<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996.
REGISTRATION NO. 33-95654
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
INGENEX, INC.
(Name of small business issuer as specified in its charter)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 2836 94-3163294
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1505 O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(415) 617-9570
(Address and telephone number of principal executive offices)
-----------------
MARK E. FURTH, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INGENEX, INC.
1505 O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(415) 617-9570
(Name, address and telephone number of agent for service)
-----------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
CHARLES I. WEISSMAN, ESQ. MARTIN H. LEVENGLICK, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP JULIE M. ALLEN, ESQ.
919 THIRD AVENUE O'SULLIVAN GRAEV & KARABELL, LLP
NEW YORK, NEW YORK 10022 30 ROCKEFELLER PLAZA
(212) 758-9500 NEW YORK, NEW YORK 10112
(212) 408-2400
</TABLE>
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- --------------------------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2) 2,127,500 $10.50 $22,338,750.00 $7,703.02
- --------------------------------- -------------- ---------------- ---------------- ----------------
</TABLE>
- ---------------
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(2) Includes 277,500 shares which the Underwriters have the option to
purchase from the Company to cover over-allotments, if any.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=============================================================================
<PAGE>
INGENEX, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER
AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------ ----------------------------------------------
<S> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus .................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus ................................... Prospectus
3. Summary Information and Risk Factors ........ Prospectus Summary; Risk Factors
4. Use of Proceeds .............................. Use of Proceeds
5. Determination of Offering Price .............. Underwriting
6. Dilution ..................................... Dilution
7. Selling Security Holders ..................... Not Applicable
8. Plan of Distribution ......................... Outside Front Cover Page of Prospectus; Risk
Factors; Underwriting
9. Legal Proceedings ............................ Business--Litigation
10. Directors, Executive Officers, Promoters and
Control Persons ............................. Management
11. Security Ownership of Certain Beneficial
Owners and Management ....................... Principal Stockholders
12. Description of Securities ................... Description of Capital Stock
13. Interest of Named Experts and Counsel ...... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................. Management --Indemnification of Directors
and Officers
15. Organization Within Last Five Years ........ Business
16. Description of Business ..................... Prospectus Summary; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis or Plan
of Operation ................................ Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property ..................... Business --Facilities
19. Certain Relationships and Related
Transactions ................................ Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters ......................... Prospectus Summary; Risk Factors; Dividend
Policy; Business; Principal Stockholders
21. Executive Compensation ...................... Management --Executive Compensation
22. Financial Statements ........................ Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure .................................. Changes in Accountants
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
PROSPECTUS
#############################################################################
GRAPHIC TO COME
#############################################################################
1,850,000 SHARES
INGENEX, INC.
COMMON STOCK
The 1,850,000 shares of Common Stock, $.001 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Ingenex,
Inc. Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of
the Common Stock will be between $9.50 and $10.50 per share. See
"Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for inclusion on The Nasdaq National Market under the symbol "INGX",
subject to the satisfaction of certain conditions.
Titan Pharmaceuticals, Inc. ("Titan"), a Delaware corporation that owns
approximately 81% of the outstanding Common Stock, has expressed an interest
in purchasing approximately 200,000 of the shares of Common Stock offered
hereby at the initial public offering price. In addition, in consideration of
a payment to the Company of $100,000, the Company has issued to Titan an
option to purchase approximately an additional 300,000 shares of Common Stock
at an exercise price per share equal to the initial public offering price
(the "Titan Option") and an additional option and a right of first refusal
with respect to future issuances of voting capital stock of the Company in
order for Titan to maintain ownership of a majority of the outstanding voting
capital stock of the Company. See "Certain Transactions."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE 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>
- -----------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------- ---------- ----------------- ------------
<S> <C> <C> <C>
Per Share ..... $ $ $
- -------------- ---------- ----------------- ------------
Total(3) ...... $ $ $
- -------------- ---------- ----------------- ------------
</TABLE>
- -----------------------------------------------------------------------------
(1) Excludes (i) a non-accountable expense allowance payable to the
representative of the Underwriters (the "Representative") equal to 2%
of the gross proceeds of the Offering, of which $25,000 has been paid
to date, and (ii) warrants to be issued to the Representative to
purchase up to 185,000 shares of Common Stock (the "Representative's
Warrants"). In addition, the Company has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $1,020,000, including the Representative's
non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 30-day option to
purchase up to 277,500 additional shares of Common Stock on the same
terms as set forth above, solely to cover over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
-----------------
The shares of Common Stock offered hereby are being offered by the
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in
part. It is expected that the certificates for the shares of Common Stock
will be available for delivery on or about , 1996 at the offices of
Kaufman Bros., L.P., New York, New York.
-----------------
KAUFMAN BROS., L.P.
The date of this Prospectus is , 1996
<PAGE>
MDRx1: Genetic Enhancement of Chemotherapy
Gene therapy with MDR-1, a human multidrug resistance gene, is
intended to protect normal blood cells from damage by drugs used to
treat cancer, potentially enabling more aggressive chemotherapy and
improved treatment outcomes.
Cancer Patient with Chemotherapy Sensitive Bone Marrow.
[INSERT FIGURE HERE]
The initial clinical trial of MDRx1 involves patients with ovarian and
breast cancer. Blood progenitor or stem cells are removed and purified
from the cancer patient's bone marrow or blood.
The MDR-1 gene is introduced to these cells using a viral delivery
system.
The photograph shows darkly stained blood cells, indicating successful
delivery of the gene to blood cell precursors taken from a cancer
patient in an ongoing clinical trial of MDRx1.
The genetically modified progenitor cells are given back to the
patient, where they can engraft in the bone marrow, multiply, and
produce protected blood cells.
Same Cancer Patient with Protected Bone Marrow.
[INSERT FIGURE HERE]
Elevated expression of MDR-1 protects blood cells by increasing their
ability to pump out various cytotoxic drugs used to treat cancer. This
may allow patients to tolerate higher and/or more frequent doses of
chemotherapy.
DNA analysis confirms the presence of the newly introduced MDR-1 gene in blood
cells of a clinical trial patient.
[INSERT FIGURE HERE]
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.
<PAGE>
RB94: Genetic Tumor Suppression
Injection of a tumor suppressor gene is intended to cause regression
of localized, malignant tumors, such as those of the prostate gland.
Introduce RB94 gene into tumor using a viral delivery system
[INSERT FIGURE HERE]
RB94 protein acts to inhibit the proliferation of cancer cells
RB protein prevents the production of other proteins needed for
cells to multiply. RB94, a shortened form of RB, appears more
stable than the full-length protein and shows enhanced
suppressive activity against tumors.
Production of RB94 Protein in Human Tumor Cells
1. Human tumor cells with defective RB genes lack
RB protein, as shown by absence of brown
staining. These cells form tumors (marked by
arrows in bottom photograph) when injected into
immune deficient mice.
[INSERT FIGURE HERE]
2. After the injection of a virus carrying RB94
into tumors, the RB94 protein is found in cell
nuclei, as shown by dark staining using an
antibody. This leads to regression of certain
human tumors in the mouse test system.
[INSERT FIGURE HERE]
RB94 tumor suppressor gene therapy reverses growth of human
tumors in mice.
Treatment not only appears effective against cancer cells that
have lost their normal RB genes, but also against certain cancer
cells that retain a normal RB gene, suggesting the potential use
of RB94 to treat a broad range of solid tumors.
[INSERT FIGURE HERE] [INSERT FIGURE HERE]
<PAGE>
GSX System: Selection of Gene-Specific Inhibitors
This system identifies genes based on the specific inhibition of their function
and is designed to pinpoint key steps in disease pathways for therapeutic
intervention.
Find DNA fragments that inhibit function of corresponding gene.
1. General random gene fragment expression library
oInsert small gene fragments into delivery vector
[INSERT FIGURE HERE]
2. Transfer library into target cells
oCells receive and express random gene fragments
3. Select cells with desired property
oResulting from specific inhibition of gene function
<TABLE>
<CAPTION>
Cell with ineffectual fragment Selected cell Cell with ineffectual fragment
<S> <C> <C>
[INSERT FIGURE HERE] [INSERT FIGURE HERE] [INSERT FIGURE HERE]
</TABLE>
4. Recover and characterize effective inhibitory gene fragments
oIdentify target gene(s) by sequencing DNA fragments
oDetermine inhibitory mechanisms
Develop Gene-Specific Inhibitory Drugs
<TABLE>
<CAPTION>
[INSERT FIGURE HERE] [INSERT FIGURE HERE] [INSERT FIGURE HERE]
<S> <C> <C>
Antisense RNA Protein fragment interferes Small molecule mimics
(oligonucleotide) blocks with activity or interactions inhibitory protein fragment
synthesis of target protein of target protein
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus, including information
under "Risk Factors" and the Financial Statements and Notes thereto. Unless
otherwise indicated, all information contained in this Prospectus (i)
reflects a 1.875-for-one stock split of the Common Stock effected in
September 1994, (ii) reflects a 3.438924545-for-one reverse stock split of
the Common Stock and the Series A Preferred Stock of the Company and a
2.328840417-for-one reverse stock split of the Series B Preferred Stock of
the Company effected in May 1995, (iii) gives effect to the conversion (the
"Preferred Stock Conversion") of all outstanding shares of Series A Preferred
Stock and Series B Preferred Stock of the Company (collectively, the
"Preferred Stock") into 1,291,234 shares of Common Stock upon the
consummation of the Offering, (iv) assumes no exercise of the
Representative's Warrants and (v) assumes no exercise of the Underwriters'
over-allotment option.
THE COMPANY
Ingenex, Inc. ("Ingenex" or the "Company") is a biopharmaceutical company
engaged in the development of proprietary gene-based therapies and the
application of functional genetics to pharmaceutical discovery. The Company's
initial commercial strategy is to develop gene therapy products for the
oncology market. The Company currently is sponsoring a Phase I/II clinical
trial of MDRx1, a gene therapy product aimed at limiting the destruction by
cytotoxic drugs of normal blood-forming cells in the bone marrow of cancer
patients undergoing chemotherapy. The Company believes that MDRx1 will permit
the administration of increased doses of cytotoxic drugs to cancer patients,
resulting in the increased efficacy of chemotherapy. Ingenex also is
developing a gene therapy product based on RB94, a modified form of RB, a
tumor suppressor gene. This product is intended to cause the regression of
localized, malignant cancers. In addition, the Company is building a new,
proprietary genomics technology, the GSX System, which identifies genes based
on the specific inhibition of their function and is designed to pinpoint key
steps in a disease pathway for therapeutic intervention. Ingenex believes
that the GSX System may be used to develop treatments for a wide range of
diseases through the discovery of both gene therapy products and small
molecule drugs.
Genomics entails the identification and sequencing of human genes and the
identification of genes implicated in particular diseases. Certain scientists
in the public and private sectors are seeking to identify and sequence the
approximately 100,000 human genes and to discover genes associated with human
diseases. However, the knowledge of a gene's DNA sequence alone does not
identify its biological role. Furthermore, the association of a gene with a
disease process usually does not suggest a way to treat that disease.
Ingenex's functional genetics strategy focuses on the identification of genes
and fragments of genes that are capable of altering the genetic program of a
cell or organism to facilitate the discovery of effective solutions to
medical problems through gene therapy or drug discovery.
MDRx1 Program. A significant limitation of cancer chemotherapy is the
destruction by cytotoxic drugs of certain normal cells in the body,
especially blood progenitor or stem cells in the bone marrow, which are
responsible for the production of white blood cells, red blood cells and
platelets. Ingenex is developing a product based on the insertion and
expression of MDR-1, the human multidrug resistance gene, into blood
progenitor or stem cells purified from bone marrow or blood. MDR-1 produces a
protein that actively pumps many cytotoxic drugs out of cells. The
introduction of MDR-1 into blood progenitor or stem cells is intended to make
them less sensitive to such drugs, thereby potentially enabling more
aggressive chemotherapy. In an ongoing Phase I/II clinical trial of MDRx1,
the investigators sponsored by the Company at The University of Texas M.D.
Anderson Cancer Center ("MD Anderson") have introduced MDR-1 into blood
progenitor or stem cells removed from 20 patients with ovarian or breast
cancer who have then undergone bone marrow transplantation with their own
modified cells. The trial is intended to assess whether cells genetically
modified for multidrug resistance can be safely reintroduced and maintained
in patients as they undergo multiple cycles of chemotherapy at increasing
doses. In addition, the results of such clinical trial may suggest whether
the modified cells will improve cancer patients' ability to tolerate
chemotherapy.
3
<PAGE>
RB94 Program. Tumor suppressor genes are generally believed to block
cancer progression. The loss or inactivation of certain tumor suppressor
genes, including RB, has been observed frequently in most of the common human
cancers, and various scientists have proposed that the reintroduction of a
functional tumor suppressor may halt the proliferation of such cancers. The
investigators sponsored by Ingenex at MD Anderson, formerly affiliated with
Baylor College of Medicine ("Baylor"), have reported that RB94 produces a
shorter, more stable protein (the "RB94 protein") than the
naturally-occurring, full-length RB gene. In preclinical studies conducted by
these scientists, the addition of RB94 to RB-deficient cancer cells prevented
tumor growth more completely than the addition of a full-length RB gene.
Furthermore, the Company believes that RB94 may have broader clinical utility
than RB because RB94 also blocks the growth of certain tumors that still
contain a naturally-occurring, full-length RB gene. Ingenex believes that an
important medical use of RB94 gene therapy may be as a supplemental or
alternative procedure to surgery in the treatment of certain regionalized
tumors.
The GSX System. The GSX System identifies genes based on their functional
roles in a biological or disease process. This system selects short gene
fragments that inhibit a biological or disease process and confer a medically
desirable cellular property, such as increased resistance of cells to a
virus. Ingenex believes that the GSX System, because it selects genetic
elements by virtue of their specific functions, represents an important
advance over methods that identify gene sequences or disease-associated genes
having no known cellular function. The GSX System has been employed by the
Company and its scientific collaborators at the University of Illinois at
Chicago ("UIC") both to gain insight into the specific functions of
previously identified genes and to discover new genes and gene fragments.
Ingenex has utilized the GSX System to identify gene fragments capable of
blocking the replication of the Human Immunodeficiency Virus ("HIV"). The
Company is also exploring the use of the GSX System to discover novel
therapeutics for cancer and other diseases characterized by aberrant cellular
function. In addition to identifying therapeutic genetic elements, the
Company believes that information obtained using the GSX System may promote
pharmaceutical discovery by demonstrating that intervention in a specific
biochemical process will have a desired outcome.
The Company's gene therapy products are currently in preclinical and
clinical development. MDRx1 is being tested in a Phase I/II clinical trial.
However, none of the Company's other proposed products is being tested in
clinical trials or has been submitted for regulatory approval. While the
Company anticipates that it will file an Investigational New Drug Application
(an "IND") in late 1997 for the use of RB94 to treat prostate cancer, there
can be no assurance that an IND will be filed within such anticipated time
period, or at all. There also can be no assurance that the results of the
clinical trial of MDRx1 or any future clinical trials will demonstrate the
safety or efficacy of MDRx1 or RB94, or that any of the Company's proposed
products will be successfully developed or will receive the necessary
regulatory approvals, or that, even if such approvals are received, that such
products will be commercialized. In addition, there can be no assurance that
the GSX System will provide the basis for the development of additional
gene-based therapeutic products. See "Risk Factors."
Ingenex is a majority-owned subsidiary of Titan. Titan participates in the
management of five operating biopharmaceutical companies, four of which are
majority-owned subsidiaries, in the fields of central nervous system
disorders, cancer therapy, blood and immune disorders and other
life-threatening diseases. Titan has expressed an interest in purchasing
approximately 200,000 of the shares of Common Stock offered hereby at the
initial public offering price. Following the Offering, assuming Titan
purchases these shares, Titan will own approximately 54% of the outstanding
Common Stock (or approximately 51% if the Underwriters' over-allotment option
is exercised in full). The Company has also granted to Titan the Titan Option
and an additional option and a right of first refusal with respect to future
issuances of voting capital stock of the Company in order for Titan to
maintain ownership of a majority of the outstanding voting capital stock of
the Company. Titan has agreed to certain restrictions with respect to its
influence over the Company. See "Business --Relationship to Titan
Pharmaceuticals, Inc." and "Underwriting."
The Company was originally incorporated in New York under the name
Pharm-Gen Systems, Ltd. in July 1991 and was reincorporated in April 1993 in
Delaware as Ingenex, Inc. The Company's corporate headquarters are located at
1505 O'Brien Drive, Menlo Park, California 94025, and its telephone number is
(415) 617-9570.
4
<PAGE>
THE OFFERING
Common Stock offered
hereby ................. 1,850,000 shares
Common Stock to be
outstanding after the
Offering ............... 4,844,391 shares (1)
Use of proceeds ........ Repayment of indebtedness, research and
development, working capital and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market
symbol ................. INGX
- ------------
(1) Excludes (i) 449,830 shares of Common Stock issuable upon the exercise
of outstanding stock options at June 30, 1996, at a weighted average
exercise price of $2.38 per share, (ii) 300,000 shares of Common Stock
issuable upon the exercise of outstanding warrants, at an exercise
price of $2.50 per share, (iii) 185,000 shares of Common Stock issuable
upon the exercise of the Representative's Warrants and (iv)
approximately 300,000 shares of Common Stock issuable upon the exercise
of the Titan Option. See "Management --1994 Stock Option Plan,"
"Certain Transactions" and "Underwriting."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
- -----------------------------------------------------------------------------
MDRx1(Trademark) and GSX(Trademark) are trademarks of the Company.
Taxol(Registered Trademark) is a registered trademark of Bristol-Myers Squibb
Company.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
YEAR ENDED SIX MONTHS ENDED OF OPERATIONS
DECEMBER 31, JUNE 30, (JULY 25, 1991)
---------------------- ---------------------- TO
1994 1995 1995 1996 JUNE 30, 1996
--------- ----------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ......................... $ -- $ 140 $ -- $ 46 $ 186
Loss from operations ............ (4,907) (3,886) (1,987) (1,569) (12,979)
Net loss ........................ (4,884) (4,995) (2,199) (1,897) (14,425)
Pro forma net loss per share(1) (1.56) (0.53)
Shares used in per share
computations (1) ............... 3,211,192 3,258,571
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(3)
---------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ -- $ -- $ 14,311
Working capital (deficiency) ....................... (925) (925) 13,924
Total assets ....................................... 199 199 14,510
Technology financing ............................... 1,504 1,504 --
Deficit accumulated during the development stage .. (14,425) (14,425) (14,425)
Total stockholders' equity (net capital deficiency) (1,699) (1,699) 14,116
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing net
loss per share.
(2) Gives pro forma effect to the Preferred Stock Conversion.
(3) Adjusted to give effect to the sale of the 1,850,000 shares of Common
Stock by the Company in the Offering at an assumed initial public
offering price of $10.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses) and the
initial application of the net proceeds therefrom as set forth in "Use
of Proceeds." See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk, and the Common Stock should not be purchased by persons who cannot
afford the loss of their entire investment. In addition to the other
information in this Prospectus, the following factors should be considered
carefully in evaluating an investment in the Common Stock offered hereby.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed
below and under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
EARLY STAGE OF DEVELOPMENT. The Company's products are under development,
with only one of the Company's planned products in the clinical trial phase.
To date, no revenues have been generated by the Company from product sales
nor are any product revenues expected for the foreseeable future. As a
result, the Company must be evaluated in light of the problems, delays,
uncertainties and complications encountered in connection with a development
stage biopharmaceutical business, which include, but are not limited to, the
possibilities that any or all of the Company's potential products will be
found to be ineffective or toxic, or will fail to receive necessary
regulatory clearances. To achieve profitable operations, the Company must
successfully develop, obtain regulatory approvals for, introduce and
commercialize products that are currently in the research and development
phase. The substantial majority of the preclinical research and clinical
development work and testing for the Company's product candidates remains to
be completed. Moreover, the results of preclinical testing do not necessarily
predict or prove safety or efficacy in humans. The Company currently is not
profitable, and no assurance can be given that the Company's research and
development efforts will be successful, that required regulatory approvals
will be obtained, that any of the Company's proposed products will be safe
and effective, that any such products, if developed and introduced, will be
commercialized or that the Company will ever become profitable. Failure of
the Company to successfully develop, obtain regulatory approvals for,
introduce and commercialize its products under development would have a
material adverse effect on the Company. See "Business."
HISTORY OF OPERATING LOSSES; NEED FOR SUBSTANTIAL ADDITIONAL FINANCING.
The Company has experienced significant operating losses since its inception
in July 1991. As of June 30, 1996, the Company had incurred cumulative net
operating losses of approximately $14,425,000 and its working capital
deficiency was approximately $925,000. The Company will continue to incur
substantial operating losses for the foreseeable future. Such losses have
been and will be principally the result of the various costs associated with
the Company's research and development activities. The Company's products are
still in research and development, and the Company has not generated any
revenues from the sale of products to date. The Company is dependent upon the
net proceeds from the Offering to continue its business operations for the
next 18 months, and it will be required to seek additional financing in the
future to continue its research and development activities thereafter. The
Company will seek to obtain additional funds through public or private equity
or debt financings, collaborative or other arrangements with corporate
partners or from other sources. The Company does not have any commitments or
arrangements to obtain such financing, and there can be no assurance that the
Company will not require additional financing prior to the end of such
18-month period or that it can obtain such financing on satisfactory terms,
or at all. If such financing is not available, the Company may be required to
modify its business development plans or reduce or cease certain or all of
its operations. The Company also intends to seek and enter into collaborative
arrangements with corporate partners to fund its research and development
activities, but there can be no assurance that the Company will be able to
find any such corporate partners or, if the Company finds any such partners,
that it will be able to form a collaborative relationship on favorable terms.
A failure by the Company to obtain additional financing or to enter into
collaborative arrangements to fund its research and development activities
would have a material adverse effect on the Company. See "--Dependence on
License and Sponsored Research Agreements," "Use of Proceeds" and "Business."
The report of the Company's independent accountants with respect to the
Company's financial statements for the fiscal year ended December 31, 1995
includes an explanatory paragraph
7
<PAGE>
indicating that certain conditions raise substantial doubt as to the ability
of the Company to continue as a going concern, although the Company believes
that this explanatory paragraph would have been omitted if the Offering had
been completed as of the date of such report. See Report of Ernst & Young
LLP, Independent Auditors.
DEPENDENCE ON LICENSE AND SPONSORED RESEARCH AGREEMENTS. The Company is
dependent upon the license and/or sponsored research agreements that it has
entered into with academic or other institutions, in particular Baylor, UIC,
MD Anderson and the Massachusetts Institute of Technology ("MIT"). The
Company is dependent upon its license agreements as the basis of its
proprietary technology and on its sponsored research agreement with MD
Anderson for the clinical trial of MDRx1.
The license agreements that have been entered into by the Company
typically require the payment of license fees and royalties based on sales of
licensed products and processes with minimum annual royalties, the use of due
diligence in bringing products to market, the achievement of funding
milestones and, in some cases, the issuance of Common Stock to the licensor.
The Company is also obligated under the licenses to indemnify its licensors
against certain liabilities, including liabilities arising out of product
liability claims. In those cases where the technology licensed to the Company
was developed, at least in part, with federal funds, the license to the
Company is subject to a statutory non-exclusive, non-transferable,
irrevocable, paid-up license retained by the U.S. government for use by, or
on behalf of, the U.S. government. The sponsored research agreement between
the Company and MD Anderson currently requires periodic payments on a monthly
basis. If the Company does not meet its financial or other obligations under
its license agreements or its sponsored research agreement in a timely
manner, the Company could lose the rights to its proprietary technology or
the right to have MD Anderson conduct the clinical trial of MDRx1. From time
to time in the past, the Company has failed to make payments to MD Anderson
on a timely basis, although the Company is now current under its sponsored
research agreement with MD Anderson and its license agreements. The Company
anticipates that the net proceeds from the Offering will enable the Company
to satisfy its financial obligations under its license and sponsored research
agreements, as well as other anticipated operating expenses, for a period of
18 months after the consummation of the Offering. Upon the expiration of such
18-month period, substantial additional financing will be necessary for,
among other things, the Company to timely honor its financial obligations
under its license and sponsored research agreements. There can be no
assurance that the Company will continue to have the funds necessary to
satisfy its obligations under its license and sponsored research agreements.
See "--History of Operating Losses; Need for Substantial Additional
Financing." If the rights of the Company under its license and sponsored
research agreements are terminated because it does not have the funds to
timely meet its financial obligations thereunder, or for any other reason,
such termination would have a material adverse effect on the Company.
Further development of the Company's proposed products depends upon the
Company's ability to maintain existing and establish new sponsored research
relationships with scientific and corporate collaborators. The Company's
MDRx1 product is currently being clinically tested by the investigators
sponsored by the Company at MD Anderson. The Company's other gene therapy
product, RB94, is in preclinical development, and the Company intends to
continue to develop this product in collaboration with a partner with
expertise in gene delivery. The Company's in-house research program is
utilizing the GSX System to identify genes and/or gene fragments that
potentially could lead to the development of additional gene therapy products
and may seek to collaborate with other companies in such research and
development. The Company is not able to exercise direct control over the
conduct of its sponsored research and most likely will not be able to
exercise direct control over the conduct of any other sponsored research
relationships it may establish in the future. No assurance can be given as to
the success of any sponsored research program of the Company or that the
Company will be able to maintain or establish new sponsored research
relationships. The failure by the Company to establish and maintain
satisfactory sponsored research relationships would have a material adverse
effect on the Company. See "Business --Product Research and Development" and
"--Proprietary Rights."
UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY TECHNOLOGY. At the present
time, Ingenex does not own any patents, although it does have one pending
U.S. patent application. Currently, the Company relies on third-party
licenses to obtain rights in respect of certain patents and patent
applications and
8
<PAGE>
other proprietary rights owned by such third parties that are essential to
the research and development of its proposed processes and products. See
"--Dependence on License and Sponsored Research Agreements." The Company may,
in the future, seek to patent other technologies and seek rights from third
parties to other patents and patent applications. The success of the Company
will depend in part on the ability of the Company and its licensors to obtain
and maintain patent protection for any processes and products developed by
the Company and on the ability of the Company to preserve its trade secrets.
Patent positions in the field of biotechnology are generally highly uncertain
and involve complex legal and scientific questions. To date, no consistent
policy has been developed in the U.S. Patent and Trademark Office regarding
the breadth of claims allowed in biotechnology patents. In addition, since
patent applications in the U.S. are maintained in secrecy until patents are
issued and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be
certain that it or its licensors were the first creators of the subject
matter covered by the Company's patent application or licensed patents and
patent applications, or that it or such licensors were the first to file
patent applications in respect of such subject matter. Accordingly, there can
be no assurance that patent applications owned by or licensed to the Company
will result in the issuance of patents, or that, if issued, such patents will
be valid or will afford the Company protection against competitors with
similar technologies. In addition, no assurance can be given that any issued
patents will provide competitive advantages for the processes and products of
the Company or will not be successfully challenged or circumvented by
competitors. Further, there can be no assurance that the patents of others
will not be infringed by the Company's processes and products or that others
will not independently develop processes and products similar to the
Company's processes and products. The Company also relies upon unpatented
proprietary technology. No assurance can be given that the Company can
meaningfully protect its rights with regard to such unpatented proprietary
technology or that competitors will not duplicate or independently develop
substantially equivalent technology. Each of the Company's employees and
service providers, and those of the Company's consultants and advisors who,
to the Company's knowledge, have access to the Company's proprietary
information, have entered into a proprietary information and inventions
agreement with the Company. There can be no assurance that the obligation to
maintain the confidentiality of such trade secrets or proprietary know-how
set forth in such agreements will not be breached by such employees, service
providers, consultants and advisors, or that the Company's trade secrets or
proprietary know-how will not otherwise become known or be independently
developed by competitors. Any failure (as described above or otherwise) by
the Company to protect its rights to any product or process it develops could
have a material adverse effect on the Company.
The Company believes that there may be a significant amount of litigation
in the industry involving patent and other intellectual property rights. If
the Company were to become involved in such litigation, regardless of the
outcome, a substantial portion of the Company's financial and human resources
could be diverted. The Company's processes and products may be found to
infringe patents which have been or will be granted to competitors or
research institutions. The possibility of infringement becomes a growing
concern as the biotechnology industry expands and more patents are issued.
Should infringement occur, legal action could be brought against the Company,
damages could be sought and certain of the Company's research, development
and commercialization activities could be enjoined. If such actions were
successful, in addition to any potential liability for damages, the Company
could be required either to obtain a license to continue using the affected
process or manufacturing or selling the affected product, or to cease using
such process or manufacturing or selling such product. There can be no
assurance that the Company could obtain any license required on terms
acceptable to the Company, if at all. Alternatively, the Company's licensed
patents could be infringed. There can be no assurance that the Company would
prevail in (or have adequate resources to commence) any litigation based on
the infringement of such licensed patents. A failure by the Company to obtain
any such necessary licenses or to prevail in any such litigation could have a
material adverse effect on the Company.
The Company is aware of a U.S. patent issued to a third party (U.S. Patent
4,912,039) (the "Riordan patent") relating to multidrug resistance. The
Riordan patent describes the isolation of two DNA molecules that code for
fractional portions of the hamster protein associated with multidrug
resistance (the "hamster MDR-1 gene"), whereas a patent licensed by the
Company (U.S. Patent 5,206,352) (the "Roninson patent") describes (and
claims) the entire human MDR-1 gene, which is the DNA that codes
9
<PAGE>
for the entire protein associated with multidrug resistance in human cells.
Nonetheless, the Riordan patent claims a DNA molecule coding for a protein,
or a fragment of a protein, that is associated with multidrug resistance in
living cells, including human cells. The Riordan patent has an earlier
effective filing date than the Roninson patent, and there can be no assurance
that the Riordan patent will not be asserted against the Company. Thus, it
may be necessary for the Company to obtain a license under the Riordan patent
to pursue commercialization of its proposed gene therapy products utilizing
the MDR-1 gene. There can be no assurance that such a license, if required,
will be made available to the Company, if at all, on terms acceptable to the
Company. Failure to obtain such a license, if required, could have a material
adverse effect on the Company.
The Company also is aware of a U.S. patent issued to a third party (U.S.
Patent 5,399,346) (the "Anderson patent") relating to ex vivo (outside the
body) gene therapy. The Anderson patent is reported to be exclusively
licensed to Genetics Therapy, Inc. The Company believes that the Anderson
patent could be asserted to cover gene therapeutics developed by the Company,
to the extent that the introduction of a gene into a subject's cells is
performed ex vivo. In January 1996, it was reported that an interference
proceeding had been instituted in the U.S. Patent and Trademark Office
between the issued Anderson patent and two pending patent applications.
Depending on the outcome of the interference, it may or may not be necessary
for the Company to obtain a license from a party to the interference (or its
licensee) to pursue commercialization of its proposed gene therapy products
utilizing ex vivo gene therapy. There can be no assurance that such a
license, if required, will be made available to the Company, if at all, on
terms acceptable to the Company. Failure to obtain such a license, if
required, could have a material adverse effect on the Company.
The Company has received notice that three companies, Chiron Corporation,
Sandoz AG, and Introgene NV, are opposing the grant of a European patent
corresponding to the Roninson patent, which the Company has licensed from
UIC, with claims directed to the human MDR-1 gene and gene fragments. While
the Company, through its licensor, intends to vigorously respond to the
oppositions, no assurance can be given as to the scope of the claims, if any,
which the European Patent Office ultimately will find patentable.
The Company is aware of the existence of a prior art reference (European
Patent Application 0 259 031) ("EP 0 259 031"), which discloses a DNA
sequence corresponding to the sequence of the RB94 DNA molecule that is
claimed in an issued U.S. patent licensed by the Company from Baylor (U.S.
Patent 5,496,731) (the "Baylor patent"). The Baylor patent also contains
claims directed to specific expression vectors containing the RB94 DNA
molecule. Although an issued patent is presumed valid, there can be no
assurance that the claims of the Baylor patent, if challenged, will not be
found invalid. In any event, given that EP 0 259 031 relates to DNA sequences
but not to methods of gene therapy, the existence of this reference alone
would not, as a matter of U.S. law, be expected to affect the patentability
of claims directed to the use of the RB94 DNA molecule in gene therapy for
certain cancers, which gene therapy claims presently are pending in a related
patent application licensed by the Company from Baylor. EP 0 259 031 further
discloses the deduced amino acid sequence encoded by the disclosed DNA
sequence, which amino acid sequence corresponds to that of the RB94 protein.
The U.S. Patent and Trademark Office, in a Final Office Action rejection, has
cited this reference as anticipating the claim directed to the RB94 protein,
which claim presently is pending in a second, related patent application
licensed by the Company from Baylor.
TECHNOLOGICAL UNCERTAINTY. Gene therapy is a new and rapidly evolving
field, and there is only limited preclinical and clinical data on the safety
and efficacy of gene therapy. Data relating to the Company's specific gene
therapy approaches is even more limited. There can be no assurance that
unacceptable side effects will not be discovered during preclinical and
clinical testing of the Company's potential products. Possible serious side
effects of gene therapy include viral infections and the initiation of
cancers in the patient. The Company's potential products are, or will be,
delivered by a viral vector to patients' cells, and certain safety issues
have been raised by the use of viral vectors for gene therapy. For example,
it is possible that regeneration of an infectious virus may occur during the
production or use of such vectors. Thus, production and quality assurance
processes must be designed to reduce the possibility of infectious virus
regeneration. In addition, any gene therapy approach that involves the random
10
<PAGE>
insertion of genetic material into the target cell's DNA could cause the
activation of a gene involved in the development or spread of cancer or other
harmful cells or the inactivation of a beneficial gene. Further, as with most
other biopharmaceutical products, there is also a possibility of toxicity
associated with a host immune response toward the vector. The possibility of
such response may be increased if there is a need to deliver the vector
repeatedly. There can be no assurance that the Company will be able to
utilize viral vector enabling technology in a form, and in a manner, that
mitigates such risks. In addition, the Company may begin development of in
vivo (inside the body) approaches to gene therapy that will target specific
cells. There can be no assurance that the desired specificity will be
attained or that the Company's proposed products will not have serious side
effects. If the Company's potential products have serious side effects, it
would have a material adverse effect on the Company.
There are many reasons why potential products that appear promising at an
early stage of research or development do not result in commercialization.
There can be no assurance that the Company will be permitted to undertake
further clinical trials of any of its proposed products or that the results
of such testing will demonstrate safety or efficacy. Even if clinical trials
are successful, there is no assurance that the Company will obtain regulatory
approval for any indication, or that an approved product can be produced in
commercial quantities at reasonable costs or be commercialized at all. A
failure by the Company to obtain such regulatory approval or to commercialize
its proposed products would have a material adverse effect on the Company.
See "Business."
GOVERNMENT REGULATION. Because gene therapy is a relatively new technology
and has not been extensively tested in humans, the regulatory requirements
governing gene therapy products are uncertain and may be subject to change by
various regulatory authorities in the U.S. and abroad. This uncertainty may
result in extensive delays in initiating clinical trials and in the
regulatory approval process. Regulatory requirements ultimately imposed could
adversely affect the Company's ability to clinically test or commercialize
products.
The research, preclinical development and clinical trials conducted by the
Company, and the manufacturing and marketing of its gene therapy products,
are subject to regulation by the U.S. Food and Drug Administration (the
"FDA") and similar health authorities in foreign countries. FDA approval of
the Company's proposed products, as well as of the manufacturing processes
and facilities used to produce such products, will be required before such
products may be marketed in the U.S. The process of obtaining approvals from
the FDA is costly, time consuming and often subject to unanticipated delays.
There can be no assurance that required approvals of the Company's proposed
products, processes or facilities will be granted on a timely basis, or at
all. Many academic institutions and companies doing research in the gene
therapy field are using a variety of approaches and technologies. Any adverse
results obtained by such researchers in preclinical or clinical studies, even
if not related to the Company's potential products, could adversely affect
the regulatory environment for gene therapy products generally and possibly
lead to delays in the approval process for the Company's potential products.
Any future failure to obtain or delay in obtaining any such approvals will
materially and adversely affect the ability of the Company to commercialize
its proposed products. Moreover, even if such regulatory approvals are
granted, such approvals may include significant limitations on indicated uses
for which any such products could be marketed. Further, even if such
regulatory approvals are obtained, a marketed drug or biological compound and
its manufacturer are subject to continuous regulatory oversight, and later
discovery of previously unknown problems may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
In addition, new government regulations may be established that could delay
or prevent regulatory approvals of the Company's products, processes or
facilities. Failure of the Company to obtain and maintain regulatory
approvals of its products, processes or facilities would have a material
adverse effect on the Company.
On October 25, 1993, the vaccines and related biological products advisory
committee to the Center for Biologics Evaluation and Research of the FDA met
to review issues related to gene therapy, including the use of retroviruses
and adenoviruses as viral vectors. The committee made certain recommendations
that were expected to form a component of a revision of the FDA's 1991
"Points to Consider on Human Somatic Cell Therapy and Gene Therapy" document
related to gene therapies and somatic cell therapies, but the committee made
no formal recommendations limiting the use of viral vectors. In January 1996,
the
11
<PAGE>
FDA released a draft "Addendum to the Points to Consider on Human Somatic
Cell and Gene Therapy (1991)." This draft document contains guidelines
concerning the production and testing of vectors used in gene therapy. There
can be no assurance, however, that new guidelines will not be instituted
limiting the use of viral vectors, or that the Company will be able to
continue to comply with existing or future regulations.
The Company's research and development activities involve the controlled
use of hazardous materials. The Company is subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the
Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any such
liability could exceed the financial resources of the Company. Although the
Company believes that it is currently in compliance in all material respects
with applicable environmental laws and regulations, there can be no assurance
that the Company will not be required to incur significant costs to comply
with such laws and regulations in the future, or that the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
The Company's proposed products, processes and facilities may also be
subject to certain other federal, state and local government (as well as
foreign) regulations, including, but not limited to, the Public Health
Service Act, the Occupational Safety and Health Act and state, local and
foreign counterparts to such acts. The Company cannot predict the extent of
the adverse effect on its business or the financial and other costs that
might result from any such existing or future government regulations. See
"Business --Government Regulation."
COMPETITION; RAPID TECHNOLOGICAL CHANGE. Competition in the
biopharmaceutical industry from pharmaceutical companies, biotechnology
companies, universities and others is intense and is expected to increase.
Furthermore, related technologies are subject to rapid and significant
change. Many of the Company's competitors and potential competitors have
significantly greater research and development capabilities, experience in
obtaining regulatory approvals, manufacturing and marketing expertise and
technological, financial and managerial resources than the Company.
Acquisitions of, or investments in, competing biotechnology companies by
large pharmaceutical companies could enhance such competitors' financial and
other resources. The Company also competes with universities and other
research institutions in the development of technologies, processes and
products. There can be no assurance that competitors of the Company will not
succeed in developing technologies, processes or products that are more
effective than those of the Company or that will render the Company's
technologies, processes or proposed products obsolete or uneconomical. In
addition, certain of the Company's competitors may achieve patent protection
or product commercialization earlier than the Company. See "--Uncertainty
Relating to Patents and Proprietary Technology."
The Company is aware of a number of competitors that have commenced, or
that are likely to commence shortly, clinical trials of the effects of the
transfer of the MDR-1 gene into progenitor or stem cells. The Company
believes that the focus of such trials and potential trials generally is the
same as the clinical trial commenced by the investigators sponsored by the
Company at MD Anderson in December 1994 (with respect to ovarian cancer) and
January 1995 (with respect to breast cancer), in each case with respect to
the MDR-1 gene and its effects on the suppression of multidrug resistance.
There can be no assurance that competitors of the Company will not complete
their clinical trials and obtain additional approvals required for later
phases of development prior to the Company, or that the results of the
Company's clinical trial will result in the issuance of such additional
approvals for the Company's MDRx1 gene therapy product. Moreover, there can
be no assurance that the Company will be able to keep pace with technological
developments on a timely basis. The failure of the Company to compete
successfully in the research, development and commercialization of its
products, processes and technologies would have a material adverse effect on
the Company. See "Business --Competition."
DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent on its
scientific staff, the loss of one or more of whom could substantially impair
the Company's ability to achieve its goals as planned.
12
<PAGE>
Because of the specialized nature of the Company's business, the Company's
ability to maintain its competitive position will depend, in large part, upon
its ability to attract and retain qualified scientific personnel. Competition
for such personnel is intense. There can be no assurance that the Company
will be able to hire sufficient qualified personnel on a timely basis or
retain such personnel given the competition among numerous pharmaceutical and
health care companies, universities and nonprofit research institutions for
experienced scientists. The Company's future success also depends on its
continuing ability to attract and retain highly qualified managerial and
other personnel, especially since the Company's anticipated growth is
expected to place increased demands on its resources, which will require the
addition of new personnel. Competition for such personnel also is intense.
The Company is currently seeking to hire a Vice President-Finance. The
Company has an employment agreement with Dr. Mark E. Furth, its President and
Chief Executive Officer; however, such agreement is terminable by either
party without cause at any time and it does not assure the services of Dr.
Furth. The Company does not currently maintain any "key person" insurance for
any of its personnel. There can be no assurance that the Company can retain
its key scientific, managerial and other employees or that it will be able to
attract, assimilate or retain other highly qualified scientific, managerial
and other personnel in the future. The failure to attract, assimilate or
retain such persons would have a material adverse effect on the Company. See
"Business --Employees" and "Management."
DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND MARKETING. To date, the
Company has not completed the development of or commercialized any products.
To be commercialized, the Company's proposed products under development must
be manufactured in compliance with regulatory requirements at acceptable
costs and successfully marketed. The Company does not have any manufacturing
or marketing experience nor does the Company anticipate having the resources
in the foreseeable future to allocate to the commercial manufacture or
marketing of its proposed products and, therefore, the Company intends to
pursue collaborative arrangements with other companies with respect to the
manufacture and marketing of such products in the future. The future success
of the Company will depend, in part, on its ability to enter into and
maintain relationships with such corporate collaborators and their success in
manufacturing and marketing any such products. To the extent that the Company
determines not to, or is unable to, enter into collaborative arrangements
with respect to the manufacture and marketing of its proposed products,
significant capital expenditures, management resources and time will be
required for the Company to establish a manufacturing facility and develop a
sales and marketing force. The Company has no experience in manufacturing or
marketing. There can be no assurance that the Company will be able to enter
into collaborative arrangements with respect to the manufacture and marketing
of its proposed products, or, in lieu thereof, to establish a manufacturing
facility or develop a sales and marketing force, or be successful in gaining
market acceptance of its proposed products. The failure by the Company to
enter into collaborative arrangements to manufacture and market its proposed
products or to develop its own manufacturing and marketing capabilities would
have a material adverse effect on the Company. See "Business --Manufacturing
and Marketing."
RISK OF PRODUCT LIABILITY. In the event that the Company successfully
develops any products, the Company may face the risk of product liability
claims alleging that such products produce adverse effects. The Company does
not presently carry product liability insurance and product liability
insurance for the biopharmaceutical industry, if available, generally is
expensive. The Company expects to obtain product liability insurance prior to
the commercial distribution or sale of any of its proposed products and, in
most cases, is required to obtain such insurance prior to the commencement of
production, sale or transfer of any products covered by its license
agreements. There can be no assurance that the Company will avoid significant
product liability claims and the attendant adverse publicity, or be able to
obtain and retain product liability insurance at an acceptable cost, or, if
obtained, that such insurance will be adequate to cover any or all litigation
expenses and damage claims. The failure by the Company to avoid significant
product liability claims or obtain and maintain adequate product liability
insurance could have a material adverse effect on the Company.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT. In both domestic and foreign
markets, sales of the Company's potential products will depend in part upon
the availability and amount of reimbursement from third-party health care
payor organizations, including government agencies, private health care
13
<PAGE>
insurers and other health care payors. Third-party payors are attempting to
control rising health care costs by limiting coverage of products and
treatments and the level of reimbursement for products and services. There is
considerable pressure to reduce the cost of drug products, and reimbursement
may become more restricted in the future. The Company expects that the costs
associated with its proposed products will be substantial. There can be no
assurance that the Company's products, if successfully developed, will be
considered cost-effective by third-party payors, or that reimbursement will
be available, or, if available, that reimbursement will be at levels
sufficient to allow the Company to sell such products on a profitable basis.
GUARANTEES OF OBLIGATIONS OF OTHERS. In February 1994, the Company, along
with Ansan, Inc., Geneic Sciences, Inc. and Theracell, Inc., subsidiaries of
Titan (collectively, the "Sublessees"), entered into a sublease agreement
(the "Sublease") with Titan whereby the Sublessees agreed to sublease from
Titan certain equipment that Titan leases pursuant to a Master Equipment
Lease (the "Master Lease"). Geneic Sciences, Inc. ceased operations in
September 1995. Under the terms of the Master Lease, Titan is obligated to
make monthly payments currently totaling approximately $31,000 per month. As
of June 30, 1996, the amount outstanding under the Master Lease was
approximately $865,000. The Sublessees have jointly and severally guaranteed
all amounts payable by Titan and all other obligations of Titan under the
Master Lease. Each of Titan and each Sublessee has experienced significant
operating losses to date and is expected to continue to do so for the
foreseeable future. The failure by Titan or any Sublessee to fulfill its
obligations with respect to the Master Lease would have a material adverse
effect on the Company. See "Business --Relationship to Titan Pharmaceuticals,
Inc."
CONTROL BY EXISTING STOCKHOLDER; RELATIONSHIP TO TITAN. Following the
Offering, assuming that Titan purchases approximately 200,000 of the shares
of Common Stock offered hereby, Titan will own approximately 54% of the
outstanding Common Stock (51% if the Underwriters' over-allotment option is
exercised in full). The Company and Titan have entered into a shareholders'
agreement in which the Company and Titan have agreed that, among other
things, (i) a majority of the Board of Directors of the Company shall consist
of members who are unaffiliated with Titan (collectively, the "Independent
Directors"); (ii) all future transactions between Titan , or any of its
executive officers or directors, or any of its or their respective affiliates
(collectively, the "Titan Affiliates"), and the Company must be approved by a
majority of the Independent Directors; (iii) Titan shall have a right of
first refusal with respect to future issuances of the Company of its voting
capital stock (and securities convertible into or exchangeable for voting
capital stock) in order to maintain a majority interest in the outstanding
voting capital stock of the Company; (iv) no additional assets shall be added
to the Master Lease; (v) neither Titan nor any of the Titan Affiliates will
engage in a "going private transaction" with the Company unless such
transaction is first approved by a majority of the Independent Directors
following their receipt of a fairness opinion; (vi) the Board of Directors of
the Company shall maintain a Nominating Committee of three directors, one of
whom shall be designated by Titan; and (vii) Titan will not take any action
to amend the Certificate of Incorporation of the Company unless such
amendment is first approved by a majority of the Board of Directors of the
Company and a majority of the Independent Directors. In addition, in
consideration of a payment to the Company of $100,000, the Company has issued
to Titan the Titan Option pursuant to the shareholders' agreement. Finally,
pursuant to the shareholders' agreement, the Company has granted Titan an
option, exercisable for a period of 60 days from the date upon which Titan's
ownership interest in the outstanding voting capital stock of the Company
falls below a majority, to purchase such number of shares of voting capital
stock as necessary for Titan to maintain its majority interest at an exercise
price per share equal to the then current fair market value of such
securities. Titan has also agreed that, prior to the consummation of the
Offering, the Certificate of Incorporation of the Company will be amended to
provide, among other things, that the Company shall not merge or consolidate
with, or sell, assign, lease or otherwise dispose of all or substantially all
of its assets to Titan or any of its parents, subsidiaries and affiliates
without the affirmative vote of stockholders holding at least two-thirds of
the issued and outstanding shares of Common Stock (and such vote would also
be required to amend such provision). Louis R. Bucalo, M.D., the Chairman of
the Board of Directors of Ingenex, is the President, Chief Executive Officer
and a director of Titan; a member of the Board of Directors of Theracell,
Inc. ("Theracell"), a subsidiary of Titan; and the Chairman of the Board of
Directors of each of Ansan, Inc. ("Ansan"), ProNeura, Inc. ("ProNeura") and
Trilex Pharmaceuticals, Inc. ("Trilex"), each
14
<PAGE>
a subsidiary of Titan. John K.A. Prendergast, Ph.D., another director of the
Company, is a Managing Director of The Castle Group Ltd., a principal
stockholder of Titan. While Ingenex does not believe that such companies
currently have any interests in conflict with those of the Company, there can
be no assurance that such companies will not in the future have such
conflicting interests. In July 1996, the Company and Titan also entered into
a one-year Corporate Services Agreement wherein Titan has agreed to provide
certain managerial, administrative and financial services to the Company for
a fee of $10,000 per month. Furthermore, the Company is also indebted to
Titan in the amount of $1,000,000 for certain working capital loans. See
"Business --Relationship to Titan Pharmaceuticals, Inc.," "Certain
Transactions" and "Principal Stockholders."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE OF THE COMMON STOCK. Prior to the Offering,
there has been no public market for the Common Stock. Although the Common
Stock has been approved for inclusion on The Nasdaq National Market, subject
to the satisfaction of certain conditions, there can be no assurance that an
active trading market will develop or be sustained after the Offering. The
absence of an active trading market would reduce the liquidity of an
investment in the Common Stock. The initial public offering price of the
Common Stock will be determined by the Company and the Representative, based
in part on market factors, and may not necessarily be related to the
Company's assets, book value, results of operations or other established and
quantifiable criteria of value and should not be regarded as any indication
of the future market price of the Common Stock. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The trading price of the Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices
of equity securities of many biotechnology companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales may occur, could adversely affect the prevailing market price of the
Common Stock and the ability of the Company to raise capital through a public
offering of its equity securities. Of the 4,844,391 shares of Common Stock to
be outstanding upon consummation of the Offering, the 1,850,000 shares of
Common Stock offered hereby (2,127,500 shares if the Underwriters'
over-allotment option is exercised in full) will be immediately freely
tradeable without restriction (except by affiliates of the Company, including
Titan) or further registration under the Securities Act of 1933, as amended
(the "Securities Act"). Any shares of Common Stock purchased in the Offering
by Titan or any other affiliate of the Company will be subject to certain of
the resale limitations of Rule 144 under the Securities Act ("Rule 144"). The
remaining 2,994,391 shares of Common Stock will be "restricted" securities
within the meaning of Rule 144 and may only be sold if registered under the
Securities Act or pursuant to an exemption from such registration
requirement, including the exemption provided by Rule 144. Holders of
2,927,159 shares of Common Stock, including each director, officer, member of
the Company's Scientific Advisory Board and principal stockholder of the
Company (including Titan), have agreed that they will not offer to sell,
contract to sell, sell, distribute, grant any option to purchase, pledge,
hypothecate or otherwise dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock for a period of 360 days after the
date of this Prospectus without the prior written consent of the
Representative. Taking into account the restrictions of Rule 144 and the
lock-up agreements, 68,079 of the restricted shares will become eligible for
sale in the public market beginning 90 days after the date of this Prospectus
and 1,923,059 will become eligible for sale in the public market beginning
360 days after the date of this Prospectus. Additional shares of Common
Stock, including shares issuable upon the exercise of options and warrants,
will also become available for sale in the public market from time to time in
the future.
Certain of the holders of Common Stock and all of the holders of warrants
to purchase shares of the Common Stock, including the Representative's
Warrants, have demand and piggy-back registration rights.
15
<PAGE>
If such holders, by exercising their registration rights, cause a large
number of shares of Common Stock to be registered and sold in the public
market, such sales could have an adverse effect on the market price of the
Common Stock. In addition, the exercise of such registration rights could
involve substantial expense to the Company. Holders of the warrants to
purchase an aggregate of 300,000 shares of Common Stock and holders of
1,463,695 shares of Common Stock have agreed not to exercise their
registration rights prior to the expiration of one year from the date of this
Prospectus. See "Shares Eligible for Future Sale" and "Underwriting."
ANTI-TAKEOVER EFFECTS OF RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW. Upon the consummation of the Offering, the Board of Directors
of the Company will have the authority to issue up to 4,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any
further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and for other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue shares of preferred stock. Further,
certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws and of Delaware law could delay or make more difficult a merger,
tender offer or proxy contest involving the Company. See "Description of
Capital Stock --Preferred Stock" and "--Anti-takeover Effects of Provisions
of the Restated Certificate of Incorporation, Bylaws and Delaware Law."
DILUTION. The Offering will result in immediate dilution of $7.09 or 71%
in the pro forma net tangible book value per share to new investors, assuming
an initial public offering price of $10.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. To
the extent that currently outstanding or subsequently granted options or
warrants to purchase shares of Common Stock are exercised, there will be
further dilution. See "Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Substantially all of the
estimated net proceeds from the Offering have been allocated to fund the
Company's research and development activities and for working capital and
other general corporate purposes. Accordingly, the Company will have broad
discretion as to the application of the net proceeds from the Offering. See
"Use of Proceeds."
NO DIVIDENDS. The Company has not paid any cash dividends on the Common
Stock since its inception and does not anticipate paying such dividends in
the future. The Company anticipates that all earnings and other resources of
the Company, if any, will be retained by the Company for investment in its
business. See "Dividend Policy."
LACK OF UNDERWRITING HISTORY. The Representative became registered as a
broker-dealer in July 1995 and to date has co-managed one public offering.
Prospective purchasers of shares of Common Stock offered hereby should
consider the limited experience of the Representative in evaluating the
Offering. See "Underwriting."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,850,000 shares of
Common Stock offered by the Company hereby are estimated to be $15,815,000
($18,284,750 if the Underwriters' over-allotment option is exercised in
full), at an assumed initial public offering price of $10.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses.
The Company intends to use approximately $1,504,000 of the net proceeds to
repay all of its outstanding indebtedness under a License Agreement and
License Assignment, dated January 31, 1995, as amended (the "ACM Agreement"),
between the Company and Aberlyn Capital Management Limited Partnership
("ACM"). Pursuant to the ACM Agreement, the Company assigned its rights under
four licenses (the "Assigned Licenses") to ACM in exchange for the payment of
$2,000,000 from ACM to the Company. The Company's products that are being
developed using technology covered by the Assigned Licenses include MDRx1 and
the GSX System. Under the ACM Agreement, the rights under the Assigned
Licenses are sublicensed-back to Ingenex by ACM in consideration for the
Company making six monthly payments of $25,000 beginning in February 1995 and
42 monthly payments of $60,060 thereafter (collectively, the "License
Payments"). As of June 30, 1996, the unpaid balance of the License Payments
aggregated approximately $1,504,000.
The remainder of the net proceeds are expected to be used to fund the
Company's research and development activities, including clinical trials of
the MDRx1 gene therapy product, preclinical studies of the RB94 gene therapy
product and further development of the GSX System, and for working capital
and other general corporate purposes, including the opening of an additional
research and development facility in North Carolina.
Over the next 18 months, the Company intends to engage in both clinical
trials and research and development activities. The Company estimates (based
on its current operating budget) that approximately $7,800,000 will be
expended over the next 18 months in the clinical trial relating to MDRx1 and
further research and development of RB94 and of the GSX System. There can be
no assurance, however, that such budgeted amounts will not be adjusted in the
future. Further, the Company expects to pay approximately $180,000 under its
services agreement with Titan over the next 18 months and approximately
$360,000 under the Sublease over the next 18 months. In addition, the Company
anticipates paying approximately $500,000 in the aggregate over the next 18
months for the opening of an additional research and development facility in
North Carolina. The Company will use the balance of the net proceeds for
working capital and other general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources" and "Business--Product Research and
Development," "--Proprietary Rights" and "--Relationship to Titan
Pharmaceuticals, Inc."
The cost, timing and amount of funds required for specific uses by the
Company cannot be determined precisely at this time and will be based on the
rate of the Company's progress in research and development, the results of
preclinical studies and clinical trials, the timing of regulatory approvals,
payments due under existing and any future license, sponsored research or
other collaborative agreements, competitive developments and the availability
of alternate methods of financing. Pending such uses, the net proceeds from
the Offering will be invested in short-term, investment-grade,
interest-bearing securities.
Future events, including the problems, delays, expenses and complications
frequently encountered by development stage companies, as well as changes in
economic, regulatory or competitive conditions, or changes in the Company's
planned business and the success or lack thereof, or changes in the Company's
research and development activities, may require reallocation of funds or may
require the delay, abandonment or reduction of the Company's research and
development efforts. There can be no assurance that the Company's estimates
will prove accurate, that research and development efforts will not require
considerable additional expenditures or that unforeseen expenses will not be
incurred.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since its
inception. The Company does not expect to pay cash dividends on the Common
Stock in the future. The payment of dividends, if any, in the future is
within the discretion of the Company's Board of Directors and will depend on
the Company's earnings, capital requirements and financial condition. See
"Risk Factors --No Dividends."
17
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1996; (ii) the pro forma capitalization of the Company as of such
date to reflect the Preferred Stock Conversion; and (iii) the pro forma
capitalization of the Company as of such date as adjusted to reflect the sale
of the 1,850,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses) and the initial
application of the proceeds therefrom as set forth in "Use of Proceeds." See
"Use of Proceeds." This table should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
(IN THOUSANDS)
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(1)
---------- ----------- --------------
<S> <C> <C> <C>
Technology financing(2) ............................ $ 1,504 $ 1,504 $ --
---------- ----------- --------------
Stockholders' equity (capital deficiency)(2):
Preferred Stock: $.001 par value, 7,465,866 shares
authorized (4,000,000 shares authorized pro forma
as adjusted); 1,291,234 shares issued and
outstanding actual; no shares issued and
outstanding pro forma as adjusted ................. 6,565 -- --
Common Stock: $.001 par value, 25,000,000 shares
authorized; 1,703,157 shares issued and
outstanding actual; and 4,844,391 shares issued
and outstanding pro forma as adjusted ............. 5,561 12,126 27,941
Additional capital ............................... 600 600 600
Accumulated deficit .............................. (14,425) (14,425) (14,425)
---------- ----------- --------------
Total stockholders' equity (net capital
deficiency) .................................... (1,699) (1,699) 14,116
---------- ----------- --------------
Total capitalization (net deficiency) ......... $ (195) $ (195) $ 14,116
========== =========== ==============
</TABLE>
- ------------
(1) Excludes (i) 449,830 shares of Common Stock issuable upon the exercise
of outstanding stock options, at a weighted average exercise price of
$2.38 per share, (ii) 300,000 shares of Common Stock issuable upon the
exercise of outstanding warrants, at an exercise price of $2.50 per
share, (iii) 185,000 shares of Common Stock issuable upon the exercise
of the Representative's Warrants and (iv) approximately 300,000 shares
of Common Stock issuable upon the exercise of the Titan Option. See
"Management --1994 Stock Option Plan," "Certain Transactions" and
"Underwriting."
(2) See Note 4 of Notes to Financial Statements.
18
<PAGE>
DILUTION
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value
per share immediately after consummation of the Offering. Net tangible book
value per share represents the amount of the Company's total assets minus the
amount of its intangible assets and liabilities, divided by the number of
shares of Common Stock outstanding (assuming conversion of the Preferred
Stock). At June 30, 1996, the Company had a negative net tangible book value
of $(1,699,000) or $(0.57) per share. After giving retroactive effect to the
sale of 1,850,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share (after deducting underwriting
discounts and commissions and estimated offering expenses) and the initial
application of the proceeds therefrom as set forth in "Use of Proceeds," the
net tangible book value of the Company, as adjusted, at June 30, 1996 would
have been $14,116,000 or $2.91 per share, resulting in an immediate dilution
to the public investors of $7.09 per share (or 71%). The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share ....................... $10.00
Negative net tangible book value per share as of June 30,
1996 ........................................................ $(0.57)
Increase per share attributable to new investors ............ 3.48
---------
Pro forma net tangible book value per share after the Offering 2.91
--------
Dilution per share to new investors(1) ........................ $ 7.09
========
</TABLE>
- ------------
(1) If the over-allotment option is exercised in full, the net tangible
book value after the Offering would be approximately $3.24 per share,
resulting in dilution to new investors in the Offering of $6.76 per
share (or 68%).
The following table summarizes, on a pro forma basis, the differences
between existing stockholders and new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration
paid to the Company (before deducting costs of issuance) and the average
price per share paid by existing stockholders and by new investors at an
assumed initial public offering price of $10.00 per share (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE PRICE
---------------------- ------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 2,994,391 61.8% $12,436,000 40.2% $ 4.15
New investors ......... 1,850,000 38.2% $18,500,000 59.8% $10.00
----------- --------- ------------- --------- ---------------
Total ................. 4,844,391 100.0% $30,936,000 100.0%
=========== ========= ============= =========
</TABLE>
The foregoing does not give effect to the exercise of any outstanding
options or warrants and excludes (i) 449,830 shares of Common Stock issuable
upon the exercise of outstanding stock options, at a weighted average
exercise price of $2.38 per share, (ii) 300,000 shares of Common Stock
issuable upon the exercise of outstanding warrants, at an exercise price of
$2.50 per share, (iii) 185,000 shares of Common Stock issuable upon the
exercise of the Representative's Warrants and (iv) approximately 300,000
shares of Common Stock issuable upon the exercise of the Titan Option. See
"Management --1994 Stock Option Plan," "Certain Transactions" and
"Underwriting."
19
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except share and per share data)
The following selected financial data should be read in conjunction with
the Financial Statements and Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere
in this Prospectus. The statement of operations data for the fiscal years
ended December 31, 1994 and 1995 and the balance sheet data as of December
31, 1995 are derived from, and are qualified by reference to, the financial
statements of the Company which have been audited by Ernst & Young LLP,
Independent Auditors, included elsewhere in this Prospectus. The statements
of operations data for the six-month periods ended June 30, 1995 and 1996 and
for the period from the Company's inception through June 30, 1996 and the
balance sheet data as of June 30, 1996 have been derived from unaudited
financial statements of the Company and, in the opinion of the Company's
management, include all normal, recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations
for those periods. Operating results for the six months ended June 30, 1996
are not necessarily indicative of the results which may be expected for the
entire fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS COMMENCEMENT
YEAR ENDED ENDED OF OPERATIONS
DECEMBER 31, JUNE 30, (JULY 25, 1991)
----------------------- ---------------------- TO
1994 1995 1995 1996 JUNE 30, 1996
---------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................................. $ -- $ 140 $ -- $ 46 $ 186
Cost and expenses:
Research and development ................ 3,988 2,501 1,436 1,067 9,318
Research and development--stockholders . 369 321 133 -- 1,437
General and administrative .............. 550 1,204 418 548 2,410
---------- ----------- ---------- ---------- ---------------
Total costs and expenses ................. 4,907 4,026 1,987 1,615 13,165
---------- ----------- ---------- ---------- ---------------
Loss from operations ..................... (4,907) (3,886) (1,987) (1,569) (12,979)
Interest income (expense), net ........... 23 (1,109) (212) (328) (1,446)
---------- ----------- ---------- ---------- ---------------
Net loss ................................. $(4,884) $ (4,995) $(2,199) $ (1,897) $(14,425)
========== =========== ========== ========== ===============
Pro forma net loss per share (1) ........ $ (1.56) $ (0.53)
=========== ==========
Shares used in per share computations (1) 3,211,192 3,258,571
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 38 $ --
Working capital (deficiency) ........................ (4,091) (925)
Total assets ........................................ 209 199
Payable to parent ................................... 1,313 --
Technology financing ................................ 1,783 1,504
Deficit accumulated during the development stage ... (12,528) (14,425)
Total stockholders' equity (net capital deficiency) (5,209) (1,699)
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing net
loss per share.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a development stage company. Since its inception in July
1991, the Company's efforts have been principally devoted to research and
development and raising capital to fund these activities. To date, the
Company has not generated any revenues from the sale of products nor does it
expect to generate any revenues from the sale of products for the foreseeable
future, if at all. The Company has experienced significant operating losses
since its inception. As of June 30, 1996, the Company had incurred cumulative
net operating losses of approximately $14,425,000. Such losses have been
principally the result of the various costs associated with the Company's
research and development activities. The Company expects to continue to incur
substantial research and development costs in the future due to ongoing
research and development programs, patent and regulatory related expenses and
preclinical and clinical testing of the Company's products. The Company also
expects that general and administrative costs (including legal and other
professional fees) related to financing activities necessary to support its
research and development activities will increase in the future. Accordingly,
the Company expects to incur increasing operating losses for the foreseeable
future. There can be no assurance that the Company will ever achieve
profitable operations.
The Company estimates that the proceeds from the sale of the Common Stock
offered hereby will be sufficient to fund its operations for 18 months,
depending on the amount of research and development actually conducted by the
Company during such period. The Company will require additional funds to
support its continued research and development activities, preclinical
studies and clinical trials and to obtain regulatory approvals for and to
commercialize its proposed products. The Company will seek to obtain
additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. There can be no assurance that such additional financing can be
obtained on desirable terms, if at all. See "Risk Factors --History of
Operating Losses; Need for Substantial Additional Financing."
RESULTS OF OPERATIONS
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Revenue. The Company's revenue consists of revenue from government grants
that support the Company's research efforts in specific research projects.
These grants generally provide for reimbursement of approved costs incurred
as defined in the various grants. The Company recognizes revenue when paid.
For the six months ended June 30, 1996, the Company recognized revenue of
approximately $46,000 relating to its Phase I Small Business Innovation
Research ("SBIR") grant from the National Institutes of Health ("NIH")
associated with its MDRx1 program. The Company did not recognize any revenue
for the six months ended June 30, 1995.
Research and Development Expenses. During the six months ended June 30,
1996 and June 30, 1995, the Company expended approximately $1,067,000 and
$1,569,000, respectively, on its research and development activities.
Approximately $120,000 and $293,000 of these expenses, respectively, was paid
to Titan. See "Certain Transactions." The decrease was primarily due to
reduced scientific payroll and personnel expenses in connection with the
implementation of cost reductions as a result of financing constraints and a
decrease in lab lease payments related to the termination in March 1995 of
the lease of a certain research facility.
General and Administrative Expenses. General and administrative expenses
for the six months ended June 30, 1996 and June 30, 1995 were approximately
$548,000 and $418,000, respectively. Such expenses primarily reflect legal,
accounting and other professional expenses principally related to the
Company's financing activities and non-scientific personnel expenses.
Interest Expense. Interest expense for the six months ended June 30, 1996
and June 30, 1995 was approximately $329,000 and $239,000, respectively. The
increase primarily represents interest payable on
21
<PAGE>
certain bridge notes issued in May 1995, interest payable on certain
indebtedness of the Company to Titan in connection with its repayment in
January and February 1996 of such bridge notes and interest payable under the
ACM Agreement.
Fiscal year ended December 31, 1995 compared to fiscal year ended December
31, 1994
Revenue. For the fiscal year ended December 31, 1995, the Company
recognized revenue of approximately $140,000 relating to its Phase I SBIR
grants from the NIH associated with its MDRx1 program and GSX System. The
Company did not recognize any revenue for the fiscal year ended December 31,
1994.
Research and Development Expenses. During the fiscal years ended December
31, 1995 and December 31, 1994, the Company expended approximately $2,821,000
and $4,357,000, respectively, on its research and development activities.
Approximately $471,000 and $515,000 of these expenses, respectively, was paid
to Titan. See "Certain Transactions." The decrease was primarily due to
reduced expenditures related to the Company's sponsored research agreement
with MD Anderson in accordance with the terms of such agreement and decreases
in lab supplies expenses and lab lease payments related to the termination in
March 1995 of the lease of a certain research facility.
General and Administrative Expenses. General and administrative expenses
for the fiscal years ended December 31, 1995 and December 31, 1994 were
approximately $1,204,000 and $550,000, respectively. Such expenses primarily
reflect legal, accounting and other professional expenses principally related
to the Company's financing activities and non-scientific personnel expenses.
The increase primarily relates to expenses incurred as a result of a bridge
financing in May 1995 and the initial public offering contemplated in 1995.
See "Certain Transactions."
Interest Expense. Interest expense for the fiscal year ended December 31,
1995 was approximately $1,150,000. The Company did not incur any interest
expense for the fiscal year ended December 31, 1994. Such expense primarily
represents amortization of the debt discount relating to certain bridge
warrants issued in May 1995, amortization of deferred financing costs and
interest payable under the ACM Agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception principally
through advances from and investments by Titan and private placements of its
securities, which placements resulted in net proceeds of approximately
$3,199,000 to date; the assignment and sublicense-back transaction entered
into by the Company in January 1995 with ACM; and SBIR grants from the NIH,
which grants have aggregated approximately $186,000 to date. Titan's advances
and investments and the proceeds from the private placements, the ACM
Agreement and the SBIR grants have been used to fund approximately
$13,165,000 of the Company's operating expenses as of June 30, 1996,
including approximately $3,392,000 in payments associated with its license,
sponsored research and consulting agreements.
Under the ACM Agreement, the Company assigned its rights under four
licenses to ACM in exchange for ACM's payment to the Company of $2,000,000.
Under the ACM Agreement, the Company is obligated to make 48 monthly license
payments (which commenced in February 1995), the first six of which are in
the amount of $25,000 each and the last 42 of which are in the amount of
$60,060 each. As of June 30, 1996, the outstanding balance of the Company's
payment obligations (including interest) under such agreement was
approximately $1,504,000. The Company intends to use approximately $1,504,000
of the net proceeds from the Offering to repay all of its outstanding
indebtedness under the ACM Agreement. See "Use of Proceeds."
The Company has also financed the lease of certain equipment pursuant to
the Sublease. In February 1994, the Company, together with the other
Sublessees, entered into the Sublease with Titan whereby the Sublessees
agreed to sublease from Titan certain equipment that it leases pursuant to
the Master Lease. Under the terms of the Master Lease, Titan is obligated to
make monthly payments currently totaling approximately $31,000 per month. As
of June 30, 1996, the amount outstanding under the Master Lease
22
<PAGE>
was approximately $865,000. The Sublessees have jointly and severally
guaranteed all amounts payable by Titan and all other obligations of Titan
under the Master Lease. Each of Titan and each Sublessee has experienced
significant operating losses to date and is expected to continue to do so for
the foreseeable future. The failure by Titan or any Sublessee to fulfill its
obligations in respect of the Master Lease would have a material adverse
effect on the Company. See "Risk Factors --Guarantees of Obligations of
Others" and "Business --Relationship to Titan Pharmaceuticals, Inc."
During the period from July through September 1996, the Company borrowed
an aggregate of $1,000,000 from Titan for working capital purposes. This loan
is evidenced by a convertible note (the "Titan Note") that bears interest at
the rate of 9% per annum and is due and payable on September 30, 1998. For a
one-year period commencing on the consummation of this Offering, Titan is
entitled to convert the Titan Note into shares of Common Stock at a
conversion price per share equal to the initial public offering price in
conjunction with Titan's exercise of the Titan Option. See "Risk Factors
- --Control by Existing Stockholder; Relationship to Titan" and "Business
- --Relationship to Titan Pharmaceuticals, Inc."
At June 30, 1996, the Company had no cash and cash equivalents, and a
working capital deficit of approximately $925,000.
The Company is a party to several license agreements and a sponsored
research agreement. See "Business --Product Research and Development" and
"--Proprietary Rights." The Company may terminate its rights under such
license agreements at any time upon prior notice to the relevant licensors.
In the event that Ingenex elects to continue to license the technology
covered by all such existing licenses, the fixed annual license fees payable
by it would be $99,000 in fiscal 1996, $136,500 in fiscal 1997, $138,500 in
fiscal 1998, $153,500 in fiscal 1999, $178,500 in fiscal 2000 and $221,000
per fiscal year thereafter. The actual fixed annual license fees paid by
Ingenex may vary if Ingenex terminates any of its current license agreements
and/or enters into new license agreements. In addition to such annual license
fees, Ingenex is obligated to pay approximately $240,000 (in the aggregate)
under its extended sponsored research agreement with MD Anderson related to
the clinical trials of MDRx1.
The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to conduct its
research and development programs, preclinical studies and clinical trials of
its potential pharmaceutical products (including MDRx1 and RB94), and the
commercialization of pharmaceutical products that are developed, if any. The
Company's capital requirements will depend on numerous factors, including the
progress of its research and development programs, the scope and results of
preclinical studies and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs of filing, prosecuting, defending
and enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing
research relationships, the ability of the Company to establish and maintain
collaborative arrangements and the development of commercialization
activities and arrangements.
The report of the Company's independent accountants with respect to the
Company's financial statements for the fiscal year ended December 31, 1995
includes an explanatory paragraph indicating that certain conditions raise
substantial doubt as to the ability of the Company to continue as a going
concern, although the Company believes that this explanatory paragraph would
have been omitted if the Offering had been completed as of the date of such
report. The Company expects that the net proceeds from the Offering will be
sufficient to fund its planned operations for the next 18 months. Over the
next 18 months, the Company intends to engage in both clinical trials and
research and development activities. The Company estimates (based on its
current operating budget) that approximately $7,800,000 will be expended over
the next 18 months in the clinical trial relating to MDRx1 and further
research and development of RB94 and of the GSX System. There can be no
assurance, however, that such budgeted amounts will not be adjusted in the
future. Further, the Company expects to pay approximately $180,000 under its
services agreement with Titan over the next 18 months and approximately
$360,000 under the Sublease over the next 18 months. In addition, the Company
anticipates paying approximately $500,000 in the aggregate over the next 18
months for the opening of an additional research and development
23
<PAGE>
facility in North Carolina. The Company will use the balance of the net
proceeds for working capital and other general corporate purposes. See "Use
of Proceeds," "Business --Product Research and Development," "--Proprietary
Rights" and "--Relationship to Titan Pharmaceuticals, Inc."
The Company will be required to seek additional financing in the future to
continue its research and development activities. The Company will seek to
obtain additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. The Company does not have any commitments or arrangements to obtain
such financing, and there can be no assurance that the Company will not
require such additional financing prior to the end of the next 18 months, or
that it can obtain such financing on satisfactory terms, or at all. In the
event that the Company fails to raise any funds it requires, it may be
necessary for the Company to significantly curtail its activities or cease
operations. See "Risk Factors --History of Operating Losses; Need for
Substantial Additional Financing" and "Use of Proceeds."
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," which requires an asset and liability approach for financial
accounting and reporting for income taxes. There was no effect on the
Company's financial statements as a result of its adoption of this SFAS since
the Company has incurred losses since its inception.
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $11,600,000 and research and development tax credit
carryforwards of approximately $300,000 for federal income tax purposes
available to offset future taxable income. Such carryforwards expire at
various dates between fiscal 2007 and 2010. The Tax Reform Act of 1986
contains certain provisions that may limit the Company's ability to utilize
net operating loss and tax credit carryforwards in any given year if certain
events occur, including cumulative changes in ownership interests in excess
of 50% over a three-year period. Assuming Titan purchases 200,000 shares of
Common Stock in the Offering, consummation of the Offering will not result in
such change in ownership.
In October 1995, the FASB also issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which established financial accounting and
reporting standards for stock-based employee compensation plans. Companies
are encouraged, rather than required, to adopt a new method that accounts for
stock compensation awards based on their fair value using an option pricing
model. Companies that do not adopt this new standard for financial statement
reporting will have to make pro forma disclosure of net loss and net loss per
share in the footnotes to the financial statements as if the fair value-based
method of accounting required by this standard had been applied. The
accounting requirements of this standard are effective for fiscal 1996. The
pro forma disclosures are required for fiscal 1995 and 1996. The Company
expects to adopt the pro forma disclosure requirements.
24
<PAGE>
BUSINESS
Ingenex is a biopharmaceutical company engaged in the development of
proprietary gene-based therapies and the application of functional genetics
to pharmaceutical discovery. The Company's initial commercial strategy is to
develop gene therapy products for the oncology market. The Company currently
is sponsoring a Phase I/II clinical trial of MDRx1, a gene therapy product
aimed at limiting the destruction by cytotoxic drugs of normal blood-forming
cells in the bone marrow of cancer patients undergoing chemotherapy. The
Company believes that MDRx1 will permit the administration of increased doses
of cytotoxic drugs to cancer patients, resulting in the increased efficacy of
chemotherapy. Ingenex also is developing a gene therapy product based on
RB94, a modified form of RB, a tumor suppressor gene. This product is
intended to cause the regression of localized, malignant cancers. In
addition, the Company is building a new, proprietary genomics technology, the
GSX System, which identifies genes based on the specific inhibition of their
function and is designed to pinpoint key steps in a disease pathway for
therapeutic intervention. Ingenex believes that the GSX System may be used to
develop treatments for a wide range of diseases through the discovery of both
gene therapy products and small molecule drugs.
GENE DISCOVERY AND GENE THERAPY
Gene Discovery: Genomics and Functional Genetics
The activities of all living cells are controlled by the genetic programs
encoded within their DNA. DNA is organized into segments called genes, with
each gene containing the information required to express, or produce, a
specific protein. The DNA code contained in a gene is copied to first produce
an intermediate, called "messenger RNA," which serves as a template to direct
the correct assembly of the appropriate protein. Proteins are the fundamental
components of living cells and are essential to their structure, growth,
metabolism and specialized function. In higher organisms, which contain a
variety of types of cells (such as nerve, muscle, blood and epithelial), many
proteins are produced only in particular sets of cells.
Abnormalities in genes and their expression contribute to many diseases.
Some diseases, such as cystic fibrosis, can be attributed to specific genetic
abnormalities, or mutations, in one out of the approximately 100,000 human
genes. Such gene mutations may cause the production of aberrant proteins or
the complete absence of particular proteins. Other diseases, such as cancer,
cardiovascular disease, diabetes and Alzheimer's Disease, appear to involve
mutations or variations in multiple genes. Cancer, in particular, displays a
very strong genetic influence. Some individuals inherit mutations that
predispose them to develop various cancers, such as those of the breast,
colon or kidney. In addition, mutations can occur in growing cells of the
body that cause the transformation of normal cells into cancer cells and that
promote the progressive growth and spread of malignant tumors. There is also
a strong genetic influence in the progression of viral diseases. Viruses
introduce their own genes into host cells in order to reproduce. Mutations in
such viral genes may allow the virus to overcome both host defense mechanisms
and anti-viral drugs.
Numerous scientists in the public and private sectors are currently
working to identify and patent genes and gene sequences involved in disease
processes. In particular, some companies and academic laboratories are using
high-throughput automated DNA sequencing and computerized database techniques
in an attempt to sequence all expressed human genes and to catalogue the
types of cells in which particular genes are expressed. Other companies and
academic laboratories are concentrating primarily on the use of genetic
mapping and "positional cloning" strategies to find genetic mutations or
variants associated with increased susceptibility to various diseases.
Collectively, such studies of gene organization, structure and disease
association are referred to as "genomics." Despite the recent dramatic
advances in human genomics, the knowledge of a gene's DNA sequence alone does
not identify its biological role. Furthermore, the identification of a gene
that appears to be associated with a disease process usually does not suggest
a way to treat that disease.
A gene is a discrete DNA sequence with a specific biological function. A
short piece or fragment of a gene may also exert a specific biological
effect. Gene fragments may act via any of several mechanisms
25
<PAGE>
to suppress or inhibit a biological process. Some produce "antisense" RNA
molecules that interfere with the proper expression of the corresponding
full-length gene. Others appear to produce short RNA molecules or fragments
of proteins that interfere or compete with the action of intact proteins.
Functional genetics focuses on the identification of genetic elements
displaying properties thought to be predictive of a beneficial therapeutic
outcome. The isolation of functional genetic elements capable of affecting a
disease process does not depend on having prior knowledge of the genetic
basis of that disease.
Gene Therapy
Gene therapy involves the insertion of genetic material into cells in an
attempt to produce a medically beneficial outcome. In some cases, the goal of
gene therapy is to produce a specific protein needed to correct or modulate a
disease condition. For instance, if a disease results from a mutation that
inactivates a particular human gene, then the goal of gene therapy would be
to insert a normal copy of that gene into those cells in which the
corresponding protein is required. Such gene replacement may not be effective
for the treatment of infectious diseases or for many other major human
diseases that generally do not arise from mutations in a single gene.
However, a gene or gene fragment capable of introducing a new functional
capacity to a cell or actively blocking a key step in a disease process may
provide the basis for effective gene therapy.
Gene therapy products require both a therapeutic genetic element and a
delivery system, or "vector," to transfer that element into, and allow it to
be expressed by, the correct target cells. The process of gene transfer can
be accomplished ex vivo, in which cells are removed from the body,
genetically modified and then restored to the patient, or in vivo, in which
the vector carrying the therapeutic gene is injected directly into the
patient's circulation or into a specific organ or tumor. A number of gene
therapy vectors have been derived from viruses, including retroviruses,
adenoviruses, adeno-associated viruses and herpes viruses, among others, and
nonviral delivery systems also are under development. To ensure safety, viral
vectors generally are crippled to prevent replication in the patient's body,
while still allowing the efficient transfer of therapeutic genes. See "Risk
Factors --Technological Uncertainty."
TECHNOLOGICAL AND COMMERCIAL STRATEGY
Ingenex's functional genetics strategy is designed not only to discover
novel therapeutic genetic elements, but also to enable the discovery of small
molecule drugs. The Company focuses on the identification of genes and gene
fragments that are capable of altering the genetic program of a cell or
organism so as to effect a desired change in its properties or behavior.
Ingenex's proprietary GSX System utilizes functional selection to identify
gene fragments that may confer medically useful properties to cells, such as
resistance to viruses, or increased sensitivity to therapeutic drugs. In some
instances, the application of such discoveries may be as gene therapy
products. However, in other cases it may prove more effective to employ the
information obtained from the GSX approach to screen for chemical inhibitors
that mimic the effect of a selected gene fragment on a disease process. In
such a drug discovery strategy, the principal value of the genetic
information is to define and validate biochemical targets and assays prior to
the inception of expensive and time-consuming searches for chemical leads.
Ingenex intends to develop gene therapy products, primarily for the
oncology market. Because of the substantial financial requirements to support
larger scale clinical testing, the Company anticipates that it will seek
alliances with larger corporations for later stage development programs. In
its development of gene therapy products, Ingenex concentrates on the
identification of therapeutic genetic elements. The Company believes that
various vectors have advantages and disadvantages for particular
applications, and that it will be beneficial to choose a delivery system
well-matched to each therapeutic genetic element and anticipated use. Ingenex
therefore intends to access multiple delivery systems by seeking
collaborative relationships and/or licensing agreements with institutions or
companies developing such systems. With respect to small molecule discovery
programs, the Company intends to enter into collaborative relationships with
biopharmaceutical companies engaged in drug discovery in order to access
their medicinal chemistry resources.
26
<PAGE>
PRODUCT RESEARCH AND DEVELOPMENT
Ingenex currently has one gene therapy product for cancer, MDRx1, in
clinical development and a second, RB94, in preclinical development. The
Company also is utilizing its GSX System in an in-house research program to
attempt to identify genetic suppressors of HIV replication that potentially
could lead to the development of a gene therapy product for the treatment of
Acquired Immunodeficiency Syndrome ("AIDS"). The following table summarizes
the potential target indications and status of the Company's current research
and development programs. Due to the early stage of the research and
development of the Company's potential products and the new and evolving
nature of gene therapy technology generally, the Company cannot predict with
any certainty when it will be able to commercialize any of its potential
products, if at all. Moreover, the Company's research and development
activities are dependent upon the Company maintaining existing, and
establishing new, collaborative arrangements, and there can be no assurance
that the Company will be able to maintain or enter into such collaborative
arrangements or that any such collaborative arrangements will lead to the
development of a successful product. There can also be no assurance that,
even if a product is developed, required regulatory approvals will be
obtained, such product will be safe and effective or such product will be
commercialized. See "Risk Factors," including "--Early Stage of Development,"
"--Dependence on License and Sponsored Research Agreements," "--Technological
Uncertainty" and "--Government Regulation."
<TABLE>
<CAPTION>
PROGRAM DEVELOPMENT STATUS INITIAL INDICATION
- -------------------- --------------------------------- --------------------------------------
<S> <C> <C>
MDRx1 Phase I/II Clinical Testing(1) Protection against toxicity of
Gene Therapy chemotherapeutic drugs in patients
with ovarian and breast cancer
RB94 Preclinical Development(2) Treatment of prostate cancer
Tumor Suppressor
GSX System Research(3) Treatment of viral infections (HIV)
</TABLE>
- ------------
(1) Initial clinical testing of MDRx1 at MD Anderson commenced in December
1994 (in connection with the treatment of ovarian cancer) and January
1995 (in connection with the treatment of breast cancer). The purpose
of such testing is to determine whether cells modified by MDRx1 can be
safely reintroduced and maintained in cancer patients as they undergo
multiple cycles of chemotherapy at increasing doses. The Company
expects such trial to be completed in late 1996 or early 1997.
(2) Preclinical development includes pharmacological testing in animals,
toxicology testing, formulation work and manufacturing scale-up.
(3) Research includes research related to identification of drugs and/or
therapeutic genetic elements.
MDRX1
Chemotherapy has been one of the oncologists' primary weapons in combating
cancer. There is, however, wide variation in tumor susceptibility to
chemotherapy. Some cancers, such as childhood acute lymphocytic leukemia,
choriocarcinoma, Hodgkin's disease and diffuse large cell lymphoma, are
relatively sensitive to cytotoxic drugs. Other cancers, such as melanoma,
renal cancer and pancreatic cancer, appear much more resistant to
chemotherapy. However, many of the most common cancers, such as bladder,
breast, colon, lung and ovarian cancer, display moderate sensitivity to
chemotherapy and would potentially respond more completely to higher doses of
cytotoxic drugs, if such higher doses could be tolerated by the patient.
27
<PAGE>
The major impediment to administering higher, potentially more efficacious
doses of available cytotoxic drugs is that, in addition to destroying cancer
cells, such drugs also damage certain healthy cells in the body. The drugs
used in cancer therapy often are particularly toxic to those normal cells
that proliferate most actively, especially progenitor or stem cells of white
blood cells, red blood cells and platelets. As a result, significant side
effects of cancer chemotherapy include infection, bleeding and anemia.
Another significant problem that limits the effectiveness of current
chemotherapy is the simultaneous resistance of certain tumor cells to several
structurally unrelated classes of cytotoxic drugs, such as doxorubicin,
etoposide (VP-16), Taxol(Registered Trademark) (paclitaxel) and vinca
alkaloids, while other tumors develop similarly broad resistance during the
course of treatment. The phenomenon of cross resistance to multiple classes
of drugs is known as "multidrug resistance."
The gene responsible for the multidrug resistance of many human cancer
cells, MDR-1, has been identified largely through the work of Dr. Igor
Roninson, a consultant to the Company and an original member of its
Scientific Advisory Board, and his collaborators. See "--Scientific Advisory
Board." A characteristic feature of multidrug resistance is the decreased
intracellular accumulation of cytotoxic drugs due to the pumping of these
drugs back across the cell membrane. This active extrusion of drugs out of
potentially susceptible cells is mediated by a transport protein,
P-glycoprotein, which is produced by the MDR-1 gene. The resistance of many
cancer cells to chemotherapeutic drugs appears to result from overproduction
of P-glycoprotein.
The identification and molecular cloning of the human MDR-1 gene suggests
a potential gene therapy to facilitate more effective chemotherapy. Normal
cells that are especially susceptible to destruction by chemotherapeutic
drugs appear to express low or undetectable levels of P-glycoprotein. Ingenex
believes that if normal bone marrow progenitor or stem cells could be
genetically modified so as to produce significantly elevated levels of
P-glycoprotein, then such cells, and the mature blood cells they produce,
would become less susceptible to destruction by cytotoxic drugs. This, in
turn, might allow more aggressive chemotherapy and improved treatment
outcomes for certain cancers. MDRx1 is based on the insertion and expression
of MDR-1 into progenitor or stem cells, purified from bone marrow or blood,
in order to produce P-glycoprotein. The introduction of MDR-1 into bone
marrow progenitor or stem cells is intended to make blood cells less
sensitive to destruction by cytotoxic drugs, thereby potentially enabling
more aggressive chemotherapy. There can be no assurance, however, that MDRx1
will allow such protection, that other dose-limiting toxicities of the
chemotherapeutic drugs will not occur or that the MDR-1 gene will not be
inadvertently delivered to tumor cells, thereby enhancing the resistance of
such cells to the relevant chemotherapeutic drug.
As the following graph illustrates, a preclinical study in mice performed
by the investigators sponsored by Ingenex at MD Anderson demonstrated that
the treatment of bone marrow stem cells with MDRx1 led to a significant
increase in the resistance of white blood cell production to treatment with
the cytotoxic drug, Taxol(Registered Trademark).
28
<PAGE>
INSERTION OF INGENEX'S MDRX1 INTO BONE MARROW STEM CELLS PROTECTS AGAINST
DESTRUCTION OF WHITE BLOOD CELLS IN MICE TREATED WITH TAXOL(REGISTERED
TRADEMARK)
#############################################################################
GRAPHIC TO COME
#############################################################################
Mice were given transplants of bone marrow cells genetically modified with
the human MDR-1 gene. These mice were treated with Taxol(Registered
Trademark), and white blood cell counts were measured. After recovery,
bone marrow cells were transplanted into a new mouse, and Taxol(Registered
Trademark) treatment was repeated. This process was repeated for up to six
cycles. Increased resistance to destruction of white blood cells by
Taxol(Registered Trademark) was observed after each treatment cycle,
indicating that MDRx1-modified stem cells retained the ability to
repopulate the bone marrow.
Based on these preclinical studies, the United States Recombinant DNA
Advisory Committee (the "RAC") and the FDA approved the commencement of a
clinical trial of MDRx1 in patients with ovarian and breast cancer. This
Phase I/II clinical trial began in December 1994 (with respect to ovarian
cancer) and January 1995 (with respect to breast cancer). The investigators
sponsored by the Company at MD Anderson have introduced MDR-1 via a
retrovirus vector into blood progenitor or stem cells removed from 20
patients with ovarian or breast cancer who have then undergone bone marrow
transplantation with their own modified cells in order to assess whether
cells genetically modified for multidrug resistance can be safely
reintroduced and maintained in cancer patients as they undergo multiple
cycles of chemotherapy with Taxol(Registered Trademark). The results of such
clinical trial may suggest whether the modified cells will improve patients'
ability to tolerate chemotherapy. The Company expects such trial to be
completed in late 1996 or early 1997.
The Phase I/II clinical trial of MDRx1 at MD Anderson is funded by the
Company pursuant to a sponsored research program with MD Anderson. Dr. Albert
Deisseroth, an original member of the Company's Scientific Advisory Board, is
the principal investigator of the trial. See "--Scientific Advisory Board."
Pursuant to the Company's sponsored research agreement with MD Anderson, the
initial term of which was set to expire in March 1996, the Company has paid
MD Anderson approximately $1,240,000 for costs and expenses of the program.
The Company and MD Anderson have agreed to extend the sponsored research
agreement from March 1996 through December 1996 in return for the Company's
payment of $240,000 in ten equal monthly installments beginning in March
1996. If Ingenex fails to make such payments in accordance with the terms of
the sponsored research agreement or fails to comply with certain other terms
and conditions, MD Anderson may terminate the agreement. Through its
sponsored research agreement with MD Anderson, Ingenex has an option to
exclusively license any patentable technology that may be developed by MD
Anderson under the program. The sponsored research agreement with MD Anderson
will expire in December 1996 unless extended by the Company, in its sole
discretion, to March 1998. See "Risk Factors --Dependence on License and
Sponsored Research Agreements."
29
<PAGE>
RB94
Normal cell division is tightly controlled by the interaction of growth
promoting signals counterbalanced by growth constraining signals. Cancer is
thought to result from the accumulation in growing cells of mutations that
disrupt this genetic system of checks and balances, so that cells can
proliferate in an uncontrolled manner. Altered genes that actively drive the
growth of cancer cells are called oncogenes. Genes that help to maintain
normal regulation of cellular proliferation are called tumor suppressors. The
development of many types of cancers appears to result from both the
activation of oncogenes and the inactivation of tumor suppressor genes. The
mutation or loss of specific tumor suppressor genes has been linked to the
progression of several common human cancers. For example, inactivation of the
RB tumor suppressor gene has been observed in a significant fraction of a
diverse group of common solid tumors. Mutations affecting other tumor
suppressor genes, such as p53, also appear in many human cancers.
It is widely believed that a potential gene therapy for the treatment of
cancer would be to restore to malignant cells a normal, functional copy of a
specific tumor suppressor gene that had been inactivated during the
progression of a particular tumor. Studies in cell cultures and in animal
models have provided encouraging support for this approach. Various
scientists have demonstrated that the transfer of a normal tumor suppressor
gene (e.g., RB or p53) to certain cancer cell lines in which that gene had
been inactivated results in growth inhibition and tumor suppression.
Growth arrest by tumor suppressor genes is often transient or incomplete.
This phenomenon, termed "tumor suppressor gene resistance," represents a
significant challenge to cancer treatment based on the restoration of tumor
suppressor genes. As shown in the figures below, the investigators sponsored
by the Company at MD Anderson, formerly affiliated with Baylor, have reported
that cancer cells treated with RB94, a truncated form of the RB tumor
suppressor gene, appear much less susceptible to tumor suppressor gene
resistance than cells treated with the naturally-occurring, full-length RB
gene. Furthermore, these scientists have reported that RB94 appears to block
the growth of other human tumors that retain the naturally-occurring,
full-length RB gene.
EFFECTIVENESS OF INGENEX'S RB94 IN CAUSING REGRESSION OF AN RB-NEGATIVE
HUMAN TUMOR
#############################################################################
GRAPHIC TO COME
#############################################################################
Human cancer cells lacking a functional RB gene were grown in mice, and
the tumors were injected with either the RB gene or RB94, each using the
same delivery vector. "Control" refers to tumors injected with no tumor
suppressor gene.
30
<PAGE>
INGENEX'S RB94 CAUSES REGRESSION OF AN RB-POSITIVE HUMAN TUMOR
#############################################################################
GRAPHIC TO COME
#############################################################################
Human cancer cells containing a functional RB gene were injected with
RB94. "Control" refers to tumors injected with no tumor suppressor gene.
There can be no assurance that the positive results of these studies would
correlate to similar results in human subjects.
Ingenex has exclusively licensed patent rights relating to RB94 from
Baylor and is developing a product that incorporates RB94 into a suitable
delivery system, such as one based on a human adenovirus, for the treatment
of localized tumors. Ingenex believes that an important medical use of RB94
gene therapy may be as a supplemental or alternative procedure to surgery in
the treatment of certain regionalized tumors such as those of the prostate
gland and bladder. The Company intends to focus its research and development
efforts on methods to introduce effective doses of RB94 into such tumors.
Ingenex intends to continue to develop RB94 in collaboration with a partner
with expertise in gene delivery and anticipates filing an IND in late 1997
for the use of RB94 to treat prostate cancer. However, there can be no
assurance that an IND will be filed within the anticipated time period, or at
all.
THE GSX SYSTEM
The Company's proprietary platform technology in functional genetics, the
GSX System, identifies genes based on their functional roles in a biological
or disease process through the isolation of short gene fragments that confer
a medically desirable cellular property, such as increased resistance of
cells to a virus. Ingenex believes that the GSX System, because it selects
genetic elements by virtue of their specific functions, represents an
important advance over methods that identify gene sequences or
disease-associated genes having no known cellular function.
Gene fragments selected by the GSX System may be utilized to develop new
gene therapy products. In addition, Ingenex believes that the GSX System can
facilitate the discovery of small molecule drugs. One of the key steps in
many drug discovery programs is the choice of a biochemical target, usually a
specific protein such as an enzyme or a receptor, that a drug may inhibit or
activate to cause a pharmacological effect. However, target selection is an
uncertain trial and error process, often based on best guesses and unproven
assumptions about how to intervene to slow or halt a disease process. Because
the GSX System selects from a random collection of fragments only those gene
fragments that effect desired changes in cellular properties, the Company
believes that it provides a tool for the unbiased
31
<PAGE>
selection of valid drug targets. The Company believes that a fragment of a
given gene acting to block a disease process can facilitate the discovery of
small molecule drugs that are capable of achieving the same outcome and are
directed against the protein encoded by that gene.
The Company has initially focused its efforts to develop and validate the
GSX System on the discovery and characterization of protective gene fragments
capable of interfering with the replication of HIV. The Company has employed
functional selection to identify specific, potentially therapeutic genetic
suppressor elements ("GSEs") from libraries of random fragments of the HIV
genome. The Company believes that such GSEs could potentially be incorporated
into a gene therapy product to protect cells of the immune system in patients
with AIDS. A key goal of future research will be to identify the most potent
gene fragments, derived from the HIV genome and/or human genes, capable of
blocking either the activation of HIV in latently infected cells or the
replication of HIV in previously uninfected cells. The Company believes that
a particular benefit of the GSX System is that GSEs of short length can be
identified so that it may be possible to combine several therapeutic genetic
elements in a single product without exceeding the capacity of available
delivery systems. As illustrated in the graph below, several gene fragments,
each derived from a different HIV gene, limit HIV infection in human cells.
The three examples shown in this illustration are representative of a larger
set and were not necessarily chosen to be the most effective. The Company
believes that a combination in a single product of multiple GSEs directed at
different target genes of HIV in a single product potentially could increase
such product's efficacy and reduce the chances of acquired viral resistance
by mutation.
INGENEX'S ANTI-HIV GSES LIMIT HIV INFECTION OF HUMAN CELLS IN CULTURE
#############################################################################
GRAPHIC TO COME
#############################################################################
Three different anti-HIV GSEs derived from HIV (IGX-009, IGX-004 and
IGX-230) were inserted into uninfected human cells in culture. The cells
were then exposed to a virulent strain of HIV, and the percentage
remaining free of active virus was measured over time. "Control" refers to
a cell culture lacking a protective GSE.
32
<PAGE>
The Company has recently been awarded by the NIH a two year Phase II SBIR
grant in the amount of approximately $716,000 to fund its development of a
gene therapy product for AIDS. The Company intends to collaborate with
scientists at the Duke University School of Medicine, Durham, N.C., including
Dr. Eli Gilboa, a member of the Company's Scientific Advisory Board, in
connection with such development, and a portion of the grant was designated
for such collaboration. See "--Scientific Advisory Board."
Ingenex believes that the GSX System may have other important medical
applications, including the identification of novel antiviral targets useful
in drug discovery. The Company has carried out preliminary experiments to
demonstrate the feasibility of selecting gene fragments protective against
the Hepatitis B Virus. In addition, studies utilizing the GSX technology to
identify genetic elements and drug targets of potential value for the
treatment of cancer already have been reported by Ingenex's academic
collaborators at UIC, and the Company has licensed certain of their
inventions. In an in-house research project supported by a Phase I SBIR grant
from the NIH, the Company has selected GSEs that appear to reverse multidrug
resistance in human cells.
The Company anticipates that it will continue to apply the GSX System to
attempt to identify novel targets for the treatment of cancer and other
diseases, both in-house and in collaboration with academic institutions and
other companies. It is likely that other disease targets also will be chosen,
as appropriate libraries, selection strategies and academic and corporate
collaborations are developed. However, there can be no assurance that the
discoveries, if any, made with the GSX System will result in the successful
development of gene therapies or drugs.
SCIENTIFIC ADVISORY BOARD
The Company has a Scientific Advisory Board ("SAB") comprised of
individuals with extensive experience in the Company's fields of interest.
The SAB members meet as a board with management and key scientific employees
of the Company on a semi-annual basis and in smaller groups or individually
on an informal basis from time to time. The members of the SAB are not
compensated for attending meetings (except that each of Drs. J. Levy, R.
Levy, D. Nathan and A. Varshavsky receives $2,000 for each SAB meeting
attended), are not employees of the Company and are not obligated to devote
any specified amount of time to the affairs of the Company. See "Management
- --Consulting Agreements." The Company anticipates that the SAB members will
assist the Company in identifying scientific and product development
opportunities, in reviewing and evaluating with management the progress of
research programs and in recruiting and evaluating scientists and other
employees. Certain members of the SAB have been granted options to purchase
shares of Common Stock. See "Management --1994 Stock Option Plan."
The SAB presently consists of the following members:
RICHARD L. DAVIDSON, PH.D., is the Benjamin Goldberg Professor and the
Head of the Department of Genetics at UIC. Dr. Davidson is an original member
of the SAB. Dr. Davidson's laboratory at UIC is currently investigating
molecular mechanisms of gene regulation and mutagenesis in mammalian cells.
Dr. Davidson's research involves a combination of the techniques of somatic
cell genetics with those of molecular biology. Dr. Davidson was the recipient
of the University of Illinois College of Medicine Faculty of the Year Award
in 1991. He has been the Editor-in-Chief of the journal entitled Somatic Cell
and Molecular Genetics since 1983. Dr. Davidson is also the editor of the
book entitled Somatic Cell Hybridization and has been an Associate Editor of
the journal entitled Cancer Research since 1991. He was the Editor-in-Chief
of the journal entitled Somatic Cell Genetics from 1974 to 1983. Dr. Davidson
received both his B.A. in Chemistry and his Ph.D. in Biology from Case
Western Reserve University.
ALBERT DEISSEROTH, M.D., PH.D., is the Ensign Professor of Medicine and
Chief of the Medical Oncology Section in the Department of Medicine at the
Yale University School of Medicine. He is also the Associate Director for
Clinical Research at the Yale Cancer Center. Before joining Yale in September
1995, Dr. Deisseroth was the Anderson Professor of Cancer Treatment and
Research and Chairman of the Department of Hematology at MD Anderson. Dr.
Deisseroth is an original member of the SAB. He has published over 300
scientific papers and has written extensively in the area of bone marrow and
peripheral
33
<PAGE>
blood transplantation and in the area of leukemias, lymphomas and solid
tumors. Dr. Deisseroth received his B.A. in Chemistry, his Ph.D. in
Biochemistry and his M.D. from the University of Rochester.
ELI GILBOA, PH.D., is a Professor in the Departments of Surgery and
Immunology at the Duke University Medical Center. Dr. Gilboa's work is
currently focused in the area of gene therapy applications to HIV and cancer.
Dr. Gilboa is the author of numerous scientific publications. He received the
CapCURE Foundation Research Award for Gene Therapy for Prostate Cancer in
1993 and the NIH M.E.R.I.T. Award in 1992. Dr. Gilboa received his B.S. in
Biochemistry from Hebrew University in Israel and his Ph.D. in Molecular
Biology from the Weizmann Institute in Israel.
ANDREI GUDKOV, PH.D., is an Assistant Professor in the Department of
Genetics at UIC. Dr. Gudkov is the former Head of the Laboratory of Molecular
Genetics at the Cancer Research Center in Moscow. He has published over 60
scientific articles and reviews. Dr. Gudkov received his M.S. in Virology
from Moscow State University, his Ph.D. in Experimental Oncology from the
Cancer Research Center in Moscow and his D.Sci. in Molecular Biology from
Moscow State University.
JAY A. LEVY, M.D., is a Professor of Medicine at the Cancer Research
Institute at the University of California School of Medicine in San
Francisco. He is an original member of the SAB. Dr. Levy has received
numerous awards and honors as a distinguished lecturer, most recently as the
Henry T. Finch, Jr. Lecturer at the Regional HIV AIDS Consortium in
Charlotte, North Carolina in 1995. He received the Award of Distinction from
the American Foundation for AIDS Research in 1994. Dr. Levy is the editor of
a textbook on AIDS and has served on the editorial boards of numerous
scientific journals. Dr. Levy received his B.A. from Wesleyan University and
his M.D. from Columbia University.
RONALD LEVY, M.D., is a Professor of Medicine and the Chief of the
Division of Oncology at the Stanford University School of Medicine. Dr. Levy
is an original member of the SAB. Dr. Levy has published over 200 scientific
papers. He received his A.B. in Biochemistry from Harvard University and his
M.D. from Stanford University School of Medicine.
DAVID G. NATHAN, M.D., is a Professor of Pediatrics and holds the Richard
and Susan Smith Professor of Medicine Chair at Harvard Medical School. Dr.
Nathan is an original member of the SAB. He has been the President of the
Dana-Farber Cancer Institute since 1995 and served as the Physician-in-Chief
at Children's Hospital in Boston from 1984 to 1995. Dr. Nathan was awarded
the National Medal of Science in 1990. He is the author of over 250
scientific papers and has served on the editorial board of many medical
journals, including the Journal of Clinical Investigation, Blood and the New
England Journal of Medicine. He is the hematology editor for Cecil's Textbook
of Medicine and is the primary editor of a textbook entitled Hematology of
Infancy and Childhood, now in its fourth edition. Dr. Nathan received his
B.A. in English Literature from Harvard College and his M.D. from Harvard
Medical School.
IGOR B. RONINSON, PH.D., is the Chairman, and an original member, of the
SAB. He is a Professor in the Department of Genetics and the Head of the
Division of Molecular Oncology at UIC. Dr. Roninson is currently researching
the molecular biology of cancer. Dr. Roninson is one of the scientists
credited with the discovery of the multidrug resistance gene, MDR-1, and the
inventor of the subject matter covered by certain patents licensed to the
Company by UIC. He is the author of over 80 articles and book chapters and
the editor of a book on multidrug resistance in cancer. Dr. Roninson was the
1994 recipient of the C.P. Rhoads Award from the American Association for
Cancer Research. He received his Ph.D. in Biochemistry from MIT.
ALEXANDER J. VARSHAVSKY, PH.D., is the Howard and Gwen Laurie Smits
Professor of Cell Biology at the California Institute of Technology. Dr.
Varshavsky has published over 120 scientific papers on topics such as gene
expression and chromosome structure, DNA replication, drug resistance and
gene amplification. Dr. Varshavsky received his B.S. in Chemistry from Moscow
University and his Ph.D. in Biochemistry from the Institute of Molecular
Biology in Moscow.
Members of the SAB may be employed by, or have consulting agreements with,
entities other than the Company, some of which may conflict or compete with
the Company, or which may limit a particular member's availability to the
Company. In particular, certain of the institutions with which the SAB
members are affiliated may have regulations or policies with respect to the
ability of such personnel to act
34
<PAGE>
as part-time consultants or in other capacities for a commercial enterprise.
Regulations or policies now in effect or adopted in the future might limit
the ability of the SAB members to consult with the Company. The loss of the
services of certain of the SAB members could adversely affect the Company.
Inventions or processes discovered by any SAB member, unless otherwise
agreed, will not become the property of the Company but will remain the
property of such person or of such person's full-time employers. However,
each current SAB member has entered into a consulting agreement with the
Company that provides that any inventions discovered by the consultant while
performing services for the Company will be the sole property of the Company
(except as may otherwise be provided by the policies of such SAB member's
full-time employer). See "Management --Consulting Agreements." The
institutions with which the SAB members are affiliated may make available the
research services of their scientific and other skilled personnel, including
the SAB members, to entities other than the Company. In rendering such
services, such institutions may be obligated to assign or license to a
competitor of the Company patents and other proprietary information which may
result from such services.
PROPRIETARY RIGHTS
At the present time, Ingenex does not own any patents, although it does
have pending one U.S. patent application filed in December 1995 relating to
certain GSEs associated with HIV. Currently, the Company relies on
third-party licenses to obtain rights in respect of certain patents and
patent applications and other proprietary rights owned by such third parties
that are essential to the research and development of its proposed processes
and products. The license agreements that have been entered into by the
Company typically require the payment of license fees and royalties based on
sales of licensed products and processes with minimum annual royalties, the
use of due diligence in bringing products to market, the achievement of
funding milestones and, in some cases, the issuance of Common Stock to the
licensor. The Company intends to enter into collaborative arrangements with
respect to the manufacturing and marketing of its proposed products. See
"--Manufacturing and Marketing." The Company is also obligated under the
licenses to indemnify its licensors against certain liabilities, including
liabilities arising out of product liability claims. In those cases where the
technology licensed to the Company was developed, at least in part, with
federal funds, the license to the Company is subject to a statutory
non-exclusive, non-transferable, irrevocable, paid-up license retained by the
U.S. government for use by, or on behalf of, the U.S. government. A summary
of the Company's material licenses is set forth below. The Company's failure
to comply with the terms of the licenses could lead to their termination.
Termination of one or more of the licenses would have a material adverse
effect on the Company. See "Risk Factors--Dependence on License and Sponsored
Research Agreements."
UIC Licenses
In May 1992, the Company acquired two exclusive worldwide licenses (the
"May 1992 UIC Licenses") from UIC regarding patent properties relating to the
GSX System and the human MDR-1 gene. Each of the May 1992 UIC Licenses
continues in effect until the expiration of the last to expire patent covered
by such license or, if earlier, termination by UIC for cause or by Ingenex
upon notice to UIC. The exclusive nature of the May 1992 UIC Licenses is
subject to certain reservations, including the use of all or part of the
subject matter of the licenses for research, educational and other
non-commercial purposes. In addition, Ingenex's rights under the license
relating to the human MDR-1 gene are subject to a non-exclusive right granted
to Glaxo-Wellcome, PLC to introduce the MDR-1 gene into the cell lines by
transfection and to use such transfectants to conduct research in producing
drugs for research purposes. Glaxo does not, however, have the right to sell
or transfer to any third party the transfectants, or any derivatives thereof,
without the written authorization of UIC. The May 1992 UIC Licenses provide
for the payment of license issue fees totaling, in the aggregate,
approximately $145,000 (all of which have been paid through June 30, 1996),
royalties based on sales of products and processes incorporating the licensed
technology, subject to certain minimum royalty payments, royalties based on
sublicensing income, a percentage of revenues from research relating to the
subject matter of each May 1992 UIC License that is performed on a contract
basis for third parties and all costs and expenses associated with patent
prosecution and maintenance. Under the May 1992 UIC Licenses, Ingenex must
use its best efforts
35
<PAGE>
to bring any products developed under the May 1992 UIC Licenses to market,
deliver and comply with a detailed business plan, obtain all necessary
government approvals and timely pay all license and royalty fees.
Additionally, the Company must use its best efforts to ensure that products
incorporating the licensed technology which are sold in the U.S. are
substantially manufactured or assembled in the U.S.
MIT License
In September 1992, Ingenex acquired an exclusive license (the "MIT
License") under a patent (issued in March 1993) assigned to MIT. The patent
covers the use of MDR genes for creating and selecting drug resistant
mammalian cells. The MIT License continues in effect until the expiration of
the underlying patent covered by such license or, if earlier, termination by
MIT for cause or by Ingenex upon notice to MIT. The MIT License is subject to
prior grants of non-exclusive licenses to Eli Lilly & Co. and Genetics
Institute, Inc. (a biotechnology company) for research purposes and
non-exclusive, commercial licenses that may be granted pursuant to options
granted to Eli Lilly and Genetics Institute to use aspects of the licensed
technology solely to manufacture and sell products that do not incorporate
genes claimed in the patent, proteins expressed by such genes or probes,
antibodies and inhibitors to such genes. The MIT License provides for the
payment of royalties based on net sales of products and processes
incorporating the licensed technology, subject to certain minimum annual
amounts, and a percentage of sublicensing income arising from the license of
such products and processes. In connection with the execution of the MIT
License, the Company issued to MIT 13,630 shares of Common Stock. An
aggregate of $13,500 has been paid to MIT in connection with the MIT License
through June 30, 1996. Under the MIT License, Ingenex must also use its
reasonable best efforts to bring any products developed under the MIT License
to market, deliver and comply with a detailed business plan and make timely
payment of all license and royalty fees.
Baylor License
In October 1992, Ingenex acquired an exclusive worldwide license (the
"Baylor License") under U.S. and foreign patent applications assigned to
Baylor relating to a modified tumor suppressor gene. The Baylor License
continues in effect until the expiration of the last to expire patent covered
by such license, or, if earlier, termination by Baylor for cause or by
Ingenex upon notice to Baylor. The Baylor License provides for royalties
based on net sales of products and processes incorporating the licensed
technology, subject to certain minimum annual amounts, and a percentage of
sublicensing income arising from the license of such products and processes.
In connection with the execution of the Baylor License, the Company issued to
Baylor and its designees an aggregate of 34,011 shares of Common Stock. An
aggregate of $38,000 has been paid to Baylor under the Baylor License through
June 30, 1996. Under the Baylor License, Ingenex must use its reasonable best
efforts to bring any products developed under the Baylor License to market,
deliver and comply with a detailed business plan, make timely payment of all
royalty fees and pay all costs and expenses incurred in patent filing,
prosecution and maintenance.
Proprietary Rights of Others
The Company is aware of a U.S. patent issued to a third party (U.S. Patent
4,912,039) (the "Riordan patent") relating to multidrug resistance. The
Riordan patent describes the isolation of two DNA molecules that code for
fractional portions of the hamster protein associated with multidrug
resistance (the "hamster MDR-1 gene"), whereas a patent licensed by the
Company (U.S. Patent 5,206,352) (the "Roninson patent") describes (and
claims) the entire human MDR-1 gene, which is the DNA that codes for the
entire protein associated with multidrug resistance in human cells.
Nonetheless, the Riordan patent claims a DNA molecule coding for a protein,
or a fragment of a protein, that is associated with multidrug resistance in
living cells, including human cells. The Riordan patent has an earlier
effective filing date than the Roninson patent, and there can be no assurance
that the Riordan patent will not be asserted against the Company. Thus, it
may be necessary for the Company to obtain a license under the Riordan patent
to pursue commercialization of its proposed gene therapy products utilizing
the MDR-1 gene. There can be no assurance that such a license, if required,
will be made available to the Company, if at all, on terms acceptable to the
Company. Failure to obtain such a license, if required, could have a material
adverse effect on the Company.
36
<PAGE>
The Company also is aware of a U.S. patent issued to a third party (U.S.
Patent 5,399,346) (the "Anderson patent") relating to ex vivo gene therapy.
The Anderson patent is reported to be exclusively licensed to Genetics
Therapy, Inc. The Company believes that the Anderson patent could be asserted
to cover gene therapeutics developed by the Company, to the extent that the
introduction of a gene into a subject's cells is performed ex vivo. In
January 1996, it was reported that an interference proceeding had been
instituted in the U.S. Patent and Trademark Office between the issued
Anderson patent and two pending patent applications. Depending on the outcome
of the interference, it may or may not be necessary for the Company to obtain
a license from a party to the interference (or its licensee) to pursue
commercialization of its proposed gene therapy products utilizing ex vivo
gene therapy. There can be no assurance that such a license, if required,
will be made available to the Company, if at all, on terms acceptable to the
Company. Failure to obtain such a license, if required, could have a material
adverse effect on the Company.
The Company has received notice that three companies, Chiron Corporation,
Sandoz AG, and Introgene NV, are opposing the grant of a European patent
corresponding to the Roninson patent, which the Company has licensed from
UIC, with claims directed to the human MDR-1 gene and gene fragments. While
the Company, through its licensor, intends to vigorously respond to the
oppositions, no assurance can be given as to the scope of the claims, if any,
which the European Patent Office ultimately will find patentable.
The Company is aware of the existence of a prior art reference (European
Patent Application 0 259 031) ("EP 0 259 031"), which discloses a DNA
sequence corresponding to the sequence of the RB94 DNA molecule that is
claimed in an issued U.S. patent licensed by the Company from Baylor (U.S.
Patent 5,496,731) (the "Baylor patent"). The Baylor patent also contains
claims directed to specific expression vectors containing the RB94 DNA
molecule. Although an issued patent is presumed valid, there can be no
assurance that the claims of the Baylor patent, if challenged, will not be
found invalid. In any event, given that EP 0 259 031 relates to DNA sequences
but not to methods of gene therapy, the existence of this reference alone
would not, as a matter of U.S. law, be expected to affect the patentability
of claims directed to the use of the RB94 DNA molecule in gene therapy for
certain cancers, which gene therapy claims presently are pending in a related
patent application licensed by the Company from Baylor. EP 0 259 031 further
discloses the deduced amino acid sequence encoded by the disclosed DNA
sequence, which amino acid sequence corresponds to that of the RB94 protein.
The U.S. Patent and Trademark Office, in a Final Office Action rejection, has
cited this reference as anticipating the claim directed to the RB94 protein,
which claim presently is pending in a second, related patent application
licensed by the Company from Baylor.
Further development of the Company's products depends upon the Company's
ability to maintain existing and establish new relationships with scientific
and corporate collaborators. The Company's MDRx1 product is currently being
clinically tested by the investigators sponsored by the Company at MD
Anderson. The Company's other gene therapy product, RB94, is in preclinical
development, and the Company intends to continue to develop this product in
collaboration with a partner with expertise in gene delivery. The Company's
in-house research program is utilizing the GSX System to identify genes
and/or gene fragments that potentially could lead to the development of
additional gene therapy products and may seek to collaborate with other
companies in such research and development. There can be no assurance that
the Company will be able to maintain or enter into any such collaborations,
or that any commercially valuable products or processes will be developed as
a result of any existing or proposed collaborations, or that Ingenex will be
able to successfully commercialize, exploit or protect any inventions or
discoveries arising out of such collaborations. Further, there can be no
assurance that any of Ingenex's licensed patent applications will result in
issued patents or that, upon issuance, any of its licensed patents will
afford protection against a competitor. Such competitors may include
companies with substantially greater financial and other resources than those
of the Company, and, therefore, with a potentially greater ability to
commercialize, exploit or protect their inventions and discoveries. See "Risk
Factors --Dependence on License and Sponsored Research Agreements" and
"--Competition; Rapid Technological Change."
37
<PAGE>
MANUFACTURING AND MARKETING
The Company does not have any manufacturing or marketing experience nor
does the Company anticipate having the resources in the foreseeable future to
allocate to the commercial manufacture or marketing of its proposed products
and, therefore, the Company intends to pursue collaborative arrangements with
other companies with respect to the manufacture and marketing of its proposed
products in the future. The future success of the Company will depend, in
part, on its ability to enter into and maintain relationships with such
corporate collaborators and their success in manufacturing and marketing any
products developed by the Company. To the extent that the Company determines
not to, or is unable to, enter into collaborative arrangements with respect
to the manufacture and marketing of its proposed products, significant
capital expenditures, management resources and time will be required for the
Company to establish a manufacturing facility and develop a sales and
marketing force. The Company has no experience in manufacturing or marketing.
There can be no assurance that the Company will be able to enter into
collaborative arrangements with respect to the manufacture and marketing of
its proposed products or, in lieu thereof, to establish a manufacturing
facility or develop a sales and marketing force, or be successful in gaining
market acceptance of its proposed products. The failure by the Company to
enter into collaborative arrangements to manufacture and market its proposed
products or to develop its own manufacturing and marketing capabilities would
have a material adverse effect on the Company.
GOVERNMENT REGULATION
The research, preclinical development and clinical trials conducted by the
Company, and the product manufacturing and marketing to be conducted for or
by the Company, are subject to regulation by the FDA and similar health
authorities in foreign countries. Preclinical testing in the U.S. is
generally conducted in the laboratory to evaluate the potential safety and
efficacy of a biological product. The results of these tests must be
submitted to the FDA as part of an IND before clinical testing can begin.
Typically, clinical testing involves a three-phase process, although in some
cases a single study may encompass more than one phase. Phase 1 consists of
testing the product in a small number of humans to determine its preliminary
safety and tolerable dose range. Phase 2 involves larger studies to evaluate
the effectiveness of the product in humans having the disease or medical
condition for which the product is indicated and to identify possible common
side effects in a larger group of subjects. Phase 3 consists of additional
controlled testing to establish clinical safety and effectiveness in an
expanded patient population of geographically dispersed test sites, to
evaluate the overall benefit-risk relationship for administering the product
and to provide an adequate basis for product labeling.
Among the conditions for clinical studies and IND approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to "good manufacturing practices" that must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical
compliance.
FDA approval of the Company's proposed products, as well as the
manufacturing processes and facilities used to produce such products, will be
required before such products may be marketed in the U.S. The process of
obtaining approvals from the FDA is costly, time consuming and often subject
to unanticipated delays. There can be no assurance that required approvals of
the Company's proposed products, processes or facilities will be granted on a
timely basis, or at all. Many academic institutions and companies doing
research in the gene therapy field are using a variety of approaches and
technologies. Any adverse results obtained by such researchers in preclinical
or clinical studies, even if not related to the Company's potential products,
could adversely affect the regulatory environment for gene therapy products
generally and possibly lead to delays in the approval process for the
Company's potential products. Any future failure to obtain or delay in
obtaining such approvals will materially and adversely affect the ability of
the Company to commercialize its proposed products. Moreover, even if
regulatory approvals are granted, such approvals may include significant
limitations on indicated uses for which any such products could be marketed.
Further, even if such regulatory approvals are obtained, a marketed drug or
biological compound and its manufacturer are subject to continuous regulatory
oversight, and
38
<PAGE>
later discovery of previously unknown problems may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. In addition, new government regulations may be established that could
delay or prevent regulatory approval of the Company's products, processes or
facilities. Failure of the Company to obtain and maintain regulatory
approvals of its products, processes or facilities would have a material
adverse effect on the Company.
The Company's research and development activities involve the controlled
use of hazardous materials. The Company is subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling
and disposing of such materials and certain waste products. Although the
Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any such
liability could exceed the financial resources of the Company. Although the
Company believes that it is currently in compliance in all material respects
with applicable environmental laws and regulations, there can be no assurance
that the Company will not be required to incur significant costs to comply
with such laws and regulations in the future, or that the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
The proposed products, processes and facilities of the Company may also be
subject to certain other federal, state and local government (as well as
foreign) regulations, including, but not limited to, the Public Health
Service Act, the Occupational Safety and Health Act and state, local and
foreign counterparts to certain of such acts. The Company cannot predict the
extent of the adverse effect on it or the financial and other costs that
might result from any such existing or future government regulations.
For marketing outside of the United States, the Company is also subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country
to country.
Under guidelines established by the NIH, deliberate transfers of
recombinant DNA into human subjects conducted within NIH laboratories or with
NIH funds must be approved by the Director of the NIH (the "NIH Director").
The NIH Director may approve a procedure if it is determined that no
significant risk to health or the environment is presented. The NIH has
established the RAC to advise the NIH Director concerning approval of
NIH-supported research involving the use of recombinant DNA. A proposal will
be considered by the RAC only after the protocol has been approved by a
clinical investigator's local Institutional Review Board and other
committees. Although the jurisdiction of the NIH applies only when NIH-funded
research or facilities are involved in any aspect of the protocol, the RAC
encourages all gene transfer protocols to be submitted for its review. The
Company intends to comply with RAC and NIH guidelines.
See also "Risk Factors --Government Regulation" and "--Uncertainty of
Health Care Reimbursement."
COMPETITION
The Company faces competition both from companies investigating gene
therapy and companies that have developed or are developing treatments for
diseases targeted by the Company. The Company is aware of several development
stage and established enterprises that are exploring the field of human gene
therapy, such as Genetics Therapy, Inc., Somatix Therapy Corp. and Targeted
Genetics Inc., or are actively engaged in research and development in areas
including multidrug resistance and tumor suppressor genes, such as
subsidiaries of Chiron Corporation and Sandoz AG (multidrug resistance) and
Intragene and Schering-Plough Corporation (tumor suppressors). Other
companies, such as Systemix, Inc. and Viagene, Inc., are also developing
gene-based therapies for the treatment of HIV. Numerous other companies, such
as Human Genome Sciences Inc., InCyte Pharmaceuticals Inc., Millenium
Pharmaceuticals Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc.,
are engaged in gene discovery. As the field of human gene therapy receives
increasing public exposure and as human trials proposed or now underway
become increasingly visible, other competitors may enter the field, and
competition in this field will intensify.
39
<PAGE>
Certain competitors and potential competitors of the Company, including
major multinational pharmaceutical and biotechnology firms and other
companies, non-profit research institutions and U.S. or foreign
government-financed entities, have substantially greater research and
development capabilities and financial, scientific, manufacturing, marketing
and human and other corporate resources than the Company. These competitors
may succeed in discovering genes and developing products faster than the
Company or its collaborators, obtaining local, state and federal approvals
for such products more rapidly or developing products that are more effective
or less costly than those developed by the Company or its collaborators.
Certain of these competitors at the current time may be further advanced in
product development than the Company is with its proposed products. Moreover,
potential competitors have or may have patent or other rights with respect to
genes and technology which may be used in gene therapy, some of which may
conflict with the patent position of the Company. See "--Proprietary Rights."
It may be difficult or impossible for the Company to obtain appropriate
licenses covering such genes and technology, which would thereby hamper or
prevent the commercialization of the Company's proposed products. The failure
to obtain such licenses could have a material adverse effect on the Company.
In addition, other companies may succeed in developing and commercializing
products earlier than the Company. There can be no assurance that the Company
will be able to keep pace with technological developments on a timely basis,
that the efforts of others will not render the Company's proposed products
obsolete or uneconomical or result in treatments or cures superior to any
therapy that may be developed by the Company, or that any therapy that may be
developed by the Company will be preferred to any existing or newly developed
technologies.
Competition is based on product efficacy, safety, the timing and scope of
regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, price and patent position. See "Risk Factors
- --Technological Uncertainty" and "--Competition; Rapid Technological Change."
RELATIONSHIP TO TITAN PHARMACEUTICALS, INC.
Titan is a biopharmaceutical holding company founded to advance
therapeutic product development and commercialization for cancer, central
nervous system disorders, blood and immune disorders and other
life-threatening diseases. Titan currently has four operating companies in
which it owns a majority interest, Ingenex, ProNeura, Theracell and Trilex,
and one operating company, Ansan, in which it owns a 44% interest. Titan has
provided initial financing and management services to its operating
companies.
As of June 30, 1996, Titan has provided approximately $10,724,000 in
financing for Ingenex and currently owns approximately 81% of the outstanding
Common Stock. See "Risk Factors --Control by Existing Stockholder;
Relationship with Titan." Ingenex's association with Titan helps the Company
obtain management resources, facilities and capital equipment and other
assets in a cost-effective manner, but there can be no assurance that Titan
will provide direct financing to the Company in the future. Dr. Bucalo, the
Chairman of the Company's Board of Directors, is the President, Chief
Executive Officer and a director of Titan; a member of the Board of Directors
of Theracell: and the Chairman of the Board of Directors of each of Ansan,
ProNeura and Trilex. Dr. Prendergast, another director of the Company, is a
Managing Director of The Castle Group Ltd., a principal stockholder of Titan.
In February 1994, the Company, together with the other Sublessees, entered
into the Sublease with Titan whereby the Sublessees agreed to sublease from
Titan certain equipment which it leases from Phoenix Leasing Incorporated
("Phoenix") pursuant to the Master Lease. Under the terms of the Master
Lease, Titan is obligated to make monthly payments to Phoenix currently
totaling approximately $31,000 per month. As of June 30, 1996, the amount
outstanding under the Master Lease was approximately $865,000. The Sublessees
have jointly and severally guaranteed all amounts payable by Titan and all
other obligations of Titan under the Master Lease. Each of Titan and each
Sublessee has experienced significant operating losses to date and is
expected to continue to do so for the foreseeable future. The failure by
Titan or any Sublessee to fulfill its obligations in respect of the Master
Lease would have a material adverse effect on the Company. See "Risk Factors
- --Guarantees of Obligations of Others."
On August 1, 1994, the Company entered into an Amended Services Agreement
with Titan pursuant to which Titan, at the request of and under the direction
of the Company, provided executive and administrative, financial, human
resources, business development and regulatory services to the Company.
40
<PAGE>
The Company paid Titan for such services on a quarterly basis. The amount
billed to the Company for each quarter was based on the total operating
expenses of each department of Titan to the extent such expenses were
allocable to the services provided by such department under the Services
Agreement. Such allocation was based on the percentage of time expended by
each such department's personnel and the percentage of each such department's
other resources utilized in providing the services. The percentage was
determined at the beginning of each calendar year by the head of each such
department of Titan providing the services to the Company. The Company also
paid for any out-of-pocket expenses incurred by Titan in providing the
services to the Company. In October 1995, the allocation was changed to a
flat fee per year of approximately $119,500. In July 1996, the Company and
Titan entered into a new one-year Corporate Services Agreement pursuant to
which the Company will pay Titan a fee of $10,000 per month for such
managerial, administrative and financial services.
In addition, the Company previously used certain facilities leased by
Titan and reimbursed Titan on a quarterly basis for the expenses incurred by
Titan with respect to such use. Moreover, the Company reimburses Titan on a
quarterly basis for its use of certain equipment leased by Titan pursuant to
the Master Lease. During fiscal 1994 and 1995, the Company made payments
aggregating $948,000 and $839,000, respectively, to Titan for corporate
services and the lease of such facilities and equipment. In March 1996, the
Company entered into a lease directly with the lessor of such facilities.
The Company and Titan have entered into a shareholders' agreement in which
the Company and Titan have agreed that, among other things, (i) a majority of
the Board of Directors of the Company shall consist of Independent Directors;
(ii) all future transactions between Titan or any Titan Affiliate and the
Company must be approved by a majority of the Independent Directors; (iii)
Titan shall have a right of first refusal with respect to future issuances of
the Company of its voting capital stock (and securities convertible into or
exchangeable for voting capital stock) in order to maintain a majority
interest in the outstanding voting capital stock of the Company; (iv) no
additional assets shall be added to the Master Lease; (v) neither Titan nor
any of the Titan Affiliates will engage in a "going private transaction" with
the Company unless such transaction is first approved by a majority of the
Independent Directors following their receipt of a fairness opinion; (vi) the
Board of Directors of the Company shall maintain a Nominating Committee of
three directors, one of whom shall be designated by Titan; and (vii) Titan
will not take any action to amend the Certificate of Incorporation of the
Company unless such amendment is first approved by a majority of the Board of
Directors of the Company and a majority of the Independent Directors. In
addition, in consideration of a payment to the Company of $100,000, the
Company has issued to Titan the Titan Option pursuant to the shareholders'
agreement. Finally, pursuant to the shareholders' agreement, the Company has
granted Titan an option, exercisable for a period of 60 days from the date
upon which Titan's ownership interest in the outstanding voting capital stock
of the Company falls below a majority, to purchase such number of shares of
voting capital stock as necessary for Titan to maintain its majority interest
at an exercise price per share equal to the then current fair market value of
such securities. The shareholders' agreement remains in effect so long as
Titan owns at least 33 1/3% of the outstanding voting capital stock of the
Company on a fully-diluted basis. Titan has also agreed that, prior to the
consummation of the Offering, the Certificate of Incorporation of the Company
will be amended to provide, among other things, that the Company shall not
merge or consolidate with, or sell, assign, lease or otherwise dispose of all
or substantially all of its assets to Titan or any of its parents,
subsidiaries and affiliates without the affirmative vote of stockholders
holding at least two-thirds of the issued and outstanding shares of Common
Stock (and such vote would also be required to amend such provision).
During the period from July through September 1996, the Company borrowed
an aggregate of $1,000,000 from Titan for working capital purposes. This loan
is evidenced by the Titan Note. For a one-year period commencing on the
consummation of this Offering, Titan is entitled to convert the Titan Note
into shares of Common Stock at a conversion price per share equal to the
initial public offering price in conjunction with Titan's exercise of the
Titan Option. See "Certain Transactions."
EMPLOYEES
As of June 24, 1996, the Company had a total of 16 employees, 14 of whom
were full-time employees. Of the total, 14 were in research and development
and 2 were in administration and finance. The
41
<PAGE>
Company's future success depends in significant part upon the continued
service of its key scientific and senior management personnel and its
continuing ability to attract and retain highly qualified scientific and
managerial personnel. See "Risk Factors --Dependence on Key Employees."
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key scientific and managerial employees or that it
can attract, assimilate or retain other highly qualified scientific and
managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be satisfactory.
Each of the Company's employees are parties to a confidentiality agreement
with the Company.
FACILITIES
The Company's principal administrative, sales, marketing, support,
research and development facility is currently located in a building in Menlo
Park, California providing approximately 22,000 square feet of available
space. The Company's current monthly lease payment for this facility is
approximately $27,200 per month. The Company intends to lease an additional
research and development facility in North Carolina within the next several
months. The Company has not entered into any arrangements or understandings
in connection with such lease nor has it identified any potential facilities.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources."
LITIGATION
The Company is not a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of July 1,
1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ----- -----------------------------------------------
<S> <C> <C>
Mark E. Furth, Ph.D. 45 President, Chief Executive Officer and Director
Louis R. Bucalo, M.D. 37 Chairman of the Board of Directors
Robert T. Abbott, Ph.D. (2) 49 Director
Vincent T. DeVita, Jr., M.D. (1) 61 Director
John K.A. Prendergast, Ph.D. (1) 42 Director
Wilhelm F. Schaeffler, Ph.D., D.V.M. (2) 64 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
MARK E. FURTH, PH.D., became the President and Chief Executive Officer of
the Company effective August 14, 1995 and a director of the Company in
November 1995. Until the Company hires a Vice President-Finance, Dr. Furth is
also the acting Principal Financial and Accounting Officer. From May 1993 to
August 1995, Dr. Furth was Vice President, Molecular Sciences, of Glaxo
Wellcome, Inc., a multinational pharmaceutical company. From January 1992 to
May 1993, Dr. Furth was Vice President, Technology, of Regeneron
Pharmaceuticals, Inc., a biotechnology company ("Regeneron"). From July 1988
to January 1992, Dr. Furth was Program Director, Molecular and Cell Biology,
of Regeneron. From January 1987 to July 1988, Dr. Furth was Program Director,
Diagnostics, of Oncogene Science, Inc., a biotechnology company. From
November 1982 to December 1986, Dr. Furth was an assistant member of the
Sloan-Kettering Institute of the Memorial Sloan-Kettering Cancer Center and,
concurrently, an assistant professor at the Sloan-Kettering Division of the
Cornell University Graduate School of Medical Sciences. He held post-graduate
fellowships with the National Cancer Institute in Bethesda, Maryland and the
Medical Research Council Laboratory of Molecular Biology in Cambridge,
England. Dr. Furth received his Ph.D. in Molecular Biology from the
University of Wisconsin-Madison and B.A. in Biochemical Sciences from Harvard
University.
LOUIS R. BUCALO, M.D., is a co-founder of the Company and has served as a
director of the Company since February 1993 and as the Chairman of the Board
of Directors of the Company since May 1994. From February 1993 to August 14,
1995, Dr. Bucalo was the Company's President and Chief Executive Officer.
Since January 1993, Dr. Bucalo has been the President and Chief Executive
Officer and a director of Titan, and is also a director of Theracell and the
Chairman of the Board of Directors of Ansan, ProNeura and Trilex. From July
1990 to April 1992, Dr. Bucalo was the Associate Director of Clinical
Research at Genentech, Inc., a biotechnology company. Dr. Bucalo received his
M.D. from Stanford University and B.A. in Biochemistry from Harvard
University.
ROBERT T. ABBOTT, PH.D., has served as a director of the Company since
February 1996. Since January 1996, Dr. Abbott has been the President and
Chief Executive Officer and a director of Angiotech Pharmaceuticals, Inc., a
biotechnology company. From January 1991 to December 1995, Dr. Abbott was the
President and Chief Executive Officer and a director of Viagene, Inc., a gene
therapy company that was acquired by Chiron Corporation in September 1995.
From May 1984 to May 1990, Dr. Abbott was the President and Chief Executive
Officer of NeoRx Corporation, a biotechnology company that he founded and
that was involved in the development of monoclonal antibody-based cancer
imaging and therapeutic products. Dr. Abbott received his Ph.D. in Pathology
from McGill University and M.B.A. from the University of Missouri at St.
Louis.
43
<PAGE>
VINCENT T. DEVITA, JR., M.D., has served as a director of the Company
since June 1996. Since July 1993, Dr. DeVita has been the Director of the
Yale Cancer Center. From September 1988 to July 1993, he was successively
Physician-in-Chief, Attending Physician and Member in the Program of
Molecular Pharmacology and Therapeutics at Memorial Sloan-Kettering Cancer
Center. From July 1980 to September 1988, Dr. DeVita was the Director of the
National Cancer Institute. Dr. DeVita has been the recipient of numerous
scientific awards, including the Medal of Honor from the American Cancer
Society in 1985 and the Albert and Mary Lasker Medical Research Award in
1972. In 1985, he was elected to the Institute of Medicine at the National
Academy of Sciences. Dr. DeVita has been a member of the Board of Directors
of ImClone Systems Incorporated, a biotechnology company, since 1991. Dr.
DeVita received his B.S. in Chemistry from the College of William and Mary
and M.D. with Distinction from The George Washington University School of
Medicine.
JOHN K.A. PRENDERGAST, PH.D., is a co-founder of the Company and has
served as a director since February 1993. Since October 1991, Dr. Prendergast
has been a Managing Director of The Castle Group Ltd., a biotechnology
venture capital firm ("The Castle Group"). Prior to joining The Castle Group,
Dr. Prendergast was an associate of D.H. Blair & Co., Inc., an investment
bank, for several months. Dr. Prendergast also is a co-founder and director
of a number of other corporations, including the following publicly-held
corporations: Avigen Inc.; Atlantic Pharmaceuticals Inc.; Avax Technologies
Inc.; Palatin Technologies Inc.; and Xenometrix Inc. Dr. Prendergast received
his M.Sc. in Microbiology and Ph.D. in Molecular Pathology from the
University of New South Wales, Sydney, Australia and C.S.S. in Administration
and Management from Harvard University. Dr. Prendergast held post-doctoral
fellowships at Harvard University with Dr. Jack Strominger, who was awarded
the 1995 Lasker Award for Medicine, and with Dr. Jean Dausset, the 1980 Nobel
Prize winner in Physiology and Medicine.
WILHELM F. SCHAEFFLER, PH.D., D.V.M., has served as a director of the
Company since September 1994. Since September 1994, Dr. Schaeffler has been a
private consultant to biotechnology and pharmaceutical companies. From
January 1986 to August 1994, Dr. Schaeffler was an Executive Vice President,
Business Development of Miles, Inc., the U.S. subsidiary of Bayer AG, a
German pharmaceutical company. Dr. Schaeffler received his D.V.M. from the
University of Giessen and M.Sc. and Ph.D., each in Veterinary Medicine, from
the University of Illinois.
Certain of the officers and directors of the Company may from time to time
serve as officers and/or directors of other biopharmaceutical or
biotechnology companies. There can be no assurance that such other companies
will not in the future have interests in conflict with those of the Company.
The number of directors of the Company is presently fixed at six. Each
director holds office until the next annual meeting of stockholders or until
his successor is duly elected and qualified. The Company's officers serve at
the discretion of the Board of Directors.
SIGNIFICANT EMPLOYEES
Significant employees of the Company include the following persons:
TANYA HOLZMAYER, PH.D., 41, became the Director of Research of the Company
in June 1995. From August 1993 to June 1995, Dr. Holzmayer was a Senior
Scientist for the Company. From July 1989 to August 1993, Dr. Holzmayer was
an Instructor in the Department of Genetics at UIC. She received her Ph.D. in
Molecular Biology from the Institute of Genetics and Selection of
MicroOrganisms in Moscow.
ANDREW DAYN, PH.D., 35, became the Director of Development of the Company
in June 1995. From October 1994 to June 1995, Dr. Dayn was a Group Leader at
Pangene Corporation, a biotechnology company. From June 1992 to October 1994,
Dr. Dayn was a Senior Scientist in the Division of Research and Development
of Abbott Laboratories, a multinational pharmaceutical company. From June
1990 to June 1992, Dr. Dayn conducted post-doctoral research in the
Department of Genetics at UIC. Dr. Dayn received his Ph.D. in Microbiology
from the Institute of Epidemiology and Microbiology of the Russian Academy of
Sciences.
44
<PAGE>
BOARD COMMITTEES
The Company's Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee sets (subject to the approval of the
full Board of Directors) the compensation for certain of the Company's
personnel and administers the Company's 1994 Stock Option Plan. See "--1994
Stock Option Plan." The Compensation Committee consists of Drs. Abbott and
Schaeffler.
The Audit Committee reviews, with the Company's independent auditors and
management, the scope and results of the annual audit, the scope of other
services provided by the Company's independent auditors, the Company's
significant accounting principles, policies and practices and the Company's
policies and procedures with respect to its internal accounting, auditing and
financial controls and makes recommendations to the Board of Directors on the
engagement of the independent auditors, as well as other matters that may
come before it or as directed by the Board of Directors. The Audit Committee
consists of Drs. DeVita and Prendergast.
DIRECTOR COMPENSATION
Directors of the Company do not receive compensation for services provided
as a director (except for grants of stock options under the Company's 1994
Stock Option Plan and except that each of Drs. Abbott, DeVita and Schaeffler
receive $2,500 for each meeting of the Board of Directors he attends). The
Company also does not pay compensation for committee participation or special
assignments undertaken by a director at the request of the Board of Directors
(except that during fiscal 1995 the Company paid $5,000 to Dr. Schaeffler for
certain consulting services).
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages
for breach of their fiduciary duty as directors. This provision does not
eliminate the liability of a director (i) for breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions by
the director not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption or (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company believes that it is the position of the Securities and
Exchange Commission (the "SEC") that, insofar as the foregoing provision may
be invoked to disclaim liability for damages arising under the Securities
Act, such provision is against public policy as expressed in the Securities
Act and is therefore unenforceable. Such limitation of liability also does
not affect the availability of equitable remedies such as injunctive relief
or rescission.
The Company intends to enter into indemnification agreements (the
"Indemnification Agreements") with each of its directors and officers prior
to the consummation of the Offering. Each such Indemnification Agreement will
provide that the Company will indemnify the indemnitee against any and all
expenses (including attorneys' fees), witness fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, arbitral, administrative or
investigative (including an action by or in the right of the Company) to
which he is, was or at any time becomes a party, or is threatened to be made
a party, by reason of the fact that he is, was, or at any time becomes a
director, officer, employee or agent of the Company, or is or was serving, or
at any time serves, at the request of the Company, as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Such indemnification will be
available, subject to certain exceptions, if the indemnitee's conduct is not
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct or a breach of his duty of loyalty to the
Company, or to have resulted in him personally having gained a financial
profit or other advantage to which he was not legally entitled. The
Indemnification Agreements will also require that the Company indemnify the
director or officer in all cases to the fullest extent permitted by
applicable law. Each Indemnification Agreement will permit the
45
<PAGE>
director or officer that is a party thereto to bring suit to seek recovery or
amounts due under the Indemnification Agreement and to recover the expenses
of such a suit if successful.
The Company's Bylaws provide that the Company shall indemnify its
directors, officers, employees or agents to the fullest extent permitted by
the Delaware General Corporation Law ("DGCL"), and the Company shall have the
right to purchase and maintain insurance on behalf of any such person whether
or not the Company would have the power to indemnify such person against the
liability. The Company has not currently purchased any such insurance policy
on behalf of any of its directors, officers, employees or agents but intends
to do so prior to, or as soon as possible after, the consummation of the
Offering.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification
will be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim for indemnification.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned in fiscal 1994 and 1995 by certain former and present executive
officers of the Company (collectively, the "Named Officers") for services
rendered in all capacities to the Company for such fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- --------------
AWARDS
--------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($) OPTIONS(#)
- ---------------------------------- ------ ----------- --------------- --------------
<S> <C> <C> <C> <C>
Dr. Mark E. Furth ................. 1994 -- -- --
1995 73,125 -- 144,000
President and Chief
Executive Officer since
August 1995
Dr. Louis R. Bucalo ............... 1994 48,351(1) -- 25,099
1995 45,269 -- --
former President and
Chief Executive Officer (from
January 1993 to August 1995)
Dr. Gregory R. Reyes .............. 1994 144,585 68,142(2) 13,967
former Vice President, 1995 85,809 49,165(2) 32,737
Research and Development
(from September 1993 to June
1995)
</TABLE>
- ------------
(1) Dr. Bucalo's cash compensation for fiscal 1994 and 1995 was paid by
Titan pursuant to an employment agreement between Dr. Bucalo and Titan.
Titan was reimbursed by the Company for such compensation. The amount
listed herein does not include compensation paid to Dr. Bucalo by Titan
for services rendered other than with respect to the Company.
(2) Represents moving and relocation costs paid by the Company on Dr.
Reyes' behalf.
46
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option
grants made to each of the Named Officers for the fiscal year ended December
31, 1995. No stock appreciation rights were granted to these individuals
during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED (#) FISCAL YEAR(2) ($/SH)(3) EXPIRATION DATE
- ----------------------- ------------ -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Dr. Mark E. Furth(1) .. 144,000 52.3% 2.00 7/31/05
Dr. Louis R. Bucalo ... -- -- -- --
Dr. Gregory R. Reyes(1) 27,737 11.9% 0.86 EXPIRED
5,000 3.50 11/01/05
</TABLE>
- ------------
(1) Dr. Furth's options were granted on July 31, 1995 and Dr. Reyes'
options were granted on January 20, 1995 and November 1, 1995,
respectively. All of the options are immediately exercisable upon
grant; however, the shares of Common Stock purchasable thereunder are
subject to a right of repurchase by the Company at the original
exercise price paid per share upon the optionee's cessation of service
prior to his vesting in such shares. Such shares vest over a four-year
period. The repurchase right has lapsed as to the following number of
shares as of June 30, 1996: Dr. Furth --0 and Dr. Reyes --5,000. Dr.
Reyes' options to purchase 27,737 shares of Common Stock were
terminated upon his resignation in June 1995. See "--1994 Stock Option
Plan."
(2) The percentage of options granted to each Named Officer is based on a
total number of options granted during fiscal 1995 of 275,361.
(3) The exercise price may be paid in cash, in shares of Common Stock
valued at their fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability
incurred by the optionee in connection with such exercise. The exercise
prices equalled the fair market value of the Common Stock on the grant
date as determined by the Compensation Committee of the Company's Board
of Directors.
47
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1995 with respect to
each of the Named Officers. No stock appreciation rights were exercised
during such year or were outstanding at the end of that year.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
SHARES AT FY-END (#)(2) AT FY-END($)(3)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED(1)($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------- --------------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. Mark E. Furth -- -- 144,000/0 72,000/0
Dr. Louis Bucalo -- -- 25,099/0 60,444/0
Dr. Gregory Reyes 4,422 10,649 5,000/0 --/0
</TABLE>
- ------------
(1) Market value at exercise less exercise price.
(2) Options are immediately exercisable for all the underlying shares, but
any shares purchased under the options will be subject to a right of
repurchase by the Company at the original exercise price per share upon
the optionee's cessation of service prior to vesting in such shares.
See "--1994 Stock Option Plan." The repurchase right has lapsed as to
the following number of shares as of June 30, 1996: Dr. Furth --0; Dr.
Bucalo --13,073; and Dr. Reyes --5,000.
(3) Represents the value of unexercised, in-the-money options at December
31, 1995 using the $2.50 fair market value as of such date as
determined by the Compensation Committee of the Company's Board of
Directors.
EMPLOYMENT AGREEMENTS
Ingenex has entered into an employment agreement, dated as of July 25,
1995, with Dr. Mark E. Furth (the "Furth Employment Agreement"), the
Company's President and Chief Executive Officer. Such agreement is terminable
by Dr. Furth or Ingenex at any time. Pursuant to the terms of the Furth
Employment Agreement, Dr. Furth is entitled to an annual salary of $195,000
and an annual performance bonus of 15% to 25% of his base salary upon the
Company's achievement of certain targets. In addition, in connection with the
execution of the Furth Employment Agreement, Dr. Furth received options to
acquire 144,000 shares of Common Stock at an exercise price of $2.00 per
share. Dr. Furth is also eligible to be awarded additional options based upon
outstanding performance. In the event of a sale or transfer of substantially
all of the assets of Ingenex, the vesting of the shares of Common Stock
underlying Dr. Furth's options will automatically accelerate immediately
prior to such event such that 100% of such shares will become vested. The
Furth Employment Agreement also prohibits Dr. Furth from engaging in any
activity that is competitive with the Company during the term of his
employment with the Company.
The Company entered into an employment agreement with Dr. Gregory R. Reyes
in September 1993 (the "Reyes Employment Agreement"). Dr. Reyes resigned from
his position as Vice President, Research and Development of the Company in
June 1995. Pursuant to the terms of the Reyes Employment Agreement, during
his employment, Dr. Reyes received an annual salary of $145,000 and was
eligible to receive an annual performance bonus up to 10% of his base salary.
In addition, Dr. Reyes received certain stock options.
1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "1994 Plan") was adopted by the
Company's directors in December 1993 and the Company's stockholders in
December 1994. In October 1996, the Company amended the 1994 Plan so that
options granted thereunder would meet the requirements of Rule 16b-3,
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act"), for exemption from the restrictions of Section 16(b) of the 1934 Act
and increased the number of shares of Common Stock authorized for issuance
under the 1994 Plan to 847,500. The 1994 Plan provides for grants of stock
48
<PAGE>
options to directors, employees and consultants of the Company, its parent
and subsidiaries. As of June 30, 1996, options to purchase an aggregate of
433,069 shares of Common Stock were outstanding under the 1994 Plan at a
weighted average price of $2.47, all of which were immediately exercisable.
All options granted under the Plan are immediately exercisable; however,
shares of Common Stock purchasable upon the exercise of options are generally
subject to repurchase by the Company at the original price paid per share
upon the optionee's cessation of service prior to his vesting in such shares.
Such shares generally vest in 25% increments over four years. There is no
limitation on the number of options which may be granted to any individual
under the Plan. As of June 30, 1996, 373,236 of the shares of Common Stock
issuable upon the exercise of such options are subject to a right of
repurchase by the Company at the original exercise price in the event of
termination of employment of the option holder.
As amended, the 1994 Plan is administered by the Compensation Committee of
the Company's Board of Directors that will consist of at least two
non-employee directors (as defined by Rule 16b-3 promulgated under the 1934
Act); provided, however, that grants of options under the 1994 Plan to the
members of the Compensation Committee will be determined and administered by
the full Board of Directors of the Company. Eligible individuals may, at the
discretion of the Compensation Committee, be granted incentive stock options
to purchase shares of Common Stock at not less than the fair market value
(110% of the fair market value in the case of 10% stockholders) of such
shares on the grant date or non-statutory options to purchase shares of
Common Stock at not less than 85% of the fair market value of such shares on
the grant date. The Compensation Committee will determine the vesting or
exercise schedule (if any) for each granted option (which vesting or exercise
schedule shall not be more restrictive than 20% per year beginning one year
after the date of grant). The Compensation Committee may accelerate the
vesting and/or exercisability of any outstanding option in whole or in part
at any time.
Each option granted under the 1994 Plan has a maximum term of ten years,
subject to earlier termination following the optionee's cessation of service
with the Company. Options are not assignable or transferable by the optionee
except by will or the laws of inheritance following the optionee's death or
as otherwise permitted by the 1994 Plan. An optionee will have no stockholder
rights with respect to the shares subject to his or her outstanding options
until such options are exercised and the purchase price is paid for the
shares.
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the 1994 Plan which is not to be assumed or replaced
with a comparable option from the successor corporation will automatically
terminate. The Company's outstanding repurchase rights under the 1994 Plan
also will terminate, and the shares subject to those repurchase rights will
become fully vested upon the merger or asset sale, unless such repurchase
rights are assigned to the successor corporation.
The Compensation Committee has the authority to effect, at any time and
from time to time, with the consent of the affected option holder, the
cancellation of outstanding options under the 1994 Plan in return for the
grant of new options for the same or different number of shares with an
exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
The Company's Board of Directors may amend or modify the 1994 Plan at any
time, provided that no such amendment or modification may adversely affect
the rights and obligations of the participants with respect to their
outstanding options without their consent. In addition, to the extent
required under applicable law or by any securities exchange on which the
securities of the Company are traded, no amendment of the 1994 Plan may,
without the approval of the Company's stockholders, (i) materially increase
the benefits accruing to participants or modify the class of individuals
eligible for participation or otherwise materially modify the 1994 Plan, or
(ii) increase the number of shares available for issuance, except in the
event of certain changes to the Company's capital structure. The 1994 Plan
will terminate on December 2003, unless sooner terminated in accordance with
its terms.
CONSULTING AGREEMENTS
The Company has entered into consulting agreements with the following
individuals who are experts in their fields of interest (in each case subject
to the approval of such person's full-time employer, if applicable). Such
individuals generally will consult with the Company on such projects as may
be
49
<PAGE>
specifically agreed. The consultants work for the Company on an as required
basis and receive compensation in the form of cash, shares of Common Stock,
or options to purchase shares of Common Stock under the 1994 Plan. The
Company may retain additional special consultants as the need arises.
William F. Benedict, M.D., is a member of the staff of MD Anderson. In
August 1993, the Company entered into a two-year consulting agreement with
Dr. Benedict, which was renewed for an additional one-year period in August
1995. The agreement will be extended for an additional one-year period unless
either party provides prior notice of non-renewal. Annual compensation under
the agreement is $22,000.
Richard Davidson, Ph.D., is a member of the SAB. See "Business
- --Scientific Advisory Board." In May 1992, the Company entered into a
three-year consulting agreement with Dr. Davidson, which was renewed for an
additional three-year term in May 1995. Annual compensation under the
agreement is $25,000. The agreement may be terminated by either party under
certain circumstances. Pursuant to the agreement, the Company issued 28,743
shares of Common Stock to Dr. Davidson, which shares are subject to a right
of repurchase by the Company upon the occurrence of certain events, including
Dr. Davidson's termination for cause as a consultant to the Company.
Eli Gilboa, Ph.D., is a member of the SAB. See "Business --Scientific
Advisory Board." In January 1994, the Company entered into a three-year
consulting agreement with Dr. Gilboa. The agreement will be automatically
extended for consecutive periods of one-year each unless either party gives
prior notice of non-renewal. The agreement may be terminated by either party
upon written notice. Annual compensation under the agreement is $15,000.
Additionally, in connection with the execution of the agreement, Dr. Gilboa
was granted options to purchase 1,888 shares of Common Stock at an exercise
price of $0.918 per share for a three-year period under the 1994 Plan. See
"--1994 Stock Option Plan."
Richard E. Giles, Ph.D., is a member of the staff at MD Anderson. In
September 1993, the Company entered into a one-year consulting agreement with
Dr. Giles which was renewed for two consecutive one-year periods and expired
in September 1996. The Company intends to extend the agreement beyond that
date. Either party may terminate the agreement upon prior notice. Annual
compensation under the agreement is $40,000.
Andrei Gudkov, Ph.D., is a member of the SAB. See "Business --Scientific
Advisory Board." In September 1993, the Company entered into a one-year
consulting agreement with Dr. Gudkov, which was renewed for an additional
two-year period in September 1994. The Company intends to extend the
agreement beyond the current expiration date of September 1996. Annual
compensation under the agreement is $15,000 (subject to increase by the
Company's Board of Directors).
Igor B. Roninson, Ph.D., is a member of the SAB. See "Business
- --Scientific Advisory Board." In May 1992, the Company entered into a
three-year consulting agreement with Dr. Roninson, which was renewed for an
additional three-year period in May 1995. Annual compensation under the
agreement is $30,000. Additionally, the Company paid Dr. Roninson's legal
fees aggregating $12,900 incurred in connection with the agreement. The
agreement may be terminated by either party under certain circumstances.
Pursuant to the agreement, the Company issued 143,718 shares of Common Stock
to Dr. Roninson, which shares are subject to a right of repurchase by the
Company upon the occurrence of certain events, including Dr. Roninson's
termination for cause as a consultant to the Company.
Hong J. Xu, M.D., is a member of the staff of MD Anderson. In August 1993,
the Company entered into a two-year consulting agreement with Dr. Xu, which
was renewed for an additional one-year period in August 1995. Annual
compensation under the agreement is $22,500.
50
<PAGE>
CERTAIN TRANSACTIONS
The Company believes that all of the transactions set forth below were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. The Company anticipates that all future
transactions, including loans, between the Company and its officers,
directors and principal stockholders (and their respective affiliates) will
be approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
In May 1994, Titan purchased 1,007,834 shares of the Company's Series A
Preferred Stock for $5.28 per share. See "Principal Stockholders." In
connection with Titan's purchase of the Series A Preferred Stock, Titan was
granted the right, exercisable in prescribed circumstances, to demand or to
participate in certain registrations of the Company's securities under the
Securities Act. Titan has waived such right to the extent that it may have
been exercisable in connection with the Offering and has agreed not to
exercise such registration rights for a period of one year from the date of
this Prospectus. See "Shares Eligible for Future Sale --Registration Rights."
In September 1994, four purchasers purchased an aggregate of 283,400
shares of the Company's Series B Preferred Stock for $5.82 per share. Such
purchasers included certain entities affiliated with Invesco Trust Company
who purchased 257,637 of such shares and who, as a result thereof,
collectively beneficially own in excess of 9% of the outstanding Common
Stock. See "Principal Stockholders." In connection with such purchase, such
purchasers were granted the right, exercisable in prescribed circumstances,
to demand or to participate in certain registrations of the Company's
securities under the Securities Act. Such purchasers have waived such right
to the extent that it may have been exercisable in connection with the
Offering and have agreed not to exercise such registration rights for a
period of one year from the date of this Prospectus. See "Shares Eligible for
Future Sale --Registration Rights."
On August 1, 1994, the Company entered into an Amended Services Agreement
with Titan pursuant to which Titan, at the request of and under the direction
of the Company, provided executive and administrative, financial, human
resources, business development and regulatory services to the Company. The
Company paid Titan for such services on a quarterly basis. The amount billed
to the Company for each quarter was based on the total operating expenses of
each department of Titan to the extent such expenses were allocable to the
services provided by such department under the Services Agreement. Such
allocation was based on the percentage of time expended by each such
department's personnel and the percentage of each such department's other
resources utilized in providing the services. The percentage was determined
at the beginning of each calendar year by the head of each such department of
Titan providing the services to the Company. The Company also paid for any
out-of-pocket expenses incurred by Titan in providing the services to the
Company. In October 1995, the allocation was changed to a flat fee per year
of approximately $119,500. In July 1996, the Company and Titan entered into a
new one-year Corporate Services Agreement pursuant to which the Company will
pay Titan a fee of $10,000 per month for such managerial, administrative and
financial services.
In addition, the Company previously used certain facilities leased by
Titan and reimbursed Titan on a quarterly basis for the expenses incurred by
Titan with respect to such use. Moreover, the Company reimburses Titan on a
quarterly basis for its use of certain equipment leased by Titan pursuant to
the Master Lease. During fiscal 1994 and 1995, the Company made payments
aggregating $948,000 and $839,000, respectively, to Titan for corporate
services and the lease of such facilities and equipment. In March 1996, the
Company entered into a lease directly with the lessor of such facilities.
The Company and Titan have entered into a shareholders' agreement in which
the Company and Titan have agreed that, among other things, (i) a majority of
the Board of Directors of the Company shall consist of Independent Directors;
(ii) all future transactions between Titan or any Titan Affiliate and the
Company must be approved by a majority of the Independent Directors; (iii)
Titan shall have a right of first refusal with respect to future issuances of
the Company of its voting capital stock (and securities convertible into or
exchangeable for voting capital stock) in order to maintain a majority
interest in the outstanding voting capital stock of the Company; (iv) no
additional assets shall be added to the Master
51
<PAGE>
Lease; (v) neither Titan nor any of the Titan Affiliates will engage in a
"going private transaction" with the Company unless such transaction is first
approved by a majority of the Independent Directors following their receipt
of a fairness opinion; (vi) the Board of Directors of the Company shall
maintain a Nominating Committee of three directors, one of whom shall be
designated by Titan; and (vii) Titan will not take any action to amend the
Certificate of Incorporation of the Company unless such amendment is first
approved by a majority of the Board of Directors of the Company and a
majority of the Independent Directors. In addition, in consideration of a
payment to the Company of $100,000, the Company has issued to Titan the Titan
Option pursuant to the shareholders' agreement. Finally, pursuant to the
shareholders' agreement, the Company has granted Titan an option, exercisable
for a period of 60 days from the date upon which Titan's ownership interest
in the outstanding voting capital stock of the Company falls below a
majority, to purchase such number of shares of voting capital stock as
necessary for Titan to maintain its majority interest at an exercise price
per share equal to the then current fair market value of such securities. The
shareholders' agreement remains in effect so long as Titan owns at least 33
1/3% of the outstanding voting capital stock of the Company on a
fully-diluted basis. Titan has also agreed that, prior to the consummation of
the Offering, the Certificate of Incorporation of the Company will be amended
to provide, among other things, that the Company shall not merge or
consolidate with, or sell, assign, lease or otherwise dispose of all or
substantially all of its assets to Titan or any of its parents, subsidiaries
and affiliates without the affirmative vote of stockholders holding at least
two-thirds of the issued and outstanding shares of Common Stock (and such
vote would also be required to amend such provision). See "Business
- --Relationship to Titan Pharmaceuticals, Inc." and "Principal Stockholders."
During the period from July through September 1996, the Company borrowed
an aggregate of $1,000,000 from Titan for working capital purposes. This loan
is evidenced by the Titan Note which bears interest at the rate of 9% per
annum and is due and payable on September 30, 1998. For a one-year period
commencing on the consummation of this Offering, Titan is entitled to convert
the Titan Note into shares of Common Stock at a conversion price per share
equal to the initial public offering price in conjunction with Titan's
exercise of the Titan Option. See "Risk Factors --Control by Existing
Stockholder; Relationship to Titan" and "Business --Relationship to Titan
Pharmaceuticals, Inc."
On May 31, 1995, the Company consummated a private placement of its
securities pursuant to which the Company issued notes in the aggregate
principal amount of $1,500,000 (the "Bridge Notes") and warrants to acquire
an aggregate of 300,000 shares of Common Stock at an exercise price of $2.50
per share, subject to anti-dilution adjustment (the "Bridge Warrants"). The
Bridge Notes bore interest at the rate of 9% per annum and were due on the
earlier of December 31, 1995 or the fifth business day following the closing
of an initial public offering of securities of the Company. In connection
with such purchase, the holders of the Bridge Warrants were granted the
right, exercisable in prescribed circumstances, to demand or to participate
in certain registrations of the Company's securities under the Securities
Act. Such holders have waived such right to the extent that it may have been
exercisable in connection with the Offering and have agreed not to exercise
such registration rights for a period of one year from the date of this
Prospectus. See "Shares Eligible for Future Sale --Registration Rights." In
January and February 1996, Titan used $1,588,000 of the net proceeds from an
initial public offering of its securities to repay the Bridge Notes on behalf
of the Company. In June 1996, the Company issued an aggregate of 981,818
shares of Common Stock to Titan in consideration of such repayment and the
cancellation by Titan of certain other indebtedness of the Company
aggregating $5,400,000.
In February 1994, the Company entered into the Sublease with Titan whereby
the Sublessees agreed to sublease from Titan certain equipment that Titan
leases pursuant to the Master Lease. Under the terms of the Master Lease,
Titan is obligated to make monthly payments currently totaling approximately
$31,000 per month. As of June 30, 1996, the amount outstanding under the
Master Lease was approximately $865,000. The Sublessees have jointly and
severally guaranteed all amounts payable by Titan and all other obligations
of Titan under the Master Lease. Each of Titan and each Sublessee has
experienced significant operating losses to date and is expected to continue
to do so for the foreseeable future. The failure by Titan or any Sublessee to
fulfill its obligations with respect to the Master Lease would have a
material adverse effect on the Company. See "Business --Relationship to Titan
Pharmaceuticals, Inc."
52
<PAGE>
In connection with the purchase of the Company's Class B Common Shares in
May 1992 (which class has since been eliminated and all of which shares have
been converted into shares of Common Stock), Drs. Roninson and Davidson were
granted the right to have 65,427 shares of Common Stock included in any
registration of the Company's securities under the Securities Act, except for
an initial public offering of the Company's securities and subject to certain
underwriter cutbacks. Drs. Roninson and Davidson have agreed not to exercise
such registration rights for a period of one year from the date of this
Prospectus. See "Shares Eligible for Future Sale --Registration Rights."
Ray Dirks Research Advisory ("RDRA") received a $140,000 finders' fee in
connection with the ACM Agreement. Michael Hsu, a director of Titan, is also
the Director of Corporate Finance for RDRA.
In connection with the ACM Agreement, Titan issued to ACM a warrant to
purchase 112,375 shares of Titan's common stock at a price of $3.56 per
share. The warrant expires January 31, 2002. Titan also guaranteed payment of
Company's obligations under the ACM Agreement and issued warrants to RDRA and
Mr. Hsu to purchase an aggregate of 7,395 shares of Titan's common stock at
an exercise price of $3.25 per share. The warrants expire in January 2002.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of August 31, 1996, and as adjusted to
reflect the sale of the 1,850,000 shares of Common Stock offered hereby, by
(i) each person who is known by the Company to own beneficially more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Officers and (iv) all current executive officers and directors of the
Company as a group. In addition to information regarding direct ownership of
the Common Stock, information regarding the ownership of Titan's common stock
has been included in the footnotes to the following table to reflect any
indirect ownership of the Common Stock through direct ownership of Titan's
common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED (2) OWNED (3)
------------------------------ ----------------------
BEFORE THE AFTER THE BEFORE AFTER
NAME OF BENEFICIAL OWNER (1) OFFERING OFFERING OFFERING OFFERING
- ------------------------------------ -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Titan Pharmaceuticals, Inc. ......... 2,416,024(4) 2,916,024(5) 81% 57%
400 Oyster Point Boulevard,
Suite 315
South San Francisco, CA 94080
Funds controlled by INVESCO Trust
Company(6) ......................... 257,637 257,637 9% 5%
7800 East Union Avenue,
Suite 800
Denver, CO 80237
Dr. Igor Roninson ................... 143,718 143,718 5% 3%
University of Illinois at Chicago
Department of Genetics
(M/C 669)
880 S. Wood Street
Chicago, IL 60612
Dr. Mark E. Furth(7) ................ 200,000 200,000 6% 4%
Dr. Louis R. Bucalo ................. 2,456,024(8) 2,956,024(9) 81% 57%
Dr. Gregory R. Reyes(10) ............ 9,422 9,422 * *
Dr. Robert T. Abbott(11) ............ 15,000 15,000 * *
Dr. Vincent T. DeVita, Jr.(12) ..... 15,000 15,000 * *
Dr. John K.A. Prendergast(13) ...... 40,000 40,000 1% *
Dr. Wilhelm F. Schaeffler(14) ...... 20,000 20,000 * *
All executive officers and directors
as a group (6 persons)(15) ......... 2,746,024 3,272,339 83% 60%
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of all persons named in the
table is c/o the Company, 1505 O'Brien Drive, Menlo Park, California
94025.
(2) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the
footnotes to the table.
(3) Applicable percentage of ownership of the Common Stock is based on
2,994,391 shares of Common Stock outstanding as of August 31, 1996,
together with applicable exercisable options or warrants for such
stockholder. Assumes conversion of 1,007,834 shares of Series A
Preferred Stock and 283,400 shares of Series B Preferred Stock into
shares of Common Stock on a one-for-one basis.
(4) Includes 1,007,834 shares of Common Stock issuable upon conversion of
the same number of shares of Series A Preferred Stock upon
consummation of the Offering.
(Footnotes continued on next page)
54
<PAGE>
(5) Includes 1,007,834 shares of Common Stock issuable upon conversion of
the same number of shares of Series A Preferred Stock upon
consummation of the Offering. Assumes Titan's purchase of 200,000
shares of Common Stock in the Offering. Includes 300,000 shares of
Common Stock which may be acquired upon exercise of the Titan Option
within 60 days of August 31, 1996. See "Risk Factors --Control by
Existing Stockholder; Relationship to Titan."
(6) Includes 103,055 shares of Common Stock owned by Global Health
Sciences Fund, 103,055 shares of Common Stock owned by Invesco
Strategic Portfolios, Inc. --Health Sciences and 51,527 shares of
Common Stock owned by Invesco Strategic Portolios, Inc. --Technology
(in each case issuable upon conversion of the same number of shares
of Series B Preferred Stock upon consummation of the Offering).
INVESCO Trust Company is also a principal stockholder of Titan.
(7) Represents 200,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 155,187 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan."
(8) Includes 40,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 25,882 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan." Includes 2,416,024 shares held by Titan, which Dr. Bucalo, as
the President and Chief Executive Officer and a director of Titan,
may be deemed to beneficially own. Dr. Bucalo is the holder of record
and beneficial owner of approximately 2.7% of Titan's common stock.
See footnote (4) above.
(9) Includes 40,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 25,882 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan." Includes 2,916,024 shares deemed to be beneficially held by
Titan, which Dr. Bucalo, as the President and Chief Executive Officer
and a director of Titan, may be deemed to beneficially own. Dr.
Bucalo is the holder of record and beneficial owner of approximately
2.7% of Titan's common stock. See footnote (5) above.
(10) Includes 5,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. None of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --Executive
Compensation" and " --1994 Stock Option Plan."
(11) Represents 15,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 11,250 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan."
(12) Represents 15,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 13,750 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan."
(13) Includes 21,463 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. All of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan."
(14) Represents 20,000 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 11,171 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan."
(15) Includes 321,463 shares of Common Stock which may be acquired upon
exercise of options within 60 days of August 31, 1996. 217,240 of the
shares issuable upon exercise of such options are subject to the
Company's right of repurchase. See "Management --1994 Stock Option
Plan." See footnotes (4), (5), (7), (8), (9), (11), (12), (13), (14)
and (15) above.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $.001 par value per share. After giving effect to the
amendment of the Company's Certificate of Incorporation to delete references
to the Series A and Series B Preferred Stock, which will occur upon
conversion of such Preferred Stock into Common Stock upon the consummation of
the Offering, the Company will have authorized 4,000,000 shares of preferred
stock.
As of August 31, 1996, there were 2,994,391 shares of Common Stock
outstanding, which were held of record by 23 stockholders (after giving
effect to the conversion of the Series A and Series B Preferred Stock into
Common Stock upon the consummation of the Offering). No shares of preferred
stock will be outstanding upon the consummation of the Offering.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the holders of Common Stock. The holders of
Common Stock are not entitled to cumulative voting rights. Subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Company's Board of Directors
out of funds legally available therefor. The Company does not intend to pay
any dividends in the foreseeable future. See "Dividend Policy." In the event
of the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are fully paid and non-assessable, and the shares of
Common Stock to be issued upon consummation of the Offering will be fully
paid and non-assessable.
PREFERRED STOCK
The authorized preferred stock of the Company is currently divided into
two series. The first series consists of 3,465,866 shares of Series A
Preferred Stock. The second series consists of 4,000,000 shares of Series B
Preferred Stock. All the issued and outstanding shares of Series A and Series
B Preferred Stock are to be converted into an aggregate of 1,291,234 shares
of Common Stock upon the consummation of the Offering. At such time, pursuant
to the Company's Restated Certificate of Amendment which will then become
effective, the Board of Directors of the Company will have the authority to
issue up to 4,000,000 shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be affected
by, the rights of the holders of any preferred stock that may be issued in
the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. Because
the terms of the preferred stock may be fixed by the Board of Directors of
the Company without stockholder action, the preferred stock could be issued
with terms calculated to defeat or delay a proposed takeover of the Company,
or to make the removal of the management of the Company more difficult. Under
certain circumstances, this would have the effect of decreasing the market
price of the Common Stock. The Company has no present plans to issue shares
of preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
Restated Certificate of Incorporation and Bylaws
In addition to the ability of the Company's Board of Directors to issue
preferred stock without further stockholder approval, the Company's Amended
and Restated Certificate of Incorporation and
56
<PAGE>
Amended and Restated Bylaws (the "Bylaws") (each to become effective upon
consummation of the Offering) contain several provisions that may be deemed
to have the effect of making more difficult the acquisition of control of the
Company by means of a hostile tender offer, open market purchases, a proxy
contest or otherwise. The provisions of the Amended and Restated Certificate
of Incorporation and Bylaws discussed below are designed to help to ensure
that holders of Common Stock are treated fairly and equally in a multi-step
acquisition. In addition, they are intended to encourage persons seeking to
acquire control of the Company to initiate such an acquisition through
arm's-length negotiations with the Company's Board of Directors.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. The Bylaws require not less than 20 nor more than 60 days' notice
to the Company with regard to stockholder proposals and the nomination, other
than by or at the direction of the Board of Directors, of candidates for
election as directors. Such notice must provide specified information,
including information regarding the ownership of Common Stock by the person
giving the notice, information regarding the proposal or the nominees and
information regarding the interest of the proponent in the proposal or the
nominations.
Stockholder Meetings. The Bylaws provide that a special meeting of the
stockholders may be called by the President and shall be called by the
President or Secretary at the request of a majority of the Board of
Directors, and may not be called absent such a request. In addition, pursuant
to the Company's Amended and Restated Certificate of Incorporation,
stockholders may not take any action by written consent.
Delaware Takeover Statute
Upon consummation of the Offering, the Company will become subject to
Section 203 of the DGCL ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directors and also officers and (y) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such
date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include, among other things:
(i) any merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, lease, exchange, mortgage, transfer, pledge or
other disposition of 10% or more of the assets of the corporation involving
the interested stockholder; (iii) subject to certain exceptions, any
transaction that results in the issuance or transfer by the corporation of
any stock of the corporation to the interested stockholder; (iv) any
transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock and the ability of the Company to raise
capital through a public offering of its equity securities. Of the 4,844,391
shares of Common Stock to be outstanding upon consummation of the Offering,
the 1,850,000 shares of Common Stock offered hereby (2,127,500 shares if the
Underwriters' over-allotment option is exercised in full) will be immediately
freely tradeable without restriction (except as to affiliates of the Company,
including Titan) or further registration under the Securities Act. The
remaining 2,944,391 shares of Common Stock will be "restricted" securities
within the meaning of Rule 144 and may only be sold if registered under the
Securities Act or pursuant to an exemption from such registration
requirement, including the exemption provided by Rule 144. Any shares of
Common Stock purchased in the Offering by Titan or any other affiliate of the
Company will be subject to certain of the resale limitations of Rule 144.
Holders of 2,927,159 shares of Common Stock, including each director,
officer, member of the SAB and principal stockholder of the Company
(including Titan), have agreed that they will not offer to sell, contract to
sell, sell, distribute, grant any option to purchase, pledge, hypothecate or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into, or exercisable or exchangeable for, shares
of Common Stock for a period of 360 days after the date of this Prospectus
without the prior written consent of the Representative, on behalf of the
Underwriters. Taking into account the restrictions of Rule 144 and the
lock-up agreements, 68,079 of the restricted shares will become eligible for
sale in the public market beginning 90 days after the date of this Prospectus
and 1,923,059 will become eligible for sale in the public market beginning
360 days after the date of this Prospectus. Additional shares of Common
Stock, including shares issuable upon the exercise of options and warrants,
will also become available for sale in the public market from time to time in
the future.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years, including a
person who may be deemed an affiliate of the Company, is entitled to sell
within any three-month period a number of such restricted shares of Common
Stock that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 48,444 shares after giving effect to the
Offering) or the average weekly trading volume of the Common Stock on The
Nasdaq National Market during the four calendar weeks preceding the filing of
a Form 144 relating to such sale. Sales under Rule 144 are subject to certain
restrictions relating to manner of sale, notice and the availability of
current public information about the Company. Under clause (k) of Rule 144, a
person who is not an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned restricted shares for at
least three years, would be entitled to sell such shares immediately
following the Offering without regard to the volume limitations, manner of
sale provisions or notice or other requirements of Rule 144.
Prior to the Offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such restricted shares in the public market, or the perception that such
sales could occur, could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities.
OPTIONS
As of August 31, 1996, options to purchase a total of 433,069 shares of
Common Stock granted under the 1994 Plan were outstanding and exercisable. An
additional 414,431 shares of Common Stock were available for future option
grants under the 1994 Plan, as amended. In addition, as of August 31, 1996,
options to purchase a total of 16,761 shares of Common Stock, which were
granted to certain officers of the Company outside of the 1994 Plan, were
outstanding and exercisable. An aggregate of 353,738 of the shares of Common
Stock purchasable upon exercise of such options are subject to lock-up
agreements that apply for a 360-day period from the date of this Prospectus.
See "Underwriting."
58
<PAGE>
Rule 701 under the Securities Act generally provides that shares of Common
Stock acquired on the exercise of outstanding options awarded pursuant to
certain written compensation benefit plans for employees, directors,
officers, consultants or advisors may be resold by persons other than
"affiliates," beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by "affiliates"
beginning 90 days after the date of this Prospectus, subject to all
provisions of Rule 144 except its two-year minimum holding period. The
Company intends to file one or more registration statements on Form S-8 under
the Securities Act to register all shares of Common Stock purchasable upon
exercise of options granted under the 1994 Plan and outside of the 1994 Plan
to certain officers. Such registration statements are expected to become
effective upon filing. Shares covered by these registration statements will
thereupon be eligible for sale in the public markets, subject to the lock-up
agreements that apply for a 360-day period from the date of this Prospectus,
if applicable. See "Underwriting."
BRIDGE WARRANTS
As of August 31, 1996, Bridge Warrants to purchase a total of 300,000
shares of Common Stock were outstanding and exercisable. An aggregate of
300,000 of the Bridge Warrants and the shares of Common Stock underlying the
Bridge Warrants are subject to lock-up agreements that apply for a 360-day
period from the date of this Prospectus. See "Underwriting."
REGISTRATION RIGHTS
After the Offering, the beneficial holders of 1,763,695 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act, including the holders of the Bridge
Warrants. Under the terms of the agreements between the Company and the
holders of such registrable securities, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security holders exercising registration rights,
such holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein. Certain of such holders
benefitting from these rights may also require the Company to file a
registration statement under the Securities Act at the Company's expense with
respect to their shares of Common Stock, and the Company is required to use
its diligent reasonable efforts to effect such registration. Further, holders
may require the Company to file additional registration statements on Form
S-3 at the Company's expense. These rights are subject to certain conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in such registration in certain
circumstances. All of the holders of such securities have agreed not to
exercise their registration rights prior to the expiration of one year from
the date of this Prospectus. See "Certain Transactions."
Furthermore, the holders of the Representative's Warrants and the
securities underlying the Representative's Warrants have certain registration
rights with respect to such securities. See "Underwriting."
59
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Kaufman Bros., L.P. is acting as
the Representative (the "Representative"), have severally agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ------------------------- --------------------
<S> <C>
Kaufman Bros., L.P. .....
--------------------
Total ................... 1,850,000
====================
</TABLE>
The Underwriting Agreement provides that the several Underwriters are
obligated to purchase all of the 1,850,000 shares of Common Stock offered by
the Underwriters hereby (other than shares which may be purchased under the
over-allotment option), if any are purchased. The Representative has advised
the Company that the Underwriters propose to offer the shares to the public
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession
of $ per share and that such dealers may reallow a concession of
$ per share to certain other dealers. After the Offering, the offering
price and the concessions may be changed by the Representative.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary
authority.
The Company has granted to the Underwriters an option, expiring at the
close of business on the 30th day after the date of the Underwriting
Agreement, to purchase up to 277,500 additional shares of Common Stock at the
initial public offering price less underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. The Underwriters may
exercise the option only to cover over-allotments, if any, in the sale of
shares of Common Stock in the Offering. To the extent that the Underwriters
exercise the option, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage thereof
that the number of shares to be purchased by each of them as shown in the
foregoing table bears to the 1,850,000 shares of Common Stock initially
offered hereby.
The Company has agreed to pay to the Representative, individually and not
in its capacity as Representative, a non-accountable expense allowance of two
percent of the gross proceeds of the Offering ($ if the
Underwriters' over-allotment option is not exercised and $ if the
Underwriters' over-allotment option is exercised in full), of which $25,000
has been paid to date. If the Offering is not consummated, the Representative
will be entitled to be reimbursed for actual out-of-pocket expenses, on an
accountable basis only, up to $50,000, inclusive of the amount paid to date.
The Company has also agreed to pay all expenses in connection with
registering or qualifying the Common Stock offered hereby for sale under the
laws of the states in which the Common Stock is sold by the Underwriters
(including expenses of counsel retained for such purposes by the
Underwriters) as well as certain expenses associated with information
meetings.
The Company has agreed to sell to the Representative, or its designees,
warrants (the "Representative's Warrants") to purchase 185,000 shares of
Common Stock at an aggregate purchase price of $185.00. The exercise price
per Representative's Warrant, subject to anti-dilution adjustment, is equal
to 165% of the initial public offering price per share of Common Stock
offered hereby. The Representative's Warrants are exercisable for a period of
five years from the date of this Prospectus (the "Warrant Exercise Term").
The Representative's Warrants may not be transferred, sold, assigned or
hypothecated for a period of one year commencing from the date of the
consummation of the Offering, except that they may be transferred during such
period to officers of the Representative or members of the underwriting or
60
<PAGE>
selling group and/or their officers or partners, if any. During the Warrant
Exercise Term, the holders of the Representative's Warrants are given, at
nominal cost, the opportunity to profit from an increase in the market price
of the Common Stock without assuming the risk of ownership, with a resulting
dilution in the interest of other security holders of the Company. The
Company has granted the Representative certain registration rights with
respect to the Representative's Warrants. All registration rights will
terminate seven years from the date of this Prospectus.
The Company and holders of 2,927,159 shares of Common Stock, including
each director, officer, member of the SAB and principal stockholder of the
Company (including Titan), have agreed that they will not offer to sell,
contract to sell, sell, distribute, grant any option to purchase, pledge,
hypothecate or otherwise dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock for a period of 360 days after the
date of this Prospectus without the prior written consent of the
Representative.
Pursuant to the Underwriting Agreement, the Representative will have the
right to designate an observer to attend all of the meetings of the Company's
Board of Directors (at the expense of the Company) for a period of three
years after the consummation of the Offering.
The initial public offering price of the Common Stock offered hereby will
be determined through negotiations between the Company and the
Representative. Among the factors to be considered in making such
determination will be the prevailing market conditions, the Company's fiscal
and operating history and condition, the Company's prospects and the
prospects of its industry, the management of the Company, the market price of
securities for companies in businesses similar to that of the Company and
other relevant factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade
in the public market subsequent to the Offering at or above the initial
offering price.
The Representative became registered as a broker-dealer in July 1995 and
to date has co-managed one public offering. See "Risk Factors --Lack of
Underwriting History."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
CHANGES IN ACCOUNTANTS
Ernst & Young LLP, which has been and is the independent auditors for
Titan and for each of Titan's subsidiaries, declined, for reasons unrelated
to the Company, in July 1995 to consent to the use of its report in the
Registration Statement on Form SB-2 (the "Registration Statement") to which
this Prospectus forms a part as originally filed. As a result, the Company
engaged Richard A. Eisner & Company, LLP as independent auditors effective
July 1995 for the purpose of auditing and reporting on the Company's
financial statements for the periods from July 25, 1991 (inception) through
December 31, 1994. The report of Richard A. Eisner & Company, LLP on such
financial statements, which report was dated July 21, 1995 and was included
in the Registration Statement as originally filed and in Amendment No. 1
thereto, did not contain an adverse opinion or a disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope, or accounting
principles. However, such report contained an explanatory paragraph that
described the substantial doubt as to the ability of the Company to continue
as a going concern.
Ernst & Young LLP now has consented to the use of its report, which is
dated February 23, 1996 (except as to certain subsequent events) and which
relates to the Company's financial statements for the periods from July 25,
1991 (inception) through December 31, 1995, in Amendment No. 2 to the
Registration Statement. Such report contains an explanatory paragraph that
describes the substantial doubt as to the ability of the Company to continue
as a going concern.
The report of Richard A. Eisner & Company, LLP has been removed from the
Registration Statement effective with Amendment No. 2. In connection with its
audit of the Company's financial statements for the period from July 25, 1991
(inception) through December 31, 1994 and subsequent thereto until the
commencement by Ernst & Young LLP of its audit of the Company's financial
statements
61
<PAGE>
of the year ended December 31, 1995, there were no disagreements between
Richard A. Eisner & Company, LLP and the Company on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
and procedures which, if not resolved to the satisfaction of Richard A.
Eisner & Company, LLP, would have caused Richard A. Eisner & Company, LLP to
make reference to the matter in its report.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York
and for the Underwriters by O'Sullivan Graev & Karabell, LLP, New York, New
York.
EXPERTS
The financial statements of Ingenex at December 31, 1994 and 1995, and for
each of the years then ended, and for the period from July 25, 1991
(inception) through December 31, 1995 appearing in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph with respect to the uncertainty surrounding the Company's ability
to continue as a going concern) appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
The statements relating to United States patent matters, under the
headings "Risk Factors--Uncertainty Relating to Patents and Proprietary
Technology" and "Business--Proprietary Rights," except those statements
qualified as being based on the Company's belief, have been reviewed and
approved by Pennie & Edmonds, New York, New York, special patent counsel to
the Company, and have been included herein in reliance upon the review and
approval by such firm as experts in United States patent law.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
(the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus 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
the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus concerning the contents of any contract or any
other document referred to are not necessarily complete; reference is made in
each instance to the copy of such contract or document filed as an exhibit to
the Registration Statement. Each such statement is qualified in all respects
by such reference to such exhibit. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the SEC's
principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from such office after
payment of fees prescribed by the SEC.
Upon consummation of the Offering, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act
and in accordance therewith will be required to file reports and other
information with the SEC. Such reports and other information can be inspected
and copied at the public reference facilities maintained by the SEC at its
principal offices. In addition, the Company is required to file electronic
versions of such reports and other information with the SEC through the SEC's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) System. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ... F-2
Balance Sheets ....................................... F-3
Statements of Operations ............................. F-4
Statement of Net Capital Deficiency .................. F-5
Statements of Cash Flows ............................. F-6
Notes to Financial Statements ........................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Ingenex, Inc.
We have audited the accompanying balance sheets of Ingenex, Inc. (a
development stage company) as of December 31, 1994 and 1995, and the related
statements of operations, net capital deficiency, and cash flows for the
years then ended and for the period from July 25, 1991 (commencement of
operations) 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 Ingenex, Inc. (a
development stage company) at December 31, 1994 and 1995, and the results of
its operations and its cash flows for the years then ended and for the period
from July 25, 1991 (commencement of operations) to December 31, 1995 in
conformity with generally accepted accounting principles.
As more fully described in Note 1 to the financial statements, the Company
is in the development stage, has incurred losses since inception of
approximately $12.5 million and expects to incur substantial and increasing
operating losses over the next several years. At December 31, 1995, the
Company had a working capital deficit and a net capital deficiency of
approximately $4.1 million and $5.2 million, respectively. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans as to these matters are also described in Note 1.
The 1995 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Palo Alto, California
February 23, 1996, except for
Note 8 as to which the date is September 27, 1996.
F-2
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED PRO
FORMA
LIABILITIES AND
NET CAPITAL
DECEMBER 31, DECEMBER 31, DEFICIENCY AT
1994 1995 JUNE 30, 1996 JUNE 30, 1996
-------------- -------------- -------------- ---------------
(UNAUDITED) (NOTE 8)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 693,538 $ 37,938 $ 168
Prepaid sponsored research ................................... 76,844 -- --
Other current assets ......................................... 16,198 -- 6,709
-------------- -------------- --------------
Total current assets ....................................... 786,580 37,938 6,877
Furniture and equipment, net ................................... -- 3,760 8,333
Deferred offering costs ........................................ -- 25,000 27,483
Deferred financing costs ....................................... -- 142,604 119,474
Other assets ................................................... 14,323 -- 37,212
-------------- -------------- --------------
Total assets ............................................... $ 800,903 $ 209,302 $ 199,379
============== ============== ==============
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable ............................................. $ 409,179 $ 376,172 $ 255,237
Note payable--bridge financing ............................... -- 1,500,000 --
Payable to parent ............................................ 592,331 1,313,214 31,613
Accrued sponsored research ................................... 522,824 197,622 --
Other accrued liabilities .................................... 91,975 248,291 107,640
Current portion of technology financing ...................... -- 494,107 537,447
-------------- -------------- --------------
Total current liabilities .................................. 1,616,309 4,129,406 931,937
Noncurrent portion of technology financing ..................... -- 1,289,313 966,430
Commitments
Net capital deficiency:
Preferred stock, $.001 par value; issuable in series, at
amounts paid in; 7,465,866 convertible shares authorized
(4,000,000 pro forma):
Series A--1,007,834 shares issued and outstanding at
December 31, 1994 and 1995, and June 30, 1996, respectively
(none pro forma); liquidation preference of $5,341,520 at
December 31, 1995 and June 30, 1996 .......................... 5,323,570 5,323,570 5,323,570 $ --
Series B--283,400 shares issued and outstanding at
December 31, 1994 and 1995, and June 30, 1996, respectively
(none pro forma); liquidation preference of $1,643,720 at
December 31, 1995 and June 30, 1996 .......................... 1,241,032 1,241,032 1,241,032 --
Common stock, $.001 par value, at amounts paid in;
25,000,000 shares authorized; 585,807, 708,537, and 1,703,157
shares issued and outstanding at December 31, 1994 and 1995,
and June 30, 1996, respectively (2,994,391 pro forma) ....... 24,457 154,085 5,561,764 12,126,366
Additional capital ............................................. 128,805 600,000 600,000 600,000
Deficit accumulated during the development stage ............... (7,533,270) (12,528,104) (14,425,354) (14,425,354)
-------------- -------------- -------------- ---------------
Total net capital deficiency ............................... (815,406) (5,209,417) (1,698,988) $ (1,698,988)
-------------- -------------- -------------- ===============
Total liabilities and stockholders' equity ................. $ 800,903 $ 209,302 $ 199,379
============== ============== ==============
</TABLE>
See accompanying notes.
F-3
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT OF
YEAR ENDED DECEMBER 31, OPERATIONS
------------------------------ (JULY 25, 1991) TO
1994 1995 DECEMBER 31, 1995
-------------- -------------- ---------------------
<S> <C> <C> <C>
Revenue ........................ $ -- $ 139,522 $ 139,522
Costs and expenses:
Research and development (1) . 3,988,139 2,500,817 8,250,972
Research and
development-stockholders (2) 368,684 320,543 1,437,240
General and administrative (1) 549,663 1,204,166 1,861,827
-------------- -------------- -----------------
Total cost and expenses ..... 4,906,486 4,025,526 11,550,039
-------------- -------------- -----------------
Loss from operations ......... (4,906,486) (3,886,004) (11,410,517)
Other income (expense):
Interest income ............... 22,885 41,036 63,921
Interest expense .............. -- (1,149,866) (1,181,508)
-------------- -------------- -----------------
Net loss ..................... $(4,883,601) $(4,994,834) $(12,528,104)
============== ============== =================
Pro forma net (loss) per share $ (1.56)
==============
Shares used in computing
pro forma net (loss) per share 3,211,192
==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
SIX MONTHS ENDED JUNE 30, OF OPERATIONS
------------------------------ (JULY 25, 1991)
1995 1996 TO JUNE 30, 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
REVENUE $ -- $ 46,418 $ 185,940
Costs and expenses:
Research and development (1) . 1,435,932 1,066,877 9,317,849
Research and
development-stockholders (2) 132,87 -- 1,437,240
General and administrative (1) 417,850 548,260 2,410,087
-------------- -------------- ----------------
Total cost and expenses ..... 1,986,656 1,615,137 13,165,176
-------------- -------------- ----------------
Loss from operations ......... (1,986,656) (1,568,719) (12,979,236)
Other income (expense):
Interest income ............... 27,621 42 63,963
Interest expense .............. (239,468) (328,573) (1,510,081)
-------------- -------------- ----------------
Net loss ..................... $(2,198,503) $(1,897,250) $(14,425,354)
============== ============== ================
Pro forma net (loss) per share $ (0.53)
==============
Shares used in computing
pro forma net (loss) per share 3,258,571
==============
</TABLE>
- ------------
(1) See Note 6 for description of related party transactions.
(2) See Note 2 for description of sponsored research agreements with certain
stockholders (3 universities).
See accompanying notes.
F-4
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- --------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to parent for amount
receivable in February 1993 at $0.0018 per
share ........................................ -- $ -- 426,372 $ 782 -- $ --
Issuance of common stock to directors for cash
and amount receivable in February 1993 at
$0.0018 per share ............................ -- -- 37,074 67 -- --
Issuance of common stock to a university for
cash in February 1993 at $0.072 per share ... -- -- 16,356 1,508 -- --
Issuance of common stock for cash to
consultants in February 1993 for $0.072 per
share ........................................ -- -- -- -- 65,427 4,800
Issuance of common stock to a college of
medicine for cash in April 1993 and November
1993 at $0.0018 per share .................... -- -- 26,948 50 -- --
Forgiveness of note payable to related party . -- -- -- 10,000 -- --
Net loss--from incorporation (July 25, 1991)
to December 31, 1993 ......................... -- -- -- -- -- --
--------- ---------- --------- ---------- -------- -------
BALANCE at December 31, 1993 .................. -- -- 506,750 12,407 65,427 4,800
Receipt of cash for stockholder receivable ... -- -- -- -- -- --
Issuance of Series A convertible preferred
stock to parent for cash and settlement of
payable in May 1994 at $5.28 per share ...... 1,007,834 5,323,570 -- -- -- --
Issuance of common stock as partial
consideration for a license to an institute
in May 1994 at $0.53 per share ............... -- -- 13,630 7,250 -- --
Issuance of Series B convertible preferred
stock to investors for cash in September 1994
at $5.82 per share (net of issuance costs of
$408,968) .................................... 283,400 1,241,032 -- -- -- --
Conversion of Class B common into common stock -- -- 65,427 4,800 (65,427) (4,800)
Common stock to be issued to a college of
medicine and pursuant to antidilutive
provisions ................................... -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
--------- ---------- --------- ---------- -------- -------
BALANCE at December 31, 1994 .................. 1,291,234 6,564,602 585,807 24,457 -- --
Issuance of antidilutive common stock in
February 1995 ................................ -- -- 107,034 99,562 -- --
Issuance of common stock to a college of
medicine in April 1995 ....................... -- -- 7,063 29,243 -- --
Issuance of common stock upon exercise of
stock option grants in November 1995 ........ -- -- 5,725 556 -- --
Issuance of common stock upon exercise of
stock option grant in December 1995 .......... -- -- 2,908 267 -- --
Issuance of warrants in connection with a
bridge financing ............................. -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
--------- ---------- --------- ---------- -------- -------
BALANCE at December 31, 1995 .................. 1,291,234 6,564,602 708,537 154,085 -- --
Issuance of common stock upon exercise of
stock option grants in March 1996 (unaudited) -- -- 12,503 7,651 -- --
Issuance of common stock upon exercise of
stock option grants in June 1996 (unaudited) -- -- 299 28 -- --
Issuance of common stock to parent for cash
and settlement of payable in June 1996 at
$5.50 per share .............................. -- -- 981,818 5,400,000 -- --
Net loss--six months ended June 30, 1996
(unaudited) .................................. -- -- -- -- -- --
--------- ---------- --------- ---------- -------- -------
BALANCE at June 30, 1996 (unaudited) ......... 1,291,234 $6,564,602 1,703,157 $5,561,764 -- $ --
========= ========== ========= ========== ======== =======
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
RECEIVABLE COMMON DURING THE NET
FROM STOCK ADDITIONAL DEVELOPMENTAL CAPITAL
STOCKHOLDERS TO BE ISSUED CAPITAL STAGE DEFICIENCY
------------- ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK TO PARENT FOR AMOUNT
RECEIVABLE IN FEBRUARY 1993 AT $0.0018 PER
SHARE ........................................ $(782) $ -- -- $ -- $ --
ISSUANCE OF COMMON STOCK TO DIRECTORS FOR CASH
AND AMOUNT RECEIVABLE IN FEBRUARY 1993 AT
$0.0018 PER SHARE ............................ (34) -- -- -- 33
Issuance of common stock to a university for
cash in February 1993 at $0.072 per share ... -- -- -- -- 1,508
-----------
Issuance of common stock for cash to
consultants in February 1993 for $0.072 per
share ........................................ -- -- -- -- 4,800
Issuance of common stock to a college of
medicine for cash in April 1993 and November
1993 at $0.0018 per share .................... -- -- -- -- 50
Forgiveness of note payable to related party . -- -- -- -- 10,000
Net loss--from incorporation (July 25, 1991)
to December 31, 1993 ......................... -- -- -- (2,649,669) (2,649,669)
------------ ------------ ---------- ------------- -----------
BALANCE at December 31, 1993 .................. (816) -- -- (2,649,669) (2,633,278)
Receipt of cash for stockholder receivable ... 816 -- -- -- 816
Issuance of Series A convertible preferred
stock to parent for cash and settlement of
payable in May 1994 at $5.28 per share ...... -- -- -- -- 5,323,570
Issuance of common stock as partial
consideration for a license to an institute
in May 1994 at $0.53 per share ............... -- -- -- -- 7,250
Issuance of Series B convertible preferred
stock to investors for cash in September 1994
at $5.82 per share (net of issuance costs of
$408,968) .................................... -- -- -- -- 1,241,032
Conversion of Class B common into common stock -- -- -- -- --
Common stock to be issued to a college of
medicine and pursuant to antidilutive
provisions ................................... -- 128,805 -- -- 128,805
Net loss ...................................... -- -- -- (4,883,601) (4,883,601)
------------ ------------ ---------- ------------- -----------
BALANCE at December 31, 1994 .................. -- 128,805 -- (7,533,270) (815,406)
Issuance of antidilutive common stock in
February 1995 ................................ -- (99,562) -- -- --
Issuance of common stock to a college of
medicine in April 1995 ....................... -- (29,243) -- -- --
Issuance of common stock upon exercise of
stock option grants in November 1995 ........ -- -- -- -- 556
Issuance of common stock upon exercise of
stock option grant in December 1995 .......... -- -- -- -- 267
Issuance of warrants in connection with a
bridge financing ............................. -- -- 600,000 -- 600,000
Net loss ...................................... -- -- -- (4,994,834) (4,994,834)
------------ ------------ ---------- ------------- -----------
BALANCE at December 31, 1995 .................. -- -- 600,000 (12,528,104) (5,209,417)
Issuance of common stock upon exercise of
stock option grants in March 1996 (unaudited) -- -- -- -- 7,651
Issuance of common stock upon exercise of
stock option grants in June 1996 (unaudited) -- -- -- -- 28
Issuance of common stock to parent for cash
and settlement of payable in June 1996 at
$5.50 per share .............................. -- -- -- -- 5,400,000
Net loss--six months ended June 30, 1996
(unaudited) .................................. -- -- -- (1,897,250) (1,897,250)
------------ ------------ ---------- ------------- -----------
BALANCE at June 30, 1996 (unaudited) ......... $ -- $ -- $600,000 $(14,425,354) $(1,698,988)
============ ============ ========== ============= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS
(JULY 25, 1991)
TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1994 1995 1995
------------ ------------ ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................... $(4,883,601) $(4,994,834) $(12,528,104)
Adjustments to reconcile net loss to net cash
used in operating activities ................
Amortization and depreciation ............... 10,837 555 14,101
Amortization of debt discount ............... -- 600,000 600,000
Amortization of debt issue costs ............ -- 237,396 237,396
Common stock issued or subsequently issued
in exchange for consulting services and
license agreements .......................... 136,055 -- 136,055
Changes in operating assets and liabilities:
Prepaid sponsored research .................. 54,107 76,844 --
Due from parent ............................. 324,136 -- --
Other current assets ........................ (16,198) 16,198 --
Other assets ................................ -- 14,323 (13,546)
Accounts payable ............................ 275,134 (33,007) 376,172
Accrued sponsored research .................. 414,364 (325,202) 197,622
Other accrued liabilities ................... 61,878 156,316 248,291
------------ ------------ ----------------
Net cash used in operating activities ....... (3,623,288) (4,251,411) (10,732,013)
------------ ------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment ........ -- (4,315) (4,315)
------------ ------------ ----------------
Net cash used in investing activities ...... -- (4,315) (4,315)
------------ ------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to related
parties ..................................... -- -- 435,000
Payments of notes payable to related parties -- -- (425,000)
Net proceeds from issuance of preferred
stock ....................................... 3,199,017 -- 3,199,017
Proceeds from issuance of common stock ..... 816 823 8,030
Payable to parent ........................... 1,113,797 720,883 4,678,799
Proceeds from technology financing ......... -- 2,000,000 2,000,000
Payment of principal on technology financing -- (216,580) (216,580)
Proceeds from bridge financing .............. -- 1,500,000 1,500,000
Payment of principal on bridge financing ... -- -- --
Deferred offering costs ..................... -- (25,000) (25,000)
Deferred financing costs .................... -- (380,000) (380,000)
------------ ------------ ----------------
Net cash provided by financing activities ... 4,313,630 3,600,126 10,774,266
------------ ------------ ----------------
Net increase (decrease) in cash and cash
equivalents ................................. 690,342 (655,600) 37,938
Cash and cash equivalents, beginning of
period ...................................... 3,196 693,538 --
------------ ------------ ----------------
Cash and cash equivalents, end of period .... $ 693,538 $ 37,938 $ 37,938
============ ============ ================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Forgiveness of note payable to a related
party ....................................... $ 10,000 $ -- $ 10,000
============ ============ ================
Issuance of Series A preferred stock for
settlement payable to Parent ............... $ 3,365,585 $ -- $ 3,365,585
============ ============ ================
Interest paid ............................... $ -- $ 233,720 $ 233,720
============ ============ ================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS
(JULY 25, 1991)
TO
SIX MONTHS ENDED JUNE 30, JUNE 30,
1995 1996 1996
------------ ------------ ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................... $(2,198,503) $(1,897,250) $(14,425,354)
Adjustments to reconcile net loss to net cash
used in operating activities ................
Amortization and depreciation ............... -- 1,076 15,177
Amortization of debt discount ............... 85,713 -- 600,000
Amortization of debt issue costs ............ 47,128 23,130 260,526
Common stock issued or subsequently issued
in exchange for consulting services and
license agreements .......................... -- -- 136,055
Changes in operating assets and liabilities:
Prepaid sponsored research .................. 24,414 -- --
Due from parent ............................. -- -- --
Other current assets ........................ 16,198 (6,709) (6,709)
Other assets ................................ 14,323 (37,212) (50,758)
Accounts payable ............................ (335,865) (120,936) 255,236
Accrued sponsored research .................. (156,328) (197,622) --
Other accrued liabilities ................... 112,206 (140,651) 107,640
------------ ------------ ----------------
Net cash used in operating activities ....... (2,390,714) (2,376,174) (13,108,187)
------------ ------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment ........ -- (5,649) (9,964)
------------ ------------ ----------------
Net cash used in investing activities ...... -- (5,649) (9,964)
------------ ------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to related
parties ..................................... -- -- 435,000
Payments of notes payable to related parties -- -- (425,000)
Net proceeds from issuance of preferred
stock ....................................... -- -- 3,199,017
Proceeds from issuance of common stock ..... -- 7,679 15,709
Payable to parent ........................... (196,176) 4,118,400 8,797,199
Proceeds from technology financing ......... 2,000,000 -- 2,000,000
Payment of principal on technology financing (29,625) (279,543) (496,123)
Proceeds from bridge financing .............. 1,500,000 -- 1,500,000
Payment of principal on bridge financing ... -- (1,500,000) (1,500,000)
Deferred offering costs ..................... (151,682) (2,483) (27,483)
Deferred financing costs .................... (380,000) -- (380,000)
------------ ------------ ----------------
Net cash provided by financing activities ... 2,742,517 2,344,053 13,118,319
------------ ------------ ----------------
Net increase (decrease) in cash and cash
equivalents ................................. 351,803 (37,770) 168
Cash and cash equivalents, beginning of
period ...................................... 693,538 37,938 --
------------ ------------ ----------------
Cash and cash equivalents, end of period .... $1,045,341 $ 168 $ 168
============ ============ ================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Forgiveness of note payable to a related
party ....................................... $ -- $ -- $ 10,000
============ ============ ================
Issuance of Series A preferred stock for
settlement payable to Parent ............... $ -- $ 5,400,000 $ 8,765,585
============ ============ ================
Interest paid ............................... $ 95,375 $ 140,876 $ 374,596
============ ============ ================
</TABLE>
F-6
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Ingenex, Inc. (the "Company") is a biopharmaceutical company engaged in
the development of proprietary gene-based therapies and the application of
functional genetics to pharmaceutical discovery. The Company's initial
commercial strategy is to develop gene therapy products for the oncology
market. The Company is currently a majority-owned subsidiary of Titan
Pharmaceuticals, Inc. ("Titan" or "Parent").
The Company is dependent on its Parent to provide working capital,
facilities and equipment and certain administrative, financial, regulatory,
business development and human resource services. The Company and the Parent
have members of their boards of directors in common. The Company also depends
on third parties for the license of certain technologies and for sponsored
research. All of the Company's current products under development are the
subject of license agreements which will require the payment of future
royalties.
BASIS OF PRESENTATION
The Company's activities since incorporation have primarily consisted of
establishing its offices and research facilities, recruiting personnel,
conducting research and development, performing business and financial
planning and raising capital. Accordingly, the Company is considered to be in
the development stage and expects to incur increasing losses and require
additional financial resources to achieve commercialization of its products.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since inception, the Company has
incurred cumulative net operating losses of approximately $12.5 million and
has a working capital deficiency of approximately $4.1 million as of December
31, 1995. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management expects the Company to
incur additional losses for the next several years and recognizes the need
for an infusion of cash during 1996. The Parent has committed to funding the
Company in the amount of $2.6 million in addition to its repayment of the
bridge financing referred to in Note 4. The Company is actively pursuing
various options which include securing additional equity financing and
believes that sufficient funding will be available to achieve its planned
business objectives. However, if the Company is unable to obtain necessary
cash, other more substantial restructuring options may be necessary, which
would have a material adverse effect on the Company's business, results of
operations and prospects. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result.
In September 1994, the Company effected a 1.875-for-one split of all
outstanding common and preferred stock. In May 1995, the Company effected a
3.4389-for-one reverse stock split of the Company's Series A convertible
preferred stock and common stock, and a 2.3288-for-one reverse stock split of
the Company's Series B convertible preferred stock. All share and per share
amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the stock split and reverse stock splits.
INTERIM FINANCIAL INFORMATION
The financial information at June 30, 1996 and for the six months ended
June 30, 1995 and June 30, 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the
F-7
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Company considers necessary for a fair presentation of its financial
position at such date and of its operating results and cash flows for those
periods. Results of the 1996 interim period are not necessarily indicative of
results expected for the entire year.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from
date of purchase of 90 days or less to be cash equivalents. At December 31,
1994 and 1995, the Company had $662,935 and $7,244, respectively, in money
market mutual funds which invest in various U.S. government securities
including Treasury bills, notes and bonds. The funds seek to maintain a
constant $1 net asset value per share. These amounts are included in cash and
cash equivalents.
The Company's investment policy is to maintain liquidity and ensure the
safety of principal.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets ranging
from three to five years.
REVENUE
Revenue consists of revenue from government grants which support the
Company's research efforts in specific research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in
the various agreements. Revenues are recognized as earned.
SPONSORED RESEARCH AND LICENSES
Research and development expenses under sponsored research arrangements
are recognized as the related services are performed, generally ratably over
the period of service. Payments for license fees are expensed as incurred.
STOCK-BASED COMPENSATION
For stock awards and options granted for a fixed number of shares to
employees at prices not less than fair value at award or grant date, the
Company does not record compensation expense.
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
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares (resulting primarily from
stock options and amounts
F-8
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
payable to the Parent) arising during the period commencing 12 months prior
to a proposed public offering at prices below the assumed public offering
price have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method for stock options and
the if-converted method for amounts payable to Parent). Per share information
calculated on the above noted basis is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net loss per share .................. $ (2.94) $ (2.83) $ (1.26) $ (1.06)
=========== =========== =========== ===========
Shares used in calculating net loss
per share .......................... 1,658,860 1,763,157 1,746,582 1,794,107
=========== =========== =========== ===========
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock and additional amounts payable to Parent.
The Company intends to use a portion of the proceeds from the proposed
public offering to repay its indebtedness associated with the technology
financing (see Note 4). Supplementary net loss per share gives effect to the
retirement of such debt at the beginning of the respective periods shown
below.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
Supplementary net loss per share ....... $ (1.40) $ (0.47)
================= ================
Shares used in calculating supplementary
net loss per share ..................... 3,394,525 3,436,913
================= ================
</TABLE>
2. SPONSORED RESEARCH AND LICENSE AGREEMENTS
WITH STOCKHOLDERS
In May 1992, the Company acquired three exclusive worldwide licenses from
the University of Illinois at Chicago ("UIC") regarding certain patent
properties. In connection with the license agreements, the Company agreed to
pay royalties based on sales of products and processes incorporating the
licensed technology, subject to certain minimum royalty payments, royalties
based on sublicensing income, a percentage of revenues from research relating
to the subject matter of each license that is performed on a contract basis
for third parties and all costs and expenses associated with patent
prosecution and maintenance. The Company also paid UIC and expensed fees for
various UIC licenses totaling $45,000, $73,000 and $149,000 in 1993, 1994 and
1995, respectively. In conjunction with the licenses, the Company and UIC
entered into a one-year sponsored research agreement pursuant to which the
Company paid UIC an aggregate of $400,000 over 1992 and 1993. Additionally,
UIC purchased 16,356 shares of the common stock of the Company ("common
stock") in February 1993. In January 1995, these licenses were assigned by
the Company to a capital management partnership (see Note 4). However, the
Company is still responsible for making minimum royalty and other payments as
stipulated in the aforementioned agreements.
F-9
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
In September 1992, the Company acquired an exclusive license under a
patent (issued in March 1993) assigned to the Massachusetts Institute of
Technology ("MIT"). Under the license agreement, the Company agreed to pay
MIT royalties based on net sales of products and processes incorporating the
licensed technology, subject to certain minimum annual amounts ranging from
$3,000 in 1993 to $15,000 in 1997, and $25,000 per year thereafter to
maintain the license. In connection with the execution of the license
agreement, the Company issued to MIT 13,630 shares of common stock as partial
consideration for the license, for which the Company expensed $7,250. In
January 1995, this license was assigned by the Company to a capital
management partnership (see Note 4). However, the Company is still
responsible for making the payments required under the license agreement.
In October 1992, the Company acquired an exclusive worldwide license under
U.S. and foreign patent applications assigned to the Baylor College of
Medicine ("Baylor"). Under the license agreement, the Company agreed to pay
Baylor royalties based on net sales of products and processes incorporating
the licensed technology, subject to certain minimum annual amounts ranging
from $8,000 in 1993 to $36,000 in 1997 and each year thereafter to maintain
the exclusivity of the license, and a percentage of sublicensing income
arising from the license of such products and processes. Pursuant to the
research agreement with Baylor also entered into in October 1992, the Company
was obligated to pay a total of $797,254 to Baylor for its research efforts.
The Company recorded expenses of $242,691 and $239,543 in 1994 and 1995,
respectively, and $132,874 and $0 for the periods ended June 30, 1995 and
1996, respectively. As more fully described in the license agreement, the
Company also agreed to issue shares of common stock to Baylor over the
three-year period following the execution of the agreement. None of these
shares were issued as of December 31, 1992, and 26,948 shares were issued in
the year ended December 31, 1993. At December 31, 1994, an additional 7,063
shares were issuable to Baylor. These shares were issued in April 1995. The
Company recorded research and development expenses of $29,243 in 1994 as
consideration for the stock to be issued and included this amount as common
stock in the Company's balance sheet at December 31, 1994.
WITH OTHER PARTIES
In March 1993, the Company entered into a research agreement with the
University of Texas M.D. Anderson Cancer Center ("MD Anderson"). Under the
research agreement, the Company agreed to pay MD Anderson $500,574 over a
two-year period for research activities. The Company exercised its option
under the agreement to provide working space for the researchers and fund
related expenditures up to $740,000. Pursuant to the agreement, $414,011 and
$826,563 were included in research and development expenses in 1993 and 1994,
respectively. The original term of the agreement expired in 1995. However,
the Company has agreed to fund an additional $240,000 at the rate of $24,000
per month commencing March 1996.
The Company is a party to several other license agreements, which involve
lesser funding commitments by the Company.
3. RENT EXPENSE
Total rent expense, including a certain research facility, was $229,154
and $97,686 for 1994 and 1995, respectively, and $14,323 and $138,565 for the
periods ended June 30, 1995 and 1996, respectively. In March 1995, the
Company terminated the lease of a certain research facility. There are no
remainingpayments due and the Company is no longer using the facility.
Additionally, included in the cost allocation from Parent (see Note 6), the
Company incurred additional occupancy charges of $174,056 and $189,928 for
1994 and 1995, respectively, and $123,238 and $33,345 for the periods ended
June 30, 1995 and 1996, respectively.
F-10
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
4. DEBT OBLIGATIONS
TECHNOLOGY FINANCING AGREEMENT
In January 1995, the Company assigned its rights under certain of its
technology license agreements to Aberlyn Capital Management Limited
Partnership ("Aberlyn") in exchange for $2,000,000. The Company has
licensed-back the technology for research and development purposes and has
agreed to make monthly payments of $25,000 through July 1995 and $60,060 from
August 1995 through January 1999. Each payment includes implicit interest at
approximately 11.6% per annum. At the end of the payment term, the assigned
license rights can be reacquired by the Company for $1.00. As part of the
financing agreement, the Parent issued to Aberlyn a warrant to purchase
112,375 shares of the Parent's common stock at a price of $3.56 per share.
The warrant expires January 31, 2002. The Company incurred a finder's fee of
$140,000 related to this transaction, which has been capitalized as deferred
financing costs and is being amortized over 48 months. The Parent has
guaranteed payment of the loan and has issued finder and director warrants to
purchase an aggregate of 7,395 shares of the Parent's common stock at an
exercise price of $3.25 per share. The warrants expire in January 2002.
BRIDGE FINANCING NOTES
In May 1995, the Company completed a bridge financing pursuant to which
the Company issued $1,500,000 principal amount of bridge notes payable and
warrants to purchase an aggregate of 300,000 shares of common stock (the
"bridge warrants"). Net proceeds from the bridge financing were approximately
$1,305,000 (after expenses of the offering). The bridge notes payable were
due, together with interest at the rate of 9% per annum, on the earlier of
December 31, 1995 or upon the consummation of an initial public offering of
the common stock. The Company did not complete an initial public offering
prior to the December 31, 1995 due date of the bridge notes and was not
otherwise able to repay the bridge notes by that date. Therefore, the Company
and the Parent negotiated an extension of the bridge notes until February 28,
1996. The bridge notes were subsequently repaid by the Parent with proceeds
from the Parent's initial public offering in January 1996. The bridge
warrants entitle the holders thereof to purchase up to 300,000 shares of the
common stock until May 30, 2000 at a price of $2.50 per share. The bridge
warrants were assigned a value of $600,000. This amount was reflected as a
discount on the bridge notes and was accreted as additional financing
(interest) expense over the initial term of the bridge notes.
FAIR VALUE OF DEBT OBLIGATIONS
The carrying amounts of the Company's technology financing and bridge
notes approximate fair value, which was estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
F-11
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The following table describes information with respect to various series
of convertible preferred stock ("preferred stock") outstanding as of December
31, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
PRIMARY
LIQUIDATION PRIMARY TOTAL
SHARES SHARES ISSUED ISSUANCE PRICE PREFERENCE PER LIQUIDATION
AUTHORIZED AND OUTSTANDING PER SHARE SHARE PREFERENCE
------------ --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Series A .. 3,465,866 1,007,834 $5.28 $5.30 $5,341,520
Series B .. 4,000,000 283,400 $5.82 $5.80 $1,643,720
</TABLE>
The holders of the Series A and B convertible preferred stock are entitled
to receive noncumulative dividends, when and if declared by the Company's
board of directors, out of legally available assets at a rate of $0.52 and
$0.58 per share, respectively, per annum. No dividends have been declared by
the board of directors.
Each share of preferred stock can be converted at the option of the holder
into one share of common stock, subject to certain adjustments. The preferred
stock will be automatically converted into common stock upon a vote by a
majority of each class of preferred shareholders or upon consummation of an
underwritten public offering in which the offering price equals or exceeds
$4.50 per share and the aggregate public offering proceeds equal or exceed
$5,000,000. Each share of the preferred stock has voting rights equal to the
number of shares of common stock into which it is convertible.
The Series A and B convertible preferred stock have primary liquidation
preferences of $5.30 and $5.80 per share, respectively, plus all dividends
declared and unpaid. After payment of these liquidation preferences, any
remaining assets will be distributed on a pro rata basis to the holders of
the Series A and B convertible preferred stock and the holders of the common
stock, based on the number of shares of common stock held by each stockholder
(assuming conversion of all such Series A and B convertible preferred stock
into common stock) until the holders of the Series A and B convertible
preferred stock have received an aggregate of $26.50 per share and $29.00 per
share, respectively, including amounts distributed to the holders of such
preferred stock prior to the pro rata distribution to all stockholders. Any
remaining assets will be distributed on a pro rata basis to the holders of
common stock.
COMMON STOCK
The Company has reserved a sufficient number of shares of common stock to
permit conversion of the preferred stock.
In February 1993, 65,427 shares of common stock were issued to two
consultants (Drs. Roninson and Davidson); such shares are subject to certain
repurchase rights of the Company if they cease being consultants to the
Company prior to the vesting of such shares. These shares were subject to
certain antidilution privileges, pursuant to which an additional 107,034
shares of common stock became issuable in May 1994 and were issued in
February 1995. At December 31, 1994, the Company recorded research and
development expenses of $99,562 as consideration for the shares to be issued
and included this amount in common stock in the balance sheet at December 31,
1994.
STOCK OPTIONS
In October 1993, the Company granted options to purchase an aggregate of
33,522 shares of common stock at an exercise price of $0.018 per share to
employees. These options are immediately exercisable,
F-12
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
but are subject to repurchase rights which lapse ratably over four years,
with the first increment after one year. At December 31, 1995 and June 30,
1996, 13,968 and 4,889 shares, respectively, of common stock underlying the
options would be subject to repurchase by the Company if all options were
exercised.
In December 1993, the Company's board of directors adopted a stock option
plan (the "Plan") and initially reserved 85,827 shares of common stock for
issuance pursuant to the exercise of options. Under the Plan, incentive stock
options may be granted to employees, and nonstatutory stock options may be
granted to employees, directors and consultants of the Company, its Parent
and subsidiary corporations.
Options granted under the Plan expire no later than ten years from the
date of the grant, except when the grantee receives an incentive stock option
and is a 10% stockholder of the Company, its Parent or subsidiary
corporations, in which case the maximum term is five years from the date of
the grant. The exercise price shall be at least 100%, 85% and 110% of the
fair market value of the stock subject to the option on the grant date, as
determined by the board of directors, for incentive stock options,
nonstatutory stock options and incentive stock options granted to 10%
stockholders of the Company (or its Parent or subsidiary corporations),
respectively. The options are exercisable immediately upon grant; however,
the shares issuable upon exercise of the options are subject to the Company's
right of repurchase. Such repurchase rights will lapse as the shares vest
over periods of up to five years from the date of grant.
Plan transactions from Plan inception (December 1993) to June 30, 1996
were as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
SHARES ------------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------- ----------- -----------------
<S> <C> <C> <C>
Shares reserved as of December 31, 1993 85,827 -- --
Shares reserved ......................... 50,480 -- --
Options granted ......................... (120,390) 120,390 $0.02 --$0.45
----------- -----------
BALANCE at December 31, 1994 ............ 15,917 120,390 $0.02 --$0.45
Shares reserved ......................... 344,561 -- --
Options granted ......................... (275,361) 275,361 $0.85 --$3.50
Options canceled ........................ 99,267 (99,267) $0.0918 --$0.8597
Options exercised ....................... -- (4,422) $0.0918
----------- -----------
BALANCE at December 31, 1995 ............ 184,384 292,062 $0.02 --$3.50
Shares reserved ......................... 366,632 -- --
Options granted ......................... (157,244) 157,244 $2.00 --$5.00
Options canceled ........................ 13,212 (13,212) $0.85 --$2.50
Options exercised ....................... -- (3,025) $0.0184
----------- -----------
BALANCE at June 30, 1996 ................ 406,984 433,069 $0.02 --$5.00
=========== ===========
</TABLE>
As of December 31, 1994 and 1995 and June 30, 1996, 100,338 shares,
248,314 shares and 373,236 shares, respectively, of common stock underlying
the options would be subject to repurchase by the Company if all options were
exercised.
6. RELATED PARTY TRANSACTIONS
On August 1, 1994, the Company entered into an agreement with the Parent
regarding the allocation of costs by Titan to the Company for certain
services provided in managing the affairs of the Company,
F-13
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
consisting primarily of occupancy and equipment charges. These expenses are
allocated among Titan and Titan's majority-owned subsidiaries based upon the
relative percentage of effort expended by Titan on each subsidiary's affairs
and relative use of assets held by Titan, including those under a master
capital equipment lease (see below). Prior to this agreement, these costs
were being allocated using a similar methodology. In October 1995, the
allocation was changed to a flat fee per year of $119,500. Management
believes that the expense allocation used by Titan is reasonable and does not
believe that the expenses would be materially different on a stand-alone
basis.
Research and development expenses allocated by Titan to the Company were
$514,733, $470,983, $293,090 and $119,724 for 1994 and 1995, and for the six
months ended June 30, 1995 and 1996, respectively. General and administrative
expenses allocated by Titan to the Company were $433,308, $367,997, $275,274
and $59,737 for 1994 and 1995, and for the six months ended June 30, 1995 and
1996, respectively.
No interest has been charged on the net payable to Parent prior to
December 1995. Activity under the payable to Parent is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Beginning balance ................... $ 2,519,983 $ 592,331 $ 1,313,214
Corporate cost allocations ......... 948,000 838,980 213,147
Cash disbursements made on behalf
of or payments made to Parent .... -- (1,023,581) --
Accrued interest ................... -- -- 155,036
Cash disbursements made on behalf
of the Company ($324,136 applied
to receivable from Parent in 1994) 489,933 905,484 3,750,216
Conversion of payable to Parent to
common stock ...................... (3,365,585) -- (5,400,000)
------------- ------------- ----------------
Ending balance ...................... $ 592,331 $ 1,313,214 $ 31,614
============= ============= ================
</TABLE>
The average balances outstanding for the years ended December 31, 1994 and
1995 and the six months ended June 30, 1996 were approximately $1,314,000,
$614,000, and $3,324,154, respectively.
Effective December 1995, the Parent and the Company executed a debt
conversion agreement whereby the Parent had the right, exercisable until July
3, 1996, to convert up to an aggregate of $1,400,000 of indebtedness
(including any accrued interest) payable by the Company to the Parent into
shares of common stock at a conversion rate of $5.50 per share (which the
Company's board of directors had determined to be the then fair value of
common stock). In May 1996, the Parent and the Company executed an additional
debt conversion agreement whereby the Parent had the right, exercisable until
July 3, 1996, to convert up to $4,000,000 of additional indebtedness
(including any accrued interest) into shares of common stock at a conversion
rate of $5.50 per share (which the Company's board of directors had
determined to be the then fair value of the common stock). In the event that
the Company consummates, on or before July 3, 1996, an initial public
offering of its securities which includes the sale of warrants to purchase
common stock for each $5.50 of indebtedness actually converted, Titan has the
right to purchase for $0.10 a five year warrant to purchase one share of the
common stock at $6.60 per share. Furthermore, pursuant to the December 1995
conversion agreement, all amounts owed to Titan bear interest at 9% per
F-14
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
annum beginning December 1995 (See Note 8). In June 1996, the Company
converted an aggregate of $5,400,000 of indebtedness payable by the Company
to the Parent into 981,818 shares of common stock.
LEASE COMMITMENT
Titan is party to a master capital equipment lease pursuant to which the
Company and other Titan subsidiaries are jointly and severally liable under a
sublease and assignment agreement and guaranty for monthly payments
(currently totaling $30,459) under the lease, should Titan be unable to
satisfy its obligations under the equipment lease. As of December 31, 1995
and June 30, 1996, the amounts outstanding under the lease were $973,851 and
$864,964, respectively.
CONSULTING AGREEMENTS
The Company incurred research and development expenses of $52,835,
$54,998, $29,499 and $29,499 for the years ended December 31, 1994 and 1995,
and the periods ended June 30, 1995 and 1996, respectively, pursuant to
consultant arrangements with two stockholders (Drs. Roninson and Davidson).
7. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement
109, the liability method is used in accounting for income taxes. There was
no effect of adoption, as the Company has incurred losses since inception.
As of December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $11,600,000. The Company also had federal
research and development tax credit carryforwards of approximately $300,000.
The net operating loss and credit carryforwards expire at various dates
beginning on 2007 through 2010, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------------- -------------
<S> <C> <C>
Net operating loss carryforwards .... $ 2,400,000 $ 4,100,000
Research credit carryforwards ....... 200,000 400,000
Capitalized research and development 300,000 500,000
Other ................................ 100,000 200,000
------------- -------------
Deferred tax asset ................... 3,000,000 5,200,000
Valuation allowance .................. (3,000,000) (5,200,000)
------------- -------------
Total ................................ $ -- $ --
============= =============
</TABLE>
During the year ended December 31, 1994, the valuation allowance increased
$2,100,000.
F-15
<PAGE>
INGENEX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
8. PROPOSED PUBLIC OFFERING AND OTHER MATTERS
In August 1995, the Company filed a registration statement with the SEC in
connection with a possible public offering of shares of common stock and
warrants to purchase shares of common stock. The possible offering was
subsequently deferred. General and administrative expenses for 1995 include a
charge of $360,799 in connection with the deferred offering.
On June 28, 1996, the Company's board of directors authorized management
to amend the registration statement originally filed in August 1995, which is
not yet effective. If the registration statement is declared effective by the
SEC, the Company expects to offer shares of common stock to the public (the
"Offering"). If the Offering is consummated under the terms presently
anticipated, all of the preferred stock outstanding will automatically
convert into 1,291,234 shares of common stock. In addition, upon the
conversion of the Series A and Series B convertible preferred stock, the
Company's Amended and Restated Certificate of Incorporation will be amended
such that the Company will be authorized to issue 4,000,000 shares of $0.001
par value preferred stock.
Unaudited pro forma liabilities and net capital deficiency gives effect to
the assumed conversion of the Series A and Series B convertible preferred
stock as if such transactions occurred as of June 30, 1996.
During the period from July through September 1996, the Company borrowed
an aggregate of $1,000,000 from Titan for working capital purposes. This loan
is to be evidenced by a convertible note (the "Titan Note") that bears
interest at the rate of 9% per annum and is due and payable on September 30,
1998. For a one-year period commencing on the consummation of the Offering,
Titan will be entitled to convert the Titan Note into shares of common stock
at a conversion price per share equal to the initial public offering price.
F-16
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
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 OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ....................... 3
Risk Factors ............................. 7
Use of Proceeds .......................... 17
Dividend Policy .......................... 17
Capitalization ........................... 18
Dilution ................................. 19
Selected Financial Data .................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 21
Business ................................. 25
Management ............................... 43
Certain Transactions ..................... 51
Principal Stockholders ................... 54
Description of Capital Stock ............. 56
Shares Eligible for Future Sale .......... 58
Underwriting ............................. 60
Change in Accountants .................... 61
Legal Matters ............................ 62
Experts .................................. 62
Additional Information ................... 62
Index to Financial Statements ............ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,850,000 SHARES
COMMON STOCK
#############################################################################
GRAPHIC TO COME
#############################################################################
INGENEX, INC.
-----------------
PROSPECTUS
-----------------
KAUFMAN BROS., L.P.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Registrant for monetary
damages for breach of their fiduciary duty as directors. This provision does
not eliminate the liability of a director (i) for breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions by the director not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent
declaration of an unlawful dividend, stock purchase or redemption or (iv) for
transactions from which the director derived an improper personal benefit.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Registrant believes that it is the position of the Securities and
Exchange Commission that, insofar as the foregoing provision may be invoked
to disclaim liability for damages arising under the Securities Act of 1933,
as amended (the "Securities Act"), such provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Registrant intends to enter into indemnification agreements (the
"Indemnification Agreements") with each of its directors and officers prior
to the consummation of the Offering. Each such Indemnification Agreement will
provide that the Registrant will indemnify the indemnitee against any and all
expenses (including attorneys' fees), witness fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, arbitral, administrative or
investigative (including an action by or in the right of the Registrant) to
which he is, was or at any time becomes a party, or is threatened to be made
a party by reason of the fact that he is, was or at any time becomes a
director, officer, employee or agent of the Registrant, or is or was serving,
or at any time serves, at the request of the Registrant, as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. Such
indemnification will be available, subject to certain exceptions, if the
indemnitee's conduct is not finally adjudged to have been knowingly
fraudulent or deliberately dishonest, or to constitute willful misconduct or
a breach of his duty of loyalty to the Registrant, or to have resulted in him
personally having gained a financial profit or other advantage to which he
was not legally entitled. The Indemnification Agreements will also require
that the Registrant indemnify the director or officer in all cases to the
fullest extent permitted by applicable law. Each Indemnification Agreement
will permit the director or officer that is a party thereto to bring suit to
seek recovery or amounts due under the Indemnification Agreement and to
recover the expenses of such a suit if successful.
The Registrant's Bylaws provide that the Registrant shall indemnify its
directors, officers, employees or agents to the fullest extent permitted by
the Delaware General Corporation Law, and the Registrant shall have the right
to purchase and maintain insurance on behalf of any such person whether or
not the Registrant would have the power to indemnify such person against the
liability. The Registrant has not currently purchased any such insurance
policy on behalf of any of its directors, officers, employees or agents but
intends to do so prior to, or as soon as possible after, the consummation of
the Offering.
ITEM 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the Common Stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee ...................... $ 7,703.02
Nasdaq National Market Listing fee ....... 28,365.64
NASD fee .................................. 2,021.13
Printing and engraving .................... 75,000.00
Legal fees and expenses of the Registrant 300,000.00
Accounting fees and expenses .............. 120,000.00
Blue sky fees and expenses ................ 15,000.00
Transfer agent fees ....................... 3,500.00
Representative's expense (non-accountable) 370,000.00
Miscellaneous ............................. 98,410.21
--------------
Total ................................... $1,020,000.00
==============
</TABLE>
ITEM 26. Recent Sales of Unregistered Securities
Since June 15, 1992, the Registrant has issued and sold the following
securities (as adjusted to reflect (i) a 1.875-for-one stock split effected
in September 1994 and (ii) a 3.438924545-for-one reverse stock split of the
Common Stock and Series A Preferred Stock and a 2.328840417-for-one reverse
stock split of the Series B Preferred Stock effected in May 1995):
1. In May 1994, the Registrant issued and sold 1,007,834 shares of its
Series A Preferred Stock to Titan Pharmaceuticals, Inc., its parent
company, for an aggregate purchase price of $5,324,000.
2. In September 1994, the Registrant issued and sold 283,400 shares of its
Series B Preferred Stock to four purchasers for an aggregate purchase
price of $1,650,000. Montgomery Securities acted as placement agent for
this financing and received fees and expenses of $168,000.
3. On May 31, 1995, the Registrant issued to ten purchasers an aggregate
of $1,500,000 principal amount of the Registrant's promissory notes
(the "Bridge Notes") due the earlier of December 31, 1995 or the fifth
business day following consummation of an initial public offering of
securities of the Registrant (the "Maturity Date"). The Bridge Notes
bore interest at 9% per annum payable on the Maturity Date. The Bridge
Notes were sold as Units consisting of (a) a promissory note in the
principal amount of $100,000 and (b) warrants to purchase 20,000 shares
of the Registrant's Common Stock (the "Bridge Warrants"). The price per
Unit was $100,000 and all fifteen Units that were offered were sold.
The Bridge Notes were repaid in January and February 1996 by the
Registrant's parent, and there are presently outstanding Bridge
Warrants to purchase 300,000 shares of the Registrant's Common Stock.
A. R. Baron acted as the Registrant's placement agent for the sale of
the Units and received from the Registrant a placement fee of $150,000
and a non-accountable expense allowance of $45,000.
4. In December 1995 and June 1996, the Registrant granted Titan the right
to convert up to an aggregate of $5,400,000 of its indebtedness into
the Registrant's Common Stock at $5.50 per share. In June 1996, Titan
converted such indebtedness into an aggregate of 981,818 shares of the
Registrant's Common Stock. Certain of such indebtedness related to
Titan's repayment of the Bridge Notes.
5. In September 1996, the Registrant issued to Titan a convertible note in
the principal amount of $1,000,000 (the "Titan Note") due on September
30, 1998. The Titan Note bears interest at 9% per annum, payable at
maturity. Pursuant to the terms of the Titan Note, Titan has the right,
on or before the first anniversary of the initial public offering of
the Registrant's securities, to convert the entire outstanding
principal amount of the Titan Note and any accrued and unpaid interest
thereunder into shares of the Registrant's Common Stock at the price
per share at which the Registrant offers shares of its Common Stock in
its initial public offering (the "IPO Price"). To the extent that Titan
exercises its right of conversion under the Titan Note, the number of
shares of the Registrant's Common Stock that Titan is entitled to
purchase pursuant to an option (the "Titan Option") granted to it by
the Registrant to purchase approximately 300,000 shares of the
Registrant's Common Stock at the IPO Price
II-2
<PAGE>
shall be decreased by the number of shares of the Registrant's Common
Stock that Titan receives pursuant to such conversion. Titan shall only
be entitled to exercise its conversion rights under the Titan Note in
connection with the exercise of the Titan Option.
The issuances described above were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of such Act as
transactions by an issuer not involving any public offering. In addition, the
recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
ITEM 27. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
1.1 * Form of Underwriting Agreement, including form of Representative's Warrant (preliminary forms).
3.1 * Certificate of Incorporation of the Company, as amended to date.
3.2 * Form of Amended and Restated Certificate of Incorporation to be filed after the closing of the
offering made pursuant to this Registration Statement.
3.3 * Amended and Restated Bylaws of the Company.
3.4 * Form of Amended and Restated Bylaws to be effective upon the closing of the offering made
pursuant to this Registration Statement.
4.2 * Specimen Common Stock certificate.
4.3 * Form of Representative's Warrant. Reference is made to Exhibit 1.1.
4.6 * Form of Subscription Agreement, dated as of May 31, 1995, by and between the Company and certain
purchasers.
4.7 * Form of Bridge Warrant.
4.9 * Registration Rights Agreement, dated May 20, 1992, by and among the Company, Dr. Igor Roninson
and Dr. Richard Davidson.
4.10* Amended and Restated Investors' Rights Agreement, dated September 27, 1994, by and between the
Company and certain investors, and related Waiver of Certain Investor's Rights.
4.11* Convertible Note, dated September 1996, issued by the Company in favor of Titan Pharmaceuticals,
Inc.
5.1 * Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
10.1 * Form of Indemnification Agreement between the Company and its directors and officers.
10.2 * Amended and Restated 1994 Stock Option Plan.
10.3 * Employment Agreement, dated July 25, 1995, between the Company and Mark E. Furth, Ph.D.
10.4 *+ Sponsored Research Agreement, dated March 23, 1993, between the Company and the University of
Texas M.D. Anderson Cancer Center.
10.6 * GSE Research Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the Board of
Trustees of the University of Illinois.
II-3
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
10.7 *+ GSE Exclusive License Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the Board
of Trustees of the University of Illinois. (Incorporated by reference to Exhibit 10.8 to the
Registration Statement (File No. 33-9938) on Form SB-2 of Titan Pharmaceuticals, Inc. (the "Titan
Registration Statement").)
10.8 *+ MDR Exclusive License Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the Board
of Trustees of the University of Illinois. (Incorporated by reference to Exhibit 10.9 to the
Titan Registration Statement.)
10.17*+ License Agreement by and between the Company and the Massachusetts Institute of Technology, dated
September 11, 1992. (Incorporated by reference to Exhibit 10.16 to the Titan Registration
Statement.)
10.18*+ License Agreement by and between the Company and Baylor College of Medicine, dated October 21,
1992 (including Research Agreement of the same date attached as Appendix I). (Incorporated by
reference to Exhibit 10.16 to the Titan Registration Statement.)
10.19*+ License Assignment and License Agreement dated January 31, 1995 by and between Aberlyn Capital
Management Limited Partnership and the Company, and First Amendment dated January 31, 1995.
(Incorporated by reference to Exhibit 10.17 to the Titan Registration Statement.)
10.20* Amended Services Agreement dated August 1, 1994, by and between the Company and Titan
Pharmaceuticals, Inc.
10.23* Consulting Agreement between Dr. Igor Roninson and the Company dated May 1992.
10.24* Consulting Agreement between Dr. Richard Davidson and the Company dated May 1992.
10.25* Consulting Agreement between Eli Gilboa, Ph.D. and the Company dated January 1994.
10.26* Consulting Agreement between Andrei Gudkov, Ph.D. and the Company dated September 1994.
10.27* Consulting Agreement between Dr. William F. Benedict and the Company dated August 1993.
10.28* Consulting Agreement between Dr. Hong J. Xu and the Company dated August 1993.
10.29* Consulting Agreement between Richard E. Giles, Ph.D. and the Company dated September 1993.
10.30* Letter Agreement between the University of Texas M.D. Anderson Cancer Center and the Company
dated May 1996.
10.31* Master Equipment Lease between Titan Pharmaceuticals, Inc. and Phoenix Leasing Incorporated dated
February 1994. (Incorporated by reference to Exhibit 10.7 to the Titan Registration Statement.)
10.32* Sublease and Acknowledgment of Assignment between Titan Pharmaceuticals, Inc., Ingenex, Inc.,
Geneic Sciences, Inc., Theracell, Inc. and Ansan, Inc. dated February 1994.
10.33* Continuing Guaranty Agreement between Ingenex, Inc., Geneic Sciences, Inc., Theracell, Inc.,
Ansan, Inc., Phoenix Leasing Incorporated and Titan Pharmaceuticals, Inc. dated February 1994.
10.34* Shareholders' Agreement between the Company and Titan Pharmaceuticals, Inc. dated September 1996.
10.35* Corporate Services Agreement between the Company and Titan Pharmaceuticals, Inc. dated July 1996.
II-4
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
10.36* Amended and Restated Conversion Agreement between the Company and Titan Pharmaceuticals, Inc.
dated December 4, 1995.
10.37* Conversion Agreement between the Company and Titan Pharmaceuticals, Inc. dated May 23, 1996.
10.38* Menlo Park Lease, dated March 6, 1996.
11.1 * Statement of Pro Forma Net Loss Per Share.
16.1 Letter of Richard A. Eisner & Company, LLP regarding change in certifying accountant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 * Consent of Shereff, Friedman, Hoffman & Goodman, LLP. Reference is made to Exhibit 5.1.
23.3 Consent of Pennie & Edmonds.
27 * Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
+ Confidential treatment requested as to certain portions of these
exhibits. Such portions have been redacted.
ITEM 28. Undertakings
The Registrant hereby undertakes to provide to the Underwriter, at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate
of Incorporation or the Bylaws of the Registrant, Indemnification Agreements
entered into between the Registrant and its officers and directors, the
Underwriting Agreement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) that, for the purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) that, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Menlo Park, State of California, on
this 25th day of October, 1996.
INGENEX, INC.
By: /s/ Mark E. Furth
-------------------------------
Mark E. Furth
President and Chief Executive
Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated on this 25th day of October,
1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ -------------------------------------------------------------
<S> <C>
/S/ MARK E. FURTH
- ------------------------------- PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR (PRINCIPAL
MARK E. FURTH EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Director
- -------------------------------
Robert T. Abbott
* Director
- -------------------------------
Louis R. Bucalo
Director
- -------------------------------
Vincent T. DeVita, Jr.
/s/ John K. A. Prendergast Director
- -------------------------------
John K. A. Prendergast
* Director
- -------------------------------
Wilhelm F. Schaeffler
*By: /s/ Mark E. Furth
---------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ---------------------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement, including form of Representative's Warrant (preliminary forms).
3.1 * Certificate of Incorporation of the Company, as amended to date.
3.2 Form of Amended and Restated Certificate of Incorporation to be filed after the closing of
the offering made pursuant to this Registration Statement.
3.3 * Amended and Restated Bylaws of the Company.
3.4 Form of Amended and Restated Bylaws to be effective upon the closing of the offering made
pursuant to this Registration Statement.
4.2 * Specimen Common Stock certificate.
4.3 Form of Representative's Warrant. Reference is made to Exhibit 1.1.
4.6 * Form of Subscription Agreement, dated as of May 31, 1995, by and between the Company and certain
purchasers.
4.7 * Form of Bridge Warrant.
4.9 * Registration Rights Agreement, dated May 20, 1992, by and among the Company, Dr. Igor Roninson
and Dr. Richard Davidson.
4.10* Amended and Restated Investors' Rights Agreement, dated September 27, 1994, by and between
the Company and certain investors, and related Waiver of Certain Investor's Rights.
4.11 Convertible Note, dated September 1996, issued by the Company in favor of Titan Pharmaceuticals,
Inc.
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
10.1 Form of Indemnification Agreement between the Company and its directors and officers.
10.2 Amended and Restated 1994 Stock Option Plan.
10.3 * Employment Agreement, dated July 25, 1995, between the Company and Mark E. Furth, Ph.D.
10.4 + Sponsored Research Agreement, dated March 23, 1993, between the Company and the University
of Texas M.D. Anderson Cancer Center.
10.6 * GSE Research Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the Board of
Trustees of the University of Illinois.
10.7 *+ GSE Exclusive License Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the
Board of Trustees of the University of Illinois. (Incorporated by reference to Exhibit 10.8
to the Registration Statement (File No. 33-9938) on Form SB-2 of Titan Pharmaceuticals, Inc.
(the "Titan Registration Statement").)
10.8 *+ MDR Exclusive License Agreement, dated May 6, 1992, between Pharm-Gen Systems, Ltd. and the
Board of Trustees of the University of Illinois. (Incorporated by reference to Exhibit 10.9
to the Titan Registration Statement.)
10.17*+ License Agreement by and between the Company and the Massachusetts Institute of Technology,
dated September 11, 1992. (Incorporated by reference to Exhibit 10.16 to the Titan Registration
Statement.)
10.18*+ License Agreement by and between the Company and Baylor College of Medicine, dated October
21, 1992 (including Research Agreement of the same date attached as Appendix I). (Incorporated
by reference to Exhibit 10.16 to the Titan Registration Statement.)
10.19*+ License Assignment and License Agreement dated January 31, 1995 by and between Aberlyn Capital
Management Limited Partnership and the Company, and First Amendment dated January 31, 1995.
(Incorporated by reference to Exhibit 10.17 to the Titan Registration Statement.)
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ---------------------------------------------------------------------------------------- ------------
10.20* Amended Services Agreement dated August 1, 1994, by and between the Company and Titan
Pharmaceuticals, Inc.
10.23* Consulting Agreement between Dr. Igor Roninson and the Company dated May 1992.
10.24* Consulting Agreement between Dr. Richard Davidson and the Company dated May 1992.
10.25* Consulting Agreement between Eli Gilboa, Ph.D. and the Company dated January 1994.
10.26* Consulting Agreement between Andrei Gudkov, Ph.D. and the Company dated September 1994.
10.27* Consulting Agreement between Dr. William F. Benedict and the Company dated August 1993.
10.28* Consulting Agreement between Dr. Hong J. Xu and the Company dated August 1993.
10.29 Consulting Agreement between Richard E. Giles, Ph.D. and the Company dated September 1993.
10.30 Letter Agreement between the University of Texas M.D. Anderson Cancer Center and the Company
dated May 1996.
10.31* Master Equipment Lease between Titan Pharmaceuticals, Inc. and Phoenix Leasing Incorporated
dated February 1994. (Incorporated by reference to Exhibit 10.7 to the Titan Registration
Statement.)
10.32 Sublease and Acknowledgment of Assignment between Titan Pharmaceuticals, Inc., Ingenex, Inc.,
Geneic Sciences, Inc., Theracell, Inc. and Ansan, Inc. dated February 1994.
10.33 Continuing Guaranty Agreement between Ingenex, Inc., Geneic Sciences, Inc., Theracell, Inc.,
Ansan, Inc., Phoenix Leasing Incorporated and Titan Pharmaceuticals, Inc. dated February 1994.
10.34 Shareholders' Agreement between the Company and Titan Pharmaceuticals, Inc. dated September
1996.
10.35 Corporate Services Agreement between the Company and Titan Pharmaceuticals, Inc. dated July
1996.
10.36 Amended and Restated Conversion Agreement between the Company and Titan Pharmaceuticals, Inc.
dated December 4, 1995.
10.37 Conversion Agreement between the Company and Titan Pharmaceuticals, Inc. dated May 23, 1996.
10.38 Menlo Park Lease, dated March 6, 1996.
11.1 Statement of Pro Forma Net Loss Per Share.
16.1 Letter of Richard A. Eisner & Company, LLP regarding change in certifying accountant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP. Reference is made to Exhibit 5.1.
23.3 Consent of Pennie & Edmonds.
27 Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
*+ Confidential treatment requested as to certain portions of these
exhibits. Such portions have been redacted.
Exhibit 16.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the section entitled "Change in Auditors" in Amendment
No. 4 to Registration Statement on Form SB-2 (File No. 33-95654) of Ingenex,
Inc. and are in agreement with the statements contained therein, insofar as
they relate to our firm.
/s/ Richard A. Eisner & Company, LLP
New York, New York
October 24, 1996
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 23, 1996 (except
for Note 8, as to which the date is September 27, 1996), in Amendment No. 4 to
the Registration Statement (Form SB-2 33-95654) and related Prospectus of
Ingenex, Inc. for the registration of 2,127,500 shares of Common Stock.
/s/ERNST & YOUNG LLP
Palo Alto, California
October 24, 1996
Exhibit 23.3
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name and
the statement with respect to us appearing under the heading "Experts" in
Amendment No. 4 to the Form SB-2 Registration Statement.
/s/Pennie & Edmonds
- ----------------------
PENNIE & EDMONDS
New York, New York
October 24, 1996
