proliferation of connective tissue cells
(fibroblasts), survival and differentiation of nerve cells and regeneration of
tissues during wound healing. 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 make them
attractive targets for drug discovery and therapeutic intervention. The
intracellular domains where enzymatic activity occurs 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.
5
<PAGE>
Product Development Programs
TKs, TPs, STKs and their signalling pathways are implicated in a broad
number of diseases. SUGEN focuses its product development efforts on those areas
which represent significant market opportunities and for which the disease
processes and signalling pathways are well understood. The Company has several
novel product candidates in various stages of development for disease areas in
which there is a critical need for major advances in efficacy and safety over
currently available therapies. These diseases include cancer as well as
diabetes, immunologic, and cardiovascular disorders. See "-Overview."
6
<PAGE>
<TABLE>
The following table outlines SUGEN's development and research programs
which are being pursued either independently by SUGEN or in collaboration with
the Company's partners:
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Program Indication(s) Status(1) Rights
- -----------------------------------------------------------------------------------------------------------------------
Cancer
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SU101 First Relapse malignant glioma Phase III SUGEN
PDGF TK Inhibitor - Monotherapy
Newly diagnosed malignant glioma Phase II SUGEN
- Combination therapy with BCNU
Prostate cancer Phase I/II pilot SUGEN
-Combination therapy with to prepare for
mitoxantrone Ovarian, lung Phase III SUGEN
and anaplastic astrocytoma Phase II
- -----------------------------------------------------------------------------------------------------------------------
SU5416 Angiogenesis inhibition Phase I Taiho
Flk-1/KDR TK Antagonist -Most solid tumor types Japan
Colorectal cancer Phase III (summer) SUGEN
Non small cell lung cancer Phase III United States and rest of
AIDS-related Kaposi's sarcoma Phase II/III world
- -----------------------------------------------------------------------------------------------------------------------
SU6668 Angiogenic and cytostatic anti-tumor Phase I SUGEN
Broad Spectrum Inhibitor activity
-Most solid tumors
- -----------------------------------------------------------------------------------------------------------------------
Raf Antagonist Pancreatic, bladder cancers Lead compounds ASTA Medica
Europe and South America
SUGEN
United States and rest of
world
- -----------------------------------------------------------------------------------------------------------------------
Pan-Her Antagonist Breast, ovarian, gastric, lung, head Preclinical ASTA Medica
and neck, prostate cancers Europe and South America
SUGEN
United States and rest of
world
- -----------------------------------------------------------------------------------------------------------------------
GRB2 Antagonist Multiple TK-driven tumors Lead compounds SUGEN
- -----------------------------------------------------------------------------------------------------------------------
Met TK Antagonist Stomach, colorectal and lung cancers Screening SUGEN
- -----------------------------------------------------------------------------------------------------------------------
Five cancer targets, Certain major cancers Research and Zeneca
including the Aurora2 screening
- -----------------------------------------------------------------------------------------------------------------------
Other proprietary programs Various cancers Research and SUGEN
screening
- -----------------------------------------------------------------------------------------------------------------------
Other Programs
- -----------------------------------------------------------------------------------------------------------------------
Insulin TP Antagonist Diabetes Type I/Type II Preclinical SUGEN
- -----------------------------------------------------------------------------------------------------------------------
Immunology targets Immune suppression, acute Research and SUGEN
inflammation screening
- -----------------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist Rheumatoid arthritis Preclinical SUGEN
(other targets)
- -----------------------------------------------------------------------------------------------------------------------
Flk-1/KDR TK Antagonist Angiogenesis inhibition in Preclinical Allergan
(other targets) ophthalmology
- Diabetic retinopathy
- Macular degeneration
- ------------------------------------------------------------------------------------------------------------------------
Neurology targets Neurodegenerative diseases Research and SUGEN
screening
- ------------------------------------------------------------------------------------------------------------------------
PDGF TK Antagonist Cardiovascular diseases Lead compounds SUGEN
(and other targets)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
"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.
7
<PAGE>
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, TPs have been implicated as potential tumor
suppressor genes due to their ability to counteract the activity of TKs.
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; 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. 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.
Many of the cancers that SUGEN's programs are addressing have patient
subsets with extremely poor prognoses 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 clinical trial
duration if the compounds prove to be active. There can be no assurance,
however, that the Company will be able to rely on smaller-scale clinical trials
to expedite commercialization of its products.
SU101/PDGF TK Antagonist. SU101 is a synthetic small molecule which inhibits the
platelet-derived growth factor receptor 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. In December 1994, the Company filed its first IND
with the Food and Drug Administration ("FDA") for SU101, a PDGF TK signalling
antagonist.
Imbalances in the PDGF TK signalling pathway have been shown by SUGEN
and others to be implicated in certain types of cancers, including brain,
prostate, lung and ovarian cancers. The Company initiated a Phase III clinical
trial in refractory glioblastoma (an aggressive type of brain cancer) in the
first quarter of 1998 and expects to conduct an interim analysis by year end. A
Phase II study of SU101 as single agent therapy for refractory anaplastic
astrocytoma, another type of malignant brain tumor, is also being conducted in
parallel with the Phase III trial, and at the same centers. A Phase II clinical
trial of SU101 in combination with BCNU, the chemotherapy drug that is part of
the standard treatment regimen in newly diagnosed brain cancer patients, was
initiated in mid-1997, and is expected to be completed by mid-year. The Company
is also conducting a pilot study of SU101 in combination with mitoxantrone, in
preparation for a pivotal Phase III trial as combination front-line therapy in
hormone-refractory prostate cancer patients, set to begin later this year. In
addition, the Company has ongoing Phase II trials in ovarian, and non small cell
lung cancers set for completion in mid 2000.
In December 1997, the Company was awarded two method of use patents in
the United States with respect to treating PDGF TK driven cancers with SU101. In
March 1997, the U.S. patent office issued to SUGEN a patent on the formulation
of SU101. The Company presently does not know if commercialization of SU101 will
infringe certain patents issued to a large pharmaceutical company but believes
that these patents may be subject to claims of invalidity as they relate to
SU101. See "-Patents and Proprietary Technology."
8
<PAGE>
SU5416/Flk-1/KDR TK Antagonist. Formation of the body's network of blood
vessels, or angiogenesis, occurs throughout childhood. This process generally
stops once a person reaches adulthood. Exceptions exist during wound healing and
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 small molecule
inhibitors of angiogenesis with low toxicity profiles because, theoretically,
inhibiting angiogenesis may limit tumor growth, extend the period of
disease-free remission in patients who respond to front-line therapy and reduce
the potential for metastases. The potential markets for such a product include
all patients with solid tumors where angiogenesis inhibition may play a role as
an important adjunctive therapy, and in patients with metastatic disease.
SUGEN and its collaborators have identified the Flk-1/KDR TK as a
receptor for vascular endothelial growth factor ("VEGF") and as a major
regulator of angiogenesis. Blocking Flk-1/KDR 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 laboratories, small molecule inhibitors of the Flk-1/KDR
blocked VEGF-dependent angiogenesis, as well as vascular permeability.
Additionally, human endothelial cells were prevented from undergoing cell
division that is required for the formation of new blood vessels.
The Company entered Phase I clinical testing in September 1997 with
SU5416, which to date has shown an excellent safety profile in over 100 patients
with a range of solid tumors, including advanced colorectal, lung and renal cell
cancers, and AIDS-related Kaposi's sarcoma. After extensive consultation with
numerous oncology opinion leaders, the Company announced plans to accelerate the
development of SU5416 with the initiation of Phase III clinical trials in non
small cell lung and colorectal cancers, and Phase II/III studies in AIDS-related
Kaposi's sarcoma in the U.S. and Europe this year. This strategy may expedite
the commercialization of SU5416, which has the potential to become the first
specific angiogenesis inhibitor to reach the U.S. market. Meanwhile, the Company
will be working with certain investigators on NCI-sponsored Phase II studies in
other cancer indications. There can be no assurance that this commercialization
strategy will result in accelerated commercialization of SU5416 or that other
angiogenesis inhibitors will not receive regulatory approval prior to any
approval of SU5416.
The Company had an exclusive research and licensing agreement with the
Max-Planck-Institut fur Physiologische and Klinische Forschung ("MPP") (MPI and
MPP are collectively referred to herein as "Max-Planck Society" or "MPS") to
support the work of Dr. Werner Risau, who was a SUGEN consultant and a director
of MPP, and his laboratory. Dr. Risau was one of the leading researchers in the
field of angiogenesis. Dr. Risau died in August 1998, and the future of this
collaboration has yet to be determined.
SU6668 Broad Spectrum Inhibitor. Through the Company's ongoing research and drug
discovery efforts in angiogenesis, SUGEN has identified additional drug
candidates which have demonstrated good potency on Flk-1/KDR, and additional
targets including FGF-R and PDGF-R which inhibit both the angiogenic process and
tumor growth and survival. In this regard, SUGEN has identified SU6668 as a
compound with these features. SU6668 is currently in Phase I clinical trials in
Europe and in the U.S. using intravenous and oral formulations, respectively.
Both studies are expected to conclude in mid 1999.
Pan-Her Inhibitor. Her2 is a TK target, first cloned by Dr. Ullrich, which is
believed to play an important role in certain aggressive breast, ovarian,
gastric and lung cancers. Dr. Ullrich and Dr. Dennis Slamon of the University of
California at Los Angeles Medical Center and member of SUGEN's Science Advisory
and Clinical Advisory Boards have established the clinical relevance of
overexpression of 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
9
<PAGE>
that the suppression of Her2 activity has a significant inhibitory effect on
tumor growth, validating Her2 as a target for cancer therapy in the subset of
patients that overexpress this TK.
Genentech's Herceptin, the monoclonal antibody targeting Her2, has
recently been approved for use in the treatment of certain Her2-positive
cancers. While the Company believes that this approval may serve to validate the
concept of targeting aberrant TKs in cancer, SUGEN believes that a small
molecule inhibitor of Her2 TK in addition to the closely related Her1 and Her4
receptors (thus, a Pan-Her inhibitor) has the potential to be a more broadly
applicable and useful product than the antibody approach. SUGEN has identified a
number of small molecule inhibitors of Pan-Her targets. The Company is currently
testing several of these molecules in animal models in order to identify the
clinical candidate in 1999. SUGEN is pursuing its Pan-Her antagonist program in
collaboration with ASTA Medica.
Raf Antagonist. Raf, an STK, is a downstream signalling molecule through which
numerous signalling pathways have been found to converge. 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. 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.
SUGEN has developed proprietary Raf-based assays and has identified
catalytic inhibitors of Raf. The Company believes that drugs that inhibit Raf
signalling may arrest tumors driven by excessive Ras activity and other
oncogenic targets. The Company has been pursuing its Raf antagonist program in
collaboration with ASTA Medica.
Met TK Antagonist. Met TK activity 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 to the bone, liver, and lung. SUGEN has recently
completed target validation studies on Met TK, has established a target-specific
screening cascade, and has derived compounds that are in evaluation for
anti-metastatic behavior in animal models.
CDK2 Antagonist. Aberrant regulation of CDK2 protein kinase activity has been
associated with a wide variety of cancers and tumor types. SUGEN has identified
potent and selective inhibitors of the CDK2 STK that inhibit cell cycle
progression and induce apoptosis. Lead finding efforts are under way to evaluate
compounds for oral efficacy using animal models.
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" above). 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 holds issued
patents to claims on the GRB2 target and compounds to inhibit GRB2 mediated
signalling. In vivo studies indicate efficacy in tumor growth inhibition with
identified lead compounds when given by the oral route of administration.
Angiogenesis Inhibition for Ophthalmic Disorders. A number of ophthalmological
disorders involve neovascularization of different regions of the eye. Since
Flk-1/KDR TK and other tyrosine kinase targets have been shown to play a crucial
role in ocular neovascularization, SUGEN and Allergan are collaborating to
identify, develop and commercialize novel angiogenesis inhibitors for the
treatment of ophthalmic diseases. In 1998, SUGEN and Allergan, using animal
models, have validated TK targets in order to provide the framework to identify
lead compounds. SUGEN and Allergan are currently in lead optimization to
identify clinical-stage compounds.
10
<PAGE>
Diabetes
Both Type I and Type II diabetes are characterized by pathologically
high levels of blood glucose due to inefficient cellular uptake and metabolism
of glucose. Type I diabetes is characterized by insufficient 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 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. Recently, disruption of a tyrosine phosphatase gene has led to mice
exhibiting features of human diabetes. This target validations work supports the
premise long held by SUGEN that a small molecule which specifically inhibits TPs
that regulate insulin TK signalling, would lead to increased glucose uptake and
metabolism.
SUGEN is currently optimizing lead compounds that inhibit TPs for use
in the treatment of diabetes.
Neurology
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.
Immunology
The role of TKs in the generation and maintenance of the human immune
system has been well established by many researchers around the world. SUGEN has
developed a diverse family of TK assays with application to the discovery of
drugs for immunologic disorders. For example, ZAP-70, an intracellular TK, has
been shown to be a primary regulator of T-lymphocyte cell activation of the
immune system. This TK and other TK targets in the immune system represent drug
discovery targets for identifying novel immunosuppressive and immuno-modulating
drugs. SUGEN has identified potent and selective chemical leads for many of
these targets and is progressing a number of these leads into animal studies.
SUGEN's Drug Discovery Technology
SUGEN's primary mission is to discover and develop drugs that target
specific TKs, TPs, and STKs. SUGEN's current drug discovery effort is focused
primarily on the discovery of small molecule drugs derived from synthetic
compound libraries. 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 may provide
more flexibility with respect to pharmacologic parameters, dose, and delivery,
including by the oral route. SUGEN has been able to identify lead compounds in a
number of its programs that:
(1) penetrate the cell;
(2) effect intracellular targets specifically;
(3) modulate biological function without cytotoxicity;
(4) show favorable oral bioavailability;
(5) can be easily manufactured; and
(6) show minimal systemic toxicity.
11
<PAGE>
SUGEN's process of drug discovery includes:
(1) target identification;
(2) target validation in relevant cellular and in vivo disease models;
(3) drug screen assay design and screening of compounds for high
quality chemical leads;
(4) lead finding crystallography and computational chemistry; and
(5) lead optimization using medicinal chemistry and
pharmacologic screens.
Target Identification
SUGEN's genomics efforts are focused exclusively on certain families of
signal transduction genes, which make up approximately two 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 or elsewhere. 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 550 protein kinases, 130 protein phosphatases, and 800 other
signal transduction genes. These genes are placed onto a signal transduction
chip, or DNA microarray, in order to study how their expression is regulated in
normal and diseased tissue in addition to 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 approximately 68,000
million instructions per second (mips) throughput. Using sophisticated pattern
recognition algorithms, SUGEN is able to rapidly mine the public databases
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 human homologs of
genes from lower organisms where genetic studies provide information pertinent
to the function of the new human gene.
SUGEN has developed a proprietary DNA array based hybridization
technology called transcript imaging, for which the Company has received a
United States patent. This technology enables SUGEN researchers to rapidly
obtain a comprehensive analysis of the expressions level for all known TKs and
TPs in a small sample of cells or tissue. SUGEN's transcript imaging allows the
Company to identify 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 candidate for target validation. 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 this technology also
has the potential to become an important diagnostic tool, an opportunity which
SUGEN may seek to pursue in partnership with an established diagnostics company
or otherwise.
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. Within this
process, "target validation" 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
12
<PAGE>
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 built a strong assay development
capability. 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 has proven to be a very important
determinant of whether screens favor the identification of high-quality chemical
leads with the desired chemical features to make drugs. SUGEN employs both
cell-based and biochemical assays in semi-automated format to support all drug
discovery programs related to TKs, TPs and STKs and related signalling targets.
Lead Finding
SUGEN's drug discovery process employs a cascade of tests including
animal models to ensure that chemicals affect a specific target function that is
consistent with each step of the screening cascade. By employing target-specific
and proprietary screening cascades, SUGEN has identified and continues to
identify high-quality lead compounds which are active in whole cell
environments, are potent and specific on intracellular targets, and which have
shown favorable features when tested in in vivo disease models where the target
plays a role. SUGEN has obtained and generated various in-house chemical
collections for screening. In addition, SUGEN has implemented combinational
chemistry to generate focused chemical collections that effect protein kinase
targets.
SUGEN has integrated crystallographic analysis and computational
chemistry into its drug discovery process. Work conducted in Dr. Schlessinger's
laboratory at NYU, as well as with other collaborators, allows SUGEN scientists
to elucidate the mechanism of compound interactions in the catalytic core of TKs
and provides a basis for further directed synthetic chemistry efforts in lead
generation and potential development of additional compounds against new
targets.
Lead Optimization/Preclinical Development
The objective of SUGEN's lead optimization program is to optimize the
pharmacologic properties of lead compounds by designing and synthesizing
compounds with the best chemical features for systemic efficacy and delivery
with the fewest side effects. The lead optimization process uses a wide variety
of in vivo pharmacologic endpoints in order to derive compounds with the best
clinical utility. SUGEN's expertise derived from its development of several
clinical-stage compounds has led to a proprietary source of information about
the relationships between compounds, specific targets, and the pharmacologic
properties of the compounds which maximizes the efficacious potential of
compounds in the clinical setting and favors commercial potential.
Corporate and Clinical Development Collaborations
The Company's approach to corporate partnering is different in cancer
than it is in other disease areas. In the cancer field, SUGEN intends to build a
vertically integrated oncology business in North America, with the objective of
bringing to market a family of target-specific signal transduction inhibitors
proprietary to SUGEN. To market its products effectively, the Company currently
intends to build a focused U.S. sales force to target the major cancer treatment
centers and may explore alliances with potential marketing and distribution
partners to optimize sales. On the European front, SUGEN recently established
SUGEN Europe as a currently wholly owned subsidiary in Schaffhausen,
Switzerland. This new entity has become the European licensee for SUGEN's cancer
pipeline, with a mission to build a strong and profitable cancer business in
Europe. While the Company had initially planned to license European rights to
its products to a fully integrated pharmaceutical company, SUGEN has concluded
that the financial terms of that route would not adequately reflect the market
potential of its products in such a potentially rapidly growing market. SUGEN
Europe expects to work with four or five national distribution partners who
bring a strong local presence on a pan-European scale to maximize product
revenue. The first of these distribution agreements has been concluded with
Esteve S.A. of Spain, and
13
<PAGE>
active negotiations are ongoing with respect to the other European territories.
The Company plans to seek additional corporate partners to fund product
development and to commercialize its products in the rest of the world. In
Japan, the Company entered into an agreement with Taiho for the development and
commercialization of SUGEN's angiogenesis inhibitors for the treatment of
cancer. Under this agreement, Taiho contributes to the worldwide development and
clinical trials costs of SU5416 and SU6668, pays certain milestones, and
receives Japanese commercial rights; SUGEN, through its affiliate, SUGEN
International, may provide finished product to Taiho on prenegotiated terms.
While the Company generally intends to retain rights to its cancer programs in
North America, SUGEN is funding a portion of its ongoing cancer research through
a collaboration with Zeneca for the development of five cancer targets,
including Aurora2, an oncogene overexpressed in more than 50% of primary
colorectal cancers. Pursuant to its agreement with Zeneca, the Company will have
the opportunity to obtain profit participation rights in the North American
market by contributing to clinical development costs as incurred and will
receive milestone payments and royalties on worldwide sales. Outside of
oncology, the Company's strategy is to seek corporate collaborations or joint
ventures to which SUGEN contributes validated targets, screening technologies
and drug leads while the partner provides the disease-specific and drug
development expertise as well as marketing experience, in addition to providing
funding to bring potential products to market. As part of this strategy, the
Company entered into a collaboration with Allergan for angiogenesis inhibition
in ophthalmic applications resulting from the Company's Flk-1/KDR TK antagonist
program. The Company also has an agreement with ProChon for the development of
drugs for the treatment of achondroplasia and other growth disorders.
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 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. The research term is due to
expire in March 2000 unless renewed by mutual consent. SUGEN performs target
identification, target validation, assay development and screening for initial
leads, while Zeneca scientists 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, October 1996 and November 1997 financings,
purchasing an additional 281,875, 509,000 and 456,000 shares, respectively, of
Common Stock in order to maintain its ownership position. To date, Zeneca has
invested approximately $36.8 million in the Company's Common Stock.
In addition to its equity purchases and annual research funding, Zeneca
paid a $5.0 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.
14
<PAGE>
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 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 April 1996, the Company entered into a Collaborative Research and
Development Agreement ("CRADA") with the National Cancer Institute (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 $4.0 million technology
set-up fee and is providing additional consideration in the form of services
provided by ASTA Medica pursuant to the collaboration but on non-collaboration
programs. Additionally, ASTA Medica purchased $9.0 million of Common Stock at a
price of $20.88 per share. In January 1998, SUGEN and ASTA Medica decided to
proceed into clinical development with their Pan-Her cancer program, marking the
first milestone in SUGEN's collaborations with ASTA Medica. ASTA Medica
exercised its option to satisfy its $500,000 milestone obligation by the
purchase of 18,665 shares of SUGEN Common Stock at a price of approximately
$26.79 per share. The Company has recorded the amount received in excess of the
fair market value of the Common Stock issued as revenue in accordance with its
policy. Fair market value of the Common Stock issued equals the 20 day average
closing price as defined in the ASTA Medica agreement. ASTA Medica has
subsequently made certain cash payments and has purchased additional SUGEN
shares in connection with modifications to the collaboration agreement as they
relate to the Pan-Her program. In due course, SUGEN may receive additional
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 product to be sold in SUGEN territories.
SUGEN retains marketing 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 and disorders of the central nervous
system/epilepsy. The company is owned by Degussa, a company active in the fields
of chemicals, health and nutrition, as well as banking and precious metals.
15
<PAGE>
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 aims to establish a
comprehensive effort to identify and validate signal transduction targets for
choroidal and retinal neovascularization. Allergan is the exclusive corporate
partner for SUGEN in ocular diseases of neovascularization and has exclusive
rights to all ophthalmic uses of collaboration products and collaboration
know-how worldwide. In return, Allergan paid SUGEN a $2.0 million initial fee
for past research services and is funding collaboration research and drug
discovery at SUGEN for at least three years. Allergan initially purchased $4.0
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 such
programs over and above its royalty entitlement. Apart from this option,
Allergan will be responsible for all development expenses.
In July 1998, the Company received its first milestone payment of
$437,500, net of royalties to third parties, triggered by the identification and
validation of the kinase receptors playing the primary role in the angiogenic
component of these diseases
Taiho Pharmaceutical Ltd.
In July 1998, the Company entered into an agreement with Taiho for the
development and commercialization of the Company's angiogenesis inhibitors for
the prevention and treatment of cancer. In connection with this agreement, Taiho
will receive marketing rights in Japan, while the Company will retain marketing
rights for the rest of the world. The Company received an initial research
payment, is receiving research and development funding and will receive
additional payments upon the achievement of certain milestones. The Company has
retained the rights to manufacture and supply finished products to Taiho for
sale in Japan on prenegotiated terms.
ProChon Biotech Limited
In June 1998, the Company entered into a collaboration with ProChon Biotech
Limited ("ProChon") to discover and develop small molecule signal transduction
inhibitors for the treatment of achondroplasia and other growth disorders. In
connection with this collaboration, the Company received $3.0 million comprised
of a $750,000 initial research payment and a $2.25 million stock purchase of
93,750 shares of SUGEN Common Stock at $24.00 per share. In addition, the
Company will receive payments upon achievement of certain milestones and
royalties with respect to worldwide sales of collaboration products.
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 Martinsried, 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 relating to TPs, TKs and STKs identification and screening areas.
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 TK, TP and STK technology being developed at NYU 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, TPs and STKs and
their physiological role, as well as identifying, isolating and cloning new TKs,
TPs and STKs and the components of the signal transduction pathways emanating
from these proteins. The research program is scheduled to expire in 2001.
SUGEN's license to technology developed before or during the research program
will survive indefinitely
16
<PAGE>
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
continue to 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
SUGEN products for which an IND is filed within four years of the end of the NYU
research period except for certain in-licensed products. 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 MPS
in Germany. These collaborations include licenses from Garching Innovation GmbH
("Garching"), the licensing arm of MPS.
Max-Planck-Institut fur Biochemie. The Company entered into a research
and license agreement with MPI and Garching which expired in August 1997 but is
expected to be renewed in modified form. This agreement grants SUGEN an
exclusive worldwide license to the commercial uses of TK and TP technology being
developed at MPI under the leadership of Dr. Ullrich. The scope of the research
program includes identification, isolation and cloning of novel receptor 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 continue to own the rights to the
technology it has developed under the 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. The
Company had an exclusive research and licensing agreement with the
Max-Planck-Institut fur Physiologische and Klinische Forschung ("MPP") (MPI and
MPP are collectively referred to herein as "Max-Planck Society" or "MPS") to
support the work of Dr. Werner Risau, who was a SUGEN consultant and a director
of MPP, and his laboratory. Dr. Risau was one of the leading researchers in the
field of angiogenesis. Dr. Risau died in August 1998, and the future of this
collaboration has yet to be determined.
Research and Development Activities
Research and development costs reimbursed by the Company's
collaborators amounted to $14.9 million, $6.0 million and $13.6 million in 1998,
1997 and 1996, respectively. Company-sponsored research amounted to $32.0
million, $28.6 million and $16.2 million for the same periods then ended.
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
provided to SUGEN compounds from Toyama's microbial strain libraries for testing
of potential biological activity. The collaboration ended with the departure of
Professor Oki in the fourth quarter of 1998. 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 have provided to SUGEN extracts from the Institutes'
17
<PAGE>
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.
Patents and Proprietary Technology
SUGEN'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
January 31, 1999, SUGEN held exclusive rights to at least 45 issued U.S.
patents, had exclusive rights to at least 20 U.S. patent applications for which
notices of allowance had been received and had filed and/or held exclusive
licenses to approximately 110 United States patent applications. SUGEN also
holds exclusive rights to many foreign patent applications corresponding to the
United States patents and patent applications.
There can be no assurance that SUGEN 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 SUGEN's
technology. There can be no assurance that SUGEN's patent applications, if
issued as patents, will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection or competitive
advantages to SUGEN. Competitors have filed applications, have been issued
patents, and may file additional applications and obtain additional patents and
proprietary rights relating to products or processes competitive with those of
SUGEN or which could block SUGEN's efforts to obtain patents or commercially
develop its technology.
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, related downstream signaling
molecules, and compounds and other modulators thereof. The commercial success of
SUGEN will depend in part on SUGEN not infringing patents issued to competitors
and not breaching the technology licenses upon which any SUGEN products are
based. SUGEN in the past has been, and from time to time in the future may be,
notified of claims that SUGEN may be infringing patents or other intellectual
property rights owned by third parties. Certain patent applications or patents
of SUGEN's competitors may conflict with SUGEN'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 SUGEN. Such
conflicts could result in a significant reduction in the scope of the coverage
of SUGEN'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, SUGEN 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 SUGEN will be able to obtain any
such license on commercially favorable terms, if at all, and if these licenses
are not obtained, SUGEN might be prevented from pursuing the development of
certain of its potential products. SUGEN'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 SUGEN.
Litigation, which could result in substantial costs to SUGEN, may also be
necessary to enforce any patents issued or licensed to SUGEN or to determine the
scope and validity of third-party proprietary rights. There can be no assurance
that SUGEN'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 SUGEN's management resources during
such litigation could have a material adverse effect on SUGEN. An adverse
outcome could subject SUGEN to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require SUGEN to cease
using such technology, any of which could have a material adverse effect on
SUGEN. If competitors of SUGEN prepare and file patent applications in the
United States that claim technology also claimed by SUGEN, SUGEN 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 SUGEN, even if the eventual outcome is favorable to SUGEN. When patents
are granted in certain countries or regions such as Japan and the European
community, third parties can oppose such issuance. Should the relevant patent
office institute a proceeding termed an opposition, SUGEN may decide to defend
its patent. There can be no assurance that SUGEN will be successful or that the
patent office will not revoke the patent or alter the scope of protection
previously granted.
18
<PAGE>
SU101, a compound generally known by the name leflunomide, is a member
of the isoxazole family of compounds. Leflunomide was discovered more than 17
years ago. In December 1997, the Company received two U.S. patents, Patent Nos.
5,700,823 and 5,700,822, relating to methods of using SU101 for treating various
diseases or disorders including cancers characterized by inappropriate PDGF-R
activity. SUGEN owns the exclusive rights to U.S. Patent No. 5,700,823. SUGEN
has been assigned the exclusive world-wide rights to U.S. Patent No. 5,700,822
and the corresponding foreign applications from all but one of the assignees
with whom negotiations will be undertaken. No assurance can be provided that
such negotiations will be successful, nor that the failure of such negotiations
will not result in a reduced value of U.S. Patent No. 5,700,822 and any foreign
patents that are obtained. In addition, SUGEN has filed several patent
applications in the United States directed to formulations containing SU101 and
the use of such formulations for treating various diseases or disorders
including cancer. Corresponding foreign patent applications have also been
filed. The Company has received two U.S. patents relating to formulations
comprising SU101. Both of these patents cover the formulation including SU101
which SUGEN presently believes will be commercially marketed. SUGEN owns the
exclusive world-wide rights to both of these patents and the corresponding
foreign applications.
SUGEN plans to commercialize SU101 in certain major markets outside the
United States either through affiliates or through licensees. While SUGEN
believes at this time that it will receive patent protection outside the United
States relating to the use of SU101 and formulations containing SU101, there can
be no assurance that any such patent protection will be issued.
Hoechst AG ("Hoechst") 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, including the use of leflunomide for treating cancer. 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.
Similar protection may not be available outside the United States. Although
SUGEN cannot predict whether or when SU101 will be approved by the FDA for
marketing in the United States, it believes that certain of Hoechst's patents in
the United States may have expired when marketing does begin and that the
remaining U.S. patents are either subject to claims of invalidity or will not be
infringed by the manufacture and sale of SU101 in the United States for treating
cancer characterized by inappropriate PDGF-R activity. There can be no assurance
that a court will agree with SUGEN's beliefs regarding invalidity and
non-infringement of Hoechst's issued patents, that the term of Hoechst's
existing patents will not be extended, or that the claims of Hoechst's pending
patent applications will not be modified prior to issuance so as to enhance
their validity or scope. To date, Hoechst has not commenced legal proceedings
against SUGEN concerning possible patent infringement. There can be no assurance
that Hoechst in the future will not assert claims against SUGEN. If a court
found SUGEN to be infringing a valid patent issued to Hoechst in the United
States covering the use of leflunomide for treating cancer, SUGEN would be
required to obtain a license from Hoechst to manufacture or sell leflunomide for
treating cancer. There can be no assurance that SUGEN could reach agreement with
Hoechst for a license for SU101 upon favorable terms or at all, if required. The
inability of SUGEN to resolve this matter on favorable terms or at all could
have a material adverse effect on SUGEN. In any event, the assertion of any such
claims, even if resolved favorably to SUGEN, could result in substantial costs
to SUGEN.
The scope, term and validity of Hoechst's patent protection outside the
United States are different than the situation in the United States. SUGEN's
ability to manufacture and sell SU101 outside the United States may be adversely
impacted by this patent protection. If a court found SUGEN to be infringing a
valid patent issued to Hoechst in a foreign country covering the use of
leflunomide for treating cancer, SUGEN would be required to obtain a license
from Hoechst to manufacture or sell leflunomide for treating cancer in the
relevant country. There can be no assurance that SUGEN could reach agreement
with Hoechst for a license for SU101 upon favorable terms or at all, if
required.
SUGEN is currently undertaking clinical trials with the compound
referred to as SU5416. In August 1998, SUGEN received U.S. Patent No. 5,792,783,
with product and methods of use claims covering SU5416. Related applications are
pending abroad, including Japan and the European community. SUGEN holds
exclusive worldwide rights to these applications, except in Japan.
19
<PAGE>
SUGEN is currently undertaking studies of the compound referred to as
SU6668. The compound SU6668 is generically covered by U.S. Patent No. 5,792,783.
SUGEN filed a provisional patent application in the United States specifically
disclosing and claiming SU6668. It is SUGEN's intention to file the material
contained in this application outside of the United States within one year of
the provisional filing date. SUGEN holds exclusive worldwide rights to this
application, except in Japan. There can be no assurance that patents will issue
with claims specifically reciting SU6668. Should such patents issue, there can
be no assurance that the term of such patents will exceed that of U.S. Patent
No. 5,792,783.
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 SUGEN would have adequate remedies for any breach, or that
SUGEN's trade secrets will not otherwise become known or be independently
discovered by competitors. To the extent that SUGEN or its consultants or
research collaborators use intellectual property owned by others in their work
for SUGEN, 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, conducting preclinical studies and
clinical trials, obtaining regulatory approvals and marketing than the Company.
Many of these competitors have significant products that have been approved or
are in development and operate large, well-funded research and development
programs. For example, Genentech's Herceptin, the monoclonal antibody targeting
Her2-dependent breast tumors, was recently approved for the treatment of Her-2
positive breast cancers. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. 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. Competition may also arise
from companies pursuing differing technological approaches to cancers and other
disease indications targeted by the Company's product candidates. 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 no assurance that the Company's competitors will not develop
more effective or more affordable products, compete more effectively for
corporate partnerships or achieve earlier patent protection or product
commercialization than the Company.
Other examples of competition can be found in the field of
angiogenesis, where several biotechnology and pharmaceutical companies are in
the process of developing angiogenesis inhibitors that block the formation of
blood vessels to tumors using direct, indirect, and unknown mechanisms of
action. The stage of these competitive programs range from preclinical to Phase
III clinical development.
Government Regulation
The Company's ongoing research and development activities and the
manufacturing and marketing of the Company's potential products 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.
20
<PAGE>
Prior to marketing in the United States, any drug developed by the
Company must undergo rigorous preclinical studies and clinical trials 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, complexity and
novelty of the product and requires the expenditure of substantial resources.
The Company is focusing its initial development efforts related to SU101 for the
treatment of malignant glioma and selected other solid tumor patient populations
with very poor prognosis. Given the poor prognoses for these patients, the
Company believes that FDA approval could potentially be obtained in a shorter
time period than typically required for approval of New Drug Applications
("NDA"). There can be no assurance, however, that the Company will be able to
rely on accelerated NDA review and approval to expedite the commercialization of
SU101 for these patient populations.
Preclinical studies must be conducted in conformance with the FDA's GLP
regulations. Before commencing clinical trials, 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 trials must meet requirements for institutional review board
oversight, informed consent and good clinical practice requirements and are
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 studies and
clinical trials 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, administrative action or changes in FDA policy during the period of
product development, 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.
Manufacturers of drugs and biologics also are required to comply with
the applicable FDA good manufacturing practice ("GMP") regulations, which
include requirements relating to quality control and quality assurance as well
as the corresponding maintenance of records and documentation. Manufacturing
facilities are subject to inspection by the FDA, including unannounced
inspection, and must be licensed before they can be used in commercial
manufacturing of the Company's products. There can be no assurance that the
Company or its suppliers will be able to comply with the applicable GMP
regulations and other FDA regulatory requirements. Such failure could have a
material adverse effect on the Company.
The Company may elect to seek approval of SU101 under the
Clinton-Kessler Cancer Initiative. Significant uncertainty exists as to the
extent to which such initiative will result in accelerated review and approval.
Further, the FDA has not made available comprehensive guidelines with respect to
this initiative, retains considerable discretion to determine eligibility for
accelerated review and approval, and is not bound by discussions that an
applicant may have had with FDA staff. Accordingly, the FDA could employ such
discretion to deny eligibility of SU101 as a candidate for accelerated review or
to require additional clinical trials or other information before approving
SU101. A determination that SU101 is not eligible for accelerated review or
delays and additional expenses associated with generating a response to any such
request for additional trials could have a material adverse effect on the
Company.
21
<PAGE>
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
studies and clinical trials. The products under development by the Company have
never been manufactured for commercial purposes, and there can be no assurance
that such products can be manufactured at a cost or in quantities necessary to
make them commercially viable. Any change in the Company's existing
relationships with, or interruption in supply from, its manufacturers of the
compounds used in its clinical trials could affect adversely the Company's
ability to complete its ongoing clinical trials and to market its product
candidates, if approved. Any such change or interruption may have a material
adverse effect on the Company. In the event of a change in the supplier of a
compound used in its clinical trials, the Company would be required to collect
data from its ongoing clinical trials with respect to a compound and file such
data with the FDA to establish comparability between the compound as produced by
different suppliers. There can be no assurance that the Company would be able to
establish such comparability. A failure to establish comparability could lead to
a requirement that the Company conduct additional clinical trials, which would
delay the Company's pursuit of regulatory approval for a product candidate. 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 studies and clinical
trial 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
GMP 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.
Employees
As of December 31, 1998, the Company had 239 full-time employees,
including a technical scientific staff of 147. The Company places an emphasis on
recruiting the highest caliber personnel. The Company has selected and assembled
a group of experienced scientists and managers with skills in a wide variety of
disciplines, including molecular biology, chemistry and pharmaceutical
development. To date, the Company believes it has been successful in its efforts
to recruit qualified employees, and although we cannot guarantee we can continue
to recruit this level of expertise we expect to be able to do so in the future.
22
<PAGE>
RISK FACTORS
This report contains forward-looking statements. These statements
relate to future events or our future clinical or product development or
financial performance. In some cases, you can identify forward-looking
statements by phrases such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of such terms and other comparable phrases. These statements
reflect only our current expectations. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined below. These factors may cause our
actual results to differ materially from any forward-looking statements. We are
not undertaking any obligation to update any forward-looking statements
contained in this report to reflect any future events or developments.
Our product candidates are at an early stage of development, and if we are
unable to successfully develop and commercialize products, we would not generate
revenues.
To date, none of our product candidates have been commercialized. All
of our product candidates are in early stages of development, and our drug
discovery and development methods are relatively new and untested. We face the
risks of failure inherent in developing biotechnology products based on new
technologies. To achieve profitable operations on a continuing basis, we, alone
or with collaborative partners, must successfully develop, manufacture,
introduce and market our proposed products. To date, three of our drug
candidates have entered human clinical testing. We cannot predict whether we
will be able to develop any commercial products. Products, if any, resulting
from our research and development programs are not expected to be commercially
available until at least 2001, even if successfully developed and proven to be
safe and effective.
If we are unable to raise additional funds, we may not be able to continue our
product development efforts, and the future viability of our business will be at
risk.
Our product development programs are very costly. We expect to continue
to spend substantial funds for our research, preclinical and clinical testing,
and operations for the foreseeable future. Our future cash liquidity and capital
requirements will depend on many factors, including:
o continued scientific progress of our research and development
programs;
o our ability to establish collaborations with partners;
o progress of our preclinical and clinical trials of product
candidates;
o the time and costs of obtaining regulatory clearances;
o the costs involved in obtaining and protecting our
intellectual property rights;
o competing technological developments;
23
<PAGE>
o changes in our existing research and commercialization
collaboration arrangements; and
o costs associated with commercialization of our products.
As of March 31, 1999, we had approximately $61.9 million available in
cash and short-term investments, and we incurred approximately $19.2 million in
development and operating expenses in the first quarter of fiscal year 1999. We
believe that our existing capital resources, together with facility and
equipment lease lines, the anticipated revenues from current collaborations and
projected interest income, will support our current and planned operations into
2000. However, we cannot predict whether our assumed levels of revenue and
expense will prove accurate.
We may need to raise additional funds if:
o our lead product candidates, SU101, SU5416 and SU6668, are not
sufficiently safe or effective to be commercialized;
o we do not establish future collaborations with partners;
o our clinical trials of SU101, SU5416 and SU6668 are delayed,
are not successful or are more costly than currently
predicted; or
o additional clinical trials are required for product approval.
We cannot predict whether we will be able to raise sufficient funds in
the future. If adequate funds are not available, we may be unable to fund our
research and development efforts, conduct our clinical trials, or successfully
commercialize and market our product candidates. If we raise additional funds by
issuing equity securities, our existing stockholders may experience substantial
dilution. If we raise additional funds through collaborative arrangements, we
may be required to give up some commercialization rights to our technologies,
product candidates or products.
We have only a limited operating history, and we expect to continue to generate
losses.
We may never achieve a profitable level of operations. To date, we have
engaged primarily in research and development. Our development and general and
administrative expenses have resulted in substantial losses. As of March 31,
1999, we had an accumulated deficit of approximately $145.5 million. We expect
our losses to continue at least through 2001. We expect cumulative losses to
increase substantially as our research and development efforts, including
preclinical and clinical testing, are expanded. Our ability to become profitable
will depend on our ability to, among other things:
o obtain and protect our intellectual property rights;
24
<PAGE>
o complete our product development;
o obtain product regulatory approvals;
o manufacture and market our proposed products; and
o achieve market acceptance for our products.
We rely heavily on collaborations for the discovery, development, clinical
testing and commercialization of our product candidates. Our dependence on
collaborators may delay or impair our ability to generate revenues or adversely
affect our profitability.
Our strategy for the discovery, development, clinical testing,
manufacturing and commercialization of our proposed products includes entering
into various collaborations with corporate partners, licensors, licensees and
others, and is dependent upon the subsequent success of these outside partners
in performing their responsibilities. If our partners are not successful, we may
not be able to continue our product development efforts, and the future
viability of our company will be at risk. Currently, we have collaborations with
the following partners:
o Allergan, Inc. and its affiliate Vision Pharmaceuticals, L.P.
o ASTA Medica Aktiengesellschaft
o Esteve S.A. of Spain
o Max-Planck Society
o National Cancer Institute
o New York University Medical Center
o ProChon Biotech Limited
o Taiho Pharmaceutical Ltd.
o Zeneca Limited
Our ability to develop, test, manufacture and market our proposed
products successfully depends significantly on our partners' performance under
these, and future, collaborations. We cannot control the amount and timing of
resources to be devoted to our collaborations by corporate partners. We cannot
be certain that our partners will perform their obligations under these
collaborations or that we will succeed in identifying lead compounds or
developing commercial products from these or future collaborations. We cannot
predict whether our partners or any future partners will pursue their own
existing or alternative technologies in preference to those being developed in
our collaborations. Generally, our collaborative arrangements do not
25
<PAGE>
obligate our partners to devote a specific level of funding to research related
to our potential products. Our collaborative partners are free to select the
methods they use in pursuing their research targets. We cannot predict whether
our collaborative partners will continue to conduct research related to our
potential products or conduct research and select research targets in a manner
consistent with our best interests. If our collaborative partners do not
continue to conduct research related to our potential products, our business,
financial condition and results of operations could be materially adversely
affected. We also cannot predict whether we will derive any additional revenue
from such arrangements over and above the contractual payment amounts.
o Termination of collaborations. The termination or material
reduction in the scope of our collaborations could have a
material adverse effect on our business. Unless extended, our
research collaboration with Allergan expires in October 1999,
research funding under our collaboration with Zeneca expires
in March 2000, and our collaboration with New York University
expires in September 2001. Our collaboration with Max-Planck
expired in August 1997, and the restatement and renewal of
this arrangement is currently under negotiation. We expect to
complete written documentation of the renewed, modified
collaboration that is consistent with the oral understanding
Max-Planck and SUGEN have been operating under to date.
However, we cannot predict whether any of these agreements
will be renewed on favorable terms, if at all. Additionally,
our collaborations may be terminated under certain
circumstances. If any of our partners terminates its agreement
or fails to provide adequate funding to support our research
and product development efforts, we will need to obtain
additional funding from other sources and will be required to
devote additional resources to the development of our
products. We cannot predict whether we would be able to find a
suitable substitute partner in a timely manner, on reasonable
terms, or at all. If we fail to find a suitable partner, our
research, development or commercialization of certain planned
products would be delayed significantly, which would cause us
to incur additional expenditures. In addition, termination of
a collaboration may cause us to give up rights to technology
or products jointly developed under the collaboration.
o Future collaborations. In addition, we cannot predict whether
you that we will be able to negotiate additional collaborative
arrangements on acceptable terms, if at all, or that such
future collaborations will be successful. To the extent that
we choose not to or are unable to establish such arrangements,
it would require substantially greater capital to undertake
research, development and marketing of our proposed products
at our own expense. In addition, we may encounter significant
delays in introducing our proposed products into certain
markets or find that the development, manufacture or sale of
our proposed products in such markets is adversely affected by
the absence of such collaborative agreements. Additionally, if
we do not establish such future collaborations, we may
encounter significant delays in the development and
commercialization of our proposed products which would cause
us to incur substantial additional expenditures.
26
<PAGE>
If we are unable to protect our intellectual property, we may be unable to
prevent other companies from using our technology in competitive products. If we
are unable to operate our business without infringing intellectual property
rights of others, we may be prevented from developing and commercializing our
product candidates.
Our technology will be protected from unauthorized use by others only
to the extent that it is covered by valid and enforceable patents or effectively
maintained as trade secrets. As a result, our success depends in part on our
ability to:
o obtain patents;
o protect trade secrets;
o operate without infringing on the proprietary rights of
others; and
o prevent others from infringing on our proprietary rights.
As of June 14, 1999, we held exclusive rights to at least 60 issued
U.S. patents, exclusive rights to at least 10 U.S. patent applications for which
notices of allowances had been received, and had filed or held exclusive
licenses to approximately 110 U.S. patent applications. We also hold exclusive
rights to many corresponding foreign patent applications. Patent matters for
biotechnology companies, especially concerning cell receptors and the DNA
encoding them, involve complex legal and factual questions, so we cannot predict
the availability and scope of patent protection. We cannot be certain that we
will develop products that are patentable or that patents will issue from our
pending applications. In addition, we cannot predict whether our patents or
patents that we license from others will be enforceable and afford protection
against competitors. Our patents or patent applications, if issued, may be
challenged, invalidated or circumvented. Our patent rights may not provide us
with proprietary protection or competitive advantages against competitors with
similar technologies. Others may independently develop technologies similar to
ours or independently duplicate our technologies. Due to the extensive time
required for development, testing and regulatory review of our potential
products, our patents may expire or remain in existence for only a short period
following commercialization. This would reduce or eliminate any advantage of the
patents.
We cannot be certain that we were the first to make the products or
processes covered by each of our issued or pending patent applications or that
we were the first to file patent applications for such products or processes. 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 their related signalling pathways. Our commercial
success will depend, in part, on not infringing our competitors' patents and not
breaching technology licenses we obtain. We have been notified from time to time
of claims that we may be infringing other's intellectual property rights. Some
companies have filed patent applications or been granted patents covering
subject matter potentially useful or necessary to us or conflicting with our
patents and patent applications. Such conflicts could significantly reduce the
scope of our issued or licensed patents. In addition, we may need to license the
right to use third-party patents and other intellectual property to continue
development and marketing of our
27
<PAGE>
products. We may not be able to acquire such required licenses on acceptable
terms, if at all. If we do not obtain such licenses, we may need to design
around other parties' patents or we may not be able to proceed with the
development, manufacture or sale of our products.
o SU101. SU101, a compound generally known as leflunomide, was
discovered more than 17 years ago. In December 1997, we
received two U.S. patents relating to methods of using SU101
for treating various diseases, including certain cancers
characterized by inappropriate PDGF-R activity. We currently
own the exclusive rights to one of the patents. We have been
assigned exclusive world-wide rights to the other patent and
the corresponding foreign patent applications from all but one
party. We cannot predict whether negotiations with the
remaining party to acquire the remaining rights will be
successful. In addition, we have filed several U.S. patent
applications, and corresponding foreign patent applications,
covering different formulations of SU101 and their use to
treat various diseases. Currently, we have received two U.S.
patents relating to SU101 formulations. These two patents
cover the SU101 formulation that we believe will be
commercially marketed. While we plan to commercialize SU101 in
certain major markets outside the U.S. through our affiliates
or licensees, we cannot predict whether we will receive patent
protection outside the U.S.
Hoechst AG holds a number of U.S. and foreign patents
and has filed U.S. and foreign patent applications covering
different compositions and pharmaceutical uses of leflunomide,
including the use of leflunomide for treating cancer. We
believe our research and development and clinical trials with
SU101 in the U.S. are protected from claims of infringement of
the Hoechst U.S. patents because such activities are being
conducted for the development and submission of information to
the FDA for regulatory approval. However, similar protection
may not be available outside the U.S. Although we cannot
predict if SU101 will be approved by the FDA for marketing in
the U.S., we believe that some of Hoechst's U.S. patents may
have expired by the time marketing of SU101 begins and that
Hoechst's other U.S. patents will either not be infringed by
our making, using and selling of SU101 in the U.S. or are
subject to claims that they are not valid, thereby permitting
us to produce and market SU101 without valid claims of
infringement of the Hoechst patents. However, we cannot
predict whether a court will agree with our beliefs regarding
invalidity and non-infringement of Hoechst's issued patents or
that the term of Hoechst's issued patents will be extended. To
date, Hoechst has not initiated legal proceedings against us
concerning possible patent infringement. However, we cannot
predict whether Hoechst will assert claims against us in the
future. If a court found us to be infringing a valid patent
issued to Hoechst covering the use of leflunomide for treating
cancer, we would be required to obtain a license from Hoechst
to manufacture or sell SU101 for treating cancer. We cannot
predict whether we would be able to reach agreement with
Hoechst for a license for SU101 upon favorable terms, if at
all. The assertion of any infringement claims, even if
resolved in our favor, could result in substantial costs and
expenses to us.
28
<PAGE>
o SU5416. In August 1998, we received a U.S. patent covering,
among other things, SU5416 and methods of using SU5416.
Currently, we have related foreign patent applications
pending, including in Japan and the European community. Except
in Japan, we hold exclusive worldwide rights to these
applications. If foreign patents are not issued, the failure
to receive foreign patent protection could materially
adversely affect our business, financial condition and results
of operations.
o SU6668. The compound SU6668 is generically covered by an
issued U.S. patent. That is, SU6668 is encompassed by some of
the claims in the issued U.S. patent, but SU6668 is not
specifically recited in the claims. In general, such generic
coverage provides adequate patent protection. However, it may
be advantageous under certain circumstances to obtain claims
that specifically recite SU6668. For example, a competitor
that challenges the validity of a patent may be able to
invalidate a claim that encompasses many different compounds,
but not a claim that recites one specific compound. We have
filed a U.S. utility application and corresponding foreign
patent applications specifically claiming SU6668. We hold the
exclusive worldwide rights to these applications, except in
Japan. We cannot predict whether patents will issue which
specifically recite SU6668 or that the term of any U.S.
patents will exceed that of the term of the outstanding U.S.
patent that generically covers SU6668. The failure to receive
U.S. and foreign patent protection could materially adversely
affect our business, financial condition and results of
operations.
We may face litigation to defend against claims of infringement, assert
claims of infringement, enforce our patents, protect our trade secrets or
know-how, or determine the scope and validity of others' proprietary rights.
Patent litigation is costly and would divert our attention and resources. In
addition, we may be involved in interference proceedings declared by the United
States Patent and Trademark Office to determine the priority of our patent
applications compared to the patent applications of one or more third parties.
Litigation or interference proceedings could have a material adverse effect on
our business, financial condition and results of operations, including as a
result of any delay in the marketing of our products due to litigation related
to our intellectual property. Additionally, we could be unsuccessful in our
efforts to enforce our intellectual property rights or obtain patent protection.
We have received letters from at least two third parties indicating that they
believe we may be practicing their proprietary technology. We do not believe
that we practice any validly claimed subject matter in which these third parties
possess an ownership interest. However, we cannot predict whether the third
parties will agree with our position or that a court will agree with our belief
regarding invalidity and/or non-infringement. As set forth above, any resulting
litigation could materially adversely affect our business, financial condition
and results of operations.
If we are not able to demonstrate the safety and efficacy of our product
candidates in our clinical trials or our clinical trials are delayed, we would
not be able to market our products in the United States or abroad on a timely
basis, if at all.
29
<PAGE>
Clinical development, including preclinical testing, is a long,
expensive and uncertain process. Any of our clinical trials may not be correctly
designed to result in data necessary to prove the safety and efficacy of our
product candidates. It may take us several years to complete our testing, and
failure can occur at any stage of testing. We cannot rely on interim results of
trials to necessarily predict their final results, and acceptable results in
early trials might not be repeated in later trials. A number of companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in advanced clinical trials, even after promising results in earlier trials. Any
trial may fail to produce results satisfactory to the FDA. Preclinical and
clinical data can be interpreted in different ways, which could delay, limit or
prevent regulatory approval. Negative or inconclusive results or adverse medical
events during a trial could cause a trial to be repeated or a program to be
terminated.
The rate of completion of our clinical trials is dependent upon, among
other factors, the rate of patient enrollment. Patient enrollment can be
affected by the size of the available patient population, the nature of the
trial protocol, the location of clinical sites and the patient eligibility
criteria for the study. Delays in patient enrollment may result in increased
costs, delays or termination of clinical trials, which could have a material
adverse effect on our business. In addition, because we have a limited clinical
staff, we generally rely on third-party clinical investigators to conduct our
clinical trials, and as a result, we face certain additional delaying factors
outside our control. These factors include:
o third-party investigator failure to perform their contractual
obligations;
o third-party investigator failure to meet regulatory standards;
o inadequately trained or insufficient personnel at the study
site; and
o delays in approvals from a study site's review board.
We cannot predict whether we will be able to submit a new drug
application as scheduled if clinical trials are completed or when new drug
applications will be reviewed and cleared by the FDA, if at all. For our three
cancer drug candidates currently in clinical trials, we cannot be certain that
planned trials will begin on time, and we cannot predict whether clinical trials
will be completed on schedule. We cannot predict whether any trials will result
in marketable products or that any products will be commercially successful even
if approved for marketing. Our product development costs will increase if we
have delays in testing or approvals. If the delays are significant, our
business, financial condition and results of operations will be materially
adversely affected.
Clinical testing may uncover negative side effects for our product candidates
which may delay or prevent commercialization of such drug products.
We face the risk that any drug candidate may be toxic or produce
negative side effects in animals or humans when given in high doses or over long
periods of time. We cannot predict whether unacceptable toxicities or side
effects will occur at any time in any toxicological study
30
<PAGE>
or human clinical trial of our proposed products. If our products produce
unacceptable toxicities or side effects in our clinical testing, we and/or the
FDA may interrupt, limit, delay or stop the development of our product
candidates. Even if a product receives regulatory clearance, it may later be
shown to be unsafe or ineffective, thus limiting the product's use or requiring
its removal from the market. We cannot predict whether any of our product
candidates will be safe and effective when administered to patients.
Our products have never been manufactured on a commercial scale, and our lack of
manufacturing expertise may impair our ability to generate revenues.
We have no manufacturing facilities and thus rely on third-party
manufacturers to produce our compounds for research and development, preclinical
and clinical purposes. If we cannot contract for a sufficient supply of our
compounds on acceptable terms, or if our manufacturers experience delays or
difficulties, our preclinical and clinical testing schedule would be delayed. A
delay in our testing schedule would result in a delay in the submission of
products for regulatory approval and the subsequent commercial sale of such
products, which would materially adversely affect our business. Also, any
manufacturer will have to prove both to us and to the FDA that its manufacturing
process complies with government regulations. Our products under development, as
well as many of their components, have never been manufactured on a commercial
scale. It may be difficult or impossible to economically manufacture our
products on a commercial scale. We may need to identify and qualify additional
manufacturers for commercial production. We cannot be certain that our existing
manufacturers or any new manufacturer will be able to provide the required
quantities of our compounds on reasonable terms, or at all.
We have no sales and marketing capability, and our lack of sales and marketing
personnel and expertise may impair our ability to generate revenues.
We currently have very limited sales, marketing and distribution
capability. We intend to rely on relationships with one or more pharmaceutical
companies with established distribution systems and sales forces to market some
of our proposed products. In addition, we expect to market some of our proposed
products directly. Thus, we must develop a marketing and sales force with the
necessary technical expertise. If we do not establish sufficient in-house sales
and distribution capabilities or establish successful marketing, co-promotion or
licensing arrangements with third parties, we will not be able to successfully
market and commercialize our drug products.
If our products are not accepted by the health care community, including
physicians, patients and health care payors, we may not be able to market and
commercialize our products, and our profitability may be adversely affected.
We believe that our ability to commercialize our product candidates
effectively will depend on the safety, efficacy and cost-effectiveness of our
products and the availability of adequate insurance reimbursement for these
products. The treatment of cancer with cytostatic, as opposed to cytotoxic,
therapy is a novel method of treating cancer that may not be accepted by
31
<PAGE>
the health care community. If cytostatic cancer treatments are not accepted by
the health care community, our ability to generate revenues may be impaired.
Additionally, even if our approach to the treatment of cancer with cytostatic
therapy is proven to be safe and effective and is accepted by the health care
community, our ability to successfully commercialize our products depends in
part on obtaining adequate reimbursement for product costs from governmental
authorities and private health care insurers (including health maintenance
organizations). Government and private third-party payors are increasingly
attempting to contain health care costs by limiting both the extent of coverage
and the reimbursement rate for new tests and treatments. If government and
private third-party payors do not adequately provide reimbursement for our
product costs, our products may not be accepted by the health care community,
and our ability to generate revenues may be impaired. Even if our products
receive the necessary regulatory and health care reimbursement approvals, our
products still may not achieve any significant degree of market acceptance among
physicians, patients and health care payors. We cannot predict whether our
technologies will be accepted rapidly or at all. If our products fail to achieve
market acceptance, our business, results of operations and financial condition
would be materially adversely affected.
If we fail to comply with extensive regulations enforced by domestic and foreign
regulatory authorities, the commercialization of our product candidates could be
prevented or delayed.
Our products under development and anticipated future products are
subject to extensive and rigorous regulation by United States local, state and
federal regulatory authorities and by foreign regulatory bodies. The FDA and
other regulatory agencies impose substantial requirements upon the manufacturing
and marketing of products such as those being developed by our company or any
partner. The process of obtaining FDA and other required regulatory approvals is
long, expensive and uncertain, and delays or failures to receive regulatory
approvals may prevent us from commercializing our products and impair our
ability to generate revenues. The time required for regulatory approvals is
uncertain and the process typically takes a number of years, depending on the
type, complexity and novelty of the product. We may encounter significant delays
or excessive costs in our efforts to secure necessary approvals or licenses.
To date, none of our product candidates have received FDA approval for
commercialization. The FDA may not approve any of our product candidates if it
believes that any applicable regulatory criteria are not satisfied. The FDA may
also require additional testing for safety and efficacy, which would delay our
commercialization of our product candidates. We cannot predict whether our
products will receive FDA approval in a timely manner, if at all. Even if
approvals are obtained, the marketing and manufacturing of drug products are
subject to continuing FDA and other regulatory requirements, such as
requirements to comply with good manufacturing practices, as defined by the FDA.
The failure to comply with such requirements could result in enforcement action,
which could adversely affect us and our business. Later discovery of problems
with a product, manufacturer or facility may result in additional restrictions
on the product or manufacturer, including withdrawal of the product from the
market. The government may impose new regulations which could further delay or
preclude regulatory approval of our potential products. We cannot predict the
impact of adverse governmental regulation which might arise from future
legislative or administrative action.
32
<PAGE>
We intend to generate product revenue from sales outside of the United
States. Distribution of our products outside the United States also may be
subject to extensive government regulation. These regulations, including the
requirements for approvals or clearance to market, the time required for
regulatory review and the sanctions imposed for violations, vary by country. It
is uncertain whether we will obtain regulatory approvals in such countries or
that we will be required to incur significant costs in obtaining or maintaining
our foreign regulatory approvals. Failure to obtain necessary regulatory
approvals or any other failure to comply with regulatory requirements could
result in reduced revenue and earnings.
We may not be able to effectively compete against our current and potential
competitors.
We operate in a rapidly changing field, and we expect our products to
encounter significant competition. Currently, other products and therapies exist
or are being developed that will compete with the products that we are seeking
to develop and market. We face intense competition from large pharmaceutical
companies, including Zeneca, Novartis and Bayer. We also compete with more
established biotechnology companies, such as Genentech and Immuncy, and even
smaller companies that form collaborative arrangements with large pharmaceutical
and biotechnology companies, such as InCLONE and Entremed. Such competition is
expected to increase. Our success will depend in part on our ability to respond
quickly to medical and technological changes through the development and
introduction of new products. Product development is risky and uncertain, and we
cannot predict whether we will develop our products successfully. Competitors'
products or technologies may make our products obsolete or non-competitive
before we are able to generate any significant revenue. Many of our competitors
or potential competitors have substantially greater financial and other
resources than we have. These competitors, academic institutions and research
organizations all may have greater experience in preclinical testing, human
clinical trials and other regulatory approval procedures. Our ability to compete
successfully will depend, in part, on our ability to:
o attract and retain skilled scientific personnel;
o develop safe and efficacious products;
o obtain patent or other proprietary protection for our products
and technologies;
o obtain required regulatory approvals for our products;
o maintain access to sufficiently broad libraries of compounds
for screening potential targets;
o be early entrants to the market; and
o manufacture, market and sell our products, independently or
through collaborations.
33
<PAGE>
We cannot predict whether our competitors will develop more effective or more
affordable products or achieve product patent protection and commercialization
earlier than we will.
Failure to attract and retain key employees could adversely affect our research
and development efforts, our ability to conduct clinical trials or our ability
to market and commercialize our product candidates.
Because of the scientific nature of our business, we depend on the
principal members of our management and scientific staff, including our Science
Advisory Board and Clinical Advisory Board. We do not maintain "key person" life
insurance on any of our officers, employees or consultants. Our future success
will depend largely on our ability to attract and retain highly skilled
executive, scientific and managerial personnel. Competition for such personnel
is intense. We cannot predict whether we will be successful in attracting and
retaining such personnel. In July 1998, we entered into a compensation
arrangement with Stephen Evans-Freke, our Chairman of the Board and Chief
Executive Officer, related to Mr. Evans-Freke's commitment to serve as our Chief
Executive Officer until at least June 30, 1999. Generally, we do not have
employment agreements with our executive officers providing for a term of
service, and we do not have any agreement with Mr. Evans-Freke providing for his
service as Chief Executive Officer after June 30, 1999. The failure to maintain
our executive, management and scientific staff and to attract additional key
personnel could materially adversely affect our business, financial condition
and results of operations and may prevent us from achieving our business
objectives. Although we intend to provide incentive compensation to attract and
retain our key personnel, we cannot guarantee these efforts will be successful.
If we are not successful in our attempt to commercialize our products in Europe
through European national partners, our ability to generate revenues may be
impaired and our profitability may be adversely affected.
Our strategy for the commercialization of our product candidates in
Europe includes entering into agreements with a limited number of distribution
partners who bring strong local presence on a pan-European scale rather than
with a single international pharmaceutical company. We cannot predict whether
this commercialization strategy will prove to be successful.
This strategy may require more capital than licensing European rights
to product candidates. We cannot predict whether we will be able to obtain
sufficient capital to pursue this strategy. Our strategy may cause SUGEN Europe
to bear research and development expenses for a longer period of time without
sharing the costs with a corporate partner. Thus, if products are not ultimately
successful, we may have large research and development losses. We may not be
able to establish arrangements with appropriate partners in all relevant
countries on reasonable terms, or at all. Our success will depend significantly
on our partners' ability and willingness to perform their obligations. We cannot
predict whether our partners will perform their obligations under any
commercialization arrangements. Additionally, contracting with numerous local
partners instead of one large European partner may be harder to manage and have
higher administrative costs. In addition, our commercialization arrangements may
be effected by the European Union requirements for free trade within Europe.
Price sensitivities in individual markets, including Spain, where SUGEN Europe
recently entered into a distribution
34
<PAGE>
arrangement, may impact the terms of collaborations and the pricing of our
products in individual markets. As is generally the case for trading within the
European Union, the ability of buyers in countries throughout the European Union
to purchase products in lower price markets may impact SUGEN Europe's ability to
enter into distribution arrangements for additional European markets and the
terms of these arrangements.
Our European operations are subject to the additional risks inherent in
international business activities, including:
o the general economic conditions in the countries in which we
and our affiliates operate;
o overlapping tax structures;
o unexpected changes in regulatory requirements;
o compliance with various foreign laws and regulations;
o longer accounts receivable payment cycles in some countries;
o import and export licensing requirements;
o trade restrictions;
o exchange controls; and
o changes in tariff and freight rates.
The market price of our stock may be highly volatile which could result in
substantial losses for individual stockholders.
Our common stock currently trades on the Nasdaq National Market. The
market prices for securities of emerging biotechnology companies like us have
been highly volatile. Announcements may have a significant impact on the market
price of our common stock. Such announcements may include:
o biological or medical discoveries;
o technological innovations or new commercial products by us or
our competitors;
o developments concerning proprietary rights, including patents
and litigation matters;
o regulatory developments in both the United States and foreign
countries;
35
<PAGE>
o public concern as to the safety of new technologies;
o developments in our relationships with current or future
collaborative partners;
o general market conditions;
o comments made by analysts, including changes in analysts'
estimates of our financial performance; and
o quarterly fluctuations in our revenue and financial results.
The stock market has from time to time experienced extreme price and
volume fluctuations, which have particularly affected the market prices for
emerging biotechnology companies, and which have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. For example, our stock
price has ranged from $9.75 to $29.50 over the last two years. In addition,
sales of substantial amounts of our common stock in the public market following
this offering could lower the market price of our common stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against the issuing company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our revenue and earnings. Any adverse determination in such litigation could
also subject us to significant liabilities.
We may be liable if our products harm people.
We face potential liability risks inherent in the testing and marketing
of medical products. We may be liable if any of our products causes injury,
illness or death. We have obtained limited product liability insurance for our
human clinical trials. However, such insurance is becoming increasingly
expensive, and we cannot predict whether we will be able to maintain such
insurance or obtain insurance covering injury, illness or death from use of our
products that are commercialized at a reasonable cost, if at all. Any insurance
we obtain may not provide adequate coverage against potential liabilities. A
liability claim, regardless of merit or eventual outcome, could materially
adversely affect our business, results of operation and financial condition.
Shares eligible for sale in the public market may affect the market price of our
common stock.
Substantially all of the shares of our common stock are eligible for
sale in the public market. The issuance of shares of our common stock upon the
exercise of stock options and warrants, and the future sale of such shares by
current stockholders, could adversely affect the market price of our common
stock. In March 1999, we issued:
o 12% senior convertible notes which are convertible into common
stock
36
<PAGE>
o warrants to purchase 12% senior convertible notes which are
convertible into common stock
Conversion of the 12% senior convertible notes, exercise of any common stock
warrants issued upon redemption of the 12% senior convertible notes or warrants
to purchase additional 12% senior convertible notes and payment of interest on
the 12% senior convertible notes in
[QUERY!!!! -- ENDS IN THE MIDDLE OF THE SENTENCE??????? COPY MISSING????????]
37
<PAGE>
Item 2. PROPERTIES
In the fourth quarter of 1998, the Company relocated its research and
headquarters facilities to a site of approximately 106,000 square feet located
in South San Francisco, California. The Company leases this space under an
operating lease extending until 2015, having renewal options of ten years. The
lease of the Company's previously occupied facilities of approximately 60,000
square feet located in Redwood City, California, was terminated at approximately
the same time as the commencement of the lease of the new facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company believes that its South San Francisco facility, in addition
to its options for additional space at the South San Francisco site, will be
sufficient to meet its needs for the next several years. There can be no
assurances, however, that, additional space, if needed, will be available on
favorable terms, if at all.
Item 3. LEGAL PROCEEDINGS
SUGEN is not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
38
<PAGE>
PART II
Item 5. MARKET FOR 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 of fiscal year 1998 and 1997.
These prices do not include retail markups, markdowns or commissions.
----------------------------------
High Low
-----------------------------------------------------------------------
1998
Fourth Quarter $ 17.25 $11.13
Third Quarter 18.94 9.75
Second Quarter 18.00 12.63
First Quarter 15.50 11.63
-----------------------------------------------------------------------
1997
Fourth Quarter 21.13 12.63
Third Quarter 20.94 11.88
Second Quarter 13.25 10.00
First Quarter $ 15.25 $ 9.88
-----------------------------------------------------------------------
As of March 15, 1999 there were approximately 299 holders of record of
the Company's Common Stock. On March 15, 1999, the last sale price reported on
the Nasdaq National Market System for the Company's Common Stock was $16.81 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.
In December 1998, the Company and ASTA Medica entered into a first
amendment to the existing collaboration agreement and issued and sold 13,307
shares of SUGEN Common Stock at $28.18 per share for a total purchase price of
$375,000 under an exemption from registration pursuant to Section 4 (2) of
Securities Act of 1933.
39
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
Statement of Operations Data:
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Contract revenue (1) .................................... $ 14,916 $ 6,031 $ 13,650 $ 13,843 $ 6,270
Costs and expenses:
Research and development ........................... 46,851 34,585 29,792 23,226 17,079
General and administrative ......................... 9,517 6,227 5,529 5,086 3,106
-------- -------- -------- -------- --------
Total costs and expenses ...................... 56,368 40,812 35,321 28,312 20,185
-------- -------- -------- -------- --------
Operating loss .......................................... (41,452) (34,781) (21,671) (14,469) (13,915)
Other income and expense:
Interest income .................................... 3,373 2,786 2,481 1,988 529
Interest expense ................................... (1,548) (1,065) (691) (494) (278)
Gain on sale of investment
in Selectide Corporation ........................ -- -- -- 1,006 --
-------- -------- -------- -------- --------
Other income, net ............................. 1,825 1,721 1,790 2,500 251
-------- -------- -------- -------- --------
Net loss ................................................ $(39,627) $(33,060) $(19,881) $(11,969) $(13,664)
======== ======== ======== ======== ========
Basic and diluted net loss per share (2) ................ ($ 2.49) ($ 2.47) ($ 1.81) ($ 1.32) ($ 4.37)
-------- -------- -------- -------- --------
Shares used in computing basic and diluted
net loss per share (2) ............................. 15,934 13,387 10,966 9,085 3,129
======== ======== ======== ======== ========
Pro forma net loss per share (3) ........................ ($ 2.27)
========
Shares used in computing pro forma net loss per share (3) 6,013
========
</TABLE>
<TABLE>
Balance Sheet Data:
(in thousands)
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments $ 47,297 $ 75,295 $ 56,334 $ 53,253 $ 22,414
Total assets $ 59,333 $ 84,825 $ 61,936 $ 59,243 $ 28,455
Capital lease obligations - non-current portion $ 5,724 $ 3,152 $ 2,938 $ 3,651 $ 2,087
Senior custom convertible notes $ 5,694 $ 17,500 $ - $ - $ -
Accumulated deficit $ (130,599) $ (90,988) $ (57,997) $ (37,964) $ (26,270)
Stockholders' equity $ 24,718 $ 49,013 $ 48,530 $ 43,441 $ 18,319
<FN>
(1) Includes amounts from related party.
(2) Basic and diluted loss per share for 1994 applies the requirements of Staff Accounting Bulletin No. 98
("SAB 98"), issued by the SEC in February 1998. Under SAB 98, certain shares of common stock and options
and warrants to purchase shares of common stock at prices substantially below the per share price of
shares sold in the Company's initial public offering previously included in the computation of shares
outstanding pursuant to Staff Accounting Bulletin's Nos. 55, 64 and 83 are now excluded from the
computation.
(3) Pro forma net loss per share information gives effect to the conversion of all preferred stock outstanding
from the date of issuance.
</FN>
</TABLE>
40
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K/A. Except for the
historical information contained herein, the discussion in this Annual Report on
Form 10-K/A contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. These forward-looking statements are based on the
current expectations of the Company, and the Company assumes no obligation to
update this information. The cautionary statements made in this Annual Report on
Form 10-K/A should be read as being applicable to all related forward-looking
statements wherever they appear in this Annual Report on Form 10-K/A. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include those
discussed under "Liquidity & Capital Resources" below, as well as those
discussed elsewhere herein.
Overview
SUGEN was founded in July 1991 to discover and develop new classes of
small molecule drugs which target specific cellular signal transduction
pathways. These signalling pathways are involved in a variety of chronic and
acute pathological diseases, including cancer and diabetes as well as in
dermatologic, ophthalmic, neurologic and immune disorders. The Company's most
advanced product candidate is SU101, a PDGF TK signalling antagonist. The
Company initiated a Phase III clinical trial for use of SU101 as a treatment for
refractory glioblastoma during the first quarter of 1998. Additionally, SUGEN
currently has underway multiple Phase II studies including SU101 in combination
with BCNU in front-line glioma, mono-therapy in ovarian and non small cell lung
cancers and mono-therapy and in combination with mitozantrone in hormone
refractory prostate cancer. A Phase II study of SU101 as single agent therapy
for refractory anaplastic astrocytoma, another type of malignant brain tumor, is
also being conducted in parallel with the Phase III trial, and at the same
centers. To date, approximately 400 patients have been treated with SU101 in
thirteen Company-sponsored clinical trials. The Company's second cancer product
candidate, SU5416, is a Flk-1/KDR TK antagonist which inhibits angiogenesis (the
process by which blood vessels are formed). Currently, the Company is conducting
multiple Phase I clinical trials for SU5416 in solid tumors in Europe and the
U.S. and a Phase I/II study of SU5416 in Kaposi's sarcoma in the U.S. The
Company announced plans to accelerate the development of SU5416 with the
initiation of Phase III clinical trials in non small cell lung and colorectal
cancers, and for Phase II/III studies in Kaposi's sarcoma. In December 1998, the
Company filed an Investigational New Drug ("IND") with the U.S. Food and Drug
Administration ("FDA") for its third cancer product, SU6668, a novel broad
spectrum inhibitor of angiogenesis and tumor growth, and is currently initiating
Phase I clinical trials in Europe and the U.S. using intravenous and oral
formulations, respectively. For the year ending December 31, 1998, substantially
all of the Company's revenue apart from interest income has been earned pursuant
to collaborations with Zeneca Limited ("Zeneca"), Taiho Pharmaceutical Ltd.
("Taiho"), Vision Pharmaceuticals L.P., an affiliate of Allergan, Inc.,
Allergan, Inc. (collectively "Allergan"), and ASTA Medica Aktiengesellschaft
("ASTA Medica"). The Company intends to pursue its cancer drug discovery
programs independently in North America and its programs in other disease areas
in collaboration with established pharmaceutical companies.
In June 1998, the Company established SUGEN International AG ("SUGEN
International"), as a wholly-owned subsidiary. SUGEN Europe AG ("SUGEN Europe")
was established in August 1998, as a wholly-owned subsidiary of SUGEN
International. Both entities are incorporated in the Canton of Schaffhausen,
Switzerland. SUGEN International and SUGEN Europe will hold certain rights to
the Company's technology portfolio outside of North America. The entities were
formed to facilitate commercialization of the Company's products outside the
United States.
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 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, 1998, the Company's
accumulated deficit was $130.5 million.
41
<PAGE>
Results of Operations
The Company's revenues for the years ended December 31, 1998, 1997, and
1996 were $14.9 million, $6.0 million, and $13.7 million, respectively. Revenues
for the year ended December 31, 1998 included contract revenue from the Taiho,
Zeneca, Allergan, and ASTA Medica collaborations, milestone payments under the
ASTA Medica and Allergan collaborations, and recognition of initial research
payments received in connection with the Taiho and ProChon Biotech Limited
("Prochon") collaborations. Consistent with the contractual terms of certain of
the Company's collaborative agreements, and the underlying substance of the
event, milestone payments received in the form of stock purchases at a premium
above its fair market value, is recorded at fair market value and the premium is
recognized as contract revenue. When common stock is purchased at a premium
above its fair market value upon the initiation of an agreement, the premium is
recorded as equity at the amount paid in. The increase in revenues in 1998 over
1997 was primarily due to revenue earned under the Taiho and ProChon
collaborations, of which approximately $4.0 million was non-recurring. The
Company is actively pursuing additional collaborations, but no assurance can be
given as to the ability of the Company to conclude such collaborations on a
timely basis, or at all. Research funding under certain of the Company's
collaborations are scheduled to expire in accordance with their original terms
in the fourth quarter of 1999 and the first quarter of 2000 which will reduce
the Company's annual revenues by approximately $5.8 million.
Revenues for 1997 included contract revenue from the Zeneca and
Allergan collaborations, and contract services revenue earned under the ASTA
Medica collaboration for services provided by ASTA Medica pursuant to the
collaboration but on non-collaboration programs. The decrease in 1997 revenues
from 1996 was due to the recognition of set-up and wind-down fees associated
with the Allergan, ASTA Medica and Amgen Inc. collaborations in 1996. No such
fees were recognized in 1997.
Research and development expenses for the years ended December 31,
1998, 1997 and 1996 were $46.9 million, $34.6 million, and $29.8 million,
respectively. The increase during 1998 was primarily due the progression of
clinical activities, including expanded Phase II studies and the initiation of a
Phase III registrational study of SU101, in addition to expanded Phase I and
Phase I/II studies of SU5416. The advancement of multiple programs through
preclinical development, including activities associated with the Company's IND
filing of SU6668 combined with higher personnel related costs associated with
the expansion of the Company's research and development programs, led to higher
expenses in 1998. The increase in 1997 expenses from the previous year was
primarily associated with additional personnel dedicated to the Company's
research and development programs. Additional Phase I and Phase II studies of
SU101 and the initiation of Phase I studies of SU5416, also contributed to the
growth in 1997 expenses. The Company expects that its research and development
expenses will continue to grow in future years due to the clinical advancement
of SU101, SU5416 and SU6668, including the related manufacturing and process
development efforts, the hiring of personnel, additional preclinical studies,
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,
1998, 1997, and 1996 were $9.5 million, $6.2 million and $5.5 million,
respectively. The increase in 1998 was primarily due to higher headcount related
expenses, costs associated with the formation of the Company's international
subsidiaries, non-recurring costs associated with the Company's relocation to
its South San Francisco facility and additional expenses in the areas of
investor relations and business development. The increase in 1997 was primarily
due to increased administrative staffing, the related recruiting and relocation
expenses and costs associated with corporate and business development. The
Company expects that its general and administrative expenses will continue to
increase in order to support the Company's expanding research and development
efforts and the anticipated establishment of a sales and marketing force.
Interest income for the years ended December 31, 1998, 1997, and 1996
was $3.4 million, $2.8 million, and $2.5 million, respectively. These increases
were due to higher investment balances arising primarily from issuances of the
Company's capital stock and convertible debt. Interest expense for the years
ended December 31, 1998, 1997 and 1996 was $1.5 million, $1.1 million, and
$691,000, respectively. The increase in 1998 was primarily due to expenses
related to the issuance of senior custom convertible notes in September 1997.
The increase in 1997 from 1996 was primarily due to the Company's continued use
of capital lease financing for equipment and property improvements related to
its previous 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 and interest expenses associated with
the March 1999 convertible debt financing.
42
<PAGE>
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 equity securities.
Liquidity and Capital Resources
At December 31, 1998, the Company had cash, cash equivalents and
short-term investments of approximately $47.3 million compared with
approximately $75.3 million at December 31, 1997. The decrease in cash and
investments during the year ended December 31, 1998 was primarily due to
operating losses. Subsequent to year end, the Company completed a $28.0 million
private placement of senior convertible notes as further discussed below.
Through December 31, 1998, 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 senior custom convertible notes,
and funds received under the Company's corporate collaborations. The Company's
current principal sources of liquidity are its research and development
collaborations with Taiho, Zeneca, Allergan and ASTA Medica, its cash, cash
equivalents and short-term investments and capital lease financing. The research
funding term under the Allergan and Zeneca collaborations are scheduled to
expire in October 1999 and March 2000, respectively. If the funding arrangements
are not renewed by these collaborative partners, the Company will scale back its
resources dedicated to these programs and reassign these resources to other
research and development areas. In February 1999, the Company secured a $5.0
million lease line for the purchase of equipment and tenant improvements.
In March 1999, the Company completed the private placement of $28.0
million principal amount of 12% Senior Convertible Notes due 2002 (the "Notes").
The Notes are convertible into SUGEN Common Stock at $20.50 per share. Interest
on the Notes may be paid in SUGEN Common Stock or cash, at the Company's option.
As part of the Note placement, purchasers were issued warrants (the "Warrants")
to acquire up to an additional $21.0 million principal amount of 12% Senior
Convertible Notes which will mature on the third anniversary date of issuance
(the "Warrant Notes"). The Warrant Notes will have principally the same terms
and conditions as the original Notes. The Warrants to purchase the Warrant Notes
are exercisable until March 2001. The Company has the right, at its option, to
require the exercise of the Warrants by the holders in the event that the
closing price of the Company's Common Stock exceeds certain levels during the
term of the Warrants, subject to certain limitations. On or before August 6,
1999, the then outstanding balance of the 5% Senior Custom Convertible Notes
issued in September 1997 with a floating conversion mechanism will be converted
into SUGEN Common Stock in accordance with their terms or, at a premium of
approximately 125% to 132% of their principal amount, exchanged for (i) an
additional principal amount of the 12% Senior Convertible Notes due 2002 (the
"Exchange Notes") and (ii) Warrants to acquire Warrant Notes in a principal
amount equal to 75% of the principal amount of the Exchange Notes. The Warrants
will be accounted for as a derivative financial instrument. See "Notes to
Consolidated Financial Statements - Subsequent Events."
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 $1.5 million, $1.4 million and $1.1 million
in 1999, 2000 and 2001, respectively. 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 cancelation. The
Company anticipates renewing certain contracts that expired in 1997 which will
increase future commitments beyond the levels indicated above for 1999 through
2001.
Increase in net equipment and leasehold improvements for the years
ended December 31, 1998, 1997 and 1996 were $3.3 million, $3.2 million and $1.7
million, respectively, which included $5.8 million, $2.7 million and $1.2
million, respectively, of equipment and leasehold improvements financed through
the Company's master lease agreements. 1998 net capital additions consisted of
$6.5 million in gross additions ($3.4 million of which was associated with the
new build-to-suit facility) partially offset by the write-off of $4.2 million of
fully depreciated assets associated with the previously occupied facility.
Additions for 1997 and 1996
43
<PAGE>
primarily included expansion costs associated with the former facilities, and
purchases of lab equipment, computer hardware and software. Under the capital
leases and certain operating lease arrangements, including the current facility
lease agreement, the Company has lease commitments of approximately $26.2
million through 2003. 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 1999 will be lower than that of the prior year as
1998 included costs associated with the completion of the Company's new
facility. However, the Company's obligations and related interest expense may
increase in future periods if the Company pursues the option of expanding its
facility. See "Properties."
The Company estimates that its existing capital resources, including
the proceeds from the March 1999 placement of the Notes, together with facility
and equipment financing, expected revenues from current collaborations and net
income from investment activities, will be sufficient to fund its planned
operations into 2000. However, 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.
44
<PAGE>
Year 2000
The Year 2000 Issue is the result of information technologies, computer
systems and scientific and manufacturing equipment being written using two
digits rather than four digits to define the applicable year. As a result,
time-sensitive functions of those software programs and equipment may
misinterpret dates after January 1, 2000, to refer to the twentieth century
rather than the twenty-first century. This could cause system or equipment
shutdowns, failures or miscalculations resulting in inaccuracies in computer
output or disruptions of operations, including, among other things, inaccurate
processing of financial information and/or temporary inability to process
transactions, manufacture products, or engage in similar normal business
activities.
The Company has a Year 2000 Project ("Y2K Project") in place to address
the potential exposures related to the impact on its computer systems and
scientific and manufacturing equipment containing computer related components
for the Year 2000 ("Y2K") and beyond. Approximately half of the Company's Y2K
scheduled work is complete. The remaining work is scheduled to be completed by
the end of the fourth quarter of 1999. The Y2K Project phases include: (1)
inventorying and prioritizing business critical systems; (2) Y2K compliance
analysis; (3) remediation activities including repairing or replacing identified
systems; (4) testing; and (5) developing contingency plans.
An inventory of business critical financial, informational and
operational systems, has been completed. This inventory has been prioritized to
reflect key items of significance. Compliance analysis is approximately 70%
complete for these systems. Remediation activities vary by department, however,
on the average, remediation activities are approximately 50% complete. Testing
of the Company's information technology infrastructure is 50% complete. Testing
of business critical application programs will begin in the second quarter of
1999, and is scheduled to be complete by the fourth quarter of 1999. Contingency
planning will begin in the second quarter of 1999. The Company believes that
with the completed modifications, the Y2K issue will not pose significant
operational problems for its key computer systems and equipment. However, if
such modifications and conversions are not made, or are not completed in a
timely fashion, the Y2K issue could have a material impact on the operations of
the Company, the precise degree of which cannot be known at this time.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information, goods
and services to the Company. These include financial institutions, suppliers,
vendors, and research and development associates. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to Y2K noncompliance, it could affect the Company's ability to process
transactions, manufacture products, or engage in similar normal business
activities. While some of these risks are outside the control of the Company,
the Company has instituted programs, including internal records review and use
of external questionnaires, to identify key third parties, assess their level of
Y2K compliance, update contracts and address any noncompliance issues. The total
cost of the Y2K systems assessments and conversions is funded through operating
cash flows and is not expected to exceed $200,000 of which approximately $20,000
has been spent to date. The actual financial impact could, however, exceed this
estimate.
To the extent that our assessment is finalized without identifying any
material noncompliant information technology systems operated by us or by third
parties, the most reasonably likely worst case scenario is a systematic failure
beyond our control, such as prolonged telecommunications or electrical failure.
Such a failure could prevent us from operating our business. We believe that the
primary business risks in the event of such failure, would include:
o Interruption in manufacturing process (clinical supplies,
validation and registration runs);
o Inability to access clinical data to compile timely New Drug
Applications;
o Inability to conduct research and development experiments; and
o Claims of mismanagement, misinterpretation or breach of
contract.
Any of these risks would have a material adverse effect on our
business, results of operations and financial condition.
45
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including changes to interest
rates and foreign currency exchange rates. A discussion of the Company's
accounting policies for financial instruments and further disclosures relating
to financial instruments is included in the Organization and Significant
Accounting Policies in the Notes to Consolidated Financial Statements.
The Company monitors the risks associated with interest rates and
foreign currency exchange rate risks and has established policies and business
practices to protect against these and other exposures. The Company places its
investments in instruments that meet high credit quality standards, as specified
in the Company's investment policy guidelines; the policy also limits the amount
of credit exposure to any one issue, issuer, or type of instrument and does not
permit derivative financial instruments in its investment portfolio. As a
result, the Company does not expect any material loss with respect to its
investment portfolio. The Company has no cash flow exposure due to interest rate
changes for its 5% Senior Custom Convertible Notes.
<TABLE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities, the table presents principal cash flows and related weighted-average
interest rates by expected maturity dates.
<CAPTION>
Fair
There- Value At
(in millions) 1999 2000 2001 2002 2003 after Total 12/31/98
-------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $ 24.0 - - - - - $ 24.0 $ 23.9
Weighted average interest rate 5.10%
Short-term investments $ 15.5 $ 7.5 - - - - $ 23.0 $ 23.4
Weighted average interest rate 5.62% 6.17%
Liabilities
5% Senior custom convertiable notes $ - $ 5.7 - - - - $ 5.7 $ 6.2
Weighted average interest rate 5%
</TABLE>
46
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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 DISCLOSURE
Not applicable.
32
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bruce R. Ross resigned from the Company's Board of Directors effective
February 18, 1999 for personal reasons.
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, 1999 in connection with the solicitation of proxies for the Company's
Annual Meeting of Stockholders to be held May 19, 1999 (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.
47
<PAGE>
<TABLE>
PART IV
<CAPTION>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
<S> <C>
1. Financial Statements Page
----
The following financial statements of SUGEN, Inc. are included in a separate section of this report:
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1998 F-4
Consolidated Statement of Stockholders' Equity for the three years in the
period ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for the three years in the period
ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
2. Financial Statement Schedules
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.
48
<PAGE>
3. Exhibits
Exhibit
Number Exhibit
- ------ -------
3.1 Restated Certificate of Incorporation, filed February 23, 1995.
(2)
3.2(ii) 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)
4.3 Form of 5% Senior Custom Convertible Note due 2000. (15)
4.4 Form of Common Stock Purchase Warrant. (15)
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)
49
<PAGE>
Exhibit
Number Exhibit
- ------ -------
10.20++ Research and License Agreement, dated October 1, 1993, among the
Registrant, 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)
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)
50
<PAGE>
Exhibit
Number Exhibit
- ------ -------
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 Institute. (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)
10.61++ Master Lease Agreement, dated March 28, 1997, between the
Registrant and Transamerica Business Credit Corporation. (13)
10.62++ Lease Financing Commitment Letter, dated March 20, 1997, between
the Registrant and Transamerica Business Credit Corporation. (13)
10.63++ Build-To-Suit Lease Agreement, dated June 11, 1997, between the
Registrant and Britannia Pointe Grand Limited Partnership. (14)
10.64++ Form of Warrant for the Purchase of Common Stock, dated June 30,
1997, issued in the connection with Build-To-Suit Lease
Agreement, between the Registrant and Britannia Pointe Grand
Limited Partnership. (14)
10.65++ Second Amended and Restated Research and License Agreement, dated
June 30, 1997, between the Registrant and New York University.
(14)
10.66++ Termination notice, dated June 1, 1997, between the Registrant
and Yissum Research Development Company of The Hebrew University
of Jerusalem. (14)
10.67++ Form of Note Purchase Agreement, dated as of September 8, 1997,
by and between the Registrant and the investors named therein.
(16)
10.68++ Amended and Restated Master Lease Agreement, dated November 12,
1997, and Lease Financing Commitment Letter, dated November 5,
1997, between the Registrant and Transamerica Business Credit
Corporation.
51
<PAGE>
Exhibit
Number Exhibit
- ------ -------
*10.69 Restricted Stock Bonus Agreement between the Registrant and K.
Peter Hirth, Ph.D., dated September 16, 1997.
10.70 Common Stock Purchase Agreement dated January 12, 1998 between
the Registrant and ASTA Medica Aktiengesellschaft. (17)
10.71++ First Amendment to Lease, dated March 8, 1998, between the
Registrant and Britannia Pointe Grand Limited Partnership. (17)
10.72 Common Stock Purchase Agreement, dated June 30, 1998, between the
Registrant and Oceana Investment Corporation PLC. (18)
10.73++ Heads of Agreement, dated June 30, 1998, between the Registrant
and ProChon Biotech Limited. (18)
10.74++ Collaboration Agreement, dated July 28, 1998, between the
Registrant, SUGEN International AG, and Taiho Pharmaceutical Co.,
Ltd. (19)
*10.75 Restricted Stock Bonus Agreement between the Registrant and James
L. Knighton, dated October 29, 1998.
*10.76 Letter Agreement between the Registrant and Stephen Evans Freke,
dated July 21, 1998.
10.77+ First Amendment to the Collaboration Agreement, between the
Registrant and ASTA Medica Aktiengesellschaft, dated December 31,
1998.
10.78 Agreement for the Purchase of Common Stock of the Registrant by
ASTA Medica Aktiengesellschaft, dated December 31, 1998.
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.
- -------------
* 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.
(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.
52
<PAGE>
(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.
(13) 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, 1997.
(14) 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, 1997.
(15) Filed as an exhibit to the Form 8-K Current Report dated
September 12, 1997, and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant's Registration Statement on
Form S-3, dated October 10, 1997, and incorporated herein by
reference.
(17) 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, 1998.
(18) 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, 1998.
(19) 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, 1998.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the year ended December 31, 1998.
53
<PAGE>
Annual Report on Form 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
Consolidated Financial Statements and Supplementary Data
Certain Exhibits
Year Ended December 31, 1998
SUGEN, Inc.
South San Francisco, California
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SUGEN, Inc.
We have audited the accompanying consolidated balance sheets of SUGEN,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SUGEN,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 5, 1999,
except for Note 13 as to which
the date is March 24, 1999.
F-2
<PAGE>
<TABLE>
SUGEN, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<CAPTION>
December 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,901 $ 23,816
Short-term investments 23,396 51,479
Accounts receivable 373 237
Prepaid expenses and other current assets 1,022 754
--------- ---------
Total current assets 48,692 76,286
Property and equipment, net 7,863 4,601
Other assets 2,778 3,938
--------- ---------
$ 59,333 $ 84,825
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,883 $ 1,991
Accrued liabilities 13,910 10,267
Deferred revenue 1,625 625
Capital lease obligations - current portion 2,779 2,277
--------- ---------
Total current liabilities 23,197 15,160
Capital lease obligations - non-current portion 5,724 3,152
Senior custom convertible notes 5,694 17,500
--------- ---------
Total long-term liabilities 11,418 20,652
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:
16,613,567 and 15,307,146 in 1998 and 1997, respectively 166 153
Additional paid-in capital 157,005 141,426
Deferred compensation (971) (695)
Note receivable from stockholder (883) (883)
Accumulated other comprehensive income (loss) (53) (69)
Accumulated deficit (130,546) (90,919)
--------- ---------
Total stockholders' equity 24,718 49,013
--------- ---------
$ 59,333 $ 84,825
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
SUGEN, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Contract revenue (includes amounts from related party $ 14,916 $ 6,031 $ 13,650
of $3,204 in 1998, $3,074 in 1997 and $3,055 in 1996)
Costs and expenses:
Research and development 46,851 34,585 29,792
General and administrative 9,517 6,227 5,529
------------ ------------ ------------
Total costs and expenses 56,368 40,812 35,321
------------ ------------ ------------
Operating loss (41,452) (34,781) (21,671)
Other income and expenses:
Interest income 3,373 2,786 2,481
Interest expense (1,548) (1,065) (691)
------------ ------------ ------------
Other income, net 1,825 1,721 1,790
============ ============ ============
Net loss $ (39,627) $ (33,060) $ (19,881)
============ ============ ============
Basic and diluted net loss per share $ (2.49) $ (2.47) $ (1.81)
============ ============ ============
Shares used in computing basic and diluted net loss
per share 15,934,000 13,387,000 10,966,000
============ ============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
SUGEN, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock Additional
------------------------- Paid-In
Shares Amount Capital
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1995 10,634,917 $ 106 $ 81,696
Net unrealized loss on available-for-sale securities of $152 -- -- --
Net loss -- -- --
Comprehensive income
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 -- -- --
----------- ----------- -----------
Balances at December 31, 1996 12,993,450 130 107,990
Net unrealized gain on available-for-sale securities of $69 -- -- --
Net loss -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net 288,696 3 1,543
Deferred compensation related to stock grant to an officer 25,000 -- 350
Issuance of Common Stock for cash in connection with the follow-on
public offering, net of offering costs of $2,340 2,000,000 20 29,640
Fair value of warrants issued -- -- 1,903
Amortization of deferred compensation -- -- --
----------- ----------- -----------
Balances at December 31, 1997 15,307,146 153 141,426
Unnrealized gain on available-for-sale securities of $48, net of reclassification
adjustment for gains included in net income of $32 -- -- --
Net loss -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net 156,528 2 1,415
Deferred compensation related to stock grant to an officer 20,000 -- 271
Issuance of Common Stock upon exercise of warrants, net 1,822 -- --
Issuance of Common Stock in connection with conversions
of senior custom convertible notes, net 1,002,349 10 10,271
Issuance of Common Stock for cash to ProChon 93,750 1 2,239
Issuance of Common Stock for cash to ASTA Medica Aktiengesellschaft 31,972 -- 625
Fair value of certain options and warrants granted to external parties -- -- 294
Deferred compensation related to certain options granted to employees -- -- 464
Amortization of deferred compensation -- -- --
=========== =========== ===========
Balances at December 31, 1998 16,613,567 $ 166 $ 157,005
=========== =========== ===========
Accumulated
Receivable Other
Deferred From Comprehensive
Compensation Stockholder Income
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1995 $ (397) $ -- $ 120
Net unrealized loss on available-for-sale securities of $152 -- -- (152)
Net loss -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net -- -- --
Issuance of Common Stock for cash and note in connection with
the exercise of stock options -- (883) --
Issuance of Common Stock for cash to Allergan, net of issuance costs of $32 -- -- --
Issuance of Common Stock for cash in connection with the follow-on
public offering, net of offering costs of $2,133 -- -- --
Issuance of Common Stock upon exercise of warrants, net -- -- --
Repurchase of Common Stock for cash from Amgen Inc. -- -- --
Issuance of warrants for cash to Amgen Inc. -- -- --
Deferred compensation related to grant of certain stock options (538) -- --
Amortization of deferred compensation 225 -- --
----------- ----------- -----------
Balances at December 31, 1996 (710) (883) (32)
Net unrealized gain on available-for-sale securities of $69 -- -- 69
Net loss -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net -- -- --
Deferred compensation related to stock grant to an officer (350) -- --
Issuance of Common Stock for cash in connection with the follow-on
public offering, net of offering costs of $2,340 -- -- --
Fair value of warrants issued -- -- --
Amortization of deferred compensation 365 -- --
----------- ----------- -----------
Balances at December 31, 1997 (695) (883) 37
Unnrealized gain on available-for-sale securities of $48, net of reclassification
adjustment for gains included in net income of $32 -- -- 16
Net loss -- -- --
Comprehensive income
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net -- -- --
Deferred compensation related to stock grant to an officer (271)
Issuance of Common Stock upon exercise of warrants, net -- -- --
Issuance of Common Stock in connection with conversions
of senior custom convertible notes, net -- -- --
Issuance of Common Stock for cash to ProChon -- -- --
Issuance of Common Stock for cash to ASTA Medica Aktiengesellschaft -- -- --
Fair value of certain options and warrants granted to external parties -- -- --
Deferred compensation related to certain options granted to employees (464) -- --
Amortization of deferred compensation 459 -- --
=========== =========== ===========
Balances at December 31, 1998 $ (971) $ (883) $ 53
=========== =========== ===========
Total
Accumulated Stockholders'
Deficit Equity
----------- -----------
<S> <C> <C>
Balances at December 31, 1995 $ (38,084) $ 43,441
Net unrealized loss on available-for-sale securities of $152 (152)
Net loss (19,881) (19,881)
-----------
Comprehensive income (20,033)
-----------
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 -- 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 $2,133 -- 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 -- --
Amortization of deferred compensation -- 225
----------- -----------
Balances at December 31, 1996 (57,965) 48,530
Net unrealized gain on available-for-sale securities of $69 -- 69
Net loss (33,060) (33,060)
-----------
Comprehensive income (32,991)
-----------
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net -- 1,546
Deferred compensation related to stock grant to an officer -- --
Issuance of Common Stock for cash in connection with the follow-on
public offering, net of offering costs of $2,340 -- 29,660
Fair value of warrants issued -- 1,903
Amortization of deferred compensation -- 365
----------- -----------
Balances at December 31, 1997 (91,025) 49,013
Unnrealized gain on available-for-sale securities of $48, net of reclassification
adjustment for gains included in net income of $32 -- 16
Net loss (39,627) (39,627)
-----------
Comprehensive income (39,611)
-----------
Issuance of Common Stock upon exercise of stock options and in
connection with an employee stock purchase plan, net -- 1,417
Deferred compensation related to stock grant to an officer
Issuance of Common Stock upon exercise of warrants, net -- --
Issuance of Common Stock in connection with conversions
of senior custom convertible notes, net -- 10,281
Issuance of Common Stock for cash to ProChon -- 2,240
Issuance of Common Stock for cash to ASTA Medica Aktiengesellschaft -- 625
Fair value of certain options and warrants granted to external parties -- 294
Deferred compensation related to certain options granted to employees -- --
Amortization of deferred compensation -- 459
=========== ===========
Balances at December 31, 1998 $ (130,652) $ 24,718
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
SUGEN, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(In thousands)
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(39,627) $(33,060) $(19,881)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,886 3,146 2,308
Issuance of options for non-cash benefits 225 -- --
Changes in operating assets and liabilities:
Accounts receivable (136) 27 24
Prepaid expenses and other current assets (268) (286) 278
Other assets (582) (1,370) (332)
Accounts payable 2,892 1,139 200
Accrued liabilities 3,721 2,861 3,819
Deferred revenue 1,000 250 (6,183)
-------- -------- --------
Net cash used in operating activities (28,889) (27,293) (19,767)
-------- -------- --------
Cash flows from investing activities
Purchases of short-term investments (45,043) (54,884) (27,998)
Maturities of short-term investments 48,521 31,515 36,973
Sales of short-term investments 24,621 3,441 4,418
Purchases of property and equipment, net (6,481) (3,177) (1,665)
-------- -------- --------
Net cash provided by (used in) investing activities 21,618 (23,105) 11,728
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of Common Stock, net 4,282 31,206 27,395
Proceeds from issuance of senior custom convertible notes -- 17,500 --
Repurchase of Common Stock -- -- (2,698)
Proceeds from issuance of warrant -- -- 200
Proceeds from lease financing of property and equipment 5,796 2,750 1,247
Payments under capital lease obligations (2,722) (2,094) (1,479)
-------- -------- --------
Net cash provided by financing activities 7,356 49,362 24,665
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 85 (1,036) 16,626
Cash and cash equivalents at beginning of year 23,816 24,852 8,226
-------- -------- --------
Cash and cash equivalents at end of year $ 23,901 $ 23,816 $ 24,852
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 1,332 $ 847 $ 691
======== ======== ========
Supplemental disclosure of noncash investing and
financing activities:
Issuance of Common Stock upon conversion of Senior Custom
Convertible Notes, due 2000, net $ 10,281 $ -- $ --
======== ======== ========
Write-off of fully depreciated assets $ 4,182 $ -- $ --
======== ======== ========
Issuance of warrants for non-cash benefits $ 69 $ 1,903 $ --
======== ======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
F-6
<PAGE>
SUGEN, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
SUGEN, Inc. (the "Company"), a Delaware corporation founded in July
1991, is a biopharmaceutical company focused on the discovery and development of
small molecule drugs which target specific cellular signal transduction
pathways. These signalling pathways are regulated by cell surface receptors or
intracellular signalling molecules known as tyrosine kinases (TKs),
serine-threonine kinases (STKs) and tyrosine phosphatases (TPs). Aberrant
signalling of TKs, STKs and TPs has been shown to result in a variety of chronic
and acute pathological diseases, including cancer and diabetes as well as
dermatologic, ophthalmic, neurologic and immune disorders. The Company pursues
its drug discovery programs independently and in collaboration with other
pharmaceutical companies.
Principles of Consolidation
The consolidated financial statements include the Company's wholly
owned subsidiaries, SUGEN International AG ("SUGEN International"), and SUGEN
Europe AG ("SUGEN Europe"). In June 1998, the Company established SUGEN
International incorporated in the Canton of Zug, Switzerland, as a wholly-owned
subsidiary. SUGEN Europe was established in August 1998, as a wholly-owned
subsidiary of SUGEN International. SUGEN International and SUGEN Europe will
hold certain rights to the Company's technology portfolio outside of North
America. All material intercompany accounts and transactions have been
eliminated in consolidation.
Formation Costs
Formation costs associated with the establishment of the subsidiaries
are expensed as incurred. These costs include legal, tax, and accounting fees.
Foreign Currency Translation
The functional currency of the Company's wholly-owned subsidiaries is
the Swiss Franc. Assets and liabilities of the subsidiaries are translated at
the United States Dollar exchange rate in effect at the balance sheet date.
Amounts included in the subsidiaries' statements of operations are translated at
the average rate of exchange prevailing during the period. Adjustments resulting
from the translation of financial statements denominated in Swiss Francs, if
significant, are reflected as a separate component of other comprehensive
income.
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.
F-7
<PAGE>
1. Organization and Significant Accounting Policies (Continued)
All debt securities are designated as available-for-sale and are
carried at fair value, with the unrealized gains and losses included in
accumulated other comprehensive income 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 as consideration for marketing and distribution rights and previous
research and development work performed are recognized in full upon contract
execution. Periodic research funding payments are recognized as revenue as the
work is performed. Milestones are recorded when the specific performance goal is
achieved, no future performance obligations with respect to the milestone
payment exist and collection of the amounts due is assured. Consistent with the
contractual terms of certain of the Company's collaborative agreements, and the
underlying substance of the event, milestone payments received in the form of
stock purchases at a premium above its fair market value, are recorded at fair
market value and the premium is recognized as contract revenue. When common
stock is purchased at a premium above its fair market value upon the initiation
of an agreement, the premium is recorded as equity at the amount paid in.
Further, the collaborative partners purchasing common stock at a premium receive
no rights or privileges other than the customary registration rights and rights
and privileges of the Company's other common shareholders.
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 and are expensed as incurred.
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 and leasehold improvements are amortized over ten
years. Amortization of assets held under capital lease is included in
depreciation expense.
Stock Based Compensation
The Company generally grants stock options for a fixed number of shares
to employees and non-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. Stock options granted to non-employees are accounted for in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for Stock
Based Compensation."
Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted
average number of common shares outstanding. Stock options, convertible
preferred stock, and warrants are excluded from the computation as their effect
is antidilutive. If the Company had been in a net income position, diluted
earnings per share would have been presented separately and would have included
the effect of outstanding stock options and warrants, calculated using the
treasury stock method.
F-8
<PAGE>
1. Organization and Significant Accounting Policies (Continued)
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net loss or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
Recent Accounting Standards
Effective January 1998, the Company adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information", ("SFAS 131") which established revised standards for the
reporting of financial and descriptive information about operating segments in
financial statements. The Company has determined that it operates in only one
segment. Accordingly, the adoption of the Statement had no impact on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133"). SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The adoption of SFAS 133 could have a
material impact on the Company's results of operations, as significant
mark-to-market adjustments may result due to fluctuations in interest rates and
the price of the Company's common stock, which historically has been volatile.
2. Investments
<TABLE>
The following is a summary of available-for-sale securities as of
December 31 (in thousands):
<CAPTION>
Available-for-Sale Securities
-------------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------
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 $ 6,017 $ 37 $ 6,054 $11,518 $ 17 $11,535
U.S. corporate notes 14,648 9 14,657 36,393 16 36,409
U.S. corporate
Commercial paper 14,273 7 14,280 16,001 2 16,003
Certificates of deposit 4,970 -- 4,970 3,999 2 4,001
Money market funds and
Other 7,336 -- 7,336 7,347 -- 7,347
------- ------- ------- ------- ------- -------
$47,244 $ 53 $47,297 $75,258 $ 37 $75,295
======= ======= ======= ======= ======= =======
Amounts included in:
Cash equivalents $23,896 $ 5 $23,901 $23,814 $ 2 $23,816
Short-term investments 23,348 48 23,396 51,444 35 51,479
------- ------- ------- ------- ------- -------
$47,244 $ 53 $47,297 $75,258 $ 37 $75,295
======= ======= ======= ======= ======= =======
</TABLE>
F-9
<PAGE>
2. Investments (continued)
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies and for
debt securities, the fair value approximates the amortized cost. 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, 1998, the average portfolio duration was
approximately six months and the longest contractual maturity did not exceed two
years. Gross realized gains and losses were immaterial during 1998, 1997, and
1996.
3. Property and Equipment
Property and equipment consists of the following at December 31 (in thousands):
1998 1997
---------------- ---------------
Leasehold improvements $ 3,960 $ 4,084
Office and computer equipment 4,508 3,251
Laboratory equipment 5,392 4,226
---------------- ---------------
13,860 11,561
Accumulated depreciation and amortization (5,997) (6,960)
---------------- ---------------
Net property and equipment $ 7,863 $ 4,601
================ ===============
Additions to 1998 property and equipment are net of a $4.2 million
write-off of fully depreciated assets associated with the previously occupied
facilities.
Property and equipment under capital leases amounted to $10.4 million
and $8.9 million as of December 31, 1998 and 1997, with related accumulated
amortization of $4.0 million and $5.1 million, respectively.
4. Accrued Liabilities
The components of accrued liabilities consist of the following at December (in
thousands):
1998 1997
---------------- --------------
Accrued research and development services $ 6,859 $ 5,351
Accrued compensation 1,937 1,176
Accrued professional fees 1,118 859
Other 3,996 2,881
---------------- --------------
$ 13,910 $ 10,267
================ ==============
5. Research and Development Collaboration Agreements
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 ($9.3 million inception to date) 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.
F-10
<PAGE>
5. Research and Development Collaboration Agreements (continued)
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 of
which the premium above fair market value was recorded as equity. 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 November 1997, October 1996 and
September 1995 financings (see Note 9), purchasing an additional 456,000,
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 $36.8 million. As of December 31, 1998, Zeneca's ownership level in SUGEN was
approximately 18%. Zeneca has committed not to increase its holdings above 20%
without the approval of SUGEN's Board of Directors.
Allergan, Inc.
In October 1996, the Company established a research and development
collaboration with Allergan, Inc. and Vision Pharmaceuticals L.P., an affiliate
of 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 worldwide. In return, the Company
received a $2.0 million initial payment for past research services, is receiving
annual research funding ($4.6 million inception to date) and expects to receive
additional fees upon the achievement of specified milestones and royalties on
any product sales. In addition, the agreement provides the Company to 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, of which the premium above fair market value was recorded as
equity 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.
In July 1998, the first milestone in connection with the Company's
collaboration with Allergan was achieved. In connection with this milestone, the
Company recognized $437,500 in contract revenue, net of royalties.
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.
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.
F-11
<PAGE>
5. Research and Development Collaboration Agreements (continued)
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. In 1995 ASTA
Medica purchased 431,137 shares of SUGEN Common Stock for $9.0 million, or
$20.88 per share, of which the premium above fair market value was recorded as
equity. In January 1998, the first milestone in connection with the Company's
collaboration with ASTA Medica was achieved in the Pan-Her cancer program. ASTA
Medica exercised its option to satisfy its $500,000 milestone obligation through
the purchase of 18,665 shares of SUGEN Common Stock at a price of $26.79 per
share. The Company has recorded the amount received in excess of the fair market
value of the common stock issued as revenue in accordance with its policy. The
fair market value of the common stock issued equaled the 20 day average closing
price as defined in the ASTA Medica agreement.
In December 1998, the Company and ASTA Medica entered into a first
amendment to the existing collaboration agreement to extend the period of time
for the screening and selection of active compounds under the Pan-Her and Raf
programs. The Company will receive $1.5 million in consideration for extending
the Pan-Her project, $750,000 of which was received in 1998; $375,000 in
contract revenue for 1998 services and the remaining $375,000 for the purchase
of 13,307 shares of SUGEN Common Stock at $28.18 per share, of which the premium
above fair market value was recorded as equity. In the event ASTA Medica elects
to extend the screening period under the Raf program, the Company would receive
additional consideration.
ProChon Biotech Limited
In June 1998, the Company entered into a collaboration with ProChon
Biotech Limited ("ProChon") to discover and develop small molecule signal
transduction inhibitors for the treatment of achondroplasia and other growth
disorders. In connection with this collaboration, the Company received $3.0
million comprised of a $750,000 initial research payment and a $2.25 million
stock purchase of 93,750 shares of SUGEN Common Stock at $24.00 per share, of
which the premium above fair market value was recorded as equity. In addition,
the Company will receive payments upon achievement of certain milestones and
royalties with respect to worldwide sales of collaboration products.
Taiho Pharmaceutical Ltd.
In July 1998, the Company entered into an agreement with Taiho
Pharmaceutical Ltd. ("Taiho") for the development and commercialization of the
Company's angiogenesis inhibitors for the prevention and treatment of cancer. In
connection with this agreement, Taiho will receive marketing rights in Japan,
while the Company will retain marketing rights for the rest of the world. The
Company received a $3.0 million initial research payment, is receiving research
and development funding ($4.0 million from inception to date) and will receive
additional payments upon the achievement of certain milestones. The Company has
retained the rights to manufacture and supply products to Taiho for sale in
Japan.
6. Leases
In June 1997, the Company entered into a build-to-suit facility lease
agreement that extends until 2015 with renewal options totaling an aggregate of
ten years and is accounted for as an operating lease. In connection with this
agreement, the Company also issued warrants to purchase shares of Common Stock.
The related fair value of the warrants was recorded as deferred expenses and is
being amortized over the five year term of the warrants. In accordance with the
terms of the agreement, the landlord agreed to use its reasonable best efforts
to complete the facility according to the building specifications and to provide
for occupancy by the Company by an
F-12
<PAGE>
6. Leases (continued)
agreed upon date. In addition to obtaining financing for its share of the cost
of building improvements, the Company is obligated to make timely rental
payments in accordance with the payment schedule. In the fourth quarter of 1998,
the new facility was completed, coinciding with the expiration of the Company's
pre-existing facility leases. Rent expense for the office and laboratory
facility leases and other operating leases amounted to $2.4 million, $1.6
million and $1.6 million for 1998, 1997 and 1996, respectively.
The Company finances substantially all of its purchases of property and
equipment through the use of lease lines of credit. Generally on a quarterly
basis, assets purchased by the Company are submitted for financing under its
capital lease arrangements. Cash proceeds are received by the Company when the
documentation submitted is accepted by the lender and the Company accounts for
these transactions as capital lease obligations.
Future minimum payments under capital and operating leases at December
31, 1998 are as follows (in thousands):
Capital Operating
Leases Leases
-------- --------
Year ended December 31:
1999 $ 3,633 $ 3,033
2000 2,890 3,057
2001 2,129 3,780
2002 1,573 3,856
2003 113 3,943
--------
Total minimum lease payments 10,338
Amount representing interest (1,835)
--------
Present value of minimum lease payments 8,503
Less current portion (2,779)
--------
Non-current portion $ 5,724
========
Annual rental obligations under operating leases average approximately
$3.5 million from 2004 through the end of the term of the lease.
7. Senior Custom Convertible Notes
In September 1997, the Company completed the sale of $17.5 million
principal amount of 5% Senior Custom Convertible Notes due 2000 (the "1997
Notes"). The 1997 Notes were sold at par, mature on September 12, 2000 and bear
interest at a rate of 5% per annum (payable in Common Stock or cash, at the
Company's option). The 1997 Notes are convertible together with accrued and
unpaid interest and subject to certain limitations, into shares of Common Stock
at a conversion price equal to the average of the two lowest trade prices of the
Common Stock during the 20 trading days immediately preceding the date of
conversion (the "Conversion Price"). Since January 19, 1998, the Conversion
Price may not exceed $14.87, 115% of the average closing bid price of the Common
Stock for the 20 trading days immediately preceding such date. In connection
with the issuance of the 1997 Notes, the Company issued warrants to purchase up
to 332,500 shares of Common Stock at an exercise price of $16.74 per share. Cash
and non-cash issuance costs (including the fair value of the warrants) totaled
approximately $2.6 million and are recorded as deferred expenses which are
amortized to expense over the term of the 1997 Notes. No purchaser of the 1997
Notes will be allowed to convert 1997 Notes and/or warrants which would result
in such person owning more than 4.9% of the then outstanding Common Stock.
Through December 31, 1998, $11.9 million of principal and accrued and unpaid
interest relating to the Company's outstanding 1997 Notes were converted into
1,002,349 shares of Common Stock at the weighted average price of $11.96 per
share. In connection with the issuance of the 1997 Notes, the Company recorded
total debt issuance costs of $2.6 million which was included in Other Assets in
the balance sheets. Such amounts are amortized to interest expense over the term
of the 1997 Notes. Upon conversion, a pro rata portion of the unamortized
issuance costs are reclassified to stockholders' equity.
Upon the occurrence of certain events, at the election of the holders
of the 1997 Notes, the Company may be required to redeem in cash all or a
portion of the 1997 Notes at redemption prices which are at a premium to the
face value of the 1997 Notes. If the 1997 Notes are not converted into Common
Stock upon maturity in September 2000, the 1997 Notes will be exchanged for
13.75% five-year debentures. Pursuant to the terms of the 1997 Notes, in
addition to other covenants, the Company has agreed to certain limitations on
the incurrence of additional indebtedness.
F-13
<PAGE>
7. Senior Custom Convertible Notes (continued)
The fair value of the 1997 Notes for each period presented has been
estimated by management using a discounted cash flow approach adjusted by an
estimate of the fair value of the related conversion feature. Such values were
estimated to be $6.2 million and $14.9 million at December 31, 1998 and 1997,
respectively. The fair value estimates included above exclude the fair value of
the detachable common stock warrants originally issued upon issuance of the 1997
Notes.
8. Commitments Under Research and Development Programs
The Company enters into license and research agreements, from time to
time, 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 $1.5 million, $1.4 million, and $1.1 million in 1999, 2000, and
2001, respectively. The Company anticipates renewing certain contracts that
expired in 1997 which will increase future commitments. 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 $1.4 million, $3.1 million, and $3.5 million for 1998, 1997 and
1996, respectively.
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, 1998, 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
quarterly dividends, when, as and if declared by the Board of Directors. As of
December 31, 1998, no dividends had been declared and no shares were
outstanding.
Common Stock
In November 1997, the Company completed a follow-on public offering of
2,000,000 shares of Common Stock at a price of $16.00 per share. The net
proceeds to the Company were approximately $29.7 million.
The total number of shares of Common Stock outstanding was 16,613,567
as of December 31, 1998, of which 50,875 were subject to repurchase. At December
31, 1998, the Company has reserved 5,511,691 shares of Common Stock for issuance
upon exercise of warrants and options and conversion of debt and 38,300 common
shares for issuance under the Employee Stock Purchase Plan.
F-14
<PAGE>
9. Stockholders' Equity (continued)
Warrants
The following warrants to purchase shares of common stock were issued
in connection with the Senior Custom Convertible Notes, certain collaboration
agreements, and various license, facility and equipment lease financing
arrangements (also see Notes 5, 6 and 7):
Warrants Outstanding at December 31, 1998
------------------------------------------------------------------------
Number of Price Per Aggregate
Shares Share Price Expiration Date
----------------- --------------- ----------------- ----------------
332,500 $ 16.74 $5,566,050 September 2000
200,000 15.50 3,100,000 January 2003
70,000 15.44 1,080,800 June 2002
40,000 3.75 150,000 October 1999
36,847 10.31 379,985 July 2000
13,598 12.87 175,006 December 2001
10,000 16.64 166,400 March 2003
7,200 11.25 81,000 December 1999
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 ix 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,
1999. As of December 31, 1998, 161,700 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 the Plan may be either incentive stock options or
nonstatutory stock options. As of December 31, 1998, an aggregate of 4,250,000
shares of Common Stock had been reserved for issuance under the Plan, of which
750,000 shares are subject to stockholders' approval.
F-15
<PAGE>
10. Stock Option and Purchase Plans (continued)
Options granted under the 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, 1998, options to purchase 1,194,477 shares of Common
Stock were exercisable, of which 73,163 shares would be subject to repurchase if
all were exercised. The Company's repurchase rights lapse over the remaining
vesting period of the options.
The Company recorded deferred compensation expense for the difference
between the exercise price and the fair value of the Company's Common Stock for
options granted to employees prior to shareholder approval in the period between
December 1997 through May 1998. This deferred compensation expense aggregated
$464,000 and is being amortized over the related vesting period.
In 1998, the Company granted options to purchase 45,000 shares to
non-employees with an estimated fair value of approximately $217,000. The
options vest over a one year to a four year period and the Company will continue
to record additional expense related to these options in future years. For the
year ended December 31, 1998, the Company expensed an aggregate compensation
amount of approximately $225,000 relating to all non-employee stock option
grants.
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").
Options granted under this 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 director
may elect at any time while a Non-Employee Director of the Company to exercise
the option prior to vesting of the option. Any unvested shares so purchased
shall be subject to a repurchase right in favor of the Company, which lapses
over the remaining vesting period of the options. 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, 380,000
shares of Common Stock have been reserved for issuance. As of December 31, 1998,
options for 186,000 shares were outstanding, of which 184,000 and 53,000 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.
F-16
<PAGE>
10. Stock Option and Purchase Plans (continued)
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 is being amortized
over the remaining vesting period of approximately five years. The options, as
amended in August 1996, vest over a period of approximately six years.
As of December 31, 1998, options for 180,000 shares were outstanding,
of which 153,000 shares and 74,250 shares were exercisable and subject to
repurchase if exercised, respectively. The Company's repurchase right lapses
over the remaining vesting period of the options.
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 1998, 1997, and 1996, respectively: risk-free interest rates of
4.8%, 5.9% and 5.9%; dividend yields of 0%; volatility factors of the expected
market price of the Company's Common Stock of .53, .55 and .57; and a
weighted-average expected life of the options of three 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.
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):
1998 1997 1996
--------- --------- ----------
Pro forma net loss $ (42,766) $ (35,604) $ (21,813)
========= ========= ==========
Pro forma net loss per share $ (2.68) $ (2.66) $ (1.99)
========= ========= ==========
The weighted average fair value of options granted during 1998, 1997
and 1996 was $5.64, $5.66 and $5.39, respectively.
F-17
<PAGE>
10. Stock Option and Purchase Plans (continued)
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:
Outstanding Stock Options
------------------------------------
Shares Weighted
Available Average
For Grant of Number of Price per
Options Shares Share
------- -------- -------
Balance at December 31, 1995 456,660 1,786,428 6.49
Shares authorized 650,000 -- --
Options granted (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
Shares authorized 900,000 -- --
Options granted (713,500) 713,500 13.15
Options exercised -- (254,836) 5.13
Options forfeited 93,186 (93,186) 11.12
------- ---------
Balance at December 31, 1997 969,839 2,263,341 10.27
Shares authorized 750,000 --
Options granted (a) (834,656) 834,656 13.61
Options exercised -- (109,285) 7.93
Options forfeited 97,689 (97,689) 12.75
------- ---------
Balance at December 31, 1998 982,872 2,891,023 11.24
======= =========
Note:
(a) Of the 834,656 options granted in 1998, options for 22,128
shares are subject to stockholder approval.
<TABLE>
The following table summarizes information concerning currently outstanding
options:
<CAPTION>
Exercisable
Outstanding Stock Options Stock Options
---------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Price Per
Prices of Shares Life Price of Shares Share
----------------- -------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$0.38 - $0.38 25,508 3.4 $0.38 25,508 $0.38
1.13 - 1.13 75,308 4.6 1.13 75,308 1.13
2.44 - 2.44 44,760 5.2 2.44 41,694 2.44
5.00 - 7.50 300,248 6.0 6.33 284,590 6.32
7.88 - 11.75 821,860 7.2 10.44 625,682 10.28
11.88 - 17.63 1,614,041 9.1 13.41 475,609 13.49
19.00 - 19.00 9,298 8.5 19.00 3,086 19.00
============== ============
$0.38 - $19.00 2,891,023 8.0 $11.24 1,531,477 9.73
============== ============
</TABLE>
F-18
<PAGE>
11. Related Party Transactions
In 1995, the Company entered into a collaboration agreement with Zeneca
(see Note 5). As of December 31, 1998, Zeneca owned approximately 18% of the
Company's outstanding Common Stock.
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,
representing the purchase price of the common stock, is included in
stockholders' equity. The remaining balance has been recorded as part of loans
receivable from key employees and officers. 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 is approximately
$446,000 of loans receivable from certain key employees and officers at December
31, 1998.
In September 1997 and October 1998, the Company granted a total of
45,000 shares of Common Stock, to certain officers and recorded deferred
compensation expense in the combined amount of $621,000, which is being
amortized over the vesting period of the shares.
Revenues derived under arrangements with related parties comprised
approximately 21%, 51%, and 22% of total revenues in 1998, 1997 and 1996,
respectively.
12. Income Taxes
The Company's current loss consists of a loss from U.S. and foreign
operations of $18.6 million and $21.0 million, respectively.
As of December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $104.7 million and $3.8 million,
respectively. The Company also had federal and California research and
development tax credit carryforwards of approximately $4.1 million and $3.1
million, respectively. The federal net operating loss and credit carryforwards
will expire at various dates beginning in the year 2006 through 2018, if not
utilized. The State of California net operating losses will expire at various
dates beginning in 1999 through 2003, if not utilized.
Utilization of the Company's U.S. federal and state net operating loss
carryforwards and credits may be subject to an annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses and credits before utilization.
For Swiss tax purposes, the Company has net operating losses of
approximately $21.0 million which will expire in 2005. The Company does not
expect to derive future tax savings from these losses.
F-19
<PAGE>
12. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets 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 are as follows as of
December 31 (in thousands):
1998 1997
-------- --------
Net operating loss carryforwards $ 35,800 $ 30,400
Research credits carryforwards 6,300 3,700
Capitalized R&D 3,100 1,700
Deferred revenue 200 100
Other - net 2,300 1,900
-------- --------
Total deferred tax assets 47,700 37,800
Valuation allowance for deferred tax assets (47,700) (37,800)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
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
$14.3 million and $8.0 million for the fiscal years ended December 31, 1997 and
1996, respectively.
Deferred tax assets as of December 31, 1998 include approximately $1.5
million relating to the exercise of stock options, which will be credited to
equity when realized.
13. Subsequent Events
In February 1999, the Company secured a $5.0 million capital lease line
to finance the purchase of equipment and tenant improvements.
In March 1999, the Company completed the private placement of $28.0
million principal amount of 12% Senior Convertible Notes due 2002 (the "Notes").
The Notes are convertible into SUGEN Common Stock at $20.50 per share. Interest
on the Notes may be paid in SUGEN Common Stock or cash, at the Company's option.
As part of the Note placement, purchasers were issued warrants (the "Warrants")
to acquire up to an additional $21.0 million principal amount of 12% Senior
Convertible Notes which will mature on the third anniversary date of issuance
(the "Warrant Notes"). The Warrant Notes will have principally the same terms
and conditions as the original Notes. The Warrants to purchase the Warrant Notes
are exercisable until March 2001. The Company has the right, at its option, to
require the exercise of the Warrants by the holders in the event that the
closing price of the Company's Common Stock exceeds certain levels during the
term of the Warrants, subject to certain limitations. On or before August 6,
1999, the then outstanding balance of the 1997 Notes with a floating conversion
mechanism (See Note 7) will be converted into SUGEN Common Stock in accordance
with their terms or, at a premium of approximately 125% to 132% of their
principal amount, exchanged for (i) an additional principal amount of the 12%
Senior Convertible Notes due 2002 (the "Exchange Notes") and (ii) Warrants to
acquire Warrant Notes in a principal amount equal to 75% of the principal amount
of the Exchange Notes.
The estimated fair value of the Warrants will be determined at the time
of issuance and adjusted to their fair value while outstanding and unexercised.
The non cash fair value of the Warrants, together with the costs and expenses
related to the issuance of the Notes and Warrants will be recorded as debt
issuance costs and amortized to expense over the term of the Notes. Further, if
upon exercise of the Warrants the fair value of the Company's Common Stock is
more than $20.50 per share (the conversion price of the Warrant Notes), the
Company may record an additional non cash expense for such beneficial conversion
feature (if such benefit exceeds the previously recorded fair value of the
Warrants).
F-20
<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 amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of South San Francisco, State of California, on July 29, 1999.
SUGEN, INC.
By: /s/ Stephen Evans-Freke
--------------------------------
Stephen Evans-Freke
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934, this
amended 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 July 29, 1999
- ------------------------------ Chairman of the Board
(Stephen Evans-Freke) (Principal Executive Officer)
/s/ James L. Knighton Senior Vice President and July 29, 1999
- ------------------------------ Chief Financial Officer
(James L. Knighton) (Principal Financial and
Accounting Officer)
Jeremy L. Curnock Cook* Director July 29, 1999
- ------------------------------
(Jeremy L. Curnock Cook)
<PAGE>
Director and Secretary July 29, 1999
- ------------------------------
(Samuel A. Hamad)
Director July 29, 1999
- ------------------------------
(Gerald Moeller)
Donald E. Nickelson* Director July 29, 1999
- ------------------------------
(Donald E. Nickelson)
Richard D. Spizzirri* Director July 29, 1999
- ------------------------------
(Richard D. Spizzirri)
Axel Ullrich* Director July 29, 1999
- ------------------------------
(Axel Ullrich)
* By: /s/ James L. Knighton
-------------------------
James L. Knighton
Attorney-in-Fact
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in amendment No.2 to the
Registration Statement (Form S-3), and related Prospectus of SUGEN, Inc., dated
July 21, 1999, pertaining to the registration of 2,461,943 shares of its common
stock, the Registration Statement (Form S-8 No.333-64439), dated September 28,
1998, pertaining to the SUGEN, Inc. 1992 Stock Option Plan and the 1994
Non-Employee Directors' Stock Option Plan, and the Registration Statement (Form
S-3 No.333-37687), dated October 10, 1997 pertaining to the registration
statement of 1,780,000 shares of common stock, of our report dated February 5,
1999, except for Note 13 as to which the date is March 24, 1999 with respect to
the consolidated financial statements of SUGEN, Inc. included in this Annual
Report (Form 10-K/A) for the year ended December 31, 1998.
Ernst & Young
Palo Alto, California
July 29, 1999
