<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHARMACYCLICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 94-3148201
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
995 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-0330
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD A. MILLER, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHARMACYCLICS, INC.
995 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-0330
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. DAVID J. SEGRE, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON SONSINI GOODRICH & ROSATI,
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(415) 424-0160 (415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
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 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>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.0001 per share............... 2,300,000 shares $17.75 $40,825,000 $14,078.00
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 300,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Based on $17.75, the average of the high and low prices reported in the
consolidated system for June 7, 1996, a date which is within the five
business days prior to the filing of the Registration Statement, and
estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933.
------------------------
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 THAT 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> 2
PHARMACYCLICS, INC.
------------------------
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 REGISTRATION STATEMENT AND ITEM AND
HEADING HEADING OR LOCATION IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Inapplicable
8. Underwriting............................... Outside and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered................................. Prospectus Summary; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant................................. Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; Use of
Proceeds; Common Stock Price Range and
Dividends; Capitalization; Dilution;
Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Underwriters; Notice to
Canadian Residents; Legal Matters; Experts;
Available Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Inapplicable
</TABLE>
<PAGE> 3
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.
PROSPECTUS (Subject to Completion)
Issued June 14, 1996
2,000,000 Shares
LOGO
Pharmacyclics, Inc.
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK, PAR VALUE $0.0001 PER SHARE, OF
PHARMACYCLICS, INC. ("PHARMACYCLICS" OR THE "COMPANY") OFFERED HEREBY
(THE "OFFERING") ARE BEING SOLD BY PHARMACYCLICS. THE COMMON
STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "PCYC." ON JUNE 12, 1996, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET WAS $ 18 1/4 PER
SHARE.
------------------
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
------------------
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.
------------------
PRICE $ PER SHARE
------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
- ------------
(1) The Company had agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deduction of expenses payable by the Company estimated at $350,000.
(3) The Company has granted the Underwriters an option exercisable within 30
days from the date of the date hereof, to purchase a maximum of 300,000
additional shares of Common Stock at the price to public less underwriting
discounts and commissions for the purposes of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total price to
public, underwriting discounts and commissions and proceeds to Company will
be $ , $ and $ , respectively. See "Underwriters."
------------------
The shares of the Common Stock are offered, subject to prior sale, when, as
and if accepted by the Underwriters named herein and subject to the approval of
certain legal matters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters. It is expected that delivery of the
shares will be made on or about , 1996 at the offices of Morgan
Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
MORGAN STANLEY & CO.
Incorporated
COWEN & COMPANY
INVEMED ASSOCIATES, INC.
, 1996
<PAGE> 4
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................... 2
Prospectus Summary.......................... 3
The Offering................................ 4
Summary Financial Data...................... 4
Risk Factors................................ 5
Use of Proceeds............................. 12
Common Stock Price Range and Dividends...... 12
Capitalization.............................. 13
Dilution.................................... 14
Selected Financial Data..................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 16
<CAPTION>
PAGE
----
<S> <C>
Business.................................... 20
Management.................................. 38
Certain Transactions........................ 46
Principal Stockholders...................... 47
Description of Capital Stock................ 49
Underwriters................................ 51
Notice to Canadian Residents................ 52
Legal Matters............................... 53
Experts..................................... 53
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
------------------------
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect to
the Company and the securities offered hereby. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
and may be obtained upon payment of the prescribed fee or may be examined
without charge at the public reference facilities of the Commission described
below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington D.C. 20549, and the following regional offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed rates.
The Company's Common Stock is quoted on the Nasdaq National Market. Reports,
proxy statements and other information concerning the Company may be inspected
at the National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
------------------------
GADOLITE(R) is a registered U.S. trademark of the Company and the Company's
stylized logo is a trademark of the Company. Other trademarks used herein are
the property of their respective owners.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE
"UNDERWRITERS."
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related notes appearing elsewhere in
this Prospectus. Except as otherwise specified, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. This
Prospectus contains, in addition to historical information, forward looking
statements that involve risks and uncertainties. Investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
Pharmacyclics, Inc. is developing patented pharmaceutical products designed
to improve radiation and chemotherapy of cancer, enable or improve the
photodynamic therapy of certain cancers and atherosclerotic cardiovascular
disease, and enhance certain diagnostic imaging techniques. These products
address significant market opportunities and are intended to enhance existing
medical procedures and improve the ability of physicians to treat or manage life
threatening and serious conditions. Such products are derived primarily from
Pharmacyclics' core technology in designing and synthesizing small, ring-shaped
molecules called expanded porphyrins, which bind metals in a way that allows the
resulting molecules to capture and focus energy to perform specific therapeutic
and diagnostic functions.
The Company's proprietary expanded porphyrins ("texaphyrins") localize in
cancer cells and atherosclerotic plaque where they can be exposed to forms of
energy that activate the molecules to eliminate diseased tissue. The physical
and chemical characteristics of the texaphyrin molecules are determined by the
type of metal inserted into the ring and the form of energy applied to activate
the molecule. For example, texaphyrins can be synthesized to focus and transform
X-ray, chemical or light energy into other forms of energy capable of producing
localized destruction of diseased tissue. This forms the basis for the use of
texaphyrins as radiation sensitizers, chemosensitizers and photosensitizers.
Lutetium-texaphyrin ("Lu-Tex") is being developed as a photosensitizing
agent for use in photodynamic therapy of cancer and atherosclerosis, and
gadolinium-texaphyrin ("Gd-Tex") is being developed for use as a radiation
sensitizer and chemosensitizer. Lu-Tex is in multicenter Phase I clinical
testing to evaluate its safety and efficacy in the treatment of certain invasive
cancers which are accessible to illumination by externally applied light. Gd-Tex
is currently in Phase I and multicenter Phase I/II clinical testing as a
radiation sensitizer to improve the efficacy and safety of radiation therapy of
certain cancers. Gd-Tex also is being developed to potentiate the activity of
certain cancer chemotherapy drugs. Based on the Company's unique metal binding
technology, it has developed GADOLITE(R) Oral Suspension product ("GADOLITE")
for use as an oral contrast agent in patients undergoing magnetic resonance
imaging ("MRI") of the abdomen or pelvis. In September 1995, the Company
submitted a New Drug Application ("NDA") with the U.S. Food and Drug
Administration (the "FDA") for GADOLITE.
The target markets for the Company's Gd-Tex product under development
include cancer patients receiving radiation therapy or cytotoxic chemotherapy.
Over seven million people in the U.S. today have been diagnosed with cancer. Of
the approximately 1.3 million newly diagnosed cancer patients each year in the
U.S., an estimated 50% are treated with radiation therapy as part of their
disease management, and more than 350,000 patients per year receive cytotoxic
chemotherapy. The target markets for the Company's Lu-Tex product under
development for photodynamic therapy include both patients with cancer and
patients with atherosclerosis. Photodynamic therapy is an emerging cancer
treatment in which a photosensitizing drug is injected into the patient and
light energy is applied to activate the therapeutic effects of the drug.
Atherosclerosis, a progressive and degenerative vascular disease, is currently
treated through surgery and other techniques, such as atherectomy and
angioplasty procedures, aimed at removing or relieving the plaque buildup in
blood vessels. Such procedures are currently performed on over 400,000 patients
per year in the U.S. The worldwide market for imaging agents exceeded $3 billion
in 1993, approximately $250 million of which was associated with MRI.
The Company's strategy is to apply its core biometallic chemistry and
expanded porphyrin technology to develop a diverse product portfolio.
Pharmacyclics is leveraging its core technology and products by establishing
relationships with third parties intended to augment its research and
development activities and to provide manufacturing capacity and sales and
marketing capabilities. To date, the Company has retained worldwide marketing
rights for its therapeutic products. The Company also dedicates significant
resources to build and protect its intellectual property rights in the U.S. and
abroad. In the United States, the Company owns or has exclusive rights to 23
issued patents, 12 allowed patent applications and 41 pending patent
applications covering various aspects of its core technology and products under
development. Outside the United States, the Company is the owner or exclusive
licensee of four counterpart patents, one allowed and 42 pending patent
applications.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.......................... 2,000,000 shares(1)
Common Stock outstanding after the Offering... 10,527,605 shares(1) (2)
Use of proceeds............................... Research and development, third party
manufacturing of product supply, clinical
trials, capital expenditures and general
corporate purposes.
Nasdaq National Market symbol................. PCYC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL
APRIL 1991 NINE MONTHS ENDED 1991
(INCEPTION) (INCEPTION)
THROUGH FISCAL YEAR ENDED JUNE 30, MARCH 31, THROUGH
JUNE 30, ------------------------------------ ----------------- MARCH 31,
1991 1992 1993 1994 1995 1995 1996 1996
---------- ----- ------- ------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License and grant
revenues.................. $ -- $ -- $ -- $ 3,000 $ 79 $ -- $ 301 $ 3,380
---- ----- ------- ------- -------- ------- ------- --------
Operating expenses:
Research and development.... -- 487 3,161 6,909 9,330 6,964 5,199 25,086
General and
administrative............ -- 58 559 1,042 996 728 982 3,637
---- ----- ------- ------- -------- ------- ------- --------
Total operating
expenses............. -- 545 3,720 7,951 10,326 7,692 6,181 28,723
---- ----- ------- ------- -------- ------- ------- --------
Loss from operations.......... -- (545) (3,720) (4,951) (10,247) (7,692) (5,880) (25,343)
Interest income (expense),
net......................... -- 22 140 (89) (232) (96) 407 248
Provision for income taxes.... -- -- -- (101) -- -- -- (101)
---- ----- ------- ------- -------- ------- ------- --------
Net loss...................... $ -- $(523) $(3,580) $(5,141) $(10,479) $(7,788) $(5,473) $(25,196)
==== ===== ======= ======= ======== ======= ======== ========
Net loss per share(3)......... $ (1.65) $ (1.23) $ (0.72)
======== ======= =======
Weighted average common and
common equivalent
shares(3)................... 6,353 6,341 7,578
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........................... $ 24,216 $ 58,176
Working capital............................................................. 22,703 56,663
Total assets................................................................ 26,936 60,896
Long-term obligations, excluding current installments....................... 828 828
Deficit accumulated during development stage................................ (25,196) (25,196)
Total stockholders' equity.................................................. 24,517 58,477
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Excludes (i) 1,073,306 shares of Common Stock issuable upon the exercise of
options outstanding as of May 31, 1996, and (ii) 197,450 shares of Common
Stock issuable upon the exercise of warrants outstanding as of May 31, 1996.
See "Management -- Stock Option Plans," "Description of Capital Stock" and
"Underwriting."
(3) For a description of the computation of net loss per common and equivalent
share, see Note 1 of Notes to Financial Statements.
(4) Adjusted to reflect the sale of the 2,000,000 shares of Common Stock offered
by the Company hereby (at an assumed public offering price of $18.25 per
share and after deducting underwriting discounts and commissions and
estimated offering expenses). See "Use of Proceeds."
4
<PAGE> 7
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
principal risk factors in addition to the other information contained in this
Prospectus.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
To achieve profitable operations on a continuing basis, the Company must
successfully research, develop, test, obtain regulatory approval for,
manufacture, introduce, market and distribute its products. The time frame
necessary to achieve these goals for any individual product is long and
uncertain. Most of the products currently under development by the Company will
require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization.
Additionally, any product the Company succeeds in developing and for which it
gains regulatory approval must then compete for market acceptance and market
share. There can be no assurance that the Company's products will prove to be
effective or that physicians, patients, or clinical or hospital laboratories
will accept the Company's products as readily as other forms of diagnosis and
treatment or as readily as other newly developed therapeutic products and
diagnostic imaging techniques. There can be no assurance that the Company's
research and development efforts will be successful or that any given product
will be safe or effective, capable of being manufactured economically in
commercial quantities, developed in a timely fashion or successfully marketed.
See "Business -- Products Under Development."
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
Pharmacyclics has conducted and plans to continue to undertake extensive
and costly clinical testing to assess the safety and efficacy of its potential
products. The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the nature of the Company's clinical trial
protocols, existence of competing protocols, size of the patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Delays in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the FDA may suspend clinical
trials at any time if it concludes that the subjects or patients participating
in such trials are being exposed to unacceptable health risks. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Further, there can be no assurance that clinical testing
will show any current or future product candidate to be safe and effective for
use in humans. See "Business -- Government Regulation."
NO ASSURANCE OF PRODUCT APPROVAL
To date, none of the Company's products has been approved for sale in the
U.S. or any international market. Satisfaction of regulatory requirements of the
FDA, or similar requirements by foreign regulatory agencies, typically takes
several years, and the time needed to satisfy them may vary substantially based
upon the type, complexity and novelty of the pharmaceutical product. There can
be no assurance that the FDA or any other regulatory agency will grant approval
for any products being developed by the Company on a timely basis, if at all. If
regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. The
Company submitted an NDA for its GADOLITE in September 1995. There can be no
assurance that the FDA will decide that the NDA does not satisfy the criteria
for approval. The Company's business would be adversely affected by delays in
FDA approvals of the manufacture and sale of GADOLITE or by failure of the FDA
to grant such approvals at all. Further, even if regulatory approval is
obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product from
the market. Delay in obtaining or failure to obtain regulatory approvals would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the policies of the FDA and foreign
regulatory bodies may
5
<PAGE> 8
change, and additional regulations may be promulgated which could prevent or
delay regulatory approval of the Company's potential products.
In addition to the drug approval requirements applicable to the Company's
Lu-Tex product for photosensitization of certain cancers and atherosclerosis,
the Company will also need to obtain the approval of the FDA and other foreign
regulatory authorities for the laser, light emitting diode ("LED") and
associated light delivery devices used in such treatments. Such device approval
requires additional regulatory submissions both by the Company and by the
manufacturers of such devices that must include clinical data obtained from the
use of such light delivery devices with Lu-Tex for photodynamic therapy, and may
result in additional delays or difficulties in obtaining approval for the use of
Lu-Tex as a photosensitizer. Such light delivery device manufacturers currently
are under no obligation to the Company to file or pursue such applications. See
"Business -- Products Under Development" and "-- Government Regulation."
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred operating losses since its inception in 1991 and,
as of March 31, 1996, had an accumulated deficit of approximately $25.2 million.
The Company anticipates that such operating losses will continue over the next
several years, as it continues to incur increasing costs of research and
development, clinical and manufacturing activities. To date, the Company has not
generated revenue from the commercial sale of its products and does not expect
to receive any such revenue until calendar year 1997 at the earliest. All
revenues to date have resulted from license and milestone payments and funding
from a government research grant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LIMITED MANUFACTURING AND MARKETING EXPERIENCE
The Company must manufacture its products either directly or through third
parties in commercial quantities, in compliance with regulatory requirements and
at an acceptable cost. Except for GADOLITE, which is the subject of a
manufacturing and supply agreement with Glaxo Wellcome Co. ("Glaxo"), the
Company does not have access to the manufacturing capacity necessary to provide
clinical and commercial quantities of the Company's products. Access to such
manufacturing capacity is necessary for the Company to conduct clinical trials,
obtain regulatory approval and commercialize its products. In October 1995, the
Company entered into a memorandum of understanding and is currently negotiating
a definitive agreement with Hoechst Celanese Corporation ("Hoechst Celanese"), a
manufacturer of chemicals and pharmaceutical intermediates, for the process
optimization, scale-up and clinical and commercial supply of Gd-Tex and Lu-Tex.
There can be no assurance that such an agreement can be successfully completed
or that Hoechst Celanese will deliver bulk-drug substance for either Gd-Tex or
Lu-Tex on a timely or commercially attractive basis to the Company. A failure to
successfully complete such agreement would, if the Company could not locate
alternate manufacturing capabilities, have a material adverse impact on the
Company's business, financial condition and results of operations. Prior to any
regulatory approval of the Company's other products under development, the
Company intends to negotiate supply agreements with manufacturers who will have
the ability to manufacture, fill, label and package such materials prior to
commercial introduction of such products. There are, however, a limited number
of contract manufacturers that operate under current federal and state Good
Manufacturing Practices ("GMP") regulations and are capable of manufacturing the
Company's products. Accordingly, there can be no assurance that the Company will
be able to enter into supply agreements on commercially acceptable terms or with
manufacturers who will be able to deliver supplies in appropriate quantity and
quality to develop and commercialize its products. Any interruption of supply of
its products could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company also has entered into a sales and distribution agreement with
E-Z-EM, Inc. ("E-Z-EM") for North American sales, marketing and distribution of
GADOLITE. The Company plans to enter into similar agreements to market GADOLITE
in Europe and Asia. To date, however, no such arrangements have been
established, and there can be no assurance that any such agreements will be
entered into. To the extent that the Company determines not to, or is unable to,
enter into co-promotion agreements or to arrange for third party distribution of
its other products or to the extent that the agreement with E-Z-EM is terminated
without a replacement agreement, significant additional resources will be
required to develop a sales force.
6
<PAGE> 9
There can be no assurance that the Company will be able to establish such a
sales force or enter into such co-promotion or distribution agreements. In
addition, the Company currently has no arrangement for the sale and distribution
of any of its other products under development.
The Company has no expertise in the development of light sources and
associated light delivery devices required for the Company's Lu-Tex
photosensitizer program. Successful development, manufacturing, approval and
distribution of the Company's photosensitization products will require third
party arrangements for the required light sources, associated light delivery
devices and other equipment. The Company currently obtains lasers from Coherent,
Inc. ("Coherent") and LEDs from Quantum Devices, Inc. ("Quantum") on a purchase
order basis, and such entities are under no obligation to continue to deliver
light devices as an ongoing basis. Failure to maintain such relationships may
require the Company to develop additional sources which may require additional
regulatory approvals and could delay commercialization of the Company's Lu-Tex
products under development. There can be no assurance that the Company will be
able to establish or maintain relationships with other sources on a commercially
reasonable basis, if at all, or that such devices will receive regulatory
approval for use in photodynamic therapy. See "Business -- Manufacturing" and
"-- Collaborative Relationships."
RELIANCE ON THIRD PARTY RELATIONSHIPS
The Company has no manufacturing facilities for commercial production of
its products under development, nor does the Company have experience in sales,
marketing or distribution. The Company's strategy for commercialization of its
products requires entering into various arrangements with corporate and other
collaborators to conduct clinical trials and to manufacture, distribute and
market its products. The Company will be dependent upon the success of these
outside parties performing their responsibilities. There can be no assurance
that such parties will perform their obligations as expected or that the
Company's reliance on others for the clinical development, manufacturing,
distribution and marketing of its products will not result in unforeseen
problems. The Company does not have the ability to conduct these development
activities in house. If one or more of these relationships were terminated or
the organizations did not perform up to expectations, the clinical development
of the Company's product candidates would likely be delayed and could be
substantially impaired depending on the availability and quality of substitute
development capabilities. See "Business -- Collaborative Relationships."
RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION
The pharmaceutical industry is subject to rapid and substantial
technological change. Technological competition in the industry from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Many of these entities have significantly greater research and development
capabilities than the Company, as well as substantially more marketing,
manufacturing, financial and managerial resources, and represent significant
competition for the Company. Acquisitions of, or investments in, competing
pharmaceutical companies by large collaborating partners could increase such
competitors' financial, marketing, manufacturing and other resources. There can
be no assurance that developments by others will not render the Company's
products or technologies noncompetitive or obsolete, or that the Company will be
able to keep pace with technological developments or other market factors.
Competitors have developed or are in the process of developing technologies that
are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar diagnostic, imaging and/or therapeutic effects than products being
developed by the Company. The Company is aware that one of its competitors in
the market for photodynamic therapy drugs has received marketing approval for
certain indications in the U.S., Canada, The Netherlands, France and Japan for
Photofrin. There can be no assurance that the Company's competitors will not
develop products that are safer, more effective and less costly than the
products developed by the Company and, therefore, present a serious competitive
threat to the Company's product offerings.
Further, the medical indications for which the Company is developing its
therapeutic products also can be treated, in the case of cancer, by surgery,
radiation and chemotherapy, and in the case of atherosclerosis, by surgery
(e.g., bypass), angioplasty, atherectomy, the use of stents and drug therapy.
These treatments are
7
<PAGE> 10
widely accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for cancer and
atherosclerosis could make such other therapies more efficacious or cost-
effective than Lu-Tex and could render the Company's technology noncompetitive
or obsolete. Also, there can be no assurance that physicians will use either
Gd-Tex as a radiation sensitizer or chemosensitizer in the case of cancer or
Lu-Tex as a photosensitizer in the case of cancer or atherosclerosis to replace
or supplement established treatments for such diseases or that the therapeutic
products the Company is developing will become competitive with current or
future treatments. Further, some companies developing photodynamic therapy
products are developing specialized light delivery devices for such products,
which when integrated with their product offering may afford them a competitive
advantage relative to the Company's strategy of sourcing such devices from third
parties. See "Business -- Competition."
REQUIREMENTS FOR ADDITIONAL FINANCING AND ACCESS TO CAPITAL MARKETS
The Company has expended and will continue to expend substantial funds to
complete the research, development and clinical testing of its products. The
Company will require additional funds for these purposes, to establish
additional clinical and commercial-scale manufacturing arrangements and to
provide for the marketing and distribution of its products. The Company believes
that its cash, cash equivalents and short-term investments and amounts available
under a capital lease agreement, together with the net proceeds of this
Offering, will be adequate to satisfy its capital needs at least through
mid-1999. However, the actual amount of the Company's capital requirements will
depend on many factors, including the status of the development of products, the
time and costs involved in conducting clinical trials, obtaining regulatory
approvals, and filing, prosecuting and enforcing patent claims; competing
technological and market developments; and the ability of the Company to market
and distribute its products and establish new collaborative and licensing
arrangements. The Company will attempt to raise any necessary additional funds
through equity or debt financings, collaborative arrangements with corporate
partners or from other sources. No assurance can be given that such additional
funds will be available on acceptable terms, if at all. If adequate funds are
not available from operations or additional sources of financing, the Company's
business, financial condition and results of operations, will be materially and
adversely affected. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DEPENDENCE UPON QUALIFIED AND KEY PERSONNEL
The Company's ability to maintain its competitive position depends on its
ability to attract and retain qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract or retain such persons. The loss
of key personnel or the failure to recruit additional personnel or to develop
needed expertise could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company relies
on consultants and advisors to assist in formulating its research and
development strategy. All of the Company's consultants and advisors are employed
by entities other than the Company and may have commitments to or consulting or
advisory contracts with other entities that may affect their ability to
contribute to the Company.
UNCERTAINTIES REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain patent
protection for its products and preserve its trade secrets. In the U.S., the
Company owns or has exclusive rights to 23 issued patents, 12 allowed, and 41
pending patent applications. Outside the U.S., the Company is the owner or
exclusive licensee of four counterpart patents, one allowed and 42 pending
counterpart patent applications. There can be no assurance that the Company's
patent applications will result in additional patents being issued or that
issued patents will afford protection against competitors with similar
technology, nor can there be any assurance that any patents issued to the
Company will not be infringed by or designed around by others. Even issued
patents may later be modified or revoked by the U.S. Patent and Trademark Office
in proceedings instituted by third parties or otherwise found to be invalid or
unenforceable. Moreover, the Company believes that obtaining foreign patents may
be more difficult than obtaining domestic patents because of differences in
patent laws,
8
<PAGE> 11
and believes the protection provided by foreign patents, if obtained, may be
weaker than that provided by domestic patents.
The Company has not conducted an extensive search of patents issued to
other companies, research or academic institutions or others, and no assurance
can be given that such patents do not exist, have not been filed or could not be
filed or issued which contain claims relating to the Company's technology,
products or processes. Because of the number of patents issued and patent
applications filed relating to biometallic and expanded porphyrin chemistries,
Pharmacyclics believes there is a significant risk that current and potential
competitors and other third parties have filed or in the future will file
applications for, or have received or in the future will receive, patents and
will obtain additional proprietary rights relating to materials or processes
used or proposed to be used by the Company. If such patents have been or become
issued, the holders of such patents may bring claims against the Company for
infringement which may have a material adverse effect on the Company's business,
financial condition and results of operations. As a result, the Company may be
required to obtain licenses from others to develop, manufacture or market its
products. There can be no assurance that the Company will be able to obtain any
such licenses on commercially reasonable terms, if at all.
The Company is aware of several U.S. patents owned by or licensed to
Schering AG that relate to MRI contrast agents. Schering AG has sent
communications to the Company suggesting that GADOLITE may infringe certain of
such Schering AG patents. The Company has obtained advice of special patent
counsel that the technologies employed by the Company for its imaging products
under development do not infringe the claims of such patents. A determination of
the infringement of any such patents could have a material adverse effect on the
Company's business. There can be no assurance that Schering AG will not seek to
assert such patent rights against the Company, which would result in significant
legal costs and require substantial management resources. The Company is aware
that Schering AG has asserted such rights against at least one other company in
the contrast agent imaging market and that a number of companies have entered
into licensing arrangements with Schering AG with respect to one or more such
patents. There can be no assurance that the Company would be able to obtain a
license from Schering AG, if required, on commercially reasonable terms, if at
all.
The Company also relies on trade secrets and proprietary know-how that it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, that others will not otherwise gain access to the Company's
proprietary technology, or disclose such technology, or that the Company can
meaningfully protect its rights in such unpatented proprietary technology. See
"Business -- Patents and Proprietary Technology" and "Experts."
UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
The future revenues and profitability of pharmaceutical and related
companies as well as the availability of capital to such companies may be
affected by the continuing efforts of government and third party payors to
contain or reduce costs of health care through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to government control. In the U.S., given recent federal and state
government initiatives directed at lowering the total cost of health care, it is
likely that the U.S. Congress and state legislatures will continue to focus on
health care reform and the cost of prescription pharmaceuticals and on the
reform of the Medicare and Medicaid systems. While the Company cannot predict
whether any such legislative or regulatory proposals will be adopted, the
announcement or adoption of such proposals could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of such products and related treatment are obtained by governmental
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care in the U.S. and the concurrent growth of
organizations such as HMOs, which could control or significantly influence the
purchase of health care services and products, as well as legislative proposals
to reform health care or reduce government insurance
9
<PAGE> 12
programs, may all result in lower prices for the Company's products. The cost
containment measures that health care payors and providers are instituting and
the effect of any health care reform could materially adversely affect the
Company's ability to operate profitably. See "Business -- Government
Regulation -- Third Party Reimbursement and Health Care Reform."
PRODUCT LIABILITY EXPOSURE
The testing, manufacturing, marketing and sale of the products under
development by the Company entail an inherent risk that product liability claims
will be asserted against the Company. Although the Company is insured against
such risks up to a $3 million annual aggregate limit in connection with human
clinical trials and commercial sales of its products under development, there
can be no assurance that the Company's present product liability insurance is
adequate. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations and may prevent the
Company from obtaining adequate product liability insurance in the future on
commercially reasonable terms. In addition, there can be no assurance that
product liability coverage will continue to be available in sufficient amounts
or at an acceptable cost. An inability to obtain sufficient insurance coverage
at an acceptable cost or otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of pharmaceutical products
developed by the Company. A product liability claim or recall would have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and its research
and development activities are subject to extensive regulation for safety,
efficacy and quality by numerous government authorities in the U.S. and other
countries. Clinical trials, manufacturing and marketing of products are subject
to the rigorous testing and approval process of the FDA and equivalent foreign
regulatory authorities. As a result, clinical trials and regulatory approval can
take a number of years to accomplish and require the expenditure of substantial
resources. To date, the Company has not received regulatory approval in the U.S.
or any foreign jurisdiction for the commercial sale of any of its products.
There can be no assurance that requisite FDA approvals or those of foreign
regulatory authorities will be obtained on a timely basis, if at all, or that
any approvals granted will cover the clinical indications for which the Company
may seek approval. The manufacture and marketing of drugs are subject to
continuing FDA and foreign regulatory review and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions, including withdrawal of the product from the market. Failure to
obtain or maintain requisite governmental approvals, failure to obtain approvals
of the clinically intended uses or the identification of adverse side effects of
the Company's products under development could delay or preclude the Company
from further developing a particular product or from marketing its products, or
could limit the commercial use of its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
ENVIRONMENTAL REGULATION
In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal, state
and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens and wastes. Although the Company
believes that it has complied with these laws, regulations and policies in all
material respects and has not been required to take any significant action to
correct any material noncompliance, there can be no assurance that the Company
will not be required to incur significant costs to comply with environmental and
health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, including but
not limited to certain hazardous chemicals and radioactive materials. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated.
10
<PAGE> 13
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 resources of the
Company. See "Business -- Government Regulation -- Environmental Regulation."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this Offering, the Company's officers, directors and
principal stockholders, and certain of their affiliates, will beneficially own
approximately 45.5% of the Company's outstanding Common Stock, or approximately
44.3% if the Underwriters' over-allotment option is exercised in full. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. Additionally, these stockholders will have
significant influence over major corporate transactions as well as the election
of directors of the Company and control over board decisions. See "Principal
Stockholders" and "Description of Capital Stock."
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of pharmaceutical and biotechnology
companies (including the Company) have historically been highly volatile, and
the market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Future announcements concerning the Company, its competitors or other
pharmaceutical and biotechnology companies including the results of testing and
clinical trials, technological innovations or new therapeutic products,
governmental regulation, developments in patent or other proprietary rights,
litigation or public concern as to the safety of products developed by the
Company or others and general market conditions may have a significant effect on
the market price of the Common Stock. The Company has not paid any cash
dividends on its Common Stock and does not anticipate paying any dividends in
the foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
Based on shares outstanding as of May 31, 1996, the Company will have
10,527,605 shares of Common Stock outstanding upon completion of this Offering.
Subject to the lock-up agreements noted below, virtually all of these
outstanding shares currently are available for resale without restriction. For a
period of 90 days from the date of this Prospectus, however, all of the
Company's executive officers and directors (and any investment funds with which
they may be affiliated) and certain of its other stockholders have agreed not to
sell or otherwise dispose of any of their shares of Common Stock (which
aggregate 5,387,369 shares plus an additional approximately 841,980 shares of
Common Stock exercisable under stock options and warrants exercisable as of 90
days from the date of this Prospectus) without the prior written consent of
Morgan Stanley & Co Incorporated. In addition, as of May 31, 1996, there were
outstanding options to purchase a total of approximately 1,073,306 shares (of
which 752,670 were subject to lockups as described above) of the Company's
Common Stock under the stock option plans of the Company. Sale of substantial
amounts of such shares in the public market or the prospect of such sales could
adversely affect the market price of the Company's Common Stock. See "Principal
Stockholders" and "Underwriters."
DILUTION TO PUBLIC INVESTORS
The public offering price will exceed the Company's net tangible book value
per share immediately after the Offering. As a result, purchasers of the shares
of Common Stock offered hereby will experience immediate, substantial dilution
to net tangible book value in an amount equal to $12.69 per share. In addition,
further dilution will occur upon the exercise of outstanding options to purchase
the Common Stock. See "Dilution."
11
<PAGE> 14
USE OF PROCEEDS
The net proceeds to be received by the Company from this Offering (at an
assumed public offering price of $18.25 per share and after deducting the
underwriting discount and estimated offering expenses payable by the Company)
are estimated to be approximately $34.0 million ($39.1 million if the
over-allotment option is exercised in full).
The Company intends to use approximately $10.0 million of the net proceeds
raised in this Offering to fund research and development and third party
manufacturing of product supply for its therapeutic and diagnostic imaging
programs, approximately $10.0 million of such proceeds to conduct its clinical
trials, approximately $4.0 million for capital expenditures and the remaining
net proceeds for general corporate purposes. Portions of the net proceeds may
also be used to fund acquisitions of or investments in complementary businesses,
products or technologies, although no transactions are currently pending. The
actual amount of the Company's capital requirements will depend on many factors,
including the status of the development of products, the time and costs involved
in obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments and the
ability of the Company to establish new collaborative and licensing
arrangements. The Company reserves the right, at the discretion of its Board of
Directors, to reallocate its use of the proceeds of this Offering in response to
these and other factors. The Company will attempt to raise any necessary
additional funds through equity or debt financings, collaborative arrangements
with corporate partners or from other sources. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company believes that its cash, cash equivalents and short-term
investments and amounts available under a capital lease agreement, together with
the net proceeds of this Offering, will be adequate to satisfy its capital needs
at least through mid-1999. Pending application of the proceeds as described
above, the Company intends to invest the net proceeds of this Offering in
investment-grade interest-bearing securities.
COMMON STOCK PRICE RANGE AND DIVIDENDS
Since October 23, 1995, the date of the Company's initial public offering,
the Company's Common Stock has traded on The Nasdaq National Market under the
symbol "PCYC." The following table sets forth for the periods indicated the high
and low reported sale prices as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON
STOCK PRICE
-------------
HIGH LOW
---- ----
<S> <C> <C>
Fiscal Year Ending June 30, 1996
Second Quarter (commencing October 23, 1995)............ $16 3/4 $ 12
Third Quarter........................................... 15 12 3/4
Fourth Quarter (through June 12, 1996).................. 20 1/4 13 3/4
</TABLE>
On June 12, 1996, the last reported sale price for the Company's Common
Stock on The Nasdaq National Market was $18 1/4. On May 28, 1996, there were
approximately 90 holders of record of the Company's Common Stock.
The Company has never declared or paid any cash dividends on the Common
Stock. The Company expects to retain any earnings for the development and
expansion of its business and, therefore, does not intend to pay dividends on
its Common Stock in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings of the Company, its financial condition, capital
requirements and other factors as the Company's Board of Directors may deem
relevant.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual short-term debt and
capitalization of the Company at March 31, 1996, and as adjusted to give effect
to the sale of the 2,000,000 shares offered hereby at an assumed public offering
price of $18.25 per share after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations........................... $ 1,020 $ 1,020
======== ========
Capital lease obligations, less current portion........................ $ 727 $ 727
Stockholders' equity:
Preferred stock: $.0001 par value, 1,000,000 shares authorized, no
shares issued and outstanding, actual and as adjusted............. -- --
Common stock: $.0001 par value, 12,000,000 shares authorized,
8,511,258 shares issued and outstanding, 10,511,258 shares issued
and outstanding as adjusted....................................... 1 1
Additional paid-in capital........................................... 49,712 83,672
Deficit accumulated during development stage......................... (25,196) (25,196)
-------- --------
Total stockholders' equity................................... 24,517 58,477
-------- --------
Total capitalization......................................... $ 25,244 $ 59,204
======== ========
</TABLE>
13
<PAGE> 16
DILUTION
The net tangible book value of the Company at March 31, 1996 was $24.5
million, or approximately $2.88 per share. "Net tangible book value per share"
represents the total tangible assets less total liabilities, divided by the
number of shares of Common Stock outstanding. Without taking into account any
other changes in such net tangible book value after March 31, 1996, other than
to give effect to the sale by the Company of the 2.0 million shares offered
hereby (at an assumed public offering price of $18.25 per share and after
deduction of estimated underwriting discounts and commissions and estimated
offering expenses), the net tangible book value of the Company at March 31, 1996
would have been $58.5 million, or $5.56 per share, representing an immediate
increase in net tangible book value of $2.68 per share to existing stockholders
and an immediate dilution of $12.69 per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share(1)................................. $18.25
Net tangible book value per share before offering........................ $ 2.88
Increase per share attributable to new investors......................... 2.68
------
Net tangible book value per share after offering........................... 5.56
------
Dilution to new investors.................................................. $12.69
======
</TABLE>
- ---------------
(1) Before deduction of estimated underwriting discounts and commissions and
estimated offering expenses associated with the Offering.
The following table summarizes, on an as adjusted basis as of March 31,
1996, the difference between the number of shares of Common Stock purchased from
the Company, the total cash consideration paid, and the average cash price per
share paid by the existing stockholders and by the investors purchasing shares
of Common Stock in this Offering:
<TABLE>
<CAPTION>
TOTAL CASH AVERAGE
SHARES PURCHASED CONSIDERATION CASH
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 8,511,258 81% $52,406,213 59% $ 6.16
New investors........................ 2,000,000 19% 36,500,000 41% $ 18.25
---------- --- ----------- ---
Total...................... 10,511,258 100% $88,906,213 100% $ 8.46
========== === =========== ===
</TABLE>
The foregoing tables and calculations assume no exercise of outstanding
options and warrants. At March 31, 1996, there were 785,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options at a weighted
average exercise price of approximately $5.94 per share and (ii) 197,540 shares
of Common Stock reserved for issuance upon the exercise of outstanding warrants
at a weighted average exercise price of approximately $7.10 per share. To the
extent that these options and warrants are exercised there will be further
dilution to new investors. See "Management -- Executive Compensation and Other
Information," and "Description of Capital Stock."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data of the Company set forth below are qualified by
reference to, and should be read in conjunction with, the financial statements
and notes thereto included elsewhere in this Prospectus. The statement of
operations data for the three years ended June 30, 1993, 1994 and 1995, for the
nine months ended March 31, 1996 and for the period from April 1991 (inception)
through March 31, 1996, and the balance sheet data at June 30, 1994 and 1995 and
March 31, 1996 are derived from the financial statements of the Company audited
by Price Waterhouse LLP, independent accountants, which are included elsewhere
in this Prospectus. The statement of operations data for the nine months ended
March 31, 1995 has been prepared on a basis consistent with the audited
statement of operations and derived from the unaudited statement of operations
also appearing herein which, in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results of operations of the Company for the unaudited
interim period. The statement of operations data for the period from April 1991
(inception) through June 30, 1991 and the year ended June 30, 1992 and the
balance sheet data at June 30, 1991, 1992 and 1993 are derived from audited
financial statements of the Company not included herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 1991 APRIL 1991
(INCEPTION) FISCAL YEAR ENDED JUNE 30, MARCH 31, (INCEPTION)
THROUGH --------------------------------------- ------------------ THROUGH
JUNE 30, 1991 1992 1993 1994 1995 1995 1996 MARCH 31, 1996
--------------- ----- ------- ------- -------- ------- ------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License and grant
revenues................. $ -- $ -- $ -- $ 3,000 $ 79 $ -- $ 301 $ 3,380
------- ------ -------- -------- ------- ------- ------ --------
Operating expenses:
Research and development... -- 487 3,161 6,909 9,330 6,964 5,199 25,086
General and
administrative........... -- 58 559 1,042 996 728 982 3,637
------- ------ -------- -------- ------- ------- ------ --------
Total operating
expenses............ -- 545 3,720 7,951 10,326 7,692 6,181 28,723
------- ------ -------- -------- ------- ------- ------ --------
Loss from operations......... -- (545) (3,720) (4,951) (10,247) (7,692) (5,880) (25,343)
Interest income (expense),
net........................ -- 22 140 (89) (232) (96) 407 248
------- ------ -------- -------- ------- ------- ------ --------
Loss before income taxes..... -- (523) (3,580) (5,040) (10,479) (7,788) (5,473) (25,095)
Provision for income taxes... -- -- -- (101) -- -- -- (101)
------- ------ -------- -------- ------- ------- ------ --------
Net loss..................... $ -- $(523) $(3,580) $(5,141) $(10,479) $(7,788) $(5,473) $ (25,196)
======= ====== ======== ======== ======== ======== ======= =========
Net loss per share (1)....... $ (1.65) $ (1.23) $ (0.72)
======== ======== =======
Weighted average common and
common equivalent shares
(1)........................ 6,353 6,341 7,578
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---- ------ ------- ------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments...................................... $6 $2,116 $ 6,196 $ 8,690 $ 376 $ 24,216
Working capital (deficit).......................... 6 2,111 5,867 7,375 (3,155) 22,703
Total assets....................................... 6 2,157 6,880 12,050 3,539 26,936
Long-term obligations, excluding current
installments..................................... -- -- 228 1,901 1,496 828
Deficit accumulated during the development stage... -- (523) (4,103) (9,244) (19,723) (25,196 )
Total stockholders' equity (deficit)............... 6 2,152 6,249 8,769 (1,652) 24,517
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of net loss per share.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
This Prospectus contains estimates and other forward-looking statements
that involve a number of risks and uncertainties including, without limitation,
those set forth in "Risk Factors." While this outlook represents the Company's
current judgment on the future direction of its business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion should be read in conjunction with Pharmacyclics'
financial statements and the related notes thereto.
OVERVIEW
During the period from its inception in April 1991 through the fiscal year
ended June 30, 1992, the Company was engaged in organizational activities,
including negotiating agreements with The University of Texas with respect to
licensing of certain aspects of its core technology in biometallic chemistry and
recruiting scientific and management personnel. Since June 1992 the Company has
devoted substantially all of its resources to the research and development of
proprietary pharmaceutical products to facilitate and improve treatments for
cancer and atherosclerosis and to improve certain diagnostic imaging procedures.
As these products are still under development, no revenues have been derived
from the sale of products and the Company does not expect to receive revenues
from the sale of any of its products until calendar year 1997 at the earliest.
The Company has financed its operations primarily through the sale of
equity securities and, in October 1995, completed its initial public offering,
issuing 2,383,450 shares of its Common Stock, resulting in proceeds of
approximately $26.0 million. In addition, cash has been received in connection
with entering into certain product licenses and license option agreements. No
revenues have been derived from the sale of products under development. The
Company is pursuing additional collaborative agreements for the financing of its
research and development efforts and for the commercialization of its products.
However, no assurance can be given that these efforts will result in any such
agreements or that the Company will obtain significant revenues therefrom.
The Company has been unprofitable since inception and had an accumulated
deficit of $25.2 million at March 31, 1996. Successful future operations depend
upon the Company's ability to develop, to obtain regulatory approval for and to
commercialize its products, of which there can be no assurance. The Company will
require additional funds to complete the development of its products and to fund
operating losses that are expected to be incurred in the next several years.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues. Revenue for the nine months ended March 31, 1996 includes two
payments received pursuant to an August 1995 product distribution agreement with
E-Z-EM. Under this agreement, the Company recorded $250,000 as revenue (net of
royalties paid to The University of Texas ("UT")) for the nine month period. In
addition, the Company received $51,000 under a Small Business Innovation
Research ("SBIR") grant from the National Cancer Institute during the same
period. There was no revenue recognized during the nine months ended March 31,
1995.
Research and Development. Research and development expenses totaled $5.2
million for the nine months ended March 31, 1996, compared to $7.0 million
during the same period in the prior fiscal year. This 26% decrease was due to
fluctuations in the level of clinical activity relating to the Company's
products. During the period ended March 31, 1995, the Company was conducting
Phase III studies of GADOLITE and completing the preclinical studies required
for an Investigational New Drug ("IND") application filing for Gd-Tex. By
comparison, the period ended March 31, 1996 included a Phase I trial for Lu-Tex
and Phase I and Phase I/II trial for Gd-Tex, each of which required a lower
number of patients. There will continue to be significant period-to-period
variations in research and development expenses related to the timing of
clinical and preclinical trials and other research activities. The Company
currently expects its research and
16
<PAGE> 19
development expenses to increase in the future periods due to planned expansion
in clinical trials and research activities.
General and Administrative. General and administrative expenses totaled
$982,000 in the nine months ended March 31, 1996, compared to $728,000 during
the same period in the prior fiscal year, an increase of 35%. This increase was
primarily the result of insurance, professional services and other expenses
related to conducting business as a public company. The Company expects that
costs related to being a public company will result in higher levels of general
and administrative expenditures in future quarters.
Interest Income/Expense. Interest income, net of interest expense, totaled
$407,000 for the nine months ended March 31, 1996, compared to net interest
expense of $96,000 for the same period in the prior fiscal year. The increase in
interest income is the result of interest earned on the proceeds from the
Company's initial public offering completed in October 1995.
FISCAL YEARS ENDED JUNE 30, 1995 AND 1994
Revenues. During the fiscal year ended June 30, 1994, the Company
recognized $2.0 million under an option whereby the Company agreed, for six
months, to refrain from entering into any discussions or agreements relating to
licensing certain technology. No license agreement was consummated pursuant to
this option. The Company also recognized $1.0 million under an agreement for the
development and commercialization of certain diagnostic imaging products in
certain Asian countries. This agreement was terminated during fiscal 1995. See
Note 7 of Notes to Financial Statements.
Revenues for the fiscal year ended June 30, 1995 comprised a license fee
from Cook, Incorporated and a SBIR grant from the National Cancer Institute. The
license fee was for the non-exclusive use of Pharmacyclics' technology in
producing MRI detectable catheters. See "Business -- Collaborative
Relationships." The SBIR grant covered early research on cancer therapy with RNA
cleaving agents.
Research and Development. Research and development expenses increased from
$6.9 million in the fiscal year ended June 30, 1994 to $9.3 million in the
fiscal year ended June 30, 1995. These increases were primarily the result of
payments to third parties, hiring additional staff and developing the
infrastructure required to advance products from research into clinical trials.
The increase in fiscal 1995 reflects costs associated with commencement of the
GADOLITE Phase II and III clinical studies. In addition, expenses related to
Phase I clinical studies for Gd-Tex for cancer therapy began in January 1995.
General and Administrative. General and administrative expenses decreased
from $1.0 million in the fiscal year ended June 30, 1994 to $996,000 in the
fiscal year ended June 30, 1995.
Interest Income/Expense. Interest expense, net of interest income, during
the fiscal years ended June 30, 1994 and 1995 was $89,000 and $232,000
respectively, and resulted from borrowings associated with capital lease
financing and notes payable which offset interest on income from cash
equivalents and short-term investments. This increase reflects interest on lease
lines resulting from growth in equipment and facilities.
Income Taxes. At June 30, 1995 and 1994, the Company had net operating
loss carryforwards of approximately $15.5 million and $8.0 million and tax
credit carryforwards of approximately $1.1 million and $600,000 for federal and
state income tax reporting purposes, respectively. These amounts expire at
various times through 2010. A change of ownership, as defined under Section 382
of the Internal Revenue Code, occurred as a result of the Company's initial
public offering. Accordingly, utilization of approximately $17.0 million of the
Company's net operating loss carryforwards will be subject to an annual
limitation of approximately $4.0 million. See Note 5 of Notes to Financial
Statements.
The tax provision of $101,000 in fiscal year ended June 30, 1994 relates
primarily to foreign withholding taxes associated with amounts received under
development and marketing agreements in certain Asian countries terminated
during fiscal 1995.
FISCAL YEARS ENDED JUNE 30, 1994 AND 1993
Revenues. The Company had no revenues in the fiscal year ended June 30,
1993. During the fiscal year ended June 30, 1994, the Company had revenues of
$3.0 million.
17
<PAGE> 20
Research and Development. Research and development expenses increased from
$3.2 million in the fiscal year ended June 30, 1993 to $6.9 million in the
fiscal year ended June 30, 1994. These increases were primarily the result of
payments to third parties, hiring additional staff and developing the
infrastructure required to advance products from research into clinical trials.
General and Administrative. General and administrative expenses increased
from $559,000 in the fiscal year ended June 30, 1993 to $1.0 million in the
fiscal year ended June 30, 1994. The increase in the level of general and
administrative expenses reflects the investment in additional personnel and
expanded facility and infrastructure to support the Company's operations.
Interest Income/Expense. Interest income, net of interest expense, of
$140,000 during fiscal 1993 resulted from interest on cash balances. In fiscal
1994 interest expense exceeded interest earned by $89,000 as interest on lease
lines reflected growth in equipment and facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through March 31,
1996 primarily through the sale of equity securities, payments under third party
agreements and proceeds from its initial public offering. From inception through
March 31, 1996, the Company has used approximately $23.1 million of cash for
operating activities and approximately $2.5 million of cash for the purchase of
laboratory and office equipment and payments under capital lease agreements.
Net cash used in operating activities of $5.2 million during the nine
months ended March 31, 1996, resulted primarily from the net loss incurred
during that period and a reduction in accounts payable, offset partially by
increases in accrued liabilities, prepaid expenses and depreciation expense. On
March 31, 1996, the Company had approximately $24.2 million in cash, cash
equivalents and short-term investments.
The Company expects to incur ongoing levels of expenditures which may not
only fluctuate from quarter to quarter but which are expected to increase as the
levels of clinical activity for the Company's products under development
increases. Additional expenditures may occur in commercializing the Company's
first product, GADOLITE. As a result of both these factors, as well as the costs
associated with being a public company, the Company expects to report increased
expenses for research and development and general and administrative activities
for at least the next several years. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the progress of the
Company's product development efforts, the progress of the Company's clinical
trials, actions relating to regulatory matters, the costs and timing of
expansion of product development, manufacturing, marketing and sales activities,
future third-party collaborations, the extent to which the Company's products
gain market acceptance, and competitive developments. Although the Company
believes that the proceeds from this Offering together with the Company's
current cash, cash equivalents and short-term investments will be sufficient to
meet the Company's operating and capital requirements through mid 1999, there
can be no assurance that the Company will not require additional financing
within this time frame.
The Company's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary
materially. The factors described above will impact the Company's future capital
requirements and the adequacy of its available funds. The Company may be
required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Requirements for Additional Financing and Access to Capital Markets."
18
<PAGE> 21
FUTURE POSSIBLE COMPENSATION EXPENSE
In May 1996, the Company granted options to purchase approximately 160,000
shares of Common Stock at $17.75 (the then fair market value of such shares) per
share to certain employees. The Company expects to grant additional options to
purchase approximately 250,000 shares of Common Stock prior to the 1996 Annual
Meeting of Stockholders currently scheduled for December 1996 (the "Annual
Meeting"), with an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant. All such option grants are subject
to stockholder approval at the Annual Meeting. As a result, the Company will be
required to record compensation expense in the event the fair market value of
the Company's Common Stock on the date of the Annual Meeting exceeds the
exercise price of the respective stock options, in an amount equal to such
difference multiplied by the number of shares subject to such option and
recognized on a straight-line basis over the vesting period of the option,
generally five years.
19
<PAGE> 22
BUSINESS
Pharmacyclics is developing patented pharmaceutical products designed to
improve radiation and chemotherapy of cancer, enable or improve the photodynamic
therapy of certain cancers and atherosclerotic cardiovascular disease, and
enhance certain diagnostic imaging techniques. These products address
significant market opportunities and are intended to enhance existing medical
procedures and improve the ability of physicians to treat or manage life
threatening and serious conditions. Such products are derived primarily from
Pharmacyclics' core technology in designing and synthesizing small molecules
called expanded porphyrins, which bind metals in a way that allows the resulting
molecule to capture and focus energy to perform specific therapeutic and
diagnostic functions.
The Company's proprietary expanded porphyrins, called "texaphyrins," are
small, ring-shaped molecules that localize in cancer cells and atherosclerotic
plaque where they can be exposed to forms of energy that activate the molecules
to eliminate diseased tissue. The physical and chemical characteristics of the
texaphyrin molecules are determined by the type of metal inserted into the ring
and the form of energy applied to activate the molecule. For example,
texaphyrins can be synthesized to focus and transform X-ray, chemical or light
energy into other forms of energy capable of producing localized destruction of
diseased tissue. This forms the basis for the use of texaphyrins as radiation
sensitizers, chemosensitizers and photosensitizers. One such molecule, Lu-Tex,
is being developed as a photosensitizing agent for use in photodynamic therapy,
and a second, Gd-Tex, is being developed for use as a radiation sensitizer and
chemosensitizer. Lu-Tex is in multicenter Phase I clinical testing to evaluate
its safety and efficacy in the treatment of certain invasive cancers which are
accessible to illumination by externally applied light. Gd-Tex is currently in
Phase I and multicenter Phase I/II clinical testing as a radiation sensitizer to
improve the efficacy and safety of radiation therapy of certain cancers. Gd-Tex
also is being developed to potentiate the activity of certain cancer
chemotherapy drugs. Based on the Company's unique metal binding technology, it
has developed GADOLITE for use as an oral contrast agent in patients undergoing
MRI of the abdomen or pelvis. In September 1995, the Company submitted an NDA
with the FDA for GADOLITE.
The Company's strategy is to apply its core biometallic chemistry and
expanded porphyrin technology to develop a diverse product portfolio.
Pharmacyclics is leveraging its core technology and products by establishing
relationships with third parties intended to augment its research and
development activities and to provide manufacturing capacity and sales and
marketing capabilities. To date, the Company has retained worldwide marketing
rights for its therapeutic products. The Company also dedicates significant
resources to build and protect its intellectual property rights in the U.S. and
abroad.
MARKET OVERVIEW
CANCER
Cancers result from the uncontrolled proliferation of cells that invade
adjacent normal tissues and organs and interfere with their function. In some
cases, cancer cells become dislodged from their primary site and spread, or
metastasize, to other anatomic sites. Cancers can arise in almost any location
in the body. In the U.S., there are approximately 1.3 million new cases of
cancer per year and the incidence of cancer is increasing. Over seven million
people in the U.S. today have been diagnosed with cancer, resulting in estimated
annual direct and indirect medical costs of over $50 billion associated with the
management of cancer. Selection of appropriate therapy depends on careful
assessment of the size, location and existence of metastases of the tumor using
diagnostic imaging procedures such as computerized tomography ("CT") and MRI,
which may be further enhanced by the use of contrast agents.
20
<PAGE> 23
Once the extent of disease has been determined, cancer therapy typically
includes some combination of surgery, radiation therapy or chemotherapy.
Unfortunately, many tumors are not controlled with surgery because of their
size, location or presence of metastases. In these cases, radiation therapy or
chemotherapy are frequently used. Radiation therapy is applied by physicians
specializing in radiation oncology. There are approximately 3,000 such
physicians based in 1,300 radiation treatment centers in the U.S. Chemotherapy
is usually prescribed by physicians who specialize in medical oncology and there
are about 6,000 such specialists in the U.S.
Chemotherapy and radiation therapy destroy both healthy and diseased cells
and cause serious side effects because their cytotoxic effects are not
adequately selective. Substantial research in cancer treatment has been directed
toward improving the efficacy of existing therapy while reducing toxicity, in
addition to searching for new treatment approaches.
Radiation Therapy for Cancer. Radiation therapy is administered to the
anatomic site where the tumor is located, known as the treatment field, while
adjacent normal tissues are shielded to minimize radiation toxicity, and is
usually given several times per week over a period of two to six weeks.
Irradiation of tissues generates free radicals and electrons (highly reactive
and short-lived molecules and particles) that attack intracellular molecules
such as DNA and lead to cell death. Treatment planning and definition of the
treatment field is highly dependent on imaging procedures which are required to
determine the location and size of the tumor and its relationship to adjacent
normal tissues.
Of the over one million newly-diagnosed cancer patients each year in the
U.S., an estimated 50% will be treated with radiation therapy as part of their
initial disease management. This includes patients with cancers of the lung,
breast, prostate, head and neck region and other anatomic sites. In addition,
approximately 150,000 patients with persistent or recurrent disease also will
receive radiation therapy. In total, approximately 700,000 patients receive
radiation therapy for cancer each year in the U.S. Depending on the complexity
and duration of treatment, a course of radiation therapy for cancer can cost
between $10,000 and $25,000. While there currently are no approved radiation
sensitizers, certain chemotherapy agents are frequently used off-label to
increase the effectiveness of radiation therapy. However, the use of
chemotherapy agents as radiation sensitizers is typically limited by lack of
tumor localization and by systemic toxicity. Optimally, a radiation sensitizer
should be safe, simple to administer to the patient and potentiate the effect of
radiation at the tumor site and not the adjacent normal tissue.
Chemotherapy of Cancer. In the U.S., over 350,000 patients per year
receive cytotoxic chemotherapy for treatment of many types of cancer. The
effectiveness of chemotherapy agents usually is limited by their serious or life
threatening side effects. These side effects often include nausea and vomiting,
suppression of white blood cell and platelet counts, renal toxicity, pulmonary
toxicity, neurotoxicity and cardiac toxicity. Chemotherapy drugs distribute
throughout the body in normal tissues as well as in the tumor. The cytotoxic
effects to normal tissues is dose-limiting for most of these drugs, resulting in
a very narrow therapeutic margin. Many recent advances in medical oncology have
resulted from the discovery of drugs that ameliorate the side effects of
chemotherapy agents, such as anti-emetics and blood cell growth factors which
allow for use of higher doses of chemotherapy. Chemosensitizers are drugs which
potentiate the anti-tumor activity of cancer chemotherapy agents. Although
certain chemosensitizers have been tested experimentally, no such agents are yet
approved. Ideally, a chemosensitizer should be safe, simple to administer to the
patient and potentiate the activity of the cytotoxic chemotherapy agent in the
tumor but not in any normal tissues or organs, thereby increasing the
therapeutic margin.
Photodynamic Therapy for Cancer. Photodynamic therapy is an emerging
cancer treatment based on the combined effects of visible light and a
photosensitizing drug. Photosensitizers are activated by being exposed to light
of a specific wavelength. In this procedure, a photosensitizing agent which
accumulates in tumors is injected into the patient. The tumor site is then
illuminated with visible light of a particular energy and wavelength that is
absorbed by the photosensitizer, creating excited state oxygen molecules in
those tissues in which the drug has localized. These molecules are highly
reactive with cellular components and cause tumor cell death. Recently, the
first photosensitizing agent was approved by the FDA for treatment of
obstructing cancers of the esophagus.
21
<PAGE> 24
To date, photodynamic therapy has been restricted to treatment of
superficial or small lesions because existing photosensitizers have been unable
to absorb light of a wavelength capable of penetrating deeply into tissues.
Other limitations of photosensitizers have included unfavorable biolocalization,
prolonged retention in the body, skin phototoxicity and insolubility in water,
complicating intravenous administration. In addition, some tumors, including
malignant melanoma, contain pigments which have not allowed adequate penetration
of light for photodynamic therapy.
Optimally, a photosensitizer should accumulate selectively in tumors and be
capable of activation with a wavelength of light that is able to penetrate
through tissue, blood and darkly pigmented skin, in order to treat larger or
more deeply situated tumors. Ideally the treatment should be accomplished in a
single outpatient visit. Other important features include safety, lack of skin
phototoxicity and simple administration of the agent to the patient.
ATHEROSCLEROSIS
Atherosclerosis is a progressive and degenerative vascular disease in which
cholesterol and other fatty materials are deposited in the walls of blood
vessels, forming a build-up known as plaque. The accumulation of plaque narrows
the interior of the blood vessels, thereby reducing blood flow. Atherosclerosis
in the coronary arteries can lead to heart attack and death. In peripheral
vessels, atherosclerosis can lead to decreased mobility, loss of function and
other complications such as strokes. Current treatments for atherosclerosis
include surgery and other techniques aimed at removing or relieving the plaque.
Procedures utilizing intravascular devices to mechanically remove or compress
the obstructing lesion include atherectomy and angioplasty, often with stent
placement, are currently performed on over 400,000 patients per year in the U.S.
These procedures require the use of anticoagulant drugs and, although the use of
stents has reduced the incidence of restenosis, generally have been limited to
localized sections of the diseased vessel.
The optimal interventional treatment for atherosclerosis should effectively
eliminate atherosclerotic plaque without the need for anticoagulant drugs or
stent placement. Since atherosclerosis is a diffuse disease, therapies which can
be used over long segments of the affected vessel offer significant advantages
over treatments limited to short segments of the vessel.
Photodynamic Therapy of Atherosclerosis. Photodynamic therapy to eliminate
atherosclerotic plaque involves administration of a photosensitizing agent which
accumulates in the plaque. The diseased site is then exposed to light delivered
by a catheter containing an optical fiber. This approach may eliminate
cholesterol plaque without damage to the blood vessel lining thereby potentially
eliminating the need for anticoagulants and reducing the frequency of
restenosis. The Company believes that the use of photodynamic therapy for
atherosclerosis previously has been limited by the inability of photosensitizers
to absorb light that is capable of penetrating through blood. The ideal
photosensitizer should localize in atherosclerotic plaque and be readily
activated by light capable of penetrating through blood to reach the drug.
DIAGNOSTIC IMAGING AGENTS
The worldwide market for imaging agents exceeded $3 billion in 1993,
approximately $250 million of which was associated with MRI. Improved contrast
agents may provide an opportunity to expand the medical indications for MRI. In
1993, approximately 3,300 MRI scanners were used in health care centers in the
U.S., and approximately seven million procedures were performed.
Since the most common cancers originate and spread within the chest,
abdomen or pelvis, the greatest need for additional MRI contrast agents is for
imaging of these areas. These sites are generally difficult to image because of
the close juxtaposition of many overlapping organs. The tortuous pathway and
unpredictable position of the stomach, small intestine and large intestine, in
addition to their being fluid-filled, often makes it difficult to distinguish
such organs from cancers, abscesses or other inflammatory processes in an MRI
scan. Thus, the development of oral MRI contrast agents capable of definitively
marking the gastrointestinal tract could improve the diagnostic quality of scans
of the abdomen and pelvis. Just as oral X-ray contrast agents currently are used
in nearly all CT scans of the abdomen and pelvis, the Company believes that, as
they become available, oral MRI contrast agents will be increasingly used in MRI
scans of the abdomen and pelvis.
22
<PAGE> 25
Improvements in diagnostic certainty resulting from image enhancement may reduce
the need for repeat scanning of patients or other diagnostic tests, and, by
permitting faster scanning and increased patient throughput, reduce the cost of
an MRI scan.
OTHER MARKETS
The Company is also developing Lu-Tex for photodynamic therapy of age
related macular degeneration, an eye disease affecting the retina that is a
leading cause of blindness in the U.S. The Company has also prepared and tested
topical formulations of Lu-Tex for various applications in dermatology. Both of
these applications are currently being studied in animal models.
PHARMACYCLICS' BUSINESS STRATEGY
Pharmacyclics' products are designed to address significant market
opportunities in the treatment of certain cancers and atherosclerosis, and in
diagnostic imaging. The key elements of the Company's business strategy include:
DEVELOPING THERAPEUTIC PRODUCTS THAT ADDRESS LARGE MARKETS FOR THE
TREATMENT OF CANCER AND ATHEROSCLEROSIS.
The Company's therapeutic products under development are designed to
improve radiation therapy, chemotherapy and photodynamic therapy for the
treatment of certain cancers and atherosclerosis. The Company's initial
therapeutic product focus has been on treatments for life threatening cancers,
where the Company believes its products may offer measurable improvements in
patient outcomes. This strategy is intended to reduce the time required to
achieve regulatory approval, substantial market penetration and favorable
pricing of these products.
APPLYING CORE BIOMETALLIC CHEMISTRY TECHNOLOGY TO DEVELOP A DIVERSE PRODUCT
PORTFOLIO.
Each of the Company's products under development incorporates one of a
series of metals within a proprietary expanded porphyrin or a zeolite structure.
The resulting synthetic small molecules selectively localize in the body and are
capable of harnessing forms of energy used in a variety of medical applications.
The Company has leveraged its expertise and proprietary position in biometallic
chemistry and expanded porphyrin technology to develop a diverse product
portfolio. Using a series of different metals which may be incorporated into
texaphyrins to enable the molecule to capture and focus different types of
energy, the Company has created several product opportunities based on similar
chemical synthesis, manufacturing and product development activities.
DESIGNING PRODUCTS THAT ENHANCE EXISTING MEDICAL PROCEDURES AND ARE SIMPLE
AND PRACTICAL TO USE.
The Company's products under development are designed to improve the
ability of physicians to treat or manage life threatening or serious conditions.
These products are designed to enhance existing procedures and should result in
accelerated product adoption. For example, the Lu-Tex photosensitizer for cancer
therapy is designed to be given by rapid intravenous infusion, and tumors can be
exposed to light within a few hours, permitting treatment in a single outpatient
visit; the Gd-Tex radiation sensitizer and chemosensitizer each are designed to
be used in conjunction with standard radiation therapy and chemotherapy
procedures; and GADOLITE is intended to improve the diagnostic capabilities of
existing abdominal and pelvic MRI procedures.
LEVERAGING ITS CORE TECHNOLOGY THROUGH COLLABORATIVE RELATIONSHIPS.
The Company is leveraging its proprietary core technology through
collaborative relationships that strengthen its basic research capabilities and
provide manufacturing and marketing capacity, enabling the Company to focus on
the development of new products addressing substantial markets in the areas of
therapeutics for cancer and atherosclerosis. Consistent with this strategy, the
Company is building a series of relationships with third parties to augment its
research and development activities and to provide
23
<PAGE> 26
manufacturing, sales and marketing capabilities. The Company has utilized a
Sponsored Research Agreement with UT Austin for continued research and
development of its expanded porphyrin technology. For its GADOLITE product, the
Company has entered into a North American manufacturing and supply agreement
with Glaxo and a sales and distribution agreement with E-Z-EM, a leading
distributor worldwide of oral contrast agents. For production of its Lu-Tex and
Gd-Tex products, the Company has entered into a memorandum of understanding and
is currently negotiating a definitive agreement with Hoechst Celanese, a
manufacturer of chemicals and pharmaceutical intermediates. The Company to date
has retained worldwide marketing rights for its therapeutic products.
EXPANDING AND PROTECTING PROPRIETARY TECHNOLOGY AND PRODUCTS.
Since its inception, the Company has dedicated significant resources to
protect its intellectual property. In the U.S., the Company owns or has
exclusive rights to 23 issued patents, 12 allowed patent applications and 41
pending patent applications covering various aspects of its core technology and
products under development. Outside the U.S., the Company is the owner or
exclusive licensee of four corresponding patents, one allowed and 42 pending
counterpart patent applications. The Company intends to continue to protect its
intellectual property through additional patent filings.
PHARMACYCLICS' TECHNOLOGY
The Company's products under development are derived from its expertise in
biometallic chemistry and expanded porphyrins, such as the proprietary
texaphyrin molecules developed by the Company and its academic collaborators. In
nature, porphyrins, such as heme or chlorophyll, bind metals, transport ions and
transform energy. In living organisms, porphyrins primarily localize to tissues
or organs responsible for energy production, metabolism or transport functions.
Based on their ability to capture and focus medically useful forms of energy,
Pharmacyclics and its collaborators have designed and synthesized these small,
ring-shaped molecules to perform specific functions in a number of medical
applications. The expanded porphyrins being developed by the Company consist
primarily of its proprietary texaphyrin molecules. For example, texaphyrins can
be synthesized to focus and transform X-ray, chemical or light energy into other
forms of energy capable of producing localized destruction of diseased tissue.
This forms the basis for the use of texaphyrins as radiation sensitizers,
chemosensitizers and photosensitizers. Texaphyrins can also be used with
radiofrequency energy to produce an enhanced MRI signal.
24
<PAGE> 27
In contrast to naturally occurring porphyrins, synthetic texaphyrins have a
larger central binding ring which makes possible the stable binding of a variety
of lanthanide metals such as gadolinium, lutetium, europium and dysprosium. The
physical and chemical characteristics and product application of the texaphyrin
molecules are determined by the type of metal inserted into the ring and the
form of energy applied to activate the molecule, as shown in the diagram below,
which depicts the several texaphyrin-based products under development by the
Company.
TEXAPHYRIN TECHNOLOGY PLATFORM
[See Appendix for description of omitted graphic]
Metal ions act as natural catalysts for a number of biochemical processes.
The binding of metal ions by texaphyrins is unique in that the metal is held
near or within the plane of the molecule. This type of binding allows the metal
to interact freely with adjacent molecules while still being retained within the
texaphyrin structure. As a result of this metal binding configuration,
texaphyrins can be engineered to capture and focus a variety of energy forms
including capture of high energy chemical species, such as free radicals.
As is the case for naturally occurring porphyrins, texaphyrins accumulate
in those areas of the body where substantial energy usage or metabolism occurs,
such as in cancer cells and the cholesterol of atherosclerotic plaque. This
selectivity for particular cell types provides the basis for the Company's
treatment approaches for certain cancers and atherosclerosis. Once localized,
these small molecules can be excited with the appropriate energy form to
activate their therapeutic effects.
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PRODUCTS UNDER DEVELOPMENT
Pharmacyclics is pursuing the development of products based on its core
technology in biometallic chemistry and the ability of its proprietary
texaphyrin molecules to capture and focus medically useful forms of energy. By
taking advantage of the Company's unique metal binding technology and the
texaphyrin molecule, Pharmacyclics has developed the following product
candidates:
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS(1) COLLABORATORS(2)
- ---------------------------- ---------------------- ------------------------ ---------------------
<S> <C> <C> <C>
CANCER THERAPY
Lu-Tex Photosensitizer for Multicenter Phase I Marketing rights
photodynamic therapy retained
for a variety of
cancers
Gd-Tex Radiation sensitizer Phase I and multicenter Marketing rights
for radiation therapy Phase I/II for brain retained
of a variety of metastases
cancers
Gd-Tex Chemosensitizer for Preclinical Marketing rights
chemotherapy of a retained
variety of cancers
ATHEROSCLEROSIS THERAPY
Lu-Tex Photosensitizer for Preclinical Marketing rights
photodynamic therapy retained
of atherosclerosis
DIAGNOSTIC IMAGING
GADOLITE(R) Oral MRI contrast NDA submitted September E-Z-EM, Inc. holds
agent for abdomen and 1995 marketing rights;
pelvis Glaxo holds
manufacturing rights
</TABLE>
- ---------------
(1) "Phase I" means initial human studies designed to establish the safety, dose
tolerance and sometimes pharmacokinetics of a compound. "Phase I/II" means
initial human studies designed to establish the safety, dose tolerance and,
sometimes, pharmacokinetics of a compound and are, in contrast to Phase I
studies, performed with patients with the targeted disease. "Phase II" means
human studies designed to establish safety, optimal dosage and preliminary
activity of a compound. "Phase III" means human studies designed to lead to
accumulation of data sufficient to support an NDA, including data as to
efficacy.
(2) The Company is currently negotiating a manufacturing agreement with Hoechst
Celanese for the clinical and commercial supply of its Lu-Tex and Gd-Tex
products. There can be no assurance that the Company will not in the future
enter into licensing agreements with third parties for the marketing of its
products under development. See "Business -- Collaborative Relationships."
CANCER THERAPY
Lu-Tex for Photodynamic Therapy of Cancer
Photodynamic therapy is a minimally invasive treatment modality in which a
photosensitizing drug that localizes to diseased tissue is injected into the
body and then activated with light. To date, photodynamic therapy has been
restricted to the treatment of superficial or small lesions because existing
photosensitizers have been unable to absorb light that is capable of penetrating
deeply into tissues. Lu-Tex is activated by light of 720-760 nanometers,
wavelengths that are optimal for penetrating through tissue, blood and skin
pigmentation such as melanin. After absorbing light of this wavelength, Lu-Tex
becomes activated to a higher energy state capable of generating cytotoxic
singlet oxygen molecules. Preclinical studies conducted by the Company indicate
that Lu-Tex localizes to a variety of cancers. Lu-Tex is a synthetic, well
characterized molecule that is water soluble and, in animal studies conducted by
the Company, was relatively rapidly cleared from the body, reducing potential
toxicity. Because of its relatively rapid clearance from normal tissue, it is
possible to illuminate the tumors within a few hours of drug administration.
This has the potential to simplify clinical use of the drug by permitting its
administration in a single outpatient visit, a substantial improvement over
current photodynamic therapies.
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The Company intends to seek initial approval for the use of Lu-Tex in
photodynamic therapy for patients with invasive surface tumors (involving the
skin or subcutaneous tissue) which are accessible to externally applied light.
Such patients include those with chest wall recurrence of breast cancer,
Kaposi's sarcoma, melanoma and other metastatic tumors to the skin or
subcutaneous tissues, which diseases may affect over 50,000 patients per year in
the U.S. Additional indications for the use of Lu-Tex include internal cancers
such as cancer of the lung, breast, esophagus, colon, rectum, prostate, head and
neck region and genitourinary tract, etc.
Clinical Status. Lu-Tex has been administered to 19 patients in the
Company's ongoing Phase I trial in cancer patients with tumors which are
accessible to externally applied light. In these studies, currently being
conducted at the University of Louisville James Brown Cancer Center, the
University of Tennessee Thompson Cancer Center and Stanford University Medical
Center, it has been possible to treat patients with a single rapid infusion of
Lu-Tex followed within a few hours by illumination of the tumor with light in a
single outpatient visit. To date, the Company has seen neither systemic toxicity
nor any significant skin phototoxicity in this study that is evaluating
increasing doses of Lu-Tex in order to find a maximally tolerated dose ("MTD").
During treatment a number of patients in these studies experienced pain
localized at the diseased site. Tumor responses have been observed in a variety
of tumor types including breast cancer, Kaposi's sarcoma and importantly,
malignant melanoma. Because Lu-Tex is activated by tissue penetrating light,
responses have been observed in large tumors and in lymph nodes involved with
cancer located in the soft tissues beneath the skin. The responses observed in
melanoma patients are of interest because other photosensitizers have failed to
be effective in this tumor. Melanoma cells contain the pigment melanin, which,
except for light of 720-760 nanometers, prevents light from penetrating into
tissue where it can activate the photosensitizer. Furthermore, Lu-Tex's ability
to be activated by light of these wavelengths also indicates that it would be
possible to treat people with darkly pigmented skin.
Gd-Tex for Radiation Sensitization of Cancer
Radiation therapy is based upon the sensitivity of cancer cells exposed to
relatively high dosages of externally applied radiation. Generally, however,
such radiation has toxic effects on healthy tissues surrounding the tumor
because the energy is not adequately targeted. Radiation sensitizers are agents
that increase the cytotoxic effects of radiation. The Company's preclinical
studies indicate that texaphyrins can increase the effect of radiation therapy
by absorbing free electrons which are generated during irradiation of tissues.
Free electron absorption by Gd-Tex results in formation of relatively long-lived
texaphyrin and other free radicals capable of destroying intracellular DNA
molecules. In addition to these physicochemical properties of Gd-Tex, its
propensity to localize selectively in cancer cells confers additional advantages
as a radiation sensitizer since this effect is localized to the tumor. Gd-Tex
uptake in tumors occurs within minutes and persists for hours. Preclinical
studies also indicate that Gd-Tex enhances radiation-induced killing of various
human and animal cancer cells. Animals receiving Gd-Tex in conjunction with
radiation therapy had enhanced tumor response and survival rates as compared to
the control group receiving equivalent dosages of radiation therapy alone.
Preclinical studies further indicate that Gd-Tex increases the effect of
radiation therapy at the tumor site but does not increase radiation damage to
normal tissues. Another possible advantage of the Gd-Tex molecule is that its
unique properties allow it to be visualized with MRI. Because radiation therapy
requires the use of imaging procedures to accurately define the treatment field,
use of Gd-Tex may allow more precise imaging of the tumor and improve radiation
treatment planning.
The Company initially intends to seek approval of Gd-Tex for brain
metastases. Brain metastases occur in nearly 14% of all cancer patients and are
typically treated with radiation therapy. Radiation therapy for treatment of
brain metastases is performed on approximately 150,000 patients per year in the
U.S. The Company believes that Gd-Tex could be used in many other tumor types
and clinical situations requiring radiation therapy.
Clinical Status. The Company has been testing Gd-Tex in a Phase I study in
patients with advanced cancers to determine the MTD of the drug and to evaluate,
using MRI, the biolocalization of Gd-Tex in tumors. In 33 patients studied to
date, there has been no serious drug related toxicity, and selective
localization of Gd-Tex in lung cancer, breast cancer and sarcomas has been
confirmed. The Company is
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conducting a multicenter Phase I/II clinical trial to evaluate the safety and
efficacy of Gd-Tex in cancer patients receiving radiation therapy for treatment
of brain metastases at the Joint Center for Radiation Therapy at Harvard, MD
Anderson Cancer Center in Houston, the University of Texas Southwestern Medical
Center in Dallas and Northwest Kinetics, L.L.C. in Tacoma, Washington and is in
the process of expanding the study to the Institute Gustave Roussy in Paris. In
this study, an intravenous dose of Gd-Tex is administered prior to each
radiation treatment.
Gd-Tex for Chemosensitization of Cancer
The Company is conducting preclinical studies regarding the use of Gd-Tex
as a chemosensitizer for use in conjunction with certain cytotoxic chemotherapy
agents. Cytotoxic chemotherapy destroys cancer cells by interfering with their
metabolism, protein synthesis or cell division. Generally, however, the damaging
effects of cancer chemotherapy agents are not restricted to the tumor. Because
these agents are not tissue selective, cancer chemotherapy agents produce
serious or life-threatening side effects which compromise quality of life and
increase the cost of management of patients with cancer. Preclinical studies
conducted by the Company and its collaborators indicate that Gd-Tex increases
the activity of certain chemotherapy agents in tumors. This effect is believed
to be related to Gd-Tex's ability to capture cytotoxic free radicals produced by
certain chemotherapy agents, such as doxorubicin and bleomycin. Gd-Tex's
selective uptake in tumors potentiates the activity of cancer chemotherapy
agents in tumor cells but not in normal tissues, thereby increasing the
therapeutic margin. In preclinical studies animals receiving Gd-Tex and
chemotherapy with either bleomycin or doxorubicin had enhanced tumor responses
and survival rates as compared to control groups receiving equivalent doses of
chemotherapy alone. In these studies, no enhancement of chemotherapy related
toxicity was noted.
ATHEROSCLEROSIS THERAPY
Lu-Tex for Photodynamic Therapy of Atherosclerosis. Animal studies
conducted by the Company and its collaborators have demonstrated that both
Lu-Tex and Gd-Tex localize to atherosclerotic plaque. In the Company's ongoing
Phase I clinical study with Gd-Tex, localization in atherosclerosis in human
aortas has been confirmed using MRI. Based on these studies, the Company
believes that Lu-Tex also should localize in human atherosclerotic plaque.
Studies conducted by the Company also have indicated that following intravenous
administration of Lu-Tex to animals, intravascular exposure of atherosclerotic
plaque to 732 nanometer light delivered through a catheter resulted in
elimination of the lesions without damage to the endothelium. The Company
believes that these results suggest that photodynamic therapy of atherosclerosis
with Lu-Tex has the potential to eliminate plaque without complications such as
thrombosis and restenosis, which are associated with techniques, such as
angioplasty and atherectomy. These animal studies also have shown that
photodynamic therapy of atherosclerosis with Lu-Tex could be used to treat
diffuse atherosclerosis over long segments of blood vessels, which is not
possible with other techniques. These results further confirm that Lu-Tex is
activated by light that is capable of penetrating through blood, a shortcoming
that has prevented the successful use of photosensitizers for cardiovascular
applications.
DIAGNOSTIC IMAGING AGENT
GADOLITE(R). The Company's oral MRI contrast agent, GADOLITE, is based on
a patented compound and is used for imaging the gastrointestinal tract in
patients undergoing MRI procedures of the abdomen or the pelvis. GADOLITE
contains gadolinium sodium aluminosilicate suspended in an aqueous,
orange-flavored oral formulation designed to fill the bowel uniformly. The
Company's preclinical studies in animals indicated that orally administered
GADOLITE is nontoxic even when used at large multiples of the intended human
dose and is not systemically absorbed.
Clinical Status. The Company's Phase I and II human clinical trials
indicated that GADOLITE is well tolerated, safe and not absorbed from the human
gastrointestinal tract. The Company has conducted two pivotal multicenter
controlled Phase III studies in patients receiving MRI scans for known or
suspected diseases of the abdomen or pelvis. A total of 284 patients received
GADOLITE in these studies, which were completed in March 1995. The Company's
analysis of data from these studies confirmed the safety,
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<PAGE> 31
tolerability and lack of absorption of GADOLITE, and indicated that it
significantly reduced diagnostic uncertainty when comparing MRI scans performed
with GADOLITE to those without GADOLITE. The Company believes that these trials
establish that GADOLITE improves the ability to distinguish the gastrointestinal
tract from adjacent anatomic or pathologic structures and thereby assists in the
detection or diagnosis of abnormalities in the abdomen or pelvis. The Company
believes that by reducing diagnostic uncertainty, GADOLITE will lessen the need
for repeated exams and other more invasive diagnostic tests, thereby reducing
costs. The Company submitted an NDA in September 1995 to market this product in
the U.S. The Company expects to file for regulatory approval in the United
Kingdom in the third quarter of 1996 and subsequently in certain other European
markets.
LU-TEX IN OTHER PHOTODYNAMIC THERAPY APPLICATIONS
The Company is developing Lu-Tex for photodynamic therapy of age related
macular degeneration, a retinal eye disease that is the leading cause of
blindness in the U.S. The Company has also prepared topical formulations of
Lu-Tex for various applications in dermatology. Both of these applications are
currently being studied in animal models.
COLLABORATIVE RELATIONSHIPS
The Company has maintained a focus on its core technology in biometallic
chemistry and expanded porphyrin molecules and has utilized relationships with
third parties for research, process development, manufacturing, sales and
marketing. In the photodynamic therapy field, the Company has used outside
collaborations for development of light production and delivery devices for use
in preclinical and clinical trials while focusing on development of its
proprietary photosensitizing drug. The Company has established and intends to
establish additional alliances with companies for late stage product
development, manufacturing, sales, marketing and distribution of certain of its
products. To date, the Company has retained worldwide marketing rights to its
therapeutic products.
THE UNIVERSITY OF TEXAS AGREEMENTS. The Company collaborates with and
sponsors research and development programs at a number of academic institutions,
including UT Austin, in a group under the direction of Jonathan Sessler, Ph.D.,
Professor of Chemistry, to extend its research capabilities in the field of
expanded porphyrin chemistry. The Company has entered into two license
agreements with UT which grant the Company the worldwide, exclusive right to
patents or patent applications that relate to or result from (i) research
conducted by UT Austin on the use, development and syntheses of expanded
porphyrin molecules, and (ii) research conducted by UT Dallas on the
incorporation of paramagnetic metals into zeolites for use as MRI contrast
agents. These agreements require the Company to pay royalties as a percentage of
net sales to UT for products incorporating the licensed technology including
each of the Company's current product candidates. In addition, the Company and
UT have entered into sponsored research agreements which expand the products,
inventions and discoveries developed by UT to which the Company's license rights
apply.
In connection with the UT license agreements, the Company also entered into
a license agreement with Dr. Stuart W. Young, a co-inventor of GADOLITE, and now
the Vice President, Medical Research of the Company, pursuant to which the
Company has been granted an exclusive royalty-bearing license to manufacture,
use and sell certain products that fall within the scope of the UT Dallas
License Agreement. See "Certain Transactions."
HOECHST CELANESE AGREEMENT. In October 1995, the Company entered into a
memorandum of understanding and is currently negotiating a definitive agreement
with Hoechst Celanese, a manufacturer of chemicals and pharmaceutical
intermediates, for the process optimization, scale-up and clinical and
commercial supply of Gd-Tex and Lu-Tex. There can be no assurance that the
parties will enter into a definitive agreement or that, if entered into, Hoechst
Celanese will deliver bulk-drug substance for Gd-Tex or Lu-Tex on a timely or
commercially attractive basis to the Company.
PHOTODYNAMIC THERAPY LIGHT PRODUCTION AND DELIVERY DEVICES. The Company
has collaborated with Coherent for the development of a laser that produces 732
nanometer light for use in photodynamic therapy
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<PAGE> 32
studies. These lasers and light delivery devices have been purchased from
Coherent and are now in use in the ongoing Phase I clinical studies. Coherent
has participated with the Company in the filing of regulatory documents required
for conducting the Company's Phase I clinical trials with this device. The
Company has purchased from Quantum. LED devices that are capable of producing
the required wavelength of light for use in photodynamic therapy with Lu-Tex.
The Company has used LED devices in preclinical animal studies and will purchase
such devices for use in its future clinical trials.
GLAXO WELLCOME SUPPLY AGREEMENT. The Company entered into a supply
agreement with Glaxo under which Glaxo has agreed to manufacture clinical and
commercial quantities of GADOLITE for the U.S. and Canada. Pursuant to the
agreement, Glaxo has agreed to manufacture and the Company has agreed to
purchase certain minimum annual quantities of GADOLITE. In addition, the Company
is obligated to make certain payments upon Glaxo's achievement of certain
process development, quality assurance and supply validation milestones. The
agreement has a five year term and is subject to earlier termination in the
event of breach or if the NDA for GADOLITE is not approved by the FDA on or
prior to January 1, 1998 or if GADOLITE is otherwise not commercialized. See
Note 6 of Notes to Financial Statements.
E-Z-EM MARKETING SALES AND DISTRIBUTION ARRANGEMENT. In August 1995, the
Company entered into an agreement with E-Z-EM, a leading manufacturer and
distributor worldwide of oral contrast agents and other products for use in
gastrointestinal radiology, for the exclusive marketing and sale of GADOLITE in
the U.S., Canada and Mexico. The Company and E-Z-EM will share equally in the
operating profits from the sale of GADOLITE, and the Company also may receive
premium payments based upon product sales if certain unit sales levels are
achieved. During the term of the agreement, E-Z-EM is prohibited from
distributing products that are directly competitive with GADOLITE, except for
products which have been or currently are being developed by E-Z-EM that contain
certain specified chemical compounds. The agreement also states that the Company
and E-Z-EM will enter into good faith negotiations for the expansion of the
agreement beyond North America. The agreement may be terminated by E-Z-EM at any
time with six months' notice. The Company is in negotiations with E-Z-EM for
marketing and distribution rights in some European countries.
COOK, INCORPORATED AGREEMENT. The Company has non-exclusively licensed to
Cook, Incorporated, a leading provider of catheter products, its technology to
produce MRI detectable materials for catheters. Under the terms of this
agreement, the Company will receive royalties based on a percentage of net sales
of products utilizing its proprietary technology. The Company intends to license
this technology to other catheter and medical device companies.
SCIENTIFIC ADVISORY BOARD
The Company maintains a Scientific Advisory Board consisting of the
following individuals with recognized expertise in porphyrin chemistry,
biophysics, physical chemistry and tumor biology:
Jonathan L. Sessler, Ph.D. is a co-founder of the Company and Chairman of
the Scientific Advisory Board. He is the primary inventor of texaphyrins and
other expanded porphyrin molecules. He is a Professor of Chemistry and
Biochemistry at The University of Texas at Austin. Dr. Sessler is the recipient
of the President's Young Investigator Award of the National Science Foundation,
a Sloan Fellowship and the Arthur C. Cope Scholar Award of the American Chemical
Society, and an Alex von Humboldt Senior Scientist Award.
Michael W. Berns, Ph.D. is the president and co-founder of the Beckman
Laser Institute and Medical Clinic at the University of California, Irvine. He
is the Arnold and Mabel Beckman Professor at the Institute and is a Professor of
Surgery, Cell Biology, Radiology and Ophthalmology. His clinical research
involves the application of lasers in cancer, cardiovascular surgery and
ophthalmology. In 1994, he was awarded the University of California, Irvine
Medal, the highest award of the University.
Steven G. Boxer, Ph.D. is a Professor of Chemistry and Chairman of the
Biophysics Program at Stanford University. He is the recipient of the
President's Young Investigator Award, the American Society of Photobiology
Research Award, and the Arthur C. Cope Scholar Award of the American Chemical
Society.
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<PAGE> 33
Dr. Boxer is a leading authority in biophysical chemistry including nuclear
magnetic resonance and photobiology.
James P. Collman, Ph.D. is presently the Daubert Professor in the
Department of Chemistry at Stanford University and a leading authority on the
chemistry of porphyrins. Dr. Collman is a member of the National Academy of
Sciences.
Peter B. Dervan, Ph.D. is Bren Professor of Chemistry at the California
Institute of Technology and Chairman of the Division of Chemistry and Chemical
Engineering. Dr. Dervan is a scientific co-founder of Gilead Sciences, is a
member of the National Academy of Sciences and Chairman of the National Science
Board.
Richard N. Zare, Ph.D. is the Marguerite Blake Wilbur Professor of
Chemistry at Stanford University and has studied extensively the interaction of
laser light with molecules. Dr. Zare received the National Medal of Science and
is a member of the National Academy of Sciences.
The Scientific Advisory Board members advise the Company about current and
long-term scientific planning, research and development. Members meet
individually or as a group with the management of the Company from time to time.
Each member of the Scientific Advisory Board has entered into a consulting
agreement with the Company. All members of the Scientific Advisory Board are
employed by employers other than the Company and may have commitments to or
consulting or advisory agreements with other entities that may limit their
availability to the Company. Members of the Scientific Advisory Board are
compensated through the issuances of Common Stock or options to acquire Common
Stock of the Company.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company seeks to protect its proprietary position by, among other
methods, continuing to file U.S. and foreign patent applications with respect to
its technology that are important to the development of its business. The
Company plans to aggressively prosecute and defend its patent applications,
issued patents and proprietary information. The Company owns or has exclusive
rights to 23 issued U.S. patents, many of which include composition of matter
claims relating to a number of Pharmacyclics' compounds, 12 allowed patent
applications and 41 pending patent applications. The Company is also the owner
or the exclusive licensee of two counterpart patents issued in Australia, two
counterpart patents issued in Europe, and one allowed and 42 pending counterpart
patent applications in Europe, Japan and certain other countries. Many of these
applications were filed through the Patent Cooperation Treaty and the European
Patent Office and preserve for the Company the right to file applications in
various countries. The existing issued U.S. patents expire between 2009 and
2013. All of the patents and patent applications not owned by the Company have
been licensed to it pursuant to its agreements with UT or the Agreement with Dr.
Stuart W. Young. See "-- Collaborative Relationships" and "Certain
Transactions."
With respect to the individual areas of research and product development
being carried out by the Company, the Company has three issued U.S. patents
related to the GADOLITE product, and two issued and five pending foreign
patents. There are five composition-of-matter issued patents and four allowed
and twelve pending applications in the U.S. related to the texaphyrin compounds,
with one issued patent, and two allowed and four pending applications directed
to synthesis of texaphyrins. Five U.S. patents have issued and two applications
have been allowed relating to photodynamic therapy using texaphyrins. The
Company also has three issued U.S. patents and one allowed and two pending
applications relating to the use of texaphyrins as contrast agents in MRI, as
well as one allowed and two pending applications related to the use of
texaphyrins in radiation sensitization and eight applications (one of which has
been allowed) related to the use of texaphyrins in other areas. Foreign
applications corresponding to the texaphyrins and their uses also have been
filed.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. Publication of discoveries in the scientific or
patent literature tend to lag behind actual discoveries and related patent
applications, and the large number of patents and applications and the fluid
state of the Company's development activities make comprehensive
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patent searches and analysis impractical or not cost-effective. As a result, the
Company has not made patent or publication searches in the U.S. or in foreign
countries to determine whether materials, processes or designs used by it or its
potential products infringe or will infringe existing patents or foreign patent
applications available to the public. However, because of the number of patents
issued and patent applications filed relating to biometallic and expanded
porphyrin chemistries, Pharmacyclics believes there is a significant risk that
current and potential competitors and other third parties have filed or in the
future will file applications for, or have received or in the future will
receive, patents and will obtain additional proprietary rights relating to
materials or processes used or proposed to be used by the Company. In the event
that any relevant claims of third party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the patent
owners of each of such patents or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available
or, if available, would be on terms acceptable to the Company or that the
Company would be successful in any attempt to redesign its products or processes
to avoid infringement. Litigation may be necessary to defend against claims of
infringement, to enforce patents issued to the Company or to protect trade
secrets and could result in substantial cost to, and diversion of effort by, the
Company.
The Company is aware of several U.S. patents owned by or licensed to
Schering AG that relate to MRI contrast agents. Schering AG has sent
communications to the Company suggesting that GADOLITE may infringe certain of
such Schering AG patents. The Company has obtained advice of special patent
counsel that the technologies employed by the Company for its imaging products
under development do not infringe the claims of such patents. A determination of
the infringement of any such patents could have a material adverse effect on the
Company's business. There can be no assurance that Schering AG will not seek to
assert such patent rights against the Company, which would result in significant
legal costs and require substantial management resources. The Company is aware
that Schering AG has asserted such rights against at least one other company in
the contrast agent imaging market and that a number of companies have entered
into licensing arrangements with Schering AG with respect to one or more such
patents. There can be no assurance that the Company would be able to obtain a
license from Schering AG, if required, on commercially reasonable terms, if at
all.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. It is the Company's policy to require its employees, consultants and
advisors to execute appropriate confidentiality and assignment-of-inventions
agreements in connection with their employment, consulting or advisory
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances, and in the case of
employees, provide that all inventions conceived by the individual during such
employment shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will not be breached or that the
Company will have adequate remedies for any breach. Furthermore, no assurance
can be given that competitors will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's proprietary technology, or that the Company can meaningfully
protect its rights in unpatented proprietary technology.
MANUFACTURING
Pharmacyclics currently uses selected third-party manufacturers for
producing various components of the products being developed by the Company.
Except for the components covered in the agreement with Glaxo described above,
manufacturers supplying the Company do not currently have the ability to provide
commercial quantities for the Company's intended products. Prior to any
regulatory approval of the Company's other products, the Company intends to
negotiate supply agreements with additional manufacturers who will have the
ability to manufacture, fill, label and package such additional necessary
materials prior to commercial introduction of its products. There can be no
assurance that the Company will be able to enter into supply agreements other
than the Glaxo agreement on commercially acceptable terms or with manufacturers
who will be able to deliver supplies in appropriate quantity and quality to meet
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commercial demand. Any interruption of supply could have a material adverse
effect on the Company's ability to manufacture its products and thus on the
ability to commercialize products. The Company and Hoechst Celanese are
negotiating a manufacturing and supply agreement to have Hoechst Celanese
provide process development and manufacturing services for Gd-Tex and Lu-Tex.
There can be no assurance that the parties will enter into a definitive
agreement, or that, if entered into, Hoechst Celanese will deliver bulk-drug
substance for Gd-Tex or Lu-Tex on a timely or commercially attractive basis to
the Company.
The Company is currently purchasing light delivery devices from Coherent
and Quantum. In addition, the Company may seek other suppliers of light delivery
devices, although there can be no assurance that any agreements will be reached
with such suppliers on terms commercially reasonable to the Company, if at all.
There also can be no assurance that these devices will be available for
commercial use or that regulatory approval for such devices will be obtained.
COMPETITION
The development of therapeutic and diagnostic agents for human diseases is
intensely competitive. Many different approaches are being developed or have
already been adopted into routine use for the management of diseases targeted by
the Company.
While, there are currently no FDA approved radiation sensitizers or
chemosensitizers, the Company expects significant competition in these fields,
as the Company believes that one or more companies may be developing and testing
products which compete directly with the products being developed by the
Company. There can be no assurance that these companies will not succeed in
developing technologies and products that are more effective than Gd-Tex or that
would render the Company's products or technologies obsolete. Certain
chemotherapy agents also are used as radiation sensitizers.
Photofrin, a photosensitizer developed by QLT Phototherapeutics Inc.
("QLT"), has been approved by the FDA for treatment of obstructing cancer of the
esophagus. Photofrin also has received marketing approval in Japan, Canada and
certain European countries for various disease indications. The Company believes
that the major competitive features for photosensitizers will include their
safety, efficacy, cost and convenience. The Company is aware of several other
photosensitizers in various stages of development for a number of indications.
In addition to QLT, other companies developing products in this area include
Dusa Pharmaceuticals, Inc., Nippon Petrochemical, and PDT, Inc. Some companies
developing photodynamic therapy products are developing specialized light
delivery devices for such products, which when integrated with their product
offering may afford them a competitive advantage relative to the Company's
strategy of sourcing such devices from third parties.
The Company expects competition in the development of improved oral MRI
contrast agents to increase substantially. Current FDA approved and commercially
available intravenous MRI contrast agents include Magnevist, Omniscan and
Prohance which are marketed by Schering AG, Nycomed and Bracco-Squibb
Diagnostics, Inc. ("Bracco"), respectively. Gastromark, an oral contrast agent
based on iron particles developed by Advanced Magnetics and licensed to
Mallinckrodt, has received initial indications of its approvability for
commercial sale from the FDA. In addition, there are several oral MRI contrast
agents in various phases of human testing in the U.S., including OMP from
Nycomed, in Phase III testing in the U.S. and on the market in Europe, and
Lumenhance, a manganese-based agent under development by Bracco. In addition,
Schering AG has introduced Enterovist, an oral formulation of its Magnevist MRI
contrast agent, in certain European markets. The Company believes that GADOLITE
may prove superior to these products because it is well tolerated and capable of
producing a strong positive signal at all levels of the gastrointestinal tract.
Although the Company believes that GADOLITE may offer advantages over competing
oral MRI contrast agents, there can be no assurance that there will be greater
acceptance of GADOLITE over other agents. In addition, to the extent that other
diagnostic modalities such as CT and X-ray may be perceived as providing greater
value than MRI, any corresponding decrease in the use of MRI would have an
adverse effect on the demand for GADOLITE.
Competition in the industry from pharmaceutical companies, universities,
governmental entities and others diversifying into the field is intense and is
expected to increase. Many of these entities have significantly
33
<PAGE> 36
greater research and development capabilities than the Company, as well as
substantial marketing, manufacturing, financial and managerial resources, and
represent significant competition for the Company. Acquisitions of, or
investments in, competing pharmaceutical companies by large collaborating
partners could increase such competitors' financial, marketing, manufacturing
and other resources. There can be no assurance that developments by others will
not render the Company's products or technologies noncompetitive or obsolete, or
that the Company will be able to keep pace with technological developments or
other market factors. Competitors may be developing products that have an
entirely different approach or means of accomplishing similar diagnostic,
imaging and/or therapeutic effects than products being developed by the Company.
These competing products may be safer, more effective and less costly than the
products developed by the Company and, therefore, may represent a serious
competitive threat to the Company's product offerings.
GOVERNMENT REGULATION
FDA REGULATION AND PRODUCT APPROVAL
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the manufacturing
and marketing of pharmaceutical products. These national agencies and other
federal, state and local entities regulate, among other things, research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products.
The process required by the FDA before the Company's products may be
marketed in the U.S. generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission of an IND application which must
become effective before clinical trials may begin; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the proposed pharmaceutical in its intended indication; and (iv) FDA approval of
an NDA or Product License Application ("PLA"). If the pharmaceutical or compound
utilized in the product has been previously approved for use in another dosage
form, then the approval process is similar, except that certain preclinical
toxicity tests normally required for the IND may be avoidable. The testing and
approval process requires substantial time, effort, and financial resources and
there can be no assurance that any approval will be granted on a timely basis,
if at all.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the preclinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before human
clinical trials may be commenced. The IND will automatically become effective 30
days after receipt by the FDA, unless the FDA before that time raises concerns
or questions about the conduct of the trials as outlined in the IND. In such a
case, the IND sponsor and the FDA must resolve any outstanding concerns before
clinical trials can proceed. There can be no assurance that submission of an IND
will result in FDA authorization to commence clinical trials. Further, each
clinical study must be reviewed and approved by an independent Institutional
Review Board.
Human clinical trials are typically conducted in three sequential phases
which may overlap. Phase I involves the initial introduction of the
pharmaceutical into healthy human subjects or patients where the product is
tested for safety, dosage tolerance, absorption, metabolism, distribution and
excretion. Phase II involves studies in a limited patient population to (i)
identify possible adverse effects and safety risks, (ii) determine the efficacy
of the product for specific, targeted indications, and (iii) determine dosage
tolerance and optimal dosage. When Phase II evaluations demonstrate that the
product is effective and has an acceptable safety profile, Phase III trials are
undertaken to further evaluate dosage, clinical efficacy and to further test for
safety in an expanded patient population at geographically dispersed clinical
study sites. The regulatory authority or the sponsor may suspend clinical trials
at any point in this process if either entity concludes that clinical subjects
are being exposed to an unacceptable health risk or for other reasons.
In the case of products for severe or life-threatening diseases, such as
cancer, the initial human testing is sometimes done in patients rather than in
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide evidence of efficacy
traditionally obtained in
34
<PAGE> 37
Phase II trials. These trials are frequently referred to as "Phase I/II" trials.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specific time period, if at all, with respect
to any of the Company's product candidates. Furthermore, the FDA may suspend
clinical trials at any time on various grounds, including a finding that the
subjects or patients are being exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of an NDA for approval of the marketing
and commercial shipment of the product. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, or may require additional clinical data.
Even if such data is submitted, the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval. Once issued, a product approval may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and it has the power to prevent or
limit further marketing of a product based on the results of these
post-marketing programs.
Additionally, in March 1996, the FDA announced a new policy intended to
accelerate the approval process for cancer therapies. Previously, cancer
therapies have been approved primarily on the basis of data regarding patient
survival rates and/or improved quality of life. Evidence of partial tumor
shrinkage, while often part of the data relied on for approval, was considered
insufficient by itself to warrant approval of a cancer therapy, except in
limited situations. Under the FDA's new policy, which became effective
immediately, the FDA has broadened the circumstances in which evidence of
partial tumor shrinkage is considered sufficient for approval. This policy is
intended to make it easier to study cancer therapies and shorten the total time
for marketing approvals; however, it is too early to tell what effect this
policy may actually have on product approvals.
In addition to the drug approval requirements applicable to the Company's
Lu-Tex product for photosensitization of certain cancers, the Company will also
need to obtain the approval of the FDA for the laser and associated light
delivery devices used in such treatments. Such device approval requires
additional submissions both by the Company and by the manufacturers of such
devices and must include clinical data obtained from the use of such devices
with Lu-Tex for photodynamic therapy, and may result in additional delays or
difficulties in obtaining approval for the use of the Lu-Tex as a
photosensitizer. Such light delivery device manufacturers currently are under no
obligation to the Company to file or pursue such applications.
Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the pharmaceutical product. The effect of government regulation may be to
delay or to prevent marketing of potential products for a considerable period of
time and to impose costly procedures upon the Company's activities. There can be
no assurance that the FDA or any other regulatory agency will grant approval for
any products being developed by the Company on a timely basis, if at all.
Success in preclinical or early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a product
may be marketed. Further, even if regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse effect on the Company's business. Marketing the Company's
products abroad will require similar regulatory approvals and is subject to
similar risks. In addition, the Company is unable to predict the extent of
adverse government regulations that might arise from future U.S. or foreign
governmental action.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and certain state
agencies, and are subject to periodic inspections
35
<PAGE> 38
by the FDA and certain state agencies for compliance with GMP, which regulations
impose certain procedural and documentation requirements upon the Company and
its third party manufacturers.
Drug labeling and promotion activities are subject to scrutiny by the FDA
and, in certain instances, the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses. The
Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. The Company is
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control, and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the U.S. and in foreign markets could result in new government
regulations which could have a material adverse effect on the Company's
business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the U.S. or abroad.
INTERNATIONAL REGULATION
In order for the Company to market its products abroad, the Company must
obtain required regulatory approvals and clearances and otherwise comply with
extensive regulations regarding safety and manufacturing processes and quality.
These regulations, including the requirements for approvals or clearance to
market and the time required for regulatory review, vary from country to
country. There can be no assurance that the Company will obtain regulatory
approvals in such countries or that it will not be required to incur significant
costs in obtaining or maintaining its foreign regulatory approvals. Delays in
receipt of approvals to market the Company's products, failure to receive these
approvals or future loss of previously received approvals could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The time required to obtain approval for sale in foreign countries
may be longer or shorter than that required for FDA approval, and the
requirements may differ. Currently, the Company is in the process of seeking
regulatory approvals for GADOLITE in the United Kingdom.
The European Community has promulgated rules that require that medical
device products receive by mid-1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. In order to market a laser
or other light delivery device for the Company's Lu-Tex product in Europe, such
CE mark will be required to be obtained, and there can be no assurance that the
Company or its light device suppliers will be successful in meeting such
certification requirements. See "Risk Factors -- No Assurance of Successful
Product Development; Uncertainties Associated with Clinical Trials; No Assurance
of Product Approval."
THIRD PARTY REIMBURSEMENT AND HEALTH CARE REFORM
The commercial success of the Company's products under development will be
substantially dependent upon the availability of government or private
third-party reimbursement for the use of such products. There can be no
assurance that Medicare, Medicaid, HMOs and other third-party payors will
authorize or otherwise budget such reimbursement. Such governmental and third
party payors are increasingly challenging the prices charged for medical
products and services. If the Company succeeds in bringing one or more products
to market, there can be no assurance that such products will be viewed as
cost-effective or that reimbursement will be available to consumers or will be
sufficient to allow the Company's products to be marketed on a competitive
basis. Furthermore, federal and state regulations govern or influence the
reimbursement to health care providers of fees and capital equipment costs in
connection with medical treatment of certain patients. In response to concerns
about the rising costs of advanced medical technologies, the current
administration of the federal government has publicly stated its desire to
reform health care, including the possibility of price
36
<PAGE> 39
controls and revised reimbursement policies. There can be no assurance that
actions taken by the administration, if any, with regard to health care reform
will not have a material adverse effect on the Company. If any actions are taken
by the administration, such actions could adversely affect the prospects for
future sales of the Company's products. Further, to the extent that these or
other proposals or reforms have a material adverse effect on the Company's
ability to secure funding for its development or on the business, financial
condition and profitability of other companies that are prospective
collaborators for certain of the Company's product candidates, the Company's
ability to develop or commercialize its product candidates may be adversely
affected.
Given recent government initiatives directed at lowering the total cost of
health care throughout the U.S., it is likely that the U.S. Congress and state
legislatures will continue to focus on health care reform and the cost of
prescription pharmaceuticals and on the reform of the Medicare and Medicaid
systems. Pharmacyclics cannot predict the likelihood of passage of federal and
state legislation related to health care reform or lowering pharmaceutical
costs. In certain foreign markets pricing of prescription pharmaceuticals is
already subject to government control. Continued significant changes in the
nation's health care system could have a material adverse effect on the
Company's business.
ENVIRONMENTAL REGULATION
In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal, state
and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal of
certain materials, biological specimens, and wastes. Although the Company
believes that it has complied with these laws, regulations and policies in all
material respects and has not been required to take any significant action to
correct any noncompliance, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental and health
and safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and radioactive materials. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be 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 resources of the
Company.
FACILITIES
The Company's principal executive offices, located at 995 East Arques
Avenue, Sunnyvale, California 94086, occupy approximately 32,000 square feet.
EMPLOYEES
As of May 31, 1996, the Company had 41 employees, three of which are
part-time. Thirty-three of its employees are dedicated to research, development,
manufacturing, quality assurance and quality control, regulatory affairs, or
preclinical and clinical testing. Fifteen of the Company's employees have an
M.D. or Ph.D. degree.
37
<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
May 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Richard A. Miller, M.D. ... 44 President, Chief Executive Officer and Director
William C. Dow, Ph.D. ..... 41 Vice President, Chemical Research and Development
Cheryl B. Jaszewski........ 50 Vice President, Finance and Administration
Marc L. Steuer............. 49 Vice President, Business Development and Chief Financial Officer
Stuart W. Young, M.D....... 53 Vice President, Medical Research
Thomas D. Kiley............ 53 Director
Joseph S. Lacob(1)......... 40 Director
Patrick F. 38 Director
Latterell(1)(2)..........
Joseph C. Scodari.......... 43 Director
Craig C. Taylor(1)(2)...... 45 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
DR. MILLER has served as President, Chief Executive Officer and a Director
since he co-founded the Company in April 1991. In 1989, Dr. Miller co-founded
CellPro, Inc. ("CellPro"), a public biotechnology company, and served as a
Director of CellPro from 1989 to 1991, and Chairman of CellPro's Scientific
Advisory Board until 1993. He continues to serve on CellPro's Scientific
Advisory Board. In 1984, Dr. Miller co-founded IDEC Pharmaceuticals Corporation
where he served as Vice President and a Director until February 1992. Dr. Miller
also is a Clinical Associate Professor of Medicine (Oncology) at Stanford
University Medical Center. Dr. Miller received his M.D., summa cum laude, from
the State University of New York Medical School and is board certified in both
Internal Medicine and Medical Oncology.
DR. DOW has served as Vice President, Chemical Research and Development
since February 1993 and previously as Senior Director, Chemical Research and
Development from July 1992 to February 1993. From 1987 to 1992, he was at
Salutar, Inc., a pharmaceutical company involved in research and development of
MRI contrast agents, where he held positions of increasing responsibility in
discovery and chemical development of contrast agents, last serving as Director,
Chemical Development and Manufacturing. Dr. Dow holds a B.S. and M.S. from
Stanford University in Chemistry and a Ph.D. in Chemistry from the California
Institute of Technology.
MS. JASZEWSKI has served as Vice President, Finance and Administration
since October 1992. From 1986 to 1991, she served as the Director, Planning and
Financial Analysis, which included strategic planning and mergers and
acquisitions, at Nellcor, Inc., a medical device company. From 1991 to 1992, Ms.
Jaszewski was a financial and administrative consultant to various private
companies. Ms. Jaszewski holds a B.A. in Economics and a M.B.A. from Stanford
University.
MR. STEUER has served as Chief Financial Officer and Vice President,
Business Development since November 1994. From April 1992 to November 1994 he
was Executive Vice President, Business Development and Commercial Affairs for
SciClone Pharmaceuticals, Inc. and also served as Chief Financial Officer. From
1985 to 1992, Mr. Steuer served in a variety of roles in the Pilkington
Visioncare Group ("PVG"), which developed, manufactured and distributed medical
devices, pharmaceuticals and equipment for the ophthalmic field. His positions
at PVG included General Manager, Ventures and Licensing and Chief Financial
Officer. Mr. Steuer was a member of the Board of Directors of SciClone
Pharmaceuticals, Inc. from January 1993 through November 1994, and currently
serves as a member of the Board of Directors of a private company. Mr. Steuer
received his M.S. and B.S. degrees in Electrical Engineering from Columbia
University and a M.B.A. from New York University.
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<PAGE> 41
DR. YOUNG is a co-founder of the Company and has served as Vice President,
Medical Research since September 1993. Dr. Young is a board certified
radiologist and served as Director of the Contrast Media Laboratory in the
Department of Radiology at Stanford University School of Medicine, where he held
various positions from 1977 to 1994. Dr. Young received his M.D. from the
Indiana University School of Medicine and his Masters of Business Management
from Stanford University, where he was an A.P. Sloan Fellow.
MR. KILEY was appointed as a Director of the Company in June 1991. He has
been self-employed since 1988 as an attorney, consultant and investor. From 1980
to 1988, he was an officer of Genentech, Inc., serving variously as Vice
President and General Counsel, Vice President for Legal Affairs and Vice
President for Corporate Development. Mr. Kiley is also a Director of
Cardiogenesis Corporation, a medical device company, Athena Neurosciences, Inc.,
and Connective Therapeutics, Inc., pharmaceutical companies, and certain private
biotechnology and other companies. Mr. Kiley received a B.S. in Chemical
Engineering from Pennsylvania State University and a J.D. from George Washington
University.
MR. LACOB was appointed as a Director of the Company in June 1991. He is a
General Partner of Kleiner Perkins Caufield & Byers, a venture capital
investment firm, which he joined in 1987. Mr. Lacob is currently Chairman of the
Board of CellPro, Inc. and Microcide Pharmaceuticals and a director of
Heartport, Inc., as well as several private life science companies. Mr. Lacob
holds a B.S. in BioChemistry from the University of California, Irvine, a M.S.
in Public Health from the University of California, Los Angeles and a M.B.A.
from Stanford University.
MR. LATTERELL was appointed as a Director of the Company in June 1991. He
is a General Partner of Venrock Associates, a venture capital investment group,
which he joined in April 1989. Mr. Latterell is currently a Director of
Biocircuits Corporation, Geron Corporation, Vical, Inc. and several private
biomedical companies. Mr. Latterell holds S.B. degrees in Biological Sciences
and Economics from the Massachusetts Institute of Technology and a M.B.A. from
Stanford University.
MR. SCODARI was appointed as a Director of the Company in December 1994. He
is Corporate Executive Vice President, and President Pharmaceutical Division for
Centocor, Inc. Prior to joining Centocor, he was Senior Vice President and
General Manager, North American Ethicals for Rhone-Poulenc Rorer
Pharmaceuticals, Inc. where he held various positions since 1989. From 1987 to
1989, Mr. Scodari was Executive Vice President of Sterling Drugs U.S. Diagnostic
Imaging Division where he held responsibilities for all marketing and sales and
business development activities for Sterling's imaging agent business. Mr.
Scodari received a B.S. in Political Science from Youngstown State University.
MR. TAYLOR was appointed as a Director of the Company in June 1991. He is a
General Partner of AMC Partners 89, L.P., the general partner of Asset
Management Associates 1989, L.P., a private venture capital partnership. Mr.
Taylor has been with Asset Management Company, a venture management group, since
1977. Mr. Taylor is a Director of Telor Ophthalmic Pharmaceuticals, Inc., Metra
BioSystems, Inc. and Lynx Therapeutics, Inc., and several private companies. Mr.
Taylor holds B.S. and M.S. degrees in Physics from Brown University and a M.B.A.
from Stanford University.
The following persons, although not executive officers, are employed by the
Company in significant capacities:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
James P. Eldridge, Ph.D.... 55 Senior Director, Quality Assurance, Quality Control
Diann T. Nagami............ 38 Director of Regulatory Affairs
</TABLE>
DR. ELDRIDGE has served as Senior Director, Quality Assurance/Quality
Control since September 1992. From 1990 to 1992, Dr. Eldridge served as Senior
Director, Quality Assurance/Quality Control at Cetus and Chiron Corporations,
biotechnology-based pharmaceutical companies that merged in 1991, and from 1975
to 1990, he was employed by Bristol-Myers Co. Dr. Eldridge received his B.A.
degree from the University of California, Davis and his Ph.D. from Oregon State
University.
39
<PAGE> 42
MS. NAGAMI has served as Director of Regulatory Affairs since April 1996
and as Manager of Regulatory Affairs from 1993 to 1996. From 1990 to 1993, she
was a Regulatory Affairs Associate with increasing levels of responsibility at
Salutar, Inc. Ms. Nagami has a B.S. in Chemistry from Scripps College.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION AND OTHER INFORMATION
The Audit Committee consists of Messrs. Latterell and Taylor. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors, and reviews
and evaluates the Company's internal control functions.
The Compensation Committee consists of Messrs. Lacob, Latterell and Taylor.
The Compensation Committee administers the Company's 1995 Stock Option Plan (the
"1995 Plan"), successor to the Company's 1992 Stock Option Plan (the "1992
Plan"), and the Company's Employee Stock Purchase Plan (the "Purchase Plan") and
makes recommendations to the Board of Directors concerning compensation for
executive officers and consultants of the Company.
All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Board and are elected annually. There are no family
relationships among executive officers or directors of the Company. Members of
the Board of Directors receive no cash compensation for their services as
directors. During fiscal year ended June 30, 1995, the Company granted an option
to purchase 16,667 shares of Common Stock, vesting over a four year period, to
Joseph Scodari, a member of the Board of Directors. Additionally, subsequent to
the fiscal year ended June 30, 1995, the Company granted options to purchase
10,000 shares of Common Stock, vesting over a five year period, to each of
Messrs. Latterell, Taylor, Lacob and Kiley, all of whom are members of the Board
of Directors.
Pursuant to the 1995 Non-Employee Directors Stock Option Plan (the
"Directors Plan") which was adopted by the Company's Board of Directors on
August 2, 1995 and subsequently approved by its stockholders, non-employee
directors are eligible to receive periodic option grants as described more fully
below. See "-- Stock Option Plans -- Non-Employee Directors Plan."
40
<PAGE> 43
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table. The following table sets forth certain
compensation paid during the fiscal year ended June 30, 1995, to (i) the
Company's Chief Executive Officer, and (ii) each of the Company's executive
officers who earned more than $100,000 (collectively, the "Named Executive
Officers"). No other executive who would have otherwise been includable in such
table on the basis of salary and bonus earned for the 1995 fiscal year resigned
or was terminated during that year.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ---------------------
------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY(1) OPTIONS(2)
- ------------------------------------------------------------- ------------ ---------------------
<S> <C> <C>
Richard A. Miller, M.D. ..................................... $155,193 --
President and Chief
Executive Officer
Stuart W. Young, M.D. ....................................... 150,366 --
Vice President,
Medical Research
James D. Mutch(3)............................................ 147,550 13,334
Vice President,
Regulatory Affairs and
Product Development
William C. Dow, Ph.D. ....................................... 124,954 16,667
Vice President, Chemical
Research and Development
Marc L. Steuer(4)............................................ 104,327 93,334
Vice President, Business
Development and Chief
Financial Officer
</TABLE>
- ---------------
(1) Includes amounts earned but not paid in the fiscal year ended June 30, 1995.
(2) Subsequent to June 30, 1995, the Company issued the following options to
purchase Common Stock to the Named Executive Officers: Richard A. Miller,
246,667; Stuart W. Young, 33,334; James D. Mutch, 6,667; William C. Dow,
47,667; Marc L. Steuer, 80,000.
(3) Mr. Mutch resigned from the Company effective as of April 29, 1996 and
currently serves the Company as a part-time consultant in the area of
regulatory affairs.
(4) Reflects compensation for employment beginning on November 1, 1994, the date
on which Mr. Steuer joined the Company as Vice President, Business
Development and Chief Financial Officer.
Option Grants in Last Fiscal Year. The following table shows certain
information regarding stock options granted to the Named Executive Officers
during the fiscal year ended June 30, 1995. No stock appreciation rights were
granted to these individuals during such year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
NUMBER OF PERCENTAGE OF STOCK PRICE
SHARES OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(4)
OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) EMPLOYEES(2) SHARE(3) DATE 5% 10%
- ------------------------------- ---------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Miller, M.D. ....... -- -- -- -- -- --
Stuart W. Young, M.D. ......... -- -- -- -- -- --
James D. Mutch(5).............. 13,334(6) 7% $3.75 10/20/04 $ 31,446 $ 79,691
William C. Dow, Ph.D. ......... 16,667(6) 9% $3.75 10/20/04 39,307 99,611
Marc L. Steuer................. 93,334(7) 48% $3.75 10/20/04 220,115 557,814
</TABLE>
- ---------------
(1) Subsequent to June 30, 1995, the Company issued the following options to
purchase Common Stock to the Named Executive Officers: Richard A. Miller,
246,667; Stuart W. Young, 33,334; James D. Mutch, 6,667; William C. Dow,
47,667; Marc L. Steuer, 80,000.
41
<PAGE> 44
(2) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at 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 and the
federal and state income or employment tax liability incurred by the
optionee in connection with such exercise. The optionee may be permitted,
subject to the approval of the Plan Administrator, to apply a portion of the
shares purchased under the option (or to deliver existing shares of Common
Stock) in satisfaction of such tax liability.
(3) Based on an aggregate of approximately 193,000 options granted to employees
in fiscal 1995, including options granted to the Named Executive Officers.
(4) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. There is no assurance that the assumed 5%
and 10% annual rates of appreciation (compounded annually) will actually be
realized over the term of the option. The assumed 5% and 10% annual rates
are set forth in accordance with the rules and regulations adopted by the
Securities and Exchange Commission and do not represent the Company's
estimate of stock price appreciation.
(5) Mr. Mutch resigned from the Company effective as of April 29, 1996, and
currently serves the Company as a part-time consultant in the area of
regulatory affairs.
(6) These options vest in equal monthly installments over the 48 months
following October 20, 1994, the date of grant, and were immediately
exercisable as of the date of grant.
(7) 25% of these options vest one year after November 1, 1994, the date of
grant, with the remainder vesting in equal monthly installments over the 36
months following the date of grant. All of these options were immediately
exercisable as of the date of grant.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values. No
options were exercised by the Named Executive Officers during the fiscal year
ended June 30, 1995. No Stock Appreciation Rights were exercised or outstanding
during the last fiscal year. The following table shows certain other information
regarding options held by the Named Executive Officers as of June 30, 1995:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Miller, M.D. ................... -- -- -- --
Stuart W. Young, M.D. ..................... 18,000 -- $ 81,225 --
James D. Mutch(2).......................... 13,334 -- 16,668 --
William C. Dow, Ph.D. ..................... 46,667 -- 156,209 --
Marc L. Steuer............................. 93,334 -- 116,668 --
</TABLE>
- ---------------
(1) Based on the fair market value of the Common Stock as of June 30, 1995, as
determined by the Board of Directors ($7.50 per share), minus the per share
exercise price, multiplied by the number of shares underlying the option.
(2) Mr. Mutch resigned from the Company effective as of April 29, 1996, and
currently serves the Company as a part-time consultant in the area of
regulatory affairs.
STOCK OPTION PLANS
1995 Stock Option Plan. The 1995 Plan was adopted by the Board of
Directors on August 2, 1995 as the successor to the 1992 Plan, and approved by
the stockholders on September 11, 1995. The 1995 Plan became effective as of
October 23, 1995, the effective date of the Company's initial public offering.
The options outstanding under the 1992 Plan were incorporated into 1995 Plan on
such date and no more option grants have been made under the 1992 Plan
thereafter. The 1995 Plan authorizes for grant 1,073,306 options to acquire
shares of Common Stock, all of which have been granted. On the first trading day
of each calendar year, this share reserve automatically increases by the number
of shares equal to 1% of the number of shares of Common Stock outstanding on the
last day of the preceding calendar year; provided that such annual increase
shall not exceed 500,000 shares. The increase on January 2, 1996 totaled 85,178
shares. In no event may any
42
<PAGE> 45
one individual receive option grants for more than 333,334 shares over the term
of the 1995 Plan. As of May 31, 1996, 432,687 shares had been issued under the
1995 Plan, options for 1,073,306 shares were outstanding (including options
incorporated from the 1992 Plan) and no shares were available for future grant.
Shares of Common Stock subject to outstanding options, including options granted
under the 1992 Plan, that expire or terminate prior to exercise will be
available for future issuance under the 1995 Plan.
Under the 1995 Plan, employees (including officers), non-employee members
of the Board (other than those serving as members of the Compensation Committee)
and independent consultants may, at the discretion of the plan administrator, be
granted options to purchase shares of Common Stock at an exercise price not less
than 85% of the fair market value of such shares on the grant date. Non-employee
members of the Board of Directors are also eligible for automatic option grants
under the Directors Plan, which is described below.
The 1995 Plan is administered by the Compensation Committee of the Board.
The Compensation Committee has complete discretion to determine which eligible
individuals are to receive option grants, the number of shares subject to each
such grant, the status of any granted option as either an incentive option or a
non-statutory option under the federal tax laws, the vesting schedule to be in
effect for each option grant and the maximum term for which each granted option
is to remain outstanding.
The 1995 Plan also authorizes stock appreciation rights, which provide the
holders with the election to surrender their outstanding options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of Common Stock. No
such rights have been issued to date.
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1995 Plan, including options
incorporated from the 1992 Plan, in exchange for the grant of new options for
the same or different number of option shares with an exercise price per share
based upon the fair market value of the Common Stock on the new grant date.
In the event the Company is acquired by merger, consolidation or asset
sale, the shares of Common Stock subject to each option outstanding at the time
under the 1995 Plan will immediately vest in full, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the acquiring entity, and options will accelerate to the extent not assumed by
the acquiring entity. Any assumed options will accelerate and assigned
repurchase rights will terminate upon the optionee's involuntary termination
within 18 months following the acquisition. The Compensation Committee also has
discretion to provide for the acceleration of one or more outstanding options
assumed on such a merger, consolidation or asset sale. The Compensation
Committee also has discretion to provide for the acceleration of one or more
outstanding options under the 1995 Plan (including options incorporated from the
1992 Plan) and the vesting of shares subject to outstanding options upon the
occurrence of certain hostile tender offers. Such accelerated vesting may be
conditioned upon the subsequent termination of the affected optionee's service.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on August 1, 2005, unless sooner terminated by the Board.
Non-Employee Directors Stock Option Plan. The Directors Plan was adopted
by the Board of Directors on August 2, 1995 and approved by the Company's
stockholders on September 11, 1995. Automatic option grants are made at periodic
intervals to eligible non-employee Board members under the Directors Plan. The
Directors Plan became effective on October 23, 1995, the effective date of the
Company's initial public offering. 166,667 shares of Common Stock have been
reserved for issuance under the Directors Plan.
Each individual serving as a non-employee Board member on the effective
date of the Company's initial public offering was automatically granted a
non-statutory option to purchase 5,000 shares of Common Stock on October 23,
1995. Accordingly, Messrs. Lacob, Taylor, Latterell, Kiley and Scodari each
received an option for 5,000 shares on October 23, 1995. Each individual first
elected or appointed as a non-employee Board member after October 23, 1995 will
automatically be granted, on the date of such election or appointment, a
non-statutory option to purchase 10,000 shares of Common Stock. In addition, on
the date of
43
<PAGE> 46
each Annual Stockholders Meeting, beginning with the 1996 Annual Meeting, each
individual who is to continue to serve as a non-employee Board member after that
Annual Meeting and has been a member of the Board for at least six months will
automatically be granted a non-statutory option to purchase 5,000 shares of
Common Stock. There will be no limit on the number of such annual 5,000-share
option grants any one non-employee Board member may receive over his or her
period of continued Board service. The exercise price per share of Common Stock
subject to each automatic option grant will be equal to the fair market value
per share on the automatic grant date. Each automatic grant will have a term of
10 years, subject to earlier termination following the optionee's cessation of
Board service. Each automatic option will be immediately exercisable; however,
any shares purchased upon exercise of the option will be subject to repurchase
should the optionee's service as a non-employee Board member cease prior to
vesting in the shares. Each 10,000-share grant will vest in five equal and
successive annual installments over the optionee's period of Board service. Each
5,000-share grant will vest in twelve equal and successive monthly installments
over the optionee's period of Board service. However, each outstanding option
will immediately vest upon (i) certain changes in the ownership or control of
the Company or (ii) the death or disability of the optionee while serving as a
Board member.
The Directors Plan will terminate on August 1, 2005.
Employee Stock Purchase Plan. The Purchase Plan was adopted by the Board
of Directors on August 2, 1995 and approved by the Company's stockholders on
September 11, 1995. A total of 50,000 shares of Common Stock were reserved for
issuance under the Purchase Plan, of which 41,621 are still available. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, is implemented in 24-month offering periods with purchases
occurring at six month intervals. The Purchase Plan is administered by the
Compensation Committee of the Board. Individuals who were eligible employees on
the start date of the initial offering period were allowed to join the Purchase
Plan at that time. Individuals who become eligible thereafter must complete 90
days of service prior to joining the Purchase Plan. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 10% of an employee's cash compensation. The price of stock
purchased under the Purchase Plan will generally be 85% of the lower of the fair
market value of the Common Stock at the beginning of the 24-month offering
period or on the applicable semi-annual purchase date. The Board may amend or
terminate the Purchase Plan immediately after the close of any offering period.
The Purchase Plan will terminate in October 2005.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
In May 1992, the Company entered into an employment letter agreement with
William C. Dow, which remains in effect unless and until terminated by either
the Company or Dr. Dow at any time and for any reason, with or without cause.
During the fiscal year ended June 30, 1995, the Company paid Dr. Dow $120,000
under the agreement.
In June 1992, the Company entered into an employment agreement with Richard
A. Miller which either party may terminate at any time upon 90 days' prior
written notice of an intent to terminate. During the fiscal year ended June 30,
1995, the Company paid Dr. Miller $150,000 under the agreement.
In August 1992, the Company entered into an employment agreement with James
D. Mutch which was terminated on April 29, 1996 when he left the employ of the
Company and became a part-time consultant to the Company. During the fiscal year
ended June 30, 1995, the Company paid Mr. Mutch $141,960 under the agreement.
In April 1993, the Company entered into an employment agreement with Stuart
W. Young which either party may terminate at any time upon 30 days written
notice of intent to terminate. If Dr. Young is terminated without cause by the
Company during the second or third year of employment, the Company is obligated
to compensate Dr. Young with his salary as severance pay for one year after
termination. During the fiscal year ended June 30, 1995, the Company paid Dr.
Young $145,192 under the agreement.
44
<PAGE> 47
In October 1994, the Company entered into an employment agreement with Marc
L. Steuer, which remains in effect unless and until terminated by either the
Company or Mr. Steuer at any time and for any reason, with or without cause. If
Mr. Steuer is discharged without cause during the first two years of employment,
the Company is obligated to compensate Mr. Steuer with six months of severance
benefits and pay. During the fiscal year ended June 30, 1995, the Company paid
Mr. Steuer $100,962 under the agreement.
Under the 1995 Plan, the Plan Administrator has the authority to accelerate
outstanding options in the event of certain changes in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was formed
in November of 1992, and the members of the Compensation Committee are Messrs.
Lacob, Latterell and Taylor. None of these individuals was at any time during
the fiscal year ended June 30, 1995, or at any other time, an officer or
employee of the Company.
45
<PAGE> 48
CERTAIN TRANSACTIONS
In June 1994 and July 1995, the Company issued, in private placement
transactions, 1,536,092 shares of Series C Preferred Stock at $8.63 per share.
An aggregate of 526,753 shares of such Series C Preferred Stock were issued in
exchange for $3.0 million in principal amount of Convertible Promissory Notes,
accrued interest thereon and $2.6 million in cash. These Notes were purchased by
persons and entities associated with Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), Asset Management Associates 1989, L.P. ("Asset Management"), Venrock
Associates ("Venrock"), and Mayfield VII prior to the July 1995 portion of the
Series C financings. All of such shares of Series C Preferred Stock
automatically converted into an aggregate of 1,536,092 shares of Common Stock
upon the closing of the Company's initial public offering. In addition, the
Company issued warrants to purchase Series C Preferred Stock in connection with
these financings. The following table summarizes the shares of Series C
Preferred Stock purchased by and warrants issued to executive officers,
directors and five percent stockholders of the Company and persons associated
with them in these financings.
<TABLE>
<CAPTION>
SHARES OF SERIES C SERIES C
INVESTOR PREFERRED STOCK WARRANTS
-------------------------------------------------- ------------------ --------
<S> <C> <C>
Thomas D. Kiley................................... 11,594 --
Kleiner Perkins(1)................................ 328,090 28,839
Asset Management.................................. 222,564 20,038
Venrock(2)........................................ 268,634 23,629
</TABLE>
- ---------------
(1) Includes shares held by both Kleiner Perkins Caufield & Byers V and KPCB
Zaibatsu Fund I. Joseph S. Lacob, a Director of the Company, is a general
partner of Kleiner Perkins Caufield & Byers and KPCB Zaibatsu Fund I.
(2) Includes shares held by both Venrock Associates and Venrock Associates II.
Patrick F. Latterell, a Director of the Company, is a general partner of
Venrock Associates and Venrock Associates II.
Holders of certain shares of the Company's Preferred Stock and Common
Stock, including certain of its officers, directors and principal stockholders
and related investment funds, are entitled to certain registration rights in
respect of the Common Stock which have been issued upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."
The Company has entered into an Indemnification Agreement with each of its
executive officers and directors.
The Company has entered into a Patent License Agreement with Dr. Young,
dated October 15, 1992, pursuant to which the Company has been granted an
exclusive royalty-bearing license to use and to manufacture and sell products
based on certain patent rights owned by Dr. Young related to certain zeolite and
zeolite-like substances. In consideration for entering into the Patent License
Agreement, the Company issued Dr. Young 16,667 shares of its Common Stock.
In September 1994, the Company entered into a Note Secured by Stock Pledge
Agreement (the "First Note") with Dr. Stuart W. Young, an executive officer of
the Company, for the total principal amount of approximately $65,000. The First
Note bears interest at 5.86%, with interest payable annually and principal due
in full on August 31, 1997. In April 1995, the Company loaned Dr. Young
approximately an additional $30,000 under a similar Note Secured by Stock Pledge
Agreement (the "Second Note"). The Second Note bears interest at 7.19%, with
principal and interest due in full on February 28, 1998. The proceeds of such
Notes were to be used solely to pay federal and state tax liability incurred by
Dr. Young in connection with his acquisition of 50,000 shares of Common Stock
pursuant to his exercise of a non-statutory stock option grant under the
Company's 1992 Stock Option Plan.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.
46
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 31, 1996 by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director, (iii) each executive officer named
herein and (iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
OWNED(1)(2)
---------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES(1) OFFERING OFFERING
- ------------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Kleiner Perkins Caufield & Byers V(3)........................ 1,500,187 17.5% 14.2%
2750 Sand Hill Road
Menlo Park, CA 94025
Venrock Associates(4)........................................ 1,239,289 14.5% 11.7%
30 Rockefeller Plaza, Suite 5508
New York, NY 10112
Asset Management Associates 1989, L.P.(5).................... 1,189,628 13.9% 11.3%
2275 E. Bayshore, Suite 150
Palo Alto, CA 94303
Richard A. Miller, M.D.(6)................................... 452,343 5.2% 4.2%
Integral Capital Partners II, L.P.(7)........................ 433,749 5.1% 4.1%
2750 Sand Hill Road
Menlo Park, CA 94025
Thomas D. Kiley(8)........................................... 121,576 1.4% 1.2%
Patrick F. Latterell(9)...................................... 1,239,289 14.5% 11.7%
Joseph S. Lacob(10).......................................... 1,500,187 17.5% 14.2%
Craig C. Taylor(11).......................................... 1,189,628 13.9% 11.3%
Joseph C. Scodari(12)........................................ 21,667 * *
Marc L. Steuer(13)........................................... 173,334 2.0% 1.6%
William C. Dow, Ph.D.(14).................................... 110,001 1.3% 1.0%
Stuart W. Young, M.D.(15).................................... 183,334 2.1% 1.7%
All officers and directors as a group (10 persons)(16)....... 5,081,361 55.4% 45.5%
</TABLE>
- ---------------
* Less than 1%.
(1) Percentage of beneficial ownership is calculated assuming 8,527,605 shares
of Common Stock were outstanding as of May 31, 1996. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
60 days of May 31, 1996, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned.
(2) This table is based upon information supplied to the Company by executive
officers, directors and principal stockholders. The address of each officer
and director identified in this table is that of the Company's executive
offices, 995 East Arques Ave., Sunnyvale, CA 94086. Unless otherwise
indicated in the footnotes to this table and subject to applicable
community property laws, each of the stockholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned by it or him.
(3) Includes shares held by persons and entities affiliated with Kleiner
Perkins, including 31,667 shares held by Joseph Lacob, a Director of the
Company, who is a General Partner of Kleiner Perkins. Mr. Lacob disclaims
beneficial ownership of the shares held by Kleiner Perkins and its
affiliated entities except to the extent of his individual share ownership
and his pecuniary interest arising from his general partnership interest in
Kleiner Perkins. Also, includes options exercisable for 15,000 shares held
by Mr. Lacob and warrants exercisable for 28,839 shares held by Kleiner
Perkins.
47
<PAGE> 50
(4) Includes shares held by persons and entities affiliated with Venrock,
including 16,667 shares held by Patrick Latterell, a Director of the
Company, who is a General Partner of Venrock. Mr. Latterell disclaims
beneficial ownership of the shares held by Venrock and its affiliated
entities except to the extent of his individual share ownership and his
pecuniary interest arising from his general partnership interest in
Venrock. Also, includes options exercisable for 15,000 shares held by Mr.
Latterell and warrants exercisable for 23,629 shares held by Venrock.
(5) Includes shares held by entities affiliated with Asset Management,
including options exercisable for 15,000 shares held by Craig Taylor, a
Director of the Company, who is a General Partner of AMC Partners 89, L.P.,
the general partner of Asset Management. Mr. Taylor disclaims beneficial
ownership of the shares held by Asset Management and its affiliated
entities except to the extent of his individual share ownership and his
pecuniary interest arising from his general partnership interest in AMC
Partners 89, L.P. Also includes warrants exercisable for 20,038 shares held
by Asset Management.
(6) Includes 13,334, 13,334, and 279,008 shares held in trust for Jordan Andrew
Miller, Jared David Miller and the Miller-Horning Family Trust,
respectively. Also, includes options exercisable for 146,667 shares within
60 days of May 31, 1996.
(7) Includes shares held by entities affiliated with Integral Capital Partners
II, L.P. and warrants exercisable for 20,518 shares within 60 days of May
31, 1996.
(8) Includes 106,576 shares held in the Kiley Revocable Trust, Thomas D. Kiley,
TEE, Nancy L. Kiley, TEE. Also, includes options exercisable for 15,000
shares within 60 days of May 31, 1996.
(9) Includes 16,667 shares held in trust by the Patrick Latterell Living Trust
and options exercisable for 15,000 shares. Also includes 1,207,622 shares
(including warrants for 23,629 shares) held by persons and entities
affiliated with Venrock, as to which shares Mr. Latterell disclaims
beneficial ownership except as set forth in Note 4 above.
(10) Includes options exercisable for 15,000 shares. Also includes 1,453,520
shares (including warrants for 28,859 shares) held by persons and entities
affiliated with Kleiner Perkins, as to which shares Mr. Lacob disclaims
beneficial ownership except as set forth in Note 3 above.
(11) Includes options exercisable for 15,000 shares. Also includes 1,142,961
shares (including warrants for 20,058 shares) held by persons and entities
affiliated with Asset Management, as to which shares Mr. Taylor disclaims
beneficial ownership except as set forth in Note 5 above.
(12) Represents options exercisable for 21,667 shares.
(13) Represents options exercisable for 173,334 shares.
(14) Includes options exercisable for 73,334 shares.
(15) Includes options exercisable for 51,334 shares.
(16) Includes options and warrants exercisable for 579,670 and 72,506 shares,
respectively. Also includes 1,453,520 shares held by persons and entities
affiliated with Kleiner Perkins, 1,142,961 shares held by persons and
entities affiliated with Asset Management and 1,207,622 shares held by
persons and entities affiliated with Venrock. Certain directors may be
deemed to be beneficial owners of such shares, but disclaim such beneficial
ownership, as discussed in Notes 3, 4, 5, 9, 10 and 11 above.
48
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of Common Stock, $0.0001 par value and 1,000,000 shares of Preferred Stock,
$0.0001 par value.
COMMON STOCK
As of May 31, 1996, there were approximately 8,527,605 shares of Common
Stock outstanding held of record by 90 stockholders. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this Offering will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized to issue the Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without any further vote or action by the stockholders. The issuance of
Preferred Stock with certain voting or conversion rights may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock, including the loss of voting control to
others. At present, the Company has no plans to issue any shares of Preferred
Stock.
OPTIONS AND WARRANTS
As of May 31, 1996, options to purchase 1,073,306 shares of Common Stock,
at a weighted average exercise price of $8.99 per share, were outstanding, of
which 215,547 are vested. The Company also had outstanding warrants to purchase
197,540 shares of Common Stock, at a weighted average exercise price of $7.10
per share. Such warrants expire on various dates, the latest of which is five
years from the effective date of this Offering. The holders of such warrants are
entitled to certain registration rights with respect to the Common Stock issued
upon exercise thereof. See "-- Registration Rights."
ANTITAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("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 which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, 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 which is not owned by the interested stockholder. Under
Section 203, the restrictions described above also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors and
which transaction is approved or not opposed by a majority of the board of
directors then in office.
Section 203 generally defines a business combination to include: (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation to the interested stockholder; (iii) subject to
certain exceptions,
49
<PAGE> 52
any transaction which 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 which 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.
The provisions of Section 203, together with the ability of the Company's
Board of Directors to issue Preferred Stock without further stockholder actions,
could delay or frustrate the removal of incumbent directors or a change in
control of the Company. The provisions also could discourage, impede or prevent
a merger, tender offer or proxy contest, even if such event would be favorable
to the interests of stockholders. The Company's stockholders, by adopting an
amendment to the Company's Restated Certificate of Incorporation or Restated
Bylaws, may elect not to be governed by Section 203 effective 12 months after
such adoption. Neither the Company's Restated Certificate of Incorporation nor
Restated Bylaws currently exclude the Company from the restrictions imposed by
Section 203.
REGISTRATION RIGHTS
Pursuant to an Amended and Restated Investors' Rights Agreement, dated July
31, 1995, among the Company and certain stockholders of the Company ("Investors'
Rights Agreement"), the holders of 5,671,993 shares of Common Stock (including
shares issuable upon the exercise of the Company's outstanding warrants) (the
"Registrable Securities") will be entitled to, subject to specific limitations,
certain rights with respect to the registration of the Registrable Securities
under the Act. Under the Investors' Rights Agreement, if the Company proposes to
register any of its securities under the Act, either for its own account or for
the account of other security holders exercising registration rights, such
holders may be entitled to notice of such registration and to include their
shares of Common Stock in such registration. These rights are subject to certain
conditions and limitations, including the right of the underwriters to limit the
number of shares included in such registration. The stockholders benefiting from
these rights may require the Company, on not more than two occasions, to file a
registration statement under the Act at the Company's expense with respect to
their shares of Common Stock, and the Company is required to use its best
efforts to effect such registration, subject to certain conditions. Further,
certain of such holders may require the Company to file additional registration
statements on Form S-3, subject to certain conditions.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
50
<PAGE> 53
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Company has agreed to sell 2,000,000 shares
of the Company's Common Stock and the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Cowen & Company and CS First Boston Corporation are
serving as Representatives, have severally agreed to purchase, the respective
number of shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.........................................
Cowen & Company...........................................................
Invemed Associates, Inc...................................................
---------
Total........................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to
certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered by the Underwriters hereby.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
In connection with the Offering, the Company, its executive officers and
directors and certain existing stockholders of the Company, who own an aggregate
of approximately 5,387,369 shares of the Company's Common Stock (and an
additional 841,980 shares subject to outstanding stock options and warrants),
have agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the several Underwriters, they will not (a) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by such person or are thereafter acquired directly from the Company),
or (b) enter into any swap or similar agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (a) or (b) of this paragraph is to be
settled by delivery of such Common Stock or such other securities, in cash or
otherwise, for a period of 90 days after the date of this Prospectus, other than
(i) the sale to the Underwriters of the shares of Common Stock under the
Underwriting Agreement, (ii) the issuance by the Company of shares of Common
Stock upon the exercise of an option sold or granted pursuant to existing
benefit plans of the Company and outstanding on the date of this Prospectus,
(iii) the transfer of shares of Common Stock in a bona fide charitable donation
or in any estate
51
<PAGE> 54
planning disposition provided that the transferee in any such transaction agrees
to be bound by the terms of the "lock-up" agreement or (iv) the transfer of
shares of Common Stock due to the death or disability of a stockholder provided
that such transferee agrees to be bound by the terms of the "lock-up" agreement.
Pursuant to regulations promulgated by the Commission, market makers in the
Common Stock who are Underwriters or prospective underwriters ("passive market
makers") may, subject to certain limitations, make bids for or purchases of
shares of Common Stock until the earlier of the time of commencement (the
"Commencement Date") of offers or sales of the Common Stock contemplated by this
Prospectus or the time at which a stabilizing bid for such shares is made. In
general, on and after the date two business days prior to the Commencement Date
(1) such market maker's net daily purchases of the Common Stock may not exceed
30% of its average daily trading volume in such stock for the two full
consecutive calendar months immediately preceding the filing date of the
Registration Statement of which this Prospectus forms a part, (2) such market
maker may not effect transactions in, or display bids for, the Common Stock at a
price that exceeds the highest bid for the Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of the Common Stock are effected. Accordingly, any resale
of the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from whom
such purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as agent
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION AND ENFORCEMENT
The Common Stock being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against such Company
or persons outside of Canada.
52
<PAGE> 55
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of the Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Common Stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only
one such report must be filed in respect of the Common Stock acquired on the
same date and under the same prospectus exemption.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California. Certain legal
matters relating to patents in connection with this Offering will be passed upon
by Arnold, White & Durkee, Austin, Texas. Certain legal matters are being passed
upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California.
EXPERTS
The financial statements as of June 30, 1994, 1995 and March 31, 1996 and
for each of the three years in the period ended June 30, 1995, the nine months
ended March 31, 1996 and for the period from inception (April 1991) through
March 31, 1996 included in this Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
Statements in this Prospectus in the penultimate paragraph under the
caption "Risk Factors -- Uncertainty Regarding Patents and Proprietary Rights"
and in the final paragraph under the caption "Business -- Patents and
Proprietary Technology" have been reviewed and approved by Brinks Hofer Gilson &
Lione, special patent counsel for the Company, as experts in such matters, and
are included herein in reliance upon such review and approval.
53
<PAGE> 56
PHARMACYCLICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheet......................................................................... F-3
Statement of Operations............................................................... F-4
Statement of Cash Flows............................................................... F-5
Statement of Stockholders' Equity (Deficit)........................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Pharmacyclics, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity (deficit) present
fairly, in all material respects, the financial position of Pharmacyclics, Inc.
(a development stage company) at June 30, 1994 and 1995 and March 31, 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended June 30, 1995, the nine months ended March 31, 1996, and for
the period from inception (April 1991) through March 31, 1996 in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
June 5, 1996
F-2
<PAGE> 58
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
------------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 8,690 $ 376 $ 15,204
Short-term investments..................................... -- -- 9,012
Prepaid expenses........................................... 65 164 78
------- ------- ---------
Total current assets............................... 8,755 540 24,294
Property and equipment, net.................................. 3,242 2,850 2,493
Deposits..................................................... 53 54 54
Notes receivable from employee............................... -- 95 95
------- ------- ---------
$12,050 $ 3,539 $ 26,936
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 642 $ 689 $ 307
Accrued liabilities........................................ 148 257 264
Current portion of capital lease obligations............... 590 749 1,020
Notes payable.............................................. -- 2,000 --
------- ------- ---------
Total current liabilities.......................... 1,380 3,695 1,591
Capital lease obligations.................................... 1,880 1,429 727
Deferred rent................................................ 21 67 101
------- ------- ---------
Total liabilities.................................. 3,281 5,191 2,419
------- ------- ---------
Commitments (Note 6)
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; authorized -- 1,000,000
shares at March 31, 1996; no shares issued and
outstanding............................................. -- -- --
Convertible preferred stock, $0.0001 par value;
authorized -- 6,666,667 shares at June 30, 1994 and
1995; shares issued and outstanding -- 4,507,839 at June
30, 1994 and 1995....................................... -- -- --
Common stock, $0.0001 par value; authorized -- 10,000,000
shares at June 30, 1994 and 1995, 12,000,000 at March
31, 1996; shares issued and outstanding -- 870,299 and
908,702 at June 30, 1994 and 1995 and 8,511,258 at March
31, 1996, respectively.................................. -- -- 1
Additional paid-in capital................................. 18,013 18,071 49,712
Deficit accumulated during development stage............... (9,244) (19,723) (25,196)
------- ------- ---------
Total stockholders' equity (deficit)............... 8,769 (1,652) 24,517
------- ------- ---------
$12,050 $ 3,539 $ 26,936
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD
FROM
NINE MONTHS ENDED INCEPTION
YEAR ENDED JUNE 30, MARCH 31, (APRIL 1991)
----------------------------- ----------------------- THROUGH
1993 1994 1995 1996 MARCH 31, 1996
------- ------- --------- 1995 --------- --------------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and grant revenues... $ -- $ 3,000 $ 79 $ -- $ 301 $ 3,380
------- ------- --------- ----------- --------- --------------
Operating expenses:
Research and development..... 3,161 6,909 9,330 6,964 5,199 25,086
General and administrative... 559 1,042 996 728 982 3,637
------- ------- --------- ----------- --------- --------------
Total operating
expenses........... 3,720 7,951 10,326 7,692 6,181 28,723
------- ------- --------- ----------- --------- --------------
Loss from operations........... (3,720) (4,951) (10,247) (7,692) (5,880) (25,343)
Interest income................ 148 164 187 169 640 1,161
Interest expense............... (8) (253) (419) (265) (233) (913)
------- ------- --------- ----------- --------- --------------
Loss before income taxes....... (3,580) (5,040) (10,479) (7,788) (5,473) (25,095)
Provision for income taxes..... -- (101) -- -- -- (101)
------- ------- --------- ----------- --------- --------------
Net loss....................... $(3,580) $(5,141) $ (10,479) $(7,788) $ (5,473) $(25,196)
======= ======= ======== ========= ======== ===========
Net loss per share (Note 1).... $ (1.65) $ (1.23) $ (0.72)
======== ========= ========
Weighted average common and
common equivalent shares
(Note 1)..................... 6,353 6,341 7,578
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED INCEPTION
(APRIL 1991)
YEAR ENDED JUNE 30, MARCH 31, THROUGH
---------------------------- --------------------- MARCH 31,
1993 1994 1995 1996 1996
------- ------- -------- 1995 ------- ------------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(3,580) $(5,141) $(10,479) $(7,788) $(5,473) $(25,196)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 80 321 643 420 496 1,491
Write-down of fixed assets............. -- -- 118 -- -- 118
Other.................................. -- -- 39 -- -- 39
Gain on sale of short-term
investments.......................... -- -- (22) -- -- (22)
Changes in assets and liabilities:
Prepaid expenses..................... (74) 9 (89) (81) 86 (68)
Deposits............................. (53) 19 (1) -- -- (54)
Notes receivable from employee....... -- -- (95) -- -- (95)
Accounts payable..................... 228 411 47 (231) (382) 307
Accrued liabilities.................. 72 74 109 -- 58 315
Deferred rent........................ -- 21 46 34 34 101
------- ------- -------- ----------- ------- ------------
Net cash used in operating
activities........................ (3,327) (4,286) (9,684) (7,646) (5,181) (23,064)
------- ------- -------- ----------- ------- ------------
Cash flows from investing activities:
Purchase of property and equipment....... (225) (770) (52) -- (16) (1,036)
Proceeds from sale of property and
equipment.............................. -- 112 -- -- -- 112
Purchase of short-term investments....... (849) -- (5,478) -- (9,012) (15,339)
Proceeds from the sale of short-term
investments............................ -- 849 5,500 -- -- 6,349
------- ------- -------- ----------- ------- ------------
Net cash (used in) provided by
investing
activities........................... (1,074) 191 (30) -- (9,028) (9,914)
------- ------- -------- ----------- ------- ------------
Cash flows from financing activities:
Issuance of common stock, net of issuance
costs.................................. 3 38 9 (42) 26,041 26,099
Proceeds from notes payable.............. -- -- 2,000 -- 1,000 3,000
Issuance of convertible preferred stock,
net of issuance costs.................. 7,674 7,623 -- -- 2,550 20,514
Payments under capital lease
obligations............................ (45) (223) (609) (437) (554) (1,431)
------- ------- -------- ----------- ------- ------------
Net cash (used in) provided by
financing activities................. 7,632 7,438 1,400 (479) 29,037 48,182
------- ------- -------- ----------- ------- ------------
Net increase (decrease) in cash and cash
equivalents.............................. 3,231 3,343 (8,314) (8,125) 14,828 15,204
Cash and cash equivalents at beginning of
period................................... 2,116 5,347 8,690 8,690 376 --
------- ------- -------- ----------- ------- ------------
Cash and cash equivalents at end of
period................................... $ 5,347 $ 8,690 $ 376 $ 565 $15,204 $ 15,204
======== ======== ========= ============ ======== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Income taxes paid during the period...... $ -- $ 101 $ -- $ -- $ -- $ 101
======== ======== ========= ============ ======== ===========
Interest paid during the period.......... $ 8 $ 238 $ 352 $ 269 $ 223 $ 821
======== ======== ========= ============ ======== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under
capital lease obligations.............. $ 371 $ 2,367 $ 317 $ 285 $ 123 $ 3,167
======== ======== ========= ============ ======== ===========
Warrants issued.......................... $ -- $ -- $ 49 $ -- $ -- $ 49
======== ======== ========= ============ ======== ===========
Conversion of notes payable and accrued
interest into convertible preferred
stock.................................. $ -- $ -- $ -- $ -- $ 3,051 $ 3,051
======== ======== ========= ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (APRIL 1991) THROUGH MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING
-------------------- ------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ------ ---------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash at
$0.02 per share...................... -- $ -- 400,000 $ -- $ 6 $ -- $ 6
----------- ------ ---------- ------ ---------- ------------ --------
Balance at June 30, 1991............... -- -- 400,000 -- 6 -- 6
Issuance of common stock for cash at an
average price of $0.02 per share..... -- -- 97,111 -- 2 -- 2
Issuance of convertible preferred stock
for cash, net of issuance costs, at
an average price of $1.32 per
share................................ 2,040,784 -- -- -- 2,667 -- 2,667
Net loss............................... -- -- -- -- -- (523) (523)
----------- ------ ---------- ------ ---------- ------------ --------
Balance at June 30, 1992............... 2,040,784 -- 497,111 -- 2,675 (523) 2,152
Issuance of common stock for cash at an
average price of $0.06 per share..... -- -- 49,000 -- 3 -- 3
Issuance of convertible preferred stock
for cash, net of issuance costs, at
$4.88 per share...................... 1,580,095 -- -- -- 7,674 -- 7,674
Net loss............................... -- -- -- -- -- (3,580) (3,580)
----------- ------ ---------- ------ ---------- ------------ --------
Balance at June 30, 1993............... 3,620,879 -- 546,111 -- 10,352 (4,103) 6,249
Issuance of common stock upon exercise
of stock options at an average price
of $0.12 per share................... -- -- 324,188 -- 38 -- 38
Issuance of convertible preferred stock
for cash, net of issuance costs, at
$8.63 per share...................... 886,960 -- -- -- 7,623 -- 7,623
Net loss............................... -- -- -- -- -- (5,141) (5,141)
----------- ------ ---------- ------ ---------- ------------ --------
Balance at June 30, 1994............... 4,507,839 -- 870,299 -- 18,013 (9,244) 8,769
Issuance of common stock upon exercise
of stock options at an average price
of $0.24 per share................... -- -- 38,403 -- 9 -- 9
Issuance of warrants................... -- -- -- -- 49 -- 49
Net loss............................... -- -- -- -- -- (10,479) (10,479)
----------- ------ ---------- ------ ---------- ------------ --------
Balance at June 30, 1995............... 4,507,839 -- 908,702 -- 18,071 (19,723) (1,652)
Issuance of convertible preferred stock
for notes payable and accrued
interest at an average of $8.63 per
share................................ 353,483 -- -- -- 3,051 -- 3,051
Issuance of convertible preferred stock
for cash, net of issuance costs, at
an average price of $8.63 per
share................................ 295,649 -- -- -- 2,550 -- 2,550
Issuance of common stock upon initial
public offering, net of issuance
costs, for cash at $12 per share..... -- -- 2,383,450 1 25,958 -- 25,959
Conversion of convertible preferred
stock into common stock.............. (5,156,971) -- 5,156,971 -- -- -- --
Issuance of common stock upon exercise
of stock options at an average
exercise price of $1.33 per share.... -- -- 62,135 -- 82 -- 82
Net loss............................... -- -- -- -- -- (5,473) (5,473)
----------- ------ ---------- ------ ---------- ------------ --------
Balance at March 31, 1996.............. -- $ -- 8,511,258 $ 1 $ 49,712 $(25,196) $ 24,517
========== ======= ========= ======= ========= ============ ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Pharmacyclics, Inc. (the "Company") was incorporated in Delaware in April
1991 and commenced operations during 1992 to develop and market pharmaceutical
products derived from biometallic chemistry for the treatment of certain
cancers, atherosclerosis diseases and contrast agents for magnetic resonance
imaging. Since its inception the Company has been in the development stage,
principally involved in research and development and other business planning
activities, with no revenues from product sales. Successful future operations
depend upon the Company's ability to develop, to obtain regulatory approval for
and to commercialize its products. The Company expects that additional funds
will be required to complete the development of its products and to fund
operating losses that are expected to be incurred in the next several years.
Initial public offering
In September 1995 the Company effected a 2 for 3 reverse stock split. All
share and per share amounts have been adjusted to retroactively reflect this
stock split.
The Company completed its initial public offering on October 23, 1995,
issuing 2,150,000 shares of its common stock. Upon the closing of the offering,
all outstanding shares of Convertible Preferred Stock were automatically
converted into 5,156,971 shares of common stock. On November 6, 1995, the
underwriters of the initial public offering exercised their over-allotment
option with respect to an additional 233,450 shares of common stock. The
Company's initial public offering resulted in net proceeds of approximately
$26.0 million.
Management's use of estimates and assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Net loss per share
The Company's historical capital structure was not indicative of its
prospective structure due to the conversion of all shares of Convertible
Preferred Stock into common stock concurrent with the closing of the Company's
initial public offering in October 1995. Accordingly, net loss per share for the
years ended June 30, 1993 and 1994 is not considered meaningful and has not been
presented herein.
Net loss per share for the year ended June 30, 1995 and for the nine months
ended March 31, 1995 and 1996 is computed using the weighted average number of
outstanding shares of common stock. In addition, the computation includes the
effect of the conversion of all shares of Series A, A1, B and C Convertible
Preferred Stock into 5,156,971 shares of common stock concurrent with the
closing of the Company's initial public offering as if they were converted into
shares of common stock on July 1, 1994. Common stock equivalent shares arising
from stock options and warrants are excluded from the computation because their
effect is antidilutive, except that common stock equivalent shares arising from
stock options and warrants (using the treasury stock method and the initial
public offering price) issued during the twelve month period prior to the
initial public offering are included in the computation of net loss per share as
if they were outstanding for all periods presented prior to the initial public
offering.
F-7
<PAGE> 63
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents and short-term investments
All highly liquid investments purchased with maturity at the date of
purchase of three months or less are considered to be cash equivalents.
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). The adoption of SFAS 115 did not have a material
impact on the Company's financial condition or results of operations. The
Company has classified its cash equivalents and short-term investments as
"available-for-sale." For all periods presented, cost of investments
approximated fair market value.
The Company's cash, cash equivalents and short-term investments consisted
of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------- MARCH 31,
INVESTMENT TYPE 1994 1995 1996
--------------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
Cash in bank....................................... $ 5 $ 2 $ 119
Money market....................................... 8,685 374 9,040
Debt (state or political subdivision).............. -- -- 4,000
Debt (corporate)................................... -- -- 2,045
-------- -------- ---------
Cash and cash equivalents........................ $8,690 $376 $15,204
======= ======= =========
Debt (state or political subdivision).............. $ -- $ -- $ 2,014
Debt (corporate)................................... -- -- 6,998
-------- -------- ---------
Short-term investments........................... $ -- $ -- $ 9,012
======= ======= =========
</TABLE>
Concentration of credit risk
The Company deposits its excess cash with financial institutions and
invests such excess cash in debt instruments of financial institutions,
corporations and government entities with strong credit ratings. Management of
the Company believes they have established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets, generally four to eight years, or the lease term of the respective
assets, if applicable. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of their estimated useful lives or
lease terms.
Research and development
Research and development costs are charged to expense as incurred.
Income taxes
The Company provides for income taxes using the liability method. This
method requires that deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the tax bases
of assets and liabilities and their financial statement reported amounts.
Reclassifications
Certain 1994 amounts have been reclassified to conform with the current
presentation.
F-8
<PAGE> 64
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair value of financial instruments
The carrying value of capital lease obligations approximate fair value due
to the short maturity of those instruments.
Adoption of recent accounting standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121")
which requires the Company to review for impairment its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
such assets might not be recoverable. In certain situations, an impairment loss
would be recognized. The Company will adopt SFAS 121 during fiscal 1997 and,
based on its initial evaluation, does not expect its adoption to have a material
impact on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will adopt SFAS 123 during fiscal 1997. The Company
intends to continue to account for employee stock options using the intrinsic
value method prescribed by APB Opinion No. 25 and to adopt the "disclosure only"
pro forma alternative described in SFAS 123.
Interim results (unaudited)
The accompanying statements of operations and of cash flows for the nine
months ended March 31, 1995 are unaudited. In the opinion of management, the
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results for the interim
period. The data disclosed in these notes to the financial statements for this
period are also unaudited.
NOTE 2 -- BALANCE SHEET COMPONENTS:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
Equipment............................................... $1,348 $1,802 $ 1,838
Furniture and fixtures.................................. 405 318 421
Leasehold improvements.................................. 1,832 1,689 1,689
------ ------ ---------
3,585 3,809 3,948
Less accumulated depreciation and amortization.......... (343) (959) (1,455)
------ ------ ---------
$3,242 $2,850 $ 2,493
====== ====== =======
</TABLE>
F-9
<PAGE> 65
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------- MARCH 31,
1994 1995 1996
---- ---- ---------
<S> <C> <C> <C>
Employee compensation...................................... $144 $184 $ 146
Employee stock purchase plan contributions................. -- -- 73
Other...................................................... 4 73 45
---- ---- ---------
$148 $257 $ 264
==== ==== =======
</TABLE>
NOTE 3 -- NOTES RECEIVABLE FROM EMPLOYEE:
In September 1994, the Company loaned an employee $65,000. This note
receivable bears interest at 5.86%, with interest payable annually and principal
due in full on August 31, 1997. In April 1995, the Company loaned the same
employee $30,000. This note receivable bears interest at 7.19%, with principal
and interest due in full on February 28, 1998.
NOTE 4 -- STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock
The Company has issued certain shares of its common stock to employees and
consultants. Under the terms of the agreements related to issuance, the Company
has the right to repurchase, at the stockholder's original cost, a declining
percentage of the shares issued for a stipulated period from the date of
issuance. At March 31, 1996, 23,408 shares were subject to such repurchase
rights.
Preferred Stock
In September 1995, the Company amended its Certificate of Incorporation
effective upon the conversion of the Convertible Preferred Stock to authorize
1,000,000 shares of Preferred Stock, par value $0.0001 per share. The Board of
Directors is authorized to issue the Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders.
Warrants
In connection with entering into certain capital leases, the Company issued
to lessors warrants to purchase 73,042 shares of Convertible Preferred Stock at
a weighted average exercise price of $4.49 per share. The warrants are
exercisable at any time prior to their expiration in 2000.
In July 1995, in connection with certain short-term note agreements entered
into prior to the Company's initial public offering, the Company issued to the
holders of such notes payable warrants to purchase 57,976 shares of Series C
Convertible Preferred Stock at an exercise price of $8.63 per share.
Also in July 1995, the Company issued warrants to purchase 66,522 shares of
Series C Convertible Preferred Stock at an exercise price of $8.63 per share to
certain holders of such stock, in exchange for an agreement by the holders to
modify certain rights received in connection with the Series C financing which
occurred in June 1994.
Management ascribed a nominal value to these warrants and has reserved
197,540 shares of common stock for future issuance upon exercise of such
warrants. In connection with the Company's initial public offering, the above
warrants were converted into warrants to purchase shares of common stock.
F-10
<PAGE> 66
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Option Plans
The 1992 Stock Option Plan (the "1992 Plan"), as amended, authorizes the
Board of Directors to grant incentive stock options and non-statutory stock
options to employees, directors and consultants to purchase up to 1,233,334
shares of common stock. Under the 1992 Plan, incentive stock options are granted
at a price not less than 100% of the estimated fair value of the stock on the
date of grant, as determined by the Board of Directors. Nonqualified stock
options are granted at a price not less than 85% of the estimated fair value of
the stock on the date of grant, as determined by the Board of Directors. To
date, all options granted under the 1992 Plan have been granted at 100% of the
estimated fair value of the common stock as determined by the Board of
Directors.
Generally, options granted under the 1992 Plan are exercisable on and after
the date of grant, subject to the Company's right to repurchase from the
optionee at the optionee's cost per share, any unvested shares which the
optionee has purchased and holds in the event the optionee attempts to dispose
of such shares or in the event of the optionee's termination of employment with
or without cause. The Company's right to repurchase lapses as the shares become
vested. Generally, shares subject to options granted under the 1992 Plan vest at
the rate of 1/4th of the shares on the first anniversary of the grant date of
the option, and an additional 1/48th of the shares upon completion of each
succeeding month of continuous employment thereafter. Options are exercisable
for a period of ten years.
The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the
Board of Directors on August 2, 1995 as the successor to the 1992 Plan. The 1995
Plan authorizes for issuance 870,769 shares of common stock, plus an additional
number of shares on the first trading day of each calendar year, commencing
January 1, 1996, equal to 1% of the number of shares of common stock outstanding
on the last day of the preceding calendar year not to exceed 500,000 shares per
year. Shares of common stock subject to outstanding options, including options
granted under the 1992 Plan, that expire or terminate prior to exercise will be
available for future issuance under the 1995 Plan.
Under the 1995 Plan, employees (including officers), non-employee members
of the Board of Directors (other than those serving as members of the
Compensation Committee) and independent consultants may, at the discretion of
the plan administrator, be granted options to purchase shares of common stock at
an exercise price not less than 85% of the fair market value of such shares on
the grant date. Non-employee members of the Board of Directors will also be
eligible for automatic option grants under the Company's Non-Employee Directors
Stock Option Plan. Generally, shares subject to options under the 1995 Plan vest
over a five-year period, and are exercisable for a period of ten years.
The exercise price for options granted under the 1995 Plan may be paid in
cash or in outstanding shares of common stock. Options may also be exercised on
a cashless basis through the same-day sale of the purchased shares. The
Compensation Committee may permit the optionee to pay the exercise price through
a promissory note payable in installments over a period of years. The amount
financed may include any federal or state income and employment taxes incurred
by reason of the option exercise.
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1995 Plan, including options
incorporated from the 1992 Plan, in exchange for the grant of new options for
the same or different number of option shares with an exercise price per share
based upon the fair market value of the common stock on the new grant date.
In the event the Company is acquired by merger, consolidation or asset
sale, the shares of common stock subject to each option outstanding at the time
under the 1995 Plan will immediately vest in full, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the acquiring entity, and options will accelerate to the extent not assumed by
the acquiring entity. Any assumed options will accelerate and assigned
repurchase rights will terminate upon the optionee's involuntary termination
within
F-11
<PAGE> 67
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
18 months following the acquisition. The Compensation Committee also has
discretion to provide for the acceleration of one or more outstanding options
under the 1995 Plan (including options incorporated from the 1992 Plan) and the
vesting of shares subject to outstanding options upon the occurrence of certain
hostile tender offers. Such accelerated vesting may be conditioned upon the
subsequent termination of the affected optionee's service.
The 1995 Plan also authorizes stock appreciation rights, which provide the
holders with the election to surrender their outstanding options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of common stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of common stock. To
date no such rights have been issued.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on August 1, 2005, unless sooner terminated by the Board.
The following table summarizes activity under the 1992 Plan and 1995 Plan
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OPTIONS OPTION PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- ------------
<S> <C> <C> <C>
Balance at June 30, 1992.................................... -- -- --
Options authorized.......................................... 1,000 -- --
Options granted............................................. (480) 480 $0.08-$ 0.49
--------- -----------
Balance at June 30, 1993.................................... 520 480 $0.08-$ 0.49
Options exercised........................................... -- (324) $0.08-$ 0.49
Options granted............................................. (167) 167 $0.49-$ 5.25
Options cancelled........................................... 8 (8) $0.08-$ 0.49
--------- -----------
Balance at June 30, 1994.................................... 361 315 $0.08-$ 5.25
Options exercised........................................... -- (39) $0.08-$ 0.49
Options granted............................................. (193) 193 $3.75
Options cancelled........................................... 38 (38) $0.49-$ 3.75
--------- -----------
Balance at June 30, 1995.................................... 206 431 $0.08-$ 5.25
Options authorized.......................................... 318 --
Options exercised........................................... -- (62) $0.08-$ 5.25
Options granted............................................. (420) 420 $7.50-$14.00
Options cancelled........................................... 4 (4) $0.49-$ 5.25
--------- -----------
Balance at March 31, 1996................................... 108 785 $0.08-$14.00
======= =========
</TABLE>
At March 31, 1996 options to purchase 194,934 shares were vested.
1995 Non-Employee Directors Stock Option Plan. The Company's 1995
Non-Employee Directors Stock Option Plan (the "Directors Plan") was adopted by
the Board of Directors on August 2, 1995. Automatic option grants are made at
periodic intervals to eligible non-employee Board members under the Directors
Plan. The Directors Plan became effective as of the effective date of the
Company's initial public offering. A total of 166,667 shares of common stock
have been reserved for issuance under the Directors Plan.
Each individual serving as a non-employee Board member on the effective
date of the Company's initial public offering was automatically granted a
non-statutory option to purchase 5,000 shares of common stock, vesting in equal
monthly installments for one year after the grant date. Each individual first
elected or appointed as a non-employee Board member after the effective date of
the Company's initial public offering
F-12
<PAGE> 68
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
will automatically be granted, on the date of such election or appointment, a
non-statutory option to purchase 10,000 shares of common stock vesting over five
years. In addition, on the date of each Annual Stockholders Meeting, beginning
with the 1996 Annual Meeting, each individual who is to continue to serve as a
non-employee Board member after that Annual Meeting and has been a member of the
Board for at least six months will automatically be granted a non-statutory
option to purchase 5,000 shares of common stock vesting in equal monthly
installments for one year after the grant date. There will be no limit on the
number of such annual 5,000-share option grants any one non-employee Board
member may receive over his or her period of continued Board service. The
exercise price per share of each automatic option grant will be equal to the
fair market value of the common stock on the automatic grant date. Each
automatic option will be immediately exercisable; however, any shares purchased
upon exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares.
Each 10,000-share grant will vest in five equal and successive annual
installments over the optionee's period of Board service. Each 5,000-share grant
will vest in twelve equal and successive monthly installments over the
optionee's period of Board service.
In the event of the optionee's death or permanent disability or in the
event the Company is acquired by a merger or asset sale and in the event of
certain hostile tender offers, each outstanding automatic grant will vest in
full so that each such option will become exercisable for fully vested shares.
Upon the acquisition of 50% or more of the Company's outstanding voting stock
pursuant to a hostile tender offer, each automatic option grant outstanding for
at least six months may be surrendered automatically or be cancelled in exchange
for a cash distribution to the director based upon the tender offer price.
The Directors Plan will terminate in all events on August 1, 2005.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan"), was adopted by the Board of Directors on August 2, 1995.
A total of 50,000 shares of common stock are reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, provides for 24-month offering periods with
purchases occurring at six month intervals. The initial offering period
commenced on October 23, 1995. The Purchase Plan is administered by the
Compensation Committee of the Board. Employees become eligible to participate in
the initial offering period if they are employed by the Company for at least 20
hours per week and five months per calendar year. For subsequent offering
periods, employees will become eligible to participate if they are employed by
the Company for at least 20 hours per week and five months per calendar year and
have completed 90 days of service with the Company or any affiliate. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's cash compensation.
The price of stock purchased under the Purchase Plan will generally be 85% of
the lower of the fair market value of the common stock at the beginning of the
24-month offering period or on the applicable semi-annual purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically following termination of
employment with the Company. Each outstanding purchase right will be exercised
immediately prior to a merger or consolidation. The Board may amend or terminate
the Purchase Plan immediately after the close of any offering period. However,
the Board may not materially increase the number of shares of common stock
available for issuance or materially modify the eligibility requirements for
participation or the benefits available to participants without stockholder
approval. The Purchase Plan will in all events terminate in October 2005.
NOTE 5 -- INCOME TAXES:
The provision for income taxes for the year ended June 30, 1994 consists
primarily of foreign withholding taxes on payments received by the Company under
a license agreement (Note 7).
F-13
<PAGE> 69
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, MARCH
----------------- 31,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 2,461 $ 5,926 $ 7,729
Tax credit carryforwards............................... 600 1,100 1,150
Capitalized start-up costs............................. 784 935 1,176
Other.................................................. 30 110 150
------- ------- --------
Gross deferred tax assets.............................. 3,875 8,071 10,205
Less valuation allowance............................... (3,801) (7,997) (10,205)
------- ------- --------
Net deferred tax assets................................ 74 74 --
Deferred tax liabilities:
Other.................................................. (74) (74) --
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>
A valuation allowance has been established for the Company's deferred tax
assets since realization of such assets through the generation of future taxable
income is uncertain.
The provision for income taxes differs from the amount determined by
applying the U.S. statutory income tax rate to loss before income taxes as
summarized below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
--------------------------- MARCH 31,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Tax benefit at statutory rate................ $ 1,217 $ 1,714 $ 3,563 $ 1,916
State income taxes, net of federal benefit... -- (1) -- --
Foreign taxes................................ -- (100) -- --
Net operating loss carryforward for which no
benefit was available...................... (1,217) (1,714) (3,563) (1,916)
------- ------- ------- -----------
$ -- $ (101) $ -- $ --
======= ======= ======= =========
</TABLE>
At March 31, 1996 the Company had net operating loss carryforwards of
approximately $20,500,000 and $18,500,000 for federal and state income tax
reporting purposes, respectively, available to reduce future taxable income. The
net operating loss carryforwards expire in various years through 2011.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and tax credit carryovers that can be carried forward may be
impaired or limited in certain circumstances. These circumstances include, but
are not limited to, a cumulative stock ownership change of greater than 50%, as
defined, over a three year period. Such an ownership change occurred as a result
of the Company's initial public offering. As a result, utilization of
approximately $17,000,000 of the Company's federal and state net operating loss
and tax credit carryforwards will be subject to an annual limitation of
approximately $4,000,000.
F-14
<PAGE> 70
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- COMMITMENTS:
The Company leases its current facilities under a non-cancelable operating
lease which expires in 2001. The Company also leases certain assets under
long-term lease agreement that are classified as capital leases. The total
amount of assets acquired under capital lease arrangements which is included in
property and equipment (Note 2), is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
Equipment............................................... $1,319 $1,619 $ 1,742
Furniture and fixtures.................................. 360 375 375
Leasehold improvements.................................. 1,050 1,050 1,050
------ ------ ---------
2,729 3,044 3,167
Less accumulated depreciation and amortization.......... (292) (811) (1,223)
------ ------ ---------
$2,437 $2,233 $ 1,944
====== ====== =======
</TABLE>
The capital lease agreements require the Company, among other things, to
pay insurance and maintenance costs. Under the terms of a capital lease
agreement, the Company may acquire additional equipment of up to $700,000 at
March 31, 1996.
Future minimum lease payments at March 31, 1996 under all non-cancelable
operating and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Three months ending June 30, 1996...................... $ 262 $ 80
Year ending June 30,
1997................................................... 997 400
1998................................................... 636 407
1999................................................... 83 392
2000................................................... 24 371
Thereafter............................................. -- 572
------- ---------
2,002 $ 2,222
=======
Less amount representing interest...................... (255)
-------
1,747
Less current portion................................... (1,020)
-------
Long-term portion of capital lease obligations......... $ 727
=======
</TABLE>
Rent expense for the years ended June 30, 1993, 1994, 1995 and the nine
months ended March 31, 1995 and 1996 was $104,000, $236,000, $366,000, $275,000
and $275,000 respectively, and $984,000 for the period from inception through
March 31, 1996. The terms of the facility lease provide for rental payments on a
graduated scale. The Company recognizes rent expense on a straight-line basis
over the lease period and has accrued for rent expense incurred but not paid at
March 31, 1996.
The Company has a manufacturing and supply agreement with a third party
under which clinical and commercial quantities of certain products will be
manufactured for the Company for a period of five years. Certain minimum
quantities of manufactured product will be required to be purchased by the
Company from this party. Upon FDA approval and commercialization of the product,
minimum quantities approximate
F-15
<PAGE> 71
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$8,500,000 over the contractual period. In addition, the Company will be
obligated to make certain payments to this party for validation, quality
assurance and technical services associated with product manufacturing.
NOTE 7 -- LICENSE AND MARKETING AGREEMENTS:
The Company has entered into two exclusive patent license agreements with
The University of Texas which permit the Company to exclusively manufacture, use
and sell products covered by patents that result from certain research conducted
by the University. Each agreement requires the Company to pay royalties to the
University. Royalties totalling $250,000 were paid under the agreements through
March 31, 1996 in connection with the E-Z-EM, Inc. ("E-Z-EM") agreement
described below.
During fiscal 1994, the Company received $2,000,000 from a corporation
under an option agreement whereby the Company agreed, for a six month period of
time, to refrain from entering into any discussions or agreements relating to
the licensing or sale of certain of the Company's future products in Europe and
Japan. The Company recorded the $2,000,000 as license income when management
ascertained that the Company had complied with all requirements under the option
agreement.
In April 1994, the Company entered into a license agreement with a
corporation for the production, use and/or sale of certain of the Company's
diagnostic products used in magnetic resonance imaging. The license is exclusive
with respect to the use and sale of the products in certain countries in the Far
East. The Company received license revenue of $1,000,000 under the agreement
during fiscal 1994. Under terms of the agreement, the Company was to receive
additional milestone payments and ongoing royalty payments based on a stipulated
percentage of amounts received from the sale of the products. However, the
license agreement was terminated in January 1995 at the option of the license
holder, prior to the achievement of any additional milestones or product sales.
Accordingly, no revenue was recognized relating to the agreement during the year
ended June 30, 1995, and the nine months ended March 31, 1996.
In August 1995, the Company entered into an agreement with E-Z-EM, a
leading manufacturer and worldwide distributor of oral contrast agents and other
products for use in gastrointestinal radiology, for the exclusive marketing and
sale of the Company's GADOLITE product in the U.S., Canada and Mexico (the
"E-Z-EM Agreement"). The Company and E-Z-EM will share equally in profits from
the sale of GADOLITE, and the Company may also receive premium payments if
certain sales levels are achieved. During the nine-months ended March 31, 1996
the Company recorded revenue of $250,000 (net of royalties paid to The
University of Texas) as a result of meeting certain milestones with respect to
the GADOLITE product, including the filing of a New Drug Application with the
Food and Drug Administration.
NOTE 8 -- SUBSEQUENT EVENT (UNAUDITED)
In May 1996, the Company granted options to purchase approximately 160,000
shares of common stock at $17.75 (the then fair market value of such shares) per
share to certain employees. The Company expects to grant additional options to
purchase approximately 250,000 shares of common stock prior to the 1996 Annual
Meeting of Stockholders currently scheduled for December 1996 (the "Annual
Meeting"), with an exercise price equal to the fair market value of the
Company's common stock on the date of grant. All such option grants are subject
to stockholder approval at the Annual Meeting. As a result, the Company will be
required to record compensation expense in the event the fair market value of
the Company's common stock on the date of the Annual Meeting exceeds the
exercise price of the respective stock options, in an amount equal to such
difference multiplied by the number of shares subject to such option and
recognized on a straight-line basis over the vesting period of the option,
generally five years.
F-16
<PAGE> 72
LOGO
Pharmacyclics, Inc.
<PAGE> 73
APPENDIX
Page 25
The title of the graphic is "Texaphyrin Technology Platform." The graphic
has four columns with subheadings that read from left to right "Input Energy,"
"Product (metal substitution in texaphyrin)," "Effect" and "Application." Below
the subheadings are four rows of graphics. The top row graphically depicts the
effect of "light" (input energy) on a stylized depiction of a Lu-Tex molecule
(product): the production of "cytotoxic singlet oxygen" (effect) for use as a
"photosensitizer" (application). The second row depicts the effect of an "x-ray"
on a stylized depiction of a Gd-Tex molecule: the production of "cytotoxic free
radicals" for use as "radiation sensitizer." The third row depicts the result of
"chemical" input energy on a stylized depiction of a Lu-Tex molecule: the
production of "cytotoxic free radicals" for use as a "chemosensitizer." The
bottom row depicts the effects of "radio frequency" input energy on a stylized
depiction of a Gd-Tex molecule: an "MRI signal" for use in applications
involving "MRI detectibility."
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All of the amounts shown are
estimates except the registration fee and the NASD filing fees.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC Registration fee............................................ $ 14,078
NASD fee........................................................ 4,583
Listing Fee..................................................... 17,500
Accounting fees and expenses.................................... 55,000
Printing and engraving.......................................... 80,000
Transfer agent fees............................................. 5,000
Blue Sky fees and expenses...................................... 10,000
Legal fees and expenses......................................... 155,000
Miscellaneous................................................... --
-------
Total................................................. $351,161
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expense incurred) arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article VII of the Registrant's Bylaws provides
for mandatory indemnification of its directors, and discretionary
indemnification of its officers, employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. The Registrant has
entered into indemnification agreements with its directors and executive
officers, a form of which is attached as Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048 and
incorporated herein by reference. The indemnification agreements provide the
Registrant's directors and executive officers with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. Reference
is also made to Section VIII of the Underwriting Agreement contained in Exhibit
1.1 hereto, indemnifying officers and directors of the Registrant against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since June 1, 1993, the Registrant has issued and sold the following
securities:
(1) In June 1993, the Registrant issued warrants to purchase 44,118
shares of its Series B Preferred Stock at an exercise price of $3.25 per
share to Comdisco, Inc. in connection with an equipment lease financing.
(2) In June 1994, the Registrant issued and sold, pursuant to a Series
C Stock Purchase Agreement, 1,330,435 shares of its Series C Preferred
Stock to investors at a purchase price of $5.75 per share for an aggregate
purchase price of $7,650,001.30.
(3) In October 1994, the Registrant issued warrants to purchase 13,914
shares of its Series C Preferred Stock at an exercise price of $5.75 per
share to Comdisco, Inc. in connection with an equipment lease financing.
(4) In April 1995, May 1995 and July 1995, the Registrant issued
Promissory Notes (the "Notes") convertible into shares of the Preferred
Stock sold in the Registrant's next equity financing at the price at which
such shares are sold. The Notes were issued to certain investors holding
shares of the Registrant's
II-1
<PAGE> 75
Series C Preferred Stock, for an aggregate amount of $3,000,000.00, with
principal, interest and warrants on the Notes due and payable no later than
180 days from the issue date of each Note.
(5) In July of 1995, the Registrant issued and sold, pursuant to a
Series C Preferred Stock Investment Agreement, 973,693 shares of its Series
C Preferred Stock to investors in exchange for cash or cancellation of
indebtedness at a purchase price of $5.75 per share for an aggregate
purchase price of $5,598,734.75.
(b) There were no underwriters employed in connection with any of the
transactions set forth in Item 15(a).
(c) The issuances of the securities set forth in this Item 15 were deemed
to be exempt from registration in reliance on Section 4(2) of the Act as
transactions by an issuer not involving any public offering. In all such
transactions that relied upon the exemption set forth in Section 4(2) of the
Act, the recipients of securities 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
securities issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant. In addition, certain issuances described in Item 15(a)(1) were
deemed to be exempt from registration under the Act in reliance upon Rule 701
promulgated under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of Registrant
3.2 Amended and Restated Bylaws of Registrant (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1, Commission File No.
33-96048)
4.1 Amended and Restated Investors' Rights Agreement, between the Registrant and the
investors specified therein, dated July 31, 1995 (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1, Commission File
No. 33-96048)
4.2 Specimen Certificate of the Registrant's Common Stock (Incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement on Form S-1, Commission
File No. 33-96048)
5.1 Opinion of Brobeck, Phleger & Harrison LLP
10.1 Form of Indemnification Agreement between Registrant and its directors and
executive officers (Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048)
10.2 Series C Stock Purchase Agreement dated as of June 13, 1994 between Registrant and
the investors specified therein (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.3 Investment Agreement dated as of July 31, 1995 between the Registrant and the
investors specified therein (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.4 Form of Series C Preferred Stock Purchase Warrant dated as of July 31, 1995 issued
by the Registrant to the investors listed on Schedule A thereto (Incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)
10.5 Master Lease and Warrant Agreements entered into between Registrant and Comdisco,
Inc. dated as of July 22, 1992, July 30, 1992, March 31, 1993, June 24, 1993, and
October 3, 1994, respectively (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
</TABLE>
II-2
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.6 Patent License Agreement entered into between Registrant and The University of
Texas, Austin entered into on or about July 1, 1991 (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1, Commission File
No. 33-96048)
10.7 Patent License Agreement entered into between Registrant and The University of
Texas, Dallas dated as of July 1, 1992, as amended by the Patent License Agreement
dated May 27, 1993 (Incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048)
10.8 Patent License Agreement entered into between Registrant and Stuart W. Young dated
as of October 15, 1992 (Incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.9 Lease Agreement entered into between the Registrant and New England Mutual Life
Insurance Company dated as of June 17, 1993, as amended on July 22, 1993, and as
further amended on March 1, 1994 (Incorporated by reference to Exhibit 10.11 to
the Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.10 Supply Agreement entered into between the Registrant and Glaxo Wellcome Co. (f/k/a
Burroughs Wellcome Co.) dated as of March 1, 1995 (Incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on Form S-1, Commission File
No. 33-96048)
10.11 License Agreement entered into between the Registrant and Cook, Incorporated dated
as of April 4, 1995 (Incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048)
10.12 License and Supply Agreement entered into between the Registrant and E-Z-EM, Inc.
dated as of August 17, 1995 (Incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.13 The Company's 1995 Stock Option Plan (Incorporated by reference to Exhibit 10.16
to the Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.14 The Company's 1995 Non-Employee Directors' Stock Option Plan (Incorporated by
reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)
10.15 The Company's Employee Stock Purchase Plan (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1, Commission File No.
33-96048)
10.16 Employment Agreement entered into between the Registrant and Richard A. Miller,
M.D., dated as of June 10, 1992 (Incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.17 Employment Agreement entered into between the Registrant and Marc L. Steuer dated
as of October 31, 1994 (Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.18 Employment Agreement entered into between the Registrant and William C. Dow,
Ph.D., dated as of May 20, 1992, as amended by a letter agreement dated July 8,
1992 (Incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96048)
10.19 Employment Agreement entered into between the Registrant and Stuart W. Young,
M.D., dated as of April 19, 1993 (Incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form S-1, Commission File No. 33-96048)
10.20 Promissory Notes issued by the Registrant to Stuart W. Young, M.D., dated as of
September 1994 and April 1995, in the amounts of $65,000 and $30,000, respectively
(Incorporated by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96048)
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)
</TABLE>
II-3
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
23.2 Consent of Price Waterhouse LLP, Independent Accountants (see page II-6)
23.3 Consent of Brinks Olds Hofer Gilson & Lione (see page II-7)
24.1 Power of Attorney (see page II-5)
27 Financial Data Schedule
</TABLE>
(b) Financial statement schedules.
No schedules have been provided because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters 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 Registrant, indemnification agreements entered
into between Registrant and its officers and directors, the Underwriting
Agreement, or otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of 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, 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 whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 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) 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 hereof.
II-4
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Sunnyvale, State of
California on the 13th day of June, 1996.
PHARMACYCLICS, INC.
By: /s/ RICHARD A. MILLER, M.D.
------------------------------------
Richard A. Miller, M.D.
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Richard A. Miller, M.D.
and Mare L. Steuer, or either of them, as his or her true and lawful
attorneys-in-fact and agents, with full power of substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign the
Registration Statement filed herewith and any and all amendments to said
Registration Statement (including post-effective amendments and registration
statements filed pursuant to Rule 462 and otherwise), and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ RICHARD A. MILLER, M.D. President, Chief Executive Officer and June 13, 1996
- ----------------------------------- Director (Principal Executive Officer)
(Richard A. Miller, M.D.)
/s/ MARC L. STEUER Vice President, Business Development and June 13, 1996
- ----------------------------------- Chief Financial Officer (Principal
(Marc L. Steuer) Financial and Accounting Officer)
/s/ THOMAS D. KILEY Director June 13, 1996
- -----------------------------------
(Thomas D. Kiley)
/s/ JOSEPH S. LACOB Director June 13, 1996
- -----------------------------------
(Joseph S. Lacob)
/s/ PATRICK F. LATTERELL Director June 13, 1996
- -----------------------------------
(Patrick F. Latterell)
/s/ JOSEPH C. SCODARI Director June 13, 1996
- -----------------------------------
(Joseph C. Scodari)
/s/ CRAIG C. TAYLOR Director June 13, 1996
- -----------------------------------
(Craig C. Taylor)
</TABLE>
II-5
<PAGE> 79
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated June 5, 1996, relating to
the financial statements of Pharmacyclics, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
PRICE WATERHOUSE LLP
San Jose, California
June 12, 1996
II-6
<PAGE> 80
EXHIBIT 23.3
CONSENT OF COUNSEL
We hereby consent to the reference to our firm under the caption "Experts"
in the Registration Statement on Form S-1 and related Prospectus of
Pharmacyclics, Inc. for the registration of up to 2,300,000 shares of its Common
Stock.
BRINKS HOFER GILSON & LIONE
/s/ ROY E. HOFER
--------------------------------------
Roy E. Hofer
Chicago, Illinois
June 12, 1996
II-7
<PAGE> 81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------
PHARMACYCLICS, INC.
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement................................................
3.1 Restated Certificate of Incorporation of Registrant...........................
3.2 Amended and Restated Bylaws of Registrant (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1, Commission
File No. 33-96048)............................................................
4.1 Amended and Restated Investors' Rights Agreement, between the Registrant and
the investors specified therein, dated July 31, 1995 (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048).................................................
4.2 Specimen Certificate of the Registrant's Common Stock (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048).................................................
4.3 Form of Lock-up Agreement.....................................................
5.1 Opinion of Brobeck, Phleger & Harrison LLP....................................
10.1 Form of Indemnification Agreement between Registrant and its directors and
executive officers (Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048).............
10.2 Series C Stock Purchase Agreement dated as of June 13, 1994 between Registrant
and the investors specified therein (Incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.3 Investment Agreement dated as of July 31, 1995 between the Registrant and the
investors specified therein (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)...
10.4 Form of Series C Preferred Stock Purchase Warrant dated as of July 31, 1995
issued by the Registrant to the investors listed on Schedule A thereto
(Incorporated by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96048)..........................
10.5 Master Lease and Warrant Agreements entered into between Registrant and
Comdisco, Inc. dated as of July 22, 1992, July 30, 1992, March 31, 1993, June
24, 1993, and October 3, 1994, respectively (Incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1, Commission
File No. 33-96048)............................................................
10.6 Patent License Agreement entered into between Registrant and The University of
Texas, Austin entered into on or about July 1, 1991 (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048).................................................
10.7 Patent License Agreement entered into between Registrant and The University of
Texas, Dallas dated as of July 1, 1992, as amended by the Patent License
Agreement dated May 27, 1993 (Incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)...
10.8 Patent License Agreement entered into between Registrant and Stuart W. Young
dated as of October 15, 1992 (Incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.9 Lease Agreement entered into between the Registrant and New England Mutual
Life Insurance Company dated as of June 17, 1993, as amended on July 22, 1993,
and as further amended on March 1, 1994 (Incorporated by reference to Exhibit
10.11 to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.10 Supply Agreement entered into between the Registrant and Glaxo Wellcome Co.
(f/k/a Burroughs Wellcome Co.) dated as of March 1, 1995 (Incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048)............................................
10.11 License Agreement entered into between the Registrant and Cook, Incorporated
dated as of April 4, 1995 (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Commission File No. 33-96048)...
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ------------------------------------------------------------------------------
<C> <S> <C>
10.12 License and Supply Agreement entered into between the Registrant and E-Z-EM,
Inc. dated as of August 17, 1995 (Incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.13 The Company's 1995 Stock Option Plan (Incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.14 The Company's 1995 Non-Employee Directors' Stock Option Plan (Incorporated by
reference to Exhibit 10.17 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048)............................................
10.15 The Company's Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.18 to the Company's Registration Statement on Form S-1, Commission
File No. 33-96048)............................................................
10.16 Employment Agreement entered into between the Registrant and Richard A.
Miller, M.D., dated as of June 10, 1992 (Incorporated by reference to Exhibit
10.19 to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.17 Employment Agreement entered into between the Registrant and Marc L. Steuer
dated as of October 31, 1994 (Incorporated by reference to Exhibit 10.20 to
the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.18 Employment Agreement entered into between the Registrant and William C. Dow,
Ph.D., dated as of May 20, 1992, as amended by a letter agreement dated July
8, 1992 (Incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048).............
10.19 Employment Agreement entered into between the Registrant and Stuart W. Young
M.D., dated as of April 19, 1993 (Incorporated by reference to Exhibit 10.22
to the Company's Registration Statement on Form S-1, Commission File No.
33-96048).....................................................................
10.20 Promissory Notes issued by the Registrant to Stuart W. Young, M.D., dated as
of September 1994 and April 1995, in the amounts of $65,000 and $30,000,
respectively (Incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1, Commission File No. 33-96048).............
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1)..........
23.2 Consent of Price Waterhouse LLP, Independent Accountants (see page II-6)......
23.3 Consent of Willian Brinks Olds Hofer Gilson & Lione (see page II-7)...........
24.1 Power of Attorney (see page II-5).............................................
27 Financial Data Schedule.......................................................
</TABLE>
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
PHARMACYCLICS, INC.
Common Stock, $.0001 par value
UNDERWRITING AGREEMENT
July __, 1996
<PAGE> 2
July __, 1996
Morgan Stanley & Co. Incorporated
Cowen & Company
Invemed Associates, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Pharmacyclics, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters"), an aggregate of 2,000,000 shares of its common
stock ($.0001 per share par value) (the "Firm Shares"),
The Company also proposes to issue and sell to the several
Underwriters not more than an additional 300,000 shares of its common stock
$.0001 per share par value (the "Additional Shares"), if and to the extent that
you, as managers of the offering, shall have determined to exercise, on behalf
of the Underwriters, the right to purchase such shares of common stock granted
to the Underwriters in Article II hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The shares of
common stock, ($.0001 per share par value), of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "Common Stock."
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a prospectus,
relating to the Shares. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) under the Securities Act for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to refer to both the registration statement referred to above
(Commission File No. 33-____) and the Rule 462 Registration Statement, in each
case as amended from time to time.
I.
The Company represents and warrants to each of the
Underwriters that:
(a) The Registration Statement has become effective, no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended
or supplemented, if applicable, will not contain any untrue
<PAGE> 3
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this
paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company.
(d) The Company does not own or control, directly or
indirectly, any interest in any other corporation, association, or
other business entity.
(e) The Company has good and marketable title in fee simple to
all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company
in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company;
and any real property and buildings held under lease by the Company are
held by it under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
except as described in or contemplated by the Prospectus.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable.
Except as set forth in the Prospectus, the Company does not have
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. All outstanding shares of capital stock and
options and other rights to acquire capital stock have been issued in
compliance with the registration and qualification provisions of all
applicable securities laws and were not issued in violation of any
preemptive rights, rights of first refusal or other similar rights.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive rights, rights of first
refusal or similar rights.
-2-
<PAGE> 4
(i) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding obligation of the
Company.
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company, or any agreement or other
instrument binding upon the Company that is material to the Company, or
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company, and no consent, approval,
authorization or order of or qualification with any governmental body
or agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company from that set forth in the Prospectus.
(l) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (i) the
Company has not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock, short-term debt or long-term debt
of the Company, except in each case as described in or contemplated by
the Prospectus.
(m) There are no legal or governmental proceedings pending or,
to the Company's knowledge, threatened to which the Company is a party
or to which any of the properties of the Company is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as required.
(n) The Company has all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made
all declarations and filings with, all federal, state, local and other
governmental authorities, all self-regulatory organizations and all
courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner
described in the Prospectus, except to the extent that the failure to
obtain or file would not have a material adverse effect on the Company.
(o) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or Rule 462 under the Securities
Act, complied when so filed in all material respects with the
Securities Act and the rules and regulations of the Commission
thereunder.
(p) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended.
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(q) There is no owner of any securities of the Company who has
any rights, not effectively satisfied or waived, to require
registration of any shares of capital stock of the Company in
connection with the filing of the Registration Statement or the sale of
any shares thereunder.
(r) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged; the
Company has not been refused any insurance coverage sought or applied
for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the
earnings, business or operations of the Company, except as described in
or contemplated by the Prospectus.
(s) The Company (i) is in compliance with any and all
applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
(collectively, "Environmental Laws"), (ii) has received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) is
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company.
(t) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company, in the course of
which it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly
or in the aggregate, have a material adverse effect on the Company.
(u) The Company owns or possesses adequate licenses or other
rights to use all patents, copyrights, trademarks, service marks, trade
names, technology and know-how necessary (in any material respect) to
conduct its business in the manner described in the Prospectus and,
except as disclosed in the Prospectus, the Company has not received any
notice of infringement or conflict with (and the Company knows of any
infringement or conflict with) asserted rights of others with respect
to any patents, copyrights, trademarks, service marks, trade names,
technology or know-how which could result in any material adverse
effect upon the Company and, except as disclosed in the Prospectus, the
discoveries, inventions, products or processes of the Company referred
to in the Prospectus do not, to the best knowledge of the Company,
infringe or conflict with any right or patent of any third party, or
any discovery, invention, product or process which is the subject of a
patent application filed by any third party, known to the Company which
could have a material adverse effect on the Company.
(v) The Company possesses all consents, approvals, orders,
certificates, authorizations and permits issued by and has made all
declarations and filings with, all appropriate federal, state or
foreign governmental or self-regulatory authorities and all courts and
other tribunals necessary to conduct its
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<PAGE> 6
business and to own, lease, license and use its properties in the
manner described in the Prospectus, and the Company has not received
any notice of proceedings related to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of any unfavorable decision, ruling or
finding, or failure to obtain or file would result in a material
adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company, except as described in
or contemplated by the Prospectus.
(w) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(x) No material labor dispute with the employees of the
Company exists, except as described in or contemplated by the
Prospectus, or, to the best knowledge of the Company, is imminent; and
the Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in any material adverse
change in the condition, financial or otherwise, or in the earnings,
business or operations of the Company.
(y) _____________________ outstanding shares of Common Stock
(including all shares of Common Stock held by the directors and
executive officers of the Company), and all securities convertible into
or exercisable or exchangeable for such Common Stock, are subject to
valid, binding and enforceable agreements (collectively, the "Lock-up
Agreements") that restrict the holders thereof from selling, granting
any option for the purchase of, or otherwise transferring or disposing
of, any of such shares of Common Stock, or any such securities
convertible into or exercisable or exchangeable for Common Stock, for a
period of 90 days after the date of the Prospectus without the prior
written consent of Morgan Stanley & Co., Incorporated.
(z) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating
to issuers doing business with Cuba.
II.
The Company hereby agrees to sell to the several Underwriters,
and each Underwriter, upon the basis of the representations and warranties
herein contained, but subject to the conditions hereinafter stated, agrees,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares (subject to such adjustments to eliminate fractional shares as you
may determine) set forth in Schedule I hereto opposite the name of such
Underwriter at $______ a share (the "purchase price").
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<PAGE> 7
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company hereby
agrees to issue and sell to the Underwriters the Additional Shares, and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 300,000 Additional Shares at the purchase price. Additional Shares may
be purchased as provided in Article IV hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 90 days after the date of the Prospectus, (1)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or similar agreement
that transfers, in whole or in part, the economic risk of ownership of the
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise, other than (i) the Shares to be sold hereunder and (ii) any shares
of Common Stock sold by the Company upon the exercise of an option or warrant or
the conversion of a security outstanding on the date hereof described in the
Prospectus.
III.
The Company is advised by you that the Underwriters propose to
make a public offering of the Shares as soon after the Registration Statement
and this Agreement have become effective as in your judgment is advisable. The
Company is further advised by you that the Shares are to be offered to the
public initially at $_____ a share (the public offering price) and to certain
dealers selected by you at a price that represents a concession not in excess of
$______ a share under the public offering price, and that any Underwriter may
allow, and such dealers may reallow, a concession, not in excess of $_____ a
share, to any Underwriter or to certain other dealers.
IV.
Payment for the Firm Shares shall be made in Federal or other
funds immediately available in New York City against delivery of such Firm
Shares for the respective accounts of the several Underwriters, at 7:00 A.M.,
local time, on ___________, 1996, or at such other time on the same or such
other date, not later than ___________, 1996, as shall be designated in writing
by you. The time and date of each such payment are hereinafter referred to as
the Closing Date.
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters, at 7:00 A.M., local time, on such date (which may be the same as
the Closing Date but shall in no event be earlier than the Closing Date nor
later than ten business days after the giving of the notice hereinafter referred
to) as shall be designated in a written notice from you to the Company of your
determination, on behalf of the Underwriters, to purchase a number, specified in
said notice, of Additional Shares, or on such other date, in any event not later
than ___________, 1996 as shall be designated in writing by you. The time and
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<PAGE> 8
date of such payment are hereinafter referred to as the "Option Closing Date".
The notice of the determination to exercise the option to purchase Additional
Shares and of the Option Closing Date may be given at any time within 30 days
after the date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the purchase price therefor.
V.
The obligations of the Company and the several obligations of
the Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act, and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial
or otherwise, or in the earnings, business or operations, of the
Company from that set forth in the Registration Statement that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company, to the effect
set forth in clause (a) (i) above, and to the effect that the
representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
The officers signing and delivering such certificate
may rely upon the best of their knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of
Brobeck, Phleger & Harrison, counsel for the Company, dated the Closing
Date, to the effect that
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<PAGE> 9
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the State of Delaware, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company;
(ii) To the best of such counsel's knowledge, the
Company does not own or control, directly or indirectly any
interest in any other corporation, association, or other
business entity.
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to
the issuance of the Shares to be sold by the Company have been
duly authorized and are validly issued, non-assessable and to
the best of such counsel's knowledge, fully paid;
(v) the Shares to be sold by the Company have been
duly authorized, and, when issued and delivered in accordance
with the terms of this Agreement, will be validly issued and
non-assessable, and to the best of such counsel's knowledge,
fully paid, and the issuance of such Shares will not be
subject to any preemptive rights, rights of first refusal or
similar rights;
(vi) the Company has corporate power and authority to
enter into this Agreement and to issue, sell and deliver to
the Underwriters the Shares to be issued and sold by the
Company. This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or bylaws of the
Company or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company that is
material to the Company, or, to such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary,
and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required
for the performance by the Company of its obligations under
this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states and
jurisdictions in connection with the offer and sale of the
Shares;
(viii) the statements (1) in the Prospectus under the
captions "Risk Factors -- No Assurance of Product Approval,"
"Risk Factors -- Uncertainties Regarding Health Care
Reimbursement and Reform," "Risk Factors -- Government
Regulation Health Care Reform," "Risk Factors -- Shares
Eligible for Future Sale and Registration Rights," "Dividend
Policy,", "Management," "Certain Transactions," "Description
of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriters" and (2) in the Registration Statement in Items
14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or
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<PAGE> 10
proceedings referred to therein, fairly present the
information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(ix) such counsel does not know of any legal,
regulatory or governmental proceeding pending or threatened to
which the Company is a party or to which any of the properties
of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes,
regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that
are not described or filed as required;
(x) the Company is not an "investment company" or an
entity "controlled" by an "investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;
(xi) to the knowledge of such counsel, there is no
legal or beneficial owner of any securities of the Company who
has any rights, not effectively satisfied or waived, to
require registration of any shares of capital stock of the
Company in connection with the filing of the Registration
Statement;
(xii) to such counsel's knowledge: (1) the
Registration Statement has become effective under the
Securities Act, no stop order proceedings with respect thereto
have been instituted or are pending or threatened under the
Securities Act and nothing has come to such counsel's
attention to lead it to believe that such proceedings are
contemplated; and (2) any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time
period required by such Rule 424(b);
(xiii) the Shares to be sold under this Agreement to
the Underwriters are duly authorized for quotation on the
Nasdaq National Market; and
(xiv) Such counsel shall also state that based upon
its participation as described in the preceding paragraph, (i)
they believe that the Registration Statement and the
Prospectus (except for financial statements and schedules and
other financial data therein, as to which they need express no
belief) complied as to form in all material respects with the
requirements of the Act and the rules and regulations of the
Commission thereunder and (ii) they confirm that they have no
reason to believe that (except for financial statements and
schedules and other financial data therein, as to which they
need express no belief) the Registration Statement (and the
prospectus included therein) as of its effective date,
contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
that (except for financial statements and schedules and other
financial data therein, as to which they need express no
belief) the Prospectus, as of the date of the Prospectus and
such date or dates as such opinion is delivered, contains any
untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(d) You shall have received on the Closing Date an opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
the Underwriters, dated the Closing Date, covering the
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<PAGE> 11
matters referred to in subparagraphs (viii) (but only as to the
statements in the Prospectus under "Description of Capital Stock"),
(viii) and (xv) of paragraph (c) above and to the effect that the
statements in the Prospectus under "Underwriters," insofar as such
statements constitute a summary of this Agreement, fairly present the
information called for with respect to such Agreement.
(e) You shall have received on the Closing Date an opinion of
Brinks Hofer Gilson & Lione, special patent counsel for the Company,
dated the Closing Date, to the effect that
(i) Such counsel represents the Company in certain
matters relating to intellectual property, including patents, trade
secrets and certain trademark matters;
(ii) Such counsel is familiar with the Company's MRI
contrast agent technology, and in particular the GADOLITE and
gadolinium texaphyrin products under development by the Company and has
read those portions of the Registration Statement and the Prospectus
entitled "Risk Factors--Patents and Proprietary Rights" at the
penultimate paragraph thereof and "Business--Patents and Proprietary
Technology" at the penultimate paragraph thereof, each of which relates
to certain patents held or licensed by Schering AG (collectively, the
"Schering Intellectual Property Portion");
(iii) Such counsel has reviewed the Schering
Intellectual Property Portion, and based upon such review, a review of
the prior art references made known to counsel and discussions with
Company scientific personnel, such counsel is aware of no valid United
States or foreign patent that is or would be infringed by the
activities of the Company in the manufacture, use or sale of GADOLITE
or an MRI contrast agent based on gadolinium texaphyrin;
(iv) Such counsel is aware of no pending judicial or
governmental proceedings relating to issued or licensed patents or
proprietary information to which the Company is a party or of which any
property of the Company is subject and such counsel is not aware of any
pending or threatened action, suit or claim by others that the Company
is infringing or otherwise violating any patent rights of others; and
(v) Such counsel has no reason to believe that the
information contained in the Schering Intellectual Property Portion of
the Registration Statement or the Prospectus at the time it became
effective contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that, at such Closing
Date the information contained in the Intellectual Property Portion of
the Prospectus or any amendment or supplement to the Schering
Intellectual Property Portion of the Prospectus contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) You shall have received on the Closing Date an opinion of
each of Arnold White & Durkee and Jaqueline S. Larson, each a patent
counsel for the Company, dated the Closing Date, to the effect that
(i) Such counsel represents the Company in certain
matters relating to intellectual property, including patents, trade
secrets and certain trademark matters;
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<PAGE> 12
(ii) Such counsel is familiar with the technology,
and in particular its GADOLITE product under development and the class
of compounds known as texaphyrins, used by the Company in its business
and the manner of their use and has read the portions of the
Registration Statement and the Prospectus entitled "Risk
Factors--Patents and Proprietary Rights" and "Business--Patents and
Proprietary Technology" exclusive of those portions defined above as
the "Schering Intellectual Property Portion" (collectively, the
"Intellectual Property Portion");
(iii) The Intellectual Property Portion contains
accurate descriptions of the Company's patent applications, issued and
allowed patents, and patents licensed to it that have been prosecuted
by such counsel and fairly summarizes the legal matters, documents and
proceedings relating thereto;
(iv) Such counsel has reviewed the Company's patent
applications prepared by such counsel and filed in the U.S. and outside
the U.S. (the "Applications"), which Applications are described in the
Intellectual Property Portion, and based upon such review, a review of
the prior art references made known to counsel and discussions with
Company scientific personnel, such counsel is aware of no valid United
States or foreign patent that is or would be infringed by the
activities of the Company in the manufacture, use or sale of any
proposed product, drug or other material as described in the Prospectus
or made or used according to the Applications;
(v) To the best of such counsel's knowledge, the
Applications have been properly prepared and filed on behalf of the
Company, and are being diligently pursued by the Company; the
inventions described in the Applications are assigned or licensed to
the Company; to the best of such counsel's knowledge, no other entity
or individual has any right or claim in any of the inventions,
Applications, or any patent to be issued therefrom, except as noted in
the Prospectus under "Business--Collaborative Relationships" and each
of the Applications discloses patentable subject matter;
(vi) Such counsel is aware of no pending or
threatened judicial or governmental proceedings relating to patents or
proprietary information to which the Company is a party or of which any
property of the Company is subject and such counsel is not aware of any
pending or threatened action, suit or claim by others that the Company
is infringing or otherwise violating any patent rights or others, nor
is such counsel aware of any rights of third parties to any of the
Company's inventions described in the Applications, issued, approved or
licensed patents which could reasonably be expected materially to
affect the ability of the Company to conduct its business as described
in the Prospectus, including the commercialization of its GADOLITE and
texaphyrin products currently under development; and
(vii) Such counsel has no reason to believe that the
information contained in the Intellectual Property Portion of the
Registration Statement or the Prospectus at the time it became
effective contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that, at such Closing
Date the information contained in the Intellectual Property Portion of
the Prospectus or any amendment or supplement to the Intellectual
Property Portion of the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
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<PAGE> 13
With respect to subparagraph (xvi) of paragraph (c) above,
Brobeck Phleger & Harrison and Wilson Sonsini Goodrich & Rosati, Professional
Corporation, may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
The opinion of Brobeck Phleger & Harrison described in
paragraph (c), the opinion of Wilian Brinks Hofer Gilson & Leoni described in
paragraph (e) above and the opinions of Arnold White & Durkee and Jaqueline S.
Larson described in paragraph (f) above shall each be rendered to you at the
request of the Company, and shall so state therein.
(g) You shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to you, from
Price Waterhouse, independent public accountants, containing statements
and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
(h) The "Lock-up Agreements" delivered to you on or before the
date hereof, shall be in full force and effect on the Closing Date.
(i) The shares of Common Stock of the Company shall have
received approval for listing, upon official notice of issuance, on the
Nasdaq National Market.
(j) The Company shall have complied with the provisions of
paragraph (a) of Section VI hereof with respect to the furnishing of
Prospectuses on the business day next succeeding the date of this
Agreement in such quantities as you may reasonably request.
(k) The Company shall have delivered all other certificates as
may be reasonably requested by Wilson Sonsini Goodrich and Rosati, Professional
Corporation, counsel for the underwriters.
All the agreements, opinions, certificates and letters
mentioned above or elsewhere in this Agreement shall be deemed in compliance
with the provisions hereof only if Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Underwriters, shall be reasonably
satisfied that they comply in form and scope.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the
Additional Shares, other matters related to the issuance of the Additional
Shares and an opinion or opinions of Brobeck Phleger & Harrison, Brinks Hofer
Gilson & Leoni, Arnold White & Durkee and Jaqueline S. Larson in form and
substance satisfactory to Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters.
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<PAGE> 14
VI.
In further consideration of the agreements of the Underwriters
herein contained, the Company covenants as follows:
(a) To furnish to you, without charge, five (5) signed copies
of the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and, during the period mentioned
in paragraph (c) below, as many copies of the Prospectus and any
supplements and amendments thereto or to the Registration Statement as
you may reasonably request. In the case of the Prospectus, to furnish
copies of the Prospectus in New York City, prior to 3:00 p.m., on the
business following the date of this Agreement, in such quantities as
you reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and to file no such proposed amendment
or supplement to which you reasonably object.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel for the Underwriters, the
Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist
as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of your counsel, it is necessary to
amend or supplement the Prospectus to comply with law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to
the Underwriters and to the dealers (whose names and addresses you will
furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request and to pay all expenses (including fees and
disbursements of counsel) in connection with such qualification and in
connection with any review of the offering of the Shares by the
National Association of Securities Dealers, Inc.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement
covering the twelve-month period ending December 31, 1997 that
satisfies the provisions of Section 11(a) of the Securities Act and the
rules and regulations of the Commission thereunder.
(f) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to you copies of
(i) all reports to its stockholders and (ii) all reports, financial
statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
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<PAGE> 15
(g) The Company will apply the proceeds from the sale of the
Shares as set forth under in "Use of Proceeds" in the Prospectus.
(h) The Company will use its best efforts to obtain maintain
in effect the quotation of the Shares on the Nasdaq National Market.
(i) The Company will comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which may from time to time be applicable
to the Company.
(j) The Company will comply with all provisions of all
undertakings contained in the Registration Statement.
(k) Prior to the Closing Date or any Additional Closing Date,
as the case may be, the Company will not issue any press release or
other communication directly or indirectly and will not hold any press
conference with respect to the Company, or its financial condition,
results of operations, business, properties or assets, or this
offering, without your prior written consent.
(l) The Company agrees: (i) to enforce the terms of each
Lock-up Agreement, (ii) issue stop-transfer instructions to the
transfer agent for the Common Stock with respect to any transaction or
contemplated transaction that would constitute a breach of or default
under the applicable Lock-up Agreement, and (iii) upon written request
of Morgan Stanley & Co. Incorporated, to release from the Lock-up
Agreements those shares of Common Stock held by those holders set forth
in such request. In addition, except with the prior written consent of
Morgan Stanley & Co. Incorporated, the Company agrees (i) not to amend
or terminate, or waive any right under, any Lock-up Agreement or take
any other action that would directly or indirectly have the same effect
as an amendment or termination, or waiver of any right under, any
Lock-up Agreement that would permit any person subject to such Lock-up
Agreement to sell, make any short sale of, grant any option for the
purchase of, or otherwise transfer or dispose of, any of such shares of
Common Stock or other securities prior to the expiration of 90 days
after the date of the Prospectus, and (ii) not to consent to any sale,
short sale, grant of an option for the purchase of, or other
disposition or transfer of shares of Common Stock, or securities
convertible into or exercisable or exchangeable for Common Stock,
subject to a Lock-up Agreement.
-14-
<PAGE> 16
VII.
The Company agrees to pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including,
but not limited to, all expenses incident to (i) the preparation and filing of
the Registration Statement (including all exhibits thereto) and the Prospectus
and all amendments and supplements thereto, (ii) the preparation, issuance and
delivery of the Shares, including any transfer taxes payable in connection with
the transfer and sale of the Shares to the Underwriters, (iii) the fees and
disbursements of the Company's counsel and accountants, (iv) the qualification
of the Shares under state securities or Blue Sky laws in accordance with the
provisions of paragraph (d) of Article VI hereof, including filing fees and the
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the preparation of any Blue Sky or Legal Investment
Memoranda, (v) the printing and delivery to the Underwriters, in quantities as
hereinabove stated, of copies of the Registration Statement (including all
exhibits thereto) and all amendments thereto and of each preliminary prospectus
and the Prospectus and any amendments or supplements thereto, (vi) the printing
and delivery to the Underwriters of copies of any Blue Sky or Legal Investment
Memoranda, (vii) the filing fees and expenses, if any, incurred with respect to
any filing with the National Association of Securities Dealers, Inc., made in
connection with the offering of the Shares, (viii) any expenses incurred by the
Company in connection with a "road show" presentation to potential investors,
(ix) the listing of the Common Stock on the Nasdaq National Market and (x) all
document production charges and expenses of counsel to the Underwriters (but not
including their fees for professional services) in connection with the
preparation of this Agreement.
VIII.
The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, or is under common control with, or is controlled by, any Underwriter, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter or any person controlling such
Underwriter, from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the directors of the Company, the
officers of the Company who sign the Registration Statement and
-15-
<PAGE> 17
each person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only with reference
to information relating to such Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to any of the two preceding paragraphs, such
person (the "Indemnified Party") shall promptly notify the person against whom
such indemnity may be sought (the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain counsel
reasonably satisfactory to the Indemnified Party to represent the Indemnified
Party and any others the Indemnifying Party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any Indemnified Party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in respect of the legal expenses of any Indemnified Party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and (b) the fees and expenses
of more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls the Company within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they are
incurred. In the case of any such separate firm for the Underwriters and such
control persons of Underwriters, such firm shall be designated in writing by
Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the
Company, and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. The Indemnifying Party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an Indemnified Party
shall have requested an Indemnifying Party to reimburse the Indemnified Party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the Indemnifying Party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
Indemnifying Party of the aforesaid request and (ii) such Indemnifying Party
shall not have reimbursed the Indemnified Party in accordance with such request
prior to the date of such settlement. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Party is or
could have been a party and indemnity could have been sought
-16-
<PAGE> 18
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such proceeding.
If the indemnification provided for in the first or second
paragraph of this Article VIII is unavailable to an Indemnified Party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each Indemnifying Party under such paragraph, in lieu of
indemnifying such Indemnified Party thereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Indemnifying Party or parties on the one hand
and the Indemnified Party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Indemnifying Party or parties on the one hand and of the Indemnified Party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Shares (before deducting expenses)
received by the Company and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate public offering price of the
Shares. The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Article VIII are several in proportion to the respective number
of Shares they have purchased hereunder, and not joint.
The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Article VIII were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article VIII, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Article VIII are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any Indemnified Party at law or in equity.
The indemnity and contribution provisions contained in this
Article VIII and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, or the
Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares.
-17-
<PAGE> 19
IX.
This Agreement shall be subject to termination by notice given
by you to the Company, if (a) after the execution and delivery of this Agreement
and prior to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either Federal or New York State authorities, or
(iv) there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your sole
judgment, is material and adverse and (b) in the case of any of the events
specified in clauses (a)(i) through (iv), such event singly or together with any
other such event makes it, in your sole judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
X.
This Agreement shall become effective upon execution and
delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided, however, that in no event
shall the number of Shares that any Underwriter has agreed to purchase pursuant
to Article II be increased pursuant to this Article X by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date or the Option Closing Date, as the case may
be, any Underwriter or Underwriters shall fail or refuse to purchase Shares and
the aggregate number of Shares with respect to which such default occurs is more
than one-tenth of the aggregate number of Shares to be purchased on such date,
and arrangements satisfactory to you and the Company for the purchase of such
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date or the Option Closing Date, as the case may be, but in
no event for longer than seven days, in order that the required changes, if any,
in the Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement,
-18-
<PAGE> 20
the Company will reimburse the Underwriters or such Underwriters as have so
terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
-19-
<PAGE> 21
This Agreement may be signed in two or more counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
Very truly yours,
Pharmacyclics, Inc.
By
-------------------------------------------
Richard A. Miller, M.D.
President and Chief Executive Officer
Accepted, July __, 1996
Morgan Stanley & Co. Incorporated
Cowen & Company
Invemed Associates, Inc.
Acting severally on behalf of themselves and the
several Underwriters named herein.
By: Morgan Stanley & Co. Incorporated
By
--------------------------------------
Name:
Title:
-20-
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------------------------------------------------- ---------------------
<S> <C>
Morgan Stanley & Co. Incorporated....................
Cowen & Company......................................
Invemed Associates, Inc. ............................
-------------------
2,000,000
Total..................... ===================
</TABLE>
-21-
<PAGE> 1
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF PHARMACYCLICS, INC.
A DELAWARE CORPORATION
Pharmacyclics, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Pharmacyclics, Inc. and that the
Corporation was originally incorporated on April 19, 1991, pursuant to the
General Corporation Law.
SECOND: The restatement of the Corporation's Restated Certificate of
Incorporation was approved by the Board of Directors of the Corporation at a
meeting held on August 2, 1995 in accordance with the provisions of Sections 242
and 245 of the General Corporation Law:
"RESOLVED, that the Restated Certificate of Incorporation of the
Corporation (the "Certificate") shall be amended and restated in its entirety as
follows:
ARTICLE I
The name of this corporation is Pharmacyclics, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
<PAGE> 2
ARTICLE IV
(A) Classes of Stock. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is Thirteen Million (13,000,000) shares. Twelve Million (12,000,000) shares
shall be Common Stock, par value $.0001 per share and One Million (1,000,000)
shares shall be Preferred Stock, par value $.0001 per share.
(B) Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by this Restated Articles of Incorporation may be
issued from time to time in series. The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon any series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights that have been or
may be granted to the Preferred Stock or series thereof in Certificates of
Determination or the corporation's Certificate of Incorporation, as amended and
restated from time to time, and requirements and restrictions of applicable law
("Protective Provisions"), the rights, privileges, preferences and restrictions
of any such additional series may be subordinated to, pari passu with
(including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series, prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
(C) Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to liquidation,
the assets of the Corporation, upon the liquidation, dissolution or winding up
of the Corporation, shall be distributed to the holders of the Common Stock.
3. Redemption. The Common Stock is not redeemable.
2.
<PAGE> 3
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
Except as otherwise provided in this Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
In the event the Corporation is subject to Section 2115 of the
California Corporations Code, Section A of this Article shall apply. Otherwise,
Section B of this Article shall apply.
A. California. The liability of each and every director of this
Corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law. If California law is hereafter amended to
authorize, with the approval of a Corporation's stockholders, further reductions
in the liability of the Corporation's directors for breach of fiduciary duty,
then a director of the Corporation shall not be liable for any such breach to
the fullest extent permitted by California law, as so amended.
3.
<PAGE> 4
B. Delaware. To the fullest extent permitted by the General
Corporation Law of Delaware, as the same may be amended from time to time, a
director of the Corporation shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director. If the General Corporation Law of Delaware is hereafter amended to
authorize, with the approval of a Corporation's stockholders, further reductions
in the liability of the Corporation's directors for breach of fiduciary duty,
then a director of the Corporation shall not be liable for any such breach to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
C. Consistency. In the event of any inconsistency between Sections A
and B of this Article, the controlling Section, as to any particular issue with
regard to any particular matter, shall be the one which provides to the director
in question the greatest protection from liability.
D. Effect of Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article IX shall not adversely affect any right or
protection of a director of the Corporation with respect to any acts or
omissions of such director occurring prior to such repeal or modification.
ARTICLE X
In the event the Corporation is subject to Section 2115 of the
California Corporations Code, Section A of this Article shall apply. Otherwise,
Section B of this Article shall apply.
A. California. To the fullest extent permitted by California law, the
Corporation is authorized to provide indemnification of (and advancement of
expenses to) agents (as defined in Section 317 of the California Corporations
Code) through bylaw provision, agreements with agents, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 317 of the California Corporations
Code, subject only to applicable limits set forth in Section 204 of the
California Corporations Code, with respect to actions for breach of duty to the
Corporation and its stockholders.
B. Delaware. To the fullest extent permitted by applicable law, the
Corporation is also authorized to provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
the Corporation to provide indemnification) though bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the Delaware General Corporation Law,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to the Corporation,
its stockholders, and others.
4.
<PAGE> 5
C. Consistency. In the event of any inconsistency between Sections A
and B of this Article, the controlling Section, as to any particular issue with
regard to any particular matter, shall be the one which authorizes for the
benefit of the agent or other person in question the provision of the fullest,
most prompt, most certain or otherwise most favorable indemnification and/or
advancement.
D. Effect of Repeal or Modification. Any repeal or modification of any
of the foregoing provisions of this Article X shall not adversely affect any
right or protection of a director, officer, agent or other person existing at
the time of, or increase the liability of any director of the Corporation with
respect to any acts or omissions of such director, officer or agent occurring
prior to such repeal or modification.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, the Restated Certificate of Incorporation has been
signed by the President and the Secretary of the Corporation this 25th day of
January, 1996.
PHARMACYCLICS, INC.
By: /s/ Richard A. Miller
--------------------------------------
Richard A. Miller
President and Chief Executive Officer
ATTEST:
/s/ Stephan Dolezalek
- --------------------------------
J. Stephan Dolezalek, Secretary
5.
<PAGE> 1
Exhibit 5.1
June 10, 1996
Pharmacyclics, Inc.
995 East Arques Avenue
Sunnyvale, CA 94086
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (Commission File No.
333-[_____]) originally filed by Pharmacyclics, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on or about June [__],
1996, as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to [__________] shares (the "Shares") of the Company's Common Stock, par
value $0.0001 per share (the "Common Stock"). The Shares include an
over-allotment option granted by the Company to the Underwriters to purchase up
to [_____] additional shares of the Common Stock and are to be sold to the
Underwriters as described in the Registration Statement for resale to the
public.
We have examined originals or copies of (i) the Restated Certificate of
Incorporation of the Company; (ii) the Bylaws of the Company; (iii) certain
resolutions of the Board of Directors of the Company; and (v) such other
documents and records as we have deemed necessary and relevant for the purposes
hereof. In additional, we have relied on certificates of officers of the Company
and certificates of public officials as to certain matters of fact relating to
this opinion and have made such investigations of law as we have deemed
necessary and relevant as a basis hereof.
We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as originals, the conformity
to authentic original documents, certificates and records submitted to as copies
and the truthfulness of all statements of facts contained therein. Based on the
foregoing and subject to the limitations set forth herein and having due regard
for such legal considerations as we deem relevant, we are of the opinion that
the Shares, when issued and sold in the manner described in the Registration
Statement, will be validly issued, fully paid and nonassessable shares of the
Common Stock.
The foregoing opinion is based on and limited to the General
Corporation Law of the State of Delaware and the relevant federal laws of the
United States, and we express no opinion with respect to the laws of any other
jurisdiction.
<PAGE> 2
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
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