AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RIGEL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 8731 94-3248524
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
240 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-1100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JAMES M. GOWER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RIGEL PHARMACEUTICALS, INC.
240 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(650) 624-1100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
PATRICK A. POHLEN, ESQ. RICHARD R. PLUMRIDGE, ESQ.
COOLEY GODWARD LLP JEFF T. HARRIS, ESQ.
FIVE PALO ALTO SQUARE ARUN JHA, ESQ.
3000 EL CAMINO REAL BROBECK, PHLEGER & HARRISON LLP
PALO ALTO, CA 94306-2155 370 INTERLOCKEN BLVD., SUITE 500
(650) 843-5000 BROOMFIELD, CO 80021
(303) 410-2000
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
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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, as amended (the "Securities Act"), 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, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration 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, check
the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
Common Stock, par value $.001............................... $100,000,000.00 $26,400.00
(1) Includes shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION FEBRUARY , 2000
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SHARES
[LOGO]
RIGEL PHARMACEUTICALS, INC.
COMMON STOCK
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This is an initial public offering of shares of our common stock. No public
market currently exists for our common stock. We expect the public offering
price to be between $ and $ per share.
We applied to have our common stock listed on the Nasdaq National Market under
the symbol "RIGL."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL
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PUBLIC OFFERING PRICE $ $
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UNDERWRITING DISCOUNT AND COMMISSIONS $ $
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PROCEEDS, BEFORE EXPENSES, TO RIGEL $ $
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The underwriters may also purchase up to shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. This option may be
exercised only to cover over-allotments, if any. If the option is exercised in
full, the total underwriting discounts and commissions will be $ , and the
total proceeds, before expenses, to Rigel will be $ .
Delivery of the shares will be made on or about .
WARBURG DILLON READ LLC
ROBERTSON STEPHENS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
Inside Front Cover Graphic
Title: Rigel addresses the key demand of the pharmaceutical industry in the
post-genomics era: determining and validating the role of genes involved
in disease
Description: A schematic diagram showing the integration of combinatorial
biology and pathway mapping technologies used at Rigel.
Inside Gatefold Graphic
Title: Rigel Technology: Rigel's integrated post-genomics combinatorial biology
technologies rapidly identify and validate therapeutic targets for the
development of small molecule drugs.
Description: A schematic diagram of the drug discovery process using Rigel
technologies.
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Until , 2000 (25 days after the date of this prospectus), all
dealers selling shares of our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
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Prospectus summary................... 3
The offering......................... 5
Summary financial and operating
data............................... 6
Risk factors......................... 7
Forward-looking information.......... 20
Use of proceeds...................... 21
Dividend policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected financial data.............. 24
Management's discussion and analysis
of financial condition and results
of operations...................... 26
Business............................. 31
Management........................... 49
Related party transactions........... 62
Principal stockholders............... 64
Description of securities............ 65
Shares eligible for future sale...... 68
Underwriting......................... 70
Legal matters........................ 71
Experts.............................. 72
Where you can find more
information........................ 72
Index to financial statements........ F-1
ABOUT THIS PROSPECTUS
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"Rigel" and the Rigel logo are trademarks of Rigel Pharmaceuticals, Inc. Other
trademarks and trade names appearing in this prospectus are the property of
their holders.
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2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock discussed under "Risk factors." Our principal executive
offices are located at 240 East Grand Avenue, South San Francisco, California
94080. Our telephone number is (650) 624-1100. Our website is
http://www.rigel.com. The information found on our website is not a part of this
prospectus.
OUR BUSINESS
We are a post-genomics combinatorial biology company which has developed a new
and faster way to find novel drug targets and to validate the role of those
targets in disease without first knowing the identity or sequence of the genes
involved. We can identify targets for drug development by creating a
disease-like setting that can detect a change in the cellular response. By
creating a map of the various protein-protein interactions in cells that are
involved in a disease process, we can select protein targets for drug
development that are specific to the diseases we study and reduce the
probability of selecting targets leading to drugs that produce side effects.
After selecting drug discovery targets, we continue drug development with the
goal of developing small molecule drugs to address large therapeutic areas.
Small molecule drugs provide the advantage that they can generally be
administered orally. In our first three years of research, we have succeeded in
identifying 15 new drug targets in seven of our nine programs and have generated
preclinical candidate compounds in our IgE mast cell, IgE B cell and E-3
ubiquitin ligase programs. We currently have programs in asthma/allergy,
autoimmunity, transplant rejection, rheumatoid arthritis/inflammatory bowel
disease, and tumor growth. We have multi-year collaborations with Cell Genesys,
Janssen, Neurocrine, Novartis and Pfizer.
THE PROBLEM
Pharmaceutical companies face enormous pressure to develop drugs that act on
novel targets within cells. Despite revolutionary advances made in molecular
biology and genomics, only approximately 500 out of thousands of possible
targets have been identified, and there has been no efficient way to identify
additional appropriate targets for drug development. Efforts to sequence the
human genome have generated huge amounts of fundamentally important genetic
information, and functional genomic efforts have provided interesting
information about which particular genes are associated with particular disease
conditions. However, neither has been able to utilize this information to
identify protein drug targets quickly and systematically, or to increase the
probability of discovering new drug candidates. The result is a shortage of
possible drug targets with limited tools to determine which new targets should
be pursued.
OUR SOLUTION
As a post-genomics combinatorial biology company, we bypass the need to know the
identity or sequence of genes in order to discover new drug targets. Instead, we
combine millions of peptide or protein probes with protein pathway members in
cells in a disease-like setting to identify novel proteins as potential targets.
Our two hybrid protein interaction technology establishes a map of the
intracellular signaling pathways controlling cellular responses. We believe that
these technologies provide us with an enhanced ability to identify new drug
targets for drug discovery rapidly and efficiently.
Our post-genomics combinatorial biology technology uses retroviruses to
introduce up to 100 million different peptides or proteins into normal or
diseased cells, stimulates the cells to induce a disease-like behavioral
response, and sorts the cells using our multi-parameter high throughput
fluorescent cell sorters at a rate of up to 60,000 cells per second to collect
data on up to 5 different parameters which
3
means that a sort of 100 million cells can be completed in approximately half an
hour. By analyzing the approximately 500 million resulting data points, we can
rapidly identify those few cells containing a peptide or protein that interacts
with a protein target in a way that causes a cell to change its behavior from
diseased back to normal. We believe we can identify the relatively few drugable
targets and initially validate them in the context of a disease-specific
cellular response.
Our two hybrid protein interaction technology enables us to map protein-protein
interactions, identify specific proteins which bind with other peptides or
proteins, and select targets for drug development that are specific to the
disease pathway we are seeking to affect, avoiding targets that have a role in
other pathways or cells.
We believe that our technology has a number of advantages: improved target
identification; rapid validation of protein targets; improved intracellular
pathway mapping; better informed target selection; more efficient compound
screening; and reduced risk of failure in the drug development process.
OUR STRATEGY
Our strategy is to develop a portfolio of many drug candidates, out-license drug
candidates at a relatively late stage of development, and focus on diseases that
represent large unmet medical needs. Also, we will focus on developing small
molecule drugs delivered to intracellular targets and establish strategic
collaborations with pharmaceutical and biotechnology companies to enhance
product development and commercialization. We structure our collaboration
agreements to permit multiple collaborations in each disease area by focusing on
disease pathways and targets.
PRODUCT DEVELOPMENT PROGRAMS
We currently have six product development programs in immune disorders and three
in cancer:
IMMUNE DISORDERS
ASTHMA/ALLERGY. We have identified preclinical candidate compounds that inhibit
the IgE-mediated secretion of inflammatory factors from mast cells, which will
enter preclinical studies in animal models. In our second program we have
identified a novel drug target that regulates the production of IgE in B cells
and a preclinical compound in this program.
AUTOIMMUNITY & TRANSPLANT REJECTION. These programs seek selective and specific
immune system therapeutics which do not negatively affect the protective
activities of the immune system. We have identified novel drug targets in
T cells and B cells.
RHEUMATOID ARTHRITIS & INFLAMMATORY BOWEL DISEASE. We are characterizing and
developing specific inhibitors of protein-degrading enzymes, named E-3 ubiquitin
ligases, and have identified preclinical compounds. We also seek to block the
inflammatory signals of the tumor necrosis factor-alpha pathway. We have
identified and validated several novel members of this signaling pathway.
CANCER
TUMOR GROWTH. We have identified and validated two intracellular targets in
our cell cycle checkpoint control program which will enter small molecule
compound screening. We have also identified several compounds which are potent
and non-toxic inhibitors of E-3 ubiquitin ligases. We are also identifying drug
targets in the angiogenesis pathway.
4
THE OFFERING
Common Stock offered by us................... shares
Common Stock to be outstanding after the
offering................................... shares
Proposed Nasdaq National Market symbol....... RIGL
Use of proceeds.............................. For research and development activities, for
financing possible acquisitions and
investments in technology, for possibly
expanding our facilities as well as for
working capital and general corporate
purposes.
Except as otherwise indicated, information in this prospectus is based on the
following assumptions:
- - 5,242,004 shares issuable upon the exercise of options outstanding as of
December 31, 1999, at a weighted average exercise price of $0.19 per share;
- - 647,498 shares issuable upon the exercise of warrants as of December 31,
1999, at a weighted average exercise price of $1.30 per share;
- - 3,694,662 additional shares available for future grant as of December 31,
1999, of which options to purchase 1,111,599 shares of common stock were
granted in January 2000 under our equity incentive plan; an additional
400,000 shares made available under our employee stock purchase plan; and
300,000 shares made available under our non-employee directors' stock option
plan;
- - the conversion of 2,508,330 outstanding shares of our preferred stock sold
on February 3, 2000, at a price of $6.00 per share, and the issuance of
50,000 shares of our preferred stock for a license for technology, into
2,558,330 shares of our common stock upon the closing of this offering.
The number of shares of common stock outstanding after this offering is based on
shares outstanding as of December 31, 1999.
5
SUMMARY FINANCIAL DATA
The following tables summarize our financial data. The pro forma information
contained in the statements of operations data gives effect to the automatic
conversion of all convertible preferred stock into common stock upon the
completion of this offering. The as adjusted balance sheet data reflects the
conversion of our preferred stock into common stock and the sale of shares
of our common stock at an assumed price to the public of $ per share, after
deducting the underwriting discounts, commissions and estimated offering
expenses payable by us.
PERIOD FROM
INCEPTION
(JUNE 14, 1996) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997(1) 1998 1998 1999
STATEMENTS OF OPERATIONS DATA
(in thousands, except per share amounts)
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Contract revenues from collaborations...... $-- $28 $-- $5,898
Total operating expenses................... 5,734 10,522 6,926 13,707
---------- ---------- ------- -------
Net loss................................... (5,649) (10,604) (6,809) (7,929)
========== ========== ======= =======
Net loss per share, basic and diluted...... $(2.25) $(4.01) $(2.59) $(2.87)
========== ========== ======= =======
Weighted average shares used in computing
net loss per share, basic and diluted.... 2,512 2,643 2,633 2,764
Pro forma net loss per share, basic and
diluted.................................. $(0.58) $(0.34)
========== =======
Shares used in computing pro forma net loss
per share, basic and diluted............. 18,334 23,418
DECEMBER 31, SEPTEMBER 30, 1999
1998 ACTUAL AS ADJUSTED
BALANCE SHEET DATA (in thousands)
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Cash and cash equivalents.................. $9,493 $7,192
Working capital............................ 3,908 1,269
Total assets............................... 12,956 17,161
Capital lease obligations, less current
portion.................................. 1,652 5,680 $5,680
Deferred stock compensation................ -- (4,164) (4,164)
Accumulated deficit........................ (16,253) (24,182) (24,182)
Total stockholders' equity................. 5,445 4,055
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(1) AMOUNTS FOR PERIOD OF INCEPTION TO DECEMBER 31, 1996 ARE IMMATERIAL AND ARE
INCORPORATED INTO 1997 AMOUNTS.
6
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RISK FACTORS
An investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this prospectus.
If any of the following risks actually occurs, our business could be harmed. In
that case, the trading price of our common stock could decline and you might
lose all or part of your investment. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently see as immaterial, may also harm our
business. If any of these additional risks or uncertainties occur, the trading
price of our common stock could decline and you might lose all or part of your
investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF OPERATING LOSSES AND
UNCERTAINTY OF FUTURE PROFITABILITY.
Due in large part to the significant research and development expenditures
required to identify and validate new drug candidates, we have not been
profitable and have generated operating losses since we were incorporated in
June 1996. Currently, our revenues are generated solely from research payments
from our collaboration agreements and licenses and are insufficient to generate
profitable operations. As of September 30, 1999, we had an accumulated deficit
of approximately $24.2 million. We expect to incur losses for at least the next
several years and expect that these losses will actually increase as we expand
our research and development activities, incur significant clinical and testing
costs and possibly expand our facilities. Moreover, our losses are expected to
continue even if our current research projects are able to successfully identify
potential drug targets. If the time required to generate revenues and achieve
profitability is longer than anticipated or if we are unable to obtain necessary
capital, we may not be able to fund and continue our operations.
MOST OF OUR EXPECTED FUTURE REVENUES ARE CONTINGENT UPON CERTAIN EVENTS.
Our ability to generate revenues in the near term depends on our ability to
enter into additional collaborative agreements with third parties and to
maintain the agreements we currently have in place. To date, all of our revenue
has been related to the research phase of each of our collaborative agreements,
which is for specified periods and is partially offset by corresponding research
costs. Following the completion of the research phase of each collaborative
agreement, additional revenue may come only from milestone payments and
royalties, which may not be paid, if at all, until some time well into the
future. The risk is heightened due to the fact that unsuccessful research
efforts may preclude us from receiving any contingent funding under these
agreements. Our receipt of revenue from collaborative arrangements is also
significantly affected by the timing of efforts expended by us and our
collaborators and the timing of lead compound identification. Under many
agreements, milestone payments may not be earned until the collaborator has
advanced products into clinical testing, which may never occur or not until some
time well into the future.
Our business plan contemplates that we will need to generate meaningful revenues
from royalties and licensing agreements. To date, we have not yet received any
revenue from royalties for the sale of commercial drugs, and we do not know when
we will receive any such revenue, if at all. Likewise, we have not licensed any
lead compounds or drug development candidates to third parties, and we do not
know whether any such license will be entered into on acceptable terms in the
future, if at all.
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RISK FACTORS
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We are unable to predict when, or if, we will become profitable and even if we
are able to achieve profitability at any point in time, we do not know if our
operations will be able to maintain profitability during any future periods.
THE FOCUS OF OUR RESEARCH RELATES TO EARLY-STAGE DRUG DISCOVERY AND DEVELOPMENT
AND THERE IS A HIGH RISK THAT SUCH RESEARCH MAY NOT SUCCESSFULLY GENERATE
PROFITABLE PRODUCTS.
At the present time, our operations are in the early stages of drug
identification and development. To date, we have only identified a few potential
drug compounds, all of which are still in very early stages of development and
have not yet been put into preclinical or clinical testing. It is statistically
unlikely that the few compounds that we have identified as potential drug
candidates will actually lead to successful drug development efforts and we do
not expect any drugs resulting from our research to be commercially available
for several years, if at all. Our leads for potential drug compounds will be
subject to the risks and failures inherent in the development of pharmaceutical
products based on new technologies. These risks include, but are not limited to,
the inherent difficulty in selecting the right drug target and avoiding unwanted
side effects as well as the unanticipated problems relating to product
development, testing, regulatory compliance, manufacturing, marketing and
competition, and additional costs and expenses that may exceed current
estimates. There is also a risk that competitors and third parties may develop
similar or superior products or have proprietary rights that preclude us from
ultimately marketing our products, as well as the potential risk that our
products may not be accepted by the marketplace.
OUR DRUG DISCOVERY TECHNOLOGY IS NEW AND UNPROVEN AND MAY NOT LEAD TO DISCOVERY
AND DEVELOPMENT OF GOOD DRUG CANDIDATES OR APPROVED DRUGS.
The drug discovery methods we employ based upon our post-genomics combinatorial
biology and two hybrid protein interaction technologies are relatively new and
therefore, untested. We do not know if these methods will lead to the successful
identification of targets, the development of new drug candidates and,
ultimately, the sale of commercially viable drugs.
THERE IS A HIGH DEGREE OF UNCERTAINTY REGARDING THE OUTCOMES OF OUR PRODUCT
CANDIDATE TESTING.
Commercialization of our product candidates depends upon successful completion
of preclinical studies and clinical trials. Preclinical testing and clinical
development are long, expensive and uncertain processes and we do not know
whether we, or any of our collaborative partners, will be permitted to undertake
clinical trials of any potential products. It may take us or our collaborative
partners several years to complete any such testing, and failure can occur at
any stage of testing. Interim results of trials do not necessarily predict final
results, and acceptable results in early trials may not be repeated in later
trials. A number of companies in the pharmaceutical industry, including
biotechnology companies, have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. Moreover, if and when
our projects reach clinical trials, we or our collaborative partners may decide
to discontinue development of any or all of these projects at any time for
commercial, scientific or other reasons.
WE ARE HIGHLY DEPENDENT UPON THIRD PARTIES FOR THEIR EXPERTISE RELATING TO
MANUFACTURING, SALES AND MARKETING, AND FOR LICENSES TO TECHNOLOGY RIGHTS.
Our strategy depends upon the formation and sustainability of multiple
collaborative arrangements with third parties in the future. We rely on these
arrangements for not only financial resources, but
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RISK FACTORS
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also for expertise that we expect to need in the future relating to
manufacturing, sales and marketing, and for licenses to technology rights. To
date, we have entered into five such arrangements with corporate collaborators;
however, we do not know if such third parties will dedicate sufficient resources
or if any such development or commercialization efforts by third parties will be
successful. Should a collaborative partner fail to develop or commercialize a
compound or product to which it has rights from us, we may not receive any
future milestone payments and will not receive any royalties associated with
such compound or product.
We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. The agreements
pursuant to which we have in-licensed technology permit our licensors to
terminate the agreements under certain circumstances. If we are not able to
continue to license these and future technologies on commercially reasonable
terms, our product development and research may be delayed.
WE WILL RELY ON THIRD PARTIES FOR THE LATER STAGES OF DRUG DEVELOPMENT AND
CONFLICTS MIGHT RESULT WITH RESPECT TO THESE EFFORTS.
We will rely on third parties for the later stages of the drug development
process outside of our initial drug target identification. If any of our
corporate collaborators were to breach or terminate their agreement with us or
otherwise fail to conduct the collaborative activities successfully and in a
timely manner, the preclinical or clinical development or commercialization of
the affected product candidates or research programs could be delayed or
terminated. We generally do not control the amount and timing of resources that
our corporate collaborators devote to our programs or potential products. We do
not know whether current or future collaborative partners, if any, might pursue
alternative technologies or develop alternative products either on their own or
in collaboration with others, including our competitors, as a means for
developing treatments for the diseases targeted by collaborative arrangements
with us. Conflicts also might arise with collaborative partners concerning
proprietary rights to particular compounds. While our existing collaborative
agreements typically provide that we retain milestone payments and royalty
rights with respect to drugs developed from certain derivative compounds, any
such payments or royalty rights may be at reduced rates and disputes may arise
over the application of derivative payment provisions to such drugs, and we may
not be successful in such disputes.
WE MAY FAIL TO MAINTAIN OR ENTER INTO NEW COLLABORATIVE ARRANGEMENTS WHICH MAY
NEGATIVELY AFFECT OUR BUSINESS.
Although we have established a few collaborative arrangements, we do not know if
we will be able to maintain these existing relationships, establish additional
collaborative arrangements, or whether current or any future collaborative
arrangements will ultimately be successful. In addition, there have been and may
continue to be a significant number of recent business combinations among large
pharmaceutical companies that have resulted and may continue to result in a
reduced number of potential future corporate collaborators, which may limit our
ability to find partners who will work with us in developing and commercializing
our drug targets. If business combinations involving our existing corporate
collaborators were to occur, the effect could be to diminish, terminate or cause
delays in one or more of our corporate collaborations.
The continuation of some of our partnered drug discovery and development
programs may be dependent on the periodic renewal of our corporate
collaborations. Our corporate collaboration agreements may terminate before the
full term of the collaborations or upon a breach or a change of
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RISK FACTORS
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control. We may not be able to renew these collaborations on acceptable terms,
if at all. In addition, we may not be able to negotiate additional corporate
collaborations on acceptable terms, if at all, and any such collaborations may
not be successful.
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUFFICIENTLY FUND OUR
OPERATIONS AND RESEARCH.
We will require additional financing in the future to fund our operations. Our
operations require significant additional funding in large part due to our
research and development expenses, future preclinical and clinical-testing
costs, the possibility of expanding our facilities, and the absence of any
meaningful revenues over the foreseeable future. We do not know whether
additional financing will be available when needed, or that, if available, we
will obtain financing on terms favorable to our stockholders or us. We have
consumed substantial amounts of capital to date and operating expenditures are
expected to increase over the next several years as we expand our infrastructure
and research and development activities.
We believe that the net proceeds from this offering, existing cash and
investment securities, and anticipated cash flow from existing and future
collaborations, if any, will be sufficient to support our current operating plan
through at least the next 18 months; however, we have based this estimate on
assumptions that may prove to be wrong. Our future funding requirements will
depend on many factors, including, but not limited to:
- - any changes in the breadth of our research and development programs;
- - the results of research and development, preclinical studies and clinical
trials conducted by us or our collaborative partners or licensees, if any;
- - the acquisition or licensing of technologies or compounds, if any;
- - our ability to maintain and establish new corporate relationships and
research collaborations;
- - our ability to manage growth;
- - competing technological and market developments;
- - the time and costs involved in filing, prosecuting, defending and enforcing
patent and intellectual property claims;
- - the receipt of contingent licensing or milestone fees from our current or
future collaborative and license arrangements, if established; and
- - the timing of regulatory approvals.
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent that we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates, or
grant licenses on terms that are not favorable to us. If adequate funds are not
available, we will not be able to continue developing our products.
OUR SUCCESS IS DEPENDENT ON INTELLECTUAL PROPERTY RIGHTS HELD BY US AND THIRD
PARTIES AND SUCH RIGHTS ARE DIFFICULT AND COSTLY TO PROTECT.
Our success will depend to a large part on our own, our licensees' and our
licensors' ability to obtain and defend patents for each party's respective
technologies and the compounds and other products, if any, resulting from the
application of such technologies. The patent positions of pharmaceutical and
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10
RISK FACTORS
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biotechnology companies can be highly uncertain and involve complex legal and
factual questions. No consistent policy regarding the breadth of claims allowed
in biotechnology patents has emerged to date. Accordingly, we cannot predict the
breadth of claims allowed in our or other companies' patents.
The degree of future protection for our proprietary rights is uncertain and we
cannot ensure that:
- - we were the first to make the inventions covered by each of our pending
patent applications;
- - we were the first to file patent applications for these inventions;
- - others will not independently develop similar or alternative technologies or
duplicate any of our technologies;
- - any of our pending patent applications will result in issued patents;
- - any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
- - we will develop additional proprietary technologies that are patentable; or
- - the patents of others will not have a negative effect on our ability to do
business.
We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, collaborators and consultants
to enter into confidentiality agreements, we may not be able to adequately
protect our trade secrets or other proprietary information in the event of any
unauthorized use or disclosure or the lawful development by others of such
information.
We are a party to certain in-license agreements which are important to our
business and we generally do not control the prosecution of in-licensed
technology. Accordingly, we are unable to exercise the same degree of control
over this intellectual property as we exercise over our internally developed
technology. Moreover, some of our academic institution licensors, research
collaborators and scientific advisors have rights to publish data and
information in which we have rights. If we cannot maintain the confidentiality
of our technology and other confidential information in connection with our
collaborations, then our ability to receive patent protection or protect our
proprietary information will be impaired. In addition, some of the technology we
have licensed relies on patented inventions developed using U.S. government
resources. The U.S. government retains certain rights, as defined by law, in
such patents, and may choose to exercise such rights.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
Our success will also depend, in part, on our ability to operate without
infringing on or misappropriating the proprietary rights of others. There are
many issued patents and patent applications filed by third parties relating to
products or processes that are similar or identical to ours or our licensors,
and others may be filed in the future. There can be no assurance that our
activities, or those of our licensors, will not infringe patents owned by
others. We believe that there may be significant litigation in the industry
regarding patent and other intellectual property rights and we do not know if we
or our collaborators would be successful in any such litigation. Any legal
action
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RISK FACTORS
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against our collaborators or us claiming damages or seeking to enjoin commercial
activities relating to the affected products, our methods or processes could:
- - require our collaborators or us to obtain a license to continue to use,
manufacture or market the affected products, methods or processes, which may
not be available on commercially reasonable terms, if at all;
- - prevent us from using the subject matter claimed in the patents held by
others;
- - subject us to potential liability for damages;
- - consume a substantial portion of our managerial and financial resources; and
- - result in litigation or administrative proceedings which may be costly,
whether we win or lose.
BECAUSE REGULATORY APPROVAL MUST BE OBTAINED TO MARKET PRODUCTS IN THE UNITED
STATES AND FOREIGN JURISDICTIONS, WE CANNOT PREDICT IF OR WHEN WE, OR OUR
COLLABORATIVE PARTNERS, WILL BE PERMITTED TO COMMERCIALIZE PRODUCTS FROM OUR
RESEARCH.
The pharmaceutical industry is subject to stringent regulation by a wide range
of authorities. We cannot predict whether regulatory clearance will be obtained
for any product we or our collaborative partners hope to develop. A
pharmaceutical product cannot be marketed in the United States until it has
completed rigorous preclinical testing and clinical trials and an extensive
regulatory clearance process implemented by the FDA. Satisfaction of regulatory
requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial
resources. Of particular significance are the requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion of
drugs for human use.
Before commencing clinical trials in humans, we, or our collaborative partners,
must submit and receive approval from the FDA of an Investigational New Drug
application, or IND. Clinical trials are subject to oversight by institutional
review boards and the FDA and:
- - must be conducted in conformance with the FDA's good laboratory practice
regulations;
- - must meet requirements for institutional review board oversight;
- - must meet requirements for informed consent;
- - must meet requirements for good clinical practices;
- - are subject to continuing FDA oversight;
- - may require large numbers of participants; and
- - may be suspended by us, our strategic partners, or the FDA at any time if it
is believed that the subjects participating in these trials are being
exposed to unacceptable health risks or if the FDA finds deficiencies in the
IND or the conduct of these trials.
Even if we are able to achieve success in our clinical testing, we, or our
collaborative partners, must provide the FDA and foreign regulatory authorities
with clinical data that demonstrates the safety and efficacy of our products in
humans before they can be approved for commercial sale. None of the product
candidates that we have internally developed has advanced to the stage of human
testing designed to determine safety, known as Phase I clinical trials. We do
not know when or if clinical trials will begin and, once begun, will not know
whether any such clinical trials will be successful or if such trials will be
completed on schedule or at all. We do not know whether any future clinical
trials will demonstrate sufficient safety and efficacy necessary to obtain the
requisite regulatory approvals or will
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RISK FACTORS
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result in marketable products. Our failure, or the failure of our strategic
partners, to adequately demonstrate the safety and efficacy of our products
under development will prevent receipt of FDA and similar foreign regulatory
approval and, ultimately, commercialization of our products.
Any clinical trial may fail to produce results satisfactory to the FDA.
Preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval. Negative or inconclusive results or
adverse medical events during a clinical trial could cause a clinical trial to
be repeated or a program to be terminated. In addition, delays or rejections may
be encountered based upon additional government regulation from future
legislation or administrative action or changes in FDA policy or interpretation
during the period of product development, clinical trials and FDA regulatory
review. Failure to comply with applicable FDA or other applicable regulatory
requirements may result in criminal prosecution, civil penalties, recall or
seizure of products, total or partial suspension of production or injunction, as
well as other regulatory action against our potential products, collaborative
partners or us. Additionally, we have no experience in working with our partners
in conducting and managing the clinical trials necessary to obtain regulatory
approval.
If regulatory clearance of a product is granted, this clearance will be limited
to those disease states and conditions for which the product is demonstrated
through clinical trials to be safe and efficacious. We cannot ensure that any
compound developed by us, alone or with others, will prove to be safe and
efficacious in clinical trials and will meet all of the applicable regulatory
requirements needed to receive marketing clearance.
Outside the United States, our ability or that of our collaborative partners to
market a product is contingent upon receiving a marketing authorization from the
appropriate regulatory authorities. This foreign regulatory approval process
typically includes all of the risks associated with FDA clearance described
above and may also include additional risks.
WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH AND THESE DIFFICULTIES
COULD INCREASE OUR LOSSES.
We have experienced a period of rapid and substantial growth that has placed and
will continue to place a strain on our human and capital resources. The number
of our employees increased from 31 at December 31, 1997 to 83 at December 31,
1999. Our ability to manage our operations and growth effectively requires us to
continue to use funds to improve our operational, financial and management
controls, reporting systems and procedures and to attract and retain sufficient
numbers of talented employees. If we are unable to manage this growth
effectively, our losses will increase.
IF OUR COMPETITORS DEVELOP TECHNOLOGIES THAT ARE MORE EFFECTIVE THAN OURS, OUR
COMMERCIAL OPPORTUNITY WILL BE REDUCED OR ELIMINATED.
The biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. Many of the drugs that we
are attempting to discover will be competing with existing therapies. In
addition, a number of companies are pursuing the development of pharmaceuticals
that target the same diseases and conditions that we are targeting. We face
competition from pharmaceutical and biotechnology companies both in the United
States and abroad. Our competitors may utilize discovery technologies and
techniques or partner with collaborators in order to develop products more
rapidly or successfully than we or our collaborators are able to do. Many of our
competitors, particularly large pharmaceutical companies, have substantially
greater financial, technical and human resources than we do. In addition,
academic institutions, government agencies, and other public and private
organizations conducting research may seek patent protection
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RISK FACTORS
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with respect to potentially competitive products or technologies and may
establish exclusive collaborative or licensing relationships with our
competitors.
We believe that our ability to compete is dependent, in part, upon our ability
to create, maintain and license scientifically advanced technology and upon our
and our strategic partners' ability to develop and commercialize pharmaceutical
products based on this technology, as well as our ability to attract and retain
qualified personnel, obtain patent protection or otherwise develop proprietary
technology or processes and secure sufficient capital resources for the expected
substantial time period between technological conception and commercial sales of
products based upon our technology. The failure by us or any of our
collaborators in any of those areas may prevent the successful commercialization
of our potential drug targets.
Our competitors might develop technologies and drugs that are more effective or
less costly than any which are being developed by us or which would render our
technology and potential drugs obsolete and noncompetitive. In addition, our
competitors may succeed in obtaining the approval of the FDA or other regulatory
approvals for drug candidates more rapidly than us or our strategic partners.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage, including certain patent and
FDA marketing exclusivity rights that would delay or prevent our ability to
market certain products. Any drugs resulting from our research and development
efforts, or from our joint efforts with our existing or future collaborative
partners, might not be able to compete successfully with competitors' existing
or future products or products under development or obtain regulatory approval
in the United States or elsewhere.
OUR ABILITY TO GENERATE REVENUES WILL BE DIMINISHED IF OUR COLLABORATIVE
PARTNERS FAIL TO OBTAIN ACCEPTABLE PRICES OR AN ADEQUATE LEVEL OF REIMBURSEMENT
FOR PRODUCTS FROM THIRD-PARTY PAYORS.
The drugs we hope to develop may be rejected by the marketplace due to many
factors, including cost. Our ability to commercially exploit a drug may be
limited due to the continuing efforts of government and third-party payors to
contain or reduce the costs of health care through various means. For example,
in some foreign markets, pricing and profitability of prescription
pharmaceuticals are subject to government control. In the United States, we
expect that there will continue to be a number of federal and state proposals to
implement similar government control. In addition, increasing emphasis on
managed care in the United States will likely continue to put pressure on the
pricing of pharmaceutical products. Cost control initiatives could decrease the
price that any of our collaborators would receive for any products in the
future. Further, cost control initiatives could adversely affect our
collaborators' ability to commercialize our products, and our ability to realize
royalties from this commercialization.
Our ability to commercialize pharmaceutical products with collaborators may
depend in part on the extent to which reimbursement for the products will be
available from:
- - government and health administration authorities;
- - private health insurers; and
- - other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. Third-party payors, including Medicare, are challenging the
prices charged for medical products and services. Government and other
third-party payors increasingly are attempting to contain healthcare costs by
limiting both coverage and the level of reimbursement for new drugs and by
refusing, in some
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RISK FACTORS
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cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted labeling approval. Third-party insurance
coverage may not be available to patients for any products we discover and
develop, alone or with collaborators. If government and other third-party payors
do not provide adequate coverage and reimbursement levels for our products, the
market acceptance of these products may be reduced.
IF CONFLICTS ARISE BETWEEN OUR COLLABORATORS, ADVISORS OR DIRECTORS AND US, ANY
OF THEM MAY ACT IN THEIR SELF-INTEREST, WHICH MAY BE ADVERSE TO YOUR INTERESTS.
If conflicts arise between us and our corporate collaborators or scientific
advisors, the other party may act in its self-interest and not in the interest
of our stockholders. Some of our corporate collaborators are conducting multiple
product development efforts within each disease area that is the subject of the
collaboration with us. In some of our collaborations, we have agreed not to
conduct independently, or with any third party, any research that is competitive
with the research conducted under our collaborations. Our collaborators,
however, may develop, either alone or with others, products in related fields
that are competitive with the products or potential products that are the
subject of these collaborations. Competing products, either developed by the
collaborators or to which the collaborators have rights, may result in their
withdrawal of support for our product candidates.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
PRODUCTS.
The testing and marketing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit
commercialization of our products. We currently do not have product liability
insurance and our inability to obtain sufficient product liability insurance at
an acceptable cost to protect against potential product liability claims could
prevent or inhibit the commercialization of pharmaceutical products we develop,
alone or with corporate collaborators. We or our corporate collaborators might
not be able to obtain insurance at a reasonable cost, if at all. While under
various circumstances we are entitled to be indemnified against losses by our
corporate collaborators, indemnification may not be available or adequate should
any claim arise.
OUR RESEARCH AND DEVELOPMENT EFFORTS WILL BE SERIOUSLY JEOPARDIZED IF WE ARE
UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.
Being a small company with only approximately 83 employees, our success depends
on the continued contributions of our principal management and scientific
personnel and on our ability to develop and maintain important relationships
with leading academic institutions, scientists and companies in the face of
intense competition for such personnel. In particular, our research programs
depend on our ability to attract and retain highly skilled chemists and other
scientists. If we lose the services of any of our personnel, in particular,
Donald Payan, our research and development efforts could be seriously and
adversely affected. We also expect to encounter increasing difficulty in
attracting enough qualified personnel as our operations expand and the demand
for these professionals increases, and this difficulty could impede
significantly the achievement of our research and development objectives.
WE DEPEND ON OUR SCIENTIFIC ADVISORS FOR THE SUCCESS AND CONTINUATION OF OUR
RESEARCH EFFORTS.
We are dependent on the members of our Scientific Advisory Board ("SAB") and
Clinical Advisory Board ("CAB") who conduct research and provide us with access
to technology developed by them.
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RISK FACTORS
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The potential success of our drug discovery programs depends in part on
continued collaborations with these advisors. We and various members of our
management and research staff rely heavily on members of the SAB and CAB for
expertise in screening research. Our scientific advisors are not employees of
ours and may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to us. All members of the SAB
and CAB have entered into scientific advisory agreements with us. These
agreements provide for indefinite terms of service on the SAB and CAB and are
generally terminable at any time by written notice by either us or the advisor.
Certain members of the SAB and CAB also have entered into separate consulting
agreements with us. We do not know if we will be able to maintain such
consulting agreements or that such scientific advisors will not enter into
consulting arrangements, exclusive or otherwise, with competing pharmaceutical
or biotechnology companies, any of which would have a detrimental impact on our
research objectives and could have a material adverse effect on our business,
financial condition and results of operations.
IF WE USE BIOLOGICAL AND HAZARDOUS MATERIALS IN A MANNER THAT CAUSES INJURY OR
VIOLATES LAWS, WE MAY BE LIABLE FOR DAMAGES.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate the
risk of accidental contamination or injury from the use, storage, handling or
disposal of these materials. In the event of contamination or injury, we could
be held liable for damages that result, and any liability could exceed our
resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with, or any potential
violation of, these laws and regulations could be significant.
WE MAY INCUR SIGNIFICANT COSTS IF YEAR 2000 COMPLIANCE ISSUES ARE NOT PROPERLY
ADDRESSED.
We use and rely on a wide variety of information technologies, computer systems
and scientific equipment containing computer chips dedicated to a specific task.
Some of our older computer software programs and equipment might be unable to
distinguish between the year 1900 and the year 2000. While we have not
experienced difficulties to date, time-sensitive functions of those software
programs and equipment may misinterpret dates after January 1, 2000 to refer to
the twentieth century rather than the twenty-first century. This could cause
system or equipment shutdowns, failures or miscalculations resulting in
inaccuracies in computer output or disruptions of operations, including
inaccurate processing of financial information and/or temporary inabilities to
engage in normal business activities. In addition to risks associated with our
own computer systems and equipment, we have relationships with, and are to
varying degrees dependent upon, a large number of third parties that provide
information, goods and services to us. These include financial institutions,
suppliers, vendors, research partners and governmental entities. Year 2000
issues, if any, affecting our business, if not adequately addressed by us, our
significant suppliers and our significant service providers could have a number
of "worst case" consequences. These might include the loss of historical data,
interruption of our research efforts and our inability to continue our research
efforts, any of which could materially disrupt our business, financial condition
and results of operations.
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RISK FACTORS
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OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
Our facilities are located in the San Francisco Bay Area near known earthquake
fault zones and are vulnerable to significant damage from earthquakes. We are
also vulnerable to damage from other types of disasters, including fires,
floods, power loss, communications failures and similar events. If any disaster
were to occur, our ability to operate our business at our facilities would be
seriously, or potentially completely, impaired and our research could be lost or
destroyed. In addition, the unique nature of our research activities and of much
of our equipment could make it difficult for us to recover from a disaster. The
insurance we maintain may not be adequate to cover our losses resulting from
disasters or other business interruptions.
RISKS RELATED TO THE OFFERING
WE MAY ALLOCATE THE NET PROCEEDS FROM THIS OFFERING IN WAYS THAT YOU AND OTHER
STOCKHOLDERS MAY NOT APPROVE.
Management will have significant flexibility in applying the net proceeds of
this offering and could use these proceeds for purposes other than those
contemplated at the time of the offering.
IF OUR OFFICERS, DIRECTORS AND LARGEST STOCKHOLDERS CHOOSE TO ACT TOGETHER, THEY
MAY BE ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS, ACTING IN THEIR BEST
INTERESTS AND NOT NECESSARILY THOSE OF OTHER STOCKHOLDERS.
Following completion of the offering, our directors, executive officers and
principal stockholders and their affiliates will beneficially own approximately
% of our common stock, based on their beneficial ownership as of
December 31, 1999. Accordingly, they collectively will have the ability to
determine the election of all of our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily those
of other stockholders.
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.
An active trading market for our common stock may not develop following this
offering. You may not be able to sell your stock quickly or at the market price
if trading in our stock is not active. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters based upon a number of factors. The initial public offering price
may not be indicative of prices that will prevail in the trading market.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR STOCK COULD DECLINE
IN VALUE.
Prior to this offering, there has been no public market for our common stock and
an active public market for our common stock may not develop or be sustained
after the offering. The initial public offering price will be determined by
negotiations between the representatives of the underwriters and us and may not
be indicative of future market prices. Among the factors to be considered in
determining the initial public offering price of the common stock, in addition
to prevailing market conditions, will be:
- - estimates of our business potential and earnings prospects;
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RISK FACTORS
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- - an assessment of our management; and
- - the consideration of the above factors in relation to market valuations of
companies in related businesses.
The market prices for securities of biotechnology companies in general have been
highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may have a significant impact on the market price of our common stock:
- - announcements of technological innovations or new commercial products by our
competitors or us;
- - developments concerning proprietary rights, including patents;
- - developments concerning our collaborations;
- - publicity regarding actual or potential medical results relating to products
under development by our competitors or us;
- - regulatory developments in the United States and foreign countries;
- - litigation;
- - economic and other external factors or other disaster or crisis; or
- - period-to-period fluctuations in financial results.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THE
OFFERING, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. After completion of the offering, we
will have outstanding shares of common stock, which assumes no exercise
of outstanding options or warrants after December 31, 1999 and no exercise of
the underwriters' over-allotment options.
We intend to file a registration statement on Form S-8 covering an aggregate of
9,636,666 shares issuable upon exercise of options to purchase common stock and
common stock reserved for issuance under our stock plans within 90 days after
the effective date of the Registration Statement of which this prospectus is a
part.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW MAY
MAKE AN ACQUISITION OF US, WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS, MORE
DIFFICULT.
Provisions of our amended and restated certificate of incorporation and bylaws,
as well as provisions of Delaware law, could make it more difficult for a third
party to acquire us, even if doing so would benefit our stockholders. These
provisions:
- - establish that members of the board of directors may be removed only for
cause upon the affirmative vote of stockholders owning at least two-thirds
of our capital stock;
- - authorize the issuance of "blank check" preferred stock that could be issued
by our board of directors to increase the number of outstanding shares and
thwart a takeover attempt;
- - limit who may call a special meeting of stockholders;
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- - prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
- - establish advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon at
stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage,
delay or prevent a third party from acquiring us.
THE OFFERING WILL CAUSE DILUTION IN NET TANGIBLE BOOK VALUE.
Purchasers in the public offerings will experience immediate and substantial
dilution in the net tangible book value of the common stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
options and warrants granted by us.
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FORWARD-LOOKING INFORMATION
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus summary," "Risk factors,"
"Use of proceeds," "Management's discussion and analysis of financial condition
and results of operations" and "Business" and elsewhere in this prospectus are
"Forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should", "will" or "would" or the negative of these terms or
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk factors."
Some statements contained in this prospectus are forward-looking statements
concerning our operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, are included, for example, in the discussions
about:
- - our strategy; sufficiency of our cash resources;
- - revenues from existing and new collaborations;
- - product development;
- - our research and development and other expenses; and
- - our operational and legal risks.
These statements involve risks and uncertainties. Actual results may differ
materially from those expressed or implied in those statements. Factors that
could cause these differences include, but are not limited to, those discussed
under "Risk factors" and "Management's discussion and analysis of financial
condition and results of operations."
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USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock that we are selling in the offering will be approximately $ , or
approximately $ if the underwriters' over-allotment option is exercised in
full, based on an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discount, commissions and estimated
offering expenses payable by us.
We intend to use the net proceeds for research and development activities, for
financing possible acquisitions and investments in technology, for possibly
expanding our facilities as well as for working capital and general corporate
purposes. We may also use a portion of the net proceeds to acquire or invest in
businesses, products and technologies that are complementary to our own,
although no acquisitions are planned or being negotiated as of the date of this
prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending these uses, the net proceeds will be invested in
investment-grade, interest-bearing securities.
The principal purposes of this offering are to increase our capitalization and
financial flexibility, to provide a public market for our common stock and to
facilitate access to public equity markets. As of the date of this prospectus,
we cannot specify with certainty all of the particular uses for the net proceeds
we will have upon completion of the offering. Accordingly, our management will
have broad discretion in the application of net proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable future.
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CAPITALIZATION
The following table shows our capitalization as of September 30, 1999:
- - on an actual basis; and
- - on a pro forma basis to give effect to the sale of 2,508,330 shares of
preferred stock on February 3, 2000 at a price of $6.00 per share, less
expenses, the issuance of 50,000 shares of preferred stock for a technology
license and after reflecting the conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering; and
- - on a pro forma as adjusted basis to give effect to the sale of shares
of common stock by us in this offering at an assumed price of $ per
share less the estimated underwriting discounts and offering expenses.
AS OF SEPTEMBER 30, 1999
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(in thousands, except share data)
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Long-term obligations, less current portion............. $5,680 $5,680 $5,680
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
24,000,000 authorized, 22,053,707, shares issued and
outstanding, actual, none issued pro forma and pro
forma as adjusted................................... 22 -- --
Common stock, $0.001 par value; 37,500,000 shares
(100,000,000 pro forma) authorized, 2,898,857 shares
issued and outstanding, 27,510,894 shares issued and
outstanding, pro forma and shares issued and
outstanding, pro forma as adjusted.................. 3 28
Deferred compensation................................... (4,164) (4,164) (4,164)
Additional paid-in capital.............................. 32,376 47,674
Accumulated deficit and accumulated comprehensive
loss.................................................. (24,182) (24,182) (24,182)
--------- --------- ---------
Total stockholders' equity.............................. 4,055 19,356
--------- --------- ---------
Total capitalization................................ $9,735 $25,036
========= ========= =========
This table above excludes:
- - 5,242,004 shares issuable upon the exercise of options outstanding as of
December 31, 1999 at a weighted average exercise price of $0.19 per share;
- - 647,498 shares issuable upon the exercise of warrants outstanding as of
December 31, 1999 at a weighted average exercise price of $1.30 per share;
- - 3,694,662 additional shares available for future grant under our equity
incentive plan, of which options to purchase 1,111,599 shares of common
stock were granted in January 2000; an additional 400,000 shares made
available for future grant under our employee stock purchase plan; and
300,000 shares made available for future grant under our non-employee
directors' stock option plan; and
- - the amendment to our certificate of incorporation upon completion of this
offering to increase our authorized common stock.
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22
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DILUTION
The pro forma net tangible book value of our common stock on September 30, 1999,
giving effect to the sale of shares of preferred stock and the issuance of
shares of preferred stock for a technology license, and reflecting the
conversion of all outstanding shares of preferred stock into shares of common
stock upon the closing of this offering, was approximately $19.4 million, or
approximately $0.70 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities
divided by the number of shares of common stock outstanding. Dilution in pro
forma net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the net tangible book value per share of our common stock immediately
afterwards. Assuming our sale of shares of common stock offered by this
prospectus at an assumed initial public offering price of $ per share, and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses, our net tangible book value at September 30, 1999 would have
been approximately $ million or $ per share. This represents an
immediate decrease in net tangible book value of $ per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
Assumed initial public offering price per share............. $--
Pro forma net tangible book value per share at September 30,
1999...................................................... $0.70
Increase per share attributable to new investors.......... --
--------- ---------
Pro forma net tangible book value per share after this
offering.................................................. --
Dilution per share to new investors......................... $--
=========
The following table summarizes, on a pro forma basis as of September 30, 1999,
the differences between the total consideration paid and the average price per
share paid by the existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us. We have assumed an
initial public offering price of $ per share and have not deducted estimated
underwriting discounts and commissions and estimated offering expenses in our
calculations.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
- ---------------------------------------------------------------------------------------------------
New investors.............. -- 0.0% $-- 0.0%
Existing investors......... 27,510,894 100.0 42,358,000 100.0 $1.54
----------- ----------- ------------ -----------
Total.................. 100.0% $42,358,000 100.0%
=========== =========== ============ ===========
The foregoing discussion and tables assume no exercise of any outstanding stock
options or warrants. The exercise of all options and warrants outstanding as of
September 30, 1999 having an exercise price less than the offering price would
increase the dilutive effect to new investors to $ per share.
If the underwriters exercise their over-allotment option in full, the following
will occur:
- - the pro forma net tangible book value per share after the offerings would be
$ per share, the increase in net tangible book value per share to
existing stockholders would be $ per share and the dilution in net
tangible book value to new investors would be $ per share;
- - the number of shares of common stock held by existing stockholders will
decrease to approximately % of the total number of shares of our common
stock outstanding; and
- - the number of shares held by new investors will increase to shares, or
approximately % of the total number of our common stock outstanding
after this offering.
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23
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to such statements and "Management's
discussion and analysis of financial condition and results of operations." The
selected data in this section is not intended to replace the financial
statements.
The statements of operations data for the year ended December 31, 1998 and the
period from inception (June 14, 1996) to December 31, 1997 have been derived
from our audited financial statements included elsewhere in this prospectus
which have been audited by Ernst & Young LLP, our independent auditors. Our
results of operations from June 14, 1996 to December 31, 1996 were immaterial.
The statements of operations data for the nine months ended September 30, 1998
and 1999 and the balance sheet data as of September 30, 1999 are derived from
our unaudited financial statements included in this prospectus, but have been
prepared on a basis consistent with our audited financial statements and the
notes thereto and include all adjustments (consisting only of normal recurring
adjustments) that we consider necessary for a fair presentation of the
information. Historical results are not necessarily indicative of future
results. See notes to the financial statements for an explanation of the method
used to determine the number of shares used in computing pro forma basic and
diluted loss per share.
PERIOD FROM
INCEPTION
(JUNE 14, 1996)
THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1998 1999
STATEMENTS OF OPERATIONS DATA: (in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Revenue:
Contract revenues from collaborations....... $-- $28 $-- $5,898
Costs and expenses:
Research and development.................... 4,568 8,305 5,071 10,165
General and administrative.................. 1,166 2,217 1,855 2,979
Amortization of deferred compensation....... -- -- -- 563
----------------- ----------------- ----------------- -----------------
5,734 10,522 6,926 13,707
----------------- ----------------- ----------------- -----------------
Loss from operations........................ (5,734) (10,494) (6,926) (7,809)
Interest income (expense), net.............. 85 (110) 117 (120)
----------------- ----------------- ----------------- -----------------
Net loss.................................... $(5,649) $(10,604) $(6,809) $(7,929)
================= ================= ================= =================
Net loss per share, basic and diluted....... $(2.25) $(4.01) $(2.59) $(2.87)
================= ================= ================= =================
Weighted average shares used in computing
basic and diluted net loss per share...... 2,512 2,643 2,633 2,764
Pro forma basic and diluted net loss per
share..................................... $(0.58) $(0.34)
================= =================
Shares used in computing pro forma net loss
per share, basic and diluted.............. 18,334 23,418
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24
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Cash and cash equivalents................................... $9,144 $9,493 $7,192
Working capital............................................. 8,109 3,908 1,269
Total assets................................................ 11,330 12,956 17,161
Capital lease obligations, less current portion............. 1,172 1,652 5,680
Deferred stock compensation................................. -- -- (4,164)
Accumulated deficit......................................... (5,649) (16,253) (24,182)
Total stockholders equity................................... 8,819 5,445 4,055
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25
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ WITH "SELECTED FINANCIAL
AND OPERATING DATA" AND OUR FINANCIAL STATEMENTS AND NOTES INCLUDED ELSEWHERE IN
THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE
IN THIS PROSPECTUS SHOULD BE READ AS APPLYING TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
We are a post-genomics combinatorial biology company that has developed a new
and faster way to find novel drug targets and to validate the role of those
targets in disease. We intend to develop a portfolio of novel drug candidates
and commercialize the resulting drug products in partnership with corporate
collaborators. We have incurred net losses since inception and expect to incur
substantial and increasing losses for the next several years as we expand our
research and development activities and move our pre-clinical drug candidates
into later stages of development. To date, we have funded our operations
primarily through the sale of equity securities, non-equity payments from
collaborative partners and capital asset lease financings. We received our first
funding from our collaborative partners in December 1998. Including both
research funding and the issuance of equity investments, we received an
aggregate of $6.5 million in 1998 and an aggregate amount of $14.9 million in
1999 from our collaborative partners. As of September 30, 1999, our accumulated
deficit was approximately $24.2 million.
We expect our sources of revenue for the next several years to consist primarily
of payments under our current and future corporate collaborations. Under these
arrangements, sources of revenue may include up front payments, funded research,
milestone payments and royalties. The process of carrying out our research
programs for our collaborative partners and the development of our own
non-partnered products to the later stages of development may require
significant additional research and development expenditures including
preclinical testing and clinical trials. These activities, together with our
general and administrative expenses, are expected to result in substantial
operating losses for the foreseeable future. We will not receive product revenue
unless we or our collaborative partners complete clinical trials, obtain
regulatory approval and successfully commercialize one or more of our products.
To date, we have entered into three collaborative partnerships with major
pharmaceutical companies that are currently contributing to our revenues. A
summary of these partnerships is as follows:
PARTNER RESEARCH PROGRAM COMMENCEMENT DATE
- --------------------------------------------------------------------------------------------------------
Janssen Tumor Growth--Cell Cycle Inhibition December 4, 1998
Pfizer Asthma/Allergies--IgE Production in B Cells January 31, 1999
Novartis Transplant Rejection--T Cell Activation May 26, 1999
Autoimmunity Disease--B Cell Activation August 1, 1999
Pulmonary Lung Inflammation January 1, 2000
Under the terms of the existing collaborations identified above, our partners
have agreed to provide future research funding of up to approximately
$37 million over the next five-years, $19 million of which is subject to
possible cancellation. In addition, we may receive additional payments upon the
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26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
achievement of specific research and development milestones and royalties upon
commercialization of any products.
In order to maintain and increase proceeds from collaborations, we are
addressing several alternatives, including the exploration of new opportunities
with existing and new potential collaborators. All of our partnerships to date
have focused on the early stages of drug discovery, specifically target
discovery and validation. We may continue to engage in collaborations focused on
the early stages of drug discovery. In addition, we currently anticipate that we
will self-fund some of our own research programs to later stages of development
prior to partnering with collaborative partners. Therefore, it is expected that
any future collaborative partnerships will have an expanded focus and could
include high-throughput screening, combinatorial chemistry and/or pre-clinical
evaluations. For some programs, we may also seek to enter into collaborations
for the development of compounds that we have discovered. The timing, the amount
of funds received and the scope of any new collaborations are uncertain and any
compound collaboration will depend on the successful progress of clinical
trials. In addition, as our existing collaborations reach termination, we will
evaluate the status of the collaboration and, if appropriate, seek to negotiate
extensions as long as an extension is determined to be in our best interest.
We recognize revenues from our research collaboration agreements as earned upon
the achievement of performance requirements of the agreements. In addition,
these agreements provide for research funding for a specified number of full
time researchers working on their associated projects. Payments received that
are related to future performance are deferred and recognized as revenue as the
related work is performed. As of September 30, 1999, we have deferred revenues
of approximately $4.4 million.
DEFERRED COMPENSATION
During the year ended December 31, 1998 and the nine months ended September 30,
1999, in connection with the grant of stock options to employees, we recorded
deferred stock compensation totaling $4.7 million, representing the difference
between the deemed fair value of our common stock for financial reporting
purposes on the date these options were granted and the exercise price. This
amount has been reflected as components of stockholders' equity and the deferred
expense is being amortized to expense over the vesting period of the individual
options, generally five years, using the graded vesting method. We recorded
compensation expense of $563,000 for the nine months ended September 30, 1999.
At September 30, 1999, we had a total of $4.2 million remaining to be amortized
over the vesting periods of the stock options. We anticipate that additional
deferred compensation will be recorded for options granted after September 30,
1999 and have recorded deferred stock compensation of approximately
$2.4 million for additional stock options granted in December 1999.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Contract revenues from collaborations were $5.9 million for the nine months
ended September 30, 1999, compared with no revenues during the nine months ended
September 30, 1998. This increase in 1999 was due to the initiation of our three
corporate collaborations. The collaboration with Janssen was signed in
December 1998 with research support beginning on January 1, 1999 while the
Pfizer collaboration was initiated on January 31, 1999. The Novartis
collaboration, which was signed on May 26, 1999, consists of five research
programs. Of these five programs, one was started on May 26, 1999 with a second
program initiated on August 1, 1999. We expect contract revenue from
collaborations to be a significant component of our total revenues for the
foreseeable future.
- --------------------------------------------------------------------------------
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $10.2 million in the first nine
months of 1999, from $5.1 million in the first nine months of 1998, an increase
of $5.1 million. This increase was primarily attributable to increases in
employee costs as our scientific headcount increased from 36 to 58 individuals
and the higher occupancy costs associated with the new building in South San
Francisco, California, which we occupied in March 1999. We expect research and
development expenses to increase in future periods in connection with the
addition of new collaborative partner research programs. In addition, we
anticipate research and development expenses will increase with the advancement
of our non-partnered research programs into later stages of development.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3.0 million in the first nine months
of 1999, compared with $1.9 million in the first nine months of 1998, an
increase of $1.1 million. This increase was primarily attributable to higher
employee and occupancy costs. We expect that general and administrative expenses
will increase in the future to support the continued growth of our research and
development efforts and to accommodate the new demands associated with operating
as a public company.
NET INTEREST EXPENSE
Net interest expense was $120,000 for the nine months ended September 30, 1999,
compared with a net interest income of $117,000 during the corresponding period
in 1998. Interest income results from our interest bearing balances while
interest expense is the result of our debt associated with fixed asset
purchases.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Contract revenue from collaborations was $28,000 in 1998 compared to 1997 in
which we had no collaborative revenue. The revenue is the result of the
initiation of the Janssen collaborative agreement in late December 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $8.3 million in 1998, from
$4.6 million in 1997, an increase of $3.7 million. The increase in 1998 was
primarily attributable to increases in employee costs as scientific headcount
increased from 22 individuals to 41 individuals.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses to $2.2 million in 1998, from $1.2 million
in 1997, an increase of $1.0 million. This increase reflects the increase in
higher employee and infrastructure costs required to support the growing
research and development activities.
NET INTEREST EXPENSE
Net interest expense was $110,000 compared to a net interest income of $85,000
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales of
preferred stock, contract payments payable to us under our collaboration
agreements and equipment financing arrangements. As of September 30, 1999, we
have received $27.3 million from the sale of equity securities, including
$9.2 million from collaborators, and received $11.5 million in non-equity
payments from
- --------------------------------------------------------------------------------
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
collaborators. In addition, we have financed through leases and loans the
purchase of equipment and leasehold improvements totaling approximately
$9.5 million through September 30, 1999.
As of September 30, 1999, we had $7.2 million in cash and cash equivalents as
compared to $9.5 million as of December 31, 1998, a decrease in cash balances of
$2.3 million. This decline in cash balances is derived from our net loss of
$7.9 million and the funding of working capital of $0.9 million offset in part
by the non-cash charges for depreciation and amortization of $1.6 million. We
invested $6.3 million in capital equipment and leasehold improvements, made
$1.0 million in payments associated with our equipment financing arrangements
offset by the receipt of $6.2 million from our equipment financing arrangements.
We received $6.0 million in proceeds from equity securities.
As of September 30, 1999, we had $7.6 million in capitalized lease obligations
in association with our financed purchase of equipment and leasehold
improvements. These obligations are secured by the equipment financed, bear
interest rates in a range of 7% to 15%, and are due in monthly installments
through September 2003. Under the terms of our three equipment financing
agreements, two of these have balloon payments at the end of each loan term
while the other agreement allows us to purchase the assets financed at the fair
market value or 20% of the original acquisition cost at the end of the financing
term. As of September 30, 1999 we had $1.6 million available under equipment
financing arrangements which we expect to utilize during the fourth quarter 1999
and early 2000.
On February 3, 2000, we received approximately $15.0 million, net of issuance
costs, in a private placement in which we sold 2,508,330 shares of preferred
stock at $6.00 per share. In addition, we currently anticipate receiving an
additional $10.0 million after we exercise our right within the Novartis
collaboration agreement in which Novartis will purchase shares in a private
placement at the IPO price. We believe our existing cash resources, including
the proceeds from the private placement and the funds received from the Novartis
investment, plus the proceeds of this offering and anticipated proceeds from
corporate collaborations will be sufficient to satisfy our anticipated cash
requirements through at least 18 months. Our future capital uses and
requirements depend on numerous forward-looking factors. These factors include
and are not limited to the following:
- - our ability to maintain our existing collaboration partnerships;
- - our ability to establish and the scope of our new collaborations;
- - the progress and number of research programs carried out at Rigel;
- - our ability to meet the milestones identified in our collaborative
agreements which trigger payments;
- - the progress and success of preclinical and clinical trials of our drug
candidates;
- - the costs and timing of obtaining, enforcing and defending our patent and
intellectual rights;
- - the costs and timing of regulatory approvals; and
- - expenses associated with unforeseen litigation.
In addition, we are constantly reviewing potential opportunities to expand our
technologies or add to our portfolio of drug candidates. In the future, we may
need further capital in order to acquire or invest in technologies, products or
businesses. For the next several years, we do not expect the cash generated from
our operations to generate the amounts of cash required by our future cash
needs. In order to finance our cash needs, we expect to finance future cash
needs through the sale of equity securities, strategic collaborations and debt
financing. We cannot assure you that additional financing or collaboration and
licensing arrangements will be available when needed or that, if available, this
- --------------------------------------------------------------------------------
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
financing will be obtained on terms favorable to us or our stockholders.
Insufficient funds may require us to delay, scale back or eliminate some or all
of our research or development programs, to lose rights under existing licenses
or to relinquish greater or all rights to product candidates at an earlier stage
of development or on less favorable terms than we would otherwise choose or may
adversely affect our ability to operate as a going concern. If additional funds
are obtained by issuing equity securities, substantial dilution to existing
stockholders may result.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will decline. To minimize this risk in the future, we
intend to maintain our portfolio of cash equivalents and short-term investments
in a variety of securities, including commercial paper, money market funds,
government and non-government debt securities. In 1998 and 1999, we maintained
an investment portfolio primarily in depository accounts. Due to the short term
nature of these investments, we believe we have no material exposure to interest
rate risk arising from our investments. Therefore, no quantitative tabular
disclosure is provided.
We have operated primarily in the United States and all funding activities with
our collaborators to date have been made in U.S. dollars. Accordingly, we have
not had any exposure to foreign currency rate fluctuations.
IMPACT OF THE YEAR 2000
We use and rely on a wide variety of information technologies, computer systems
and scientific equipment containing computer chips dedicated to a specific task.
Some of our older computer software programs and equipment may not be able to
distinguish between the year 1900 and the year 2000. While we have not
experienced difficulties to date, time-sensitive functions of those software
programs and equipment may misinterpret dates after January 1, 2000 to refer to
the twentieth century rather than the twenty-first century. This could cause
system or equipment shutdowns, failures or miscalculations resulting in
inaccuracies in computer output or disruptions of operations, including
inaccurate processing of financial information and/or temporary inabilities to
engage in normal business activities. In addition to risks associated with our
own computer systems and equipment, we have relationships with, and are to
varying degrees dependent upon, a large number of third parties that provide
information, goods and services to us. These include financial institutions,
suppliers, vendors, research partners and governmental entities. Year 2000
issues affecting our business, if not adequately addressed by us, our
significant suppliers and our significant service providers could have a number
of "worst case" consequences. These include the loss of historical data,
interruption of our research efforts and our inability to continue our research
efforts, any of which could materially disrupt our business, financial condition
and results of operations.
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30
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BUSINESS
OVERVIEW
We are a post-genomics combinatorial biology company which has developed a new
and faster way to find novel drug targets and to validate the role of those
targets in disease without first knowing the identity or sequence of the genes
involved. We can identify targets for drug development by creating a
disease-like setting that can detect a change in the cellular response. By
creating a map of the various protein-protein interactions in cells that are
involved in a disease process, we can select protein targets for drug
development that are specific to relevant diseases and reduce the probability of
selecting targets leading to drugs that produce side effects. After selecting
drug discovery targets, we continue drug development with the goal of developing
small molecule drugs to address large therapeutic areas. Small molecule drugs
provide the advantage that they can generally be administered orally. In our
first three years of research, we have succeeded in identifying 15 new drug
targets in seven of our nine programs and have generated preclinical candidate
compounds in our IgE mast cell, IgE B cell and E-3 ubiquitin ligase programs. We
currently have programs in asthma/allergy, autoimmunity, transplant rejection,
rheumatoid arthritis/inflammatory bowel disease and cancerous tumor growth. We
have multi-year collaborations with Cell Genesys, Inc. (Cell Genesys), Janssen
Pharmaceutica N.V., a Johnson & Johnson company (Janssen), Neurocrine
Biosciences, Inc. (Neurocrine), Novartis Pharma AG (Novartis) and Pfizer Inc.
(Pfizer).
BACKGROUND
PHARMACEUTICAL INDUSTRY NEED FOR NEW DRUGS AND NOVEL TARGETS
In order to sustain growth, major pharmaceutical companies need to bring
approximately two or more new drugs to market each year. However, it is
currently estimated that, using traditional drug discovery and development
methodologies, pharmaceutical companies are bringing to market, on average, less
than one new drug per year. As a result, major pharmaceutical companies have a
discovery and product pipeline gap. In addition, we believe this demand for new
products will be compounded by the expiration in coming years of patents on
numerous significant revenue-generating drugs.
We believe that several thousand of the more than 100,000 genes in the human
genome will provide potential drug targets directed at specific diseases.
Despite this potential, researchers have only identified and validated
approximately 500 distinct targets for existing drug interventions which serve
as the basis for many pharmaceutical products today. We feel that the existing,
relatively small pool of potential targets limits pharmaceutical companies'
opportunities to develop new drug candidates to satisfy their growth objectives.
Moreover, we believe this situation creates a critical need for tools directed
at novel ways to expand the pool of targets by rapidly identifying and
successfully validating new targets which lead to new chemical entities.
TRADITIONAL DRUG DISCOVERY
The traditional drug discovery process involves testing or screening compounds
in disease models. The process is often undertaken with little knowledge of the
intracellular processes underlying the disease or the specific drug target
within the cell. Consequently, it is necessary to screen a very large number of
arbitrarily-selected compounds in order to obtain a desired change in a disease
model. While this approach sometimes successfully produces drugs, it has a
number of disadvantages:
- - INEFFICIENCY: it is labor intensive, time consuming and inefficient at
identifying and validating targets;
- - LACK OF PRODUCTIVITY: it results in relatively few new drug candidates, or
"hits";
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31
BUSINESS
- --------------------------------------------------------------------------------
- - LACK OF INFORMATION: it produces limited information about the intracellular
processes or targets to guide target selection and subsequent drug
development; and
- - RISK OF SIDE EFFECTS: it often produces drug candidates with a high risk of
serious side effects, including toxicity.
SUBSEQUENT BIOLOGICAL ADVANCES AND GENOMICS
Beginning in the mid 1970's, pharmaceutical companies began to use a growing
knowledge of cellular and molecular biology to enlarge their understanding of
biochemical interactions within and between cells in order to understand the
cellular basis for disease processes. For example, researchers equipped with a
more thorough understanding of cellular mechanisms relating to blood pressure
regulation were able to identify proteins called angiotensin converting enzymes
(ACE) which regulate molecules causing high blood pressure. By identifying
compounds that act as ACE inhibitors, the researchers developed a family of
highly specific drugs that lower blood pressure without causing serious side
effects.
More recently, pharmaceutical companies have begun to look at the genetic basis
for disease. For example, the Human Genome Project was undertaken to identify
the DNA sequence of all the genes in the human genome, with the hope that
knowledge of the human genome would enable a comprehensive understanding of the
molecular causes of all diseases, and therefore provide a source of targets for
drug discovery. However, merely developing sequence data with respect to genes
does not, on its own, provide information about the cellular function of the
proteins encoded by the genes expressed in a particular tissue at a particular
time under particular disease circumstances. In addition, it fails to tell us
which proteins might make useful targets for compound screening to identify drug
candidates to modulate any of these functions. With more than 100,000 genes in
the human genome, the number of possible combinations of expressed proteins in a
cell and the number of possible interactions of those proteins produce a volume
of information which often obscures rather than illuminates the functional role
of any particular gene in a disease process.
Later efforts to link genes to disease, or functional genomics, have focused on
which genes are responsible for changes in the behavior of cells under disease
conditions. However, the functional connection between particular genes and
their expressed proteins on the one hand, and cellular behavior seen in disease
conditions on the other hand, has remained unknown in the majority of diseases.
For this reason, pharmaceutical companies have sought better means to identify
the genes which are important to cellular behavior and to understand their role
in causing or preventing disease. Whether through gene sequencing or functional
genomics, understanding the functional role of a gene is critical to
understanding, identifying and validating a gene's expressed protein as a target
for compound screening. We believe that there remains a critical need for
research methods which will be able to utilize the information currently
available to identify protein targets quickly and systematically, with increased
probability of discovering new drug candidates.
ROLE OF TARGET VALIDATION
The identification of intracellular protein targets is an important step in the
process of identifying potential drugs. Most drugs are discovered today by
screening collections of libraries of chemical compounds against protein targets
which are part of signaling, or information-transmitting, pathways within cells.
These signaling pathways participate in the regulation of cell behavior in both
normal and diseased cells. However, drug discovery and development often occurs
without first validating the drug target and mechanism of action. If
pharmaceutical companies were to validate a target's role in a disease at an
early stage, they would reduce risks involved in the drug development process,
such as the pursuit of unsuccessful discovery pathways, regulatory delay and
drug side effects.
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32
BUSINESS
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A target is regarded as validated if a causal link is established between an
intracellular protein target and a cellular response important in a disease
process. Each drug discovery company has its own standards for deciding whether
a target has been sufficiently validated.
OUR SOLUTION
Our post-genomics combinatorial biology technology addresses the shortcomings of
traditional and genomics-based drug discovery. It is designed to identify
protein targets for compound screening and validate the functional role of those
targets in the disease process. Rather than traditional genomics approaches,
which begin by identifying genes and then search for their functions, we have
developed technologies designed to identify proteins that are demonstrated to
have an important role in a disease pathway. By understanding the disease
pathway, we attempt to avoid studying genes that will not make good drug targets
and focus only on the sub-set of expressed proteins of genes that we believe are
specifically implicated in the disease process.
We begin by developing assays which model the key events in a disease process at
the cellular level. We then use retroviral probes in hundreds of millions of
cells to identify potential protein targets. In addition, we use our two hybrid
protein interaction technology to identify each of the other proteins involved
in the intracellular process and prepare a map of their interactions, thus
giving us a comprehensive picture of the intracellular disease pathway. We
believe that our post-genomics combinatorial biology technology, together with
our two hybrid protein interaction technology, has a number of advantages:
- - IMPROVED TARGET IDENTIFICATION: it focuses only on the sub-set of expressed
proteins of genes believed to be specifically implicated in the disease
process;
- - RAPID VALIDATION OF PROTEIN TARGETS: it produces validated protein targets
more quickly because it uses key events in the disease process as the basis
to design the functional, disease-based screen;
- - IMPROVED DISEASE PATHWAY MAPPING: it produces a comprehensive map of the
intracellular disease pathway enabling the identification of a larger number
of potential protein targets;
- - BETTER INFORMED TARGET SELECTION: it provides a variety of different types
of targets and information concerning the role each plays to better select
targets more susceptible to pharmaceutical intervention;
- - MORE EFFICIENT COMPOUND SCREENING: it increases the probability and speed
that compound screening will identify "hits" because it provides more
detailed knowledge of the target which can be used to guide the design of
the compound screen; and
- - RISK REDUCTION: it may reduce the risk of failure in the drug development
process due to serious side effects, including toxicity or other reasons, by
selecting only targets that are specific to the disease in question and
which have no role in other cell types or signaling pathways.
TECHNOLOGY
We have developed two technologies: post-genomics combinatorial biology and two
hybrid protein interaction. These technologies help us identify and validate new
protein targets and establish a map of the intracellular proteins that define a
specific signaling pathway controlling cellular responses. We believe that,
together, these technologies allow for rapid pathway mapping of complex
biological processes and increase our ability to identify targets for drug
discovery.
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POST-GENOMICS COMBINATORIAL BIOLOGY
Our post-genomics combinatorial biology technology first uses retroviruses to
introduce up to 100 million different peptides or proteins into an equal number
of normal or diseased cells. Each retrovirus delivers a specific gene into an
individual cell, causing the cell to produce a specific peptide or protein.
Then, we stimulate the cells in a manner known to produce a disease-like
behavioral response or phenotype of the disease process. Once in the cell, the
expressed peptide or protein interacts with potential protein targets in the
cell. Then, we sort the cells using our multi-parameter high throughput
fluorescent cell sorters (FACS) at a rate of up to 60,000 cells/second to
collect data on up to 5 different parameters which means that a sort of
100 million cells can be completed in approximately half an hour. By analyzing
the approximately 500 million resulting data points, we can rapidly identify
those few cells containing a peptide or protein that has interacted with a
protein target in a way that causes the cell to change its behavior from
diseased back to normal. Using this method we believe that we can identify the
relatively few targets that are validated in the context of a disease-specific
cellular response.
TWO HYBRID PROTEIN INTERACTION
Our two hybrid protein interaction technology identifies specific proteins that
bind with other peptides or proteins that are known to be part of a signaling
pathway, either because we identified them using our post-genomics combinatorial
biology technology or because the peptides or proteins have been described in
the scientific literature. This two hybrid protein interaction technology is
directed at:
- - mapping an entire protein-protein intracellular functional pathway in
disease relevant cells;
- - finding new proteins interacting with other new and known proteins; and
- - eliminating potential targets rapidly because they interact with multiple
signaling pathways, thus identifying the protein as a less desirable target.
Using this technology, a protein that gives a detectable signal (reporter
protein), such as fluorescence, is split into two inactive parts. One part of
the reporter protein is fused with a specific protein known to be involved in a
signaling disease-relevant pathway (bait protein). Multiple copies of the other
part of the reporter protein are fused one by one with all the proteins known to
be present in the cell type being studied (library protein). When the bait
protein binds to a specific library protein, the two parts of the reporter
protein reunite and become active again, thereby generating a detectable signal.
We employ an improved version of the two hybrid protein interaction method in
yeast cells. In addition, we have developed a proprietary method of employing
the two hybrid protein interaction technology in mammalian cells. Mammalian
cells offer the opportunity to monitor protein-protein interactions in a
potentially more relevant cellular environment.
We also use our two hybrid protein interaction technology to screen identified
protein targets against a library of peptides in order to identify each active
protein-peptide interaction site on the target. This information is useful in
directing our combinatorial chemistry efforts to identify compounds specifically
designed to bind to the functional site on the target.
TARGET VALIDATION
Our target validation begins with our post-genomics combinatorial biology
technology. In contrast to traditional approaches, the first step of our target
validation occurs very early in the research process, saving time and enhancing
the probability that those targets which are identified and pursued are
disease-relevant. Using our post-genomics combinatorial biology, we design a
screen that reflects a key event in the disease process. When one of our
peptides or proteins changes the behavior of a specific cell, this indicates
that we have identified an interaction with a cellular target that is important
to a
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specific disease response. Therefore, this interaction provides immediate
validation of the target in the context of a disease specific cellular response.
This approach also tells us that the peptide or protein interacts with a
functional site on the target since the interaction results in a change in the
behavior of the cell. We further validate the function of specific targets by:
- - using technology to knock out the target from specific cells and see if the
loss of the target from the cell alters the cell's responses to
disease-causing stimuli;
- - altering the structure of the target in order to identify which part of the
target is functionally important; and
- - using peptides that attach to specific sites on the target to change the way
the target works inside the cell.
OUR DISCOVERY PROGRESS: 1997 - 1999
Since 1997, we have detected more than 500 million protein-protein interactions
in cells. We have also discovered more than 10,000 novel protein-protein
interactions in signaling pathways which modify cellular function. We have
mapped the protein interactions of over 150 disease modifying protein targets in
seven disease relevant pathways. We have identified 15 new drugable targets in
our programs: asthma/allergy, autoimmunity, transplant rejection, rheumatoid
arthritis (both E-3 ubiquitin ligase and TNF pathway) and tumor growth (both
cell cycle inhibition and E-3 ubiquitin ligase). We have identified small
molecule lead compounds in three of our programs.
[GRAPHIC]
OTHER TECHNOLOGIES
Our integrated drug discovery platform utilizes the following additional
technologies:
HIGH THROUGHPUT COMPOUND SCREENING (HTS)
Using our FACS System, we conduct screening of small molecule compounds in the
same cell-based disease-specific screens that are used to identify the protein
targets by our post-genomics combinatorial biology technology. This enables us
to screen thousands of compounds in a matter of a few hours, while
simultaneously examining multiple physiological parameters. In addition, we have
established conventional high throughput screens of small molecule compounds on
our validated protein targets
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using biochemical methods similar to those widely used in the biotechnology and
pharmaceutical industry. We have a library of approximately 150,000 synthetic
small molecule compounds having highly diverse molecular structures for our
compound screening activities.
We select for compound screening only those protein drug targets we judge to be
drugable; that is, that meet several criteria:
- - the target's causal relationship to the disease of interest is established;
- - the target's activity is determined to be specific to the disease of
interest;
- - the target is of a protein type, such as an enzyme, for which there is
experience indicating that intervention by a synthetic small molecule
compound would be an effective therapeutic; and
- - the target is novel and provides us freedom of action to pursue drug
discovery without interference from the rights of third parties.
PROTEOMICS
Our proteomics program is an integral part of our target discovery and
validation effort. In contrast to our two hybrid protein interaction technology
which can be used to find single protein-protein interactions, proteomics
techniques can be used to find protein complexes comprised of several protein
targets and to study protein-protein interactions in order to map active
interaction sites on potential protein targets. To this end, our protein
chemistry group uses the most advanced proteomic technologies, including high
resolution two dimensional gel electrophoresis in conjunction with in-gel
tryptic digests followed by mass spectrometry, in order to identify specific
drug targets. In addition, we design and test the effects of different
presentation structures in our peptide libraries, based on the function of
active peptides in cellular assays used in our post-genomics combinatorial
biology technology.
MEDICINAL AND COMBINATORIAL CHEMISTRIES
Our medicinal chemistry activities carry out traditional structure-activity
relationship studies of potential lead compounds and conducts lead optimization
utilizing chemistry techniques to synthesize new analogs of a lead compound with
improved properties. Our combinatorial chemistry activities synthesize compounds
incorporating desirable molecular features.
OUR STRATEGY
Our strategy is to employ our technologies to discover a portfolio of many drug
candidates that may be developed into small molecule therapeutics. We believe
that producing a portfolio of many drug candidates and working in conjunction
with pharmaceutical companies to further develop the candidates greatly
increases our probability of commercial success. By utilizing our technology to
rapidly discover and validate new targets and drug candidates that regulate
them, we believe that we are well positioned to help fill the product pipeline
gap of major pharmaceutical companies.
The key elements of our scientific and business strategy are to:
- - expand, enhance and protect our post-genomics combinatorial biology and our
two hybrid protein interaction technologies;
- - focus on diseases that represent large medical markets with significant
populations that are currently underserved;
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- - structure corporate partnering agreements to permit multiple collaborations
in each disease area by focusing on disease pathways and targets;
- - establish strategic collaborations with pharmaceutical and biotechnology
companies to enhance product development and commercialization and to
partner our future research programs in the later stages of drug
development; and
- - develop small molecule drugs, delivered to intracellular targets.
PRODUCT DEVELOPMENT
We believe that, with a steadily aging population, the main focus of medicine in
the United States and other developed countries is shifting to a greater
emphasis on the prevention and treatment of chronic diseases such as asthma and
rheumatoid arthritis. The parallel trends of the increasing knowledge of drug
targets and the increasing incidence of the diseases treated with small molecule
compounds allow us to exploit our technology for large and fast growing segments
of the pharmaceutical marketplace on a worldwide basis. Our programs address
asthma, allergy, autoimmunity, transplant rejection, rheumatoid arthritis and
inflammatory bowel disease affecting the immune system as well as cancerous
tumor growth. These programs offer potential opportunities to develop drugs for
many therapeutic indications. We believe that there are significant unmet
medical and quality-of-life needs for these diseases that represent large
commercial markets.
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The following table summarizes key information in our nine programs that focus
on specific disease mechanisms:
COLLABORATIVE
DISORDER/DISEASE MECHANISM STATUS KEY ACHIEVEMENTS PARTNER
----------------------------------------------------------------------------------------------------------------------------
IMMUNE DISORDERS
----------------------------------------------------------------------------------------------------------------------------
Asthma/Allergy IgE receptor on mast cells Preclinical -Preclinical candidate None
development (1) compounds identified
-Cell based high
throughput screening
(HTS) underway
-Protein interaction
pathway map established
IgE production in B cells Target -Preclinical candidate Pfizer
screening (2) compounds identified
-HTS underway
-Protein interaction
pathway map established
-Novel drug targets
identified
----------------------------------------------------------------------------------------------------------------------------
Autoimmunity B cell activation Target -Novel drug targets Novartis
screening (2) identified
----------------------------------------------------------------------------------------------------------------------------
Transplant rejection T cell activation Target -Novel drug targets Novartis
screening (2) identified
----------------------------------------------------------------------------------------------------------------------------
Rheumatoid arthritis/ E-3 ubiquitin ligase Compound -Novel drug targets None
inflammatory bowel screening (3) identified and validated
disease -Preclinical candidate
compounds identified
TNF pathway Target -Protein interaction None
validation (4) pathway map established
-Novel drug targets
identified and validated
----------------------------------------------------------------------------------------------------------------------------
CANCER
----------------------------------------------------------------------------------------------------------------------------
Tumor growth Cell cycle inhibition Target -Protein interaction Janssen
Validation (4) pathway map established
-Novel drug targets
identified and validated
E-3 ubiquitin ligase Compound -Novel drug targets None
screening (3) identified and validated
-Preclinical candidate
compounds identified
Angiogenesis Target -HTS underway Cell Genesys
screening (2)
- ------------
(1) "PRECLINICAL DEVELOPMENT": PHARMACOLOGY AND TOXICOLOGY TESTING IN ANIMAL
MODELS TO GATHER DATA NECESSARY TO COMPLY WITH APPLICABLE REGULATORY
PROTOCOLS PRIOR TO SUBMISSION OF AN INVESTIGATIONAL NEW DRUG APPLICATION TO
THE FDA.
(2) "TARGET SCREENING": DISEASE MODELED SCREENING IN CELLS USING OUR
POST-GENOMICS COMBINATORIAL BIOLOGY TECHNOLOGY.
(3) "COMPOUND SCREENING": SCREENING OF SMALL MOLECULE COMPOUNDS IN BIOCHEMICAL
AND FACS ASSAYS TO IDENTIFY A COMPOUND WHICH BINDS TO A FUNCTIONALLY ACTIVE
SITE OF A VALIDATED TARGET.
(4) "TARGET VALIDATION": TESTING TO ESTABLISH A CAUSAL LINK BETWEEN AN
INTRACELLULAR PROTEIN TARGET AND A CELLULAR RESPONSE IMPORTANT IN A DISEASE
PROCESS.
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IMMUNE DISORDERS
Many diseases and disorders result from defects in the immune system. Over 50
million people in the United States suffered from allergic and asthmatic
disorders in 1999. Anti-asthmatic and allergy relief medications exceeded $5
billion in worldwide sales in 1997 and have been growing at a 5% annual growth
rate. In 1999, another 3 million to 5 million patients in the United States were
treated for other immune disorders. We currently have six programs in immunology
focused on asthma/allergy (two programs), autoimmunity, transplant rejection,
rheumatoid arthritis and inflammatory bowel disease and three programs in cancer
focused on tumor growth.
ASTHMA/ALLERGY
IgE receptor on mast cells
The goal of this program is to identify compounds that inhibit the secretion of
inflammatory factors resulting from IgE binding to its receptor on mast cells.
IgE is one of several immunoglobulins produced by the body's immune system.
Currently, we have several preclinical candidate compounds which will enter
preclinical studies in animal models. Preliminary studies demonstrate that these
compounds inhibit the ability of IgE to activate its receptor on mast cells.
There is evidence in animal models and early clinical studies that blocking IgE
from binding to mast cells can reduce allergic symptoms in multiple species,
including humans. However, most programs in development today are intravenous
therapeutic antibodies. We believe that small molecule inhibitors of IgE could
play an important role in treatment of such chronic disorders.
IgE production in B cells
In this program, we have been working with our partner, Pfizer, since
January 1999 to identify intracellular drug targets that control the production
of IgE in B cells. We have identified a protein target that appears to regulate
a key event in this pathway that leads to allergic and asthmatic symptoms and a
preclinical candidate compound in this program.
AUTOIMMUNITY & TRANSPLANT REJECTION
Autoimmunity disorders and organ transplant rejection are the result of
inappropriate activation of the immune system. Most existing therapies for
inflammatory diseases also have toxic side effects. A challenge facing all
research groups in this field has been the design of selective and specific
immune system therapeutics that affect only the pathological activities without
negatively affecting the protective activities of the immune system.
Our programs are designed to identify and validate novel molecules which
specifically signal cell activation and cell death, or apoptosis, of T cells and
B cells. Activation and apoptosis determine the quality, magnitude, and duration
of immune responses. Activation pathways are initiated by the binding of antigen
(foreign protein) to specific surface receptors on T cells or B cells. This sets
off an intracellular cascade of signals, resulting in changes in gene expression
and the production of proteins that drive the immune response or lead to
antibody production and secretion in B cells. The apoptosis signals prevent
overactivation or prolonged activation of the T and B cells, which can lead to
disease or organ rejection. We are identifying T cell and B cell-specific drug
targets that are effective in modulating immune-mediated processes.
B cell activation
The goal of the B cell activation program is to prevent antibody secretion by
activated B cells, an important mechanism in autoimmunity. We have commenced
screening using our post-genomics combinatorial biology technology and have
identified novel drug targets. This program has been partnered with Novartis
since August 1999.
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T cell activation
The goal of our T cell program is to identify early steps in the process of T
cell activation. We have commenced screening using our post-genomics
combinatorial biology technology and have identified novel drug targets. This
program has been partnered with Novartis since May 1999.
RHEUMATOID ARTHRITIS & INFLAMMATORY BOWEL DISEASE
We have programs directed at two different cellular pathways for these
inflammatory diseases:
E-3 ubiquitin ligase
This program is focused on characterizing and developing specific inhibitors of
protein-degrading enzymes, named E-3 ubiquitin ligases, in inflammation. The
levels of many intracellular proteins that play a critical role in signaling
pathways are regulated by this protein-degrading process. Many signaling
proteins control cell function through active intermediates whose levels vary
rapidly during different phases of a physiologic response. Disease processes can
be treated by up-regulating or down-regulating these key signaling proteins as a
way to enhance or dampen specific cellular responses. This principle has been
successfully used in the design of a number of therapeutics for the treatment of
inflammation. We also anticipate that, as the field of E-3 ubiquitin ligase
biology evolves, inhibitors can be identified which will have clinical utility
in metabolic diseases and possibly in neurodegenerative processes. We have
screened over 60,000 small molecules against several members of the E-3
ubiquitin ligase family, and have identified several small molecule compounds
which, based on preliminary data, appear to be potent and non-toxic inhibitors.
TNF pathway
This second program focuses on blocking the inflammatory signals of the tumor
necrosis factor-alpha (TNFa) pathway, a pathway validated by existing antibody
therapies as an important site for therapeutic intervention. We have identified
and validated several novel members of this signaling pathway which are moving
into both biochemical and cell based high throughput compound screens. Our
preliminary results suggest that the targets we have identified in the TNFa
pathway regulate inflammatory responses in specific cell types, thus potentially
making small molecule compounds directed at these targets more disease specific.
In addition, these small molecules will be less likely to exhibit the side
effects of chronic administration of anti-TNF antibodies or antibodies directed
at the TNFa receptor.
Additionally, our scientists have identified potential drug targets in the TNF
pathway that protect T cells from apoptotic signals, and have used those
interactions to identify a protective protein termed Toso. When T cells are
activated, Toso production is activated and in turn causes other intracellular
proteins to block apoptotic signals. Thus Toso may protect activated T cells
from apoptosis. We are investigating Toso inhibition as a method of selectively
killing activated disease-causing T cells.
CANCER
Cancer is a group of diseases characterized by the uncontrolled growth and
proliferation of cells. This growth invades vital organs and often results in
death. The United States market for branded cancer drugs totaled approximately
$7.0 billion in 1999 and is projected to grow at an 11% annual growth rate.
Cancer is the second leading cause of death in the United States, exceeded only
by cardiovascular disease. In 1999, an estimated 1.2 million people were
diagnosed with cancer, and more than 500,000 patients died of cancer in the
United States. Although there have been improvements in cancer therapies over
the last decade, there remains a significant medical need for the development of
both more effective and less toxic drugs for these diseases.
We are currently pursuing three important pathways directed against tumor
growth:
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Cell cycle inhibition
This program is directed toward the cell cycle checkpoint pathway. The
proliferation of normal cells is controlled by built-in safety mechanisms in the
cell cycle, termed checkpoints, that ensure that only cells with normal genetic
material can progress through the cell cycle and divide. Cells with genetic
mutations are recognized and shunted into the apoptosis pathway to protect the
organism from cancer and other genetic disorders. It is estimated that more than
50 percent of all human tumors contain cancer cells that have lost one or more
crucial checkpoint genes. Cancer cells also can carry mutations in another group
of normal cell genes that mimic extracellular proliferation signals, causing
tumor cells to continue to divide even in the absence of normal cell growth
signals. The net result of these genetic mutations is uncontrolled cell division
and disease. We have collaborated with our partner Janssen since December 1998
to identify intracellular drug targets involved in cell cycle control. We have
identified two validated targets in this program which are expected to enter
small molecule screens.
E-3 ubiquitin ligase
Our second antitumor program is focused on the E-3 ubiquitin ligase pathway. The
goal of this program is to examine specific inhibitors of ubiquitin ligases
implicated in regulating mitosis, or cell division, in a number of transformed
cell lines and normal cells. We also have identified several small molecule
compounds in this program.
Angiogenesis
Our third antitumor program is directed toward the angiogenesis pathway.
Angiogenesis is defined as the growth of new blood vessels. In diseased
circumstances or in oxygen deficient conditions, angiogenesis is stimulated by
the synthesis and release of specific pro-angiogenic factors. In contrast to
normal angiogenesis, tumor angiogenesis is a continuous process. As a
significant proportion of tumors are dependent on continued angiogenesis,
inhibition of this process blocks tumor growth which often leads to complete
tumor deterioration. Thus, we believe therapeutic intervention of tumor-promoted
angiogenesis represents an important form of anti-tumor therapy. We have
established and initiated two screens in capillary endothelial cells using our
post-genomics combinatorial biology technology in order to identify targets in
the angiogenesis pathway.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses were $10.2 million for the nine months
ended September 30, 1999, $8.3 million in 1998 and $4.6 million in 1997.
CORPORATE COLLABORATIONS
To fund a wide array of research and development programs, we have established
and will continue to pursue corporate collaborations with pharmaceutical and
biotechnology companies. We currently have collaborations on six of our nine
research programs, including one with Janssen relating to oncology therapeutics
and diagnostics, one with Pfizer relating to asthma and allergy therapeutics,
three with Novartis relating to immunology, and one with Cell Genesys relating
to angiogenesis.
As of December 31, 1999, we had received a total of $21.4 million, including
$9.0 million in research funding from these collaborators. In addition, we have
a number of scientific collaborations with academic institutions and
biotechnology companies under which we have in-licensed technology. We intend to
pursue further collaborations as appropriate.
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In most of our collaborations, inventions are intended to be owned by the
employer of the inventor or inventors thereof in accordance with United States
patent law, subject to licenses or assignments granted in the agreements.
JANSSEN
Effective December 1998, we entered into a three-year research collaboration
with Janssen, a Johnson & Johnson company, to identify, discover, and validate
novel drug targets that regulate cell cycle, and, specifically, the
identification of drug targets and the active peptides that bind to them that
can restore a mutated cell's ability to stop uncontrolled cell division. Under
the agreement, we will provide certain assays and associated technology to
Janssen for the assessment of the alteration or normalization of the
dysfunctional cell cycles of cancer cells for Janssen's internal research
purposes.
Once a drug target and the associated active peptide are identified and
validated, Janssen shall have the exclusive right to conduct compound screening
on such drug target and associated active peptide for three years thereafter. If
Janssen fails to initiate compound screening with the drug target and associated
active peptide during this three year period, or if screening is initiated by
Janssen but Janssen fails to pursue such screening in a manner consistent with
its normal business practices, Janssen will lose its rights to the drug target
and associated active peptide, and we shall have an exclusive license to the
drug target and associated active peptide on a worldwide, royalty-free basis.
Under the collaboration, Janssen has the exclusive right to utilize our
technology and technology developed during the collaboration to discover,
develop, identify, make, and commercialize certain products on a worldwide
basis. These products are:
- - diagnostic products which are either a component of a drug target and
associated active peptide, identified by or on behalf of us or Janssen in an
assay developed during the collaboration, or identified in a Janssen
screening assay as a result of Janssen's internal research;
- - products identified by or on behalf of Janssen as a result of Janssen's
internal research;
- - products identified by or on behalf of either us or Janssen in an assay
which incorporates a drug target and associated active peptide delivered to
Janssen by us; and
- - products which contain a component of a drug target and associated active
peptide, or the functional equivalent of a component.
Janssen also has a non-exclusive right to use our technology, and technology
developed during the research collaboration, to the extent necessary to use the
assays we transfer to Janssen for internal research. Janssen's rights are
subject to its obligation to provide research funding for the collaboration,
make milestone payments and up-front payments to us, and pay royalties to us on
the sales of products, as described above.
We will have the non-exclusive right to use any technology developed by Janssen
during the research collaboration, and any improvements to our technology
developed by Janssen during its internal research, on a royalty-free and
worldwide basis. However, during the first 18 months after the signing date of
the agreement, we may not enter into a research collaboration with a third party
to identify drug targets and the associated active peptides which cause
alterations in the cell cycle of human tumor cells.
The research collaboration will terminate (three years after the effective date
of the agreement) unless the agreement is terminated, or the research
collaboration is extended for up to two additional one year periods at Janssen's
option.
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The Johnson & Johnson Development Corporation, the investment entity affiliated
with Janssen, purchased 1,500,000 shares of our Series D preferred stock at a
price per share of $2.00 in connection with our Series D financing and purchased
166,666 shares of our Series E preferred stock at a price per share of $6.00 in
connection with our Series E financing.
PFIZER
Effective January 1999, we entered into a two-year research collaboration with
Pfizer, renewable by Pfizer for an additional year, to identify intracellular
drug targets that control the production of IgE, a key mediator in allergic
reactions and asthma in B cells. We will provide the following technology
developed or identified during and pursuant to the research collaboration to
Pfizer:
- - drug targets;
- - technology associated with identified drug targets;
- - technology necessary for Pfizer's performance of its research collaboration
obligations; and
- - technology necessary for Pfizer's performance of HTS on identified drug
targets.
Pfizer will exclusively own drug targets for which it has initiated HTS. We will
have no obligation to Pfizer with regard to any drug target Pfizer does not
select for HTS. During the research collaboration, we may not conduct research
within the scope of the research collaboration by ourselves or with any third
party except in connection with the research collaboration with Pfizer.
We and Pfizer each have the non-exclusive right to use for research purposes the
technology of the other which is disclosed or developed during the research
collaboration, excluding our peptide libraries and proprietary cell lines. Under
the collaboration, Pfizer also has the exclusive, worldwide right to develop and
market diagnostic and therapeutic products for humans and animals which were
identified by Pfizer in HTS and modulate the activity of a drug target
identified in the research collaboration. Pfizer's rights to develop and market
such products are subject to its obligation to provide research funding to us
for a minimum of two years, as well as cash, up front payments, research
milestones, and royalties on the sales of these products.
In addition to typical termination events, Pfizer may terminate this agreement
if Dr. Donald Payan's association with us as our chief scientific officer or
similar role ends and we and Pfizer cannot agree on a successor acceptable to
Pfizer.
Pfizer purchased 1,000,000 shares of Series D preferred stock at a price per
share of $2.00 in connection with our Series D financing.
NOVARTIS
In May 1999, we signed an agreement for the establishment of a broad
collaboration with Novartis, whereby the two companies will work together on
five different five-year research projects to identify drug targets for products
that can treat, prevent, or diagnose the effects of human disease. Two of the
research projects will be conducted jointly by Novartis and us, and the other
three research projects will be conducted at Novartis. The first research
project, a joint research project, is focused on identifying small molecule drug
targets that regulate T cells. The second research project, also a joint
research project, relates to the identification and validation of small molecule
drug targets that can mediate specific functions of B cells. The third research
project, a project carried out at Novartis, is focused on identifying small
molecule drug targets that regulate pulmonary inflammation. Novartis will select
the remaining two projects by May 2001.
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Once a drug target from any of the five research projects has been identified
and validated, Novartis shall have the right to conduct compound screening on
such drug target on an exclusive basis for two years thereafter. Novartis will
have the option to extend this exclusive right for up to five additional
one-year periods so long as Novartis pays us an annual fee for such right and
satisfies certain diligence conditions. Upon the expiration or termination of
this right, both we and Novartis shall have the non-exclusive right to use, and
allow others to use, such drug target for compound screening.
Under the collaboration, Novartis has the non-exclusive right to utilize our
post-genomics combinatorial biology technology and two hybrid protein
interaction technology for confirmational and similar uses relating to validated
drug targets, including uses necessary for the further development,
registration, and commercialization of products whose principal mechanism of
action is based upon, derived or discovered from, or discovered with the use of,
a drug target. Novartis also has the exclusive right to utilize other of our
technology and technology developed during the collaboration, to make and
commercialize these products. Novartis' rights are subject to its obligation to
provide research funding for the joint research projects, to pay milestone
payments and up front payments to us, and to pay third party royalties
associated with Novartis' use of certain of our technology.
Under the collaboration, we will have the non-exclusive right to use any
improvements to our post-genomics combinatorial biology technology and two
hybrid protein interaction technology developed during a research project on a
royalty-free and worldwide basis.
Novartis may terminate the joint research projects two years after the
applicable commencement date, or three and one half years after the applicable
commencement date if Novartis gives six months prior notice of its termination.
In some circumstances, Novartis also may terminate either of the joint research
projects after the expiration of 12 months after the applicable commencement
date. Novartis may terminate the research projects to be conducted at Novartis
at any time.
Novartis purchased two million shares of our Series D preferred stock at a per
share purchase price of $2.00 in connection with our Series D financing.
Novartis also entered into an agreement with us which provides that, in certain
circumstances, we may elect to sell Novartis up to $10.0 million of our stock.
Such sale may be made in a private placement of our securities or as part of our
initial public offering.
CELL GENESYS
In September 1999, we established a research collaboration and license agreement
with Cell Genesys. The goal of the research collaboration is to use our
post-genomics combinatorial biology technology to identify novel therapeutic
peptide, protein, and gene products in the field of gene therapy. Cell Genesys
also will be granted exclusive, royalty-free worldwide rights to make, use, and
commercialize therapeutic peptide, protein and gene products in the field of
gene therapy. Cell Genesys also will be granted the right to make and use the
intracellular drug targets with which their gene therapy products bind for the
sole purpose of the research and development of gene therapy products. Cell
Genesys also has the option to obtain rights under some of our cell lines and
associated technology to make and commercialize gene therapy products.
In exchange for our performance of the research and the license granted to Cell
Genesys, we were granted a royalty-free, worldwide right to some Cell Genesys
patents and technology pertaining to retroviral gene delivery technology for use
in the field of our post-genomics combinatorial biology. Each company will pay
to the other company third-party sublicensing fees and royalties associated with
the grant of the licenses discussed above, and fund their own research.
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NEUROCRINE BIOSCIENCES
In addition to our nine programs focusing on specific disease mechanisms,
effective December 1997, we entered into a two-year research collaboration with
Neurocrine, renewable for additional one-year periods, to discover novel
molecular targets involved in glial cell activation and to discover small
molecule inhibitors of protein interactions which are not involved in glial cell
activation. We will use our unique intracellular combinatorial libraries
designed to allow screening of glial cell signaling pathways, to discover drug
targets involved in glial cell activation. Neurocrine will use several of its
technologies and proprietary chemical libraries to screen drug targets delivered
to it by us which are not involved in glial cell activation.
Under the terms of the agreement, Neurocrine has the exclusive, royalty-free
right to utilize our technology and technology developed during the research
collaboration to develop, make, and commercialize on a worldwide basis, products
which incorporate or are discovered using a drug target involved in glial cell
activation or a peptide identified or produced by us which binds to this type of
drug target. We have the exclusive, royalty-free right to utilize Neurocrine
technology and technology developed during the research collaboration to
develop, make, and commercialize on a worldwide basis, products which
incorporate or are discovered using a drug target not involved in glial cell
activation or a peptide identified or produced by Neurocrine which binds to this
type of drug target. Each company will assign to the other company its rights in
proprietary technology and technology developed during the research
collaboration which is related to the other company's products described above.
Each company will fund their own research under the collaboration.
INTELLECTUAL PROPERTY
We will be able to protect our technology from unauthorized use by third parties
only to the extent that it is covered by valid and enforceable patents or are
effectively maintained as trade secrets. Accordingly, patents or other
proprietary rights are an essential element of our business. As of December 31,
1999, we have 56 pending patent applications in the United States and
corresponding foreign patent applications. At the same date, at least seven
patent applications had been filed in the United States by or on behalf of
universities which had granted us exclusive license rights to the technology. To
date, no patents have issued to us but we have received notification from the
United States Patent Office that it intends to allow claims in one of our patent
applications. Our policy is to file patent applications to protect technology,
inventions and improvements to inventions that are commercially important to the
development of our business. We seek United States and international patent
protection for a variety of technologies, including: new screening methodologies
and other research tools; target molecules that are associated with disease
states identified in our screens; and lead compounds that can affect disease
pathways. We also intend to seek patent protection or rely upon trade secret
rights to protect other technologies that may be used to discover and validate
targets and that may be used to identify and develop novel drugs. We seek
protection, in part, through confidentiality and proprietary information
agreements. We are a party to various other license agreements that give us
rights to use technologies in our research and development.
COMPETITION
We face, and will continue to face intense competition from pharmaceutical and
biotechnology companies, as well as academic and research institutions and
government agencies, both in the United States and abroad. Some of these
competitors are pursuing the development of pharmaceuticals that target the same
diseases and conditions as our research programs. Our major competitors include
fully integrated pharmaceutical companies that have extensive drug discovery
efforts and are developing
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novel small molecule pharmaceuticals. We face significant competition from
organizations that are pursuing the same or similar technologies, including the
discovery of targets that are useful in compound screening, as the technologies
used by us in our drug discovery efforts. Our competitors or their collaborative
partners may utilize discovery technologies and techniques or partner more
rapidly or successfully than we or our collaborators are able to do.
Many of these companies and institutions, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
significantly greater experience than we do in:
- - identifying and validating targets;
- - screening compounds against targets; and
- - undertaking preclinical testing and clinical trials.
Accordingly, our competitors may succeed in obtaining patent protection,
identifying or validating new targets or discovering new drug compounds before
us.
Competition may also arise from:
- - new or better methods of target identification or validation;
- - other drug development technologies and methods of preventing or reducing
the incidence of disease;
- - new small molecules; or
- - other classes of therapeutic agents.
Developments by others may render our product candidates or technologies
obsolete or noncompetitive. We face and will continue to face intense
competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies, for establishing relationships with
academic and research institutions and for licenses to additional technologies.
These competitors, either alone or with their collaborative partners, may
succeed in developing technologies or products that are more effective than
ours.
Our ability to compete successfully will depend, in part, on our ability to:
- - identify and validate targets;
- - discover candidate drug compounds which interact with the targets we
identify;
- - attract and retain scientific and product development personnel;
- - obtain patent or other proprietary protection for our new drug compounds and
technologies; and
- - enter commercialization agreements for our new drug compounds.
GOVERNMENT REGULATION
If our potential preclinical compounds become ready to enter clinical testing,
our ongoing development activities will be subject to extensive regulation by
numerous governmental authorities in the United States and other countries,
including the FDA under the federal Food, Drug and Cosmetic Act. The regulatory
review and approval process is expensive and uncertain. Securing FDA approval
requires the submission of extensive preclinical and clinical data and
supporting information to the FDA for each
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indication to establish a product candidate's safety and efficacy. The approval
process takes many years, requires the expenditure of substantial resources and
may involve ongoing requirements for post-marketing studies. Before commencing
clinical investigations in humans, we must submit to, and receive approval from,
the FDA of an IND. We expect to rely on some of our collaborative partners to
file IND applications and generally direct the regulatory approval process for
certain of our products. If we succeed in developing products that receive
regulatory approval for marketing in the United States or abroad, the
manufacturing and marketing of our products will also be subject to extensive
governmental regulation.
Outside the United States, our ability to market a product is contingent upon
receiving a marketing authorization from the appropriate regulatory authorities.
The requirements governing the conduct of clinical trials, marketing
authorization, pricing and reimbursement vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Community, or EC, registration procedures are
available to companies wishing to market a product in more than one EC member
state. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. This foreign regulatory approval process involves all of the risks
associated with FDA clearance.
EMPLOYEES
As of December 31, 1999, we employed 83 persons, of whom 23 hold Ph.D. or M.D.
degrees and 3 hold other advanced degrees. Approximately 66 employees are
engaged in research and development, and 17 support administration, finance,
management information systems, facilities and human resources. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced work stoppages. We believe that our relations with our employees are
good.
FACILITIES
Our facilities consist of approximately 61,000 square feet of research and
office space located at 240 East Grand Avenue, South San Francisco, California
that is leased to us until 2015. We have options to renew these leases for 2
additional periods of 5 years each. We believe our facility will meet our space
requirements for research and development and administration functions through
the year 2001.
SCIENTIFIC ADVISORY BOARD
We utilize scientists and physicians to advise us on scientific and medical
matters as part of our Scientific Advisory Board including, experts in human
genetics, mouse genetics, molecular biology, biochemistry, cell biology,
chemistry, infectious diseases, immunology and structural biology. Generally,
each of our scientific and medical advisors and consultants receives an option
to purchase our common stock and an honorarium for time spent assisting us. The
following is a list of our Scientific Advisory Board members:
GARRY P. NOLAN, PHD, our co-founder and Chairman of the Scientific Advisory
Board, is Assistant Professor in the Department of Molecular Pharmacology and
Department of Microbiology and Immunology at Stanford University Medical Center.
ROBIN G. COOPER, DSC, PHD, is former Research Advisor at Eli Lilly and Co, and
presently President of Cooper Consulting Inc.
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CHARLES S. CRAIK, PHD, is Professor of Pharmaceutical Chemistry and
Pharmacology, Biochemistry and Biophysics, and Director of the Chemistry and
Chemical Biology Graduate Group at the University of California San Francisco.
DANIEL R. LITTMAN, MD, PHD, is the Coordinator of the Molecular Pathogenesis
Program, Skirball Institute of Biomolecular Medicine, Professor of Microbiology
and Pathology at the New York University School of Medicine and Investigator,
Howard Hughes Medical Institute.
RICHARD LOCKSLEY, MD, is Professor, Departments of Medicine and
Microbiology/Immunology, Chief of the Division of Infectious Diseases, and
Investigator, Howard Hughes Medical Institute, at the University of California
San Francisco.
RICHARD SCHELLER, PHD, is Professor of Molecular and Cellular Physiology and
Investigator, Howard Hughes Medical Institute at Stanford University.
KEVAN M. SHOKAT, PHD, is Associate Professor of Cellular and Molecular
Pharmacology at the University of California San Francisco, and Department of
Chemistry at University of California Berkeley.
BRANIMIR I. SIKIC, MD, is Professor of Medicine at Stanford University School of
Medicine, Director of the General Clinical Research Center at Stanford, and
Director of the Clinical Trials Office of the Stanford Clinical Cancer Center.
RICHARD ULEVITCH, PHD, is Chairman of the Department of Immunology at the
Scripps Research Institute.
MATTHIAS WABL, PHD, is Professor of Microbiology and Immunology in the
Department of Microbiology and Immunology at the University of California San
Francisco.
CLINICAL ADVISORY BOARD
In addition to our Scientific Advisory Board, we utilize a number of scientists
and physicians to advise us on the scientific and medical matters associated
with clinical trials. This group is known as our Clinical Advisory Board. The
following is a list of our Clinical Advisory Board members:
THOMAS A. RAFFIN, MD, Chairman of our Clinical Advisory Board, is Colleen and
Robert Haas Professor of Medicine and Biomedical Ethics, Chief of the Division
of Pulmonary and Critical Care Medicine, and Co-Director of the Center for
Biomedical Ethics at Stanford University Medical Center.
DENNIS A. CARSON, MD, is Professor of Medicine in the Department of Medicine at
the University of California San Diego and Director of the Sam and Rose Stein
Institute on Aging.
ALAN R. LEFF, MD, is Professor of Medicine, Neurobiology, Pharmacology and
Physiology, Pediatrics, Anesthesia and Critical Care, Clinical Pharmacology and
Cell Physiology and Chief of the Division Pulmonary and Critical Care Medicine
at the University of Chicago, Chicago, Illinois.
ROBERT S. MUNFORD, MD, is Professor of Internal Medicine and Microbiology at the
University of Texas Southwestern Medicine Center in Dallas, Texas.
GLENN D. ROSEN, MD, is Assistant Professor in the Division of Pulmonary and
Critical Care Medicine at Stanford University Medical Center.
LEGAL PROCEEDINGS
We are not a party to any pending material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is the name, age, position and a brief account of the business
experience of each of our executive officers and directors.
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------------
James M. Gower.......................... 51 President, Chief Executive Officer and
Director
Donald G. Payan, MD..................... 51 Executive Vice President and Chief
Scientific Officer and Director
Brian C. Cunningham..................... 56 Senior Vice President, Chief Operating
Officer, Chief Financial Officer and
Secretary
James H. Welch.......................... 42 Vice President, Finance and
Administration and Assistant Secretary
Jean Deleage, PhD(1).................... 59 Director
Alan D. Frazier(1)(2)................... 48 Director
Tak W. Mak, PhD......................... 53 Director
Walter H. Moos, PhD(1)(2)............... 45 Director
- ------------
(1) MEMBER OF THE AUDIT COMMITTEE.
(2) MEMBER OF THE COMPENSATION COMMITTEE.
JAMES M. GOWER Mr. Gower joined us as our President, Chief Executive Officer and
as a member of our board of directors in January 1997. From 1992 to March 1996,
Mr. Gower was President and Chief Executive Officer of Tularik, Inc., a
biotechnology company developing small-molecule drugs regulating gene
expression. Prior to Tularik, Mr. Gower spent 10 years at Genentech, Inc., a
biopharmaceutical company, where he most recently served as Senior Vice
President. During his ten years at Genentech, Mr. Gower was responsible for
business development and sales and marketing functions. In addition, he
established and managed Genentech's foreign operations in Canada and Japan and
served as President of Genentech Development Corporation. Mr. Gower serves on
the board of directors of Cell Genesys, Inc. He holds a BS and an MBA in
operations research from the University of Tennessee.
DONALD G. PAYAN, MD Dr. Payan is our co-founder, and has been a member of our
board of directors since July 1996 and has served as our Executive Vice
President and Chief Scientific Officer since January 1997. From January 1997 to
July 1998, he also served as our Chief Operating Officer. From July 1996 to
January 1997, Dr. Payan served as our President and Chief Executive Officer.
From December 1995 to May 1996, Dr. Payan was Vice President of AxyS
Pharmaceuticals, Inc., a biopharmaceutical company. From September 1993 to
December 1995, Dr. Payan was the founder and Executive Vice President and Chief
Scientific Officer of Khepri Pharmaceuticals, Inc. which merged with AxyS
Pharmaceuticals. Dr. Payan continues his association with the University of
California, San Francisco, which began in 1982, where he is currently an Adjunct
Professor of Medicine and Surgery. Dr. Payan holds a BS and an MD from Stanford
University.
BRIAN C. CUNNINGHAM Mr. Cunningham has been our Secretary since July 1996. In
July 1998, he joined us as Senior Vice President and Chief Operating Officer and
in February 1999, he also became our Chief Financial Officer. From January 1989
to September 1998, Mr. Cunningham was a partner in
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MANAGEMENT
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the law firm Cooley Godward LLP where he was head of the Life Sciences Group and
the Health Care Group and is currently Of Counsel. From May 1982 to
December 1989, he served as Vice President, Secretary and General Counsel of
Genentech Inc. Mr. Cunningham holds a BS in engineering science and a JD from
Washington University.
JAMES H. WELCH Mr. Welch joined us as our Vice President, Finance and
Administration, and Assistant Secretary in May 1999. From June 1998 to
May 1999, he served as an independent consultant at various companies. From
February 1997 to June 1998, Mr. Welch served as Chief Financial Officer of
Biocircuits Corporation, a manufacturer of medical diagnostic equipment, and
from June 1992 to February 1997, he served as Corporate Controller of
Biocircuits. Previously, Mr. Welch held various positions at NeXT
Computer, Inc., most recently as Division Controller. Mr. Welch holds a BA in
business administration from Whitworth College and an MBA from Washington State
University.
JEAN DELEAGE, PHD Dr. Deleage joined us as a director in January 1997.
Mr. Deleage is a founder and managing general partner of Alta Partners, a
venture capital partnership investing in information technologies and life
science companies. From 1979 to 1996, Dr. Deleage was a managing partner of
Burr, Egan, Deleage & Co., a venture capital firm. Dr. Deleage was the founder
of Sofinnova, a venture capital organization in France, and Sofinnova, Inc., the
U.S. subsidiary of Sofinnova. Dr. Deleage currently serves on the board of
directors of Flamel Technologies S.A. Dr. Deleage received a Baccalaureate in
France, a Masters Degree in electrical engineering from the Ecole Superieure
d'Electricite, and a PhD in Economics from the Sorbonne.
ALAN D. FRAZIER Mr. Frazier joined us as a director in October 1997. In 1991,
Mr. Frazier founded Frazier & Company, a venture capital firm, and has served as
the managing principal since its inception. From 1983 to 1991, Mr. Frazier
served as Executive Vice President, Chief Financial Officer and Treasurer of
Immunex Corporation, a biopharmaceutical company. From 1980 to 1983,
Mr. Frazier was a principal in the Audit Department of Arthur Young & Company
(now Ernst & Young). He also serves on the board of trustees of the Fred
Hutchinson Cancer Research Center, the Technology Alliance of Washington,
Voyager Capital's Advisory Board and the Washington Venture Capital Association.
Mr. Frazier holds a BA in economics from the University of Washington.
TAK W. MAK, PHD Dr. Mak joined us as a director since January 1997. Dr. Mak is
currently the Vice President of Research and Director of the Amgen Institute in
Toronto. Dr. Mak is also a professor for the Departments of Medical Biophysics
and Immunology at the University of Toronto where he was appointed professorship
in 1997. Since July 1974, Dr. Mak has been associated with the Ontario Cancer
Institute/Princess Margaret Hospital in Toronto as a staff scientist including
serving as Head of the Division of Cellular and Molecular Biology from April
1991 to February 1993. Dr. Mak holds a BS and an MS in biochemistry from the
University of Wisconsin, and a PhD in biochemistry from the University of
Alberta.
WALTER H. MOOS, PHD Dr. Moos joined us as a director since March 1997. Since
1997, Dr. Moos has served as the Chairman and Chief Executive Officer of
MitoKor, a biotechnology company. From 1991 to 1997, he served as Corporate Vice
President and Vice President, Research and Development in the Technologies
Division of Chiron Corporation, a biotechnology company. From 1982 to 1991,
Dr. Moos held several positions at the Parke-Davis Pharmaceutical Research
Division of the Warner-Lambert Company, last holding the position of Vice
President, Neuroscience and Biological Chemistry. He has been an Adjunct
Professor at the University of California, San Francisco, since 1992. Dr. Moos
holds an AB from Harvard University and a PhD in chemistry from the University
of California, Berkeley.
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Our executive officers are appointed by our board of directors and serve until
their successors are elected or appointed. There are no family relationships
among any of our directors or executive officers. No director has a contractual
right to serve as a member of our board of directors.
BOARD COMMITTEES
AUDIT COMMITTEE
Our audit committee, consisting of Drs. Deleage and Moos and Mr. Frazier,
reviews our internal accounting procedures and the services provided by our
independent auditors.
COMPENSATION COMMITTEE
Our compensation committee, consisting of Mr. Frazier and Dr. Moos, reviews and
recommends to our board of directors the compensation and benefits of all our
officers and establishes and reviews general policies relating to compensation
and benefits of our employees.
DIRECTOR COMPENSATION
We do not provide cash compensation to members of our board of directors for
serving on our board of directors or for attendance at committee meetings.
Members of our board of directors are reimbursed for some expenses in connection
with attendance at board and committee meetings. In consideration for services
as non-employee directors, on November 12, 1998, we granted an option to
purchase 20,000 shares of common stock to each of Drs. Mak and Moos at an
exercise price of $0.20 per share. The $0.20 per share exercise price for these
options was equal to the fair market value of the common stock on the date of
grant as determined by our board of directors. These options vest in a series of
equal monthly installments beginning on the grant date of the option and
extending through the next two years of service. In January 2000, the Company
granted Dr. Mak 50,000 shares of common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Mr. Frazier and Dr. Moos.
Mr. Gower served on our compensation committee from February 1998 to January
2000. No current member of the compensation committee has been an officer or
employee of ours at any time. None of our executive officers serve as a member
of the board of directors or compensation committee of any other company that
has one or more executive officers serving as a member of our board of directors
or compensation committee. Prior to the formation of a compensation committee in
February 1998, the board of directors as a whole made decisions relating to
compensation of our executive officers.
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MANAGEMENT
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation that we
paid during 1999 to our Chief Executive Officer and each of the four other most
highly compensated executive officers that earned more than $100,000 during
1999. All option grants were made under our 1997 Stock Option Plan.
SUMMARY COMPENSATION
- --------------------------------------------------------------------------------
ANNUAL LONG TERM
COMPENSATION COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------------------------------------------------------------------------------------
James G. Gower ...................................... $255,000 -- 450,000
President, Chief Executive Officer
and Director
Donald G. Payan ..................................... 235,417 -- 150,000
Executive Vice President and Chief
Scientific Officer and Director
Brian C. Cunningham ................................. 250,000 -- (1)
Senior Vice President, Chief Operating
Officer, Chief Financial Officer and Secretary
James H. Welch(2) ................................... 100,000 $25,000 150,000(3)
Vice President, Finance and
Administration and Assistant Secretary
Donald W. Perryman(4) ............................... 140,000 -- --
Former Vice President, Business Development
- ------------
(1) IN JANUARY 2000, WE GRANTED MR. CUNNINGHAM AN OPTION TO PURCHASE 200,000
SHARES OF COMMON STOCK AT AN EXERCISE PRICE OF $4.50 PER SHARE, WHICH WAS
EQUAL TO THE FAIR MARKET VALUE OF THE COMMON STOCK ON THE DATE OF GRANT AS
DETERMINED BY THE BOARD OF DIRECTORS. THESE OPTIONS VEST MONTHLY OVER A
FOUR-YEAR PERIOD FROM THE DATE OF GRANT.
(2) MR. WELCH JOINED RIGEL IN MAY 1999. HIS ANNUALIZED 1999 SALARY WAS $150,000.
(3) IN JANUARY 2000, WE GRANTED MR. WELCH AN OPTION TO PURCHASE 50,000 SHARES OF
COMMON STOCK AT AN EXERCISE PRICE OF $4.50 SHARE, WHICH WAS EQUAL TO THE
FAIR MARKET VALUE OF THE COMMON STOCK, ON THE DATE OF GRANT AS DETERMINED BY
THE BOARD OF DIRECTORS. THESE OPTIONS VEST MONTHLY OVER A FOUR-YEAR PERIOD.
(4) MR. PERRYMAN RESIGNED AS VICE PRESIDENT, BUSINESS DEVELOPMENT, EFFECTIVE
JANUARY 15, 2000.
The following table sets forth summary information regarding the option grants
made to our Chief Executive Officer and each of our four other most highly paid
executive officers during 1999. Options granted to purchase shares of our common
stock under our 1997 Stock Option Plan generally vest over a four-year or
five-year period. The exercise price per share is equal to the fair market value
of our common stock on the date of grant as determined by our board of
directors. The percentage of total options was calculated based on options to
purchase an aggregate of 2,783,000 shares of common stock granted to employees
under our stock option plan in 1999. The potential realizable value was
calculated based on the ten-year term of the options and assumed rates of stock
appreciation of 5% and 10%, compounded annually from the date the options were
granted to their expiration date based on the fair market value of the common
stock on the date of grant.
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OPTION GRANTS IN 1999
- --------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE APPRECIATION OF STOCK
OPTIONS EMPLOYEES IN PRICE/PER EXPIRATION PRICE FOR OPTION TERM
NAME GRANTED 1999 SHARE DATE 5% 10%
- -------------------------------------------------------------------------------------------------------
James M. Gower............ 450,000 16.2% $0.20 2/11/09 $ $
Donald G. Payan........... 150,000 5.4 0.20 2/11/09
Brian C. Cunningham....... -- -- -- --
James H. Welch............ 150,000 5.4 0.20 5/11/09
Donald W. Perryman........ -- -- -- --
The following table sets forth summary information regarding the number and
value of options held as of December 31, 1999 for our Chief Executive Officer
and each of our four most highly compensated executive officers. Our Chief
Executive Officer and each of our four most highly compensated executive
officers did not acquire any shares upon exercise of options in 1999. Amounts
shown in the value of unexercised in-the-money options at December 31, 1999
column are based on an initial public offering price of per share without
taking into account any taxes that may be payable in connection with the
transaction, multiplied by the number of shares underlying the option, less the
aggregate exercise price payable for these shares.
YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 DECEMBER 31, 1999
NAME VESTED UNVESTED VESTED UNVESTED
- ------------------------------------------------------------------------------------------------------
James G. Gower.............................. 75,000 375,000 $ $
Donald G. Payan............................. 25,000 125,000
Brian C. Cunningham......................... 141,666 358,334
James H. Welch.............................. 0 150,000
Donald W. Perryman.......................... 58,333 41,667
EMPLOYEE BENEFIT PLANS
2000 EQUITY INCENTIVE PLAN
Our board of directors adopted our 2000 Equity Incentive Plan on January 27,
2000, subject to stockholder approval. The 2000 Equity Incentive Plan is an
amendment and restatement of our 1997 Stock Option Plan.
SHARE RESERVE
We have reserved a total of 9,525,000 shares of our common stock for issuance
under the incentive plan. If the recipient of a stock award does not purchase
the shares subject to such stock award before the stock award expires or
otherwise terminates, the shares that are not purchased will again become
available for issuance under the incentive plan.
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MANAGEMENT
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ADMINISTRATION
The board administers the incentive plan unless it delegates administration to a
committee. The board has the authority to construe, interpret and amend the
incentive plan as well as to determine:
- - who will receive awards under the incentive plan;
- - the dates on which such awards will be granted;
- - the number of shares subject to the awards;
- - the vesting and/or exercisability of the awards;
- - the exercise price of the awards;
- - the type of consideration that may be used to satisfy the exercise price;
and
- - the other terms of the awards.
ELIGIBILITY
The board may grant incentive stock options that qualify under Section 422 of
the Internal Revenue Code to our employees and to the employees of our
affiliates. The board also may grant nonstatutory stock options, stock bonuses
and restricted stock purchase awards to our employees, directors and consultants
as well as to the employees, directors and consultants of our affiliates.
Our incentive plan includes the following features:
- - a stock option is a contractual right to purchase a specified number of our
shares at a specified price (exercise price) during a specified period of
time.
- - an incentive stock option is a stock option that meets the requirements of
Section 422 of the Internal Revenue Code. The holder of such an option will
not be required to pay tax on either the date of grant or the date of
exercise. If two holding period tests are met--more than two years between
grant date and sale date and more than one year between exercise date and
sale date--the optionholder will be taxed on the profit received on the
subsequent disposition of the option stock as long-term capital gain. If the
holding periods are not met, there has been a disqualifying disposition, and
the difference between the exercise price and the fair market value of the
shares on the exercise date will be taxed at ordinary income rates. The
difference between the fair market value on date of exercise and the
exercise price is an item of adjustment for purposes of the alternative
minimum tax unless there is a disqualifying disposition in the year of
exercise.
- - a nonstatutory stock option is a stock option that does not meet the
Internal Revenue Code criteria for qualifying as an incentive stock option.
Upon exercise of a nonstatutory option, the option holder will be required
to pay state and federal income tax and, if applicable, federal employment
taxes on the difference between the exercise price and the fair market value
on the exercise date.
- - a restricted stock purchase award is an offer to purchase shares at a price
that is at or near the fair market value of the shares. A stock bonus, on
the other hand, is a grant of our shares at no cost to the recipient in
consideration for past services rendered. Such awards generally are subject
to a vesting schedule pursuant to which we may reacquire the shares subject
to either type of award at the original purchase price (which is zero in the
case of a stock bonus) if the recipient's service to us and our affiliates
terminates before the shares vest.
The board may not grant an incentive stock option to any person who, at the time
of the grant, owns or is deemed to own stock possessing more than 10% of our
total combined voting power or the total
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MANAGEMENT
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combined voting power of an affiliate of ours, unless the exercise price is at
least 110% of the fair market value of the stock on the grant date and the
option term is no more than five years.
LIMITS ON OPTION GRANTS
There are limits on the number of shares that the board may grant under an
option.
- - section 162(m) of the Internal Revenue Code denies a deduction to publicly
held corporations for compensation paid to the corporation's chief executive
officer and its four highest compensated officers in a taxable year to the
extent that the compensation for each such officer exceeds $1,000,000. When
we become subject to Section 162(m), in order to prevent options granted
under the incentive plan from being included in such compensation, the
incentive plan provides that the board may not grant options under the
incentive plan to any employee covering an aggregate of more than 1,500,000
shares in any calendar year.
- - an employee may not receive incentive stock options that exceed the $100,000
per year limitation set forth in Section 422(d) of the Internal Revenue
Code. In calculating the $100,000 per year limitation, we consider the
aggregate number of shares under all incentive stock options granted to that
employee that will become exercisable for the first time during a calendar
year. For this purpose, we include incentive stock options granted under the
incentive plan as well as under any other stock plans that we and our
affiliates maintain. We then determine the aggregate fair market value of
shares subject to all such incentive stock options as of the grant date of
the options. Taking the options into account in the order in which they were
granted, we treat only the options covering the first $100,000 worth of
stock as incentive stock options. We treat any options covering stock in
excess of $100,000 as nonstatutory stock options.
OPTION TERMS
The board may grant incentive stock options with an exercise price of 100% or
more of the fair market value of a share of our common stock on the grant date.
It may grant nonstatutory stock options with an exercise price as low as 85% of
the fair market value of a share on the grant date.
THE MAXIMUM OPTION TERM IS 10 YEARS
The board may provide for exercise periods of any length following an
optionholder's termination of service in individual option grants. However,
generally options will provide that they terminate three months after the
optionholder's service to us and our affiliates terminates. If such termination
is due to the optionholder's disability, the exercise period generally is
extended 12 months. If such termination is due to the optionholder's death, or
if the optionholder dies within three months after his or her service
terminates, the exercise period generally is extended to 18 months following the
optionholder's death.
The board may provide for the transferability of nonstatutory stock options but
not incentive stock options. However, the optionholder may designate a
beneficiary to exercise either type of option following the optionholder's
death. If the optionholder does not designate a beneficiary, the optionholder's
option rights will pass to his or her heirs will or the laws of descent and
distribution.
TERMS OF OTHER STOCK AWARDS
The board determines the purchase price of other stock awards, which may not be
less than 85% of the fair market value of our common stock on the grant date.
However, the board may award stock bonuses in consideration of past services
without a cash purchase price. Shares that we sell or award under the incentive
plan may, but need not be, restricted and subject to a repurchase option in our
favor in accordance with a vesting schedule that the board determines. The
board, however, may accelerate the vesting of such awards.
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MANAGEMENT
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OTHER PROVISIONS
Transactions not involving our receipt of consideration, such as a merger,
consolidation, reorganization, stock dividend, or stock split, may change the
class and number of shares subject to the incentive plan and to outstanding
awards. In that event, the board will appropriately adjust the incentive plan as
to the class and the maximum number of shares subject to the incentive plan and
to the Section 162(m) limit. It also will adjust outstanding awards as to the
class, number of shares and price per share applicable to such awards.
If we dissolve or liquidate, then outstanding stock awards will terminate
immediately prior to such event. However, we treat outstanding stock awards
differently in the following situations:
- - a sale, lease or other disposition of all or substantially all of our
assets;
- - a merger or consolidation in which we are not the surviving corporation; or
- - a reverse merger in which we are the surviving corporation but the shares of
our common stock outstanding immediately before the merger are converted by
virtue of the merger into other property, such as securities or cash.
In these situations, the surviving corporation may either assume all outstanding
awards under the incentive plan or substitute other awards for the outstanding
awards. If the surviving corporation does not assume or substitute, then, for
award holders who are then providing services to us or our affiliates, the
vesting and exercisability of the awards will accelerate and the awards will
terminate immediately prior to the occurrence of the event described above. The
vesting and exercisability of awards held by award holders who are no longer
providing services to us or one of our affiliates will not accelerate. However,
those awards will also terminate immediately prior to the occurrence of the
event described above.
STOCK AWARDS GRANTED
As of December 31, 1999, 588,334 shares were issued upon the exercise of options
under our equity incentive plan, 2,500 shares of which have been repurchased;
options to purchase 5,242,004 shares were outstanding and 3,694,662 shares
remained available for grant.
PLAN TERMINATION
The incentive plan will terminate in 2010 unless the board terminates it sooner.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
We adopted the 2000 Non-Employee Directors' Stock Option Plan on January 27,
2000, subject to stockholder approval. The directors' plan will become effective
on the effective date of this initial public offering. The directors' plan
provides for the automatic grant to our non-employee directors of options to
purchase shares of our common stock.
SHARE RESERVE
We have reserved a total of 300,000 shares of our common stock for issuance
under the directors' plan.
If an optionholder does not purchase the shares subject to such option before
the option expires or otherwise terminates, the shares that are not purchased
again become available for issuance under the directors' plan.
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MANAGEMENT
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ADMINISTRATION
The board administers the directors' plan unless it delegates administration to
a committee. The board has the authority to construe, interpret and amend the
directors' plan, but the directors' plan specifies the essential terms of the
options, including:
- - who will receive options under the directors' plan;
- - the dates on which such options will be granted;
- - the number of shares subject to the options;
- - the vesting schedule applicable to the options;
- - the exercise price of the options; and
- - the type of consideration that may be used to satisfy the exercise price.
ELIGIBILITY
Each non-employee director who is serving on the effective date of this offering
will automatically be granted an option to purchase 20,000 shares of common
stock. Each person who is elected or appointed to be a non-employee director for
the first time after the effective date of this offering will be granted an
option to purchase 20,000 shares of common stock upon such election or
appointment. In addition, each non-employee director who continues to serve as a
non-employee director automatically will be granted an option to purchase 5,000
shares of common stock on the day following each annual meeting of our
stockholders. The number of shares subject to the grants to be made following
each annual meeting will be pro-rated for any non-employee director who has not
continuously served as a director for the entire 12-month period prior to the
date of grant. The options will vest over 2 years in equal monthly installments
provided that the non-employee director continues to provide services to us or
one of our affiliates.
OPTION TERMS
Options granted under the directors' plan will have an exercise price equal to
100% of the fair market value of the common stock on the grant date and a term
of 10 years. As long as a non-employee director continues to serve with us or
with an affiliate of ours, whether in the capacity of a director, an employee or
a consultant, the non-employee's option will continue. Options will terminate
three months after the optionholder's service terminates. However, if such
termination is due to the optionholder's disability, the exercise period will be
extended to 12 months. If such termination is due to the optionholder's death or
if the optionholder dies within three months after his or her service
terminates, the exercise period will be extended to 18 months following death.
Optionholders may transfer options granted under the directors' plan by gift to
immediate family or, under certain circumstances, to a trust for estate-planning
purposes. Optionholders also may designate a beneficiary to exercise their
options following the optionholder's death. Otherwise, option exercise rights
will pass by the optionholder's will or by the laws of descent and distribution.
OTHER PROVISIONS
Transactions not involving our receipt of consideration, such as a merger,
consolidation, reorganization, stock dividend, or stock split, may change the
class and number of shares subject to the directors' plan and to outstanding
options. In that event, the board will appropriately adjust the directors' plan
as to the class and the maximum number of shares subject to the directors' plan.
It also will adjust outstanding options as to the class, number of shares and
price per share applicable to such options.
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MANAGEMENT
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If we dissolve or liquidate, then outstanding options will terminate immediately
prior to such event. However, we treat outstanding options differently in the
following situations:
- - a sale, lease or other disposition of all or substantially all of our
assets;
- - a merger or consolidation in which we are not the surviving corporation; or
- - a reverse merger in which we are the surviving corporation but the shares of
our common stock outstanding immediately before the merger are converted by
virtue of the merger into other property, such as securities or cash.
In these situations, the surviving corporation will either assume the options
outstanding under the directors' plan or substitute other options for the
outstanding options. If the surviving corporation does not assume or substitute
all outstanding options under the directors' plan, then the vesting and
exercisability of the options will accelerate and the options will terminate if
they are not exercised prior to the event described above.
OPTIONS ISSUED
We have not issued any options under the directors' plan.
PLAN TERMINATION
The directors' plan will terminate in 2010 unless the board terminates it
sooner.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board adopted the 2000 Employee Stock Purchase Plan on January 27, 2000,
subject to stockholder approval.
SHARE RESERVE
We have authorized the issuance of 400,000 shares of our common stock pursuant
to purchase rights granted to eligible employees under the purchase plan. On the
anniversary of the effective date of this offering, starting with the
anniversary of this offering in 2001, the share reserve will automatically be
increased by a number of shares equal to the lesser of:
- - 1% of our then outstanding shares of common stock;
- - 400,000 shares; or
- - a number determined by our board of directors.
ELIGIBILITY
The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. The purchase
plan provides a means by which eligible employees may purchase our common stock
through payroll deductions. We implement the purchase plan by offerings of
purchase rights to eligible employees. Generally, all of our full-time employees
and full-time employees of our affiliates incorporated in the United States may
participate in offerings under the purchase plan. However, no employee may
participate in the purchase plan if, immediately after we grant the employee a
purchase right, the employee has voting power over 5% or more of our outstanding
capital stock. As of the date hereof, no shares of common stock had been
purchased under the purchase plan.
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MANAGEMENT
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ADMINISTRATION
Under the purchase plan, the board may specify offerings of up to 27 months.
Unless the board otherwise determines, common stock will be purchased for
accounts of participating employees at a price per share equal to the lower of:
- - 85% of the fair market value of a share on the first day of the offering; or
- - 85% of the fair market value of a share on the purchase date.
For the first offering, which will begin on the effective date of this initial
public offering, we will offer shares registered on a Form S-8 registration
statement. The fair market value of the shares on the first date of this
offering will be the price per share at which our shares are first sold to the
public as specified in the final prospectus with respect to our initial public
offering. Otherwise, fair market value generally means the closing sales price
(rounded up where necessary to the nearest whole cent) for such shares (or the
closing bid, if no sales were reported) as quoted on the Nasdaq National Market
on the trading day prior to the relevant determination date, as reported in The
Wall Street Journal.
The board may provide that employees who become eligible to participate after
the offering period begins nevertheless may enroll in the offering. These
employees will purchase our stock at the lower of:
- - 85% of the fair market value of a share on the day they began participating
in the purchase plan; or
- - 85% of the fair market value of a share on the purchase date.
If authorized by the board, participating employees may authorize payroll
deductions of up to 15% of their base compensation for the purchase of stock
under the purchase plan. Generally employees may end their participation in the
offering at any time up to 10 days before a purchase period ends. Their
participation ends automatically on termination of their employment or loss of
full-time status.
OTHER PROVISIONS
The board may grant eligible employees purchase rights under the purchase plan
only if the purchase rights, together with any other purchase rights granted
under other employee stock purchase plans established by us or by our
affiliates, if any, do not permit the employee's rights to purchase our stock to
accrue at a rate which exceeds $25,000 of fair market value of our stock for
each calendar year in which the purchase rights are outstanding.
Upon a change in control, a surviving corporation may assume outstanding
purchase rights or substitute other purchase rights therefor. If the surviving
corporation does not assume or substitute the purchase rights, the offering
period will be shortened and our stock will be purchased for the participants
immediately before the change in control.
DESCRIPTION OF 401(K) PLAN
We maintain a retirement and deferred savings plan for our U.S. employees. The
retirement and deferred savings plan is intended to qualify as a tax-qualified
plan under Section 401 of the Internal Revenue Code. The retirement and deferred
savings plan provides that each participant may contribute up to 20% of his or
her pre-tax compensation (up to a statutory limit, which is $10,500 in calendar
year 2000). Under the plan, each employee is fully vested in his or her deferred
salary contributions. Employee contributions are held and invested by the plan's
trustee. The retirement and deferred savings plan also permits us to make
discretionary contributions, subject to established limits and a vesting
schedule. To date, we have not made any discretionary contributions to the
retirement and deferred savings plan on behalf of participating employees.
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MANAGEMENT
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LIMITATIONS OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
In connection with the consummation of this offering, we will adopt and file an
amended and restated certificate of incorporation and amended and restated
bylaws. As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director will be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- - for any breach of duty of loyalty to us or to our stockholders;
- - for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- - for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
- - for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that we
must indemnify our directors to the fullest extent permitted by Delaware law.
In addition, our amended and restated bylaws provide that:
- - we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, subject to limited exceptions;
- - we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors, unless otherwise prohibited by law,
our amended and restated certificate of incorporation, our amended and
restated bylaws or agreements;
- - we are required to advance expenses to our directors and executive officers
as incurred in connection with legal proceedings against them for which they
may be indemnified; and
- - the rights conferred in the amended and restated bylaws are not exclusive.
We have entered into indemnification agreements with each of our directors and
officers. These agreements, among other things, require us to indemnify each
director and officer to the fullest extent permitted by Delaware law, including
indemnification for expenses such as attorneys' fees, judgments, fines and
settlement amounts incurred by the director or officer in any action or
proceeding, including any action by or in the right of Rigel, arising out of the
person's services as a director or officer of us, any subsidiary of ours or any
other company or enterprise to which the person provides services at our
request. At present, we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification would be required or permitted. We believe that our
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
We have an employment agreement with Dr. Payan, dated as of January 16, 1997,
and continuing indefinitely. Under the agreement, Dr. Payan is entitled to
receive an annualized base salary of $185,000 and 750,000 shares of our common
stock. As of January 16, 2000, all such shares were fully vested and not subject
to repurchase by us. Either Rigel or Dr. Payan may terminate his employment at
any time for any reason. If we terminate Dr. Payan without cause, he will
receive a severance payment equal to one year's salary.
We have an employment agreement with Donald Perryman dated as of January 16,
1997 and continuing indefinitely. Under the agreement, Mr. Perryman is entitled
to receive an annualized base
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MANAGEMENT
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salary of $140,000 and an option to purchase 100,000 shares of our common stock.
These shares vest over a five-year period. If Mr. Perryman's employment is
terminated without cause within five years and if less than one-fifth of the
shares remain unvested, then all shares shall become fully vested. Otherwise,
one-fifth of the total shares shall immediately vest upon termination. Either
Rigel or Mr. Perryman may terminate his employment at any time for any reason.
If we terminate Mr. Perryman without cause, he will receive a severance payment
equal to one year's salary.
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RELATED PARTY TRANSACTIONS
Stock option grants to our executive officers and directors are described in
this prospectus under the heading "Management--Compensation of Directors,
- --Executive Compensation and --Employment Agreements and Termination of
Employment Agreements."
From January 31, 1997, through January 31, 2000, the following executive
officers, directors and holders of more than 5% of our voting securities
purchased securities in the amounts and as of the dates set forth below.
PREFERRED STOCK
EXECUTIVE OFFICERS, ------------------------------------------------------------------------
DIRECTORS AND COMMON SERIES D
5% STOCKHOLDERS(1) STOCK SERIES A SERIES B SERIES C SERIES D WARRANTS SERIES E(2)
- ----------------------------------------------------------------------------------------------------------------
DIRECTOR
Tak W. Mak.............. 50,000 -- -- -- -- -- --
FIVE PERCENT STOCKHOLDERS
Entities affiliated with
Alta Partners(3)...... -- -- 2,500,000 1,403,509 558,107 55,640 166,666
Entities affiliated with
Frazier and Company,
Inc.(4)............... -- -- -- 3,649,123 521,596 52,000 125,000
Johnson & Johnson
Development
Corporation........... -- -- -- -- 1,500,000 -- 166,666
Entities affiliated with
Lombard Odier & Cie... -- -- 3,750,000 2,105,263 837,161 83,460 500,000
Novartis Pharma AG...... -- -- -- -- 2,000,000 -- --
Price Per Share........... $4.50 $0.80 $1.14 $2.00 $2.00 $6.00
Date(s) of Purchase....... 01/00 1/97 11/97 12/98-5/99 12/98 2/00
- ------------
(1) SEE "PRINCIPAL STOCKHOLDERS" FOR MORE DETAIL ON SHARES HELD BY THESE
PURCHASERS.
(2) THE CLOSING OF THE SERIES E PREFERRED STOCK FINANCING OCCURRED ON
FEBRUARY 3, 2000.
(3) MR. DELEAGE, ONE OF OUR DIRECTORS, IS THE MANAGING GENERAL PARTNER OF ALTA
PARTNERS.
(4) MR. FRAZIER, ONE OF OUR DIRECTORS, IS THE MANAGING PRINCIPAL OF FRAZIER AND
COMPANY, INC.
We have entered into an Amended and Restated Registration Rights Agreement with
each of the purchasers of preferred stock set forth above, pursuant to which
these and other stockholders will have registration rights with respect to their
shares of common stock issuable upon conversion of their preferred stock
following this offering.
We have entered into indemnification agreements with our directors and certain
officers for the indemnification and advancement of expenses to these persons to
the fullest extent permitted by law. We also intend to enter into those
agreements with our future directors and officers.
In September 1999, we established a research collaboration and license agreement
with Cell Genesys, Inc. James Gower, our President and Chief Executive Officer,
serves on the board of directors of Cell Genesys.
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent and
disinterested directors, and will be on terms no less favorable to us than could
be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table shows information known to us with respect to the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of the shares of common stock offered under this prospectus by:
- - each person or group who beneficially owns more than 5% of our common stock;
- - our chief executive officer;
- - each of our four other most highly compensated executive officers whose
compensation exceeded $100,000 during 1999;
- - each of our directors; and
- - all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the Securities
and Exchange Commission and generally includes any shares over which a person
exercises sole or shared voting or investment power. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock held by them. Shares of common stock subject to
options currently exercisable or exercisable within 60 days of December 31, 1999
and not subject to repurchase as of that date are deemed outstanding for
calculating the percentage of outstanding shares of the person holding these
options, but are not deemed outstanding for calculating the percentage of any
other person. Applicable percentage ownership in the following table is based on
27,708,051 shares of common stock outstanding as of December 31, 1999, after
giving effect to the issuance of 2,558,330 shares of Series E preferred stock on
February 3, 2000, and the conversion of all outstanding shares of preferred
stock into common stock upon the closing of this offering, and shares
of common stock outstanding immediately following the completion of this
offering. Unless otherwise indicated, the address of each of the named
individuals is c/o Rigel Pharmaceuticals, Inc., 240 East Grand Avenue, South San
Francisco, California 94080.
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PRINCIPAL STOCKHOLDERS
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AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED AS OF DECEMBER 31, 1999
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SHARES ISSUABLE
PURSUANT TO
OPTIONS
EXERCISABLE PERCENT OF TOTAL
OUTSTANDING WITHIN 60 DAYS OUTSTANDING SHARES
SHARES OF OF BENEFICIALLY OWNED
COMMON DECEMBER 31, PRIOR THE AFTER THE
BENEFICIAL OWNER STOCK 1999 OFFERING OFFERING
- -------------------------------------------------------------------------------------------------------------------
FIVE PERCENT SHAREHOLDERS
Entities affiliated with Lombard Odier & Cie(1)........ 7,275,884 -- 26.2%
11. rue de la Corraterie
1211 Geneve 11
Switzerland
Entities affiliated with Alta Partners(2).............. 4,683,922 -- 16.9
One Embarcadero Center, Suite 4050
San Francisco, CA 94111
Entities affiliated with Frazier and Company, 4,347,719 -- 15.7
Inc.(3)..............................................
601 Union Street, Suite 2110
Seattle, WA 98101
Novartis Pharma AG..................................... 2,000,000 -- 7.2
Head Financial Investments
CH-4002
Basel, Switzerland
Johnson & Johnson Development Corporation(4)........... 1,666,666 -- 6.0
One Johnson & Johnson Plaza
New Brunswick, NJ08933
James M. Gower......................................... 500,000 90,000 2.1
Donald G. Payan........................................ 750,000 30,000 2.8
Brian C. Cunningham.................................... -- 162,499 *
James H. Welch......................................... -- 1,041 *
Donald W. Perryman(5).................................. -- 61,666 *
Jean Deleage(2)........................................ 4,683,922 -- 16.9
Alan D. Frazier(3)..................................... 4,347,719 -- 15.7
Tak W. Mak(6).......................................... 50,000 8,333 *
Walter H. Moos......................................... -- 8,333 *
All executive officers and directors as a 10,331,641 300,206 37.8%
group (8 people) (7).................................
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* LESS THAN ONE PERCENT (1%).
(1) INCLUDES 4,587,161 SHARES HELD BY LOMBARD ODIER & CIE AND 2,105,263 SHARES
HELD BY RYCO AND CO. ALSO INCLUDES 83,460 SHARES ISSUABLE UPON THE EXERCISE
OF OUTSTANDING WARRANTS WITHIN 60 DAYS OF DECEMBER 31, 1999. INCLUDES
500,000 SHARES OF SERIES E PREFERRED STOCK ISSUED ON FEBRUARY 3, 2000.
(2) INCLUDES 4,361,961 SHARES HELD BY ALTA CALIFORNIA PARTNERS, L.P. AND 99,655
SHARES HELD BY ALTA EMBARCADERO PARTNERS, LLC. ALSO INCLUDES 54,400 SHARES
AND 1,240 SHARES ISSUABLE UPON THE EXERCISE OF OUTSTANDING WARRANTS WITHIN
60 DAYS OF DECEMBER 31, 1999 BY ALTA CALIFORNIA PARTNERS, L.P. AND ALTA
EMBARCADERO PARTNERS, LLC, RESPECTIVELY. ALSO INCLUDES 162,943 SHARES AND
3,723 SHARES OF SERIES E PREFERRED STOCK ISSUED TO ALTA CALIFORNIA PARTNERS,
L.P. AND ALTA EMBARCADERO PARTNERS, L.P., RESPECTIVELY, ON FEBRUARY 3, 2000.
DR. DELEAGE DISCLAIMS BENEFICIAL OWNERSHIP OF THE SHARES HELD BY FUNDS
AFFILIATED WITH ALTA PARTNERS EXCEPT TO THE EXTENT OF HIS PROPORTIONATE
PECUNIARY INTEREST THEREIN.
(3) INCLUDES 15,144 SHARES HELD BY FRAZIER AND COMPANY, INC. AND 4,155,755
SHARES HELD BY FRAZIER HEALTHCARE II, L.P. ALSO INCLUDES 51,820 SHARES
ISSUABLE UPON THE EXERCISE OF AN OUTSTANDING WARRANT WITHIN 60 DAYS OF
DECEMBER 31, 1999 BY FRAZIER HEALTHCARE II, L.P. ALSO INCLUDES
124,549 SHARES AND 451 SHARES OF SERIES E PREFERRED STOCK ISSUED TO FRAZIER
AND COMPANY, INC. AND FRAZIER HEALTHCARE II, L.P., RESPECTIVELY, ON
FEBRUARY 3, 2000. MR. FRAZIER DISCLAIMS BENEFICIAL OWNERSHIP OF THE SHARES
HELD BY FRAZIER AND COMPANY, INC. AND FRAZIER HEALTHCARE II, L.P. EXCEPT TO
THE EXTENT OF HIS PROPORTIONATE PECUNIARY INTEREST THEREIN.
(4) INCLUDES 166,666 SHARES OF SERIES E PREFERRED STOCK ISSUED ON FEBRUARY 3,
2000.
(5) MR. PERRYMAN RESIGNED AS VICE PRESIDENT, BUSINESS DEVELOPMENT, EFFECTIVE
JANUARY 15, 2000.
(6) REPRESENTS 50,000 SHARES ISSUED TO DR. MAK ON JANUARY 27, 2000.
(7) INCLUDES AN AGGREGATE OF 107,460 SHARES ISSUABLE UPON THE EXERCISE OF
WARRANTS THAT ARE EXERCISABLE WITHIN 60 DAYS OF DECEMBER 31, 1999. ALSO
INCLUDES AN AGGREGATE OF 341,666 SHARES OF SERIES E PREFERRED STOCK AND
50,000 SHARES OF COMMON STOCK ISSUED ON FEBRUARY 3, 2000 AND JANUARY 27,
2000, RESPECTIVELY.
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DESCRIPTION OF SECURITIES
Upon the closing of this offering and the filing of our amended and restated
certificate of incorporation, our authorized capital stock will consist of
shares of common stock, $0.001 par value, and shares of preferred stock,
$0.001 par value.
COMMON STOCK
As of December 31, 1999, there were 25,149,721 shares of common stock
outstanding that were held of record by approximately 54 stockholders after
giving effect to the conversion of our preferred stock into common stock at a
one-to-one ratio. There will be shares of common stock outstanding
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options) after giving effect to the sale of the shares of common
stock offered by this prospectus.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of our stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Subject to preferences that may be applicable to any
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive ratably any dividends out of assets legally
available therefor as our board of directors may from time to time determine.
Upon liquidation, dissolution or winding up of Rigel, holders of our common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable.
PREFERRED STOCK
Pursuant to our amended and restated certificate of incorporation, our board of
directors will have the authority, without further action by the stockholders,
to issue up to shares of preferred stock, in one or more series. Our board
shall determine the rights, preferences, privileges and restrictions of the
preferred stock, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, sinking fund terms and the number
of shares constituting any series or the designation of any series. The issuance
of preferred stock could adversely affect the voting power of holders of common
stock, and the likelihood that holders of preferred stock will receive dividend
payments and payments upon liquidation may have the effect of delaying,
deferring or preventing a change in control of Rigel, which could depress the
market price of our common stock. We have no present plan to issue any shares of
preferred stock.
WARRANTS
As of December 31, 1999, three warrants to purchase an aggregate of 150,000
shares of our common stock were outstanding. These warrants shall expire upon
the earlier of (i) June 1, 2008, or (ii) seven years after the closing of the
initial public offering of our stock and entitle the holders of these warrants
to purchase up to 150,000 shares of our common stock at a price of $1.14 per
share, subject to adjustment in the event of a merger, reorganization or sale of
Rigel. These warrants give the holders the right of a net issue election.
As of December 31, 1999, one warrant to purchase 175,000 shares of our Series B
preferred stock was outstanding. This warrants automatically convert upon the
earlier of (i) April 30, 2004, or (ii) a merger or reorganization involving
Rigel and entitles the holder of this warrant to purchase up to 175,000 shares
of our Series B preferred stock at a price of $0.80 per share, subject to
adjustment in
- --------------------------------------------------------------------------------
65
DESCRIPTION OF SECURITIES
- --------------------------------------------------------------------------------
the event of a merger, reorganization or sale of Rigel. This warrant gives the
holder the right of a net issue election.
As of December 31, 1999, one warrant to purchase 131,578 shares of our Series C
preferred stock was outstanding. This warrant shall expire upon June 30, 2005
and entitles the holder of this warrant to purchase up to 131,578 shares of our
Series C preferred stock at a price of $1.14 per share, subject to adjustment in
the event of a merger, reorganization or sale of us. This warrants gives the
holder the right of a net issue election.
As of December 31, 1999, four warrants to purchase an aggregate of 190,920
shares of our Series D preferred stock were outstanding. These warrants shall
expire upon the earlier of (i) the closing of the initial public offering of our
stock, (ii) a reorganization, merger or sale of Rigel, or (iii) December 3, 2003
and entitle the holders of these warrants to purchase up to 190,920 shares of
our Series D preferred stock at a price of $2.00 per share, subject to
adjustment in the event of a merger, reorganization or sale of us. These
warrants give the holders the right of a net issue election.
REGISTRATION RIGHTS
Upon completion of this offering, holders of an aggregate of 23,947,217 shares
of common stock and warrants to purchase an aggregate of 497,498 shares of
common stock will be entitled to rights to register these shares under the
Securities Act. These rights are provided under an Amended and Restated
Registration Rights Agreement, dated February 3, 2000, and under agreements with
similar registration rights. If we propose to register any of our securities
under the Securities Act, either for our own account or for the account of
others, the holders of these shares are entitled to notice of the registration
and are entitled to include, at our expense, their shares of common stock in the
registration and any related underwriting, provided, among other conditions,
that the underwriters may limit the number of shares to be included in the
registration and in some cases, including this offering, exclude these shares
entirely. In addition, the holders of these shares may require us, at our
expense and on not more than two occasions at any time beginning six months from
the date of the closing of this offering, to file a registration statement under
the Securities Act with respect to their shares of common stock, and we will be
required to use our best efforts to effect the registration. Further, the
holders may require us at our expense to register their shares on Form S-3 when
this form becomes available.
ANTI-TAKEOVER PROVISIONS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CHARTER
CERTIFICATE OF INCORPORATION AND BYLAWS
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- - prior to the date, our board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder;
- - upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers, and by employee stock plans in which shares
held subject to the plan will be tendered in a tender or exchange offer; or
- - on or subsequent to this date, the business combination is approved by our
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the
- --------------------------------------------------------------------------------
66
DESCRIPTION OF SECURITIES
- --------------------------------------------------------------------------------
affirmative vote of at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
Section 203 defines "business combination" to include:
- - any merger or consolidation involving the corporation and the interested
stockholder;
- - any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
- - subject to exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder; and
- - 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 the entity or person.
Our amended and restated certificate of incorporation requires that upon
completion of the offering, any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by a consent in writing. Additionally, our
amended and restated certificate of incorporation:
- - substantially limits the use of cumulative voting in the election of
directors;
- - provides that the authorized number of directors may be changed only by
resolution of our board of directors; and
- - authorizes our board of directors to issue blank check preferred stock to
increase the amount of outstanding shares.
Our amended and restated bylaws provide that candidates for director may be
nominated only by our board of directors or by a stockholder who gives written
notice to us no later than 60 days prior nor earlier than 90 days prior to the
first anniversary of the last annual meeting of stockholders. The authorized
number of directors is fixed in accordance with our amended and restated
certificate of incorporation. Our board of directors currently consists of six
members who will be elected at each annual meeting of our stockholders. Our
board of directors may appoint new directors to fill vacancies or newly created
directorships. Our amended and restated bylaws also limit who may call a special
meeting of stockholders.
Delaware law and these charter provisions may have the effect of deterring
hostile takeovers or delaying changes in control of our management, which could
depress the market price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Norwest Bank Minnesota,
N.A.
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67
- --------------------------------------------------------------------------------
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below, sales of substantial
amounts of our common stock in the public market after these restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
December 31, 1999. Of these shares, all of the shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
27,708,051 shares of common stock held by existing stockholders are restricted
securities, including the issuance of 2,558,330 shares of Series E preferred
stock on February 3, 2000. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
described below under Rules 144, 144(k) or 701 promulgated under the Securities
Act.
As a result of the contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
- - shares will be eligible for sale upon completion of this offering;
- - shares will be eligible for sale upon the expiration of the lock-up
agreements, described below, beginning 180 days after the date of this
prospectus;
- - shares will be eligible for sale at various times after the date of
this prospectus; and
- - shares will be eligible for sale upon the exercise of vested options
180 days after the date of this prospectus.
LOCK-UP AGREEMENTS
All of our officers, directors and some of our stockholders and option holders
have agreed not to transfer or dispose of, directly or indirectly, any shares of
our common stock or any securities convertible into shares or exercisable or
exchangeable for shares of our common stock, for a period of at least 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
only with the prior written consent of Warburg Dillon Read LLC.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus a person or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- - 1% of the number of shares of our common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- - the average weekly trading volume of our common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about Rigel.
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68
SHARES ELIGIBLE FOR FUTURE SALE
- --------------------------------------------------------------------------------
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner except an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. shares of our common stock will qualify as
"144(k) shares" within 180 days after the date of this prospectus.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any of
our employees, consultants or advisors, other than affiliates, who purchases or
receives shares from us in connection with a compensatory stock purchase plan or
option plan or other written agreement will be eligible to resell their shares
beginning 90 days after the date of this prospectus, subject only to the manner
of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of an aggregate of 23,947,217
shares of our common stock and warrants to purchase an aggregate of 497,498
shares of common stock, or their transferees, will be entitled to rights with
respect to the registration of their shares under the Securities Act.
Registration of their shares under the Securities Act would result in these
shares becoming freely tradeable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness of
such registration.
STOCK OPTIONS
Following this offering, we intend to file a registration statement on Form S-8
under the Securities Act covering the shares of common stock reserved for
issuance under our 2000 Equity Incentive Plan, 2000 Employee Stock Purchase Plan
and 2000 Non-Employee Directors' Stock Option Plan that will become effective
upon filing. Accordingly, shares registered under that registration statement
will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market after the filing, except those shares
subject to lock-up agreements.
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69
- --------------------------------------------------------------------------------
UNDERWRITING
We and the underwriters of the offering have entered into an underwriting
agreement concerning the shares being offered. Subject to conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. Warburg Dillon Read LLC, FleetBoston Roberston
Stephens Inc. and Prudential Securities Incorporated are the representatives of
the underwriters.
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------------------------
Warburg Dillon Read LLC.....................................
FleetBoston Robertson Stephens Inc..........................
Prudential Securities Incorporated..........................
---------------
Total...................................................
===============
If the underwriters sell more shares than sell more shares than the total number
set forth in the table above, the underwriters have a 30-day option to by from
us up to an additional shares at the initial public offering prices
less the underwriting discounts and commissions to cover these sales. If any
shares are purchased under this option, the underwriters will severally purchase
shares in approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up to
an additional shares.
NO EXERCISE FULL EXERCISE
- -----------------------------------------------------------------------------------------
Per share................................................... $ $
Total................................................... $ $
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representative may change the offering price and the other
selling terms.
The underwriters have informed us that they do not expect discretionary sales to
exceed % of the shares of common stock to be offered.
We, our directors, officers, stockholders and optionholders have agreed with the
underwriters not to offer, sell, contract to sell, hedge or otherwise dispose
of, directly or indirectly, or file with the SEC, a registration statement under
the Securities Act relating to any of its common stock or securities convertible
into or exchangeable for shares of common stock during the period from the date
of this prospectus continuing through the date 180 days after the date of this
prospectus, without the prior written consent of Warburg Dillon Read LLC.
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70
UNDERWRITING
- --------------------------------------------------------------------------------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:
- - the information set forth in this prospectus and otherwise available to the
representatives;
- - the history and the prospects for the industry in which we compete;
- - the ability of our management;
- - our prospects for future earnings, the present state of our development, and
our current financial position;
- - the general condition of the securities markets at the time of this
offering; and
- - the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of the common stock. As a result, the price of the common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act of 1933, as amended, and to
contribute to payments that the underwriters may be required to make in respect
thereof.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
LEGAL MATTERS
Cooley Godward LLP, Palo Alto, California, will provide us with an opinion as to
the validity of the common stock offered under this prospectus. Brobeck,
Phleger & Harrison LLP, Broomfield, Colorado, will pass upon certain legal
matters related to this offering for the underwriters. As of the date of this
prospectus, certain partners and associates of Cooley Godward LLP own an
aggregate of 78,860 shares of our common stock through investment partnerships.
Brian Cunningham, our Senior Vice President, Chief Operating Officer, Chief
Financial Officer and Secretary, is Of Counsel with Cooley Godward and
participates in their investment partnerships.
- --------------------------------------------------------------------------------
71
- --------------------------------------------------------------------------------
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1997 and December 31, 1998, and for the period from
inception (June 14, 1996) through December 31, 1997 and the year ended December
31, 1998, as set forth in their report. We have included our financial
statements in this prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered under this prospectus. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule to the registration statement. For further information with respect
to us and our common stock, we refer you to the registration statement and to
the exhibits and schedule to registration statement. Statements contained in
this prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, we refer you to
the copy of the contract or other document filed as an exhibit to the
registration statement. Each of these statements is qualified in all respects by
this reference. You may inspect a copy of the registration statement without
charge at the SEC's principal office in Washington, D.C., and copies of all or
any part of the registration statement may be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of fees prescribed by the SEC. The SEC maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
Web site is http://www.sec.gov. The SEC's toll free investor information service
can be reached at 1-800-SEC-0330. Information contained on our website does not
constitute part of this prospectus.
Upon completion of the offering, we will be subject to the information reporting
requirements of the Securities Exchange Act of 1934, as amended, and we will
file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing financial
statements audited by our independent public accountants and quarterly reports
for the first three fiscal quarters of each fiscal year containing unaudited
interim financial information. Our telephone number is (650) 624-1100.
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72
Rigel Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
PAGE
- ----------------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Stockholders' Equity........................... F-5
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-8
- --------------------------------------------------------------------------------
F-1
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Rigel Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Rigel Pharmaceuticals, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1998 and
the period from inception (June 14, 1996) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rigel Pharmaceuticals, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998 and the period from inception (June 14,
1996) to December 31, 1997 in conformity with generally accepted accounting
principles.
Palo Alto, California /s/ ERNST & YOUNG LLP
February 19, 1999
- --------------------------------------------------------------------------------
F-2
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................... $9,144 $9,493 $7,192
Accounts receivable................................. -- -- 1,160
Prepaid expenses and other current assets........... 104 112 343
--------- --------- ----------------
Total current assets.............................. 9,248 9,605 8,695
Property and equipment, net........................... 1,932 3,218 8,387
Other assets.......................................... 150 133 79
--------- --------- ----------------
$11,330 $12,956 $17,161
========= ========= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $250 $484 $420
Accrued compensation................................ 44 104 193
Accrued liabilities................................. 413 916 514
Deferred revenue.................................... -- 3,472 4,386
Capital lease obligations........................... 432 721 1,913
--------- --------- ----------------
Total current liabilities......................... 1,139 5,697 7,426
Capital lease obligations............................. 1,172 1,652 5,680
Other long-term liabilities........................... 200 162 --
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
16,750,000, 22,000,000, and 24,000,000 shares
authorized in 1997, 1998, and 1999 respectively,
(none pro forma) issuable in series, 15,551,843,
19,033,707, and 22,053,707 shares issued and
outstanding in 1997, 1998, and 1999, respectively
(none pro forma) (aggregate liquidation preference
at December 31, 1997 and 1998 of $14,488 and
$21,451, respectively and September 30, 1999 of
$27,474).......................................... 16 19 22 $--
Common stock, $0.001 par value; 28,000,000,
35,000,000, and 37,500,000 shares authorized in
1997, 1998, and 1999, respectively, (100,000,000
pro forma), 2,556,667, 2,675,333, and
2,898,857 shares issued and outstanding in 1997,
1998, and 1999, respectively, and (24,952,564
pro forma)........................................ 3 3 3 25
Additional paid-in capital............................ 14,449 21,676 32,376 32,376
Deferred stock compensation........................... -- -- (4,164) (4,164)
Accumulated deficit................................... (5,649) (16,253) (24,182) (24,182)
--------- --------- ---------------- ----------------
Total stockholders' equity............................ 8,819 5,445 4,055 $4,055
--------- --------- ---------------- ================
$11,330 $12,956 $17,161
========= ========= ================
See accompanying notes.
- --------------------------------------------------------------------------------
F-3
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
INCEPTION
(JUNE 14, 1996) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1998 1999
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Revenues:
Contract revenues from collaborations....... $-- $28 $-- $5,898
Costs and expenses:
Research and development.................... 4,568 8,305 5,071 10,165
General and administrative.................. 1,166 2,217 1,855 2,979
Amortization of deferred compensation....... -- -- -- 563
------------------- --------------- ------------ ------------
5,734 10,522 6,926 13,707
------------------- --------------- ------------ ------------
Loss from operations.......................... (5,734) (10,494) (6,926) (7,809)
Interest income (expense), net................ 85 (110) 117 (120)
------------------- --------------- ------------ ------------
Net loss...................................... $(5,649) $(10,604) $(6,809) $(7,929)
=================== =============== ============ ============
Net loss per share, basic and diluted......... $(2.25) $(4.01) $(2.59) $(2.87)
=================== =============== ============ ============
Weighted average shares used in computing
basic and diluted net loss per share........ 2,512 2,643 2,633 2,764
Pro forma net loss per share (unaudited),
basic and diluted........................... $(0.58) $(0.34)
=============== ============
Weighted average shares used in computing pro
forma net loss per share (unaudited), basic
and diluted................................. 18,334 23,418
See accompanying notes.
- --------------------------------------------------------------------------------
F-4
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE ADDITIONAL DEFERRED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of common stock to
founders at $0.001 per share
for cash in July
1996........................ -- 2,400,000 $3 $-- $-- $-- $3
Issuance of Series A
convertible preferred stock
at $0.10 per share in July
1996 for cash, net of
issuance cost............... 600,000 1 -- -- 51 -- -- 52
Issuance of Series A
convertible preferred stock
at $0.10 per share in
October 1996 for license
rights...................... 65,000 -- -- -- 7 -- -- 7
Issuance of common stock at
$0.001 per share for cash in
January 1997................ -- -- 110,000 -- -- -- -- --
Issuance of Series B
convertible preferred stock
at $0.80 per share in
January 1997 for cash, net
of issuance cost............ 7,500,000 8 -- -- 5,961 -- -- 5,969
Issuance of warrants to
purchase Series B preferred
stock for financing
arrangement................. -- -- -- -- 47 -- -- 47
Issuance of Series C preferred
stock at $1.14 per share in
November 1997 for cash, net
of issuance cost............ 7,236,843 7 -- -- 8,202 -- -- 8,209
Issuance of Series C preferred
stock at $1.14 per share in
August 1997 for license
rights...................... 150,000 -- -- -- 171 -- -- 171
Issuance of options to
consultants for services.... -- -- -- -- 5 -- -- 5
Issuance of common stock upon
exercise of options......... -- -- 46,667 -- 5 -- -- 5
Net loss and comprehensive
loss........................ -- -- -- -- -- -- (5,649) (5,649)
---------- ------ --------- ------ ---------- ------------ ----------- -------------
Balance at December 31, 1997.... 15,551,843 16 2,556,667 3 14,449 -- (5,649) 8,819
(TABLE CONTINUED ON FOLLOWING PAGE.)
- --------------------------------------------------------------------------------
F-5
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE ADDITIONAL DEFERRED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of warrants to
purchase Series C preferred
stock for financing
arrangement................. -- -- -- -- 86 -- -- 86
Issuance of Series D
preferred stock at $2.00 per
share in December 1998 for
cash, net of issuance
costs....................... 3,481,864 3 -- -- 6,938 -- -- 6,941
Issuance of warrants to
purchase Series D preferred
stock for financing
arrangement................. -- -- -- -- 185 -- -- 185
Compensation expense related
to options granted to
consultants................. -- -- -- -- 6 -- -- 6
Issuance of common stock upon
exercise of options......... -- -- 118,666 -- 12 -- -- 12
Net loss and comprehensive
loss........................ -- -- -- -- -- -- (10,604) (10,604)
---------- ------ --------- ------ ---------- ------------ ----------- -------------
Balance at December 31, 1998.... 19,033,707 19 2,675,333 3 21,676 -- (16,253) 5,445
Issuance of Series C preferred
stock at $1.14 per share for
financing arrangement, net
of issuance cost
(unaudited)................. 20,000 -- -- -- 23 -- -- 23
Issuance of Series D
preferred stock at $2.00 per
share for cash, net of
issuance cost (unaudited)... 3,000,000 3 -- -- 5,925 -- -- 5,928
Issuance of common stock upon
exercise of options
(unaudited)................. -- -- 223,524 -- 25 -- -- 25
Deferred stock compensation
(unaudited)................. -- -- -- -- 4,727 (4,727) -- --
Amortization of deferred stock
compensation (unaudited).... -- -- -- -- -- 563 -- 563
Net loss and comprehensive
loss (unaudited)............ -- -- -- -- -- -- (7,929) (7,929)
---------- ------ --------- ------ ---------- ------------ ----------- -------------
Balance at September 30, 1999
(unaudited)................... 22,053,707 $22 2,898,857 $3 $32,376 $(4,164) $(24,182) $4,055
========== ====== ========= ====== ========== ============ =========== =============
See accompanying notes.
- --------------------------------------------------------------------------------
F-6
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
INCEPTION
(JUNE 14, 1996) YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1998 1999
- ---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss................................................ $(5,649) $(10,604) $(6,809) $(7,929)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization......................... 409 1,103 771 1,086
Amortization of deferred stock compensation........... 563
Issuances of equity instruments for noncash
benefits............................................ 230 192 -- 23
Changes in assets and liabilities:
Accounts receivable................................. -- -- -- (1,160)
Prepaid expenses and other current assets........... (104) (9) (44) (231)
Other assets........................................ (149) 17 38 54
Accounts payable.................................... 250 234 203 (64)
Accrued compensation................................ 44 60 30 89
Accrued liabilities................................. 412 503 (168) (402)
Deferred revenue.................................... -- 3,472 -- 914
Long-term liabilities............................... 200 (39) -- (162)
---------------- --------------- ------------ ------------
Net cash used in operating activities............. (4,357) (5,071) (5,979) (7,219)
---------------- --------------- ------------ ------------
INVESTING ACTIVITIES
Capital expenditures.................................... (2,341) (2,389) (1,658) (6,255)
---------------- --------------- ------------ ------------
Net cash used in investing activities............. (2,341) (2,389) (1,658) (6,255)
---------------- --------------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from capital lease financing..................... 1,846 1,426 1,020 6,231
Principal payments on capital lease obligations........... (242) (571) (388) (1,011)
Net proceeds from issuances of common stock............... 7 12 9 25
Net proceeds from issuances of convertible preferred
stock................................................... 14,231 6,942 -- 5,928
---------------- --------------- ------------ ------------
Net cash provided by financing activities......... 15,842 7,809 641 11,173
---------------- --------------- ------------ ------------
Net increase in cash and cash equivalents................. 9,144 349 (6,996) (2,301)
Cash and cash equivalents at beginning of period.......... -- 9,144 9,144 9,493
---------------- --------------- ------------ ------------
Cash and cash equivalents at end of period........ $9,144 $9,493 $2,148 $7,192
================ =============== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................... $71 $161 $102 $433
================ =============== ============ ============
SCHEDULE OF NON CASH TRANSACTIONS
Deferred stock compensation............................. $-- $-- $-- $4,727
================ =============== ============ ============
See accompanying notes.
- --------------------------------------------------------------------------------
F-7
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Rigel Pharmaceuticals, Inc. ("Rigel" or the "Company") was incorporated in the
state of Delaware on June 14, 1996. The Company is engaged in the discovery and
development of a broad range of new small molecule drug candidates. The
Company's results of operations from June 14, 1996 to December 31, 1996 were
immaterial.
The Company matured from its development stage to an operating company in 1998.
As such, its financial statements are no longer prepared on a development stage
basis. The Company's current operating plan anticipates that the Company will
require additional capital to fund its operations and continue its research and
development programs. As of September 30, 1999, the Company has funded its
operations primarily through the sale of private equity securities, payments
from corporate collaborators and capital asset lease financings. The Company
plans to seek additional funding through public or private financing
arrangements with third parties.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited but, in the opinion of management, has
been prepared on the same basis as the annual financial statements and includes
all adjustments (consisting only of normal recurring adjustments) that Rigel
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flow for such periods. Results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for any subsequent period.
UNAUDITED PRO FORMA INFORMATION
If Rigel's initial public offering as described in Note 8 is consummated, all of
the preferred stock outstanding will automatically be converted into common
stock. The unaudited pro forma convertible preferred stock and stockholders'
equity at September 30, 1999 has been adjusted for the assumed conversion of
preferred stock based on the shares of preferred stock outstanding at
September 30, 1999.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
90 days or less, when purchased, to be cash equivalents. For the periods
presented, cash equivalents consist of money market funds. Rigel has established
guidelines regarding diversification of its investments and their maturities
that should maintain safety and liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities and accrued compensation are carried at
cost, which management believes approximates fair value.
- --------------------------------------------------------------------------------
F-8
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which range
from two to seven years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
REVENUE RECOGNITION
The Company's research and development collaboration agreements provide for
periodic payments in support of the Company's research activities. The Company
recognizes revenues from these agreements as earned based upon the performance
requirements of the agreements and payments for up front technology access fees
are recognized ratably over the period of the research program. Payments
received, which are related to future performance, are deferred and recognized
as revenue when earned over future performance periods.
RESEARCH AND DEVELOPMENT
Research and development expenditures, including direct and allocated expenses,
are charged to expense as incurred. Collaboration agreements generally specify
minimum levels of research effort required to be performed by the Company.
COMPREHENSIVE LOSS
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 130, "REPORTING
COMPREHENSIVE INCOME" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's net loss or
stockholders' equity. The comprehensive loss is equal to the net loss and has
been disclosed in the statement of stockholders' equity.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of 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"), the Company reviews long-lived assets,
including property and equipment, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. Under SFAS 121, an impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of
the asset and its eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. Through
September 30, 1999, there have been no such losses.
SEGMENT REPORTING
Effective in January 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION" ("SFAS 131"). SFAS 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas, and major customers. The Company has
determined that it operates in only one segment. Accordingly, the adoption of
SFAS 131 had no impact on the Companies financial statements.
- --------------------------------------------------------------------------------
F-9
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION" ("SFAS 123"), the Company has elected to follow
Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" and related interpretations in accounting for its employee stock
option grants ("APB 25") and to disclose the pro forma effect of SFAS 123 (see
Note 6). Pro forma net loss information, as required by ("SFAS 123"), is
included in Note 6. Options granted to consultants are accounted for using the
Black-Scholes method prescribed by SFAS 123 and in accordance with Emerging
Issues Task Force Consensus No. 96-18 ("EITF 96-18") the options are subject to
periodic re-valuation over their vesting terms.
NET LOSS PER SHARE
Net loss per share has been computed according to the Financial Accounting
Standards Board Statement No. 128, "EARNINGS PER SHARE," which requires
disclosure of basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, shares subject to repurchase,
warrants, and convertible securities. Diluted earnings per share includes the
impact of potentially dilutive securities. Following the guidance given by the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and preferred stock that has been issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and dilutied net loss per
common shares as of these shares had been outstanding for all periods presented.
To date, the Company has not issued or granted shares for nominal consideration.
Pro forma net loss per share includes shares issuable upon the conversion of
outstanding shares of preferred stock (using the as if method) from the original
date of issuance.
A reconciliation of shares used in the calculations is as follows (in
thousands):
PERIOD FROM
INCEPTION
(JUNE 14, 1996) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1998 1999
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Basic and diluted:
Weighted-average shares of common stock
outstanding................................. 2,152 2,643 2,633 2,764
=================== ============
Adjustment to reflect weighted-average effect
of assumed conversions of preferred stock
(unaudited)................................. 15,691 20,654
--------------- ------------
Weighted-average shares used in pro forma
basic and diluted net loss per share
(unaudited)................................. 18,334 23,418
=============== ============
During all periods presented, the Company had securities outstanding which could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted net loss per
- --------------------------------------------------------------------------------
F-10
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
share, as their effect would have been antidilutive. These outstanding
securities consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1997 1998 1998 1999
- -------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock....................... 15,552 19,034 15,552 22,034
Outstanding Options............................... 1,475 3,354 3,058 5,132
Warrants.......................................... 175 648 457 648
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND FOR HEDGING ACTIVITIES" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 and is not anticipated to have an impact on the
Company's results of operations of financial condition when adopted as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.
In March 1998, the AICPA issued Statement of Position 98-1, "ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE"
("SOP 98-1"). SOP 98-1 requires that entities capitalize certain costs related
to internal use software once certain criteria have been met. The Company
adopted the provisions of SOP 98-1 on January 1, 1999. Through September 30,
1999, the Company had not capitalized any costs related to internal use
software.
2. SPONSORED RESEARCH AND LICENSE AGREEMENTS
RESEARCH AGREEMENTS
In April 1997, Rigel entered into a two-year sponsored research agreement with
Leland Stanford Junior University ("Stanford") for certain patent rights,
materials and other know-how relating to the discovery of viral delivery
systems. Under the terms of this agreement, Rigel is required to pay research
funding fees to be used for salaries and for costs associated with supplies and
equipment necessary to perform the research. Stanford retains ownership of all
technologies discovered under this agreement, and Rigel has an option to extend
the agreement by one year and to acquire all such technologies.
On December 4, 1998, the Company entered into a research collaboration agreement
with Janssen Pharmaceutica NV ("Janssen") to research and identify novel targets
for drug discovery. Under the terms of the contract, Janssen paid an one time
fee and will provide support for research activities during the three-year
research period, as well as various milestones and royalties. As part of this
collaborative research agreement, Johnson & Johnson ("J&J"), a related company
to Janssen, participated in the Company's Series D preferred stock financing.
J&J contributed $3,000,000 for 1,500,000 shares of Series D preferred stock.
On January 31, 1999, the Company entered into a two-year collaborative research
agreement with Pfizer Inc. to discover and develop various molecular targets.
Upon signing of the agreement, Pfizer was obligated to pay a one-time,
nonrefundable, noncreditable fee. Under the terms of the contract, Pfizer will
provide support for research for two years, as well as payment for various
milestones and royalty if certain conditions are met. In conjunction with the
agreement, Pfizer contributed an additional $2,000,000 in exchange for 1,000,000
shares of Series D preferred stock.
- --------------------------------------------------------------------------------
F-11
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On May 28, 1999, the Company entered into a broad collaboration with Novartis
Pharma AG, whereby the Company and Novartis agreed to work on five different
research programs to identify various targets for drug development. Two of the
five programs were initiated in 1999, with the third program initiated on
January 1, 2000. The remaining two programs will be initiated no later than
May 28, 2001. Upon the initiation of each research program, Novartis is
obligated to pay a one-time, non-refundable, noncreditable fee. For each of the
first two programs, Novartis will provide support for research activities for a
period of five years. For all programs, Novartis will provide payment for
various milestones and royalties if certain conditions, as denoted in the
collaboration agreement, are met. In conjunction with the agreement, Novartis
contributed an additional $4,000,000 in exchange for 2,000,000 shares of
Series D preferred stock The agreement also allows for an additional equity
investment of up to $10,000,000 which is callable by the Company up through an
Initial Public Offering ("IPO"). The price of this additional equity investment
is to be determined by the most recent private financing price or IPO price.
LICENSE AGREEMENTS
In October 1996, Rigel entered into a license agreement with Stanford for
certain patent rights and other know-how relating to the use of retrovirally
produced peptide and protein libraries. Under the terms of this agreement, Rigel
is required to pay a nonrefundable license fee, minimum royalties and to issue
Stanford 65,000 shares of Series A preferred stock. The agreement terminates at
the earlier of 20 years or 10 years after the date of the first commercial sale.
In August 1997, Rigel signed a three-year agreement relating to the 1996
agreement to provide the Company with exclusivity to these patents. Under this
agreement, Rigel is required to pay a nonrefundable fee and an exclusivity fee
over the next three years and issued Stanford 150,000 shares of Series C
preferred stock.
3. SIGNIFICANT CONCENTRATIONS
In 1998, Pfizer represented 100% of total revenues. For the nine months ended
September 30, 1999, Pfizer, Janssen and Novartis accounted for 38%, 36% and 26%,
respectively. For the nine months ended September 30, 1998, no revenues were
recorded.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
- ------------------------------------------------------------------------------------------------------------
Laboratory and office equipment............................. $2,129 $4,010 $7,992
Leasehold improvements...................................... 212 720 2,993
------------ ------------ --------------
2,341 4,730 10,985
Less accumulated depreciation and amortization.............. (409) (1,512) (2,598)
------------ ------------ --------------
Property and equipment, net................................. $1,932 $3,218 $8,387
============ ============ ==============
5. LONG-TERM OBLIGATIONS
On March 1, 1999, the Company moved its facilities from Sunnyvale, California to
South San Francisco. At December 31, 1998, the Company recorded an accrual of
$142,495 for early termination of its Sunnyvale lease.
- --------------------------------------------------------------------------------
F-12
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998 future minimum lease payments under all noncancelable
leases are as follows (in thousands):
CAPITAL OPERATING
DECEMBER 31, 1998 LEASES LEASES
- -----------------------------------------------------------------------------------------
1999........................................................ $ 926 $ 1,564
2000........................................................ 926 1,463
2001........................................................ 613 2,018
2002........................................................ 196 2,263
2003........................................................ -- 2,333
2004 and thereafter......................................... -- 25,388
------------ ------------
Total minimum payment required.............................. 2,661 $35,029
============
Less amount representing interest........................... (288)
------------
Present value of future lease payments...................... 2,373
Less current portion........................................ (721)
Noncurrent obligations under capital leases................. $1,652
============
The Company leases its San Francisco office and research facility under a
noncancelable operating lease which expires in February 2016. Rent expense under
all operating leases amounted to approximately $385,000, $381,000 and $1,247,000
for the period from inception (June 14, 1996) to December 31, 1997, the year
ended December 31, 1998 and the nine months ended September 30, 1999,
respectively.
In 1997, the Company entered into an equipment lease line agreement for up to
$2,000,000. This was fully utilized in 1998. In June 1998, the Company entered
into a second equipment lease line agreement for up to $3,000,000, which was
fully utilized in June 1999.
In June 1999 and August 1999, the Company entered into two additional equipment
lease line agreements for an aggregate total of $6,000,000, or $3,000,000 each.
As of September 30, 1999, approximately $1,581,000 was available for future draw
downs.
The lease periods for all leases are for four years. The 1997 and 1998 leases
have an option to purchase the equipment at fair value at the end of the periods
or to renew the leases upon the terms and conditions of the original lease
agreement while the 1999 leases have a balloon payment at the end of the term of
10% of the original acquisition price. The interest on each lease is fixed at
the time of the draw down with the interest rates ranging from 7% to 15%.
Obligations under all leases are secured by the assets financed under the
leases.
6. STOCKHOLDERS' EQUITY
All series of preferred stock are convertible at the stockholders' option at any
time into common stock on a one-for-one basis, subject to adjustment for
antidilution, and carry voting rights equivalent to common stock. Conversion is
automatic upon the closing of an underwritten public offering with aggregate
offering proceeds exceeding $15,000,000 and an offering price of at least $3.50
per share (appropriately adjusted for any stock splits, stock dividends,
recapitalization or similar events) or upon agreement of the majority of holders
of the outstanding shares.
Holders of Series A, B, C, and D convertible preferred stock are entitled to
noncumulative dividends of $0.008, $0.064, $0.0912, and $0.16 per share,
respectively, if and when declared by the board of
- --------------------------------------------------------------------------------
F-13
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
directors. These dividends are to be paid in advance of any distributions to
common stockholders. In addition, dividends are to be paid to Series B, C, and D
stockholders in advance of Series A stockholders. No dividends have been
declared through September 30, 1999.
In the event of a liquidation or winding up of the Company, holders of
Series A, B, C, and D convertible preferred stock shall have a liquidation
preference of $0.10, $0.80, $1.14, and $2.00 per share, respectively, together
with any declared but unpaid dividends, over holders of common shares.
Preference shall be given to Series B, C, and D stockholders over Series A
stockholders.
Preferred stockholders are entitled to the number of votes they would have upon
conversion of their preferred shares into common stock.
The authorized, issued and outstanding Series A, B, C, and D shares of
convertible preferred stock were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1998
SHARES AGGREGATE SHARES AGGREGATE
SHARES ISSUED AND LIQUIDATION SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE AUTHORIZED OUTSTANDING PREFERENCE
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Series A............. 665 665 $66 665 665 $66
Series B............. 7,675 7,500 6,000 7,675 7,500 6,000
Series C............. 8,000 7,387 8,422 8,000 7,387 8,422
Series D............. -- -- -- 5,660 3,482 6,963
Undesignated......... 410 -- -- -- -- --
---------- ------------ ----------- ---------- ------------ -----------
16,750 15,552 $14,488 22,000 19,034 $21,451
========== ============ =========== ========== ============ ===========
SEPTEMBER 30, 1999
(UNAUDITED)
SHARES AGGREGATE
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
- --------------------- ---------------------------------------
(IN THOUSANDS)
Series A............. 665 665 $66
Series B............. 7,675 7,500 6,000
Series C............. 8,000 7,407 8,444
Series D............. 7,000 6,482 12,964
Undesignated......... 660 -- --
---------- ------------ -----------
24,000 22,054 $27,474
========== ============ ===========
WARRANTS
In conjunction with the equipment lease line executed in April 1997, the Company
issued a warrant to purchase 175,000 shares of Series B preferred stock at an
exercise price of $0.80 per share. The warrant expires in April 2004.
In conjunction with the equipment lease line executed in June 1998, the company
issued a warrant to purchase 131,578 shares of Series C preferred stock at an
exercise price of $1.14 per share. The warrant expires in June 2005.
In conjunction with the Series D preferred stock financing in December 1998, the
Company issued warrants to purchase 191,100 shares of Series D preferred stock
at an exercise price of $2.00 per share. The warrant expires at the earlier of
the closing of the initial public offering or December 2003.
In conjunction with the facilities lease entered into in June 1998, the Company
issued a warrants to purchase 150,000 shares of common stock at an exercise
price of $1.14 per share. The warrants are exercisable at any time up to the
seventh anniversary of the closing of an initial public offering.
1997 INCENTIVE STOCK PLAN
On March 5, 1997, the board adopted the Rigel Pharmaceuticals, Inc. Stock Option
Plan (the "Stock Plan") under which incentive stock options and nonstatutory
stock options may be granted to employees, directors of, or consultants to, the
Company and its affiliates.
Options granted under the Stock Plan expire no later than 10 years from the date
of grant. The option price of each incentive stock option shall be at least 100%
of the fair value on the date of grant, and
- --------------------------------------------------------------------------------
F-14
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the option price for each nonstatutory stock option shall be not less than 85%
of the fair value on the date of grant, as determined by the board of directors.
Options may be granted with different vesting terms from time to time but not to
exceed five years from the date of grant.
As of September 30, 1999, a total of 9,525,000 shares of common stock have been
authorized for issuance under the Stock Plan.
Activity under the Stock Plan through September 30, 1999 is as follows:
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
- ------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996.................... --
Granted................................................... 1,545,000 $0.10
Exercised................................................. (46,667) 0.10
Cancelled................................................. (23,333) 0.10
---------
Options outstanding at December 31, 1997.................... 1,475,000 0.10
Granted................................................... 2,157,500 0.16
Exercised................................................. (118,666) 0.10
Cancelled................................................. (159,584) 0.12
---------
Options outstanding at December 31, 1998.................... 3,354,250 0.14
Granted (unaudited)....................................... 2,422,000 0.23
Exercised (unaudited)..................................... (226,024) 0.11
Cancelled (unaudited)..................................... (418,423) 0.16
---------
Options outstanding at September 30, 1999 (unaudited)....... 5,131,803 $0.18
=========
The shares available for future grant are 803,333, 1,805,417, and 4,001,840 as
of December 31, 1997, December 31, 1998, and the nine months ended
September 30, 1999.
The weighted-average fair value of the options granted in 1997, 1998, and the
nine months ended September 30, 1999, was $0.02, $0.03, and $0.06 respectively.
At December 31, 1998 and September 30, 1999, the weighted-average remaining
contractual life of outstanding options was 9.18 years and 9 years,
respectively. Options exercisable at December 31, 1998 were 612,687 at a
weighted-average exercise price of $0.11 per share and at September 30, 1999
were 1,142,578 at a weighted average exercise price of $0.15 per share.
Pro forma information regarding net loss and net loss per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method prescribed by the Statement.
The fair value for these options was estimated at the date of grant using the
minimum value method with the following weighted-average assumptions for the
period from inception (June 14, 1996) to December 31, 1997, for the year ended
December 31, 1998, and the nine months ended September 30, 1999: risk-free
interest rates of 4.5%, 5.5% and 6.0% respectively; an expected option life of
five years; and no dividend yield.
- --------------------------------------------------------------------------------
F-15
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information follows (in thousands, except per share amounts):
PERIOD FROM INCEPTION
(JUNE 14, 1996) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 SEPTEMBER 30, 1999
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
Net loss:
As reported..................... $(5,649) $(10,604) $(7,929)
Pro forma....................... (5,649) (10,604) (7,960)
Basic and diluted net loss per
share:
As reported..................... $(2.25) $(4.01) $(2.87)
Pro forma....................... (2.25) (4.01) (2.88)
The effects of applying SFAS 123 for pro forma disclosures are not likely to be
representative of the effects as reported net loss for future years.
The Company granted 627,500 and 279,000 common stock options to consultants in
exchange for services for the year ended December 31, 1998 and the nine months
ended September 30, 1999. The company has recorded compensation expense related
to these options. In accordance with SFAS 123 and EITF 96-18, options granted to
consultants are periodically revalued as they vest.
The Company has recorded deferred stock compensation of approximately $4,727,000
in the nine months ended September 30, 1999, representing the difference between
the exercise price of the options and the deemed fair value of the common stock.
These amounts are being amortized by shares to operations over the vesting
periods using the graded vesting method. Such amortization expense amounted to
approximately $563,000 for the nine months ended September 30, 1999.
RESERVED SHARES
As of December 31, 1998, the Company has reserved shares of common stock for
future issuance as follows:
DECEMBER 31,
1998
- ---------------------------------------------------------------------------
Warrants.................................................... 150,000
Incentive stock plan........................................ 5,159,667
Convertible preferred stock................................. 19,033,707
------------
24,343,374
============
In addition, the Company has reserved the following preferred stock for future
issuance upon exercise of warrants:
DECEMBER 31,
1998
- ---------------------------------------------------------------------------
Series B.................................................... 175,000
Series C.................................................... 131,578
Series D.................................................... 191,100
- --------------------------------------------------------------------------------
F-16
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
As of December 31, 1998, the Company had a federal net operating loss
carryforward of approximately $14,600,000. The Company also had federal research
and development tax credit carryforward of approximately $300,000. The net
operating loss and credit carryforward will expire at various dates beginning in
2011 through 2018, if not utilized.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before utilization.
As of December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $6,400,000 and $2,500,000, respectively, which primarily related
to net operating loss carryforward. A full valuation allowance is provided
against the deferred tax assets as, due to the Company's lack of earnings
history, realization of these future benefits are not sufficiently assured. The
valuation allowance increased by $3,900,000 in 1998 and $2,500,000 in 1997.
8. SUBSEQUENT EVENTS (UNAUDITED)
SERIES E FINANCING
On February 3, 2000, the Company closed a private placement in which it sold
2,508,330 shares of Series E Preferred stock at $6.00 per share for net proceeds
of approximately $15 million. Series E Preferred stock is convertible to common
stock at any time into common stock on a one-for-one basis and on conversion is
automatic if the IPO (see below) is consummated. In addition, the Company issued
50,000 shares of Series E preferred stock for a license of technology.
INITIAL PUBLIC OFFERING
In February 2000, the board of directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering. If the
offering contemplated by this prospectus is consummated, the preferred stock
outstanding as of the closing date will be converted into shares of the
Company's common stock. The pro forma stockholders' equity in the accompanying
balance sheet as of September 30, 1999 reflects conversion of the outstanding
preferred stock into 24,612,042 shares of common stock. Pro forma net loss per
share is computed as if the outstanding preferred stock has been converted into
common stock on the date of issuance.
ADDITIONAL DEFERRED COMPENSATION
From October 1, 1999 through January 27, 2000, options to purchase 1,472,599
shares were granted pursuant to the 1997 Stock Option Plan with a weighted
average price of $3.47 per share. The company estimates that additional deferred
compensation of approximately $7.0 million will be recorded as a result of these
options and amortized to compensation expense in accordance with Rigel's policy.
In addition, in January 2000, the Company fully vested an option to purchase
75,000 shares of common stock to a consultant for services. The company
estimates that compensation with respect to these options will be approximately
$664,000 and will be recorded in January 2000.
2000 EMPLOYEE STOCK PURCHASE PLAN
In January 2000, the Company adopted its 2000 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 400,000 shares of the Company's common stock have
been reserved for issuance under the
- --------------------------------------------------------------------------------
F-17
RIGEL PHARMACEUTICALS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Purchase Plan. In addition, the Purchase Plan provides for annual increases in
the number of shares available for issuance under the Purchase Plan on each
anniversary date of the effective date of the offering. The number of shares
reserved automatically is equal to the lesser of 400,000 shares, 1% of the
outstanding shares on the date of the annual increase or such amount as may be
determined by the board. The Purchase plan permits eligible employees to
purchase common stock at a discount through payroll deductions during defined
offering periods. The price at which the stock is purchased is equal to the
lower of 85% of the fair market value of the common stock on the first day of
the offering or 85% of the fair market value of the Company's common stock on
the purchase date. The initial offering period will commence on the effective
date of the offering.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1999, the Company adopted the 2000 Non-Employee Directors Stock
Option Plan and reserved a total of 300,000 shares of common stock for issuance
thereunder. Each non-employee director who becomes a director of the Company
will be automatically granted a nonstatutory stock option to purchase 20,000
shares of common stock on the date on which such person first becomes a
director. At each board meeting immediately following each annual stockholders
meeting, beginning with the first board meeting after the 2001 Annual
Stockholders Meeting, each non-employee director will automatically be granted a
nonstatutory option to purchase 5,000 shares of common stock. The exercise price
of options under the Directors' Plan will be equal to the fair market value of
the common stock on the date of grant. The maximum term of the options granted
under the Directors' Plan is ten years. All grants under the Directors' Plan
will vest monthly over two years from date of grant. The Directors' Plan will
terminate in September 2009, unless terminated earlier in accordance with the
provisions of the Directors' Plan.
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F-18
[LOGO]
- --------------------------------------------------------------------------------
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 the
underwriting discounts payable by us, in connection with the sale of common
stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market listing fee.
SEC registration fee........................................
NASD filing fee.............................................
Nasdaq National Market listing fee..........................
Blue Sky Fees and Expenses..................................
Transfer Agent and Registrar fees...........................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Printing and engraving costs................................
Miscellaneous expenses......................................
Total................................................... $
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Delaware law, our amended and restated certificate of
incorporation provides that no director of ours will be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- - for any breach of duty of loyalty to us or to our stockholders;
- - for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- - for unlawful payment of dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law; or
- - for any transaction from which the director derived an improper personal
benefit.
Our amended and restated certificate of incorporation further provides that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and agents to the fullest extent permitted by Delaware
law. We believe that indemnification under our amended and restated certificate
of incorporation covers negligence and gross negligence on the part of
indemnified parties.
We have entered into indemnification agreements with each of our directors and
certain officers. These agreements, among other things, require us to indemnify
each director and officer for certain expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of Rigel, arising
out of the person's services as our director or officer, any subsidiary of ours
or any other company or enterprise to which the person provides services at our
request.
The underwriting agreement (Exhibit 1.1) will provide for indemnification by the
underwriters of Rigel, our directors, our officers who sign the registration
statement, and our controlling persons for some liabilities, including
liabilities arising under the Securities Act.
- --------------------------------------------------------------------------------
II-1
PART II
- --------------------------------------------------------------------------------
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 15, 1996, Rigel has sold and issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and Rigel believes that each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof, Regulation D promulgated thereunder or Rule 701 pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. We believe that all recipients had adequate access
to information about Rigel, through their relationships with Rigel.
Since July 15, 1996, Rigel has sold and issued the following unregistered
securities:
(1) From July 15, 1996 to January 31, 2000, we granted incentive stock options
and nonstatutory stock options to purchase an aggregate of 7,597,099 shares
of Rigel's common stock at exercise prices ranging from $0.10 to $4.50 per
share to employees, directors and consultants under the Plan. Of these stock
options 655,162 shares have been canceled without being exercised, 588,334
shares have been exercised, 2,500 shares have been repurchased and 6,108,603
shares remain outstanding.
(2) In July 1996 and January 1997, we sold an aggregate of 2,860,000 shares of
our common stock to five purchasers at a purchase price of $0.001 per share,
350,000 shares of which we repurchased.
(3) From July 1996 to January 1997, we sold an aggregate of 665,000 shares of
our Series A preferred stock to four purchasers at a purchase price of $0.10
per share.
(4) In January 1997, we sold an aggregate of 7,500,000 shares of our Series B
preferred stock to nine purchasers at a purchase price of $0.80 per share.
(5) In May 1997, we issued a warrant to purchase 175,000 shares of our Series B
preferred stock at a purchase price of $0.80 per share.
(6) From November 1997 to January 1998, we sold an aggregate of 7,406,843 shares
of our Series C preferred stock to twelve purchasers at a purchase price of
$1.14 per share.
(7) In June 1998, we issued a warrant to purchase 131,578 shares of Series C
preferred stock at an exercise price of $1.14 per share.
(8) From December 1998 to May 1999, we sold an aggregate of 6,481,864 shares of
our Series D preferred stock to ten purchasers at a purchase price of $2.00
per share.
(9) In December 1998, we issued five warrants to purchase an aggregate of
191,100 shares of Series D preferred stock at an exercise price of $2.00 per
share, of which 180 shares have been exercised.
(10) On February 3, 2000, we sold an aggregate of 2,508,330 shares of our
Series E preferred stock to thirteen purchasers at a purchase price of $6.00
per share, and issued 50,000 shares of Series E preferred stock to one
entity for a license for technology.
- --------------------------------------------------------------------------------
II-2
PART II
- --------------------------------------------------------------------------------
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Rigel
to be filed upon the closing of the offering made pursuant
to this Registration Statement.
3.2* Amended and Restated Bylaws of Rigel to be filed upon the
closing of the offering made pursuant to this Registration
Statement.
4.1* Specimen Common Stock Certificate.
4.2* Amended and Restated Investor Rights Agreement, dated
February 3, 2000, between Rigel and holders of Rigel's
Series B, Series C, Series D and Series E preferred stock.
4.3* Form of Founder Stock Purchase Agreement.
4.4 Form of warrant to purchase shares of common stock.
4.5 Warrant issued to Lighthouse Capital Partners II, L.P. for
purchase of shares of Series B preferred stock.
4.6 Warrant issued to Lighthouse Capital Partners II, L.P. for
purchase of shares of Series C preferred stock.
4.7 Form of warrant to purchase shares of Series D preferred
stock.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement.
10.2 2000 Equity Incentive Plan.
10.3 Form of Stock Option Agreement pursuant to 2000 Equity
Incentive Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Non-Employee Directors' Stock Option Plan.
10.6++ Collaboration Agreement between Rigel and Janssen
Pharmaceutica N.V., dated December 4, 1998.
10.7++ Collaborative Research and License Agreement between Rigel
and Pfizer Inc., dated January 31, 1999.
10.8++ Collaboration Agreement between Rigel and Novartis Pharma
AG, dated May 26, 1999.
10.9++ License and Research Agreement between Rigel and Cell
Genesys, Inc., dated September 2, 1999.
10.10 Collaborative Research and Development Agreement between
Rigel and Neurocrine Biosciences, Inc., dated
December 1997.
10.11 Employment agreement between Rigel and Donald Payan, dated
January 16, 1997.
10.12 Lease between Rigel and Britannia Pointe Grand Limited
Partnership, dated June 2, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
- ---------
* To be filed by amendment.
++ Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
ITEM 17. UNDERTAKINGS
The registrant 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.
- --------------------------------------------------------------------------------
II-3
PART II
- --------------------------------------------------------------------------------
Insofar as indemnification by the registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
- --------------------------------------------------------------------------------
II-4
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of South San
Francisco, State of California, on the 3rd day of February, 2000.
RIGEL PHARMACEUTICALS INC.
By: /s/ JAMES M. GOWER
--------------------------------------------
James M. Gower
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints James M. Gower and Brian C. Cunningham,
and each of them, his or her true and lawful agent, proxy and attorney-in-fact,
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to (i) act on, sign and
file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and (iv) take any and
all actions which may be necessary or appropriate to be done, as fully for all
intents and purposes as he or she might or could do in person, hereby approving,
ratifying and confirming all that such agent, proxy and attorney-in-fact or any
of his substitutes may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE
- ----------------------------------------------------------------------------------------------------
/s/ JAMES M. GOWER President, Chief Executive Officer
- --------------------------------- and Director (Principal Executive February 3, 2000
James M. Gower Officer)
Senior Vice President, Chief
/s/ BRIAN C. CUNNINGHAM Financial Officer Chief Operating
- --------------------------------- Officer and Secretary (Principal February 3, 2000
Brian C. Cunningham Finance and Accounting Officer)
/s/ DONALD G. PAYAN
- --------------------------------- Executive Vice President, Chief February 3, 2000
Donald G. Payan Scientific Officer and Director
/s/ JEAN DELEAGE
- --------------------------------- Director February 3, 2000
Jean Deleage
/s/ ALAN FRAZIER
- --------------------------------- Director February 3, 2000
Alan D. Frazier
/s/ TAK MAK
- --------------------------------- Director February 3, 2000
Tak Mak
/s/ WALTER MOOS
- --------------------------------- Director February 3, 2000
Walter H. Moos
- --------------------------------------------------------------------------------
II-5
- --------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Rigel
to be filed upon the closing of the offering made pursuant
to this Registration Statement.
3.2* Amended and Restated Bylaws of Rigel to be filed upon the
closing of the offering made pursuant to this Registration
Statement.
4.1* Specimen Common Stock Certificate.
4.2* Amended and Restated Investor Rights Agreement, dated
February 3, 2000, between Rigel and holders of Rigel's
Series B, Series C, Series D and Series E preferred stock.
4.3* Form of Founder Stock Purchase Agreement.
4.4 Form of warrant to purchase shares of common stock.
4.5 Warrant issued to Lighthouse Capital Partners II, L.P. for
purchase of shares of Series B preferred stock.
4.6 Warrant issued to Lighthouse Capital Partners II, L.P. for
purchase of shares of Series C preferred stock.
4.7 Form of warrant to to purchase shares of Series D preferred
stock.
5.1* Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement.
10.2 2000 Equity Incentive Plan.
10.3 Form of Stock Option Agreement pursuant to 2000 Equity
Incentive Plan.
10.4 2000 Employee Stock Purchase Plan.
10.5 2000 Non-Employee Directors' Stock Option Plan.
10.6++ Collaboration Agreement between Rigel and Janssen
Pharmaceutica N.V., dated December 4, 1998.
10.7++ Collaborative Research and License Agreement between Rigel
and Pfizer Inc., dated January 31, 1999.
10.8++ Collaboration Agreement between Rigel and Novartis Pharma
AG, dated May 26, 1999.
10.9++ License and Research Agreement between Rigel and Cell
Genesys, Inc., dated September 2, 1999.
10.10 Collaborative Research and Development Agreement between
Rigel and Neurocrine Biosciences, Inc., dated
December 1997.
10.11 Employment agreement between Rigel and Donald Payan, dated
January 16, 1997.
10.12 Lease between Rigel and Britannia Pointe Grand Limited
Partnership, dated June 2, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
- ---------
* To be filed by amendment.
++ Confidential treatment requested as to specific portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.