<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registration No. 333-4943
LOGO
LA JOLLA PHARMACEUTICAL COMPANY
2,000,000 SHARES
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being issued
and sold by La Jolla Pharmaceutical Company ("LJP" or the "Company"). On July 1,
1996, the last sale price of the Company's Common Stock, as reported on the
Nasdaq National Market, was $5.00 per share. See "Price Range of Common Stock."
The Common Stock of the Company is traded on the Nasdaq National Market under
the symbol "LJPC."
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $5.00 $0.30 $4.70
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Total (2)............................ $10,000,000 $600,000 $9,400,000
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $300,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $11,500,000, $690,000 and $10,810,000,
respectively.
---------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about July 8, 1996.
ROBERTSON, STEPHENS & COMPANY
PACIFIC GROWTH EQUITIES, INC.
VECTOR SECURITIES INTERNATIONAL, INC.
The date of this Prospectus is July 2, 1996
<PAGE> 2
LJP'S TOLERANCE TECHNOLOGY
TARGETED DISEASES:
- LUPUS
- ANTIBODY-MEDIATED
STROKE
- RECURRENT FETAL LOSS
B CELL [PHOTO] - RH HEMOLYTIC DISEASE
- MYASTHENIA GRAVIS
- GRAVES' DISEASE
DISEASE-CAUSING
ANTIBODIES
In antibody-mediated diseases, B cells produce antibodies that
bind to tissue and cause disease
TOLERAGEN
B CELL [PHOTO]
LJP's Toleragens are designed to arrest the production of
disease-causing antibodies
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10b-6a UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Price Range of Common Stock........................................................... 16
Capitalization........................................................................ 17
Dilution.............................................................................. 18
Selected Financial Data............................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 20
Business.............................................................................. 24
Management............................................................................ 35
Principal Stockholders................................................................ 40
Description of Capital Stock.......................................................... 42
Shares Eligible for Future Sale....................................................... 45
Underwriting.......................................................................... 47
Legal Matters......................................................................... 48
Experts............................................................................... 48
Available Information................................................................. 48
Incorporation of Certain Documents by Reference....................................... 49
Index to Financial Statements......................................................... F-1
</TABLE>
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Tolerance Technology(R) is a registered trademark, and Toleragen(TM) and
the LJP(TM) logo are trademarks, of La Jolla Pharmaceutical Company. All other
trademarks and registered trademarks used in this Prospectus are the property of
their respective owners.
3
<PAGE> 4
SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
La Jolla Pharmaceutical Company is a leading biopharmaceutical company
focused on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as systemic lupus erythematosus
("lupus") and antibody-mediated stroke, are caused by abnormal B cell production
of antibodies that attack healthy tissues. Current therapies for these
autoimmune disorders only address symptoms of the disease or nonspecifically
suppress the normal operation of the immune system, which often results in
severe, adverse side effects and hospitalization. The Company believes that its
drug candidates, called Toleragens, will treat the underlying cause of many
antibody-mediated diseases without these severe, adverse side effects. The
Company plans to initiate a Phase IIb clinical trial in the second half of 1996
for its lupus drug candidate, LJP 394.
The Company is utilizing its proprietary Tolerance Technology to design
Toleragens, a novel class of therapeutics that suppress the production of
disease-causing antibodies without affecting the protective functions of the
immune system. Toleragens are designed to bind to targeted B cells in order to
"tolerize" or inhibit them from producing disease-causing antibodies. These
molecules are developed using the Company's proprietary combinatorial epitope
libraries, molecular modeling capabilities, disease-specific screening methods
and chemical optimization expertise. The Company owns five issued patents and
has filed 41 patent applications covering its Tolerance Technology and its lupus
and antibody-mediated stroke drug candidates.
LJP 394 is a Toleragen for the treatment of lupus, a chronic and
potentially fatal autoimmune disease that is believed to affect between 250,000
and 1,000,000 people in the United States. Antibodies to double-stranded DNA
("dsDNA") are widely thought to cause lupus kidney disease, a major cause of
morbidity and mortality in lupus patients. Currently, lupus patients with severe
symptoms are treated with nonspecific and often toxic steroid and anti-cancer
therapies which may leave patients susceptible to serious infections, another
major cause of morbidity and mortality in lupus patients.
The Company recently announced results from a dose-ranging study conducted
as part of its Phase II clinical trials, in which LJP 394 reduced antibodies to
dsDNA when the highest dose levels were administered weekly. The double-blind,
placebo-controlled dose-ranging study was conducted in the United States at
eight clinical centers in 58 patients at three dose levels and three frequencies
of administration. The drug was well tolerated with no clinically significant
dose-related adverse reactions observed.
In addition to lupus and antibody-mediated stroke, the Company is
developing Toleragens for a number of autoimmune and other antibody-mediated
diseases, including deep vein thrombosis, recurrent fetal loss and Rh hemolytic
disease of the newborn, myasthenia gravis and Graves' disease.
The Company's business strategy includes the following key elements:
complete clinical development of LJP 394 to treat lupus; apply Tolerance
Technology to other life-threatening antibody-mediated diseases; form strategic
alliances to develop and commercialize product candidates; exploit proprietary
manufacturing technology; and expand the Company's intellectual property
leadership position.
The Company was incorporated in Delaware in May 1989. Its offices are
located at 6455 Nancy Ridge Drive, San Diego, California 92121, and its
telephone number is (619)452-6600.
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<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company..................... 2,000,000 shares
Common Stock Outstanding After the Offering............. 16,072,732 shares(1)
Use of Proceeds......................................... To fund clinical trials, research
and development and manufacturing
scale-up and for working capital
and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market Symbol........................... LJPC
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ -- $ 3,000 $ -- $ --
Operating expenses:
Research and development..................... 6,737 8,499 9,804 2,105 2,560
General and administrative................... 1,386 2,049 2,390 429 588
-------- -------- -------- ------- -------
Total operating expenses.................. 8,123 10,548 12,194 2,534 3,148
-------- -------- -------- ------- -------
Loss from operations........................... (8,123) (10,548) (9,194) (2,534) (3,148)
Interest income (net).......................... 176 235 640 104 229
-------- -------- -------- ------- -------
Net loss....................................... $(7,947) $(10,313) $ (8,554) $(2,430) $(2,919)
======== ======== ======== ======= =======
Net loss per share (2)......................... $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
======== ======== ======== ======= =======
Number of shares used in computing net loss per
share (2).................................... 5,016 7,137 10,883 8,618 14,060
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
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ACTUAL AS ADJUSTED (3)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................... $20,360 $29,460
Total assets........................................................ 23,082 32,182
Deficit accumulated during the development stage.................... (41,696) (41,696)
Total stockholders' equity.......................................... 20,739 29,839
</TABLE>
- ---------------
(1) Excludes an aggregate of 3,917,646 shares of Common Stock issuable upon
exercise of warrants and stock options outstanding as of March 31, 1996, as
follows: (i) 1,495,000 shares issuable upon exercise of the Company's
publicly traded Redeemable Common Stock Purchase Warrants at an exercise
price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise of
various privately held warrants and options at a weighted average exercise
price of $6.55 per share; and (iii) 1,420,738 shares issuable upon exercise
of stock options outstanding under the Company's various stock option plans
at a weighted average exercise price of $2.55 per share. See "Dilution" and
"Description of Capital Stock."
(2) See Note 1 of Notes to Financial Statements for an explanation of the
computation of per share data.
(3) Adjusted to reflect the sale by the Company of the 2,000,000 shares of
Common Stock offered hereby and the application of the net proceeds
therefrom. See "Use of Proceeds."
Except as otherwise indicated, the information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option.
5
<PAGE> 6
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing shares of the Common Stock offered
hereby.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
The Company must demonstrate through preclinical testing and clinical
trials that LJP 394, the Company's only drug candidate in clinical trials, is
safe and effective for use in each target indication prior to applying for any
regulatory approvals. The results from preclinical testing and clinical trials
of LJP 394 conducted to date may not be indicative of results that may be
obtained in further clinical trials. A number of companies in the
biopharmaceutical industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. The rate of
completion of the Company's clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, a slower timetable as
determined by the Company or a collaborative partner, or any other adverse
event. During the course of clinical trials, patients can die or suffer other
adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested but which can nevertheless affect clinical
trial results. There can be no assurance that the Company will be permitted by
regulatory authorities to undertake additional clinical trials of LJP 394 or to
initiate clinical trials of any other drug candidates, or that any clinical
trials undertaken by the Company will be completed successfully within any
particular time period, if at all. Any delays in, or termination of, the
Company's clinical trial efforts would have a material adverse effect on the
Company's business, financial condition and results of operations. There also
can be no assurance that LJP 394 or any other drug candidate of the Company will
prove to be safe or effective in clinical trials, that LJP 394 or any other drug
candidate of the Company will receive regulatory approval for any indication, or
that any clinical trials undertaken by the Company will result in marketable
products. If LJP 394 is not shown to be safe and effective in clinical trials,
the resulting delays in developing any other drug candidate and conducting
related preclinical testing and clinical trials, as well as the need for
additional financing, would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Products Under Development -- Results of Clinical Trials."
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
All of the Company's product development efforts are based upon unproven
technologies and therapeutic approaches that have not been widely tested or
used. To date, the Company's Tolerance Technology has been used only in the
preclinical tests and clinical trials of LJP 394 conducted by the Company.
Application of Tolerance Technology to antibody-mediated diseases other than
lupus is in earlier discovery or preclinical research stages. LJP 394 and any
other potential drug candidates of the Company will require significant
additional research and development and are subject to significant risks.
Potential products that appear to be promising at early stages of development
may be ineffective or cause harmful side effects during preclinical testing or
clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture, be uneconomical to produce, particularly if high doses are
required, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. There can be no
assurance that the Company's product development efforts with respect to LJP 394
or any other drug candidate will be successfully completed, that required
regulatory approvals will be obtained or that any product, if introduced, will
be successfully marketed or achieve commercial acceptance.
The mechanism of action utilized by LJP 394 is unproven in humans, and to
date, no therapeutic products have been developed that target the activity of
specific B cells. There can be no assurance
6
<PAGE> 7
that LJP 394 will reliably induce or sustain suppression of disease-causing
antibodies, or that LJP 394 will prove to be safe or effective. Furthermore,
clinical trials of LJP 394 may be viewed as a test of the Company's entire
Tolerance Technology approach. If these clinical trials encounter problems or
are otherwise unsuccessful, the applicability of the Company's Tolerance
Technology to other antibody-mediated diseases will be highly uncertain.
Therefore, there is significant risk that the Company's therapeutic approaches
will not prove to be successful, and there can be no assurance that the
Company's drug discovery technologies will result in any commercially successful
products. See "Business -- Products Under Development."
UNCERTAINTY OF COLLABORATIVE ARRANGEMENTS
As part of its business strategy, the Company pursues collaborations with
pharmaceutical companies in an effort to access their research, drug
development, manufacturing, marketing and financial resources. In September
1995, the Company entered into a collaborative agreement with Leo Pharmaceutical
Products, Ltd. of Denmark ("Leo Pharmaceutical"), pursuant to which the Company
granted to Leo Pharmaceutical the exclusive right to distribute LJP 394 in
Europe and the Middle East. In May 1996, the Company terminated the
collaborative agreement because the Company and Leo Pharmaceutical could not
reach agreement regarding the timing and allocation of resources with respect to
further clinical trials of LJP 394. As a result of the termination of the
collaborative relationship with Leo Pharmaceutical, the Company will be required
to fund all development costs of LJP 394. The Company intends to pursue
collaborative arrangements with other pharmaceutical companies to assist in its
research programs and the clinical development and commercialization of LJP 394
and its other drug candidates. There can be no assurance that the Company will
be able to negotiate arrangements with any other collaborative partners on
acceptable terms, if at all, or that any such collaborations will be successful.
Failure to establish or maintain collaborative arrangements will require the
Company to fund all of its research and development activities, resulting in
accelerated depletion of the Company's capital, and will require the Company to
develop its own marketing capabilities for any drug candidate that may receive
regulatory approval. As a result, failure to establish or maintain collaborative
arrangements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Even if the Company is successful in establishing new collaborative
arrangements, there can be no assurance that any future collaborative partner
will continue funding any particular program or will not pursue alternative
technologies or develop alternative drug candidates, either individually or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by the Company. Furthermore,
competing products, either developed by a collaborative partner or to which a
collaborative partner has rights, may result in the withdrawal of support by the
collaborative partner with respect to all or a portion of the Company's
technology. The failure of any collaborative partner to continue funding any
particular program of the Company or to commercialize successfully any product
could delay or halt the development or commercialization of any products
involved in such program, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Collaborative Arrangements."
NEED FOR ADDITIONAL FUNDING; UNCERTAIN ACCESS TO CAPITAL
The Company's operations to date have consumed substantial capital
resources, and LJP will continue to expend substantial and increasing amounts of
capital to support research, product development, preclinical testing and
clinical trials of its drug candidates, to establish commercial-scale
manufacturing capabilities, and to market its potential products. The Company's
future capital requirements will depend on many factors, including continued
scientific progress in its research and development programs, the size and
complexity of these programs, the scope and results of preclinical testing and
clinical trials, the time and costs involved in applying for regulatory
approvals, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims, competing techno-
7
<PAGE> 8
logical and market developments, the ability of the Company to establish and
maintain collaborative research and development arrangements and the cost of
manufacturing scale-up and effective commercialization activities and
arrangements. The Company expects to incur substantial and increasing losses
each year for at least the next several years as its clinical trial, research,
development and manufacturing scale-up activities increase. The Company expects
its existing capital resources, together with the net proceeds of this offering
and interest thereon, to be sufficient to fund the Company's activities, as
currently planned, for at least the next 18 months. However, the amounts
expended by the Company for various purposes may vary significantly, and it is
possible that the Company's cash requirements will exceed current projections
and that the Company will therefore need additional financing sooner than
currently expected. There can be no assurance that the Company will have
adequate resources to support its existing or future business activities.
The Company actively seeks additional funding, including through
collaborative arrangements and public and private financings. The Company's
choice of financing alternatives may vary from time to time depending upon
various factors, including the market price of the Company's securities,
conditions in the financial markets, and the interest of other entities in
strategic transactions with the Company. There can be no assurance that
additional financing will be available on acceptable terms, if at all, whether
through collaborative arrangement, issuance of securities, or otherwise. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its research and development programs or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
potential products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred operating losses each year since its inception in
1989 and had an accumulated deficit of approximately $41.7 million as of March
31, 1996. The continued development of the Company's products will require the
commitment of substantial resources to conduct expanded research and preclinical
and clinical development programs, to enhance manufacturing capabilities, and to
establish additional quality control, regulatory, administrative and marketing
and sales capabilities. The Company expects to incur substantial and increasing
losses each year for at least the next several years as its research,
development, clinical trial and manufacturing scale-up activities increase. To
achieve profitability the Company must, among other things, complete development
of its products, obtain regulatory approvals and establish commercial
manufacturing and marketing capabilities. The amount of net losses and the time
required by the Company to reach sustained profitability are highly uncertain,
and the Company does not expect to generate revenues from the sale of products,
if any, for at least several years. There can be no assurance that the Company
will obtain required regulatory approvals, or successfully develop, manufacture,
commercialize and market products or that the Company will ever achieve product
revenues or profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any potential product developed by the Company must
undergo an extensive regulatory approval process that includes preclinical
testing and clinical trials and may include post-marketing surveillance of each
compound to establish its safety and efficacy. This regulatory process can take
many years and require the expenditure of substantial resources. Data obtained
from the Company's preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejections may be encountered based upon changes in
policies of the United States Food and Drug Administration ("FDA") for drug
approval during the period of product development and FDA regulatory review of
each submitted new drug application ("NDA"). Similar delays may also be
encountered in foreign countries. Regulatory
8
<PAGE> 9
approval may entail limitations on the indicated uses of the drug. In addition,
the Company will be required to obtain separate regulatory approval for each
indicated use of a drug. Even if regulatory approval is obtained, a marketed
drug and its manufacturer are subject to continuing review, and discovery of
previously unknown problems with a product or manufacturer may have adverse
effects on the Company's business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage, including preclinical testing and clinical
trials, the approval process or post-approval surveillance, may result in
various adverse consequences including the FDA's delay in approving or its
refusal to approve a product, withdrawal of an approved product from the market
and the imposition of criminal penalties against the manufacturer and NDA
holder. The Company has not submitted any Investigational New Drug ("IND")
application for any drug candidate other than LJP 394, and none of the Company's
drug candidates has been approved for commercialization in the United States or
elsewhere. There can be no assurance that regulatory approval will be obtained
for any drugs developed by the Company. Failure to obtain requisite government
approvals or approvals of the scope requested would delay or preclude the
Company or any licensees or marketing partners from marketing the Company's
potential products or limit the commercial use of such products and will have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is also subject to numerous and varying
foreign regulatory requirements governing the design and conduct of clinical
trials and marketing approval for pharmaceutical products to be marketed outside
of the United States. The regulatory procedures vary among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval, and if
approval by the FDA were granted, such approval does not ensure approval by the
health authorities of any other country. See "Business -- Government
Regulation."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success will depend heavily upon its ability to obtain patent
protection for its therapeutic approach and for any developed products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. While the Company has received four United States
patents and one Australian patent covering certain aspects of its technology,
there can be no assurance that any additional patents will be issued, or that
the scope of any patent protection will be sufficient, or that any current or
future issued patent will be held valid if subsequently challenged. There is a
substantial backlog of biotechnology patent applications at the United States
Patent and Trademark Office ("USPTO") that may delay the review and issuance of
any patents. The patent position of biotechnology firms generally is highly
uncertain and involves complex legal and factual questions, and no consistent
policy has emerged regarding the breadth of claims covered in biotechnology
patents or protection afforded by such patents. To date, the Company has rights
to certain United States and foreign issued patents and has filed or
participated as a licensee in the filing of a number of patent applications in
the United States relating to the Company's technology, as well as foreign
counterparts of certain of these applications in certain countries. The Company
intends to continue to file applications as appropriate for patents covering
both its products and processes. There can be no assurance that patents will
issue from any of these applications, or that claims allowed under issued
patents will be sufficient to protect the Company's technology. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending applications or
that the Company was the first to invent, or to file patent applications for,
such technology. Competitors may have filed applications for, or may have
received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes that block or compete with those of the
Company.
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A number of pharmaceutical and biotechnology companies and research and
academic institutions have filed or may file patent applications, and have
received or may receive patents, in the fields being pursued by the Company.
Certain 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. In particular, the Company is aware of one currently
pending United States patent application that, if allowed, may contain claims
covering subject matter that may be competitive or conflicting with certain of
the Company's patents and patent applications. Any conflict between the
Company's patents and patent applications, and patents or patent applications of
third parties, could result in a significant reduction of the coverage of the
Company's existing patents or any future patents that may be issued. In
addition, to determine the priority of inventions, the Company may have to
participate in interference proceedings declared by the USPTO or in opposition,
nullity or other proceedings before foreign agencies with respect to any of its
existing patents or patent applications or any future patents or applications,
which could result in substantial cost to the Company. Further, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of goods which would compete unfairly with
products of the Company. If patents containing competitive or conflicting claims
are issued to other parties and such claims are ultimately determined to be
valid, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost, if at all, or be able to develop
or obtain alternative technology.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain consultants. There can be no assurance
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement, or that binding agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. In addition, the Company could incur substantial
costs in defending against suits brought against it by others for infringement
of intellectual property rights or in prosecuting suits which the Company might
bring against other parties to protect its intellectual property rights. See
"Business -- Patents and Proprietary Technologies."
COMPETITION AND TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
expected to increase. A number of companies are pursuing the development of
pharmaceuticals in the Company's targeted areas. These include Genelabs
Technologies, Inc., which has initiated Phase III clinical trials of a hormone
for the treatment of lupus, and other competitors that are working on
third-generation steroids. Many other companies are in earlier stages of
developing other potential therapies for lupus.
In addition, there are many academic institutions, both public and private,
engaged in activities relating to research and development of therapeutics for
autoimmune, inflammatory and other diseases. Most of these companies and
institutions have substantially greater facilities, resources, research and
development capabilities, regulatory compliance expertise, and manufacturing and
marketing capabilities than the Company. In addition, other technologies may in
the future be the basis of competitive products. There can be no assurance that
the Company's competitors will not develop or obtain regulatory approval for
products more rapidly than the Company, or develop and market technologies and
products that are more effective than those being developed by the Company or
that would render the Company's technology and proposed products obsolete or
noncompetitive. See "Business -- Competition."
10
<PAGE> 11
LIMITED MANUFACTURING CAPABILITIES
The manufacture of the Company's potential products for clinical trials and
the manufacture of any approved products for commercial purposes is subject to
current Good Manufacturing Practices ("cGMP") as defined by the FDA. While the
Company is producing limited quantities of LJP 394 for clinical trials, its
current facilities are not adequate for commercial production of its potential
products. The Company will be required to invest substantial amounts of capital
in the expansion and build-out of its facilities to enable manufacture of any
products in commercial quantities. The Company has never operated an
FDA-approved manufacturing facility, and there can be no assurance that it will
obtain necessary approvals. The Company has limited manufacturing experience,
and no assurance can be given that it will be able to make the transition to
commercial production successfully. The Company may enter into arrangements with
contract manufacturing companies to expand its own production capacity in order
to meet requirements for its products, or to attempt to improve manufacturing
efficiency. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products, clinical
trials, market introduction and subsequent sales of such products would be
adversely affected. Moreover, contract manufacturers must operate in compliance
with the FDA's cGMP requirements. The Company's potential dependence upon third
parties for the manufacture of its products may adversely affect the Company's
profit margins and its ability to develop and deliver such products on a timely
and competitive basis. See "Business -- Manufacturing."
LACK OF MARKETING EXPERIENCE
In order to commercialize any drug candidate approved by the FDA, the
Company must either develop a marketing and sales force or enter into marketing
arrangements with third parties. The Company currently has no such third-party
arrangements, and there can be no assurance that the Company will be able to
enter into any marketing agreements on terms favorable to the Company, if at
all, or that any such agreements that the Company may enter into will result in
payments to the Company. To the extent that the Company enters into co-promotion
or other marketing and sales arrangements with other companies, any revenues to
be received by the Company will be dependent on the efforts of others and there
can be no assurance that such efforts will be successful. If the Company chooses
to attempt to develop its own marketing and sales capabilities, it will compete
with other companies that currently have experienced and well-funded marketing
and sales operations. Furthermore, there can be no assurance that the Company
will be able to establish sales and distribution capabilities without undue
delays or expenditures or that it will be successful in gaining market
acceptance for any of its drug candidates. See "Business -- Marketing and
Sales."
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means may have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in certain foreign markets, pricing and/or
profitability of prescription pharmaceuticals are subject to government control.
In the United States, the Company expects that there will continue to be a
number of federal and state proposals to implement similar government control.
In addition, increasing emphasis on managed care in the United States will
continue to put pressure on pharmaceutical pricing. Cost control initiatives
could decrease the price that the Company receives for any products it may
develop and sell in the future and have a material adverse effect on the
Company's business, financial condition and results of operations. Further, to
the extent that cost control initiatives have a material adverse effect on the
Company's commercial partners, the Company's ability to commercialize its
products may be adversely affected.
The Company's ability to commercialize pharmaceutical products may depend
in part on the extent to which reimbursement for the products will be available
from government health administra-
11
<PAGE> 12
tion authorities, private health insurers and other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and third-party payors, including Medicare, are
increasingly challenging the prices charged for medical products and services.
There can be no assurance that any third-party insurance coverage will be
available to patients for any products developed by the Company. Government and
other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products and by refusing in some cases to provide coverage for uses
of approved products for disease indications for which the FDA has not granted
labeling approval. If adequate coverage and reimbursement levels are not
provided by government and other third-party payors for the Company's products,
the market acceptance of these products would be adversely affected.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE
The Company has not received marketing approval from the FDA for any of its
drug candidates and currently uses LJP 394 only in clinical trials. The use of
LJP 394 or any of the Company's other potential products in such clinical trials
and the sale of any approved products may expose the Company to liability claims
resulting from the use of products or product candidates and associated negative
publicity. These claims might be made directly by consumers, pharmaceutical
companies or others. The Company maintains product liability insurance coverage
for claims arising from the use of its products in clinical trials in the amount
of $3.0 million. However, coverage is becoming increasingly expensive, and there
can be no assurance that the Company will be able to maintain insurance or, if
maintained, that insurance can be acquired at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability that could have a
material adverse effect on the Company's business, financial conditions and
results of operations. There can be no assurance that the Company will be able
to obtain product liability insurance on commercially reasonable terms for any
product approved for marketing in the future or that insurance coverage and the
resources of the Company would be sufficient to satisfy any liability resulting
from product liability claims. A successful product liability claim or series of
claims brought against the Company could have a material adverse effect on its
business, financial condition and results of operations.
DEPENDENCE UPON KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent upon the principal members of its
scientific and management staff, the loss of whose services would delay the
achievement of its research and development objectives. The Company's
anticipated growth and expansion into areas and activities requiring additional
expertise, such as clinical trials, government approvals, manufacturing, and
marketing, are expected to place increased demands on the Company's resources
and require the addition of new management personnel as well as the development
of additional expertise by existing management personnel. Retaining the
Company's current key employees and recruiting additional qualified scientific
personnel to perform research and development work in the future will also be
critical to the Company's success. Because competition for experienced
scientists among numerous pharmaceutical and biotechnology companies and
research and academic institutions is intense, there can be no assurance that
the Company will be able to attract and retain such personnel.
In addition, the Company relies upon consultants and advisors to assist the
Company in formulating its research and development, clinical, regulatory and
manufacturing strategies. All of the Company's consultants and advisors are
employed outside the Company and may have commitments or consulting or advisory
contracts with other entities that may affect their ability to contribute to the
Company.
ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. There can be
no assurance that the Company will not be required to incur significant costs to
comply with
12
<PAGE> 13
environmental regulations as manufacturing is increased to commercial volumes,
or that the operations, business or assets of the Company will not be materially
and adversely affected by current or future environmental laws, rules,
regulations and policies or by any releases or discharges of hazardous material.
In its research activities, the Company utilizes radioactive and other
materials that could be hazardous to human health, safety or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. The risk of accidental
injury or contamination from these materials cannot be eliminated. In the event
of such an accident, the Company could be held liable for any resulting damages,
and any such liability could exceed the Company's resources.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and pharmaceutical
companies, including the Company, have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new therapeutic products by the
Company or others, clinical trial results, developments concerning agreements
with collaborators, government regulation, developments in patent or other
proprietary rights, public concern as to the safety of drugs discovered or
developed by the Company or others, future sales of substantial amounts of
Common Stock by existing stockholders, comments by securities analysts and
general market conditions can have an adverse effect on the market price of the
Common Stock. The realization of any of the risks described in these "Risk
Factors" could have an adverse effect on market price of the Company's Common
Stock. See "Price Range of Common Stock."
DILUTION
Purchasers of the Common Stock offered pursuant to this Prospectus will
incur immediate and substantial dilution in net tangible book value per share.
Based on the net tangible book value of the Common Stock at March 31, 1996 and
an offering price of $5.00, dilution in net tangible book value for purchasers
in the offering will be $3.18 per share. See "Dilution."
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market, or the perception
that such sales could occur, could adversely affect the prevailing market price
of the Company's securities and impair the Company's ability to complete equity
financings. In addition to the shares to be sold in this offering, the Company
has outstanding approximately 6,762,000 shares of Common Stock that have been
issued in registered public offerings, pursuant to the Company's Employee Stock
Purchase Plan or upon exercise of stock options and are freely tradable in the
public markets, and approximately 5,310,000 shares of Common Stock currently
eligible for resale in the public market pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). An additional
2,000,000 shares issued to an overseas investor pursuant to Regulation S under
the Securities Act may also be resold. In addition, an aggregate of 3,917,646
shares of Common Stock are issuable upon exercise of warrants and stock options
outstanding as of March 31, 1996, as follows: (i) 1,495,000 shares issuable upon
exercise of the Company's publicly traded Redeemable Common Stock Purchase
Warrants at an exercise price of $6.00 per share; (ii) 1,001,908 shares issuable
upon exercise of various privately held warrants and options at a weighted
average exercise price of $6.55 per share, and (iii) 1,420,738 shares issuable
upon exercise of stock options outstanding under the Company's various stock
option plans at a weighted average exercise price of $2.55 per share. The
Company has in effect or intends to file registration statements under the
Securities Act registering approximately 1,600,000 shares of Common Stock
reserved under its employee stock option and purchase plans, up to 1,495,000
shares of Common Stock reserved for issuance upon exercise of the Company's
publicly traded
13
<PAGE> 14
Redeemable Common Stock Purchase Warrants, and resale of approximately 625,000
shares of Common Stock issuable upon exercise of privately held warrants.
Approximately 806,000 shares of Common Stock issuable upon future exercise of
outstanding stock options will be available for public resale under Rule 144
pursuant to Rule 701 under the Securities Act. The Company is unable to estimate
the number of shares of Common Stock that may actually be resold in the public
market since this will depend upon the market price for the Common Stock, the
individual circumstances of the sellers and other factors. The Company has a
number of institutional stockholders that own significant blocks of the
Company's Common Stock. If such stockholders sell large portions of their
holdings in a relatively short time, for liquidity or other reasons, the
prevailing market price of the Company's Common Stock could be negatively
affected. See "Principal Stockholders" and "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in the
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over
then-current market prices. The Company may also issue shares of Preferred Stock
without stockholder approval and upon such terms as the Company's Board of
Directors may determine. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire a majority of the
Company's outstanding stock, and the holders of such Preferred Stock could have
voting, dividend, liquidation and other rights superior to those of holders of
the Common Stock. See "Description of Capital Stock -- Preferred Stock" and
"-- Delaware Anti-Takeover Law."
ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends since its inception and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, at a public offering price of $5.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses, are estimated to be $9.1 million ($10.5 million if the Underwriters'
over-allotment option is exercised in full).
The Company estimates that more than 80% of the net proceeds from the
offering will be used to fund clinical trials, research and development
activities and manufacturing scale-up, and the balance will be used for working
capital and general corporate purposes. The amounts actually expended for each
purpose may vary significantly and are subject to change at the Company's
discretion depending upon numerous factors, including the progress of the
Company's research, drug discovery and development programs, the results of
preclinical studies and clinical trials, the timing of regulatory approvals,
technological advances, determinations as to commercial potential of the
Company's drug candidates and the status of competitive products. In addition,
expenditures will also depend upon other factors including the establishment of,
and compliance with, collaborative arrangements, the development of
manufacturing and marketing capabilities, the availability of other financing
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company believes that its available cash, cash equivalents and
short-term investments, together with the net proceeds of this offering and
interest earned thereon, will be sufficient to satisfy its current and projected
capital needs for at least the next 18 months. Pending application of the
proceeds as described above, the Company intends to invest the net proceeds of
this offering in investment-grade, interest-bearing instruments.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain its earnings for future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future. Future cash dividends, if any, will be determined by the
Company's Board of Directors.
15
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "LJPC." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Common Stock of the
Company on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
Second Quarter (from June 3, 1994)................................ $53/4 $5
Third Quarter..................................................... 53/8 2
Fourth Quarter.................................................... 23/4 1 1/2
1995
First Quarter..................................................... 37/8 1 3/4
Second Quarter.................................................... 41/4 2 3/4
Third Quarter..................................................... 57/8 3 1/2
Fourth Quarter.................................................... 53/16 3 5/8
1996
First Quarter..................................................... 93/8 4 7/8
Second Quarter.................................................... 87/8 5 1/8
</TABLE>
On July 1, 1996, the last price reported on the Nasdaq National Market for
the Company's Common Stock was $5.00 per share. As of such date, there were
approximately 246 holders of record of the Common Stock.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996, and as adjusted to reflect the sale of 2,000,000 shares of
Common Stock offered hereby at the public offering price of $5.00 per share and
the application of the net proceeds therefrom:
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Long-term obligations under capital leases............................. $ 641 $ 641
-------- --------
Stockholders' equity:
Preferred Stock $0.01 par value, 8,000,000 authorized; none issued... -- --
Common Stock $0.01 par value, 32,000,000 shares authorized;
14,072,732 shares issued and outstanding; 16,072,732 shares issued
and outstanding, as adjusted(1)................................... 141 161
Additional paid-in capital........................................... 62,626 71,706
Note receivable from stockholder..................................... (14) (14)
Deferred compensation................................................ (318) (318)
Deficit accumulated during the development stage..................... (41,696) (41,696)
-------- --------
Total stockholders' equity........................................ 20,739 29,839
-------- --------
Total capitalization......................................... $ 21,380 $ 30,480
======== ========
</TABLE>
- ---------------
(1) Excludes an aggregate of 3,917,646 shares of Common Stock issuable upon
exercise of warrants and stock options outstanding as of March 31, 1996, as
follows: (i) 1,495,000 shares issuable upon exercise of the Company's
publicly traded Redeemable Common Stock Purchase Warrants at an exercise
price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise of
various privately held warrants and options at a weighted average exercise
price of $6.55 per share; and (iii) 1,420,738 shares issuable upon exercise
of stock options outstanding under the Company's various stock option plans
at a weighted average exercise price of $2.55 per share. See "Dilution" and
"Description of Capital Stock."
17
<PAGE> 18
DILUTION
The net tangible book value of the Company as of March 31, 1996 was
approximately $20.2 million, or $1.43 per share of Common Stock, based upon
14,072,732 shares outstanding. After giving effect to the sale by the Company of
the 2,000,000 shares of Common Stock offered hereby at a public offering price
of $5.00 per share and the receipt of the net proceeds therefrom, the pro forma
net tangible book value of the Company as of March 31, 1996 would have been
approximately $29.3 million, or $1.82 per share of Common Stock, based upon
16,072,732 shares outstanding. This represents an immediate increase in net
tangible book value of approximately $0.39 per share to existing stockholders
and an immediate dilution in net tangible book value of $3.18 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price(1)............................................. $5.00
Net tangible book value before offering(2)......................... $1.43
Increase attributable to new investors............................. 0.39
-----
Pro forma net tangible book value after offering..................... 1.82
-----
Dilution to new investors............................................ $3.18
=====
</TABLE>
The foregoing computations exclude an aggregate of 3,917,646 shares of
Common Stock issuable upon exercise of warrants and stock options outstanding as
of March 31, 1996, as follows: (i) 1,495,000 shares issuable upon exercise of
the Company's publicly traded Redeemable Common Stock Purchase Warrants at an
exercise price of $6.00 per share; (ii) 1,001,908 shares issuable upon exercise
of various privately held warrants and options at a weighted average exercise
price of $6.55 per share, and (iii) 1,420,738 shares issuable upon exercise of
stock options outstanding under the Company's various stock option plans at a
weighted average exercise price of $2.55 per share. See "Description of Capital
Stock."
- ---------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Net tangible book value per share is equal to total tangible assets of the
Company less total liabilities divided by the number of shares of Common
Stock outstanding.
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<PAGE> 19
SELECTED FINANCIAL DATA
The following table presents selected financial data for the Company. The
selected financial data as of December 31, 1994 and 1995, and for each of the
three years in the period ended December 31, 1995, are derived from the
Company's financial statements which have been audited by Ernst & Young LLP,
independent auditors, which financial statements are included elsewhere in this
Prospectus. The selected financial data set forth below as of December 31, 1991,
1992 and 1993, and for each of the two years in the period ended December 31,
1992, are derived from audited financial statements, which financial statements
are not included or incorporated by reference in this Prospectus. The statement
of operations data for the three months ended March 31, 1995 and 1996 and the
balance sheet data at March 31, 1996 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial data
have been prepared on a basis consistent with the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
condition and results of operations for the periods presented. The results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. This
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ -- $ -- $ -- $ -- $ 3,000 $ -- $ --
Operating expenses:
Research and development................... 2,712 4,425 6,737 8,499 9,804 2,105 2,560
General and administrative................. 1,089 1,052 1,386 2,049 2,390 429 588
------- ------- ------- -------- ------- ------ ------
Total operating expenses............ 3,801 5,477 8,123 10,548 12,194 2,534 3,148
------- ------- ------- -------- ------- ------ ------
Loss from operations......................... (3,801) (5,477) (8,123) (10,548) (9,194) (2,534) (3,148)
Interest income (net)........................ 475 705 176 235 640 104 229
------- ------- ------- -------- ------- ------ ------
Net loss..................................... $(3,326) $(4,772) $(7,947) $(10,313) $(8,554) $(2,430) $(2,919)
======= ======= ======= ======== ======= ====== ======
Net loss per share........................... -- $ (0.96) $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
======= ======= ======== ======= ====== ======
Number of shares used in computing net loss
per share(1)............................... -- 4,949 5,016 7,137 10,883 8,618 14,060
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------ MARCH 31,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $ 16,974 $ 13,449 $ 7,699 $ 13,960 $ 23,651 $ 20,360
Total assets................................ 18,008 15,269 10,102 17,094 26,375 23,082
Obligations under capital leases............ -- -- 1,595 1,628 892 641
Deficit accumulated during the development
stage..................................... (7,191) (11,963) (19,910) (30,223) (38,777) (41,696 )
Total stockholders' equity.................. 17,638 14,855 6,938 13,810 23,568 20,739
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
computation of per share data.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from the those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Since its inception in May 1989, the Company has devoted substantially all
of its resources to the research and development of technology and potential
drugs to treat antibody-mediated diseases. The Company has never generated any
revenue from product sales and has relied upon private and public investors,
equipment lease financings, a payment from its former collaborative partner, and
interest income on invested cash balances for its working capital. The Company
has been unprofitable since inception and expects to incur substantial and
increasing operating losses for at least the next several years as it increases
expenditures on research and development and allocates significant and
increasing resources to its clinical trials, manufacturing and marketing
activities. The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future, and the Company's historical
operations and the financial information included in this Prospectus are not
indicative of its future operating results or financial condition.
In September 1995, the Company entered into a collaborative agreement with
Leo Pharmaceutical, pursuant to which the Company granted to Leo Pharmaceutical
the exclusive right to distribute LJP 394 in Europe and the Middle East. In May
1996, the Company terminated the collaborative agreement because the Company and
Leo Pharmaceutical could not reach agreement regarding the timing and allocation
of resources with respect to further clinical trials of LJP 394. Under the
termination provisions of the agreement, the Company retained a $3.0 million
payment previously received from Leo Pharmaceutical, and neither the Company nor
Leo Pharmaceutical has any further obligations. As a result of the termination
of the collaborative agreement with Leo Pharmaceutical, the Company will be
required to fund all development costs of LJP 394. The Company intends to pursue
collaborative arrangements with other pharmaceutical companies to assist in its
research programs and the clinical development and commercialization of LJP 394
and its other drug candidates. There can be no assurance that the Company will
be able to negotiate arrangements with any other collaborative partners on
acceptable terms, if at all, or that any such collaborations will be successful.
Failure to establish or maintain collaborative arrangements will require the
Company to fund all of its research and development activities, resulting in
accelerated depletion of the Company's capital, and will require the Company to
develop its own marketing capabilities for any drug candidate that may receive
regulatory approval. As a result, failure to establish or maintain collaborative
arrangements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Collaborative
Arrangements."
The Company expects that losses will fluctuate from quarter to quarter as a
result of differences in the timing of expenses incurred and potential revenues
from collaborative arrangements, if any, and such fluctuations may be
significant. The Company's research and development expenses are expected to
increase significantly in the future as the Company increases its development
efforts. As of March 31, 1996, the Company's accumulated deficit was
approximately $41.7 million.
The Company's business is subject to significant risks, including but not
limited to the risks inherent in its research and development efforts, including
clinical trials, uncertainties associated both with obtaining and enforcing its
patents and with the patent rights of others, the lengthy, expensive and
uncertain process of seeking regulatory approvals, uncertainties regarding
government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties and dependence
on any collaborative partners and other third parties. Even if the
20
<PAGE> 21
Company's product candidates appear promising at an early stage of development,
they may not reach the market for numerous reasons. Such reasons include the
possibilities that the products will be ineffective or unsafe during clinical
trials, will fail to receive necessary regulatory approvals, will be difficult
to manufacture on a large scale, will be uneconomical to market or will be
precluded from commercialization by proprietary rights of third parties.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Revenue
The Company had no revenue in the first quarter of 1996 or 1995.
Research and Development Expenses
Research and development expenses increased to $2.6 million for the three
months ended March 31, 1996 from $2.1 million for the same period in 1995. The
increase was due primarily to manufacturing scale-up activities for the
Company's clinical trials of LJP 394, additions to research and development
personnel, expansion of the Company's research and development programs, and
increased facilities expenditures.
General and Administrative Expenses
General and administrative expenses increased to $588,000 for the three
months ended March 31, 1996 from $429,000 for the same period in 1995. The
increase was primarily attributable to increased personnel to support increased
research and development and clinical activities, and increased facilities
expenditures.
Interest Income and Expense
Interest income increased to $286,000 for the three months ended March 31,
1996 from $190,000 for the same period in 1995. The increase was due to higher
investment balances following receipt of the net proceeds of the Company's
public offering in June 1995, its sale of stock to a private investor in October
1995, and the payment from Leo Pharmaceutical in September 1995. Interest
expense decreased to $57,000 for the three months ended March 31, 1996 from
$86,000 for the same period in 1995. The decrease was the result of decreases in
the Company's capital lease obligations as compared to the same period in 1995.
Years Ended December 31, 1995, 1994 and 1993
Revenue
The Company had revenue of $3.0 million in the year ended December 31, 1995
and no revenue in the years ended December 31, 1994 and 1993 (or at any other
time since inception). Revenue in 1995 was attributable solely to the payment
received upon the execution of the agreement with Leo Pharmaceutical.
Research and Development Expenses
Research and development expenses increased to $9.8 million for the year
ended December 31, 1995 from $8.5 million in 1994 and $6.7 million in 1993.
Several factors contributed to this increase, including additions to research
and development personnel, expansion of the Company's research and development
programs, manufacturing scale-up activities, conduct of the Company's toxicology
and clinical programs, including Phase II clinical trials of LJP 394, and
increased facilities expenditures.
General and Administrative Expenses
General and administrative expenses increased to $2.4 million for the year
ended December 31, 1995 from $2.0 million in 1994 and $1.4 million in 1993.
Several factors contributed to this increase,
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including increased personnel to support increased research and development and
clinical activities, increased facilities expenditures, and expanded business
development activities.
Interest Income and Expense
Interest income increased to $941,000 for the year ended December 31, 1995
from $599,000 in 1994 and $321,000 in 1993. The increase in interest income in
1995 as compared to 1994 was due to higher investment balances following receipt
of the net proceeds from the Company's public offering in June 1995, its sale of
stock to a private investor in October 1995, and the payment from Leo
Pharmaceutical in September 1995. The increase in interest income in 1994 as
compared to 1993 was due to interest income from the investment of the proceeds
from the Company's bridge financing and initial public offering completed in
June 1994. Interest expense decreased to $301,000 in 1995 from $364,000 in 1994.
Interest expense was $145,000 in 1993. The decrease in interest expense from
1994 to 1995 resulted from decreases in the Company's capital lease line. The
increase in interest expense from 1993 to 1994 was the result of additions to
the Company's capital lease line.
Net Operating Loss Carryforwards
At December 31, 1995, the Company had available net operating loss
carryforwards and research credit carryforwards of approximately $36.3 million
and $2.0 million, respectively, for federal income tax purposes. Because of
"change of ownership" provisions of the Tax Reform Act of 1986, the Company's
net operating loss and tax credit carryforwards will be subject to an annual
limitation regarding utilization against taxable income in future periods. The
Company believes that such limitation will not have a material adverse impact on
the benefits that may arise out of its net operating loss and tax credit
carryforwards, but there can be no assurance that additional limitations arising
from any future changes in ownership will not have a material adverse impact on
the Company.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, the Company had incurred a
cumulative net loss of approximately $41.7 million and financed its operations
through private and public offerings of its securities, capital and operating
lease transactions, the payment from Leo Pharmaceutical, and interest income on
its invested cash balances. As of March 31, 1996, the Company had raised $61.8
million in net proceeds since inception from sales of equity securities.
At March 31, 1996, the Company had $20.4 million in cash, cash equivalents
and short-term investments, as compared to $23.7 million at December 31, 1995.
The Company's working capital at March 31, 1996 was $19.0 million, as compared
to $21.9 million at December 31, 1995. The decreases in cash, cash equivalents
and short-term investments and in working capital resulted from the continued
use of the Company's cash toward expenses of ongoing research and development
and clinical programs and related general and administrative expenses. The
Company invests its cash in investment-grade, interest-bearing instruments.
As of March 31, 1996, the Company had acquired an aggregate of $4.4 million
in equipment, furniture and fixtures, of which approximately $3.2 million had
been acquired through capital lease obligations. In addition, the Company leases
its office and laboratory facilities under operating leases. The Company has no
material commitments for the acquisition of property and equipment.
The Company intends to use its financial resources to fund clinical trials,
research and development, manufacturing scale-up, and for working capital and
other general corporate purposes. Anticipated near-term expenses include costs
of additional clinical trials for LJP 394, the production of LJP 394 for
toxicology studies and clinical trials, and the expansion of research
activities. The Company anticipates that its existing capital and the net
proceeds of this offering and interest earned thereon will be sufficient to fund
the Company's operations as currently planned for at least the next 18 months.
However, the amounts expended by the Company for various purposes may vary
significantly, and it is possible that the Company's cash requirements will
exceed current projections
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and that the Company will therefore need additional financing sooner than
currently expected. The Company's future capital requirements will depend on
many factors, including continued scientific progress in its research and
development programs, the size and complexity of these programs, the scope and
results of preclinical testing and clinical trials, the time and costs involved
in applying for regulatory approvals, the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, competing technological
and market developments, the ability of the Company to establish and maintain
collaborative arrangements and the cost of manufacturing scale-up and effective
commercialization activities and arrangements. The Company expects to incur
substantial and increasing losses each year for at least the next several years
as it expands its current research and development programs and invests
increasing amounts of capital in clinical trials, manufacturing scale-up,
establishment of marketing and sales capabilities, and administration of a more
complex organization.
The Company has no current means of generating cash flow from operations,
and LJP 394 will not generate revenues, if at all, until it has been proven safe
and effective, has received regulatory approval, and has been successfully
commercialized, a process that is expected to take at least the next several
years. The Company's other drug candidates are much less developed than LJP 394.
There can be no assurance that the Company's product development efforts with
respect to LJP 394 or any other drug candidate will be successfully completed,
that required regulatory approvals will be obtained, or that any product, if
introduced, will be successfully marketed or achieve commercial acceptance.
Accordingly, the Company must continue to rely upon outside sources of financing
to meet its capital needs for the foreseeable future.
The Company will continue to seek capital through any appropriate means,
including the issuance of its securities and establishment of collaborative
arrangements. However, there can be no assurance that additional financing will
be available on acceptable terms, and the Company's negotiating position in its
capital-raising efforts may worsen as it continues to use its existing
resources. There also can be no assurance that the Company will be able to
negotiate arrangements with any collaborative partners on acceptable terms, if
at all, or that any such collaborations will be successful.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
La Jolla Pharmaceutical Company is a leading biopharmaceutical company
focused on the research and development of highly specific therapeutics for the
treatment of certain life-threatening antibody-mediated diseases. These
diseases, including autoimmune conditions such as lupus and antibody-mediated
stroke, are caused by abnormal B cell production of antibodies that attack
healthy tissues. Current therapies for these autoimmune disorders only address
symptoms of the disease or nonspecifically suppress the normal operation of the
immune system, which often results in severe, adverse side effects and
hospitalization. The Company believes that its drug candidates, called
Toleragens, will treat the underlying cause of many antibody-mediated diseases
without these severe, adverse side effects. The Company plans to initiate a
Phase IIb clinical trial in the second half of 1996 for its lupus drug
candidate, LJP 394.
ANTIBODY-MEDIATED DISEASES
The immune system is the major biological defense mechanism responsible for
recognizing and fighting disease. The immune system identifies antigens, such as
bacteria, viruses and other disease-causing substances, and seeks to rid the
body of these antigens. There are two fundamental types of immune responses:
cell-mediated and antibody-mediated. Cell-mediated immunity is primarily
responsible for ridding the body of cells that have become infected.
Antibody-mediated immunity is primarily responsible for eliminating circulating
antigens. These immune responses are controlled by the activities of white blood
cells called T cells and B cells. T cells provide cell-mediated immunity and
regulate B cells. B cells produce antibodies that recognize and help to
eliminate antigens.
Each B cell produces antibodies against a specific structure on the
antigen's surface called an epitope. The B cell is triggered to produce
antibodies when the specific epitope is recognized by and binds to the antibody
receptors on the surface of the B cell and only when the B cell receives an
appropriate signal from a T cell. When an epitope binds to the B cell with no
corresponding T cell signal, the B cell may become "tolerized" and cease to
produce antibodies.
A properly functioning immune system distinguishes between antigens and the
body's healthy tissues. In a malfunctioning immune system, healthy tissue may
trigger an immune response that causes B cells to produce disease-causing
antibodies, resulting in anti-body-mediated autoimmune disease. For example, B
cells can produce disease-causing antibodies that are associated with the
destruction of the kidneys in lupus and the wasting of muscles in myasthenia
gravis. Other antibody-mediated disorders include antibody-mediated stroke,
recurrent fetal loss, Rh hemolytic disease of the newborn and Graves' disease.
Current therapies for antibody-mediated diseases have significant
shortcomings, including severe side effects and a lack of specificity. Mild
forms of antibody-mediated diseases are generally treated with drugs that
address only the disease symptoms and fail to suppress disease progression
because they do not control the production of disease-causing antibodies. Severe
antibody-mediated diseases are generally treated with high levels of steroids
and immunosuppressive therapy (primarily anti-cancer drugs) which broadly
suppress the normal function of the entire immune system. These therapies can
leave patients susceptible to potentially life-threatening infections that may
require hospitalization. Repeated dosing with steroids may cause other serious
conditions, including diabetes, hypertension, cataracts, osteoporosis and
psychosis, that may limit the use of this therapy. The use of chemotherapy may
lead to acute problems, including weight loss and nausea, and long-term adverse
effects, including sterility and an increased risk of malignancies.
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LJP'S TOLERANCE TECHNOLOGY PROGRAM
The Company's Tolerance Technology program focuses on the discovery and
development of proprietary therapeutics, called Toleragens, which target and
suppress the production of specific disease-causing antibodies without affecting
the protective functions of the immune system. The Company believes that its
Toleragens will treat the underlying causes of antibody-mediated diseases, and
that its Tolerance Technology can be applied broadly wherever antibodies are
involved in the disease process.
Toleragens are composed of disease-specific epitopes and a carrier
platform, which are proprietary chemical structures developed and synthesized by
the Company. To mimic the unique epitopes on an antigen's surface, LJP
identifies and synthesizes epitopes specific to particular antibody-mediated
diseases and attaches or conjugates these epitopes to the carrier platform,
which serves as a vehicle for presenting the epitopes to the antibody receptors
on the targeted B cell. When the epitope binds to the antibody receptors on the
B cell in the absence of a T cell signal, the B cell may become tolerized and
cease to produce disease-causing antibodies. The Company believes that the
Toleragen carrier platform, or a modification thereof, can be used with epitopes
specific to other diseases to create additional therapeutics targeted at
different antibody-mediated diseases.
The Company designs its Toleragens to bind selectively to disease-causing B
cells without affecting the function of disease-fighting B cells. This process
involves: (i) collecting and purifying the disease-causing antibodies from
patients with the targeted disease; (ii) generating and selecting an epitope
that strongly binds to the purified antibodies; (iii) modifying the epitope's
structure to maximize its binding properties (optimization) and (iv) linking the
optimized epitope to the carrier platform. The Company believes this process
enables the Company to create Toleragens that will preferentially tolerize and
shut down B cells that generate antibodies with the highest binding affinity,
which are believed to be the most harmful. To achieve this process, the Company
utilizes advanced technologies in order to identify suitable epitopes that will
bind to targeted disease-causing B cells. These technologies include:
Combinatorial Epitope Libraries. Since 1991, the Company has been
developing epitope libraries to provide a large and diverse pool of epitope
candidates for screening. Each library is a collection of billions of different
epitopes that are created by introducing random sequences of DNA into bacterial
viruses. These DNA sequences direct the viruses to express a wide variety of
epitopes on their surfaces. LJP has used these libraries in the development of
drug candidates for lupus, antibody-mediated stroke, recurrent fetal loss, Rh
hemolytic disease and myasthenia gravis.
Molecular Modeling Capabilities. The Company uses nuclear magnetic
resonance spectroscopy (NMR) and molecular modeling software to determine and
analyze important three-dimensional structural features of epitopes and the
related disease-causing antibodies. These capabilities permit further
optimization of epitopes to increase their binding to targeted B cells.
Disease-Specific Screening Methods and Assays. The Company clones and
expresses receptors that are associated with the targeted disease to screen the
disease-causing antibodies from patient blood. After screening, these antibodies
are presented to the epitope libraries through a series of assays in order to
identify suitable epitope candidates. Using these methods, the Company rapidly
and efficiently selects lead epitope candidates with the highest antibody
binding affinity.
Chemical Optimization Expertise. The Company optimizes each lead epitope
candidate by changing its chemical structure. These changes to the molecule
increase its binding affinity and stability. The Company then attaches multiple
copies of the lead epitope to the carrier platform to create a Toleragen. The
Company's carrier platform technology provides a stable presentation of multiple
copies of the epitope in an optimal configuration that increases binding
affinity and thus tolerization of B cells.
BUSINESS STRATEGY
The Company's objective is to become the leading developer of highly
specific therapeutics for the treatment of life-threatening antibody-mediated
disorders such as lupus, antibody-mediated stroke,
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recurrent fetal loss, deep vein thrombosis, Rh hemolytic disease of the newborn,
myasthenia gravis and Graves' disease. The Company's strategy includes the
following key elements:
Complete Clinical Development of LJP 394. The Company's primary near-term
goal is to complete development of LJP 394 to treat lupus. The Company plans to
initiate Phase IIb clinical trials in the second half of 1996 to explore
preliminary indications of its efficacy in a larger population of patients.
Apply Tolerance Technology to Life-threatening Antibody-mediated
Diseases. The Company is focusing on chronic, life-threatening
antibody-mediated diseases, such as lupus, for which there are no existing
treatments or for which current therapeutics have significant limitations. The
Company intends to use its Tolerance Technology to design therapeutics that
specifically address other targeted antibody-mediated diseases without adversely
affecting normal immune system function.
Form Strategic Alliances to Develop and Commercialize Product
Candidates. The Company intends to establish collaborations with pharmaceutical
companies to provide support for its research programs and the clinical
development and commercialization of its drug candidates.
Exploit Proprietary Manufacturing Technology. Through the production of
LJP 394 for clinical trials, the Company has developed proprietary synthesis and
conjugation technologies that are being used in the development of its other
Toleragen candidates. The Company intends to further develop these technologies
in order to increase manufacturing efficiencies and to apply its know-how to the
development and manufacture of other potential products.
Expand Intellectual Property Leadership Position. The Company owns five
issued patents and has filed 41 patent applications covering the Company's
Tolerance Technology and its lupus and antibody-mediated stroke drug candidates.
The Company plans to broaden this position with further discoveries and patent
filings.
PRODUCTS UNDER DEVELOPMENT
The Lupus Program
Lupus is a life-threatening antibody-mediated disease in which
disease-causing antibodies damage various tissues. According to recent
information compiled by the Lupus Foundation of America and other sources and
epidemiological studies conducted in the 1970s, the number of lupus patients in
the United States is between 250,000 and 1,000,000, with 16,000 new cases
diagnosed each year. Approximately nine out of 10 lupus patients are women, who
usually develop the disease during their childbearing years. Lupus is
characterized by a number of symptoms, including chronic kidney inflamation,
which can lead to kidney failure, and serious episodes of cardiac and central
nervous system inflammation, as well as arthritis and rashes. Approximately 80%
of patients will progress to more serious disease symptoms, and approximately
50% of lupus patients have renal involvement.
Antibodies to double-stranded DNA ("dsDNA") can be detected in
approximately 90% of untreated lupus patients, and are widely believed to cause
kidney disease (nephritis), often resulting in morbidity and mortality in lupus
patients. These antibodies are also associated with episodes of potentially
life-threatening inflammation called flares, which may occur more than once per
year and usually require intensive care hospitalization. Significant kidney
destruction occurs during flares. Lupus nephritis can lead to deterioration of
kidney function and end-stage kidney disease, requiring long-term renal dialysis
or kidney transplantation.
Current treatments for lupus patients with kidney disease and other serious
symptoms usually include repeated administration of steroids, often at high
levels that can have toxic effects when used as a chronic treatment regimen.
Many patients with advanced disease are also treated with immunosuppressive
therapy, including anti-cancer drugs, that have a general suppressive effect on
the immune system and may be carcinogenic. This immunosuppressive treatment
leaves the patient vulnerable to serious infection and is a significant cause of
morbidity and mortality.
The Company has designed LJP 394 to suppress the production of antibodies
to dsDNA in lupus patients without suppressing the normal function of the immune
system. The design of LJP 394 is based upon scientific evidence of the role of
antibodies to dsDNA in lupus. A recent study indicated that a rise in the level
of antibodies to dsDNA may be predictive of flares in lupus patients with renal
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involvement, and that suppressing antibodies to dsDNA by treating these patients
with steroids that non-specifically lower antibody levels prevents relapses in a
majority of patients. In a mouse model of lupus nephritis that generates
elevated levels of antibodies to dsDNA, administration of LJP 394 reduced the
production of antibodies to dsDNA, reduced the number of antibody forming cells,
and reduced kidney disease while extending the life of the animals. The Company
believes that its own and other studies provide evidence that inhibiting
antibodies to dsDNA may provide an effective therapy for lupus nephritis.
Certain studies of lupus patients indicate that antibodies to dsDNA with
the highest binding affinity are associated with the most damage to the kidneys.
The Company believes that its Tolerance Technology process preferentially
targets these antibodies.
Results of Clinical Trials
Based on its preclinical findings, the Company filed an IND application for
LJP 394 with the FDA in August 1994. In a double-blind, placebo-controlled Phase
I clinical trial in December 1994, healthy volunteers received LJP 394 and
displayed no significant drug-related adverse effects and no immune reaction to
the drug.
To date, the Company's Phase II clinical trials have included a single-dose
trial, a repeat escalating-dose trial, and a dose-ranging trial.
The single-dose clinical trial evaluated the safety of a single, 100 mg
intravenous dose of LJP 394 in four female lupus patients by monitoring antibody
levels, blood chemistry, vital signs and complement (inflammation-promoting
proteins) levels for 28 days after dosing. LJP 394 was well tolerated by all
four patients, with no drug-related adverse clinical symptoms and no clinically
significant complement level changes. In addition, no clinically significant
immune complex formation (inflammation-promoting accumulation of antibodies and
antigens) was observed, indicating the absence of an adverse immune response to
LJP 394. A transient reduction in dsDNA antibody levels was also observed. These
results were presented at the American College of Rheumatology Conference in
October 1995.
The repeat escalating-dose clinical trial involved two female patients,
each receiving doses of 10, 10, 50, 50, 100 and 100 mg of LJP 394 at two-week
intervals. After the 10-week dosing regimen, patients were followed for six
weeks. LJP 394 was well tolerated with no drug-related adverse clinical
symptoms, no clinically significant complement changes, and no significant
immune complex formation. Six weeks after the last dose, the antibody levels in
both patients remained suppressed below baseline levels.
The Company recently announced results from the Phase II dose-ranging
trial, in which LJP 394 reduced antibodies to dsDNA when the highest dose levels
were administered weekly. This trial evaluated 58 patients with mild lupus
symptoms (53 females and five males). All patients were clinically stable and
had dsDNA antibody levels exceeding those generally found in healthy
individuals. The patients were organized into nine treatment groups at three
dose levels (1 mg, 10 mg and 50 mg), and three frequencies (once per week, once
every two weeks and once every four weeks). Patients were randomized to one of
the nine treatment groups so that at each dose and frequency four to seven
patients received LJP 394 and one patient received a placebo. In patients
receiving weekly 10 mg or 50 mg doses of LJP 394, antibodies to dsDNA were
reduced and remained suppressed in certain patients for up to two months after
the last dose. The drug was well tolerated with no clinically
significant dose-related adverse reactions observed. Three patients who began
the study experienced lupus flares, and three other patients were hospitalized
as a result of adverse events that the treating clinicians believed were related
to the underlying disease or remotely related to therapy, such as heartburn,
diarrhea and phlebitis. Two of the patients with flares withdrew from the study,
as did four patients who experienced exacerbations of lupus and one patient with
herpes rash. However, no relationship was observed between the development of an
adverse event and the dose or frequency of administration of LJP 394.
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The Company plans to initiate Phase IIb clinical trials later this year to
explore preliminary indications of the efficacy of LJP 394 in a larger
population of patients with moderate disease symptoms. There can be no assurance
that the Company will be permitted by regulatory authorities to undertake
additional clinical trials for LJP 394, that any interim clinical results can be
replicated in further clinical testing or that LJP 394 will be effective in
inducing and sustaining antibody suppression, will prove to be clinically safe
or effective, or will receive required regulatory approvals.
Antibody-Mediated Stroke and Recurrent Fetal Loss
Stroke is a leading cause of death in the United States. In 1994, there
were approximately two million stroke patients in the United States,
approximately 500,000 new episodes occurred and approximately 150,000 people
died from stroke. This debilitating condition results from acute neurological
injury caused by the blockage or rupture of blood vessels in the brain. Many of
the blockages are caused by thromboses (blood clots), which clinicians believe
may be caused by a number of factors including a class of antibodies called
anticardiolipin antibodies, which can be identified and measured by a clinical
laboratory assay. It is estimated that 5 to 10% of the strokes in the United
States (affecting 100,000 to 200,000 patients) are caused by these antibodies.
Antibody-mediated stroke is thought to occur in younger individuals and with
greater frequency than non-antibody-mediated stroke. The cost of treatment for a
survivor of a serious stroke is approximately $30,000 per year for life,
consisting of hospitalization and home nursing care costs.
Anticardiolipin antibodies are also associated with recurrent fetal loss, a
major cause of repeated miscarriage. Published clinical reports estimate that
many women with elevated anticardiolipin antibody levels experience multiple
miscarriages, delayed fetal development or premature childbirth. Elevated levels
of anticardiolipin antibodies are also found in 20-30% of patients with other
clotting disorders, including deep vein thrombosis, thrombocytopenia (platelet
deficiency), cardiac valve lesion and myocardial infarction (heart attack), as
well as in approximately 30% of lupus patients.
Current treatments for antibody-mediated thrombosis involve the use of
steroids and chronic, potentially life-long anticoagulant therapy with drugs
such as heparin or warfarin to prevent the formation of blood clots. Patients
must be carefully monitored to minimize serious bleeding episodes which can
occur because of the therapy. If patients are removed from anticoagulant
therapy, they are at an increased risk of stroke or another thrombotic episode.
Warfarin is not recommended in the treatment of recurrent fetal loss because it
is toxic to the developing fetus.
The Company believes that a Toleragen that binds to B cells producing
anticardiolipin antibodies may suppress antibody production and prevent or
reduce antibody-associated blood clots. To develop such a Toleragen, the Company
established a supply of blood samples from representative stroke and recurrent
fetal loss patients and purified antibodies from these samples. The Company then
used its epitope libraries to discover and optimize a number of epitopes
recognized by anticardiolipin antibodies. In late 1995, the Company identified a
single, broadly reactive epitope that was capable of binding to the antibodies
in the blood samples of 61 of the 65 stroke and recurrent fetal loss patients
tested. This epitope is currently being optimized in an effort to increase its
stability and binding affinity for targeted B cells. If these optimization and
other development efforts are successful, the Company intends to incorporate the
optimized epitope into a Toleragen to begin preclinical testing. However, there
can be no assurance that the Company will successfully optimize the epitope or
that the Company's development efforts will lead to clinical trials.
Rh Hemolytic Disease of the Newborn
Rh hemolytic disease of the newborn is a life-threatening fetal condition
characterized by the hemolysis (destruction) of fetal red blood cells. This
condition occurs in Rh incompatible pregnancies in which maternal antibodies to
Rh cross the placenta, bind to fetal red blood cells and cause their
destruction. Rh is a family of proteins on the surface of red blood cells. When
the most common form of these proteins is present, the blood type is Rh(+), and
when it is absent, the blood type is Rh(-). A pregnancy is "Rh incompatible"
when the fetus is Rh(+) and the mother is Rh(-).
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Each year approximately 500,000 women in the United States have Rh
incompatible pregnancies. Despite current treatments that attempt to control
maternal immune systems with immunoglobulin, approximately 5,000 of these women
each year begin producing antibodies against fetal red blood cells and therefore
become part of the existing pool of patients who are at risk of developing Rh
hemolytic disease in a subsequent pregnancy. Every year approximately 5,000
women from this pool of patients have pregnancies that result in severe cases of
Rh hemolytic disease, which can result in loss of the fetus. This condition is
treated by intrauterine fetal blood transfusions and associated amniocentesis
procedures, which are usually repeated several times prior to birth, are risky
to the fetus and mother, and can cost more than $30,000 during the course of a
pregnancy. The Company believes that these women, as well as others who produce
Rh antibodies and avoid pregnancy altogether, could be treated with an Rh
Toleragen.
The Company believes that a Toleragen that binds to the appropriate
maternal B cells will suppress Rh antibody production, and that once the level
of antibodies to Rh(+) red blood cells is reduced, the risk of life-threatening
hemolysis will be eliminated. LJP has purified antibodies to Rh from blood
samples taken from sensitized patients and has identified several epitopes bound
by antibodies to Rh. The Company is currently using its epitope libraries to
screen and further define these epitopes, with the expectation of using selected
epitopes to synthesize lead Toleragens.
Other Antibody-Mediated Diseases
The Company believes its Tolerance Technology may be applicable to many
diseases and conditions caused by the production of disease-causing antibodies,
including myasthenia gravis and Graves' disease. Myasthenia gravis is a form of
muscular paralysis in which neuromuscular receptors are attacked by antibodies,
which can lead to a wasting of muscles, progressive loss of strength and
life-threatening respiratory arrest. This disease affected an estimated 20,000
people in the United States in 1994. Graves' disease is caused by antibodies
that bind to the thyroid stimulating hormone receptor and stimulate excessive
production of thyroid hormones, which results in hyperthyroidism (including
potentially life-threatening increases in heart rate, blood pressure and body
temperature). Graves' disease affected over one million people in the United
States in 1987. The Company has cloned human receptors for acetylcholine (for
myasthenia gravis) and thyroid stimulating hormone (for Graves' disease), which
can be used to purify antibodies from the blood of patients in order to identify
potential epitope candidates.
Inflammation
LJP's inflammation technology targets a family of enzymes, phospholipase
A(2) (PLA(2)), critical to the inflammation process. Inflammation is another
important defense mechanism that works in parallel with the body's immune system
to eliminate foreign substances from the body. However, when inflammatory cells
and chemical mediators called prostaglandins and leukotrienes are
inappropriately activated, they may attack healthy tissue, resulting in
disorders such as rheumatoid arthritis, inflammatory bowel disease and asthma.
These disorders are currently treated with anti-inflammatory agents such as
steroids, which can have severe side effects. PLA(2) enzymes play a critical
role in this process by catalyzing the formation of prostaglandins and
leukotrienes. The Company believes that a drug that inhibits PLA(2) enzymes
could selectively reduce the production of the inflammatory mediators and
provide the anti-inflammatory benefits of steroids without their serious side
effects. LJP has established in vitro assays to measure the activity of
potential PLA(2) inhibitors and has cloned, expressed and purified PLA2 enzymes
from human tissue and a blood cell line. The Company's efforts in the
inflammation area have been scaled back for the foreseeable future to enable the
Company to focus its resources on the Tolerance Technology program. To retain
its exclusive license rights to certain PLA(2) inhibitor technology licensed
from The Regents of the University of California, the Company must meet and
satisfy certain development milestones in addition to its royalty and other
obligations under the agreement. These milestones include submission of an IND
application with the FDA for a potential product utilizing the licensed
technology by 1999, and other standards designed to promote diligent development
and marketing of potential products. There can be no assurance that the Company
will meet these milestones, and the Company may decide to discontinue the
inflammation program at any time.
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COLLABORATIVE ARRANGEMENTS
As part of its business strategy, the Company pursues collaborations with
pharmaceutical companies in an effort to access their research, drug
development, manufacturing, marketing and financial resources. In September
1995, the Company entered into a collaborative agreement with Leo
Pharmaceutical, pursuant to which the Company granted to Leo Pharmaceutical the
exclusive right to distribute LJP 394 in Europe and the Middle East. In May
1996, the Company terminated the collaborative agreement because the Company and
Leo Pharmaceutical could not reach agreement regarding the timing and allocation
of resources with respect to further clinical trials of LJP 394. As a result of
the termination of the collaborative relationship with Leo Pharmaceutical, the
Company will be required to fund all development costs of LJP 394. The Company
intends to pursue collaborative arrangements with other pharmaceutical companies
to assist in its research programs and the clinical development and
commercialization of LJP 394 and its other drug candidates. There can be no
assurance that the Company will be able to negotiate arrangements with any other
collaborative partners on acceptable terms, if at all, or that any such
collaborations will be successful. Failure to establish or maintain
collaborative arrangements will require the Company to fund all of its research
and development activities, resulting in accelerated depletion of the Company's
capital, and will require the Company to develop its own marketing capabilities
for any drug candidate that may receive regulatory approval. As a result,
failure to establish or maintain collaborative arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Even if the Company is successful in establishing new collaborative
arrangements, there can be no assurance that any future collaborative partner
will continue funding any particular program or will not pursue alternative
technologies or develop alternative drug candidates, either individually or in
collaboration with others, including the Company's competitors, as a means for
developing treatments for the diseases targeted by the Company. Furthermore,
competing products, either developed by a collaborative partner or to which a
collaborative partner has rights, may result in the withdrawal of support by the
collaborative partner with respect to all or a portion of the Company's
technology. The failure of any collaborative partner to continue funding any
particular program of the Company or to commercialize successfully any product
could delay or halt the development or commercialization of any products
involved in such program and could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANUFACTURING
The Company has constructed and is presently operating a pilot production
plant for the manufacture of LJP 394 for clinical trials. Through internal
development programs and external collaborations, the Company has made several
improvements to the manufacturing process for LJP 394 that have reduced costs
and increased capacity. The Company believes sufficient capacity exists to meet
its anticipated research and clinical trial needs for LJP 394. The Company has
developed proprietary synthesis and conjugation technologies that are being used
in the development of its other Toleragen candidates. The Company intends to
further develop these technologies in order to increase manufacturing
efficiencies and apply its know-how to the development and manufacture of other
potential products.
The manufacture of the Company's potential products for clinical trials and
the manufacture of any resulting products for commercial purposes is subject to
cGMP as defined by the FDA. While the Company is producing limited quantities of
LJP 394 for clinical trials, its current facilities are not adequate for
commercial production of its potential products. The Company will be required to
invest substantial amounts of capital in the expansion of its facilities to
enable manufacture of any products in commercial quantities. The Company has
never operated an FDA-approved manufacturing facility, and there can be no
assurance that it will obtain necessary approvals. The Company has limited
manufacturing experience, and no assurance can be given that it will be able to
make the transition to commercial production successfully. The Company may enter
into arrangements with contract
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manufacturers to expand its own production capacity in order to meet
requirements for its products, or to attempt to improve manufacturing
efficiency. If the Company chooses to contract for manufacturing services and
encounters delays or difficulties in establishing relationships with
manufacturers to produce, package and distribute its finished products, clinical
trials, market introduction and subsequent sales of such products would be
adversely affected. Moreover, contract manufacturers must operate in compliance
with the FDA's cGMP requirements. The Company's potential dependence upon third
parties for the manufacture of its products may adversely affect the Company's
profit margins and its ability to develop and deliver such products on a timely
and competitive basis.
MARKETING AND SALES
In order to commercialize any drug candidate approved by the FDA, the
Company must either develop a marketing and sales force or enter into marketing
arrangements with third parties. Such arrangements may be exclusive or
nonexclusive and may provide for marketing rights worldwide or in a specific
market. The Company currently has no such third-party arrangements, and there
can be no assurance that the Company will be able to enter into any marketing
agreements on terms favorable to the Company, if at all, or that any such
agreements that the Company may enter into will result in payments to the
Company. To the extent that the Company enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by the Company will be dependent on the efforts of others and there can
be no assurance that such efforts will be successful. If the Company chooses to
attempt to develop its own marketing and sales capability, it will compete with
other companies that currently have experienced and well-funded marketing and
sales operations. Furthermore, there can be no assurance that the Company will
be able to establish sales and distribution capabilities without undue delays or
expenditures or that it will be successful in gaining market acceptance for any
of its drug candidates.
PATENTS AND PROPRIETARY TECHNOLOGIES
The Company files patent applications in the United States and in foreign
countries, as it deems appropriate, for protection of its proprietary
technologies and drug candidates. The Company owns five issued patents and has
filed 41 patent applications covering its Tolerance Technology and its lupus and
antibody-mediated stroke drug candidates. The Company's issued patents include
two issued United States patents and one issued Australian patent concerning its
lupus Toleragens (expiring in 2009, 2011 and 2011, respectively), one issued
United States patent concerning its overall Tolerance Technology (expiring in
2010) and one United States patent (expiring in 2012) on linkage chemistries for
its Toleragens. The Company has received Notices of Intent to grant a European
patent (expiring in 2011) on its lupus Toleragens and a European patent
(expiring in 2012) on its overall Tolerance Technology, and has also received a
Notice of Allowance from the Japanese patent office (expiring in 2012) on its
overall Tolerance Technology. The Company also has an option to obtain the
exclusive license to several issued United States patents and related technology
concerning compounds that may be used in the potential treatment of muscular
dystrophies or myasthenia gravis. The Company's decision to exercise the option,
which will require payment of a nonrefundable advance against future royalties
of $100,000, will be made based upon the results of future studies of this
technology.
The Company's success will depend upon its ability to obtain patent
protection for its therapeutic approaches and for any developed products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. While the Company has received patents covering certain
aspects of its technology, there can be no assurance that any additional patents
will be issued, that the scope of any patent protection will be sufficient, or
that any current or future issued patents will be held valid if subsequently
challenged.
There is a substantial backlog of biotechnology patent applications at the
USPTO that may delay the review and issuance of any patents. The patent position
of biotechnology firms generally is highly uncertain and involves complex legal
and factual questions, and no consistent policy has emerged regarding the
breadth of claims covered in biotechnology patents or protection afforded by
such patents. To date, the Company has rights to certain United States and
foreign issued patents and has
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filed or participated as a licensee in the filing of a number of patent
applications in the United States relating to the Company's technology, as well
as foreign counterparts of certain of these applications in certain countries.
The Company intends to continue to file applications as appropriate for patents
covering both its products and processes. There can be no assurance that patents
will issue from any of these applications, or that claims allowed under issued
patents will be sufficient to protect the Company's technology. Patent
applications in the United States are maintained in secrecy until a patent
issues, and the Company cannot be certain that others have not filed patent
applications for technology covered by the Company's pending applications or
that the Company was the first to invent, or to file patent applications for,
such technology. Competitors may have filed applications for, or may have
received patents and may obtain additional patents and proprietary rights
relating to, compounds or processes that block or compete with those of the
Company.
A number of pharmaceutical and biotechnology companies and research and
academic institutions have filed or may file patent applications, and have
received or may receive patents, in the fields being pursued by the Company.
Certain 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. In particular, the Company is aware of one currently
pending United States patent application that, if allowed, may contain claims
covering subject matter that may be competitive or conflicting with the
Company's patents and patent applications. Any conflict between the Company's
patents and patent applications and patents or patent applications of third
parties could result in a significant reduction of the coverage of the Company's
existing patents or any future patents that may be issued. In addition, to
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the USPTO or in opposition, nullity or
other proceedings before foreign agencies with respect to any of its existing
patents or patent applications or any future patents or applications, which
could result in substantial cost to the Company. Further, the Company may have
to participate at substantial cost in International Trade Commission proceedings
to abate importation of goods which would compete unfairly with products of the
Company. If patents containing competitive or conflicting claims are issued to
other parties and such claims are ultimately determined to be valid, there can
be no assurance that the Company would be able to obtain licenses to these
patents at a reasonable cost, if at all, or be able to develop or obtain
alternative technology.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with its commercial partners, collaborators,
employees and consultants. The Company also has invention or patent assignment
agreements with its employees and certain consultants. There can be no assurance
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement, or that binding agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known or be independently
discovered by competitors. In addition, the Company could incur substantial
costs in defending against suits brought against it by others for infringement
of intellectual property rights or in prosecuting suits which the Company might
bring against other parties to protect its intellectual property rights.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid
technological change. Competition from domestic and foreign biotechnology
companies, large pharmaceutical companies and other institutions is intense and
expected to increase. A number of companies are pursuing the development of
pharmaceuticals in the Company's targeted areas. These include Genelabs
Technologies, Inc., which has initiated Phase III clinical trials of a hormone
for the treatment of lupus, and other competitors that are working on
third-generation steroids. Many other companies are in earlier stages of
developing other potential therapies for lupus.
In addition, there are many academic institutions, both public and private,
engaged in activities relating to research and development of therapeutics for
autoimmune, inflammatory and other
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diseases. Most of these companies and institutions have substantially greater
facilities, resources, research and development capabilities, regulatory
compliance expertise, and manufacturing and marketing capabilities than the
Company. In addition, other technologies may in the future be the basis of
competitive products. There can be no assurance that the Company's competitors
will not develop or obtain regulatory approval for products more rapidly than
the Company, or develop and market technologies and products that are more
effective than those being developed by the Company or that would render the
Company's technology and proposed products obsolete or noncompetitive.
The Company believes that its ability to compete successfully will depend
upon its ability to attract and retain experienced scientists, develop patented
or proprietary technologies and products, obtain regulatory approvals,
manufacture and market products either alone or through third parties, and
secure additional capital resources to fund anticipated net losses for at least
the next several years. The Company expects that competition among products
approved for marketing will be based in large part upon product safety,
efficacy, reliability, availability, price and patent position.
GOVERNMENT REGULATION
The Company's research and development activities and the future
manufacturing and marketing of any products developed by the Company are subject
to significant regulation by numerous government authorities in the United
States and other countries. In the United States, the Federal Food, Drug and
Cosmetic Act and the Public Health Service Act govern the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of any products the Company may develop. In addition to FDA
regulations, the Company is subject to other federal, state and local
regulations such as the Occupational Safety and Health Act and the Environmental
Protection Act as well as regulations governing the handling, use and disposal
of radioactive and other hazardous materials used by the Company in its research
activities. Product development and approval within this regulatory framework
takes a number of years and involves the expenditure of substantial resources.
In addition, this regulatory framework is subject to changes that may affect
approval, delay an application or require additional expenditures by the
Company.
The steps required before a pharmaceutical compound may be marketed in the
United States include (i) preclinical laboratory and animal testing, (ii)
submission to the FDA of an IND application, which must become effective before
clinical trials may commence, (iii) adequate and well-controlled clinical trials
to establish the safety and efficacy of the drug, (iv) submission to the FDA of
an NDA and (v) FDA approval of the NDA prior to any commercial sale or shipment
of the drug. In addition to obtaining FDA approval for each product, each
domestic drug manufacturing establishment must be registered with, and approved
by, the FDA. Drug product manufacturing establishments located in California
also must be licensed by the State of California in compliance with separate
regulatory requirements.
Preclinical testing includes laboratory evaluation of product chemistry and
animal studies to assess the safety and efficacy of the product and its
formulation. The results of preclinical testing are submitted to the FDA as part
of an IND and, unless the FDA objects, the IND will become effective 30 days
following its receipt by the FDA.
Clinical trials involve administration of the drug to healthy volunteers or
to patients diagnosed with the condition for which the drug is being tested
under the supervision of a qualified clinical investigator. Clinical trials are
conducted in accordance with 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 is submitted to the FDA as part of the IND. Each
clinical trial is conducted under the auspices of an independent Institutional
Review Board (the "IRB"). The IRB will consider, among other matters, ethical
factors, the safety of human subjects and the possible liability of the
institution.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy human subjects, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves trials in a limited patient population to (i) characterize the
actions of the drug in
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targeted indications, (ii) determine drug tolerance and optimal dosage and (iii)
identify possible adverse side effects and safety risks. When a compound is
found to be effective and to have an acceptable safety profile in Phase II
clinical trials, Phase III clinical trials are undertaken to further evaluate
and confirm clinical efficacy and safety within an expanded patient population
at multiple clinical trial sites. The FDA reviews both the clinical plans and
the results of the trials and may discontinue the trials at any time if
significant safety issues arise.
The results of preclinical testing and clinical trials are submitted to the
FDA in the form of an NDA or Product License Application for marketing approval.
The testing and approval process is likely to require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. In addition, the Company will be required to obtain
separate regulatory approval for each indicated use of a drug. The approval
process is affected by a number of factors, including the severity of the
disease, the availability of alternative treatments and the risks and benefits
demonstrated in clinical trials.
Additional preclinical testing or clinical trials may be requested during
the FDA review period and may delay marketing approval. After FDA approval for
the initial indications, further clinical trials may be necessary to gain
approval for the use of the product for additional indications. The FDA mandates
that adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Among the conditions for FDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's cGMP requirements. Domestic manufacturing facilities are subject to
biennial FDA inspections and foreign manufacturing facilities are subject to
periodic inspections by the FDA or foreign regulatory authorities.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and marketing
approval for pharmaceutical products to be marketed outside of the United
States. The approval procedure varies among countries and can involve additional
testing, and the time required to obtain approval may differ from that required
to obtain FDA approval. The foreign regulatory approval process includes all of
the risks associated with obtaining FDA approval, and approval by the FDA does
not ensure approval by the health authorities of any other country.
EMPLOYEES
The Company has 76 full-time employees (including 15 Ph.D.s and M.D.s.), 57
of whom are involved full-time in research, development and manufacturing
scale-up activities. All of the Company's management have had prior experience
with pharmaceutical, biotechnology or medical product companies. The Company
believes that it has been successful in attracting skilled and experienced
scientific personnel, but competition for such personnel is intense and there
can be no assurance that the Company will be able to attract and retain the
individuals needed. None of the Company's employees is covered by collective
bargaining agreements, and management considers relations with the Company's
employees to be good.
FACILITIES
The Company leases a 35,000 square-foot facility in San Diego, California.
This facility is subject to a lease that expires in 2004 and includes an option
exercisable by the Company to extend the term of the agreement for an additional
five years, as well as an option to lease an adjacent 19,000 square foot
facility. The Company believes that these facilities will be adequate to meet
its needs for the near term. Over the longer term, management believes
additional space can be secured at commercially reasonable rates.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information with respect to the executive officers and directors of the
Company as of March 31, 1996 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Steven B. Engle............... 41 President, Chief Executive Officer and Director
Stephen M. Coutts, Ph.D. ..... 54 Executive Vice President, Research and Development
Peter G. Ulrich............... 43 Senior Vice President, Corporate Development and
Marketing
Mark T. Edgar, Ph.D. ......... 44 Vice President, Manufacturing
Wood C. Erwin................. 45 Vice President, Finance, Chief Financial Officer and
Secretary
Bonnie Hepburn, M.D. ......... 55 Vice President, Clinical Development
Andrew Wiseman, Ph.D. ........ 47 Director, Business Development
Joseph Stemler................ 65 Chairman of the Board
Thomas H. Adams, Ph.D.(1)..... 53 Director
William E. Engbers(1)......... 53 Director
Robert A. Fildes, Ph.D.(1).... 57 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee and the Compensation Committee
Steven B. Engle joined the Company as Executive Vice President and Chief
Operating Officer in 1993, and became President and a Director in 1994 and Chief
Executive Officer in 1995. From 1991 to 1993, Mr. Engle served as Vice President
of Marketing, Acting Vice President of Manufacturing and Acting Chief Executive
Officer for Cygnus Inc., a publicly held company that develops drug delivery
systems. From 1987 to 1991, he was Chief Executive Officer of Quantum Management
Company, a management consulting firm serving the pharmaceutical and
biotechnology industry. From 1984 to 1987, he was Vice President of Marketing
and Divisional General Manager for Micro Power Systems, Inc., a privately held
company that manufactures high technology products including medical devices. He
holds an MSEE and a BSEE in Biomedical Engineering from the University of Texas.
Stephen M. Coutts, Ph.D., has served as the Executive Vice President of
Research and Development of the Company since its formation in May 1989. From
1987 until 1989, Dr. Coutts was Vice President of Therapeutics Research and
Development for Quidel Corporation, a publicly held company that markets human
diagnostic kits. From 1986 to 1987 he served as Executive Director of Scientific
Research of the Purdue Frederick Company, a pharmaceutical company, and from
1976 to 1986 he held various positions with the Revlon Health Care Group,
including Director of Revlon's Department of Immunobiology. From 1968 to 1976,
Dr. Coutts held academic research and teaching positions at The Institute for
Molecular Biology (Braunschweig, Germany) and Princeton University. Dr. Coutts
holds an MBA from New York University and a Ph.D. in Biochemistry from Harvard
University.
Peter G. Ulrich joined the Company in December 1995 as Senior Vice
President of Corporate Development and Marketing. Mr. Ulrich has served as
President and Chief Executive Officer of three biotechnology companies:
MedClone, Inc., a biotechnology company developing therapeutics for autoimmune
diseases from 1991 to 1994, LipoGen, Inc. from 1988 to 1990, and BIOTX from 1985
to 1988. From 1982 to 1985, he was the Vice President of Marketing at Analytical
Luminescence Laboratory, and from 1974 to 1982 he held various positions with
Baxter Travenol Laboratories, including International Marketing Manager and
National Sales Manager. Before joining the Company, Mr. Ulrich served for one
year as Assistant Vice President of Technology Development for the University of
Alabama at Birmingham. Mr. Ulrich holds a B.A. from the University
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<PAGE> 36
of Texas at Austin and a Masters Degree in International Business Administration
from the University of Dallas.
Mark T. Edgar, Ph.D., joined the Company in May 1995 as Vice President of
Manufacturing. Prior to joining the Company, Dr. Edgar was with Syntex Corp. for
15 years, during which time he served in a variety of capacities, including as
Vice President and Director of the CNTF Program Management Team at Syntex
Development Research from 1993 to 1995 Director of Operations at Syntex Bahamas
Chemical from 1990 to 1993; and Director of Manufacturing Engineering and
Materials at Syntex Laboratories, Inc. from 1987 to 1990. Dr. Edgar holds a
Ph.D. in organic chemistry from Arizona State University and an MBA from the
University of Colorado.
Wood C. Erwin joined the Company as Vice President of Finance and Chief
Financial Officer in January 1996. Before joining the Company, Mr. Erwin served
during 1995 as Vice President of Finance and Chief Financial Officer of Resource
Optimization, Inc., a software company. From 1992 to 1995 he served as Chief
Financial Officer of MedClone, Inc., a biotechnology company developing
therapeutics for autoimmune diseases. From 1991 to 1992, Mr. Erwin served as
Vice President of Finance and Chief Financial Officer of Med Images, Inc., a
provider of computerized services to hospitals; and from 1986 to 1991 as Chief
Financial Officer and Director of Operations of LipoGen, Inc., a biotechnology
company. Mr. Erwin was also the Controller of Plasti-Line, Inc., a publicly
traded manufacturer of illuminated signs; Vice President of Finance of Kusan,
Inc., a subsidiary of Bethlehem Steel Corp.; and Cost Analyst for Oscar Mayer
Company. Mr. Erwin holds BS and MBA degrees from the University of Tennessee and
is a Certified Public Accountant and Certified Management Accountant.
Bonnie Hepburn, M.D., a practicing rheumatologist, joined the Company in
April 1996 as Vice President of Clinical Development. Prior to joining the
Company, from 1994 to 1995, Dr. Hepburn served as Director of Immunology
Clinical Research for Centocor. From 1987 to 1994, Dr. Hepburn held several
positions with Ciba-Geigy Ltd., including Head of Inflammation/Bone/Allergy
Clinical Research, Executive Director of Anti-Inflammatory/Pulmonary Clinical
Research, and Director of Regulatory Affairs. She served as a member and
chairman on the FDA Arthritis Advisory Committee from 1980 to 1983 and also on
the Committee for Revision of FDA Antirheumatic Drug Guidelines. Since 1975, Dr.
Hepburn has held a faculty position at UMDNJ-Robert Wood Johnson Medical School
(formerly Rutgers Medical School). Dr. Hepburn received her B.A. from Wellesley
College and her M.D. from the University of Pennsylvania School of Medicine, and
completed her medical residency and fellowship in rheumatology at the Mayo
Clinic.
Andrew Wiseman, Ph.D., has served as the Director of Business Development
for the Company since its formation in May 1989. From 1983 to 1989, Dr. Wiseman
held several positions with Quidel Corporation including Senior Research
Scientist, Project Manager in Diagnostic Research and Development and Manager of
Business Development. Dr. Wiseman was an Associate Member (Professor) at the
Medical Biology Institute and an Assistant Member at the Scripps Clinic and
Research Foundation and holds a Ph.D. in Genetics from Duke University.
Joseph Stemler has served as Chairman of the Board of Directors of the
Company since its formation in May 1989, and also served as its Chief Executive
Officer until July 1995. From 1985 to 1989, Mr. Stemler served as Chief
Executive Officer and Chairman of Quidel Corporation, a publicly held company
that markets human diagnostic test kits. From 1978 to 1985, he served as
President of Bentley Laboratories and, after Bentley's acquisition by American
Hospital Supply Corporation (AHSC), as President of AHSC's Bentley subsidiary.
Mr. Stemler is currently a director of Sunrise Medical Inc., a publicly held
manufacturer and provider of medical products used in the rehabilitation and
recovery phases of patient care, Safeskin Corporation, a publicly held
manufacturer of surgical gloves, and Scholle Corporation, a privately held
company that develops, manufactures and markets aseptic flexible food
containers. He is an engineering graduate of Illinois Institute of Technology
and also holds advanced degrees in engineering and business administration.
Thomas H. Adams has been a director of the Company since 1991, and is the
founder, Chairman and Chief Executive Officer of Genta, Inc., a publicly held
biotechnology company in the field of
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antisense technology. Before founding Genta, Dr. Adams founded Gen-Probe, Inc.
in 1984 and served as its Chief Executive Officer and Chairman until its
acquisition by Chugai Pharmaceuticals, Inc. in 1989. Before founding Gen-Probe,
Dr. Adams was Senior Vice President of Research and Development at Hybritech
until 1984. Hybritech was later acquired by Eli Lilly and Co. in 1986. Dr. Adams
has also held management positions at Technicon Instruments and the Hyland
Division of Baxter Travenol. In addition to his chairmanship of Genta, Inc., Dr.
Adams currently serves as a director of Life Technologies, Inc., a publicly held
company that develops, manufactures and markets products to support biomedical
research. Dr. Adams holds a Ph.D. in Biochemistry from the University of
California at Riverside.
William E. Engbers has been a director of the Company since 1991, and has
been Venture Capital Manager for Allstate Insurance Company since 1989. Before
joining Allstate, he was a Vice President at Whitehead Associates, an investment
firm, from 1983 to 1987, and Chairman of the Board of Plant Genetics, Inc., a
publicly-traded biotechnology company, from 1982 to 1989. Mr. Engbers is also a
director of Applied Biometrics, a publicly held medical device company, DM
Management, a publicly held women's apparel company, and Diametrics Medical,
Inc., a publicly held manufacturer and marketer of blood chemistry testing
systems. Mr. Engbers received a BBA degree in accounting from Marshall
University and has attended graduate business school at Marshall and Seattle
University.
Robert A. Fildes has been a director of the Company since 1991, and has
been Chairman and Chief Executive Officer of Scotgen Biopharmaceuticals, Inc., a
privately held company in the field of human monoclonal antibody technology,
since 1993. From 1990 to 1993, Dr. Fildes was an independent consultant in the
biopharmaceutical industry. Dr. Fildes was the President and Chief Executive
Officer of Cetus Corporation from 1982 to 1990. Before his eight years at Cetus,
Dr. Fildes was the President of Biogen, Inc. from 1980 to 1982 and the Vice
President of Operations for the Industrial Division of Bristol-Myers from 1975
to 1980. Dr. Fildes is also a director of Carrington Laboratories, a publicly
held company that develops and manufactures products for wound and skin care.
Dr. Fildes holds a D.C.C. degree in Microbial Bio-chemistry and a Ph.D. in
Biochemical Genetics from the University of London.
All directors of the Company are elected annually and hold office until the
next annual meeting of stockholders or until their successors have been elected
and qualified. Officers serve at the pleasure of the Board of Directors, except
where the Company has entered into an employment agreement with such officer.
SCIENTIFIC ADVISORS TO THE COMPANY
The Company has established relationships with a group of scientific
advisors with recognized expertise in immunology, synthetic chemistry,
inflammation or one or more of the Company's targeted diseases. The Company's
scientific advisors consult with management and key scientific employees of the
Company to assist the Company in identifying scientific and product development
opportunities, review the progress of the Company's specific projects, and
recruit and evaluate the Company's scientific staff. The nature, scope and
frequency of consultations between the Company and each scientific advisor
varies depending upon the Company's current activities, the need for specific
assistance and the individual scientific advisor. While contact with certain
scientific advisors may be limited to telephonic consultations one or more times
a year, on-site consultations with other scientific advisors may occur on a
quarterly or monthly basis.
The Company pays certain of its scientific advisors consulting fees and
provides reimbursement for expenses incurred in connection with service to the
Company. The Company has also granted stock options to certain of its
consultants. During the year ended December 31, 1995, the Company paid an
aggregate of approximately $102,000 in consulting fees and granted options to
purchase an aggregate of 7,000 shares of Common Stock to its scientific advisors
for their services. These options have an exercise price of $3.13 per share and
become exercisable in five equal installments commencing one year from the date
of grant.
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Although the Company expects to receive guidance from its scientific
advisors, all of these advisors have substantial commitments to third parties
and are able to devote only a limited portion of their time to the Company. The
Company's scientific advisors have entered into confidentiality agreements with
the Company, and agreements with certain consultants also include an invention
assignment for the benefit of the Company.
The Company's scientific advisors and consultants include:
K. Frank Austen, M.D., Chairman, Dept. of Rheumatology & Immunology,
Harvard Medical School, Boston, Massachusetts. Dr. Austen has studied the role
of cells and inflammatory mediators in allergy and inflammation, as well as the
ability of biological mediators to influence cell function and phenotype and
various inflammatory diseases. Dr. Austen's numerous publications in medicine
and immunology are frequently cited, and he maintains active research and
clinical programs.
Bruce M. Coull, M.D., Director, Oregon Stroke Center and Professor, Dept.
of Neurology, Oregon Health Science University, Portland, Oregon. Dr. Coull
researches the role of antiphospholipid antibodies in stroke and treats stroke
patients. He is a member of a clinical research organization (APASS) examining
the role of antibodies in stroke.
Edward Dennis, Ph.D., Professor, Dept. of Chemistry, University of
California, San Diego, California. Dr. Dennis studies the role of PLA(2) enzymes
in inflammation and is currently researching the regulation of secreted and
cellular PLA(2). Dr. Dennis is the co-inventor of the PLA2 inhibitor technology
licensed to the Company.
James Donadio, M.D., Dept. of Nephrology, Mayo Clinic, Rochester,
Minnesota. Dr. Donadio actively treats a large number of lupus patients at the
Mayo Clinic and has studied and contributed to the development of current
treatments for lupus nephritis.
Richard Furie, M.D., Associate Professor of Clinical Medicine, Cornell
University Medical College, North Shore University Hospital, Manhasset, New
York. Dr. Furie treats a large number of lupus patients and participated in the
Phase II clinical studies of LJP 394. He also treats patients with
antiphospholipid antibody syndrome.
Richard Glassock, M.D., Chairman and Professor, Department of Internal
Medicine, University of Kentucky, Lexington, Kentucky. Dr. Glassock has a large
practice of lupus patients and has studied and researched lupus nephritis. Dr.
Glassock is the editor of several textbooks on the kidney and is a leading
expert in the general field of nephrology.
Steven A. Krilis, Ph.D., FRACP, Professor and Director of the Department of
Immunology, Allergy and Infectious Disease, the St. George Hospital, Kogarah,
Australia. Dr. Krilis investigates the biochemistry and immunology of
antiphospholipid antibodies.
Steven R. Levine, M.D., Clinical Associate Professor of Neurology,
University of Michigan Medical School, Henry Ford Hospital, Detroit, Michigan.
Dr. Levine researches the role of antiphospholipid antibodies in stroke and
treats stroke patients. He is a member of a clinical organization (APASS)
examining the role of antibodies in stroke.
Edmond T. Lewis, M.D., Chief of Nephrology, Rush Presbyterian St. Luke's
Medical Center, Chicago, Illinois. Dr. Lewis is a clinical researcher and
nephrologist responsible for a large number of lupus patients. He is a leader of
the lupus collaborative study group, a national organization of clinical
researchers in lupus, and has overseen the design and supervision of large
multi-center clinical studies in lupus nephritis.
S.P. Masouredis, M.D., Ph.D., Professor of Pathology Emeritus, University
of California, San Diego School of Medicine, San Diego, California. Dr.
Masouredis is an expert in blood transfusion medicine and is the former Director
of the UCSD Medical Center Blood Bank.
Jamie Scott, M.D., Ph.D., Assistant Research Professor, Frasier University,
Burnaby, British Columbia. Dr. Scott was a co-discoverer of phage epitope
library technology with George Smith while
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they collaborated at the University of Missouri. She is currently researching
the use of peptide libraries to evaluate various biological molecules.
Michael Swenson, M.D., Chief of Staff, University of California, San Diego
Medical Center, San Diego, California. Dr. Swenson treats a large number of
patients with neuromuscular disorders. Dr. Swenson is active in the clinical
research of myasthenia gravis and heads the Myasthenia Gravis Clinic at the UCSD
Medical Center.
Gregory L. Verdine, Ph.D., Professor of Chemistry, Harvard University,
Cambridge, Massachusetts. Dr. Verdine's research areas are the investigation of
protein-DNA interactions, using the tools of molecular biology and DNA synthetic
chemistry. He also conducts research in the biochemistry of key regulatory
proteins.
39
<PAGE> 40
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the ownership of the
Company's Common Stock as of March 31, 1996 by (i) those known by the Company to
be beneficial owners of 5% or more of the outstanding shares of the Company's
Common Stock, (ii) each director of the Company, (iii) each of the Company's
executive officers and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED (1) OFFERING OFFERING
- ------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Biotech Target S.A.(2)................................ 2,000,000 14.2% 12.4%
Swiss Bank Tower
Panama 1
Republic of Panama
Allstate Insurance Company(3)......................... 1,247,211 8.9% 7.8%
Allstate Plaza G5D
Northbrook, Illinois 60062
New York Life Insurance Company(4).................... 1,095,608 7.8% 6.8%
51 Madison Avenue
New York, New York 10010
State of Wisconsin Investment Board................... 1,022,500 7.3% 6.4%
121 East Wilson
Madison, Wisconsin 53707
Putnam Investments.................................... 762,500 5.4% 4.7%
99 High Street, 9th Floor
Boston, MA 02110
E.M. Warburg, Pincus & Co., Inc....................... 760,200 5.4% 4.7%
466 Lexington Ave., 10th Floor
New York, NY 10017
Thomas H. Adams, Ph.D.(5)............................. 15,400 * *
Stephen M. Coutts, Ph.D.(6)........................... 160,639 1.1% *
Mark T. Edgar(5)...................................... 6,500 * *
William E. Engbers(5)(7).............................. 10,000 * *
Steven B. Engle(8).................................... 130,881 * *
Wood C. Erwin......................................... -- * *
Robert A. Fildes, Ph.D.(9)............................ 47,802 * *
Bonnie Hepburn, M.D. ................................. -- * *
Joseph Stemler(10).................................... 382,375 2.7% 2.4%
Peter G. Ulrich....................................... -- * *
Andrew Wiseman, Ph.D.(11) ............................ 15,600 * *
All directors and executive officers as a group
(11 persons)(12).................................... 769,197 5.5% 4.8%
</TABLE>
- ---------------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3 (d) under the Securities Exchange Act of
1934, as amended. Applicable percentage ownership is based on 14,072,732
shares of Common Stock outstanding prior to the offering and 16,072,732
shares of Common Stock after the offering. In addition, shares not
outstanding that are subject to options or warrants exercisable by the
holder thereof within 60 days of the date of this Prospectus are deemed
outstanding for the purposes of calculating the number and percentage owned
by such stockholder, but not deemed outstanding for the purpose of
calculating the percentage owned by each other stockholder listed. Unless
otherwise noted, all shares listed as beneficially owned by a stockholder
are actually outstanding. The number of shares beneficially owned is deemed
to include shares of the Company's Common Stock as to
40
<PAGE> 41
which the beneficial owner has or shares either investment or voting power.
Unless otherwise stated, and except for voting power held jointly with a
person's spouse, the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. All information with respect to
beneficial ownership is based on filings made by the respective beneficial
owners with the Securities and Exchange Commission (the "Commission") or
information provided to the Company by such beneficial owners.
(2) Wholly owned subsidiary of BB Biotech AG, a Swiss corporation.
(3) Includes 140,429 shares issuable upon exercise of warrants.
(4) Includes 112,343 shares issuable upon exercise of warrants.
(5) All shares are issuable upon exercise of stock options.
(6) Includes 155,375 shares issuable upon exercise of stock options.
(7) Mr. Engbers is the Venture Capital Manager for Allstate Insurance Company,
and as such may be deemed to be a beneficial owner of the shares of the
Company's capital stock indicated as owned by Allstate Insurance Company.
Mr. Engbers disclaims such beneficial ownership.
(8) Includes 130,500 shares issuable upon exercise of stock options.
(9) Includes 17,400 shares issuable upon exercise of stock options.
(10) Includes 342,375 shares issuable upon exercise of stock options.
(11) Includes 14,500 shares issuable upon exercise of stock options.
(12) Includes 692,050 shares issuable upon exercise of stock options.
41
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The authorized capital of the Company consists of 32,000,000 shares of
Common Stock, par value $0.01 per share and 8,000,000 shares of undesignated
Preferred Stock, par value $0.01 per share. The rights of holders of Common
Stock may be inferior in voting, dividend, liquidation distribution and other
respects to the rights of holders of any Preferred Stock that may be issued by
the Company from time to time.
COMMON STOCK
As of March 31, 1996, there were 14,072,732 shares of Common Stock
outstanding and held of record by 242 stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders. Subject to the rights of any Preferred Stock that may
be issued in the future, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. The outstanding shares of Common Stock are, and the
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable. No preemptive rights, conversion rights, redemption
rights or sinking fund provisions are applicable to the Common Stock.
WARRANTS AND IPO OPTION
All of the warrants and options described below contain anti-dilution and
adjustment provisions providing for adjustment of the underlying shares and/or
the exercise price upon the occurrence of certain events, including
recapitalizations, reclassifications, share dividends, share splits or
combinations, mergers or acquisitions or similar transactions. In the event of
liquidation, dissolution or winding up of the Company, holders will not be
entitled to receive any assets of the Company available for distribution to the
holders of Common Stock.
In the event of any reclassification, capital reorganization or other
similar change of outstanding Common Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification, capital reorganization or other similar change
in the outstanding Common Stock), or a sale or conveyance to another corporation
of all or substantially all of the property of the Company, each of the warrants
and options described below will thereupon become exercisable for the kind and
number of shares of stock or other securities, assets or cash to which a holder
of the number of shares of Common Stock issuable (at the time of such
reclassification, reorganization, consolidation, merger or sale) upon exercise
of such warrant would have been entitled upon such reclassification,
reorganization, consolidation, merger or sale.
For the life of the various warrants and options described below, the
holders thereof have the opportunity to profit from a rise in the market price
of the Common Stock without assuming the risk of ownership of the shares of
Common Stock issuable upon the exercise of such warrants and options. The
holders of the warrants and options may be expected to exercise at times when
the exercise price is less than the market price for the Common Stock, with
resulting dilution in the interests of the Company's stockholders. Further, the
terms on which the Company could obtain additional capital during the life of
the warrants and options may be adversely affected.
$6.00 Public Warrants
In the Company's initial public offering in June 1994 (the "IPO") the
Company issued to the public 2,990,000 Units, each including one share of Common
Stock and a Redeemable Common Stock Purchase Warrant to purchase one-half of one
share of Common Stock for $3.00 (the "$6.00 Public Warrants"). The $6.00 Public
Warrants may be exercised only in multiples of two by the registered holder
thereof, with
42
<PAGE> 43
each two $6.00 Public Warrants entitling such holder to purchase one share of
Common Stock at a total exercise price per share of $6.00, subject to certain
anti-dilution and other adjustments. The $6.00 Public Warrants are exercisable
at any time until June 3, 1999, unless earlier redeemed.
The Company may redeem the outstanding $6.00 Public Warrants in whole but
not in part at any time upon at least 30 days' prior written notice to the
registered holders thereof, at a price of $0.05 per Warrant, provided that the
closing price (as defined in the Warrant Agreement governing the $6.00 Public
Warrants) of the Common Stock has been at least 150% of the then-effective $6.00
Public Warrant exercise price for one whole share of Common Stock for a period
of at least 20 consecutive trading days ending within 15 calendar days prior to
the date of the notice of redemption.
For a holder to exercise the $6.00 Public Warrants there must be a current
registration statement in effect with the Commission and registration or
qualification with, or approval from, various state securities agencies with
respect to the shares or other securities underlying the $6.00 Public Warrants
or valid exemptions from such registration requirements. The Company is
obligated to use its best efforts to cause a registration statement with respect
to such securities under the Securities Act to continue to be effective during
the term of such warrants and to take such other actions under the laws of
various states as may be required to cause the sale of Common Stock upon
exercise of such warrants to be lawful. The Company currently has such a
registration statement in effect.
$6.00 Private Warrants
In a pre-IPO bridge financing (the "1994 Financing"), the Company issued
approximately $4.2 million in bridge notes to certain stockholders. In
connection with the subsequent IPO, this indebtedness and the accrued interest
thereon was converted at the IPO price into a total of 833,517 Units, each
including one share of Common Stock and a warrant (a "$6.00 Private Warrant") to
purchase one-half of one share of Common Stock for $3.00. These $6.00 Private
Warrants are identical to the $6.00 Public Warrants except that they have not
been registered under the Securities Act and are not publicly traded. The
Company intends to file a registration statement with the Commission shortly
after the offering to register the resale of the Common Stock issuable upon
exercise of the $6.00 Private Warrants.
$5.00 Warrants
The Company issued to participants in the 1994 Financing additional
warrants to purchase a total of 166,697 shares of Common Stock at $5.00 per
share (the "$5.00 Warrants"). The $5.00 Warrants are exercisable until June 3,
1999, but have not been registered under the Securities Act and are not publicly
traded. The Company intends to file a registration statement with the Commission
shortly after the offering to register the resale of the Common Stock issuable
upon exercise of the $5.00 Warrants.
IPO Option and $7.20 Warrants
In connection with the IPO, the Company issued to the IPO underwriter an
option (the "IPO Option") to purchase up to 260,000 Units at $8.00 per Unit,
each Unit consisting of one share of Common Stock and a warrant to purchase
one-half of one share of Common Stock for $3.60 (the "$7.20 Warrants"). This
option is exercisable until June 3, 1999, but has not been exercised (and
accordingly no $7.20 Warrants are outstanding) as of the date of this
Prospectus. The underlying $7.20 Warrants, if issued, will be subject to the
same general terms as the $6.00 Public Warrants except for their exercise price.
The holder of the IPO Option has certain registration rights with respect to
such option and its underlying securities. See "Registration Rights of Certain
Holders."
Lease Financing Warrants
As of March 31, 1996, the Company had outstanding warrants to purchase a
total of up to 40,690 shares of Common Stock issued to the provider of the
Company's lease financing facility (the "Lease Financing Warrants"). The
exercise price of these warrants is $8.43 per share with respect to 20,690
shares, and $5.00 per share with respect to the remaining 20,000 shares. The
Company intends to
43
<PAGE> 44
file a registration statement with the Commission shortly after the offering to
register the resale of the Common Stock issuable upon exercise of the Lease
Financing Warrants.
PREFERRED STOCK
The Company's Board of Directors has the authority, without further vote or
action by the stockholders, to issue up to 8,000,000 shares of Preferred Stock
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting or
conversion rights that could adversely affect the voting power of, or have
liquidation rights superior to those of, the holders of Common Stock. In
addition, the issuance of Preferred Stock could be used, under certain
circumstances, to render more difficult or discourage a hostile takeover of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
STOCK OPTIONS
As of March 31, 1996, there were outstanding options to purchase up to
1,420,738 shares of Common Stock under the Company's various stock option plans.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of the IPO Option have the right, subject to certain
restrictions, to demand prior to June 3, 1999, that the Company register the IPO
Option and its underlying Common Stock, the $7.20 Warrants and the Common Stock
underlying the $7.20 Warrants on no more than two occasions, once at the
Company's expense and once at the expense of the holder of such right. Such
holders also have the right to participate in registrations initiated by the
Company or another security holder on a pro-rata basis until June 3, 2001.
The Company is obligated to use its best efforts to cause a registration
statement under the Securities Act with respect to the 1,495,000 shares of
Common Stock issuable upon exercise of the $6.00 Public Warrants to continue to
be effective during the term of such warrants, and currently has in effect such
a registration statement.
Shortly after the offering, the Company expects to file a registration
statement covering the public resale of approximately 625,000 shares of Common
Stock issuable upon exercise of the $6.00 Private Warrants, the $5.00 Private
Warrants, and the Lease Financing Warrants.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). In general, Section 203 prohibits certain publicly-held
Delaware corporations from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date of the
transaction in which the person or entity became an interested stockholder,
unless the business combination is approved in a prescribed manner. For purposes
of Section 203, "business combination" is defined broadly to include mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is any person or entity
that, together with affiliates and associates, owns (or within the three
immediately preceding years did own) 15% or more of the company's voting stock.
Section 203 could deter hostile takeovers of the Company, changes in the
Company's management, and certain transactions that stockholders might deem to
be in their best interests.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. is the transfer agent and registrar for
the Company's Common Stock.
44
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
approximately 16,072,732 shares of Common Stock without taking into account an
aggregate of 3,917,646 shares of Common Stock issuable upon exercise of warrants
and stock options outstanding as of March 31, 1996, as follows: (i) 1,495,000
shares issuable upon exercise of the $6.00 Warrants at an exercise price of
$6.00 per share; (ii) 1,001,908 shares issuable upon exercise of the $6.00
Private Warrants, the $5.00 Warrants, the IPO Option and the Lease Financing
Warrants at a weighted average exercise price of $6.55 per share; and (iii)
1,420,738 shares issuable upon exercise of stock options outstanding under the
Company's various stock option plans at a weighted average exercise price of
$2.55 per share. See "Dilution" and "Description of Capital Stock." Of these
outstanding shares, the 2,000,000 shares sold in this offering, 6,390,000 shares
previously sold by the Company in registered public offerings, and approximately
372,000 shares issued pursuant to the Company's Employee Stock Purchase Plan or
upon exercise of stock options, as well as the $6.00 Public Warrants and the
1,495,000 shares of Common Stock issuable upon their exercise, will be freely
transferable without restriction under the Securities Act, unless held by an
"affiliate" of the Company (as that term is defined below). Any such affiliate
will be subject to the resale limitations of Rule 144 adopted under the
Securities Act. The remaining approximately 7,310,000 outstanding shares of
Common Stock, as well as the $6.00 Private Warrants, $5.00 Warrants, IPO Option
and Lease Financing Warrants and the Common Stock issuable upon their exercise,
were or will be issued by the Company in private transactions not involving a
public offering, and are "restricted securities" for purposes of Rule 144.
Restricted securities may not be resold in a public distribution except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption therefrom, including that provided by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an "affiliate," who has beneficially
owned shares that are "restricted securities" for at least two years is entitled
to sell, within any three-month period, that number of shares that does not
exceed the greater of 1% of the then outstanding shares or the average weekly
trading volume of the then outstanding shares during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information. Under Rule 144(k), a person (or persons whose shares
are aggregated) who is not an "affiliate" of the Company for at least 90 days
prior to a proposed transaction, and who has beneficially owned "restricted
securities" for at least three years, is entitled to sell such shares under Rule
144 without regard to the volume limitations described above. As defined in Rule
144, an "affiliate" of an issuer is a person who directly or indirectly
controls, or is controlled by, or is under common control, with such issuer.
There is currently pending before the Commission a proposal to shorten the Rule
144 holding period to one year and the Rule 144(k) holding period to two years.
Of the approximately 7,310,000 restricted shares outstanding, up to
approximately 3,810,000 shares owned by non-affiliates will be eligible for sale
in the public market pursuant to Rule 144(k), approximately 1,500,000 additional
shares will be eligible for resale in the public market under Rule 144, subject
to the volume limitations described above, and 2,000,000 shares of Common Stock
issued to an overseas investor pursuant to Regulation S under the Securities Act
may also be resold. Approximately 77,000 outstanding shares are owned by the
officers and directors of the Company and will be subject to a 90-day lock-up
after the closing of the offering.
The holder of the IPO Option has registration rights with respect to the
IPO Option and its underlying securities. See "Description of Capital
Stock -- Registration Rights of Certain Holders." Further, the Company has in
effect or intends to file registration statements under the Securities Act
registering 1,250,000 shares of Common Stock reserved for issuance under its
1994 Stock Incentive Plan, 300,000 shares of Common Stock reserved for issuance
under the Company's 1995 Employee Stock Purchase Plan, and up to 1,495,000
shares of Common Stock reserved for issuance upon exercise of the $6.00 Public
Warrants. In addition, shortly after the offering the Company intends to file a
registration statement under the Securities Act to register the resale of
approximately 625,000 shares of
45
<PAGE> 46
Common Stock issuable upon exercise of the $6.00 Private Warrants, the $5.00
Private Warrants and the Lease Financing Warrants. Registration of such shares
will make them freely tradable when issued or resold (except shares issued to
affiliates, which are tradable in compliance with the volume limitations of Rule
144). In addition, approximately 806,000 shares of Common Stock issuable upon
future exercise of outstanding stock options will be available for public resale
under Rule 144 pursuant to Rule 701 under the Securities Act.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Company's Securities prevailing from time to time. Sales of
substantial amounts of the Company's Securities, or the perception that such
sales could occur, could have a material adverse effect on the market price of
the Company's securities, as well as the Company's ability to raise new equity
capital.
46
<PAGE> 47
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Pacific Growth Equities, Inc. and Vector
Securities International, Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
respective names below. The Underwriters are committed to purchase and pay for
all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
--------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC.................................... 680,000
Pacific Growth Equities, Inc. ....................................... 510,000
Vector Securities International, Inc. ............................... 510,000
Van Kasper & Company ................................................ 100,000
Dillon, Read & Co. Inc. ............................................. 100,000
Lehman Brothers Inc. ................................................ 100,000
---------
Total...................................................... 2,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $0.17 per share, of which $0.10
may be reallowed to other dealers. After the public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 2,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
2,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 2,000,000
shares are being sold.
The Company's officers and directors have agreed with the Representatives
for a period of 90 days from the date of this Prospectus (the "Lock-Up Period")
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any option to purchase any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock now owned or hereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition without the prior written consent of Robertson,
Stephens & Company LLC, which may, in its sole discretion and at any time or
from time to time, without notice, release all or any portion of the shares
subject to the lock-up agreements. In addition, the Company has agreed that
during the Lock-Up Period, the Company will not, without prior written consent
of Robertson, Stephens & Company LLC, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the issuance of Common Stock
and warrants upon the exercise of outstanding warrants and options and the
Company's grant of options under existing employee stock option plans or
pursuant to the establishment of any collaborative arrangement approved by the
Company's Board of Directors.
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<PAGE> 48
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities including
liabilities under the Securities Act.
The offering price for the Common Stock has been determined by negotiations
among the Company and the Representatives of the Underwriters, based largely
upon the market price for the Common Stock as reported on the Nasdaq National
Market.
The rules of the Commission generally prohibit the Underwriters and other
members of the selling group from making a market in the Company's Common Stock
during the period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted an exemption from these rules
that permits passive market making under certain conditions. These rules permit
an Underwriter or other member of the selling group to continue to make a market
in the Company's Common Stock subject to the conditions, among others, that its
bid not exceed the highest bid by a market maker not connected with the offering
and that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters and other members of the
selling group intend to engage in passive market making in the Company's Common
Stock during such period.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gibson, Dunn & Crutcher LLP, Orange County, California. Certain legal
matters will be passed upon for the Underwriters by Cooley Godward Castro
Huddleson & Tatum, San Diego, California.
EXPERTS
The financial statements of the Company at December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 and for the
period from May 2, 1989 (inception) to December 31, 1995 appearing in this
Prospectus and Registration Statement and appearing in the Company's Annual
Report (Form 10-K) for the year ended December 31, 1995 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and incorporated herein by reference. Such financial
statements are included and incorporated herein by reference in reliance upon
such report given upon the authority of such firms as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission
located at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room
1204, Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of all or any part of such material may
also be obtained from the Public Reference Section, Securities and Exchange
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon the payment of prescribed fees. The Company's Common Stock is listed on The
Nasdaq National Market, and material filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street N.W., Washington, D.C. 20006.
48
<PAGE> 49
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") on Form S-3 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the schedules and exhibits filed as a part
thereof. Statements contained in this Prospectus regarding the contents of any
contract or other document are not necessarily complete, and each such statement
is qualified in all respects by reference made hereby to the copy of such
contract or document filed, or incorporated by reference, as an exhibit to the
Registration Statement. A copy of the Registration Statement and the exhibits
and schedules thereto may be inspected without charge at the offices of the
Commission, or obtained at prescribed rates from the public reference facilities
maintained by the Commission at the addresses set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission, are
hereby incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995;
2. The Company's Current Report on Form 8-K dated January 1, 1996;
3. The Company's Current Report on Form 8-K dated February 15, 1996;
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1996; and
5. The description of Common Stock contained in the Company's registration
statement on Form 8-A filed pursuant to the Exchange Act, and any
amendment or report filed for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a subsequent statement
contained herein or in any other document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements as modified or superseded shall be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon written
or oral request of such person, a copy of any or all of the documents referred
to above which have been or may be incorporated by reference in this Prospectus
(other than certain exhibits to such documents). Requests for such documents may
be made by writing La Jolla Pharmaceutical Company, 6455 Nancy Ridge Drive, San
Diego, California 92121 (Attention: Chief Financial Officer) or by calling (619)
452-6600.
49
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... F-2
Balance Sheets......................................................................... F-3
Statements of Operations............................................................... F-4
Statements of Stockholders' Equity..................................................... F-5
Statements of Cash Flows............................................................... F-7
Notes to Financial Statements.......................................................... F-8
</TABLE>
F-1
<PAGE> 51
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
La Jolla Pharmaceutical Company
We have audited the accompanying balance sheets of La Jolla Pharmaceutical
Company (a development stage company) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995 and for the period May
2, 1989 (inception) to December 31, 1995. 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 La Jolla Pharmaceutical
Company (a development stage company) at December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995 and for the period May 2, 1989 (inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 25, 1996
F-2
<PAGE> 52
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 11,417 $ 19,804 $ 7,262
Short-term investments -- available for sale............ 2,543 3,847 13,098
Other current assets.................................... 302 213 372
-------- -------- --------
Total current assets...................................... 14,262 23,864 20,732
Equipment, furniture and fixtures, net.................... 2,303 1,925 1,750
Patent costs and other assets, net........................ 529 586 600
-------- -------- --------
Total assets.................................... $ 17,094 $ 26,375 $23,082
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................... $ 735 $ 738 $ 670
Accrued payroll and related expenses.................... 253 398 206
Current portion of obligations under capital leases..... 668 779 826
-------- -------- --------
Total current liabilities................................. 1,656 1,915 1,702
Obligations under capital leases.......................... 1,628 892 641
Commitments
Stockholders' equity:
Common Stock, $0.01 par value; 32,000,000 shares
authorized, 8,616,171, 14,046,712 and 14,072,732
shares issued and outstanding at December 31, 1994
and 1995 and March 31, 1996, respectively............ 86 140 141
Additional paid-in capital.............................. 44,690 62,647 62,626
Note receivable from stockholder........................ (27) (14) (14)
Deferred compensation................................... (716) (428) (318)
Deficit accumulated during the development stage........ (30,223) (38,777) (41,696)
-------- -------- --------
Total stockholders' equity................................ 13,810 23,568 20,739
-------- -------- --------
Total liabilities and stockholders' equity...... $ 17,094 $ 26,375 $23,082
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 53
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 2, 1989
(INCEPTION) THREE MONTHS ENDED MAY 2, 1989
YEAR ENDED DECEMBER 31, TO MARCH 31, (INCEPTION) TO
--------------------------------------- DECEMBER 31, ------------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
---------- ---------- ----------- ------------- ---------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ 3,000 $ 3,000 $ -- $ -- $ 3,000
Operating expenses:
Research and
development......... 6,737 8,499 9,804 35,895 2,105 2,560 38,455
General and
administrative...... 1,386 2,049 2,390 8,989 429 588 9,577
---------- ---------- ----------- -------- ---------- ----------- --------
Total operating
expenses....... 8,123 10,548 12,194 44,884 2,534 3,148 48,032
---------- ---------- ----------- -------- ---------- ----------- --------
Loss from operations.... (8,123) (10,548) (9,194) (41,884) (2,534) (3,148) (45,032)
Interest expense........ (145) (364) (301) (810) (86) (57) (867)
Interest income......... 321 599 941 3,917 190 286 4,203
---------- ---------- ----------- -------- ---------- ----------- --------
Net loss................ $ (7,947) $ (10,313) $ (8,554) $ (38,777) $ (2,430) $ (2,919) $(41,696)
========== ========== =========== ======== ========== =========== ========
Net loss per share...... $ (1.58) $ (1.44) $ (0.79) $ (0.28) $ (0.21)
========== ========== =========== ========== ===========
Shares used in
computation of net
loss per share........ 5,015,953 7,137,412 10,883,009 8,617,531 14,060,127
</TABLE>
See accompanying notes.
F-4
<PAGE> 54
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD MAY 2, 1989 (INCEPTION) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
--------------- --------------- PAID-IN FROM DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER STAGE COMPENSATION EQUITY
------ ------ ------ ------ ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for net
assets acquired at
inception............ 5,360 $ 54 139 $ 1 $ 333 $ -- $ -- $ -- $ 388
Conversion of Series A
through F Preferred
Stock to Common
Stock............... (5,360) (54) 536 6 48 -- -- -- --
Issuance of Series G
Preferred Stock at
$0.61 and $0.66 per
share, net of
issuance costs...... 20,778 208 -- -- 12,279 -- -- -- 12,487
Issuance of Series H
Preferred Stock and
warrants to purchase
Series H Preferred
Stock at $0.75 per
share, net of
issuance costs...... 15,999 160 -- -- 11,757 -- -- -- 11,917
Exercise of warrants
and stock options... -- -- 8 -- 19 -- -- -- 19
Issuance of Common
Stock under stock
purchase
agreement........... -- -- 3 -- 3 -- -- -- 3
Issuance of Common
Stock for cash and
an 8% note
receivable under
stock purchase
agreement........... -- -- 76 1 75 (61) -- -- 15
Net loss since
inception........... -- -- -- -- -- -- (7,191) -- (7,191)
------ ---- --- -- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1991............ 36,777 368 762 8 24,514 (61) (7,191) -- 17,638
Issuance of Series H
Preferred Stock and
warrants to purchase
Series H Preferred
Stock at $0.75 per
share, net of
issuance costs...... 2,334 23 -- -- 1,720 -- -- -- 1,743
Issuance of Series H
Preferred Stock upon
exercise of
warrants............ 300 3 -- -- 223 -- -- -- 226
Exercise of stock
options............. -- -- 9 -- 9 -- -- -- 9
Payment on note
receivable.......... -- -- -- -- -- 11 -- -- 11
Net loss.............. -- -- -- -- -- -- (4,772) -- (4,772)
------ ---- --- -- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1992............ 39,411 394 771 8 26,466 (50) (11,963) -- 14,855
Exercise of stock
options............. -- -- 16 -- 16 -- -- -- 16
Payment on note
receivable.......... -- -- -- -- -- 11 -- -- 11
Deferred compensation
related to grant of
stock options....... -- -- -- -- 302 -- -- (302) --
Amortization of
deferred
compensation........ -- -- -- -- -- -- -- 3 3
Net loss.............. -- -- -- -- -- -- (7,947) -- (7,947)
------ ---- --- -- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1993............ 39,411 394 787 8 26,784 (39) (19,910) (299) 6,938
</TABLE>
(continued on F-6)
F-5
<PAGE> 55
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE PERIOD MAY 2, 1989 (INCEPTION) TO MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE NOTE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
---------------- --------------- PAID-IN FROM DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER STAGE COMPENSATION EQUITY
------- ------ ------ ------ ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1993............ 39,411 $394 787 $ 8 $ 26,784 $ (39) $ (19,910) $ (299) $ 6,938
Issuance of Common
Stock upon
initial public
offering at $5.00
per Unit, net of
issuance costs... -- -- 2,990 30 12,672 -- -- -- 12,702
Conversion of
Preferred Stock
to Common
Stock............ (39,411) (394) 3,941 39 355 -- -- -- --
Conversion of
bridge notes and
accrued interest
to Common
Stock............ -- -- 833 8 4,159 -- -- -- 4,167
Exercise of stock
options.......... -- -- 65 1 64 -- -- -- 65
Payment on note
receivable....... -- -- -- -- -- 12 -- -- 12
Deferred
compensation
related to grant
of stock
options.......... -- -- -- -- 656 -- -- (656) --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 239 239
Net loss........... -- -- -- -- -- -- (10,313) -- (10,313)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1994........... -- -- 8,616 86 44,690 (27) (30,223) (716) 13,810
Issuance of Common
Stock upon
secondary public
offering at $3.25
per share, net of
issuance costs... -- -- 3,400 34 9,852 -- -- -- 9,886
Issuance of Common
Stock at $4.07
per share........ -- -- 2,000 20 8,120 -- -- -- 8,140
Exercise of stock
options.......... -- -- 31 -- 30 -- -- -- 30
Payment on note
receivable....... -- -- -- -- -- 13 -- -- 13
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 243 243
Adjustment to
deferred
compensation for
terminations..... -- -- -- -- (45) -- -- 45 --
Net loss........... -- -- -- -- -- -- (8,554) -- (8,554)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT DECEMBER
31, 1995........... -- -- 14,047 140 62,647 (14) (38,777) (428) 23,568
Issuance of Common
Stock
(unaudited)...... -- -- 26 1 40 -- -- -- 41
Amortization of
deferred
compensation
(unaudited)...... -- -- -- -- -- -- -- 49 49
Adjustment to
deferred
compensation for
terminations
(unaudited)...... -- -- -- -- (61) -- -- 61 --
Net loss
(unaudited)...... -- -- -- -- -- -- (2,919) -- (2,919)
------- ----- ------ ---- ------- ---- -------- ----- -------
BALANCE AT MARCH 31,
1996(unaudited).... -- $ -- 14,073 $141 $ 62,626 $ (14) $ (41,696) $ (318) $ 20,739
======= ===== ====== ==== ======= ==== ======== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 56
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 2, 1989 THREE MONTHS ENDED MAY 2, 1989
YEAR ENDED DECEMBER 31, (INCEPTION) TO MARCH 31, (INCEPTION) TO
---------------------------- DECEMBER 31, -------------------- MARCH 31,
1993 1994 1995 1995 1995 1996 1996
------- -------- ------- -------------- ------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(7,947) $(10,313) $(8,554) $(38,777) $(2,430) $ (2,919) $(41,696)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Write-off of patent costs.......... -- -- -- 209 -- -- 209
Depreciation and amortization...... 456 683 784 2,536 191 193 2,729
Deferred compensation
amortization..................... 3 239 243 485 65 49 534
Common Stock issued for interest... -- 11 -- 11 -- -- 11
Changes in operating assets and
liabilities:
Other current assets............... 34 (148) 89 (213) 55 (159) (372)
Accounts payable and accrued
expenses......................... 573 (147) 3 604 (201) (68) 536
Accrued payroll and related
expenses......................... 120 28 145 378 (108) (192) 186
------- -------- ------- -------- ------- -------- --------
Net cash used for operating
activities........................... (6,761) (9,647) (7,290) (34,767) (2,428) (3,096) (37,863)
INVESTING ACTIVITIES
(Increase) decrease in short-term
investments.......................... 1,100 (2,543) (1,304) (3,847) (527) (9,251) (13,098)
Additions to equipment, furniture and
fixtures............................. (469) (288) (248) (2,661) (2) (12) (2,673)
Proceeds from sale-leaseback of
equipment............................ 1,747 -- -- 1,747 -- -- 1,747
Increase in patent costs and other
assets............................... (119) (120) (83) (578) (15) (20) (598)
------- -------- ------- -------- ------- -------- --------
Net cash provided by (used for)
investing activities................. 2,259 (2,951) (1,635) (5,339) (544) (9,283) (14,622)
FINANCING ACTIVITIES
Payment on note receivable from
stockholder.......................... 11 12 13 47 -- -- 47
Proceeds from issuance of Preferred
Stock, net........................... -- -- -- 26,373 -- -- 26,373
Proceeds from issuance of Common
Stock, net........................... 16 12,767 18,056 30,885 -- 41 30,926
Proceeds from bridge notes............. -- 4,156 -- 4,156 -- -- 4,156
Payments on obligations under capital
leases............................... (175) (619) (757) (1,551) (177) (204) (1,755)
------- -------- ------- -------- ------- -------- --------
Net cash provided by (used for)
financing activities................. (148) 16,316 17,312 59,910 (177) (163) 59,747
Increase (decrease) in cash and cash
equivalents.......................... (4,650) 3,718 8,387 19,804 (3,149) (12,542) 7,262
Cash and cash equivalents at beginning
of period............................ 12,349 7,699 11,417 -- 11,417 19,804 --
------- -------- ------- -------- ------- -------- --------
Cash and cash equivalents at end of
period............................... $ 7,699 $ 11,417 $19,804 $ 19,804 $ 8,268 $ 7,262 $ 7,262
======= ======== ======= ======== ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid.......................... $ 145 $ 353 $ 301 $ 799 $ 86 $ 57 $ 856
======= ======== ======= ======== ======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred for
equipment, furniture and fixtures.... $ 2,232 $ 858 $ 132 $ 3,222 $ 132 $ -- $ 3,222
======= ======== ======= ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 57
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(INFORMATION AS OF AND SUBSEQUENT TO MARCH 31, 1996 AND FOR THE THREE MONTH
PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
La Jolla Pharmaceutical Company ("LJP" or the "Company") is a leading
biopharmaceutical company focused on the research and development of highly
specific therapeutics for the treatment of certain life-threatening
antibody-mediated diseases. These diseases, including autoimmune conditions such
as systemic lupus erythematosus ("lupus") and antibody-mediated stroke, are
caused by abnormal B cell production of antibodies that attack healthy tissues.
The Company plans to initiate a Phase IIb clinical trial in the second half of
1996 for its lupus drug candidate, LJP 394.
The Company has not commenced commercial operations and is considered to be
in the development stage. All of the Company's revenues to date have been
derived from its former collaborative agreement with Leo Pharmaceutical Products
Ltd., a Danish company ("Leo Pharmaceutical"). (See Note 5.) Prior to generating
product revenues, the Company must complete the development of its products,
including several years of clinical testing, and receive regulatory approvals
prior to selling these products commercially. There can be no assurance that the
Company's product development efforts with respect to LJP 394 or any other drug
candidate will be successfully completed, that required regulatory approvals
will be obtained or that any product, if introduced, will be successfully
marketed or achieve commercial acceptance. In addition, there can be no
assurance that the Company can successfully manufacture and market any such
products at prices that would permit the Company to operate profitably.
The Company actively seeks additional financing to fund its research and
development efforts and commercialize its technologies. There is no assurance
such financing will be available to the Company when required or that such
financing would be available under favorable terms.
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The patent positions of
biotechnology firms, including the Company, are uncertain and involve complex
legal and factual questions for which important legal principles are largely
unresolved. There can be no assurance that any additional patents will be
issued, or that the scope of any patent protection will be sufficient, or that
any current or future issued patent will be held valid if subsequently
challenged.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The financial statements at March 31, 1996 and for the three-month periods
ended March 31, 1995 and 1996 are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair statement of the financial position at such dates and the
operating results and cash flows for those periods. Results for interim periods
are not necessarily indicative of results for the entire year.
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 amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
F-8
<PAGE> 58
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less and are stated at market. Short-term investments consist of debt
securities with maturities greater than three months.
Available-for-sale securities are carried at fair value, with unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method.
The Company has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any losses on its cash
equivalents and short-term investments.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the periods as adjusted for the effects of certain
rules of the Securities and Exchange Commission for the periods prior to the
Company's initial public offering in June 1994. In addition, the calculation of
the shares used in computing net loss per share includes shares of convertible
Preferred Stock that converted into Common Stock in conjunction with the
Company's initial public offering as if they had converted into Common Stock as
of the original dates of issuance.
INCOME TAXES
The Company accounts for income taxes using the liability method under
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Laboratory equipment..................................... $ 3,243 $ 3,450
Office equipment......................................... 247 389
Furniture and fixtures................................... 516 547
------- -------
4,006 4,386
Less depreciation........................................ (1,703) (2,461)
------- -------
$ 2,303 $ 1,925
======= =======
</TABLE>
Equipment, furniture and fixtures are stated at cost and depreciated using
the straight-line method over estimated useful lives (primarily five years).
F-9
<PAGE> 59
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The adoption of
the new standard had no material effect on the financial statements.
STOCK OPTIONS
Effective January 1, 1996, the Company adopted SFAS No. 123 Accounting and
Disclosure of Stock Based Compensation ("SFAS 123"). As allowed under SFAS 123,
the Company has elected to continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees ("APB 25") and related interpretations. The Company
generally grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant and,
under APB 25, recognizes no compensation expense for such stock option grants.
The adoption of SFAS 123 had no material effect on the financial statements.
PATENTS
The Company has filed several patent applications in the United States
Patent and Trademark Office and in foreign countries. Legal costs and expenses
incurred in connection with pending patent applications have been deferred.
Costs related to successful patent applications are amortized using the
straight-line method over the lesser of the remaining useful life of the related
technology or the remaining patent life, commencing on the date the patent is
issued. Accumulated amortization at December 31, 1994 and 1995 was $49,000 and
$75,000, respectively. Deferred costs related to patent applications are charged
to operations at the time a determination is made not to pursue such
applications.
2. SHORT-TERM INVESTMENTS
The following is a summary of the estimated fair value of
available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Money market accounts.................................... $ -- $13,400
U.S. corporate debt securities........................... 5,018 9,805
Obligations of states and municipalities................. 6,246 --
Other debt securities.................................... 2,579 --
------- -------
$13,843 $23,205
======= =======
</TABLE>
As of December 31, 1994 and 1995, the difference between cost and estimated
fair value of available-for-sale securities was not significant. Included in
cash and cash equivalents at December 31, 1994 and 1995 were $11,300,000 and
$19,358,000, respectively, of securities classified as available-for-sale. All
available for sale securities are due in one year or less.
F-10
<PAGE> 60
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMITMENTS
LEASES
The Company has a non-cancellable operating lease for its office and
research facilities which expires in July 2004. Under the terms of the lease,
monthly rental payments are increased annually by not less than 4% or more than
8%, based upon changes in the CPI index. The lease provides the Company with an
option to extend the lease term for an additional five years at 95% of the then
market rental rate. In addition, the Company may exercise a one-time
cancellation option effective any time after August 1, 1998 with the payment of
certain penalties.
The Company has a $4,000,000 equipment lease financing facility. In 1993,
the Company sold and leased back equipment (under a capital lease) for
$1,747,000, consisting of $1,278,000 of equipment acquired prior to 1993 and
$469,000 of equipment acquired in 1993. No gain or loss was recognized in
connection with this transaction.
Annual future minimum lease payments as of December 31, 1995, which include
$721,000 for the effect of exercising the cancellation option, are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1996..................................................... $ 669 $ 952
1997..................................................... 635 788
1998..................................................... 1,099 168
1999..................................................... -- 9
------ ------
Total............................................... $ 2,403 1,917
======
Less amount representing interest........................ (246)
------
Present value of net minimum lease payments.............. 1,671
Less current portion..................................... (779)
------
Long-term portion of capital lease obligations........... $ 892
======
</TABLE>
Rent expense under all operating leases totaled $308,000, $485,000,
$545,000 and $2,556,000 for the years ended December 31, 1993, 1994 and 1995 and
the period May 2, 1989 (inception) to December 31, 1995, respectively. Equipment
acquired under capital leases totaled $2,386,000 and $1,859,000 (net of
accumulated amortization of $704,000 and $1,363,000) at December 31, 1994 and
1995, respectively.
LICENSE AGREEMENT
In September 1991, the Company entered into an exclusive license agreement
for certain technology related to its inflammation program with The Regents of
the University of California. Under the agreement, the Company is required to
pay royalties on approved drugs employing the technology of 2% to 6% based upon
sales of products with a minimum annual royalty of $50,000. To retain its
exclusive license rights, the Company must meet and satisfy certain development
milestones in addition to its royalty and other obligations under this
agreement. These milestones include submission of an IND for a potential product
utilizing the licensed technology by 1999, and other standards designed to
promote diligent development and marketing of potential products. The Company
has the right to terminate the agreement at any time and failure to meet the
above conditions could result in termination of the license.
F-11
<PAGE> 61
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE AGREEMENT
In June 1994, the Company purchased certain scientific equipment. In
connection with the purchase agreement, the Company may be required to make
annual payments of $200,000 for a period of up to 10 years, in the event that
the equipment is used to produce materials for sale.
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of December 31, 1995, the Company is authorized to issue 8,000,000
shares of Preferred Stock, in one or more series.
STOCK OFFERINGS
In June 1994, the Company completed an initial public offering of 2,990,000
Units (the "IPO") at a price of $5.00 per Unit. Each Unit consisted of one share
of Common Stock and one redeemable warrant to purchase one-half of one share of
Common Stock. The Company received net proceeds from the IPO of $12,700,000.
Upon the closing of the IPO, all outstanding shares of Preferred Stock
automatically converted into an aggregate of 3,941,063 shares of Common Stock
and shareholder bridge notes and accrued interest totaling $4,167,000 converted
into 833,517 Units. In connection with the IPO, the IPO underwriter was granted
the option to purchase up to 260,000 additional Units at $8.00 per Unit. The
purchase option expires on June 3, 1999.
In June 1995, the Company completed a secondary public offering of
3,400,000 shares of Common Stock for net cash proceeds of $9,886,000. In October
1995, the Company issued 2,000,000 shares of Common Stock to an institutional
investor for cash proceeds of $8,140,000.
SHAREHOLDER BRIDGE NOTES
In May 1994, the Company issued $4,156,000 of 8% bridge notes to existing
shareholders. The terms of the bridge notes required the automatic conversion of
the principal and accrued interest to Units at the price paid in the IPO. In
addition, the bridge notes provided for the granting of additional warrants to
the holders equal to 20% of the Units into which the debt was converted. Those
additional warrants permit the holders to purchase 166,697 shares of Common
Stock at $5.00 per share through June 1999.
WARRANTS
In connection with the IPO and the conversion of the bridge notes, the
Company issued 3,823,517 redeemable warrants. The redeemable warrant holders are
entitled to purchase one half of one share of Common Stock for each warrant at
an exercise price of $3.00 per one-half share, subject to adjustment. The
warrants are exercisable beginning June 3, 1995 until June 3, 1999. The Company
is entitled to redeem the warrants on not less than 30 days written notice at
$0.05 per warrant if the average closing bid price of the Common Stock exceeds
150% of the then-effective warrant exercise price for one share of Common Stock,
over a period of 20 consecutive trading days, ending within 15 days of the date
of notice of redemption.
In connection with capital lease agreements entered into during 1993 and
1994, the Company issued warrants to purchase 20,690 shares of the Company's
Common Stock at $8.43 per share and
F-12
<PAGE> 62
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20,000 shares of the Company's Common Stock at $5.00 per share, respectively.
These warrants expire on June 10 and June 3, 1996, respectively.
All warrants were outstanding as of December 31, 1995 and 2,119,145 shares
of Common Stock are reserved for issuance upon exercise of warrants.
STOCK OPTION PLANS
In May 1989, the Company adopted the 1989 Stock Option Plan and 1989
Nonstatatury Stock Option Plan (the "1989 Plan"), under which 885,130 shares of
Common Stock are reserved for issuance upon exercise of options granted by the
Company.
In June 1994, the Company adopted the 1994 Stock Incentive Plan (the "1994
Plan"), under which 1,250,000 shares of Common Stock are reserved for issuance
upon exercise of options granted by the Company. The 1994 Plan provides for the
grant of incentive and non-qualified stock options, as well as other stock based
awards, to employees, consultants and advisors of the Company with various
vesting periods as determined by the compensation committee, as well as
automatic fixed grants to non-employee directors of the Company.
As of December 31, 1995, options to purchase 720,588 common shares were
exercisable.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
MAY 2, 1989
(INCEPTION) MAY 2, 1989
YEAR ENDED DECEMBER 31, TO THREE MONTHS (INCEPTION)
----------------------------------- DECEMBER 31, ENDED TO
1993 1994 1995 1995 MARCH 31, MARCH 31,
------- ----------- ----------- ------------ 1996 1996
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 632,750 753,011 1,200,874 -- 1,462,038 --
Granted................ 137,000 566,280 336,195 1,697,511 74,400 1,771,911
Exercised.............. (16,043) (65,055) (30,541) (130,509) (17,528) (148,037)
Cancelled.............. (696) (53,362) (44,490) (104,964) (98,172) (203,136)
-------- ----------- ----------- ----------- ----------- -----------
Outstanding at end
of period.............. 753,011 1,200,874 1,462,038 1,462,038 1,420,738 1,420,738
======== =========== =========== =========== =========== ===========
Price of options granted,
exercised and
outstanding............ $1.00 $1.00-$5.25 $1.00-$5.25 $1.00-$5.25 $1.00-$7.88 $1.00-$7.88
======== =========== =========== =========== =========== ===========
</TABLE>
For certain options granted, the Company recognizes as compensation expense
the excess of the deemed value for accounting purposes of the Common Stock
issuable upon exercise over the aggregate exercise price of such options.
Compensation expense is amortized ratably over the vesting period of each
option.
EMPLOYEE STOCK PURCHASE PLAN
Effective August 1, 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the "Purchase Plan") under which 300,000 shares of Common Stock
are reserved for sale to full-time employees with one year of service. On August
1 and February 1, eligible employees may enroll in the Purchase Plan for an
offering period of 24 months. Employees may purchase stock every six months (up
to but not exceeding 10% of each employee's earnings) over the offering period
at the lesser of 85% of the fair market value of the stock on the enrollment
date for the offering period or 85% of the fair market value on the purchase
date.
F-13
<PAGE> 63
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COLLABORATIVE ARRANGEMENT
In September 1995, the Company granted to Leo Pharmaceutical Products Ltd.,
a Danish company ("Leo") the exclusive rights to distribute LJP 394 in Europe
and the Middle East. Leo made an initial payment of $3.0 million in connection
with this arrangement and was obligated to make further milestone payments to
the Company and fund approximately 50% of the clinical development costs of LJP
394, subject to progress in the clinical trials and regulatory approval process
for the compound. Leo was obligated to collaborate with the Company in
attempting to complete clinical trials and secure necessary regulatory approvals
for LJP 394. Subject to appropriate marketing approvals, the Company was
obligated to sell LJP 394 in bulk form to Leo and Leo would formulate and
package the compound for commercial distribution in Europe and the Middle East
and pay the Company royalties on its sales.
In May 1996, the Company terminated its relationship with Leo
Pharmaceutical because the Company and Leo Pharmaceutical could not reach
agreement regarding the timing and allocation of resources with respect to
further clinical trials of LJP 394. Under the termination provisions of the
agreement, the Company retained a $3.0 million payment previously received from
Leo Pharmaceutical, and neither the Company nor Leo Pharmaceutical has any
further obligations.
6. 401(K) PLAN
The Company has established a 401(k) defined contribution retirement plan
(the "Plan") covering all employees. The Plan provides for voluntary employee
contributions up to 20% of annual compensation (as defined). The Company does
not match employee contributions or otherwise contribute to the Plan.
7. INCOME TAXES
At December 31, 1995, the Company had federal and California income tax net
operating loss carryforwards of approximately $36,291,000 and $1,862,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California income tax purposes and the 50% limitation
on California loss carryforwards. The Company also had federal and California
research tax credit carryforwards of $1,996,000 and $785,000, respectively. The
federal net operating loss and tax credit carryforwards will begin to expire in
2004 unless previously utilized, while the California net operating loss
carryforwards will begin to expire in 1997.
In accordance with certain provisions of the Internal Revenue Code, a
change in ownership of greater than 50% within a three-year period will place an
annual limitation on the Company's ability to utilize its existing net operating
loss and tax credit carryforwards. Due to the completion of the initial public
offering in June 1994, the Company is subject to these annual limitations.
However, the annual limitations are not expected to have a material adverse
effect on the Company's ability to utilize its net operating loss and tax credit
carryforwards.
F-14
<PAGE> 64
LA JOLLA PHARMACEUTICAL COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets are shown below
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 9,694 $ 12,814
Research and development credits..................... 2,416 2,781
Capitalized research and development................. 1,048 2,041
Other................................................ 27 340
-------- --------
Total deferred tax assets.............................. 13,185 17,976
Valuation allowance for deferred tax assets............ (13,185) (17,976)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
A valuation allowance of $17,976,000 has been recognized to offset the
deferred tax assets as realization of such assets is uncertain.
F-15
<PAGE> 65
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