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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended ........................December 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number 0-28674
CADUS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3660391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 Old Saw Mill River Road
Tarrytown, New York 10591-6705
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (914) 467-6200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 Common Stock held by non-affiliates of the
Company, computed by reference to the closing price on March 20, 1998 was
$38,807,739.
Number of shares outstanding of each class of Common Stock, as of March 20,
1998: 12,392,353 shares.
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Special Note Regarding Forward Looking Statements
Certain statements in this Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, the Company's lack of developed pharmaceutical products and uncertainties
regarding its ability to develop safe and efficacious pharmaceutical products,
technological uncertainties regarding the Company's technologies, uncertainties
regarding the Company's future acquisition and licensing of technologies, the
Company's relationship with its collaborative partners and uncertainties
regarding its ability to enter into future collaborative agreements, the
Company's capital needs and uncertainty of future funding, the Company's history
of operating losses, the Company's dependence on proprietary technology and the
unpredictability of patent protection, intense competition in the pharmaceutical
and biotechnology industries, rapid technological development that may result in
the Company's technologies and future products becoming obsolete, uncertainties
regarding the Company's ability to attract and retain key officers, employees
and consultants, as well as other risks and uncertainties discussed in the
Company's prospectus dated July 17, 1996.
PART I
Item 1. Business.
General
Cadus Pharmaceutical Corporation ("Cadus" or the "Company") was
incorporated under the laws of the State of Delaware in January 1992. Cadus is
engaged in the identification of genomic targets in human cell signaling
pathways, the elucidation of their function and the discovery of novel small
molecule therapeutics that act on such targets. The Company is using proprietary
drug discovery technologies based on genetically engineered yeast cells to
simultaneously discover the function of specific genes and create high
throughput screens for the discovery of chemical compounds that act on the
products of such genes. The Company believes that its proprietary technologies
enable it and its collaborative partners to initiate drug discovery against
targets for which conventional techniques cannot initially be used and generally
to accelerate and reduce the cost of the drug discovery process. The Company has
research collaborations with Bristol-Myers Squibb Company ("Bristol-Myers
Squibb"), Solvay Pharmaceuticals B.V. ("Solvay Pharmaceuticals") and SmithKline
Beecham p.l.c. ("SmithKline Beecham").
Cadus is a leader in the development of proprietary technologies that
exploit the similarities between yeast and human genes to elucidate gene
function and cell signaling pathways. The
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Company has developed several proprietary drug discovery technologies. Two of
these technologies are used to identify small molecules that act as agonists or
antagonists to cell surface receptors and other targets in the signal
transduction pathway: (i) a hybrid yeast cell technology that expresses a
functioning human receptor and a portion of its signaling pathway in a yeast
cell and (ii) the Autocrine Peptide Expression ("Apex(TM)") system that
expresses in a hybrid yeast cell both a known human ligand and the receptor that
is activated by that ligand. Two other technologies are used to identify and
characterize orphan receptors (receptors whose function is not known), ligands
and key signaling molecules: (i) the Company's Self Selecting Combinatorial
Library ("SSCL(TM)") technologies, which are used to identify a ligand that
activates a targeted orphan receptor and (ii) the Company's signal transduction
technologies, which are used to determine potential molecular targets in the
human cell signaling pathway and to assist in the determination of a receptor's
biological function. The Company has also developed proprietary software
algorithms that it uses to identify potential new targets from data generated by
the Human Genome Project. The Company uses other complementary technologies,
including in-house combinatorial chemistry libraries, high throughput screening,
medicinal chemistry, pharmacology and mammalian cell biology.
Background
The human body is comprised primarily of specialized cells that perform
different physiological functions and that are organized into organs and
tissues. All human cells contain DNA, which is arranged in a series of subunits
known as genes. It is estimated that there are approximately 100,000 genes in
the human genome. Genes are responsible for the production of proteins. Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological functions of humans, including regulating the body's immune
system. Thus, genes are the indirect control center for all physiological
functions. Over the last few decades, there has been a growing recognition that
many major diseases have a genetic basis. It is now well established that genes
play an important role in diseases such as cancer, cardiovascular disease,
psychiatric disorders, obesity, and metabolic diseases. Significant resources
are being focused on genomics research based on the belief that the sequence and
function of a gene, and the protein that gene expresses, will lead to an
understanding of that gene's role in the functioning and malfunctioning of
cells. This understanding is expected in turn to lead to therapeutic and
diagnostic applications focused on molecular targets associated with the gene
and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor. This
binding event activates the receptor triggering the transmission of a message
through a cascade of signaling molecules from the exterior to the interior of
the cell. This process is called signal transduction. When the signal is
transmitted into the interior of the cell, it may, among other things, activate
or suppress specific genes that switch on or switch off specific biological
functions of the cell. The biological response of the cell, such as the
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secretion of a protein, depends primarily on the specific ligand and receptor
involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are:
G Protein-coupled receptors, cytokine receptors, tyrosine kinase coupled
receptors and multisubunit immune recognition receptors. G Protein-coupled
receptors, which are located on the surface of the cell, constitute the largest
group of receptors. In humans, G Protein-coupled receptors are involved in many
of the body's most basic functions, including heartbeat, sight, sense of smell,
cognition and behavior and also mediate most of the body's basic responses such
as secretion from glands, contractility of blood vessels, movement of cells,
growth and cell death. Tyrosine kinase coupled receptors are involved in cell
growth and differentiation. Multisubunit immune recognition receptors activate
the body's immune defense system.
There are an estimated 2,000 to 5,000 G Protein-coupled receptors in the
human genome, half of which are believed to be involved in taste, smell and
sight. The importance of G Protein-coupled receptors is demonstrated by the fact
that more than 60% of all commercially available prescription drugs work by
interacting with known G Protein-coupled receptors. These drugs include the
anti-ulcer agents Zantac and Tagamet, as well as the cardiac drugs Tenormin and
Lopressor. Many of these drugs were developed through the application of time
consuming and expensive trial and error methods without an understanding of the
chemistry and structure of the G Protein-coupled receptors with which they
interact. More efficient drug discovery methods are available once the gene
sequence, biological function and role in disease processes of a
G Protein-coupled receptor have been determined.
The sequences and functions of approximately 150 human G Protein-coupled
receptors have been identified. This knowledge has also been used to help
identify the sequence of at least 100 more orphan G Protein-coupled receptors.
The Company believes that the identification of the gene sequences and functions
of the remaining G Protein-coupled receptors (other than those involved in
taste, smell or sight) will yield a substantial number of potential drug
discovery targets. Scientists working on the Human Genome Project have sequenced
portions of thousands of genes and have published such sequences or placed them
in public databases. Although the Human Genome Project has produced and made
publicly available an ever increasing volume of raw DNA sequences (including
sequence fragments that may represent portions of human G Protein-coupled
receptors),
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such data cannot be used in drug discovery until (i) a DNA sequence is
recognized to comprise a portion of a G Protein-coupled receptor (ii) the full
DNA sequence of the G Protein-coupled receptor is identified, (iii) the function
of the G Protein-coupled receptor is elucidated, and (iv) agonists and/or
antagonists for the G Protein-coupled receptor are identified.
Traditional Drug Discovery
Drug discovery consists of three key elements: (i) the target, such as a
receptor, on which the drug will act, (ii) the potential drug candidates, which
include organic chemicals, proteins or peptides, and (iii) the assays or tests
to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive process.
Traditional drug discovery has been hampered by the limited number of known
targets and a reliance on in vitro assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an in vitro assay can be difficult. For example, all known G
Protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped structure that cannot be maintained when the isolated
protein is put into an in vitro assay format. If an assay does not accurately
replicate the structure of a target receptor, the compounds identified in the
assay may not function as expected when applied to the target receptor on a
living cell. Furthermore, receptors, signal transduction proteins and other
molecular targets for therapeutic intervention do not exist in isolation in the
cell. Their functional activity results from a complex interrelationship with
numerous other molecules within the cell. Consequently, traditional drug
screening assays often identify compounds as potential drug candidates which,
when tested in living cells, prove to have no useful activity or are even toxic.
A variety of methods have been developed to address these problems, including
using living cells in assays. However, most live cell assays are slow, complex
and expensive to maintain.
In recent years, scientific advances have created new and improved tools
for drug discovery. For example, molecular biology is identifying a growing
number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
Protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
Protein-coupled receptors.
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Yeast
The Company has developed technologies based on yeast that are useful in
identifying drug discovery candidates targeted at G Protein-coupled receptors.
Yeast is a single-celled microorganism that is commonly used to make bread, beer
and wine. In the 1980's, scientists discovered structural and functional
similarities between yeast cells and human cells. Both yeast and human cells
consist of a membrane, an intracellular region and a nucleus containing genes.
Basic cellular processes, including metabolism, cell division, DNA and RNA
synthesis and signal transduction, are the same in both human and yeast cells.
Yeast also have signal transduction pathways that function similarly to human
cell pathways. More than 40 percent of all human gene classes have functional
equivalents in yeast. The genes in yeast express proteins, including
cell-surface receptors such as G Protein-coupled receptors and signaling
molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes enables the
evaluation of the biological function of human proteins, including
receptors and signaling molecules, of unknown function. Proteins with
comparable gene sequences frequently carry out similar functions. This
fact can be used to determine the function of a human gene by genetically
engineering a yeast cell to replace a yeast gene coding for a known
function with the human gene suspected of having a comparable function.
If the yeast cell retains its normal function, it suggests that the human
gene and its protein have a biological function similar to that of their
yeast counterparts. Consequently, genetically engineered yeast cells can
replicate human gene function and provide a biologically relevant context
for evaluating interactions between receptors and their related signaling
pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge has
facilitated analysis of the correlation between yeast and human gene
structure and aids in the definition of human gene functions.
o While the yeast signaling mechanism bears many similarities to the human
signaling mechanism, the yeast intracellular environment is less complex,
thus eliminating much of the ancillary and redundant intracellular
signaling pathways that exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate them into
their genome. As a result, their genetic structure can be easily
manipulated using common genetic engineering techniques.
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o Yeast cells replicate rapidly. Speed of replication is particularly
important because creating a new yeast strain that successfully
incorporates new genetic material and adapts to new conditions may take
several generations and the strain that so adapts is identifiable by
growth. In addition, because a yeast cell reproduces itself every two
hours, compared with 24 to 48 hours for mammalian cells, a drug screen
using yeast can be developed and evaluated much faster than one using
human cell assays.
o Yeast can be easily and inexpensively grown in the laboratory using
standard microbiological techniques and, as a consequence, can readily be
used in automated screening systems.
o Yeast are resistant both to the solvents often needed to dissolve
potentially active compounds and the toxins often found in natural
products. Consequently, hybrid yeast cells can be used to screen
libraries of synthetic compounds, combinatorial chemicals or natural
products.
Cadus's Drug Discovery and Development Strategy
The Company's goal is to discover and develop novel small molecule drugs
targeted to receptors and signaling molecules. The following are the key
elements of the Company's strategy:
o Develop Proprietary Yeast-Based Drug Discovery Technologies. The Company
manipulates the yeast genome by inserting human genes into yeast cells to
create hybrid yeast strains as a novel drug discovery platform.
o Elucidate the Function of Orphan Receptors. The Company uses its
proprietary yeast-based and signal transduction technologies to determine
the biological function of orphan receptors in human cells and to
determine whether they are appropriate drug discovery targets.
o Identify Novel Targets in Signal Transduction Pathways. The Company uses
its proprietary signal transduction technologies to identify new
signaling molecules in signal transduction pathways and to determine
whether they are appropriate drug discovery targets.
o Conduct Proprietary Drug Discovery and Development Programs. The Company
conducts proprietary drug discovery programs to identify lead compounds.
The Company uses its combinatorial chemistry capability and other
technologies to develop selected lead compounds through the preclinical
testing stage.
o Collaborate with Pharmaceutical Companies. The Company collaborates with
pharmaceutical companies in order to combine its drug discovery
capabilities with its collaborators' research, drug development,
manufacturing, marketing and
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financial resources. The Company is currently engaged in collaborations
with Bristol-Myers Squibb, Solvay Pharmaceuticals and SmithKline Beecham.
o Improve Proprietary Technologies and Acquire Complementary Technologies.
The Company expends significant resources on research to improve its
proprietary technologies, including its yeast-based and signal
transduction platform technologies, bioinformatics and the creation of
targeted small molecule chemical libraries. The Company also seeks to
acquire companies and technologies that will complement its proprietary
technologies.
Cadus's Drug Discovery Platform
The Company has developed a novel platform for drug discovery that
addresses many of the limitations of traditional drug discovery methods. This
platform consists of several proprietary drug discovery technologies including
tools used to screen for compounds that act as agonists or antagonists to cell
surface receptors and other molecules in the signal transduction pathway and
tools used to identify and characterize orphan receptors, ligands and key
signaling molecules.
Hybrid Yeast Cells
The Company has developed a proprietary technology to insert human genes
into yeast cells to create hybrid yeast cells. Initially, the Company has
focused its hybrid yeast cell technology primarily on G Protein-coupled
receptors. The Company's scientists typically create hybrid yeast cells by
replacing yeast G Protein-coupled receptor genes and certain signaling molecules
with their human equivalents. As a result, these hybrid yeast cells express a
human G Protein-coupled receptor and a portion of its signaling pathway. The
Company uses these hybrid yeast cells to identify those compounds that act as
agonists or antagonists to that receptor or a molecule that is in its signaling
pathway. The Company has also created hybrid yeast cells using other classes of
human cell-surface receptors that have a functional equivalent in yeast. To
facilitate drug screen development, the Company has designed and developed more
than ten thousand genetically different yeast strains that it uses to build
novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because the Company is able to insert different human genes into
yeast, hybrid yeast cells enable the Company to identify compounds that act at
virtually any site in the human cell signaling pathway. These sites include the
ligand binding site on the receptor, as well as other sites on the receptor, and
the protein components of individual signaling pathways. Moreover, because yeast
are resistant to solvents and toxins often used to dissolve test compounds,
hybrid yeast cells can be used to screen synthetic organic libraries,
combinatorial libraries and natural product libraries. The Company and
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its collaborative partners use hybrid yeast cells to perform high throughput
screening of compound libraries.
The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and genetic
engineering tools. This database currently has approximately 15,000 entries,
that include the phenotype and the genotype of the cell or yeast strain and its
storage site. The Company's scientists select from this database strains or
cells for their research that, based on their prior experience, will most
readily incorporate a particular receptor, enabling the Company's scientists to
more rapidly construct assays and hybrid yeast cell strains. The Company's
biological database grows by approximately 1,000 new entries per quarter. The
Company believes that its collection of cells, cell lines, yeast strains and
genetic engineering tools in its biological database is unique.
Autocrine Peptide Expression System (Apex(TM))
The Company has extended its hybrid yeast cell technology to develop a
novel drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists have
converted this natural multi-cell process into a single cell process by
inserting into a hybrid yeast cell both the human G Protein-coupled receptor and
the gene that causes the yeast cell to produce the ligand that naturally binds
to the receptor being expressed by the same hybrid yeast cell. As a result, the
Company's scientists have made the cell self-stimulating, or "autocrine," in
that it both sends a signal through production and secretion of a ligand and
responds, by replication, to that same signal through the receptor. The Company
believes that the autocrine nature of the Apex(TM) system makes it an effective
tool for the identification of compounds that act as agonists or antagonists
with respect to that receptor or a molecular target in its signaling pathway. As
a result, drug screening may be conducted in an accelerated, cost effective
process as compared to conventional screening techniques.
Self Selecting Combinatorial Library Technology (SSCL(TM))
The Company has developed and is using a systematic approach to determine
the biological function of orphan receptors and demonstrate their value as drug
discovery targets. The critical first step in this approach is to identify a
ligand that activates the orphan receptor. The Company accomplishes this by
using its proprietary SSCL(TM) technology. The SSCL(TM) technology involves the
creation of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast cells
that all express the same orphan receptor. The activation of this receptor is
functionally coupled with cell replication. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast
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cells replicate and, therefore, are readily identified. Thus, the SSCL(TM)
technology uses self selection to identify the ligand that binds to the targeted
orphan receptor. The sequence of the peptide ligand can then be rapidly
identified and undergo further evaluation. The Company's combinatorial peptide
expression libraries contain approximately one hundred million peptides. One to
ten million peptides can be tested in a matter of hours. The Company has used
its SSCL(TM) technology to successfully identify ligands to orphan receptors in
less than a month, significantly accelerating this step in the drug discovery
process.
Once the Company has identified a ligand that activates an orphan receptor,
the Company uses a number of different approaches to determine the biological
significance of the orphan receptor. These include testing the ligand on human
cells, in animals and on human tissue. In addition, the Company uses its signal
transduction technologies to determine the human cell signaling pathway that is
linked to the orphan receptor in order to thereby determine whether to focus
drug discovery efforts at the receptor or in the signaling pathway.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enables the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
Signal Transduction Technologies
The Company has developed signal transduction technologies, based on
genetically engineered human cells, to complement its yeast-based technologies.
The Company uses these signal transduction technologies to dissect human cell
signaling pathways from the receptor to the interior of the cell. As a result,
the Company can confirm the effectiveness of compounds identified through the
use of hybrid yeast cells and ligands identified by the SSCL(TM) technology and
determine where and how compounds and ligands modulate the signaling pathway.
Potential sites of action by a compound include the receptor itself or molecules
downstream in the receptor's signal transduction pathway. Accordingly, each
molecule in the signaling pathway may be a potential target for drug discovery.
Traditional drug discovery has resulted in several successful drugs that are now
known to target such molecules in the signaling pathway, including the
immunosuppressants Cyclosporin A and FK506. For this reason, the Company is
pursuing such molecules as potential targets for drug discovery. The Company's
scientists have used the Company's signal transduction technologies to develop
proprietary assays to identify antagonists of specific molecular targets, as
well as to identify new molecular targets in the signaling pathway. The Company
also uses its yeast-based and human cell-based technologies to determine the
function of such newly identified signaling molecules.
The Company's scientists have used the Company's signal transduction
technologies to discover, sequence and characterize a series of related MEKK
enzymes that are part of the inflammatory signaling pathway in human white blood
cells. MEKK enzymes regulate the synthesis and secretion from white blood cells
of cytokines, some of which are inflammation inducing proteins. MEKK enzymes
have also been shown to play a central role in regulating cell
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growth and cell death in a variety of cell types, including cancer. The Company
is the exclusive worldwide licensee of a patent on a MEKK enzyme. The Company
believes that MEKK enzymes are important targets for drug discovery.
Bioinformatics for Target Identification
The Company has developed proprietary software algorithms that it uses,
together with its extensive knowledge of the structure of G Protein-coupled and
other receptors, to rapidly search through the data generated by the Human
Genome Project for DNA sequences that are likely to be those of G
Protein-coupled receptors. The Company has identified hundreds of partial gene
sequences that it believes are likely to be portions of G Protein-coupled
receptors. The Company is using such information to seek to fully sequence
orphan G Protein-coupled receptors.
Primary and Secondary Screening Capabilities
High throughout screening, or primary screening, is the practice of rapidly
testing thousands of compounds against a target assay by using computer-based
technologies, including robotics. The Company currently conducts high throughput
screening in-house and uses a laboratory information management system to handle
the vast quantity of data generated.
With the advances in both high throughput screening and combinatorial
chemistry, pharmaceutical and biotechnology companies can now routinely screen
100,000 compounds per week per assay in primary screening. As a result of
running multiple assays concurrently, and even with success rates, or "hit"
rates, of less than 0.1%, companies can be faced with hundreds of compounds per
week that then require pharmacological analysis. Pharmacological analysis, also
known as secondary screening, involves the analysis of how selectively a
compound binds to a particular biological target and a biological target's
response to different concentrations of a compound. Secondary screening is
becoming a bottleneck in current drug discovery practice.
The Company has licensed from Axiom Biotechnologies Inc. ("Axiom") the
first High Throughput Pharmacology System ("HT-PS(TM)") to be produced by Axiom,
which, if it performs as represented by Axiom, should alleviate this bottleneck.
Axiom has indicated to the Company that it intends to deliver the HT-PS(TM) by
May of 1998. However, there can be no assurance that the HT-PS(TM) will be
delivered by that time. The HT-PS(TM) measures the immediate physiological
responses to chemical compounds of natural or genetically engineered human cells
and, as designed by Axiom, is expected to be able to perform both selectivity
profiles and dose-response curves on a high throughput basis. By automating the
slow, labor-intensive and costly process of assessing the pharmacological
properties of potential therapeutic compounds identified through primary
screening, the HT-PS(TM) should accelerate the secondary screening process and
thus the identification of lead compounds.
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Combinatorial and Medicinal Chemistry Capabilities
As the Company's drug discovery strategy includes the screening of compound
libraries, access to libraries of compounds is an important aspect of the
Company's drug discovery efforts. The Company develops its own in-house
libraries of compounds by purchasing commercially available compounds and
through automated compound synthesis.
The Company creates small molecule chemical libraries targeted specifically
at G Protein-coupled receptors. The Company believes that its collection and
knowledge of G Protein-couple receptors enables it to synthesize libraries of
compounds that have a greater likelihood of interacting with G Protein-coupled
receptors. The Company is creating these targeted libraries to identify small
molecule agonists and antagonists to G Protein-coupled receptors.
The Company's use of traditional medicinal and combinatorial chemistry
techniques also allows for the optimization of a compound's pharmacological
characteristics once it has been identified as a drug candidate. Optimization
involves improving the potency, selectivity, in vivo stability, bioavailability
and toxicological characteristics of a lead compound by synthesizing new
compound analogs.
Living Chip(TM) Project
In January 1998, the Company entered into a sponsored research agreement
with Massachusetts Institute of Technology ("M.I.T.") pursuant to which M.I.T.
will use its expertise in micro-robotics to co-develop the Living Chip(TM), a
novel drug discovery screening tool that would miniaturize and automate the
Company's proprietary hybrid yeast cell technology. If developed, the Living
Chip(TM) could ultimately accommodate as many as 100,000 yeast-based drug
discovery assays on a single CD-sized synthetic disc and could permit the
testing of thousands of compounds on multiple assays at the individual
scientist's lab bench. The Company is only obligated to provide M.I.T. with
research funding for 1998 but has the option to extend the arrangement through
1999. The Company also entered into a license agreement with M.I.T. pursuant to
which the Company obtained exclusive worldwide rights, for use in
pharmaceutical, diagnostic, animal health and agricultural businesses, to the
technology developed under the sponsored research arrangement. In order to
maintain its exclusive license, the Company must provide M.I.T. with research
funding in 1998 and 1999 and make a minimum level of expenditures thereafter to
commercialize the technology until the technology is commercialized. The Company
is required to pay M.I.T. an annual license fee, royalties on the sale or lease
of Living Chip(TM) systems, royalties on the sale by the Company of therapeutics
and diagnostics developed using the Living Chip(TM), and royalties on services
rendered by the Company based on the Living Chip(TM). In lieu of royalty
payments on sales by sublicensees of drugs initially identified by sublicensees
through the use of licensed technology, the Company pays an annual fee for each
sublicense in effect, provided that a license to other technology owned or
licensed by the Company was granted to the sublicensee at the same time.
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Cadus's Proprietary Drug Discovery Program
The Company is conducting proprietary drug discovery programs to identify
novel targets and lead compounds. The Company has directed these efforts to
G Protein-coupled receptors, G Proteins, tyrosine kinase coupled receptors,
multisubunit immune recognition receptors, cytokine receptors, phosphotyrosine
phosphatases and certain other intracellular signaling molecules, including MEKK
enzymes, as potential targets for a variety of therapeutic areas. These
therapeutic areas are allergic inflammation, acute inflammation and certain
types of cancer, with a specific focus on allergic asthma and small-cell lung
carcinoma. There can be no assurance that the Company's drug discovery efforts
will lead to the discovery of lead compounds in these therapeutic areas.
Allergic Inflammation. Approximately 20% of the population of the United
States suffers from time to time from some form of allergic inflammation. The
best known form of allergic inflammation is asthma. Approximately 14 million
people each year suffer from asthma in the United States. Asthma and other
allergic responses result from a complex series of physiological events
involving signaling by chemokine, IgE and cytokine receptors, with IgE receptor
signaling initiating the allergic response. Chemokine receptors are
G Protein-coupled receptors. IgE receptors and cytokine receptors are coupled to
specific tyrosine kinases, which are proteins in the signaling cascade.
SCLC. Approximately 20% of all lung cancer is small-cell lung carcinoma
("SCLC"), and approximately 35,000 people each year are diagnosed with this
disease in the United States. The disease is characterized by rapid tumor growth
and metastasis, and the mean survival of untreated patients is only two to three
months. SCLC generally cannot be surgically removed and chemotherapy has not
been effective. When stimulated, certain G Protein-coupled receptors cause SCLC
growth. Based on this knowledge, the Company has used its signal transduction
technologies and identified peptides and small molecules that selectively cause
the death of SCLC cells in vitro. The Company is using its hybrid yeast cells
and other technologies to identify small molecules that may mimic the action of
SCLC death-promoting peptides in cells. The Company expects to enter one or more
such small molecules into animal studies within the next year.
Trega Joint Discovery Program. In January 1995, the Company and Trega
Biosciences, Inc. ("Trega") commenced a joint discovery effort, with acute
inflammation as the initial therapeutic focus for the collaboration. Trega
provides combinatorial libraries to the Company and the Company screens such
combinatorial libraries against hybrid yeast cells for the purpose of
identifying candidates for drug development. Trega and the Company may jointly
develop or sell or license any such compounds identified by the Company as
candidates for drug development to corporate partners of the Company or others.
Either Trega or the Company may develop any such compound on its own if the
other party elects not to pursue joint development.
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Collaborative Arrangements
As a key part of its business strategy, the Company pursues collaborations
with pharmaceutical companies to combine the Company's drug discovery
capabilities with the collaborators' research, drug development, manufacturing,
marketing and financial resources. The Company has existing collaborative
arrangements with three pharmaceutical companies and is currently in discussions
with several other pharmaceutical companies regarding potential collaborations.
The Company structures its collaborations around specific targets, such as
receptors and signaling molecules, rather than in specific therapeutic areas.
This approach enables the Company to broadly exploit its drug discovery
technologies, while retaining maximum flexibility in pursuing additional
collaborations. In addition, the Company has structured its collaborations so
that while each collaborator has exclusive rights to particular molecular
targets, the reagents, yeast strains and cell lines (without the molecular
target) created as part of a collaboration are available to the Company and its
other collaborators. This structure enables the Company to grant exclusivity to
particular targets while retaining rights to improvements to its core
technologies for use in its internal programs and collaborations with others.
There can be no assurance, however, that the current collaborations will result
in the development of drugs, any new collaboration will be established or, if a
collaboration is established, it will be on terms favorable to the Company.
Failure either to maintain its existing, or enter into any new, collaborations
could limit the scope of the Company's drug discovery and development
activities, particularly if alternative sources of funding are unavailable. Such
failure could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's existing collaborations are as follows:
The Bristol-Myers Squibb Collaboration
In July 1994, the Company and Bristol-Myers Squibb entered into a
three-year drug discovery collaboration. In January 1997, Bristol-Myers Squibb
exercised its option to extend the collaboration for an additional two years.
Currently, the collaboration focuses on certain G Protein-coupled receptors
whose functions are known, certain orphan receptors and certain other molecular
targets as targets for drug discovery in a variety of therapeutic areas. These
therapeutic areas include cardiovascular disease, acute inflammation, central
nervous system disorders, obesity and diabetes. Bristol-Myers Squibb's use of
the Company's yeast-based technologies has resulted in the identification of
potential lead compounds with utility in several therapeutic areas. These lead
compounds are directed at sleep disorders and both acute and chronic
inflammation. Other programs with Bristol-Myers Squibb include those relating to
cardiovascular and metabolic diseases. The collaboration has also resulted in
the identification of a ligand for an orphan receptor that acts on human cells
in vitro and that has been delivered to Bristol-Myers Squibb for further
evaluation in animal models.
During the term of the research program, Bristol-Myers Squibb is required
to provide the Company with research funding of up to $4.0 million each year,
adjusted for inflation. From July
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1994 through February 28, 1998, Bristol-Myers Squibb paid the Company
approximately $14.5 million in research funding. Bristol-Myers Squibb is
required to make payments to the Company upon the achievement by Bristol-Myers
Squibb of certain pre-clinical and drug development milestones and to pay the
Company royalties on the sale of any drugs developed as a result of the research
program or through the use of the Company's drug discovery technologies. The
research program expires in July 1999. There can be no assurance that the
collaboration will result in the development of any drugs.
Bristol-Myers Squibb purchased $12.5 million of the Company's Series B
Preferred Stock in July 1994, an additional $5.0 million of such Series B
Preferred Stock in September 1995 upon the Company achieving a research
milestone and $2.5 million of the Company's Common Stock in the Company's
initial public offering in July 1996. All such shares of Series B Preferred
Stock were converted into shares of Common Stock on July 22, 1996. Bristol-Myers
Squibb has certain registration rights with respect to the shares of Common
Stock issued to it upon such conversion.
The Solvay Pharmaceuticals Collaboration
In November 1995, the Company and Solvay Pharmaceuticals (an indirect
wholly-owned subsidiary of Solvay S.A.) entered into a drug discovery
collaboration. The collaboration focuses on certain G Protein-coupled receptors
whose functions are known, certain orphan receptors and certain other molecular
targets as targets for drug discovery in a variety of therapeutic areas. These
therapeutic areas include cardiovascular disease, central nervous system
disorders, gynecological diseases and gastrointestinal indications. The Company
has provided Solvay Pharmaceuticals with a number of targets and assays that
Solvay Pharmaceuticals is using to search for novel therapeutics.
During the term of the research program, which expires in December 2000,
Solvay Pharmaceuticals is required to provide the Company with research funding
of up to $2.5 million each year, adjusted for inflation. From November 1995
through February 28, 1998, Solvay Pharmaceuticals paid the Company approximately
$6.2 million in research funding. Solvay Pharmaceuticals is required to make
payments to the Company upon the achievement by Solvay Pharmaceuticals of
certain drug development milestones and to pay the Company royalties on the sale
of drugs developed through the use of the Company's drug discovery technologies.
There can be no assurance that the collaboration will result in the development
of any drugs.
The term of the research program may be extended by Solvay Pharmaceuticals
for between two and five years by notice to the Company given at least two years
(and in some circumstances at least 18 months) prior to January 2001. Solvay
Pharmaceuticals has the right under certain circumstances to terminate the
program after July 1999, if the Company fails to meet certain minimum
performance objectives in connection with the conduct of the research program.
In the event of such termination, Solvay Pharmaceuticals has no further
obligation to provide the Company with funding for the research program. There
can be no assurance that the Company will be able to meet the minimum
performance objectives or that the collaboration with Solvay Pharmaceuticals
will be extended.
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The Company has reserved the right to use certain hybrid yeast cells that
are part of the research program for its own benefit in the discovery of drugs
relating to cancer, autoimmune, allergic and inflammatory diseases, with certain
specific exclusions. The Company is required to make payments to Solvay
Pharmaceuticals upon the achievement by the Company of certain drug development
milestones and to pay Solvay Pharmaceuticals royalties on the sale of such
drugs.
Physica B.V., an indirect wholly-owned subsidiary of Solvay S.A., purchased
$10.0 million of the Company's Series B Preferred Stock in November 1995 and
$5.0 million of the Company's Common Stock in the Company's initial public
offering in July 1996. All such shares of Series B Preferred Stock were
converted into shares of Common Stock on July 22, 1996. Physica B.V. has certain
registration rights with respect to the shares of Common Stock issued to it upon
such conversion.
The SmithKline Beecham Collaboration
In February 1997, the Company entered into a drug discovery collaboration
with SmithKline Beecham. During the term of the research collaboration, which
expires in February 2002, the Company will seek to identify ligands and to
elucidate the function of orphan G Protein-coupled receptors included within the
collaboration and create high-throughput screens to discover small molecule
agonists and antagonists to these receptors.
During the term of the research collaboration, SmithKline Beecham is
required to provide the Company with research funding of $3.0 million each year,
adjusted for inflation, and certain other payments. From February 1997 through
February 1998, SmithKline Beecham paid the Company approximately $3.3 million in
research funding and a one-time $2.0 million technology development fee.
SmithKline Beecham is also required to make payments to the Company upon the
achievement of certain research milestones and upon the achievement by
SmithKline Beecham of certain drug development milestones. SmithKline Beecham is
also required to pay the Company royalties on the sale of drugs developed
through the use of the Company's drug discovery technologies. The Company has
co-promotion rights in North America for certain products that may result from
the collaboration and rights to certain potential products that SmithKline
Beecham may choose not to develop. There can be no assurance that the
collaboration will result in the development of any drugs.
SmithKline Beecham has the right to extend the term of the research
collaboration for between two and five years by notice to the Company given
prior to February 25, 2001. SmithKline Beecham has the right to terminate the
research collaboration after February 25, 1999 (or later under certain
circumstances) ("Evaluation Date") if (i) the Company fails to meet certain
scientific objectives in connection with the conduct of the research
collaboration or (ii) fails to perform its obligations in the conduct of the
research collaboration in any material respect and does not cure such failure
within a period of 60 days after receiving notice thereof. In the event of such
termination, SmithKline Beecham has no further obligation to provide the Company
with funding
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for the research collaboration. There can be no assurance that the Company will
be able to timely meet such scientific objectives or that the collaboration with
SmithKline Beecham will be extended.
In February 1997, the Company and SmithKline Beecham Corporation entered
into a stock purchase agreement pursuant to which the Company has the option to
sell to SmithKline Beecham Corporation (i) shares of the Company's common stock
having a then fair market value of $5.0 million during a 90-day period
commencing on February 25, 1998 and (ii) shares of the Company's Common Stock
having a then fair market value of $5.0 million, during a 90-day period
commencing on the date certain scientific objectives are achieved (subject to
the Company achieving such objectives prior to the Evaluation Date and meeting
certain financial requirements). In addition, SmithKline Beecham Corporation has
the right, at its option, to purchase up to $5.0 million worth of shares of the
Company's Common Stock at 150% of then fair market value in lieu of making
certain research milestone payments. The Company granted SmithKline Beecham
Corporation certain registration rights with respect to shares of the Company's
Common Stock which SmithKline Beecham Corporation may purchase pursuant to the
stock purchase agreement.
Patents, Proprietary Technology and Trade Secrets
The Company believes that patents and other proprietary rights are
important to the development of its business. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. As of March 21,
1998, the Company was the exclusive worldwide licensee of two issued U.S.
patents for use in drug discovery and the non-exclusive licensee of five other
issued U.S. Patents. In addition, as of such date, the Company had filed or held
licenses to 58 U.S. patent applications, as well as related foreign patent
applications.
The Company seeks to protect its proprietary technology at every stage of
development. The Company files patent applications which claim inventions
arising from each of the various aspects of the Company's drug discovery and
development process including: gene sequences encoding novel targets and
ligands, amino acid sequences of protein targets, methods of treating a disease
based on the Company's knowledge of how signaling molecules interact with one
another and how this causes an abnormal condition, and specific chemical
compositions that may be useful as therapeutics, as well as novel methods of
manufacture. In addition, the Company files patent applications claiming its
proprietary methodologies, such as drug discovery techniques, unless it believes
that keeping an invention a trade secret is preferable.
The Company has obtained from Duke University an exclusive worldwide
license to an issued U.S. patent and U.S. and international patent applications
covering hybrid yeast cell technologies. This patent and these patent
applications are directed to hybrid yeast cells engineered to express human G
Protein-coupled receptors and to methods of their use. In consideration for such
license, the Company pays a minimum annual royalty and is required to make
payments upon the achievement by the Company of certain drug development
milestones and to pay royalties (net of minimum royalties) on the sale of drugs
by the Company which were initially identified by the
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Company through the use of the licensed technology. In lieu of milestones and
royalty payments on sales of drugs by sublicensees initially identified by
sublicensees through the use of the licensed technology, the Company pays an
annual fee (net of the minimum annual royalty) for each sublicense granted by it
to such technology.
The Company has also filed patent applications based on inventions by
Cadus's scientists directed to hybrid yeast cells and yeast cells engineered to
produce both peptide libraries and human proteins that can function in certain
signal transduction pathways of the engineered yeast cell. These applications
seek to protect aspects of the Apex(TM) and SSCL(TM) technologies. The Company
has also filed patent applications directed to methods, constructs and reagents,
including engineered cells, for discovering ligands to orphan receptors.
Peptides, and mimetics thereof, which have been discovered using the SSCL(TM)
technology are also covered in these patent applications both as compositions
and for their therapeutic use.
The Company is the exclusive worldwide licensee of an issued U.S. patent
relating to an MEKK enzyme and U.S. and international patent applications in the
field of signal transduction in human cells from National Jewish Center for
Immunology and Respiratory Medicine. In consideration for such license, the
Company pays an annual maintenance fee and is required to make payments upon the
achievement by the Company of certain drug development milestones and to pay
royalties (net of annual fees and milestone payments) on the sale of drugs by
the Company whose utility was identified by the Company through the use of the
licensed technology. In lieu of milestone and royalty payments on sales of drugs
by sublicensees initially identified by sublicensees through the use of the
licensed technology, the Company pays an annual fee (net of the annual
maintenance fee) for each sublicense in effect. Certain of these patent
applications are directed to novel genes and gene products and methods of their
use, including as therapeutic targets in drug screening assays. Certain other
patent applications are directed to certain small molecule agents and their uses
in modulating cellular signal transduction, particularly as therapeutic agents.
In addition to this license, in return for certain payments, the Company has
rights to license all signal transduction technologies that are invented in the
laboratories of Drs. Gary L. Johnson and John C. Cambier at National Jewish
Center for Immunology and Respiratory Medicine from November 1994 to the end of
an option period.
The Company has obtained from M.I.T. an exclusive worldwide license, for
use in pharmaceutical, diagnostic, animal health and agricultural businesses, to
the technology being developed by M.I.T. with respect to the Living Chip(TM)
under its sponsored research arrangement with the Company. In order to maintain
its exclusive license, the Company must provide M.I.T. with research funding in
1998 and 1999 and make a minimum level of expenditures thereafter to
commercialize the technology until the technology is commercialized. In
consideration for such license, the Company is required to pay M.I.T. an annual
license fee, royalties on the sale or lease of Living Chip(TM) systems,
royalties on the sale by the Company of therapeutics and diagnostics developed
using the Living Chip(TM), and royalties on services rendered by the Company
based on the Living Chip(TM). In lieu of royalty payments on sales by
sublicensees of drugs initially identified by sublicensees through the use of
the licensed technology, the Company pays an annual fee for each
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sublicense in effect, provided that a license to other technology owned or
licensed by the Company was granted to the sublicensee at the same time.
The Company has granted certain rights under several of its patents and
patent applications relating to its yeast-based technologies to Bristol-Myers
Squibb, Solvay Pharmaceuticals and SmithKline Beecham.
In addition to patent protection, the Company relies upon trade secrets,
proprietary know-how and technological advances to develop and maintain its
competitive position. To maintain the confidentiality of its trade secrets and
proprietary information, the Company requires its employees, consultants and
collaborative partners to execute confidentiality agreements upon the
commencement of their relationships with the Company. In the case of employees
and consultants, the agreements also provide that all inventions resulting from
work performed by them while in the employ of the Company will be the exclusive
property of the Company.
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number of
pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents covering their
gene discoveries. Some of these applications or patents may be competitive with
the Company's applications or conflict in certain respects with claims made
under the Company's applications. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue, because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States
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Patent and Trademark Office or similar agencies in other countries to determine
priority of invention. Any such participation could result in substantial cost
to the Company, even if the eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial cost to and diversion of resources by the Company. An
adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to cease using the subject
technology or require the Company to license the subject technology from the
third party, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such license on commercially favorable terms, if at all, and if these licenses
are not obtained, the Company might be prevented from using certain of its
technologies. The Company's failure to obtain a license to any technology that
it may require to continue its drug discovery efforts may have a material
adverse effect on the Company's business, financial condition and results of
operations.
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
infringement action against the Company alleging infringement by the Company of
a patent relating to an aspect of drug screening techniques used, seeking
injunctive relief and monetary damages. The Company has filed an Answer and
Counterclaim, claiming that the patent is not infringed and is invalid and
unenforceable, seeking a declaratory judgment of patent invalidity,
unenforceability and noninfringement and claiming intentional and tortious
interference by SIBIA with the Company's initial public offering. The Company
believes, based on advice of counsel, that none of its operations infringes any
valid claim of the patent and intends to vigorously defend the action and pursue
its counterclaims against SIBIA. The Company also believes that if its
operations were found to infringe any valid claim of the patent, the Company has
adequate technical alternatives that would not infringe this patent. If
injunctive relief is granted, certain aspects of the drug discovery and
development efforts of the Company and its collaborative partners could be
delayed. If monetary damages are awarded, the business, financial condition and
results of operations of the Company could be materially adversely affected. The
costs of and the diversion of Company resources associated with infringement
litigation could have a material adverse effect on the business, financial
condition and results of operations of the Company.
Competition
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational biotechnology and pharmaceutical
companies, are actively engaged in drug discovery similar to that of the
Company. The Company's technology platform consists principally of genetically
engineered yeast cells and certain signal transduction technologies, which it
utilizes to determine the biological function of orphan receptors and signaling
molecules. The
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Company is aware of other companies, such as American Home Products Corporation
and Glaxo Wellcome, Plc, that may use yeast as a drug discovery medium, other
companies, such as Merck & Co., Inc., that may be engaged in efforts to
determine the biological function of orphan receptors, and other companies such
as Novartis A.G. and Pfizer Inc. that may be engaged in research and development
efforts relating to signal transduction. In addition, there are several smaller
companies pursuing these areas of research. Furthermore, many companies have
potential drugs in various stages of development to treat asthma and small-cell
lung carcinoma, two diseases targeted by the Company in its proprietary research
programs. Many of the Company's competitors have greater financial and human
resources, and more experience in research and development, preclinical and
clinical testing, obtaining regulatory approvals, manufacturing and marketing
than the Company. There can be no assurance that competitors of the Company will
not develop competing drug discovery technologies or drugs that are more
effective than those developed by the Company and its collaborative partners or
obtain regulatory approvals of their drugs more rapidly than the Company and its
collaborative partners, thereby rendering the Company's and its collaborative
partners' drug discovery technologies and/or drugs obsolete or noncompetitive.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its collaborative partners' ability to use the Company's drug
discovery technologies or commercialize drugs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that some of the Company's
collaborative partners will not develop independently or with third parties
drugs that could compete with drugs of the types covered by the collaboration or
otherwise being developed by the Company.
The Company also expects to encounter significant competition with respect
to any drugs that may be developed using its technologies. Companies that
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent protection for its gene discoveries and drug
discovery technologies and to make these technologies available to
pharmaceutical companies through collaborative and licensing arrangements for
use in discovering drugs. There can be no assurance, however, that the Company
will obtain patents covering its technologies that protect it against
competitors. Moreover, there can be no assurance that the Company's competitors
will not succeed in developing technologies that circumvent the Company's
technologies or that such competitors will not succeed in developing
technologies and drugs that are more effective than those developed by the
Company and its collaborative partners or that would render technology or drugs
of the Company and its collaborators less competitive or obsolete.
Government Regulation
The development, manufacturing and marketing of drugs developed through the
use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose
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mandatory procedures and standards for the conduct of certain preclinical
testing and clinical trials and the production and marketing of drugs for human
therapeutic use. Product development and approval of a new drug are likely to
take a number of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include: (i) preclinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (an "IND"); (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of a new drug application (an "NDA"); and (v) review and
approval of the NDA by the FDA before the drug may be shipped or sold
commercially.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
Clinical trials, which involve the administration of the investigational
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with Good Clinical Practices under protocols that detail
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND. Further, each clinical study must be conducted under the
auspices of an independent Institutional Review Board (the "IRB") at the
institution where the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution. Compounds must be formulated according to the
FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
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Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be reviewed
by the FDA in a timely manner or that once reviewed, the NDA will be approved.
The approval process is affected by a number of factors, including the severity
of the targeted indications, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the drug. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling, an NDA supplement may be required to be submitted to the
FDA.
Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on its collaborative partners
and third party clinical research organizations to design and conduct most of
such activities if required. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners will be, responsible for preclinical testing, clinical
trials, regulatory approvals, manufacturing and commercialization of drugs, the
ability to obtain and the timing of regulatory approvals are not within the
control of the Company.
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Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
Manufacturing
The Company has no manufacturing facilities and intends to rely on its
collaborative partners and contract manufacturers to produce the materials
required for preclinical and clinical development purposes. If the Company were
unable to contract for these services on acceptable terms, or if it should
encounter delays or difficulties in its relationships with such providers, the
Company's product development would be delayed, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Scientific Consultants
The Company has consulting arrangements with a number of leading academic
scientists. The consultants routinely attend project meetings and are available
to the scientific staff and management of the Company. Most of the Company's
consultants are paid for their services on a per diem basis and are reimbursed
for their travel expenses and other expenses incurred at the request of the
Company pursuant to the terms of their consulting arrangements with the Company.
Certain other consultants are paid fixed fees for their services on a monthly or
quarterly basis. Several of the Company's consultants serve on the Company's
Scientific Advisory Board. None of the consultants is an employee of the
Company. Most of the consultants have other commitments to, or consulting or
advisory contracts with, their employers and other institutions.
The Company is highly dependent on three consultants, Dr. James R. Broach,
Dr. John C. Cambier and Dr. Gary L. Johnson, in the conduct of its research
programs. Dr. Broach is the Director of Research, Dr. Cambier is the Director of
Immunology and Dr. Johnson is the Director of Cell Biology at the Company. In
December 1995, the Company granted Dr. Broach an option to purchase 141,667
shares of Common Stock. Such option vested in July 1996. He has partially
exercised this
24
<PAGE>
option and purchased 21,000 shares of Common Stock. In November 1994, the
Company granted to each of Dr. Cambier and Dr. Johnson an option to purchase
166,667 shares of Common Stock. Each such option vests in equal annual
installments of 41,667 shares over four years commencing March 11, 1996. Each of
Dr. Cambier and Dr. Johnson has partially exercised his option and purchased
40,000 shares of Common Stock. The consulting agreement with Dr. Broach contains
an exclusivity provision that restricts him from providing service to a
competitor of the Company, without the Company's consent. The consulting
agreements with Drs. Cambier and Johnson contain exclusivity provisions that
restrict them from providing service to any pharmaceutical or other
biotechnology company, without the Company's consent.
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board (the "SAB") presently
comprised of eight individuals (the "Scientific Advisors") who are leaders in
the fields of drug discovery, molecular biology, yeast biology, immunology,
oncology and pharmacology.
Members of the SAB review the Company's research, development and operating
activities and are available for consultation with the Company's management and
staff relating to their respective areas of expertise. The SAB holds regular
meetings. Several of the individual Scientific Advisors meet more frequently, on
an individual basis, with the Company's management and staff to discuss the
Company's ongoing research and development projects. The Scientific Advisors are
reimbursed for their expenses in connection with their service. In addition, the
Scientific Advisors own Common Stock or hold options to purchase Common Stock.
The Scientific Advisors are expected to devote only a small portion of their
time to the business of the Company.
The Scientific Advisors are all employed by entities other than the
Company. Each Scientific Advisor has entered into a consulting agreement with
the Company that contains confidentiality and non-disclosure provisions that
prohibit the disclosure of confidential information to anyone outside the
Company. Such consulting agreement also provides that all inventions,
discoveries or other intellectual property that come to the attention of or are
discovered by the Scientific Advisor while performing services under a
consulting agreement with the Company will be assigned to the Company. The
current members of the SAB are as follows:
Thomas F. Deuel, M.D., Chairman of the Scientific Advisory Board, is the
Director of the Division of Growth Regulation at Beth Israel Hospital and
Professor of Medicine at Harvard University. He is widely known for his work in
cell growth and development and is an international expert on the biology of
platelet derived growth factor and transforming growth factor beta. He conducted
post-doctoral training at Harvard Medical School and the NIH and completed his
M.D. at Columbia University's College of Physicians and Surgeons.
Norman R. Klinman, M.D., Ph.D. is a member of the Department of Immunology
in the Research Institute of Scripps Clinic and an Adjunct Professor in the
Department of Biology of the University of California at San Diego. Previously
he served as Professor of Pathology and
25
<PAGE>
Microbiology in the School of Medicine at the University of Pennsylvania. He is
widely known for his work on immunoregulation, humoral immunity and B cell
maturation, and repertoire expression. Dr. Klinman has had numerous editorial
appointments. He received his Ph.D. from the University of Pennsylvania and his
M.D. from Jefferson Medical College.
Arnold J. Levine, Ph.D., a scientific founder of the Company, is Chairman
and Weiss Professor in Life Sciences of the Department of Molecular Biology at
Princeton University. Dr. Levine, a member of the National Academy of Sciences
and the Institute of Medicine, is a world-renowned expert in the biology of
tumor suppressor genes and oncogenes. He is noted for his fundamental research
on the function of the p53 gene, implicated in a wide variety of human cancers.
Dr. Levine is the recipient of many honors, including the Bristol-Myers Squibb
Award for Distinguished Achievement in Cancer Research, and is a member of a
number of scientific advisory boards including the Memorial Sloan Kettering
Cancer Center and the Howard Hughes Medical Institute. He received his Ph.D.
from the University of Pennsylvania.
Eva J. Neer, M.D., is a Professor of Medicine (Biochemistry), and an
Associate Master, Cannon Society at Harvard Medical School and Senior Biochemist
in the Department of Medicine at Brigham and Women's Hospital. Dr. Neer is best
known for her studies on the structure and function of the heterotrimeric G
Proteins. She has served as Chairman of the Board of Scientific Counselors of
the Division of Intramural Research and as Chairman of the Board of the
Publication Committee for ASBMB. She serves on multiple editorial boards and has
been the recipient of numerous scientific awards. Dr. Neer is also a fellow of
the American Academy of Arts and Sciences. Dr. Neer had post-doctoral training
at Yale University and Harvard University and received her M.D. at Columbia
University's College of Physicians and Surgeons.
Elliot M. Ross, Ph.D. is a Professor of Pharmacology at the University of
Texas Southwestern Medical Center. Dr. Ross' research focuses on G
Protein-mediated signal transduction, where he is best known for direct
biochemical studies of the mechanisms whereby receptors regulate G Protein
activation. His other interests include the structure of G Protein-coupled
receptors, the action of GTPase-activating proteins in G Protein signaling
pathways and the impact of the membrane environment on regulatory interactions
among G Proteins. He received his Ph.D. in Biochemistry from Cornell University.
Thomas E. Shenk, Ph.D., a scientific founder of the Company, became a
member of the SAB in December 1996. From the Company's inception to December
1996, Dr. Shenk was a director of the Company. In 1996 he was elected to the
U.S. National Academy of Science. Dr. Shenk has been a Professor of Molecular
Biology at Princeton University since 1984. He is currently endowed Professor of
Molecular Biology at Princeton University, an American Cancer Society professor
and Investigator for the Howard Hughes Medical Institute. Dr. Shenk conducted
post-doctoral research at Stanford University and received his Ph.D. in Virology
from Rutgers University.
Jeremy W. Thorner, Ph.D. holds the William V. Power Endowed Chair in
Biology and is a Professor in the Department of Molecular and Cell Biology at
the University of California at
26
<PAGE>
Berkeley. He is coauthor, with R.J. Lefkowitz, of the seminal paper published in
Science in 1990 that forms the basis of the initial yeast-related drug discovery
technology within the Company. His research interests include the structure and
function of peptide ligands, receptors and other components of signal
transduction pathways and their role in the biology of saccharomyces cerevisiae
(bakers yeast). Dr. Thorner is the Program Director for an NIH Training Grant in
Cellular and Molecular Science. He conducted post-doctoral research at Stanford
University School of Medicine and received his Ph.D. in Biochemistry from
Harvard University.
Employees
As of March 20, 1998, the Company had 103 full-time employees, 35 of whom
hold Ph.D. degrees. Of the Company's full-time employees, 82 are engaged
directly in scientific research and 21 are engaged in general and administrative
functions. The Company's scientific staff members have diversified experience
and expertise in a wide variety of disciplines, including molecular and cell
biology, biochemistry, molecular pharmacology and chemistry.
All employees have entered into agreements with the Company pursuant to
which they are prohibited from disclosing to third parties the Company's
proprietary information and they are obligated to assign to the Company all
rights to inventions made by them during their employment with the Company. See
"--Patents, Proprietary Technology and Trade Secrets."
The Company's employees are not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employees is
good.
27
<PAGE>
Item 2. Properties.
The Company currently leases approximately 25,776 square feet of laboratory
and office space at 777 Old Saw Mill River Road in Tarrytown, New York, under an
agreement expiring on December 31, 2002. The Company has the option to renew
such lease for a five-year period commencing January 1, 2003. The Company is
currently negotiating to lease an additional 18,577 square feet of contiguous
space under the same terms as the existing lease. Until this additional space
can be acquired, the Company is leasing 7,152 square feet of laboratory space
from the landlord on a temporary basis under the same terms as the existing
lease. The Company plans to expand its facilities to accommodate additional
staff and increased research activities as it expands its proprietary research,
drug discovery and drug development activities and its activities with
collaborative partners.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings other than
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corporation. SIBIA commenced
an action on July 9, 1996 in the United States District Court for the Southern
District of California alleging infringement by the Company of a patent relating
to an aspect of drug screening techniques and seeking injunctive relief and
monetary damages. On August 1, 1996, the Company filed an Answer and
Counterclaim claiming that the patent is not infringed and is invalid and
unenforceable, seeking a declaratory judgment of patent invalidity,
unenforceability and noninfringement, and claiming intentional and tortious
interference by SIBIA with the Company's initial public offering. The Company
intends to vigorously defend against the claims made by SIBIA and to pursue its
counterclaims against SIBIA.
Item 4. Submission to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's common stock, $.01 par value per share (the "Common
Stock"), is traded on the Nasdaq National Market under the symbol KDUS. The
table below sets forth the high and low sales price per share of the Common
Stock for each fiscal quarter since the Company's July 17, 1996 initial public
offering, as reported by the Nasdaq National Market.
28
<PAGE>
Fiscal Year 1996 High Low
Third quarter ended September 30, 1996
(July 17, 1996 - September 30, 1996) $ 8 1/4 $ 5 1/2
Fourth quarter ended December 31, 1996 $ 9 3/8 $ 6
Fiscal Year 1997
First quarter ended March 31, 1997 $20 7/8 $ 8 1/2
Second quarter ended June 30, 1997 $15 $ 9 3/8
Third quarter ended September 30, 1997 $14 1/2 $11
Fourth quarter ended December 31, 1997 $15 7/16 $ 5 3/8
(b) As of March 20, 1998, there were approximately 71 holders of record of
the Company's Common Stock.
(c) The Company has not declared or paid any cash dividends on its Common
Stock during the past two fiscal years and does not anticipate paying any such
dividends in the foreseeable future. The Company intends to retain any earnings
for the growth of and for use in its business.
Recent Sales of Unregistered Securities.
Within the past three years, the Company has issued and sold the following
securities that were not registered under the Securities Act of 1933, as amended
(the "Act"), in each case in reliance on an exemption from required registration
pursuant to Section 3(b) or 4(2) of the Act:
(1) In August and September 1995, the Company issued an aggregate of
1,250,000 shares of Series B Preferred Stock at a price of $4.00 per share to
Bristol-Myers Squibb. The 1,250,000 shares of Series B Preferred Stock were
converted into 442,474 shares of Common Stock concurrently with the closing of
the Company's initial public offering in July 1996.
(2) In September 1995, the Board of Directors granted to each director then
in office a 30- day option to purchase 8,334 shares of Common Stock at an
exercise price of $2.25 per share. In October 1995, six directors exercised
their options and purchased an aggregate of 50,004 shares of Common Stock at
$2.25 per share.
(3) In November 1995, the Company issued 2,500,000 shares of Series B
Preferred Stock at a price of $4.00 per share to Physica B.V. The 2,500,000
shares of Series B Preferred Stock were
29
<PAGE>
converted into 884,942 shares of Common Stock concurrently with the closing of
the Company's initial public offering in July 1996.
(4) From March 20, 1995 to May 10, 1996, the Company granted options to
acquire 124,860 shares of the Company's Common Stock to employees, officers and
consultants of the Company pursuant to the Company's 1993 Stock Option Plan. In
general, such options are exercisable at a price equal to the fair market value
of a share of Common Stock on the date of grant, as determined in good faith by
the Board of Directors, have a ten-year term and vest or have vested over
four-year periods at various rates.
(5) From March 20, 1995 to February 14, 1997 (when a registration statement
on Form S-8 covering the Company's 1993 Stock Option Plan was filed), options to
acquire 61,752 shares of the Company's Common Stock granted pursuant to the
Company's 1993 Stock Option Plan were exercised. The exercise price of such
options ranged from $1.37 to $3.00.
(6) From May 10, 1996 to February 14, 1997 (when a registration statement
on Form S-8 covering the Company's 1996 Stock Option Plan was filed), the
Company granted options to acquire 669,864 shares of the Company's Common Stock
to employees, officers and consultants pursuant to the Company's 1996 Incentive
Plan. In general such options are exercisable at a price equal to the fair
market value of a share of Common Stock on the date of grant, have a ten-year
term and vest over four-year periods at various rates.
(7) From March 20, 1995 to March 20, 1998, the Company granted options to
acquire 312,967 shares of the Company's Common Stock to employees, officers and
consultants pursuant to individual stock option agreements. In general, such
options are exercisable at a price equal to the fair market value of a share of
Common Stock on the date of grant, have a ten-year term and vest over four-year
periods at various rates.
(8) In November 1996, the Company granted options to acquire 120,000 shares
of the Company's Common Stock to certain directors pursuant to individual stock
option agreements. The exercise price of such options is $6.75. Such options
have a ten-year term and vest over four years in equal annual installments.
(9) From March 20, 1995 to February 14, 1997 (when a registration statement
on Form S-8 covering the individual stock option agreements granted by the
Company was filed), options to acquire 1,500 shares of the Company's Common
Stock granted pursuant to individual stock option agreements were exercised. The
exercise price of such options was $3.60.
Item 6. Selected Financial Data.
The selected financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and notes thereto included
elsewhere in this Report.
30
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ..................... $ 9,013 $ 6,500 $ 4,418 $ 1,355 $ -
Operating costs and expenses:
Research and development ... 11,561 8,283 5,383 2,246 1,645
General and administrative . 4,092 2,315 1,376 937 550
----------- ---------- ---------- ------- -------
Total operating costs and
expenses .................... 15,653 10,598 6,759 3,183 2,195
Operating loss ............... (6,640) (4,098) (2,341) (1,828) (2,195)
Net loss (1) ................. $ (5,411) $ (2,441) $ (1,482) $(1,393) $(2,148)
=========== ========== ========== ======= =======
Net loss per share (2) ....... $ (.44) $ (.39) $ (1.07)
=========== ========== ==========
Shares used in calculation of
net loss per share .......... 12,225,463 6,280,917 1,382,139
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ---------- ---------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .... $ 36,762 $ 43,153 $ 25,683 $14,406 $ 3,568
Total assets ................. 42,241 47,287 30,725 15,740 3,962
Short-term debt .............. 150 13 2,397 203 6
Long-term debt ............... -- 166 29 46 12
Accumulated deficit .......... (13,842) (8,431) (5,991) (4,508) (3,115)
Stockholders' equity (deficit) 40,500 45,181 27,723 14,534 3,491
</TABLE>
- ------------
(1) The net loss of $1.4 million for the year ended December 31, 1994 includes
an extraordinary gain of approximately $159,000 from the early
extinguishment of a debt obligation.
(2) Computed as described in Note 2 of Notes to Financial Statements.
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
31
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.
Overview
The Company was incorporated in 1992 and has devoted substantially all of
its resources to the development and application of novel yeast-based and signal
transduction drug discovery technologies. To date, all of the Company's revenues
have resulted from research funding provided by its collaborative partners.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $5.4 million during the year ended
December 31, 1997. At December 31, 1997, the Company had an accumulated deficit
of approximately $13.8 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's revenues and interest income. The Company expects to
incur substantial additional operating losses over the next several years as a
result of increases in its expenses for research and product development.
Through December 31, 1997, the Company has received research funding from
its corporate collaborators aggregating $21.1 million. See "Business --
Collaborative Arrangements." Research funding is received quarterly based on
predetermined funding requirements and is recognized as revenue when earned as a
result of work completed. The Company does not expect to receive royalties for a
number of years if at all.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenues
Revenues for 1997 increased to $9.0 million from $6.5 million in 1996. This
increase was primarily attributable to the commencement in February 1997 of
research funding from SmithKline Beecham, one of the Company's collaborative
partners.
Operating Expenses
The Company's research and development expenses for 1997 increased to $11.6
million from $8.3 million in 1996. This increase was attributable primarily to
increases in staffing and laboratory supplies for the SmithKline Beecham
collaboration and the Company's internal programs, including expansion of its
chemistry and bioinformatics capabilities, as well as facilities expenses in
connection with the Company's occupancy of additional laboratory space.
32
<PAGE>
General and administrative expenses for 1997 increased to $4.1 million from
$2.3 million in 1996. This increase was attributable primarily to increased
legal expenses, the hiring of management personnel, and the increase in the
Company's directors and officers liability insurance premium and other
administrative expenses resulting from the regulatory requirements of being a
public company.
Net Interest Income
Net interest income for 1997 increased to $2.1 million from $1.7 in 1996.
This increase related primarily to interest earned on the net proceeds from the
Company's initial public offering and additional revenues from research
collaborations, as well as the reduction in interest expense on the line of
credit, which was repaid in September 1996.
Equity in Other Ventures
Equity in other ventures reflects losses associated with the Company's two
investments. For the year ended December 31, 1997, the Company recognized losses
of approximately $174,000 related to its investment in Laurel Partners Limited
Partnership. For the year ended December 31, 1997, the Company recognized
approximately $658,000 in losses generated by Axiom. The Company's investment in
Axiom is accounted for under the equity method with the Company recognizing 100%
of Axiom's net losses to the extent that the Company's investment is funding
those losses.
Net Loss
The net loss for 1997 increased to $5.4 million from $2.4 million in 1996.
The increase can be attributed to the increase in the operating expenses of the
Company as described above, which was partially offset by increases in revenues
and interest income.
Years Ended December 31, 1996 and 1995
Revenues
Revenues for 1996 increased to $6.5 million from $4.4 million in 1995. This
increase was attributable to the inclusion in 1996 of a full year of research
funding from Solvay Pharmaceuticals, one of the Company's collaborative
partners, which began in November 1995.
Operating Expenses
The Company's research and development expenses for 1996 increased to $8.3
million from $5.4 million for 1995. This increase was attributable primarily to
an increase in staffing related to implementation of the research collaboration
with Solvay Pharmaceuticals and the Company's internal programs, including
expansion of its chemistry capability, as well as expenses in connection
33
<PAGE>
with licenses from third parties and a full year of facilities expenses in
connection with the Company's occupancy of its facility in Tarrytown, New York.
General and administrative expenses for 1996 increased to $2.3 million from
$1.4 million for 1995. This increase was attributable primarily to increased
legal expenses, the recruiting and hiring of management personnel, and the
increase in the Company's directors and officers liability insurance premium and
other administrative expenses resulting from the regulatory requirements of
being a public company.
Net Interest Income
Net interest income for 1996 increased to $1.7 million from $903,000 for
the same period in 1995. This increase related primarily to interest earned on
the net proceeds from the sale of Series B Convertible Preferred Stock in
September and November 1995 and from the sale of Common Stock in July and August
1996 pursuant to the Company's initial public offering, net of interest expense
on a line of credit and bank loans.
Net Loss
The net loss for 1996 increased to $2.4 million from $1.5 million in 1995.
This increase can be attributed to the increase in the operating expenses of the
Company, as described above, most of which was offset by increases in revenues
and interest income.
Liquidity and Capital Resources
At December 31, 1997, the Company held cash and cash equivalents of $36.8
million. The Company's working capital at December 31, 1997 was $35.4 million.
The Company has funded operations through December 31, 1997 with sales of
preferred stock and common stock totaling $52.6 million and payments from
corporate collaborators totaling $21.1 million.
In July 1996, the Company completed an initial public offering of 2,750,000
shares of Common Stock at $7.00 per share. The Company received proceeds, net of
underwriting discounts, commissions and other initial public offering expenses,
of approximately $17.2 million.
In August 1996, the Company sold an additional 412,500 shares of Common
Stock at $7.00 per share pursuant to the exercise by the underwriters of an
over-allotment option granted to them. The Company received proceeds, net of
underwriting discounts and commissions, of approximately $2.7 million.
In September 1996, the Company repaid an outstanding line of credit balance
of approximately $2.4 million, which was secured by negotiable certificates of
deposit. As a result of such repayment, these certificates of deposit are no
longer considered restricted cash and are classified as cash equivalents on the
balance sheet as of December 31, 1996.
34
<PAGE>
In May 1997, the Company purchased $2.0 million of convertible preferred
stock in Axiom, representing approximately 26% of the outstanding shares of
Axiom on an as converted basis. The Company has agreed to purchase an additional
$2.0 million of convertible preferred stock in Axiom if the Company receives and
accepts Axiom's High Throughput Pharmacology System on or prior to May 29, 1998.
This would increase the Company's equity interest in Axiom to approximately 38%
of Axiom's then outstanding shares (assuming no additional shares of common
stock or securities convertible into common stock are issued by Axiom in the
interim) on an as converted basis.
Through December 31, 1997, the Company has invested approximately $1.7
million in property and equipment of which approximately $820,000 was financed
through sale leaseback arrangements with GE Capital Corporation. The Company
expects capital expenditures to increase over the next several years as it
expands facilities to support the planned expansion of research and development
efforts. The Company expects to finance the majority of these capital
expenditures using its existing lease line with GE Capital Corporation or other
similar arrangements.
The Company intends to increase its expenditures substantially over the
next several years to enhance its technologies and pursue internal proprietary
drug discovery programs. The Company believes that its existing capital
resources, together with interest income and future payments due under its
research collaborations, will be sufficient to support its current and projected
funding requirements through the end of 2000. This forecast of the period of
time through which the Company's financial resources will be adequate to support
its operations is a forward-looking statement that may not prove accurate and,
as such, actual results may vary. The Company's capital requirements may vary as
a result of a number of factors, including the progress of its drug discovery
programs, competitive and technological developments, the continuation of its
existing collaborative agreements and the establishment of additional
collaborative agreements, and the progress of the development efforts of the
Company's corporate partners. The Company expects that it will require
significant additional financing in the future, which it may seek to raise
through public or private equity offerings, debt financings or additional
corporate partnerships. No assurance can be given that such additional financing
will be available when needed or that, if available, such financing will be
obtained on terms favorable to the Company. To the extent that additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities could result in dilution to the Company's
stockholders.
At December 31, 1997, the Company had tax net operating loss carryforwards
of approximately $13.9 million and research and development credit carryforwards
of approximately $1.2 million which expire in years 2008 through 2013. The
Company's ability to utilize such net operating loss and research and
development credit carryforwards is subject to certain limitations due to
ownership changes as defined by rules enacted with the Tax Reform Act of 1986.
Recently issued accounting standards may affect the Company's financial
statements in the future. See Note 2 of the Notes to Financial Statements.
35
<PAGE>
Year 2000
The Company is aware of challenges associated with the inability of certain
computer systems to properly format information after December 31, 1999 (the
"Year 2000 Challenge"). The Company is modifying its computer systems to address
the Year 2000 Challenge and does not expect that the cost of modifying such
systems will be material. The Company believes it will fully remediate any of
its Year 2000 Challenges in advance of the year 2000 and does not anticipate any
material disruption in its operations as the result of any failure by the
Company to fully remediate such challenges. The Company does not have any
information concerning the status of Year 2000 Challenges of its suppliers and
customers.
Item 8. Financial Statements.
The financial statements and notes thereto may be found following Item 14
of this report. For an index to the financial statements and supplementary data,
see Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
Information with respect to the executive officers, directors, key
employees and consultants of the Company as of March 20, 1998 is set forth
below:
Name Age Position
- ---- --- --------
Philip N. Sussman 46 Senior Vice President of Corporate
Development
David R. Webb, Ph.D. 53 Vice President of Research and Chief
Scientific Officer
James S. Rielly 34 Vice President of Finance, Treasurer
and Secretary
Arlindo L. Castelhano, Ph.D. 45 Executive Director of Chemistry
James R. Broach, Ph.D. 50 Director of Research
John C. Cambier, Ph.D. 49 Director of Immunology
Gary L. Johnson, Ph.D. 48 Director of Cell Biology
Algis Anilionis, Ph.D. 47 Director of Intellectual Property
Jennifer LaVin 32 Director of Corporate Communications
O. Prem Das, Ph.D. 44 Director of Business Development
Carl C. Icahn 62 Director
Theodore Altman 56 Director
Harold First (1)(2) 61 Director
Jeremy M. Levin, D.Phil., MB.BCHIR 44 Director
Peter S. Liebert, M.D. 62 Director
Robert J. Mitchell(2) 51 Director
Mark H. Rachesky, M.D. 39 Director
Leon E. Rosenberg, M.D. 65 Director
Professor Siegfried G. Schaefer 49 Director
Nicole Vitullo (1) 40 Director
Samuel D. Waksal, Ph.D. (2) 50 Director
Jack G. Wasserman (1) 61 Director
- ------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
37
<PAGE>
Philip N. Sussman, Senior Vice President of Corporate Development, joined
the Company in September 1993 in the capacity of Vice President of Corporate
Development. From December 1990 to September 1993, Mr. Sussman was Director of
Strategy and Business Development for the Pharmaceuticals Division of Ciba-Geigy
Corporation, a public pharmaceutical company. He is a member of the Review Panel
for the Innovative Technology Research Grant Program, Center for Biotechnology,
New York State Science and Technology Foundation. He is also a member of the New
York Venture Capital Forum, Inc. and a director of the M.I.T. Enterprise Forum
of New York. He is a member of the Board of Directors of Axiom Biotechnologies,
Inc., a private biotechnology company. Mr. Sussman holds an S.M., with a
concentration in Finance, from the Sloan School of Management at the
Massachusetts Institute of Technology. He also holds a B.S. from the State
University of New York at Stony Brook and is currently a candidate for an M.S.
degree in Biotechnology from Manhattan College.
David R. Webb, Ph.D., Vice President of Research and Chief Scientific
Officer, joined the Company in such capacities in July 1995. From January 1987
to July 1995, Dr. Webb was a Distinguished Scientist at Syntex Inc., a public
pharmaceutical company, in the Department of Molecular Immunology. From April
1990 to January 1995, Dr. Webb was also Director of Syntex Inc.'s Institute of
Immunology and Biological Sciences. Prior to that Dr. Webb was a member of the
Department of Cell Biology at the Roche Institute of Molecular Biology. From
January 1989 to the present, Dr. Webb has also been a Consulting Professor of
Cancer Biology at Stanford University. Dr. Webb is a member of the Board of
Directors of Axiom Biotechnologies, Inc., a private biotechnology company. Dr.
Webb holds a Ph.D. in Microbiology from Rutgers University, and an M.A. and a
B.A. in Biology from California State University at Fullerton.
James S. Rielly, Vice President of Finance, Treasurer and Secretary, joined
the Company in September 1992 as its Controller, became its Treasurer and
Secretary in September 1993 and became its Vice President of Finance in December
1997. From November 1989 to September 1992, Mr. Rielly was the Controller and
Treasurer of Baring Brothers & Co., Inc., an investment banking firm. Mr. Rielly
is a certified public accountant and holds a B.S.B.A. from Bucknell University.
Arlindo L. Castelhano, Ph.D., has been Executive Director of Chemistry of
the Company since June 1996 and Director of Chemistry from September 1995 to
June 1996. He was a scientist at Syntex Inc., a public pharmaceutical company,
from 1982 to 1995 and served as Principal Scientist from 1993 to 1995. He
received his Ph.D. in Chemistry from McMaster University and his B.S. from
University of Toronto.
James R. Broach, Ph.D., a scientific founder of the Company and inventor of
the Company's yeast-based drug discovery technology, has been Director of
Research of the Company since its inception. He is and has been since 1984 a
Professor at Princeton University in the Department of Molecular Biology. In
1984, Dr. Broach and his collaborators were the first ones to demonstrate that
human genes could be successfully implanted into yeast cells. He received his
Ph.D. in Biochemistry from University of California at Berkeley and his B.S.
from Yale University.
38
<PAGE>
John C. Cambier, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been Director of Immunology of the Company since
November 1994. He is Chief of the Division of Basic Sciences in the Department
of Pediatrics at the National Jewish Center for Immunology and Respiratory
Medicine. Dr. Cambier is also Professor of Immunology at the University of
Colorado Health Sciences Center. He is internationally known for his work on
transmembrane signal transduction, especially antigen and immunoglobulin Fc
receptors. Dr. Cambier conducted his postdoctoral training at the University of
Texas Southwestern Medical School, completed his Ph.D. in Immunology and
Virology at the University of Iowa, and received his B.S. from Southwest
Missouri State University.
Gary L. Johnson, Ph.D., inventor of certain of the Company's signal
transduction technologies, has been Director of Cell Biology of the Company
since November 1994. He is Director of the Program in Molecular Signal
Transduction at the National Jewish Center for Immunology and Respiratory
Medicine. He is also Professor of Pharmacology at the University of Colorado
School of Medicine and a Senior Member of its Cancer Center where he serves on
the executive board. Dr. Johnson's research focuses on receptor activation of G
Proteins and the integration of signal transduction pathways regulated by G
Proteins and tyrosine kinases. He received his Ph.D. in Pharmacology from the
University of Colorado and his B.S. from California State University.
Algis Anilionis, Ph.D., has been Director of Intellectual Property of the
Company since November 1994. He was Patent Manager at Oncogene Science Inc., a
public biotechnology company, from 1991 to 1994 and Manager of Molecular Biology
and Genetics Research at Praxis Biologics, Inc. (now known as Lederle/Praxis, a
division of American Home Products), a public vaccine manufacturer and research
and development company, from 1986 to 1991. Dr. Anilionis has nine issued U.S.
patents and four granted European patents. He is a registered Patent Agent. He
received his Ph.D. in Molecular Biology from Edinburgh University and a B.A.
Hons. degree from University of Oxford.
Jennifer LaVin, Director of Corporate Communications, joined the Company in
September 1996. From December 1992 to September 1996, Ms. LaVin was an equity
analyst and Assistant Vice President at Merrill Lynch & Co., Inc. focusing on
the pharmaceutical industry. Ms. LaVin received her M.B.A. from Columbia
Business School and her B.A. in Biochemistry from the University of
Pennsylvania.
O. Prem Das., Ph.D., Director of Business Development, joined the Company
in September 1996. Dr. Das was President of Heartland BioTechnologies, Inc. from
May 1995 to September 1996, and its Vice President from April 1994 to May 1995.
From April 1994 to September 1996, he was also Director of Research at
Heartland. Prior to that, Dr. Das completed several postdoctoral fellowships in
biochemistry, molecular biology and genetics at Rutgers University, the
University of Minnesota and Georgetown University. Dr. Das received his Ph.D.
from MIT, an M.Sc. from the Indian Institute of Technology and a B.Sc. from
Loyola College, Madras University.
39
<PAGE>
Carl C. Icahn became a director of the Company in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
been Chairman of the Board and Chief Executive Officer of ACF Industries Inc., a
privately-held railcar leasing and manufacturing company, since 1984, ACF
Industries Holding Corp., a privately-held holding company for ACF Industries
Inc. since August 1993, and, since 1968, Icahn & Co., Inc., a registered
broker-dealer and until 1995 a member firm of the New York Stock Exchange, Inc.
Since November 1990, Mr. Icahn has been Chief Executive Officer and Chairman of
the Board of American Property Investors, Inc., the general partner of American
Real Estate Partners, L.P., a public limited partnership that invests in real
estate. He has been a director of both Marvel Entertainment Group, Inc., a
public company that publishes comic books and develops, sells and licenses comic
book and other characters, and Toy Biz, Inc., a public company that markets and
sells toys, since June 1997. From before 1990, Mr. Icahn has been Chief
Executive Officer and Chairman of the Board of Starfire Holding Corporation, a
privately-held holding company. From before 1991 to January 1993, Mr. Icahn was
Chief Executive Officer and Chairman of the Board of Trans World Airlines, Inc.,
a public airline company. Mr. Icahn received his B.A. from Princeton University.
Theodore Altman became a director of the Company in May 1996. For the past
five years, Mr. Altman has been a senior partner in the law firm of Gordon
Altman Butowsky Weitzen Shalov & Wein, concentrating his areas of practice in
securities law and litigation. Mr. Altman received a B.A. from Bucknell
University and an LL.B. from New York University.
Harold First became a director of the Company in April 1995. Mr. First has
been since January 1993 an independent financial consultant. From December 1990
through January 1993, Mr. First served as Chief Financial Officer of Icahn
Holding Corp., a privately-held holding company, and related entities. He has
been a director of Trump Taj Mahal Realty Corp., a privately-held real estate
company, from October 1991 until September 1996; a member of the Supervisory
Board of Directors of Memorex Telex N.V., a public technology company, from
February 1992 until February 1997; a director of Tel-Save Holdings, Inc., a
public long-distance telephone service company, since September 1995; a director
of both Marvel Entertainment Group, Inc., a public company that publishes comic
books and develops, sells and licenses comic book and other characters, and Toy
Biz, Inc., a public company that markets and sells toys, since June 1997; and a
director of Panaco, Ltd., an oil and gas drilling company, since September 1997.
Mr. First was a director of Trans World Airlines, Inc., a public airline
company, from December 1990 through January 1993; a director of ACF Industries,
Inc., a privately-held railcar leasing and manufacturing company, from February
1991 through December 1992; and Vice Chairman of the Board of Directors of
American Property Investors, Inc., the general partner of American Real Estate
Partners, L.P., a public limited partnership that invests in real estate from
March 1991 through December 1992. He is a certified public accountant and holds
a B.S. from Brooklyn College.
Jeremy M. Levin, D.Phil., MB.BCHIR, became a director of the Company in
January 1993. Dr. Levin is the Chairman of the Board of Directors of Physiome
Sciences, Inc., a private company that develops predictive physiological models
of cells, tissues and organs. Dr. Levin was the Chief Executive Officer and
President of the Company from December 1992 until January 31, 1998 and
40
<PAGE>
the Chairman of the Board of Directors of the Company from May 1996 to January
31, 1998. From December 1990 to December 1992, Dr. Levin was Vice President of
Corporate Development for Genzyme Corp.'s majority-owned subsidiary, IG
Laboratories, Inc., a public laboratory testing company. Prior to that Dr. Levin
served in a number of positions at biotechnology companies and at major teaching
hospitals in Europe. Dr. Levin has served on the Board of Directors and the
Executive Committee of the Board of Directors of the Biotechnology Industry
Organization. He is currently a member of the Board of Directors of Trega
Biosciences, Inc., a public biotechnology company. Dr. Levin holds a D.Phil. in
Molecular Biology from the University of Oxford and an MB. BCHIR from University
of Cambridge.
Peter S. Liebert, M.D., became a director of the Company in April 1995. Dr.
Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. He is also Chairman of the Board of Rx Vitamins, Inc. Dr. Liebert
holds an M.D. from Harvard University Medical School and a B.A. from Princeton
University.
Robert J. Mitchell became a director of the Company in May 1996. Mr.
Mitchell has been Senior Vice President-Finance of ACF Industries Inc. since
March 1995 and was Treasurer of ACF Industries Inc. from December 1984 to March
1995. Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holdings Corp. since August 1993 and as Vice President, Liaison Officer of Icahn
& Co., Inc. since November 1984. From 1987 to January 1993, Mr. Mitchell served
as Treasurer of Trans World Airlines, Inc. Mr. Mitchell has been a director of
National Energy Group, Inc., a public company involved in the exploration of oil
and gas reserves, since August 1996. He has been a director of both Marvel
Entertainment Group, Inc., a public company that publishes comic books and
develops, sells and licenses comic book and other characters, and Toy Biz,
Inc., a public Company that markets and sells toys, since June 1997.He received
his B.S. degree in Business Administration from St. Francis college.
Mark H. Rachesky, M.D. became a director of the Company in July 1993. Since
June 1996, Dr. Rachesky has been the President of MHR Fund Management LLC, the
investment manager of three investment partnerships. From February 1990 until
June 1996, Dr. Rachesky was employed by Icahn Holding Corporation where he
initially served as a senior investment officer and, for the last three years,
as Carl C. Icahn's chief investment advisor. Dr. Rachesky has been a director of
Samsonite Corp., a public luggage manufacturing company, since June 1993 and a
director of Culligan Water Technologies, Inc., a public water purification
company, since its spin-off from Samsonite Corp. in December 1995. From November
1990 to June 1996, Dr. Rachesky served as a director and officer of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P., a public limited partnership that invests in real estate. From June 1987
to February 1990, Dr. Rachesky was employed by an affiliate of the Robert M.
Bass Group, Inc., a privately-held financial company. Dr. Rachesky received an
M.D. and an M.B.A. from Stanford University and his B.S. from the University of
Pennsylvania.
Leon E. Rosenberg, M.D., became a director of the Company in March 1997.
Since February 1998, Dr. Rosenberg has been a Professor of Molecular Biology at
Princeton University and Chief Executive Officer of Funding First, a Lasker
Trust initiative for medical research advocacy. From January 1997 to January
1998, Dr. Rosenberg was Senior Vice President, Scientific Affairs of
41
<PAGE>
Bristol-Myers Squibb Company. From September 1991 to January 1997, Dr. Rosenberg
was President of Bristol-Myers Squibb Pharmaceutical Research Institute. From
July 1984 to September 1991, he served as Dean of the Yale University School of
Medicine, where he had held faculty positions since 1965. Dr. Rosenberg
currently serves on the Boards of Directors of the Whitehead Institute for
Biomedical Research, the Lovelace Respiratory Research Institute and
Research!America. He received both his M.D. and his B.A. from the University of
Wisconsin. He is a member of the National Academy of Sciences and of the
Institute of Medicine.
Professor Siegfried G. Schaefer became a director of the Company in January
1998. Dr. Schaefer has been head of worldwide research at Solvay Pharmaceuticals
since July 1997 and the head of research at a Dutch division of Solvay
Pharmaceuticals from May 1996 to July 1997. From September 1992 to July 1997 Dr.
Schaefer was a department head for project management at an affiliate of Solvay
Pharmaceuticals. Dr. Schaefer has a B.S. in Biology from the University of
Bochum and a Doctorate in Pharmacology from the University of Munich. Dr.
Shaefer is currently a Professor at the University of Hamburg in the Department
of Pharmacology and Toxicology.
Nicole Vitullo became a director of the Company in December 1996. Ms.
Vitullo has been Senior Vice President of Rothschild International Asset
Management since November 1996 and Vice President thereof from November 1992
until November 1996. From July 1991 to November 1992, Ms. Vitullo served as
Director of Corporate Communications and Investor Relations at Cephalon, Inc., a
public biotechnology company. From June 1979 to July 1991, she held various
positions at Eastman Kodak, including Manager of Venture Capital Development of
the Healthcare Group. Ms. Vitullo serves as a director of Cytel Corporation,
Anergen, Inc., Onyx Pharmaceuticals, Inc. and Corvas International, public
biotechnology companies. Ms. Vitullo received her M.B.A. from the University of
Rochester's William E. Simon School of Business and her B.S. in Mathematics/
Statistics from the University of Rochester.
Samuel D. Waksal, Ph.D., a founder of the Company, has been a director of
the Company since its inception and was a Co-Chairman of the Board of Directors
from May 1995 to May 1996. Dr. Waksal was Chief Executive Officer of the Company
from June 1992 to December 1992 and was its Chairman of the Board of Directors
from June 1992 to May 1995. Dr. Waksal has been the Chief Executive Officer and
a director of ImClone Systems Incorporated, a public biotechnology company,
since 1985 and President since March 1987. From 1982 to 1985, Dr. Waksal was a
member of the faculty of the Mr. Sinai School of Medicine as Associate Professor
of Pathology and Director of the Division of Immunotherapy within the Department
of Pathology. He has served as visiting Investigator of the National Career
Institute, Immunology Branch, Research Associate of the Department of Genetics,
Stanford University Medical School, Assistant Professor of Pathology at Tufts
University School of Medicine and Senior Scientist for the Tufts Cancer Research
Center. Dr. Waksal was a scholar of the Leukemia Society of America from 1979 to
1984. He currently serves as Chairman of the New York Council for the
Humanities. Dr. Waksal received his Ph.D. in Immunology from Ohio State
University College of Medicine.
Jack G. Wasserman became a director of the Company in May 1996. For the
past five years, Mr. Wasserman has been a senior partner in Wasserman, Schneider
& Babb, a New York law firm which concentrates its practice in legal matters
relating to international trade. Mr. Wasserman is a director of American
Property Investors, Inc., the general partner of American Real Estate Partners,
L.P., a public limited partnership that invests in real estate. Mr. Wasserman
received a B.A. from Adelphi University, a J.D. from Georgetown University and a
Diploma from the Johns Hopkins University School of Advanced International
Studies.
42
<PAGE>
Directors are elected by the stockholders of the Company at each annual
meeting of stockholders and serve until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
removal or resignation.
Dr. Rachesky has agreed to tender his resignation as a director of the
Company if so requested by Mr. Icahn.
The Board of Directors has (i) a Compensation Committee, consisting of
Messrs. First and Wasserman and Ms. Vitullo, which makes recommendations
regarding salaries and incentive compensation for employees of and consultants
to the Company and which administers the 1993 Stock Option Plan and the 1996
Incentive Plan and (ii) an Audit Committee, consisting of Messrs. First and
Mitchell and Dr. Waksal, which oversees actions taken by the Company's
independent auditors and reviews the Company's internal accounting controls.
In September 1995, the Board of Directors granted to each director then in
office a 30-day option to purchase 8,334 shares of Common Stock at an exercise
price of $2.25 per share. In October 1995, each of Harold First, Carl C. Icahn,
Peter S. Liebert, Mark H. Rachesky, Thomas E. Shenk, then a director of the
Company, and Samuel D. Waksal exercised his option and purchased 8,334 shares of
Common Stock at $2.25 per share. In November 1996, the Compensation Committee
granted to each of the non-employee directors then in office, other than Dr.
Lawrence Muschek, an option to purchase 12,000 shares of Common Stock at an
exercise price of $6.75 per share. Each stock option is exercisable in four
cumulative annual installments of 3,000 shares commencing in November 1997 and
expires in November 2006. In October 1997, the Compensation Committee granted to
Nicole Vitullo an option to purchase 12,000 shares of Common Stock at an
exercise price of $14.00 per share. The stock option is exercisable in four
cumulative annual installments of 3,000 shares commencing in December 1997 and
expires in October 2007. In December 1997, the Board of Directors granted to
each of the three members of the Compensation Committee an option to purchase
2,500 shares of Common Stock at an exercise price of $6.375 per share. Each
stock option expires in December 2007 and is exercisable upon the approval by
the stockholders of the Company of the amendment to the Company's 1996 Incentive
Plan that increases the maximum number of shares of Common Stock that may be the
subject of awards under such plan from 833,334 to 1,833,334 (plus any shares
that are the subject of canceled or forfeited awards). The shares issuable upon
the exercise of such options are registered pursuant to a registration statement
on Form S-8.
The non-employee directors receive $1,000 for each meeting of the Board of
Directors attended and $500 for each meeting of a committee of the Board of
Directors attended.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal years ended December 31, 1997, 1996 and 1995,
by its Chief Executive Officer and each of the
43
<PAGE>
Company's other executive officers whose total salary and bonus exceeded
$100,000 during such fiscal year (collectively, the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
--------------------- Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options(#) Compensation
- --------------------------- ---- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Jeremy M. Levin (1) ........... 1997 225,000 45,000 300,000 231,164
President and Chief Executive 1996 225,000 45,000 25,000 --
Officer 1995 175,260 65,000 -- --
Philip N. Sussman ............. 1997 160,000 20,000 75,000
Senior Vice President of 1996 149,375 -- 65,000 --
Corporate Development 1995 110,260 70,000 33,334 --
David R. Webb ................. 1997 175,000 20,000 45,000
Vice President of Research 1996 175,000 17,500 17,500 --
and Chief Scientific Officer 1995 94,868(2) 30,000 66,667 128,021(3)
Arlindo L. Castelhano, Ph.D. .. 1997 118,800 15,000 1,000 --
Executive Director of 1996 105,833 15,000 11,666 --
Chemistry 1995 -- -- -- --
James S. Rielly ............... 1997 95,000 20,000 15,000
Vice President of Finance 1996 100,846 15,000 16,666 --
1995 -- -- -- --
</TABLE>
- ------------
(1) Dr. Levin ceased being the President and Chief Executive Officer of the
Company on January 31, 1998. All other Compensation includes $231,164 in
accrued severance.
(2) Dr. Webb joined the Company in June 1995 and received a salary at the rate
of $175,000 per annum for 1995.
(3) All Other Compensation includes: (i) $121,754 of relocation expenses, (ii)
$5,880 in healthcare premiums and reimbursements paid by the Company and
(iii) $387 in short term and long-term disability premiums and life
insurance premiums paid by the Company.
Employment Agreements
Philip N. Sussman
Mr. Sussman is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause (i) the Company
will continue to pay him his then
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<PAGE>
salary and provide him with medical benefits until the earlier of twelve months
from the date of termination or his commencement of comparable new employment
with another company and (ii) all unvested stock options issued to him will
immediately vest as of the date of termination.
Dr. David R. Webb
Dr. Webb is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause he will receive
severance equal to (i) 6 months' salary if such termination is after 24 months
but before the 37th month after commencement, or (ii) whatever is deemed
appropriate for other officers of the Company at the time of termination if such
termination is more than 36 months after commencement.
James S. Rielly
Mr. Rielly is an employee at will but has a severance agreement with the
Company which provides that if he is terminated without cause (i) the Company
will continue to pay him his then salary and provide him with medical benefits
until the earlier of six months from the date of termination or his commencement
of new employment and (ii) all unvested stock options issued to him will
immediately vest as of the date of termination.
Option Grants
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1997 by the Company to the
Named Executive Officers:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------- Potential Realizable
Percent of Value At Assumed
Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Terms ($)
Options Employees in Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/share) Date 5% 10%
---- ---------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin ........ 100,000 15.34 20.00 2/4/07(1) 1,257,789 3,187,485
200,000 30.69 13.375 2/4/07(1) 1,682,293 4,263,261
Philip N. Sussman ...... 20,000 3.07 6.375 12/30/07 80,184 203,202
5,000 0.77 6.375 12/30/07 20,046 50,801
50,000 7.67 6.375 12/30/07 200,460 508,005
David R. Webb .......... 20,000 3.07 6.375 12/30/07 80,184 203,202
10,000 1.53 6.375 12/30/07 40,092 101,601
15,000 2.30 6.375 12/30/07 60,138 152,402
Arlindo L. Castelhano .. 1,000 0.15 6.375 12/30/07 4,009 10,160
James S. Rielly ........ 15,000 2.30 6.375 12/30/07 60,138 152,402
</TABLE>
Option Exercises and Holdings
46
<PAGE>
The following table sets forth certain information concerning each exercise
of stock options, during the fiscal year ended December 31, 1997 by the Named
Executive Officers and unexercised stock options held by the Named Executive
Officers as of the end of such fiscal year.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
Shares Aggregate December 31, 1997 (#) December 31, 1997 ($)(2)
Acquired on Value -------------------------- --------------------------
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeremy M. Levin ........ 25,000 309,500 315,071 -- 1,424,713 --
Philip N. Sussman ...... -- -- 85,002 121,666 213,090 46,248
David R. Webb .......... 10,000 98,750 27,708 91,459 96,248 137,503
Arlindo L. Castelhano .. 6,666 61,661 2,917 16,417 -- 27,506
James S. Rielly ........ 8,334 93,872 5,834 30,832 4,626 9,249
</TABLE>
- ------------
(1) These options were canceled when Dr. Levin and the Company determined, on
December 29, 1997, not to renew his employment agreement.
(2) Based on the difference between the closing price of the underlying shares
of Common Stock on December 31, 1996 as reported by the NASDAQ National
Market ($6.375) and the option exercise price.
1993 Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to purchase
shares of Common Stock to officers, employees and consultants of the Company.
The maximum number of shares of Common Stock that may be issued pursuant to the
1993 Stock Option Plan is 666,667 (plus any shares that are the subject of
canceled or forfeited awards). Effective as of May 10, 1996, the 1993 Stock
Option Plan was replaced by the 1996 Incentive Plan with respect to all future
awards to the Company's employees and consultants. See " -- 1996 Incentive
Plan."
The 1993 Stock Option Plan is administered by the Compensation Committee
which is presently comprised of Harold First, Jack G. Wasserman and Nicole
Vitullo.
Under the 1993 Stock Option Plan, the Compensation Committee may establish
with respect to each option granted such vesting provisions as it determines to
be appropriate or advisable. In general, options granted under the 1993 Stock
Option Plan have a ten-year term, and such options vest or have vested over
four-year periods at various rates. Unexercised options automatically terminate
upon the termination of the holder's relationship with the Company. However, the
Compensation Committee may accelerate a vesting schedule and/or extend the time
for exercise of
47
<PAGE>
all or any part of an option in the event of the termination of the holder's
relationship with the Company. In addition, the 1993 Stock Option Plan includes
a provision authorizing the Compensation Committee to adjust the number of
shares of Common Stock available for grant, the number of shares of Common Stock
subject to outstanding awards thereunder and the per share exercise price
thereof in the event of any stock dividend, stock split, recapitalization,
merger or certain other events. The Compensation Committee may terminate the
1993 Stock Option Plan at any time but any such termination will not adversely
affect options previously granted.
Options granted under the 1993 Stock Option Plan are nontransferable except
by will or the laws of descent and distribution.
During 1997, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 20, 1998, an aggregate of 460,701 shares of Common Stock were
subject to outstanding stock options granted under the 1993 Stock Option Plan.
As of March 20, 1998, options to purchase 409,810 shares were exercisable at
prices ranging from $1.37 to $3.51 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under the 1993 Stock Option Plan pursuant to a registration
statement on Form S-8.
Stock Option Agreements
The Company has granted non-qualified stock options to directors, officers,
employees and consultants of the Company by means of stock option agreements.
During 1997, there were no stock options granted pursuant to stock option
agreements. As of March 20, 1998, an aggregate of 607,257 shares of Common Stock
were subject to outstanding stock options granted under stock option agreements,
and options to purchase 375,475 shares under such option agreements were
exercisable at prices ranging from $1.50 to $6.75 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under such stock option agreements pursuant to a registration
statement on Form S-8
1996 Incentive Plan
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted
by the Board of Directors and approved by the stockholders of the Company in May
1996. The 1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as
of May 10, 1996, with respect to all future awards by the Company to its
employees and consultants. However, while all future awards will be made under
the 1996 Incentive Plan, awards made under the 1993 Stock Option Plan will
continue to be administered in accordance with the 1993 Stock Option Plan. See
"Incentive Plans -- 1993 Stock Option Plan." In December 1996, the Board of
Directors amended the 1996 Incentive Plan to (i) increase the maximum number of
shares of Common Stock that may be the subject of awards under the 1996
Incentive Plan from 333,334 to 833,334 (plus any shares that are the subject of
48
<PAGE>
canceled or forfeited awards) and (ii) provide for the grant of stock options to
directors of the Company . The stockholders of the Company approved such
amendments to the 1996 Incentive Plan in June 1997. In December 1997, the Board
of Directors amended the 1996 Incentive Plan to increase the maximum number of
shares of Common Stock that may be the subject of awards under the 1996
Incentive Plan from 833,334 to 1,833,334 (plus any shares that are the subject
of canceled or forfeited awards), subject to approval by the stockholders of the
Company.
The 1996 Incentive Plan is administered by the Compensation Committee,
which has the power and authority under the 1996 Incentive Plan to determine
which of the Company's employees, consultants and directors will receive awards,
the time or times at which awards will be made, the nature and amount of the
awards, the exercise or purchase price, if any, of such awards, and such other
terms and conditions applicable to awards as it determines to be appropriate or
advisable.
Options granted under the 1996 Incentive Plan may be either non-qualified
stock options or options intended to qualify as incentive stock options under
Section 422 of the Code. The term of incentive stock options granted under the
1996 Incentive Plan cannot extend beyond ten years from the date of grant (or
five years in the case of a holder of more than 10% of the total combined voting
power of all classes of stock of the Company on the date of grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may establish
with respect to each option or share awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with the Company and in no event beyond
the expiration of the term. The Company may either repurchase unvested shares of
Common Stock at their original purchase price upon the termination of the
holder's relationship with the Company or cause the forfeiture of such shares,
as determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of shares sold
under the 1996 Incentive Plan are determined by the Compensation Committee, but
may not, in the case of incentive stock options, be less than the fair market
value of the Common Stock on the date of grant (or, in the case of incentive
stock options granted to a holder of more than 10% of the total combined voting
power of all classes of stock of the Company on the date of grant, 110% of such
fair market value), as determined by the Compensation Committee.
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant
49
<PAGE>
Tandem SARs as an addition to outstanding non-qualified stock options. A Tandem
SAR permits the participant, in lieu of exercising the corresponding option, to
elect to receive any appreciation in the value of the shares subject to such
option directly from the Company in shares of Common Stock. The amount payable
by the Company upon the exercise of a Tandem SAR is measured by the difference
between the market value of such shares at the time of exercise and the option
exercise price. Generally, Tandem SARs may be exercised at any time after the
underlying option vests. Upon the exercise of a Tandem SAR, the corresponding
portion of the related option must be surrendered and cannot thereafter be
exercised. Conversely, upon exercise of an option to which a Tandem SAR is
attached, the Tandem SAR may no longer be exercised to the extent that the
corresponding option has been exercised. Nontandem stock appreciation rights
("Nontandem SARs") may also be awarded by the Compensation Committee. A
Nontandem SAR permits the participant to elect to receive from the Company that
number of shares of Common Stock having an aggregate market value equal to the
excess of the market value of the shares covered by the Nontandem SAR on the
date of exercise over the aggregate base price of such shares as determined by
the Compensation Committee. With respect to both Tandem and Nontandem SARs, the
Compensation Committee may determine to cause the Company to settle its
obligations arising out of the exercise of such rights in cash or a combination
of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also award
tax offset payments to assist employees in paying income taxes incurred as a
result of their participation in the 1996 Incentive Plan. The amount of the tax
offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive Plan may
be adjusted by the Compensation Committee to prevent dilution or enlargement of
rights in the event of various changes in the capitalization of the Company. At
the time of grant of any award, the Compensation Committee may provide that the
number and class of shares issuable in connection with such award be adjusted in
certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors may suspend, amend, modify or terminate the 1996
Incentive Plan. However, the Company's stockholders must approve any amendment
that would (i) materially increase the aggregate number of shares issuable under
the 1996 Incentive Plan, (ii) materially increase the benefits accruing to
employees under the 1996 Incentive Plan or (iii) materially modify the
requirements for eligibility to participate in the 1996 Incentive Plan. Awards
made prior to the termination of the 1996 Incentive Plan shall continue in
accordance with their terms following such termination. No amendment, suspension
or termination of the 1996 Incentive Plan shall adversely affect the rights of
an employee or consultant in awards previously granted without such employee's
or consultant's consent.
50
<PAGE>
As of March 20, 1998, an aggregate of 678,242 shares of Common Stock were
subject to outstanding stock options granted under the 1996 Incentive Plan. As
of March 20, 1998, stock options to purchase 122,352 shares were exercisable at
prices ranging from $5.75 to $14.00 per share.
The Company has registered the shares issuable upon exercise of stock
options granted or which may be granted under the 1996 Incentive Plan pursuant
to a registration statement on Form S-8.
401(k) Plan
In November, 1993, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering the Company's employees. Generally,
employees may elect to contribute to the 401(k) Plan, through payroll
deductions, up to 20% of their compensation for services rendered in any year,
not to exceed a statutorily prescribed annual limit. The trustee under the
401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in any of seven investment options. The 401(k) Plan is intended to
qualify under Section 401 of the Code so that contributions by employees to the
401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn. The Company made an aggregate matching contribution
for the fiscal year ended December 31, 1997 of approximately $74,646 to
participants under the 40l(k) Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 20, 1998 with respect to (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all directors and officers as a group. All
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
Number of Shares Percentage of
Amount and Nature Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- ---------------------------------------- ----------------------- -------------
Carl C. Icahn .......................... 3,364,216(3) 27.14%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb ................... 2,061,673 16.64%
P.O. Box 4000
South 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V. (4) ....................... 1,599,942 12.91%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
51
<PAGE>
Number of Shares Percentage of
Amount and Nature Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- ---------------------------------------- ----------------------- -------------
International Biotechnology Trust plc .. 850,000(5) 6.86%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithins Lane
London EC4N 8NR
United Kingdom
Philip N. Sussman ...................... 85,002(6) *
David R. Webb, Ph.D. ................... 27,708(7) *
Arlindo L. Castelhano, Ph.D. ........... 9,583(8) *
James S. Rielly ........................ 6,034(9) *
Theodore Altman ........................ 3,000(10) *
Harold First ........................... 11,334(11) *
Jeremy M. Levin, D.Phil., MB.BCHIR ..... 290,071(12) 2.29%
Peter S. Liebert, M.D. ................. 11,334(13) *
Robert J. Mitchell ..................... 3,000(14) *
Mark H. Rachesky, M.D. ................. 193,683(15) 1.56%
Leon E. Rosenberg, M.D. ................ -- *
Siegfried G. Schaefer .................. 1,599,942(16) 12.91%
Nicole Vitullo ......................... 853,000(17) 6.88%
Samuel D. Waksal, Ph.D. ................ 3,000(18) *
Jack G. Wasserman ...................... 3,000(19) *
All executive officers and directors ... 8,525,580(20) 66.45%
as a group (16 persons)
- ------------
* Less than one percent
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 777 Old Saw Mill River Road,
Tarrytown, NY 10591-6705. Except as indicated in the other footnotes to
this table, the persons named in this table have sole voting and investment
power with respect to all shares of Common Stock.
(2) Share ownership in the case of each person listed above includes shares
issuable upon the exercise of options held by such person as of March 20,
1998, that may be exercised within 60 days after such date for purposes of
computing the percentage of Common Stock owned by such person, but not for
purposes of computing the percentage of Common Stock owned by any other
person.
52
<PAGE>
(3) Includes 2,258,790 shares of Common Stock held by High River Limited
Partnership. Mr. Icahn is the sole shareholder of the sole general partner
of High River Limited Partnership. Also includes 3,000 shares of Common
Stock that Mr. Icahn currently has the right to acquire upon the exercise
of stock options.
(4) Physica B.V. is an affiliate of Solvay Pharmaceuticals.
(5) Consists of 850,000 shares of Common Stock held by the International
Biotechnology Trust plc ("IBT"). Rothschild Asset Management acts as the
investment manager to IBT and therefore may be deemed to share beneficial
ownership of these shares.
(6) Consists of 85,002 shares of Common Stock which Mr. Sussman currently has
the right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(7) Consists of 27,708 shares of Common Stock which Dr. Webb currently has the
right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(8) Consists of 2,917 shares of Common Stock which Dr. Castelhano currently has
the right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(9) Includes 5,834 shares of Common Stock which Mr. Rielly currently has the
right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(10) Consists of 3,000 shares of Common Stock which Mr. Altman currently has the
right to acquire upon the exercise of stock options.
(11) Includes 3,000 shares of Common Stock which Mr. First currently has the
right to acquire upon the exercise of stock options.
(12) Consists of 290,071 shares of Common Stock which Dr. Levin currently has
the right to acquire upon the exercise of stock options. See "Management -
Incentive Plans."
(13) Includes 3,000 shares of Common Stock which Dr. Liebert currently has the
right to acquire upon the exercise of stock options.
(14) Consists of 3,000 shares of Common Stock which Mr. Mitchell currently has
the right to acquire upon the exercise of stock options.
(15) Includes 3,000 shares of Common Stock which Dr. Rachesky currently has the
right to acquire upon the exercise of stock options.
(16) Consists of 1,599,942 shares of Common Stock held by Physica B.V., an
affiliate of Solvay Pharmaceuticals. Professor Schaefer is the head of
worldwide research at Solvay Pharmaceuticals. Professor Schaefer may be
deemed the beneficial owner of the 1,599,942 shares of Common Stock held by
Physica B.V., but disclaims such beneficial ownership.
(17) Includes (a) 850,000 shares of Common Stock held by IBT and (b) 3,000
shares of Common Stock which Ms. Vitullo currently has the right to acquire
upon the exercise of stock options. Ms. Vitullo is Vice President of
Rothschild Asset Management Ltd., the investment manager for IBT. Ms.
Vitullo may be deemed the beneficial owner of the 850,000 shares of Common
Stock held by IBT, but disclaims such beneficial ownership.
(18) Consists of 3,000 shares of Common Stock which Dr. Waksal currently has the
right to acquire upon the exercise of stock options.
53
<PAGE>
(19) Consists of 3,000 shares of Common Stock which Mr. Wasserman currently has
the right to acquire upon the exercise of stock options.
(20) Includes (a) 438,532 shares of Common Stock issuable upon exercise of
options, (b) 1,599,942 shares of Common Stock held by Physica B.V., and (c)
850,000 shares of Common Stock held by IBT. See footnotes (3), (6), (7),
(8), (9), (10), (11), (12), (13), (14), (15), (16), (17), (18) and (19).
Item 13. Certain Relationships and Related Transactions.
For the year ended December 31, 1997, the Company received $3,115,275 in
cash for research funding from Bristol-Myers Squibb and recorded $4,115,275 as
revenue, which constituted 46% of the Company's gross revenues in 1997. Leon E.
Rosenberg, a director of the Company, was the Senior Vice President of
Scientific Affairs of Bristol-Myers Squibb during 1997.
For the year ended December 31, 1997, the Company received $2,587,460 in
cash for research funding from Solvay Pharmaceuticals, an affiliate of Physica
B.V., which constituted 29% of the Company's gross revenues in 1997. Siegfried
G. Schaefer, a director of the Company, is the head of worldwide research at
Solvay Pharmaceuticals.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements Page
-------------------- ----
Index to Financial Statements F-1
Independent Auditors' Report F-2
54
<PAGE>
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the last quarter of the
period covered by this Report.
(c) Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of Cadus
Pharmaceutical Corporation (the "Company"), as filed with the
Secretary of State of Delaware on July 22, 1996. (1)
3.2 By-laws of the Company. (2)
4.1 Specimen of Common Stock Certificate of the Company. (2)
4.2 1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)
4.3 Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)
4.4 Amendment to Cadus Pharmaceutical Corporation 1996 Incentive
Plan. (1)
4.5 Form of Incentive Stock Option Agreement utilized in
connection with issuances of stock options under the Cadus
Pharmaceutical Corporation 1996 Incentive Plan. (1)
4.6 Form of Stock Option Agreement between the Company and each of
the following employees of the Company: Philip N. Sussman,
John Manfredi, Andrew Murphy, Jeremy Paul, Lauren Silverman,
Joshua Trueheart, James S. Rielly, Thomas F. Deuel, Norman R.
Klinman, Elliott M. Ross, Jeremy Thorner, Arnold Levine, John
Ransom, Christine Klein, Suzanne K. Wakamoto, Christopher
Pleiman, Algis Anilionis, Anupama K. Nadkarni, Mitchell
Silverstein, Michael A. Spruyt and David Fruhling. (1)
55
<PAGE>
4.7 Form of Stock Option Agreement between the Company and each of
the following non-employee directors of the Company: Theodore
Altman, Harold First, Carl Icahn, Peter Liebert, Robert
Mitchell, Mark Rachesky, William Scott, Jack Wasserman and
Samuel D. Waksal. (1)
4.2 Stock Purchase Agreement between the Company and SmithKline
Beecham Corporation, dated as of February 25, 1997. (3)
4.3 Registration Rights Agreement between the Company and
SmithKline Beecham Corporation, dated as of February 25, 1997.
(3)
10.1 Form of Indemnification Agreement entered into between the
Company and its directors and officers. (2)
10.2 Form of Agreement Regarding Assignment of Inventions,
Confidentiality and Non-Competition. (2)
10.3 The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)
10.4 Employment Agreement between Jeremy M. Levin and the Company.
(2)
10.5 Preferred Stock Purchase Agreement dated as of July 30, 1993
between the Company and the purchasers of Series A Preferred
Stock, together with the First and Second Amendments thereto
dated as of July 26, 1994 and October 31, 1995, respectively.
(2)
10.6 Preferred Stock Purchase Agreement dated as of July 26, 1994
between the Company and Bristol-Myers Squibb Company
("Bristol-Myers") concerning Series B Preferred Stock,
together with the First Amendment thereto dated as of October
31, 1995. (2)
10.7 Preferred Stock Purchase Agreement dated as of November 1,
1995 between the Company and Physica B.V. concerning Series B
Preferred Stock. (2)
10.8 Research Collaboration and License Agreement, dated as of July
26, 1994, between the Company and Bristol-Myers. (2)
10.9 Screening and Option Agreement, dated as of July 26, 1994,
between the Company and Bristol-Myers. (2)
56
<PAGE>
10.10 Research Collaboration and License Agreement, dated as of
November 1, 1995 between the Company and Solvay
Pharmaceuticals B.V. (2)
10.11 Sublease Agreement, dated as of October 19, 1994, between the
Company and Union Carbide Corporation. (2)
10.12 Lease, dated as of June 20, 1995 between the Company and Keren
Limited Partnership. (2)
10.13 Consulting Agreement between the Company and James R. Broach,
dated February 1, 1994. (2)
10.14 Amended and Restated License Agreement between the Company and
Duke University, dated May 10, 1994. (2)
10.15 License Agreement between the Company and National Jewish
Center for Immunology and Respiratory Medicine dated November
1, 1994. (2)
10.16 Stock Option Agreement, dated as of November 1, 1994, between
the Company and John C. Cambier. (2)
10.17 Stock Option Agreement, dated as of November 1, 1994, between
the Company and Gary L. Johnson. (2)
10.18 Consulting Agreement, dated as of November 1, 1994, between
the Company and John C. Cambier. (2)
10.19 Consulting Agreement, dated as of November 1, 1994, between
the Company and Gary L. Johnson. (2)
10.20 Research Collaboration Agreement, dated as of January 9, 1995,
between the Company and Houghten Pharmaceuticals, Inc.,
together with the Amendment thereto dated as of March 1996.
(2)
10.21 Stock Option Agreement, dated as of December 18, 1995, between
the Company and James R. Broach. (2)
10.22 Waiver, dated May 17, 1996, of Section 1.05 of the Preferred
Stock Purchase Agreement dated as of July 26, 1994 between the
Company and Bristol-Myers, as amended by the First Amendment
thereto dated as of October 31, 1995. (2)
57
<PAGE>
10.23 Waiver, dated May 17, 1996, of Section 1.04 of the Preferred
Stock Purchase Agreement dated as of November 1, 1995 between
the Company and Physica B.V. (2)
10.24 Research Collaboration and License Agreement among the
Company, SmithKline Beecham Corporation and SmithKline Beecham
p.l.c., dated as of February 25, 1997. (3)
11 Computation of Net Loss per Share.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
24 Power of Attorney (filed as part of the signature page to this
Report).
27 Financial Data Schedule.
- ------------
(1) Filed with the Company's Registration Statement on Form S-8 (Registration
No. 333-21871), dated February 14, 1997.
(2) Filed with the Company's Registration Statement on Form S-1 (Registration
No. 333-4441), declared effective by the Commission on July 17, 1996.
(3) Filed with the Company's Current Report on Form 8-K, dated March 7, 1997.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CADUS PHARMACEUTICAL CORPORATION
By: /s/ Philip N. Sussman
----------------------------------
Philip N. Sussman
Senior Vice President of Corporate
Development
Each person whose signature appears below constitutes and appoints Philip
N. Sussman and James S. Rielly, or either of them, each with the power of
substitution, his or her true and lawful attorney-in-fact to sign any amendments
to this report and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact, or his or her
substitute, may do or choose to be done by virtue hereof.
Pursuant to the Requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Philip N. Sussman Senior Vice President of Corporate March 26, 1998
- ------------------------- Development (Principal Executive
Philip N. Sussman Officer)
/s/ James S. Rielly Vice President of Finance, Treasurer March 26, 1998
- ------------------------- and Secretary (Principal Financial
James S. Rielly and Accounting Officer)
Director March __, 1998
- -------------------------
Carl C. Icahn
Director March __, 1998
- -------------------------
Theodore Altman
/s/ Harold First Director March 26, 1998
- -------------------------
Harold First
/s/ Jeremy M. Levin Director March 26, 1998
- -------------------------
Jeremy M. Levin
/s/ Peter S. Liebert Director March 26, 1998
- -------------------------
Peter S. Liebert
/s/ Robert J. Mitchell Director March 26, 1998
- -------------------------
Robert J. Mitchell
/s/ Mark H. Rachesky Director March 26, 1998
- -------------------------
Mark H. Rachesky
/s/ Leon E. Rosenberg Director March 26, 1998
- -------------------------
Leon E. Rosenberg
/s/ Siegfried G. Schaefer Director March 23, 1998
- -------------------------
Siegfried G. Schaefer
/s/ Nicole Vitullo Director March 26, 1998
- -------------------------
Nicole Vitullo
/s/ Samuel D. Waksal Director March 26, 1998
- -------------------------
Samuel D. Waksal
/s/ Jack G. Wasserman Director March 26, 1998
- -------------------------
Jack G. Wasserman
59
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Index
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 1997 and 1996 F-3
Statements of Operations - For the years ended December 31, F-4
1997, 1996 and 1995
Statement of Stockholders' Equity - For the F-5
years ended December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the years ended December 31, F-6
1997, 1996 and 1995
Notes to Financial Statements F-7
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Cadus Pharmaceutical Corporation:
We have audited the accompanying balance sheets of Cadus Pharmaceutical
Corporation (the Company) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cadus Pharmaceutical
Corporation as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
February 27, 1998
F-2
<PAGE>
Cadus Pharmaceutical Corporation
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,761,516 $ 43,152,677
Prepaid and other current assets 405,597 263,052
------------ ------------
Total current assets 37,167,113 43,415,729
Restricted cash (note 6 & 13) -- 118,000
Fixed assets, net of accumulated depreciation and amortization of $2,582,661
at December 31, 1997, $1,488,015 at December 31, 1996 (note 3) 2,646,936 2,955,530
Deferred tax asset, less valuation allowance of $7,204,000 at December 31, 1997
and $3,787,0000 at December 31, 1996 (note 7) -- --
Due from stockholder (note 4) -- 5,974
Investments in other ventures (note 5) 1,478,229 310,660
Other assets, net (notes 2) 948,912 480,965
------------ ------------
Total assets $ 42,241,190 $ 47,286,858
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Deferred revenue (note 8) $ 94,190 $ 1,000,000
Accounts payable 892,636 455,794
Accrued expenses and other current liabilities (note 12) 604,146 470,660
Note payable to partnership-current portion 150,000
Line of credit and loans payable to bank-current portion (note 6) -- 12,601
------------ ------------
Total current liabilities 1,740,972 1,939,055
Loans payable to bank (note 6) -- 16,474
Note payable to partnership (note 5) -- 150,000
------------ ------------
Total liabilities 1,740,972 2,105,529
Commitments and contingencies (note 13)
Stockholders' equity (notes 8, 9 and 10 ):
Common Stock, $.01 par value. Authorized 35,000,000 shares at
December 31, 1997 and 1996; issued 12,500,156 shares at December 31, 1997,
12,202,900 shares at December 31, 1996; outstanding 12,358,489
shares at December 31, 1997, 12,061,233 shares at December 31, 1996 125,001 122,029
Additional paid-in capital 54,517,519 53,790,704
Accumulated deficit (note 1) (13,842,227) (8,431,329)
Treasury stock, 141,667 shares of common stock at December 31, 1997 and 1996 (300,075) (300,075)
------------ ------------
Total stockholders' equity 40,500,218 45,181,329
------------ ------------
Total liabilities and stockholders' equity $ 42,241,190 $ 47,286,858
============ ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
Cadus Pharmaceutical Corporation
Statements of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues, principally from
related parties (notes 2 and 8) $ 9,013,113 $ 6,500,000 $ 4,417,809
------------ ------------ ------------
Costs and expenses:
Research and development costs 11,561,213 8,282,507 5,383,285
General and administrative expenses 4,091,866 2,315,042 1,376,126
------------ ------------ ------------
Total costs and expenses 15,653,079 10,597,549 6,759,411
------------ ------------ ------------
Operating loss (6,639,966) (4,097,549) (2,341,602)
------------ ------------ ------------
Other income and (expenses):
Interest income 2,079,058 1,829,820 980,567
Interest expense (17,865) (110,416) (77,866)
Equity in other ventures (note 5) (832,431) -- --
Gain on sale of equipment 3,281 -- --
------------ ------------ ------------
Total other income and (expenses) 1,232,043 1,719,404 902,701
Loss before income taxes (5,407,923) (2,378,145) (1,438,901)
State and local taxes (note 7) 2,975 62,580 43,589
------------ ------------ ------------
Net loss (5,410,898) (2,440,725) (1,482,490)
Basic net loss per share (note 2) $ (0.44) $ (0.39) $ (1.07)
============ ============ ============
Shares used in calculation of basic net loss
per share (note 2) 12,225,463 6,280,917 1,382,139
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
Cadus Pharmaceutical Corporation
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock, Series A Preferred Stock, Series B
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 14,879,651 $ 14,880 3,571,429 $ 3,571
Issuance of Convertible Preferred Stock, Series B for cash,
in connection with achievement of scientific milestone 1,250,000 1,250
Issuance of Convertible Preferred Stock, Series B for cash, net of
issuance costs of $154,858, in connection with
corporate partnering transaction in November 1995 2,500,000 2,500
Issuance of common stock for cash in connection with
exercise of options
Repurchase of stock from founder for cash
Net loss for year ended December 31, 1995
------------ ------------ ------------ ------------
Balance at December 31, 1995 14,879,651 14,880 7,321,429 7,321
Issuance of common stock for cash in connection with
exercise of options
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996 (14,879,651) (14,880) (7,321,429) (7,321)
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996
Net loss for year ended December 31, 1996
------------ ------------ ------------ ------------
Balance at December 31, 1996 -- -- -- --
Issuance of common stock for cash in connection with
exercise of options
Net loss for year ended December 31, 1997
------------ ------------ ------------ ------------
Balance at December 31, 1997 -- $ -- -- $ --
============ ============ ============ ============
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Accumulated
Shares Amount capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 1,380,005 $ 14,050 $ 19,009,293 $ (4,508,114)
Issuance of Convertible Preferred Stock, Series B for cash,
in connection with achievement of scientific milestone 4,998,750
Issuance of Convertible Preferred Stock, Series B for cash, net of
issuance costs of $154,858, in connection with
corporate partnering transaction in November 1995 9,842,642
Issuance of common stock for cash in connection with
exercise of options 60,004 600 126,255
Repurchase of stock from founder for cash (116,667)
Net loss for year ended December 31, 1995 (1,482,490)
------------ ------------ ------------ ------------
Balance at December 31, 1995 1,323,342 14,650 33,976,940 (5,990,604)
Issuance of common stock for cash in connection with
exercise of options 23,877 239 36,704
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 2,750,000 27,500 17,149,124
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996 7,551,514 75,515 (53,314)
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996 412,500 4,125 2,681,250
Net loss for year ended December 31, 1996 (2,440,725)
------------ ------------ ------------ ------------
Balance at December 31, 1996 12,061,233 122,029 53,790,704 (8,431,329)
Issuance of common stock for cash in connection with
exercise of options 297,256 2,972 726,815
Net loss for year ended December 31, 1997 (5,410,898)
------------ ------------ ------------ ------------
Balance at December 31, 1997 12,358,489 $ 125,001 $ 54,517,519 $(13,842,227)
============ ============ ============ ============
<CAPTION>
Treasury Stock
----------------------------
Shares Amount Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1995 (25,000) $ (75) $ 14,533,605
Issuance of Convertible Preferred Stock, Series B for cash,
in connection with achievement of scientific milestone 5,000,000
Issuance of Convertible Preferred Stock, Series B for cash, net of
issuance costs of $154,858, in connection with
corporate partnering transaction in November 1995 9,845,142
Issuance of common stock for cash in connection with
exercise of options 126,855
Repurchase of stock from founder for cash (116,667) (300,000) (300,000)
Net loss for year ended December 31, 1995 (1,482,490)
------------ ------------ ------------
Balance at December 31, 1995 (141,667) (300,075) 27,723,112
Issuance of common stock for cash in connection with
exercise of options 36,943
Issuance of common stock for cash at $7.00 per share, net
of issuance costs of $2,073,376, in connection with
the initial public offering in July 1996 17,176,624
Conversion of Preferred Stock into common stock in
connection with the initial public offering in July 1996 --
Issuance of common stock for cash at $7.00 per share, net of
commissions of $202,125, in connection with the exercise
of the underwriters' over-allotment in August 1996 2,685,375
Net loss for year ended December 31, 1996 (2,440,725)
------------ ------------ ------------
Balance at December 31, 1996 (141,667) (300,075) 45,181,329
Issuance of common stock for cash in connection with
exercise of options 729,787
Net loss for year ended December 31, 1997 (5,410,898)
------------ ------------ ------------
Balance at December 31, 1997 (141,667) $ (300,075) $ 40,500,218
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
Cadus Pharmaceutical Corporation
Statements of Cash Flow
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,410,898) $ (2,440,725) $ (1,482,490)
Equity in other ventures 832,431 -- --
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,328,532 837,984 544,855
(Gain)/loss on sale/trade in of equipment (97,471) 2,658
Amortization of gain on sale of equipment 3,281 -- --
Changes in assets and liabilities:
(Increase) decrease in prepaid and other current assets (142,545) (186,242) 10,327
(Increase) decrease in other assets (16,645) (64,701) 5,088
(Decrease) increase in deferred revenue (909,091) 1,000,000 (645,381)
Increase (decrease) in accounts payable 436,842 301,331 (102,595)
Increase in accrued expenses and other current liabilities 133,486 49,505 366,989
------------ ------------ ------------
Net cash used in operating activities (3,842,078) (502,848) (1,300,549)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (1,696,861) (1,574,678) (1,893,858)
Sale of fixed assets 820,384 -- --
Decrease (increase) in restricted cash 118,000 2,380,000 (2,193,000)
Repayment of stockholder's loan 5,974 7,762 7,763
Investments in other ventures (2,000,000) (160,660) --
Patent costs (497,292) (181,375) (192,170)
------------ ------------ ------------
Net cash (used in)/provided by operating activities (3,249,795) 471,049 (4,271,265)
------------ ------------ ------------
Cash flows from financing activities:
(Repayments of)/proceeds from bank line of credit -- (2,380,000) 2,193,000
Payments on bank loans (29,075) (17,386) (15,941)
Net proceeds from issuance of common stock in public offering -- 19,861,999 --
Proceeds from issuance of common stock upon exercise of stock options 729,787 36,943 126,855
Net proceeds from issuance of convertible preferred stock -- -- 14,845,142
Purchase of treasury stock -- -- (300,000)
------------ ------------ ------------
Net cash provided by financing activities 700,712 17,501,556 16,849,056
------------ ------------ ------------
Net (decrease)/increase in cash and cash equivalents (6,391,161) 17,469,757 11,277,242
Cash and cash equivalents at beginning of period 43,152,677 25,682,920 14,405,678
------------ ------------ ------------
Cash and cash equivalents at end of period $ 36,761,516 $ 43,152,677 $ 25,682,920
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Organization and Basis of Preparation
Cadus Pharmaceutical Corporation (the "Company") was incorporated on
January 23, 1992 under the laws of the State of Delaware. The Company
is focused on the development and application of novel yeast-based and
signal transduction drug discovery technologies.
The Company has accumulated a loss of $13,842,227 from January 23, 1992
(date of inception) to December 31, 1997. Management intends to
continue research toward the development of commercial products in
order to generate future revenues from license fees, royalties, direct
sales and performance of contract research. The Company has financed
its operations through the sale of common stock in the public market,
the sale of convertible preferred stock and through revenues resulting
from research funding provided by its collaborative partners (note 8).
The Company is at an early stage of development and therefore faces
certain risks and uncertainties which are present in a young
biotechnology company. The Company's yeast-based and signal
transduction technologies are novel as drug discovery methods and have
not yet been shown to be successful in the development of any
commercialized drug. The Company has not completed development of any
drugs and does not expect that any drugs resulting from its and its
collaborative partners' research and development efforts will be
commercially available for a significant number of years, if at all.
The Company is relying on its collaborative partners to fund a
substantial portion of its research operations over the next several
years. Through December 31, 1997, the Company had entered into three
collaborative arrangements, however there can be no assurance that the
Company will be able to establish additional collaborative
arrangements, or that these contracts will continue to be renewed, or
that any renewal will be made on terms favorable to the Company.
Commencing in July 1998 and February 1999, respectively, the research
provisions of the Solvay Duphar Agreement and the SmithKline Beecham
Agreement, may each be terminated for nonperformance under certain
circumstances, which termination would result in the Company losing its
research funding from Solvay Duphar or SmithKline Beecham, as the case
may be. The termination or expiration of the research provisions of any
of such contracts, or failure by BMS, Solvay Duphar, or SmithKline
Beecham to provide research funding to the Company, could have a
material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the Company faces risks and uncertainties regarding the
future profitability of the Company, ability to obtain additional
funding, protection of patents and property rights, competition and
technological change, government regulations including the need for
product approvals and the changing health care marketplace, and
attracting and retaining key officers, employees and consultants.
(2) Significant Accounting Policies
(a) Development Stage Enterprise
Through December 31, 1996, the Company reported as a
development stage enterprise in accordance with the Financial
Accounting Standards Board's ("FASB")
F-7
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises".
Management believes it has established major scientific and
research collaborations and that these collaborations have
generated significant revenues. Therefore, beginning with the
year ended December 31, 1997, the Company no longer reports as
a development stage enterprise.
(b) Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less when purchased to
be cash equivalents. At December 31, 1997 and 1996, cash
equivalents consist of $36,571,433 and $41,099,144,
respectively.
(c) Fixed Assets
Fixed assets are stated at cost. Depreciation of equipment and
furniture and fixtures is calculated using the straight-line
method over estimated useful lives of five to seven years.
Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful lives of the
improvements or the remaining term of the lease.
(d) Other Assets, Net
Other assets include capitalized patent costs that are
amortized on a straight-line basis over fifteen years. At
December 31, 1997 and 1996, accumulated amortization is
$78,406 and $32,414, respectively.
(e) Income Taxes
The Company accounts for income taxes in accordance with the
principles set forth in SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires that the Company recognize
deferred tax assets and liabilities for the expected future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Research and Development
Research and development costs are expensed as incurred and
include direct costs of research scientists and supplies and
an allocation of shared facilities and services.
F-8
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(g) Revenue Recognition
The Company has entered into research agreements that provide
for the payment of nonrefundable fees during the term of the
research programs. In addition, the agreements provide for
payment of fees when both parties concur that certain
milestone events have occurred. These fees are reflected as
revenue when earned as related costs are incurred or when
agreement is reached that milestone events have occurred.
Revenue recognized in the accompanying statements of
operations is not subject to repayment. Revenue received that
is related to future performance under such contracts is
deferred and recognized as revenue when earned.
(h) Net Loss Per Share
All common share data has been restated to give effect to a
one-for-three reverse stock split effected on July 18, 1996
(see note 9).
At December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings
per Share. Basic net loss per share is computed by dividing
the net loss by the weighted average number of common shares
outstanding. Diluted net loss per share is the same as basic
net loss per share since the inclusion of potential common
stock equivalents (stock options and warrants) in the
computation would be anti-dilutive.
(i) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(j) Fair Value of Financial Instruments
For cash, due from stockholder, accounts payable and accrued
expenses and line of credit, the carrying amount approximates
the fair value because of the short maturities of those
instruments.
For loans payable to bank the difference between the carrying
value and fair value is not material.
(k) Stock-Based Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation,"
establishes a fair value based method for accounting for
stock-based compensation plans and for the measurement basis
of transactions in which an entity acquires goods or services
from non-employees in exchange for equity instruments. SFAS
No. 123 requires that reporting entities either elect expense
recognition or its disclosure-only alternative for stock-based
employee compensation. During 1996, the Company adopted SFAS
No. 123 and has elected to continue measuring stock-based
employee compensation cost in accordance with the intrinsic
value based method of Accounting Principles Board ("APB")
Opinion No. 25 "Accounting for Stock Issued to Employees".
Therefore, the Company has included in the notes to the
financial statements pro forma net income and pro forma
earnings per share using the fair value based method for the
year ended December 31, 1997 with comparable disclosures for
the years ended December 31, 1996 and 1995.
(3) Fixed Assets
Fixed assets, at cost, are summarized as follows:
December 31,
------------
1997 1996
---- ----
Equipment $4,196,654 $3,364,781
Furniture and fixtures 253,008 238,252
Leasehold improvements 779,935 840,512
---------- ----------
5,229,597 4,443,545
---------- ----------
Less accumulated depreciation
And amortization 2,582,661 1,488,015
---------- ----------
$2,646,936 $2,955,530
========== ==========
Depreciation expense for the years ended December 31, 1997, 1996 and
1995 was $1,282,540, $839,000 and $517,700, respectively.
F-10
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(4) Due from Stockholder and Related Party Transactions
A founder of the Company entered into an agreement pursuant to which he
was entitled to borrow up to $25,000, drawn at a maximum rate of $5,000
per month, beginning April 1993 at an interest rate of 8% per annum.
The loan was fully repaid during 1997 resulting in a $0 balance at
December 31, 1997 compared to a balance of $5,974 at December 31, 1996.
Prior to repayment, the loan was secured by 13,334 shares of the
founder's common stock in the Company.
See notes 5 and 8 for further discussion of transactions with related
parties.
(5) Investments in Other Ventures
In December 1996, the Company issued a $150,000 promissory note bearing
interest at 7% per annum in exchange for a 42% limited partnership
interest in Laurel Partners Limited Partnership ("Laurel"), a limited
partnership of which a shareholder of the Company is the general
partner. An interest payment of $10,500 was accrued at December 31,
1997 and paid in January 1998. The principal amount and interest
acccrued thereon is payable on December 26, 1998. In addition, the
Company purchased for $160,660 a 47% limited partnership interest in
Laurel from Tortoise Corporation, a corporation wholly owned by the
shareholder. Laurel's purpose is to invest, directly or indirectly, in
securities of biotechnology companies. The Company has the right to
require the shareholder to match any future investment made by the
Company in Laurel up to an aggregate investment on the part of the
shareholder of $5.0 million. This right expires on the earlier of
December 31, 1999 or such time that neither the shareholder nor one of
his affiliates is the general partner of Laurel. The Company is not
required to make any additional investment in Laurel. The investment is
accounted for under the equity method with the recognition of losses
limited to the Company's capital contributions. For the year ended
December 31, 1997, the Company recognized $173,964 in losses related to
the investment. The remaining investment in Laurel of $136,696 is
included in investments in other ventures on the balance sheet.
In May 1997, the Company purchased $2.0 million of convertible
preferred stock in Axiom Biotechnologies Inc. ("Axiom"), representing
approximately 26% of the outstanding shares of Axiom on an as converted
basis. As part of the arrangement, Axiom has agreed to deliver and
license to the Company its first High Throughput Pharmacology
System (HT-PS(TM)). The Company has agreed to purchase an
additional $2.0 million of convertible preferred stock in Axiom if the
Company receives and accepts Axiom's HT-PS(TM) on or prior to
May 29, 1998. This would increase the Company's equity interest in
Axiom to approximately 38% of Axiom's then outstanding shares on an as
converted basis. The investment is accounted for under the equity
method with the Company recognizing 100% of Axiom's net losses to the
extent that the Company's investment is funding those losses. The the
year ended December 31, 1997, the Company recognized $658,467 in losses
generated by Axiom. The remaining investment in Axiom of $1,341,533 is
included in investments in other ventures on the balance sheet.
F-11
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(6) Line of Credit and Loans Payable to Bank
The Company obtained an $18,000 loan from a bank for the purchase of
equipment in December 1993. The loan bore interest at the rate of 9.50%
per annum. Principal and interest payments of approximately $560 per
month commenced in January 1994 and continued for a period of 36
months. As of December 31, 1997 and 1996, the balance of this loan was
$0, and $574, respectively. Until its repayment, the loan was secured
by cash on deposit with such bank, which was reflected as restricted
cash in the accompanying balance sheet.
The Company obtained a $57,000 loan from a bank for the purchase of
equipment in March 1994. The loan bore interest at the rate of 8% per
annum. Principal and interest payments of approximately $1,156 per
month commenced in April 1994 and were due to continue for a period of
60 months. The remaining principal balance of $22,605 was repaid in
June 1997. As of December 31, 1997 and 1996, the balance of the loan
was $0, and $28,501, respectively. Until its repayment, the loan was
secured by a certificate of deposit with such bank, which was reflected
as restricted cash in the accompanying balance sheet.
In September 1994, the Company obtained a $1,500,000 secured line of
credit with the Bank of New York. In June 1995, the Company increased
this secured line of credit from $1,500,000 to $2,500,000. In September
1996, the Company repaid the outstanding line of credit balance of
$2,380,000 and canceled the line of credit. Upon repayment and
cancellation of the line of credit, the certificates of deposit which
acted as collateral on the line were no longer considered restricted
cash and instead are classified as cash equivalents on the balance
sheet as of December 31, 1996.
(7) Income Taxes
Deferred tax assets of approximately $7,204,000 and $3,787,000 at
December 31, 1997 and 1996, respectively, relate principally to tax net
operating loss carryforwards of $13,933,000 and $6,576,000 and research
credit carryforwards of $1,212,000 and $571,000 at December 31, 1997
and 1996, respectively. An offsetting valuation allowance has been
established for the full amount of the deferred tax assets to reduce
such assets to zero, as a result of the significant uncertainty
regarding their ultimate realization. The aggregate valuation allowance
increased $3,417,000 and $1,166,000 during the periods ended December
31, 1997 and 1996, respectively.
The Company's net operating loss carryforwards and research and
development tax credit carryforwards noted above expire in various
years from 2008 to 2013. The Company's ability to utilize such net
operating loss and research and development tax credit carryforwards is
subject to certain limitations due to ownership changes, as defined by
rules enacted with the Tax Reform Act of 1986.
The Company is subject to New York State tax on capital.
F-12
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(8) Preferred Stock Purchase and Research Collaboration and License
Agreements
On July 26, 1994, the Company entered into a Preferred Stock Purchase
Agreement with Bristol-Myers Squibb Company ("BMS") and issued
3,571,429 shares of Series B Convertible Preferred Stock ("Series B
Preferred Stock") to BMS at a purchase price of $3.50 per share for
aggregate consideration of $12,500,000, before issuance costs of
approximately $73,000.
In accordance with a related Research Collaboration and License
Agreement, BMS has agreed to provide funding to the Company for the
conduct of research programs in the amount of up to $4,000,000 each
year during the term of the research programs which was due to expire
in July 1997. In January 1997, BMS exercised its option to extend its
collaboration with the Company for an additional two years through July
1999. For the year ended December 31, 1997, the Company received
$3,115,275 in cash and recorded $4,115,275 of revenue. For the year
ended December 31, 1996, the Company received $5,000,000 in cash and
recorded $4,000,000 of revenue and $1,000,000 of deferred revenue
pursuant to this agreement. For the year ended December 31, 1995, the
Company received $3,354,619 in cash and recorded revenue of $4,000,000.
In August and September 1995, the Company issued to BMS an aggregate of
1,250,000 shares of Series B Preferred Stock at $4.00 per share for
$5,000,000 in cash upon the Company's achievement of a research
milestone. In addition, BMS is obligated to make payments to the
Company upon the achievement of certain scientific and commercial
milestones and to pay royalties on sales of products developed under
the agreement.
In July 1996, BMS purchased $2.5 million of the Company's Common Stock
in the Company's initial public offering.
In November 1995, the Company entered into a Preferred Stock Purchase
Agreement with Physica B.V, a subsidiary of Solvay Duphar B.V. ("Solvay
Duphar"), and issued 2,500,000 shares of Series B Preferred Stock at a
purchase price of $4.00 per share for aggregate consideration of
$10,000,000 before issuance costs of approximately $155,000.
In accordance with a related Research Collaboration and License
Agreement, Solvay Duphar will provide funding to the Company for the
conduct of research programs in an amount of up to $2,500,000 each
year, adjusted for inflation, during the term of the research programs.
For the year ended December 31, 1997, the Company received cash and
recorded revenue of $2,587,460. For the years ended December 31, 1996
and 1995, the Company received and recorded revenue of $2,500,000 and
$417,809, respectively. In addition, Solvay Duphar is obligated to make
payments to the Company upon the achievement of certain scientific and
commercial milestones and to pay royalties on sales of products
developed under the agreement. No such payments were received during
1996 or 1995. The Company has reserved the right to use certain hybrid
yeast cells that are part of the research program for its own benefit
in the discovery of drugs relating to cancer, autoimmune, allergic and
inflammatory diseases, with certain specific exclusions. The Company is
required to make payments to Solvay Duphar upon the achievement by the
Company of certain drug development milestones and to pay Solvay Duphar
royalties on the sale of such drugs.
F-13
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
In July 1996, Solvay Duphar purchased $5.0 million of the Company's
Common Stock in the Company's initial public offering.
See note 9 for discussion of the conversion of the Convertible
Preferred Stock to Common Stock.
In February 1997, the Company entered into a drug discovery
collaboration and license agreement with SmithKline Beecham p.l.c.
("SmithKline Beecham"). During the term of the research collaboration,
which expires in February 2002, the Company will seek to identify
ligands and to elucidate the function of orphan G protein-coupled
receptors included within the collaboration and create high-throughput
screens to discover small molecular agonists and antagonists to these
receptors.
During the term of the collaboration, SmithKline Beecham is required to
provide the Company with research funding of $3.0 million each year,
adjusted for inflation and certain other payments, including a $2.0
million payment which was received in February 1998. For the year ended
December 31, 1997, the Company received cash and recognized revenue of
$2,118,056. SmithKline Beecham is also required to make payments to the
Company upon the achievement of certain research milestones and upon
the achievement by SmithKline Beecham of certain drug development
milestones. SmithKline Beecham is also required to pay the Company
royalties on the sale of drugs developed through the use of the
Company's drug discovery technologies. The Company has co-promotion
rights in North America for certain products that may result from the
collaboration and rights to certain potential products that SmithKline
Beecham may choose not to develop.
SmithKline Beecham has the right to extend the term of the
collaboration for between two and five years by notice to the Company
given prior to February 25, 2001. SmithKline Beecham has the right to
terminate the research collaboration after February 25, 1999 (or later
under certain circumstances) ("Evaluation Date") if (i) the Company
fails to meet certain scientific objectives in connection with the
conduct of the research collaboration or (ii) fails to perform its
obligations in the conduct of the research collaboration in any
material respect and does not cure such failure within a period of 60
days after receiving notice thereof. In the event of such termination,
SmithKline Beecham has no further obligation to provide the Company
with funding for the research collaboration.
In February 1997, the Company and SmithKline Beecham Corporation
entered into a stock purchase agreement pursuant to which the Company
has the option to sell to SmithKline Beecham Corporation (i) shares of
the Company's common stock having a then fair market value of $5.0
million during a 90-day period commencing on February 25, 1998 and (ii)
shares of the Company's common stock having a then fair market value of
$5.0 million, during a 90-day period commencing on the date certain
scientific objectives are achieved (subject to the Company achieving
such objectives prior to the Evaluation Date and meeting certain
financial requirements). In addition, SmithKline Beecham Corporation
has the right, at its option, to purchase up to $5.0 million worth of
shares of the Company's common stock at 150% of the then fair market
value in lieu of making certain research milestone payments. The
Company granted SmithKline Beecham Corporation certain
F-14
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
registration rights with respect to shares of the Company's common
stock which SmithKline Beecham Corporation may purchase pursuant to the
stock purchase agreement.
(9) Equity Transactions
In July 1996, the Company effected a one-for-three reverse Common Stock
split and changed the par value of the Common Stock to $.01 from $.001.
All Common Stock data have been restated to give effect to this reverse
stock split and change in par value for all periods presented.
In July 1996, the Company completed an initial public offering of
2,750,000 shares of Common Stock at $7.00 per share. The Company
received proceeds, net of underwriting discounts, commissions and other
initial public offering expenses of $17,176,624. Following the initial
public offering, all outstanding shares of the Series A and Series B
Preferred Stock were converted into an aggregate of 7,551,514 shares of
Common Stock. Upon conversion, the entire class of Convertible
Preferred Stock of the Company was canceled and withdrawn from the
authorized capital stock of the Company. As a result, upon completion
of the offering, the Company's authorized capital consisted of
35,000,000 shares of Common Stock.
In August 1996, the Company sold an additional 412,500 shares of Common
Stock at $7.00 per share pursuant to the exercise by the underwriters
of an over-allotment option granted to them. The Company received
proceeds, net of underwriting discounts and commissions, of $2,685,375.
(10) Stock Options
The 1993 Stock Option Plan ("the 1993 Plan") was adopted in January
1993. The 1993 Plan provides for the grant of options to reward
executives, consultants and employees in order to foster in such
personnel an increased personal interest in the future growth and
prosperity of the Company. The options granted under the 1993 Plan may
be either incentive stock options or nonqualified options. An aggregate
of 666,667 common shares were reserved for issuance under the 1993
Plan.
Options granted under the 1993 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% and
85% of the fair market value on the date of grant as determined by the
Board of Directors for incentive stock options and nonqualified
options, respectively. The options generally become exercisable
according to a schedule of vesting as determined by the Compensation
Committee of the Board of Directors. The schedule prescribes the date
or dates on which the options become exercisable, and may provide that
the option rights accrue or become exercisable in installments over a
period of months or years.
Effective May 10, 1996, the 1993 Plan was replaced by the 1996
Incentive Plan ("the 1996 Plan") with respect to all future awards to
the Company's employees and consultants.
F-15
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
However, awards made under the 1993 Plan will continue to be
administered in accordance with the 1993 Plan.
Activity under the 1993 Plan is as follows:
Options outstanding
-------------------
Number Weighted
of Average
shares Exercise Price
------ --------------
Balance at January 1, 1995 548,501 $1.47
1995 activity:
Granted 124,860 2.49
Exercised (10,000) 1.44
Canceled (11,668) 1.39
--------
Balance at December 31, 1995 651,693 1.67
-------- -----
1996 activity:
Granted -- --
Exercised (23,877) 1.55
Canceled (10,091) 2.91
--------
Balance at December 31, 1996 617,725 1.65
-------- -----
1997 activity:
Granted -- --
Exercised (140,796) 1.65
Canceled (2,569) 2.94
--------
Balance at December 31, 1997 474,360 $1.65
======== =====
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.37 to $3.51
and 6 years, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable
was 422,553, 486,041 and 429,659, respectively and the weighted-average
exercise price of those options was $1.73, $1.54 and $1.66,
respectively.
The Company entered into stock option agreements not pursuant to any
plan with certain directors, employees, founders and consultants. These
options generally become exercisable according to a schedule of vesting
as determined by the Compensation Committee of the Board of Directors.
The options become exercisable in installments over a period of months
or years. As of December 31, 1997, an aggregate of 610,800 common
shares was reserved for issuance pursuant to such stock option
agreements.
F-16
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
In September 1995, the Board of Directors granted to each director then
in office a 30-day option to purchase 8,334 shares of Common Stock at
an exercise price of $2.25 per share. In October 1995, six directors
exercised their options and purchased 8,334 shares each of Common Stock
at $2.25 per share.
In November 1996, the Compensation Committee granted to certain
directors then in office an option to purchase 12,000 shares of Common
Stock at an exercise price of $6.75 per share. Each stock option is
exercisable in four cumulative annual installments of 3,000 shares
commencing in November 1997 and expires in November 2006.
Activity for all of the above grants is as follows:
Options outstanding
-------------------
Number Weighted-
of Average
shares Exercise Price
------ --------------
Balance at January 1, 1995 333,334 $1.50
1995 activity:
Granted 379,639 2.98
Exercised (50,004) 2.25
Canceled (16,668) 2.25
--------
Balance at December 31, 1995 646,301 2.29
-------- -----
1996 activity:
Granted 120,000 6.75
Exercised -- --
Canceled (25,334) 5.09
--------
Balance at December 31, 1996 740,967 2.92
-------- -----
1997 activity:
Granted -- --
Exercised (115,647) 1.96
Canceled (14,520) 6.20
--------
Balance at December 31, 1997 610,800 $3.02
======== =====
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.50 to $6.75
and 7.5 years, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable
was 295,684, 264,499 and 0, respectively and the weighted-average
exercise price of those options was $2.82 and $2.39 at December 31,
1997 and 1996, respectively.
The 1996 Plan was adopted in May 1996. The options granted under the
1996 Plan may be either incentive stock options or nonqualified
options. In December 1996, the maximum number of shares of Common Stock
that may be the subject of awards under
F-17
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
the 1996 Incentive Plan was increased from 333,334 to 833,334 (plus any
shares that are the subject of canceled or forfeited awards) by the
Board of Directors and approved by the stockholders of the Company in
June 1997. In December 1997, the maximum number of shares of Common
Stock that may be the subject of awards under the 1996 Incentive Plan
was increased to 1,833,334 (plus any shares that are the subject of
canceled or forfeited awards) by the Board of Directors subject to
approval by the stockholders of the Company.
Options granted under the 1996 Plan expire no later than ten years from
the date of grant. The option price is required to be at least 100% of
the fair value on the date of grant as determined by the Board of
Directors for incentive stock options. The options generally become
exercisable according to a schedule of vesting as determined by the
Compensation Committee of the Board of Directors. The schedule
prescribes the date or dates on which the options become exercisable,
and may provide that the option rights accrue or become exercisable in
installments over a period of months or years.
Activity under the 1996 Plan is as follows:
Options outstanding
-------------------
Number Weighted-
of Average
shares Exercise Price
------ --------------
Balance at January 1, 1996 -- $ --
1996 activity:
Granted 369,864 6.58
Exercised -- --
Canceled -- --
--------
Balance at December 31, 1996 369,864 6.58
-------- ------
1997 activity:
Granted 671,250 11.28
Exercised (40,813) 6.62
Canceled (344,895) 14.60
--------
Balance at December 31, 1997 655,406 $ 7.17
======== ======
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.75 to $14.00
and 9.5 years, respectively.
At December 31, 1997 and December 31, 1996, the number of options
exercisable was 137,216 and 0, respectively and the weighted average
exercise price of those options was $6.72 at December 31, 1997.
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. If the Company had
elected to recognize compensation cost based on the fair value of the
options granted at the grant date under SFAS No. 123, net income and
earnings
F-18
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
per share would have been reduced to the pro forma amounts indicated in
the table below (in thousands except per share amounts):
1997 1996 1995
---- ---- ----
Net income - as reported $(5,411) $(2,441) $(1,482)
Net income - pro forma $(6,546) $(3,217) $(1,546)
Earnings per share - as reported $(.44) $(.39) $(1.07)
Earnings per share - pro forma $(.54) $(.51) $(1.12)
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
1997 1996 1995
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility .79 to .99 0.90 .0001
Risk-free interest rate 5.65% to 6.36% 6.00% to 6.66% 5.58% to 6.51%
Expected life of options 6 years 6 years 6 years
The weighted average grant date fair value of options granted during
the years ended December 31, 1997, 1996 and 1995 was $8.00 per share,
$5.02 per share and $.80 per share, respectively.
(11) License and Sponsored Research Agreements
The Company has entered into several agreements with third parties as
part of its program to develop novel classes of therapeutics that
target cellular signal transduction pathways. Generally, the agreements
provide that the Company will make research payments and will pay
license fees and/or maintenance payments, in return for the use of
technology and information and the right to manufacture, use and sell
future products. These agreements provide for payments based on the
completion of milestone events, as well as royalty payments based upon
a percentage of product or assay sales. License fees and maintenance
payments for the years ended December 31, 1997, 1996 and 1995, amounted
to approximately $590,000, $355,000 and $250,000, respectively.
F-19
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(12) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the
following:
December 31,
------------
1997 1996
---- ----
Accrued legal costs $170,000 $175,000
Accrued rent 0 65,431
Accrued compensation 254,649 32,500
Other accrued expenses
and other liabilities 179,497 197,729
------- -------
$604,146 $470,660
======== ========
(13) Commitments and Contingencies
Lease Commitments
In October 1994, the Company entered into a sublease agreement with
Union Carbide Corporation to sublease approximately 18,400 rentable
square feet of laboratory/office space in Tarrytown, New York. The term
of this agreement is for a period of approximately three years
commencing on May 15, 1995 and expiring on December 30, 1997. Pursuant
to this agreement, the Company received the first four months rent
free, which was being amortized through December 30, 1997 so as to
produce a level amount of rent expense over the life of the lease. The
unamortized portion was included in accrued expenses and other current
liabilities in the accompanying balance sheet. In addition, the Company
delivered an irrevocable letter of credit to Union Carbide in the
amount of $40,000 as security for the Company's performance of its
obligations under this lease. The letter of credit was secured by a
one-year certificate of deposit, which was reflected as restricted cash
in the accompanying balance sheet until December 31, 1997. In May 1996,
the Company amended its sublease agreement with Union Carbide
Corporation and the landlord to sublease an additional 7,376 square
feet of laboratory/office space in Tarrytown, New York. During 1997,
the Company exercised its option to lease these facilities directly
from the landlord for a five-year period commencing January 1, 1998 and
is currently negotiating with the landlord of the Tarrytown facility to
obtain additional space under the same terms as the existing lease. The
Company also has an option to renew such lease for a five-year period
commencing on January 1, 2003.
In November 1994, the Company entered into an agreement to sublease
2,989 square feet of laboratory/office space, in Lakewood, Colorado,
from Colorado Bio/Medical Venture Center ("CBVC") for a period of 21
months ending on July 9, 1996. In March 1996, the Company extended the
sublease agreement for eight additional months, therefore extending the
lease expiration date to March 9, 1997 at which time the Company became
a month-to-month tenant. In May 1996, the Company subleased an
additional 521 square feet of office space from CBVC. In July 1997, the
Company announced plans to relocate its Lakewood,
F-20
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
Colorado facility to New York (see note 14) and terminated its lease
with CBVC on December 31, 1997.
Future minimum lease payments for each of the five years subsequent to
December 31, 1997 and thereafter (excluding the impact of leasing the
additional space) are $552,940 in 1998 and $529,440 per year from 1999
through the year ended December 31, 2002.
Rent expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $759,800, $620,600 and $434,600,
respectively.
Equipment Lease Line of Credit
In November 1997, the Company signed a $3.0 million lease line of
credit with General Electric Capital Corporation ("GE Capital"). Under
the agreement, the Company purchases equipment and then enters into a
sales-leaseback arrangement with GE Capital whereby the Company sells
the equipment to GE Capital and then leases back the equipment for a
period of 37 months. Any gains recognized on the difference between the
equipment's book value and sale price are booked to deferred revenue
and recognized over the life of the lease.
The Company made two draw downs against the lease line of credit in
November and December 1997 for approximately $601,000 and $219,000,
respectively. Monthly lease payments of $13,650 and $4,926,
respectively are made under the November and December lease agreements.
Gains totaling $97,471 relating to the sale of the equipment to GE
Capital were credited to deferred revenue on the balance sheet. $3,281
was subsequently recognized as gain on sale of equipment on the income
statement.
Employment Agreements
The Company entered into a two-year employment agreement with its Chief
Executive Officer effective as of December 12, 1995. Pursuant to this
agreement, the Chief Executive Officer receives a minimum annual base
salary of $225,000, is guaranteed an annual bonus equal to 20% of his
base salary, and is eligible to receive an additional annual bonus at
the discretion of the Compensation Committee of the Board of Directors.
The Chief Executive Officer and certain other officers are entitled to
termination benefits under certain circumstances.
On December 31, 1997, the CEO announced that he would be leaving the
Company in January 1998. In accordance with his severance agreement,
the Company accrued an expense of approximately $231,000 as of December
31, 1997.
Consulting Agreements
The Company has entered into various consulting agreements, the terms
of which do not exceed four years. These agreements generally require
the Company to pay consulting fees on a quarterly or per diem basis.
These agreements are generally terminable at the Company's or the
consultant's option.
Contingency
In July 1996, SIBIA Neurosciences, Inc. ("SIBIA") commenced a patent
infringement action against the Company alleging infringement by the
Company of a patent relating to an aspect of drug screening techniques
used, seeking injunctive relief and monetary damages. The Company has
filed an Answer and Counterclaim, claiming that the patent is not
infringed and is invalid and unenforceable, seeking a declaratory
judgment of patent invalidity, unenforceability and noninfringement and
claiming intentional and tortious interference by SIBIA with the
Company's initial public offering. The Company believes, based on
advice of counsel, that none of its operations infringes any valid
claim of the patent and intends to virgorously defend the action and
pursue its counterclaims against SIBIA.
F-21
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(14) Relocation of Colorado Operations
On July 14, 1997, The Company announced plans to relocate its Lakewood,
Colorado operations to New York. The Company completed the relocation
by December 31, 1997 at an approximate cost of $349,000.
(15) Supplemental Cash Flow Information
1997 1996 1995
---- ---- ----
Cash payment for :
Interest $7,365 $110,416 $77,866
====== ======== =======
Income taxes $28,541 $ 45,475 $21,694
======= ======== =======
(16) Employee Benefits
The Company has a 401(k) savings plan in which substantially all of its
permanent employees are eligible to participate. Annually, the
Company's Compensation Committee determines the amount the Company will
match of the participants' contributions. In 1997, the Compensation
Committee elected to match 25% of the participant's contribution up to
a maximum of $3,500. In 1996, the Compensation Committee elected to
match 50%, of the participant's contribution up to a maximum of 6% of
the participant's salary. The total Company contribution for the year
ended December 31, 1997 and 1996 was $74,646 and $37,856, respectively.
No matching contributions were made by the Company prior to December
31, 1996.
(17) Subsequent Event
In January 1998, the Company entered into a sponsored research
agreement with Massachusetts Institute of Technology ("M.I.T.")
pursuant to which M.I.T. will use its expertise in micro-robotics to
co-develop the Living Chip(TM), a novel drug discovery screening tool
that would miniaturize and automate the Company's proprietary hybrid
yeast cell technology. If developed, the Living Chip(TM) would
ultimately accommodate at least 100,000 yeast-based drug discovery
assays on a single CD-sized synthetic disc and would permit the testing
of thousands of compounds on multiple assays at the individual
scientist's lab bench. The Company is only obligated to provide M.I.T.
with research funding for 1998 but has the option to extend the
arrangement through 1999. The Company also entered into a license
agreement with M.I.T. pursuant to which the Company obtained exclusive
worldwide rights, for use in pharmaceutical, animal health and
agricultural businesses, to the technology developed under the
sponsored research arrangement. In order to maintain its exclusive
license, the Company must provide M.I.T. with research funding in 1998
and 1999 and make a minimum level of expenditures thereafter to
commercialize the technology until the technology is commercialized.
The Company is required to pay M.I.T. an annual license fee, royalties
on the sale or lease of Living Chip(TM) systems, royalties on the sale
of therapeutics and diagnostics developed
F-22
<PAGE>
CADUS PHARMACEUTICAL CORPORATION
Notes to Financial Statements
December 31, 1997, 1996 and 1995
using the Living Chip(TM), royalties on services rendered based on the
Living Chip(TM), and an annual sublicense fee for each sublicense of
the Living Chip(TM).
F-23
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cadus Pharmaceutical Corporation:
We consent to incorporation by reference in the registration statement (No.
333-21871) on Form S-8 of Cadus Pharmaceutical Corporation of our report dated
February 27, 1998, relating to the balance sheets of Cadus Pharmaceutical
Corporation as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 annual report on Form 10-K of Cadus Pharmaceutical Corporation.
/s/ KPMG Peat Marwick LLP
-------------------------------
KPMG Peat Marwick LLP
Jericho, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet, and Income Statement and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<TOTAL-ASSETS> 42,241,190
<CURRENT-LIABILITIES> 1,740,972
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0
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