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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended .....................................December 31,1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28674
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CADUS PHARMACEUTICAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3660391
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
767 Fifth Avenue
New York, New York 10153
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (212) 702-4351
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
the Company, computed by reference to the closing price on March 15, 2000, was
$20,181,324.
Number of shares outstanding of each class of Common Stock, as of March
15, 2000: 13,144,040 shares.
Special Note Regarding Forward Looking Statements
Certain statements in this Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, technological uncertainties regarding the Company's technologies,
uncertainties regarding the Company's ability to license its technologies to
third parties, uncertainties regarding the Company's future acquisition and in-
licensing of technologies, Company's capital needs and uncertainty of future
funding, risks and uncertainties relating to the Company's ongoing litigation
with SIBIA Neurosciences, Inc. ("SIBIA")*, including uncertainties relating to
the outcome of appeals and the re-examination of SIBIA's patent at issue in the
litigation, the Company's history of operating losses, the Company's dependence
on proprietary technology and the unpredictability of patent protection, intense
competition in the pharmaceutical and biotechnology industries, rapid
technological development that may result in the Company's technologies and
future products becoming obsolete, uncertainties regarding the Company's ability
to attract and retain key officers, employees and consultants, as well as other
risks and uncertainties discussed in the Company's prospectus dated July 17,
1996.
PART I
Item 1. Business.
General
Cadus Pharmaceutical Corporation ("Cadus" or the "Company") was
incorporated under the laws of the State of Delaware in January 1992 and until
July 30, 1999 devoted substantially all of its resources to the development and
application of novel yeast-based and other drug discovery technologies.
On July 30, 1999, the Company sold to OSI Pharmaceuticals, Inc.
("OSI"), pursuant to an asset purchase agreement, its drug discovery programs
focused on G Protein-coupled receptors, its directed library of approximately
150,000 small molecule compounds specifically designed for drug discovery in the
G Protein-coupled receptor arena, its collaboration with Solvay Pharmaceuticals
B.V. ("Solvay Pharmaceuticals"), its lease to its research facility in
Tarrytown, New York together with the furniture and fixtures and its lease to
equipment in the facility, and its inventory of laboratory supplies. Pursuant to
such sale transaction, OSI assumed the Company's lease to the Company's research
facility in Tarrytown, New York, the Company's equipment lease with General
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*SIBIA was acquired by Merck & Co. in the fourth quarter of 1999 and,
accordingly, references to SIBIA herein are references to Merck & Co. after such
date.
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Electric Capital Corporation ("GECC") and the Company's research collaboration
and license agreement with Solvay Pharmaceuticals. OSI also hired more than 45
of the Company's scientific and administrative personnel. As consideration for
the sale, the Company received approximately $1,500,000 in cash and OSI assumed
certain liabilities of the Company relating to employees hired by OSI
aggregating approximately $133,000. In addition, the Company would be entitled
to royalties and up to $3.0 million in milestone payments on the first product
derived from compounds sold to OSI or from the collaboration with Solvay
Pharmaceuticals. The Company licensed to OSI on a non-exclusive basis certain
technology solely to enable OSI to fulfill its obligations under the
collaboration with Solvay Pharmaceuticals. The Company also licensed to OSI on a
non-exclusive basis certain proprietary software and technology relating to
chemical resins in order to enable OSI to fully benefit from the compounds it
acquired from the Company. The Company retained ownership of all its other
assets, including its core yeast technology for developing drug discovery
assays, its collection of over 25,000 proprietary yeast strains, human and
mammalian cell lines, and genetic engineering tools, its joint ownership of the
human orphan G Protein-coupled receptors identified pursuant to its
collaboration with Genomic Therapeutics Corporation, its proprietary software,
its genomics databases related to G Protein-coupled receptors, all assays and
technologies reverting to it from its collaboration with Bristol-Myers Squibb
Company, a 30% equity position in Axiom Biotechnologies Inc., the Company's cash
and cash equivalents, and the approximately $19.1 million being held in escrow
pending appeal of the verdict in favor of SIBIA. The Company ceased its drug
discovery operations and research efforts for collaborators as a result of this
transaction and terminated all employees who were not hired by OSI or who did
not voluntarily resign, except for the chief executive officer.
The Company is seeking to license its technologies and to otherwise
realize value from its assets. The Company is also seeking to use a portion of
its available cash to acquire technologies or products or to acquire or invest
in companies.
Prior to July 30, 1999, the Company developed several proprietary
technologies that exploit the similarities between yeast and human genes to
elucidate gene function and cell signaling pathways. In February 2000, the
Company licensed its yeast technologies and its bioinformatics software to OSI
on a non-exclusive basis. The Company is seeking to license these technologies
to other third parties on a non-exclusive basis. Three of these technologies are
used to identify small molecules that act as agonists or antagonists to cell
surface receptors: (i) a hybrid yeast cell technology that expresses a
functioning human receptor and a portion of its signaling pathway in a yeast
cell, (ii) the Autocrine Peptide Expression ("Apex(TM)") system that expresses
in a hybrid yeast cell both a known human ligand and the receptor that is
activated by that ligand and (iii) the Company's Self Selecting Combinatorial
Library ("SSCL(TM)") technologies, which are used to identify a ligand that
activates a targeted orphan receptor (a receptor whose function is not known).
Background
The human body is comprised primarily of specialized cells that perform
different physiological functions and that are organized into organs and
tissues. All human cells contain DNA,
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which is arranged in a series of subunits known as genes. It is estimated that
there are approximately 100,000 genes in the human genome. Genes are responsible
for the production of proteins. Proteins such as hormones, enzymes and receptors
are responsible for managing most of the physiological functions of humans,
including regulating the body's immune system. Thus, genes are the indirect
control center for all physiological functions. Over the last few decades, there
has been a growing recognition that many major diseases have a genetic basis. It
is now well established that genes play an important role in diseases such as
cancer, cardiovascular disease, psychiatric disorders, obesity, and metabolic
diseases. Significant resources are being focused on genomics research based on
the belief that the sequence and function of a gene, and the protein that gene
expresses, will lead to an understanding of that gene's role in the functioning
and malfunctioning of cells. This understanding is expected in turn to lead to
therapeutic and diagnostic applications focused on molecular targets associated
with the gene and the protein it expresses.
Cell surface receptors are an important class of proteins involved in
cellular functioning because they are the primary mediators of cell to cell
communication. Their location on the cell surface also makes them the most
accessible targets for drug discovery. Cellular communication occurs when one
cell releases a chemical messenger, called a "ligand," which communicates with
another cell by binding to and activating the receptor on the exterior of the
second cell. Typically, a ligand binds only with one specific receptor or
families of related receptors. This binding event activates the receptor
triggering the transmission of a message through a cascade of signaling
molecules from the exterior to the interior of the cell. This process is called
signal transduction. When the signal is transmitted into the interior of the
cell, it may, among other things, activate or suppress specific genes that
switch on or switch off specific biological functions of the cell. The
biological response of the cell, such as the secretion of a protein, depends
primarily on the specific ligand and receptor involved in the communication.
Many diseases, such as cancer, stem from the malfunctioning of cellular
communication. Efforts to treat a particular disease often concentrate on
developing drugs that interact with the receptor or signaling pathway believed
to be associated with the malfunction. These drugs work by inhibiting or
enhancing the transmission of a signal through the cascade of signaling
molecules triggered by the receptor. Drugs that inhibit signal transduction by
blocking a receptor or the intracellular proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal transduction by
stimulating a receptor or associated intracellular proteins are called agonists.
Human cells carry many different types of receptors. Receptors are
classified into groups based upon similarities in their chemistry and structure.
Some of the major receptor groups involved in signal transduction are: G
Protein-coupled receptors, tyrosine kinase receptors and multisubunit immune
recognition receptors. G Protein-coupled receptors, which are located on the
surface of the cell, constitute the largest group of receptors. In humans, G
Protein-coupled receptors are involved in many of the body's most basic
functions, including heartbeat, sight, sense of smell, cognition and behavior
and also mediate most of the body's basic responses such as secretion from
glands, contractility of blood vessels, movement of cells, growth and cell
death. Tyrosine kinase coupled
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receptors are involved in cell growth and differentiation. Multisubunit immune
recognition receptors activate the body's immune defense system.
There are approximately 2,000 G Protein-coupled receptors estimated to
be in the human genome, half of which are believed to be involved in taste,
smell and sight. The importance of G Protein-coupled receptors is demonstrated
by the fact that more than 60% of all currently available prescription drugs
work by interacting with known G Protein-coupled receptors. These drugs include
the anti-ulcer agents Zantac and Tagamet, the anti-depressants Prozac and
Zoloft, and the anti- histamine Claritin. Many of these drugs were developed
through the application of time consuming and expensive trial and error methods
without an understanding of the chemistry and structure of the G Protein-coupled
receptors with which they interact. More efficient drug discovery methods are
available once the gene sequence, biological function and role in disease
processes of a G Protein-coupled receptor have been determined.
The sequences and functions of approximately 200 human G
Protein-coupled receptors have been identified. This knowledge has also been
used to help identify the sequence of at least 100 more orphan G Protein-coupled
receptors. The Company believes that the identification of the gene sequences
and functions of the remaining G Protein-coupled receptors (other than those
involved in taste, smell or sight) will yield a substantial number of potential
drug discovery targets. Scientists working on the Human Genome Project have
sequenced portions of thousands of genes and have published such sequences or
placed them in public databases. Although the Human Genome Project has produced
and made publicly available an ever increasing volume of raw DNA sequences
(including sequence fragments that may represent portions of human G
Protein-coupled receptors), such data cannot be used in drug discovery until (i)
a DNA sequence is recognized to comprise a portion of a G Protein-coupled
receptor (ii) the full DNA sequence of the G Protein-coupled receptor is
identified, (iii) the function of the G Protein-coupled receptor is elucidated,
and (iv) agonists and/or antagonists for the G Protein-coupled receptor are
identified.
Traditional Drug Discovery
Drug discovery consists of three key elements: (i) the target, such as
a receptor, on which the drug will act, (ii) the potential drug candidates,
which include organic chemicals, proteins or peptides, and (iii) the assays or
tests to screen these compounds to determine their effect on the target.
Historically, drug discovery has been an inefficient and expensive
process. Traditional drug discovery has been hampered by the limited number of
known targets and a reliance on in vitro assays as a format in which to test
compounds. Until scientists began to define the molecular structure of receptors
and ligands, there was no simple method to determine the function of such
molecules in the cell and, therefore, their utility as drug discovery targets.
Even when the target's molecular structure is known, incorporating that target
effectively into an in vitro assay can be difficult. For example, all known G
Protein-coupled receptors are woven through the cell membrane seven times in a
very complex, looped structure that cannot be maintained when the isolated
protein is put into an in vitro assay format. If an assay does not accurately
replicate the structure of a target
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receptor, the compounds identified in the assay may not function as expected
when applied to the target receptor on a living cell. Furthermore, receptors,
signal transduction proteins and other molecular targets for therapeutic
intervention do not exist in isolation in the cell. Their functional activity
results from a complex interrelationship with numerous other molecules within
the cell. Consequently, traditional drug screening assays often identify
compounds as potential drug candidates which, when tested in living cells, prove
to have no useful activity or are even toxic. A variety of methods have been
developed to address these problems, including using living cells in assays.
However, most live cell assays are slow, complex and expensive to maintain.
In recent years, scientific advances have created new and improved
tools for drug discovery. For example, molecular biology is identifying a
growing number of targets and their gene sequences. There have been significant
developments in turning these gene sequences into drug discovery candidates.
Cells have been genetically engineered to produce assays that more effectively
replicate the physiological environment of a living organism. Robotics have
enabled the creation of high-throughput screening systems. Combinatorial
chemistry has enhanced the ability to optimize lead compounds by improving their
pharmacological characteristics. However, due to the complexity of G
Protein-coupled receptors and limited knowledge of their gene sequences and
function, these advances do not offer a comprehensive, rapid and cost effective
approach to the identification of drug discovery candidates targeted at G
Protein-coupled receptors.
Yeast
The Company has developed technologies based on yeast that are useful
in identifying drug discovery candidates targeted at G Protein-coupled
receptors. Yeast is a single-celled microorganism that is commonly used to make
bread, beer and wine. In the 1980's, scientists discovered structural and
functional similarities between yeast cells and human cells. Both yeast and
human cells consist of a membrane, an intracellular region and a nucleus
containing genes. Basic cellular processes, including metabolism, cell division,
DNA and RNA synthesis and signal transduction, are the same in both human and
yeast cells. Yeast also have signal transduction pathways that function
similarly to human cell pathways. More than 40 percent of all human gene classes
have functional equivalents in yeast. The genes in yeast express proteins,
including cell-surface receptors such as G Protein-coupled receptors and
signaling molecules such as protein kinases, that are similar to human proteins.
The Company believes that yeast cells have several important
characteristics that are useful in drug discovery.
o The strong correlation between human and yeast gene classes
enables the evaluation of the biological function of human
proteins, including receptors and signaling molecules, of
unknown function. Proteins with comparable gene sequences
frequently carry out similar functions. This fact can be used
to determine the function of a human gene by genetically
engineering a yeast cell to replace a yeast gene coding for a
known function with the human gene suspected of having a
comparable function. If the yeast cell retains its normal
function, it suggests that the human gene
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and its protein have a biological function similar to that of
their yeast counterparts. Consequently, genetically engineered
yeast cells can replicate human gene function and provide a
biologically relevant context for evaluating interactions
between receptors and their related signaling pathways.
o In 1996, the yeast genome was fully sequenced. This knowledge
has facilitated analysis of the correlation between yeast and
human gene structure and aids in the definition of human gene
functions.
o While the yeast signaling mechanism bears many similarities to
the human signaling mechanism, the yeast intracellular
environment is less complex, thus eliminating much of the
ancillary and redundant intracellular signaling pathways that
exist in human cells.
o Yeast have the ability to absorb DNA fragments and incorporate
them into their genome. As a result, their genetic structure
can be easily manipulated using common genetic engineering
techniques.
o Yeast cells replicate rapidly. Speed of replication is
particularly important because creating a new yeast strain
that successfully incorporates new genetic material and adapts
to new conditions may take several generations and the strain
that so adapts is identifiable by growth. In addition, because
a yeast cell reproduces itself every two hours, compared with
24 to 48 hours for mammalian cells, a drug screen using yeast
can be developed and evaluated much faster than one using
human cell assays.
o Yeast can be easily and inexpensively grown in the laboratory
using standard microbiological techniques and, as a
consequence, can readily be used in automated screening
systems.
o Yeast are resistant both to the solvents often needed to
dissolve potentially active compounds and the toxins often
found in natural products. Consequently, hybrid yeast cells
can be used to screen libraries of synthetic compounds,
combinatorial chemicals or natural products.
Cadus's Drug Discovery Technologies
The Company has developed several proprietary drug discovery
technologies that address many of the limitations of traditional drug discovery
methods, including tools used to screen for compounds that act as agonists or
antagonists to cell surface receptors and tools used to identify ligands to
targeted orphan receptors. The Company is currently seeking to license these
technologies on a non-exclusive basis to third parties.
Hybrid Yeast Cells
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The Company has developed a proprietary technology to insert human
genes into yeast cells to create hybrid yeast cells. The Company focused its
hybrid yeast cell technology primarily on G Protein-coupled receptors. The
Company's scientists typically created hybrid yeast cells by replacing yeast G
Protein-coupled receptor genes and certain signaling molecules with their human
equivalents. As a result, these hybrid yeast cells express a human G
Protein-coupled receptor and a portion of its signaling pathway. These hybrid
yeast cells can be used to identify those compounds that act as agonists or
antagonists to that receptor or a molecule that is in its signaling pathway. The
Company has also created hybrid yeast cells using other classes of human
cell-surface receptors that have a functional equivalent in yeast. To facilitate
drug screen development, the Company has designed and developed more than
twenty-five thousand genetically different yeast strains that can be used to
build novel hybrid yeast cells.
The Company believes that hybrid yeast cells are highly effective for
screening compounds. Hybrid yeast cells can be used to measure the biological
activity of the human signaling pathway in which intervention is desired. In
addition, hybrid yeast cells contain a single human receptor which connects to a
defined signaling pathway. Accordingly, a specific change in cell behavior, such
as replication, is easily monitored and can be attributed to the compound being
tested. Also, because different human genes can be inserted into yeast, hybrid
yeast cells enable the user to identify compounds that act at virtually any site
in the human cell signaling pathway. These sites include the ligand binding site
on the receptor, as well as other sites on the receptor, and the protein
components of individual signaling pathways. Moreover, because yeast are
resistant to solvents and toxins often used to dissolve test compounds, hybrid
yeast cells can be used to screen synthetic organic libraries, combinatorial
libraries and natural product libraries. Hybrid yeast cells can also be used to
perform high throughput screening of compound libraries.
The Company has developed a biological database that catalogues the
Company's collection of proprietary cells, cell lines, yeast strains and genetic
engineering tools. This database currently has approximately 30,000 entries,
that include the phenotype and the genotype of the cell or yeast strain and its
storage site.
Autocrine Peptide Expression System (Apex(TM))
The Company extended its hybrid yeast cell technology to develop a
novel drug screening technology. Biological signaling frequently involves the
concerted behavior of at least two cells: one that sends the signal and a second
that receives and responds to that signal. The Company's scientists converted
this natural multi-cell process into a single cell process by inserting into a
hybrid yeast cell both the human G Protein-coupled receptor and the gene that
causes the yeast cell to produce the ligand that naturally binds to the receptor
being expressed by the same hybrid yeast cell. As a result, the Company's
scientists made the cell self-stimulating, or "autocrine," in that it both sends
a signal through production and secretion of a ligand and responds, by
replication, to that same signal through the receptor. The Company believes that
the autocrine nature of the Apex(TM) system makes it an effective tool for the
identification of compounds that act as agonists or antagonists with respect to
that receptor or a molecular target in its signaling pathway. As a result, drug
screening may be
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conducted in an accelerated, cost effective process as compared to conventional
screening techniques.
Self Selecting Combinatorial Library Technology (SSCL(TM))
The Company developed its proprietary SSCL(TM) technology to identify a
ligand that activates an orphan receptor. The SSCL(TM) technology involves the
creation of a library of peptides encoded in DNA, called a combinatorial peptide
expression library. This library is inserted into a strain of hybrid yeast cells
that all express the same orphan receptor. The activation of this receptor is
functionally coupled with cell replication. Each of the millions of yeast cells
in the strain incorporates a different peptide encoded in DNA, resulting in a
library of yeast cells which all express the same orphan receptor but are each
programmed to secrete a different peptide. Most of the secreted peptides have no
effect on the orphan receptor and the hybrid yeast cells producing these
peptides do not replicate. The Company estimates that one in a million hybrid
yeast cells generates a peptide ligand that activates the orphan receptor. These
particular hybrid yeast cells replicate and, therefore, are readily identified.
Thus, the SSCL(TM) technology uses self selection to identify the ligand that
binds to the targeted orphan receptor. The sequence of the peptide ligand can
then be rapidly identified and undergo further evaluation. One to ten million
peptides can be tested in a matter of hours. The Company has used its SSCL(TM)
technology to successfully identify ligands to orphan receptors in less than a
month, significantly accelerating this step in the drug discovery process.
Identifying ligands to orphan receptors is the critical first step in
determining the biological function of orphan receptors and demonstrating their
value as drug discovery targets.
The strains of hybrid yeast cells constructed for the SSCL(TM) can
simultaneously be used as screens for large libraries of chemical compounds.
This capability enabled the Company to seek to identify a peptide ligand to an
orphan receptor while simultaneously creating a high throughput screen for small
molecule agonists and antagonists to that receptor.
Bioinformatics for Target Identification
The Company has developed proprietary software algorithms that can be
used to rapidly search through the data generated by the Human Genome Project
for DNA sequences that are likely to be those of G Protein-coupled receptors.
Human Orphan G Protein-Coupled Receptors
On July 25, 1998, the Company entered into a collaboration agreement
with Genome Therapeutics Corporation ("GTC"), which has bioinformatics
technologies and know-how that it uses to identify and sequence orphan G
Protein-coupled receptors. Pursuant to the collaboration, the Company and Genome
Therapeutics Corporation identified and isolated fifty-six (56) human orphan G
Protein-coupled receptors. The rights to such fifty-six (56) human orphan G
Protein-coupled receptors are owned jointly by the Company and GTC. Each of the
Company and GTC will share in any research funding, equity investments, license
fees, milestone payments and royalties that may be received from third party
pharmaceutical companies that enter into collaboration agreements with
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the Company and/or GTC with respect to such G Protein-coupled receptors. As of
November 1999, the Company and GTC ceased collaborating.
SIBIA Injunction
On January 29, 1999, SIBIA Neurosciences, Inc. ("SIBIA") obtained an
injunction that precludes the Company from using the readout method covered by a
patent owned by SIBIA that utilized an added reporter gene to enable detection
of the results from screening compounds against the Company's hybrid yeast
cells. The Company may have difficulties licensing its technologies to third
parties unless and until this injunction is dissolved on appeal. See "Legal
Proceedings."
Investment in Axiom Biotechnologies Inc.
The Company has an approximately 30% equity interest in Axiom
Biotechnologies Inc. ("Axiom") which is developing a High Throughput
Pharmacology System ("HT-PS(TM)"). The HT-PS(TM) measures the immediate
physiological responses to chemical compounds of natural or genetically
engineered human cells and performs both selectivity profiles and dose-response
curves. By automating the slow, labor-intensive and costly process of assessing
the pharmacological properties of potential therapeutic compounds identified
through primary screening, the HT-PS(TM) enables scientists to accelerate the
secondary screening process and thus the identification of lead compounds.
Collaborative Arrangements
The Company no longer has any collaborations with pharmaceutical
companies. The Bristol- Myers Squibb Company collaboration expired in July 1999,
the Solvay Pharmaceuticals collaboration was assigned to OSI in July 1999 and
the Company and SmithKline Beecham p.l.c. agreed to terminate their
collaboration in September 1999. Each of Bristol-Myers Squibb Company and
SmithKline Beecham p.l.c. is required to make payments to the Company upon the
achievement by it of certain pre-clinical and drug development milestones and to
pay the Company royalties on the sale of any drugs developed as a result of the
research collaboration with the Company or through the use of the Company's drug
discovery technologies. There can be no assurance that any such milestones will
be achieved or any such drugs developed.
Licensing Arrangements
In February 2000, the Company licensed to OSI, on a non-exclusive
basis, its yeast technologies, including various reagents and its library of
over 30,000 yeast strains, and its bioinformatics software. OSI paid to the
Company a license fee of $100,000 and an access fee of $600,000. OSI is also
obligated to pay an annual maintenance fee of $100,000 until 2010 and a
supplemental license fee of $250,000 upon the lifting or dissolution of the
injunction obtained by SIBIA. The Company is seeking to license these
technologies to other third parties on a non- exclusive basis.
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Patents, Proprietary Technology and Trade Secrets
The Company relies upon patents and trade secrets to protect its
proprietary technologies. As of March 15, 2000, the Company was the assignee of
two issued U.S. patents covering aspects of its yeast technology and was the
exclusive worldwide licensee of two issued U.S. patents for use in drug
discovery. In addition, as of such date, the Company had filed or held licenses
to 23 other U.S. patent applications, as well as related foreign patent
applications.
The Company has obtained from Duke University an exclusive worldwide
license to two issued U.S. patents and U.S. and international patent
applications covering hybrid yeast cell technologies. These patents and patent
applications are directed to hybrid yeast cells engineered to express human G
Protein-coupled receptors and to methods of their use. In consideration for such
license, the Company pays a minimum annual royalty and is required to make
payments upon the achievement by the Company of certain drug development
milestones and to pay royalties (net of minimum royalties) on the sale of drugs
by the Company which were initially identified by the Company through the use of
the licensed technology. In lieu of milestones and royalty payments on sales of
drugs by sublicensees initially identified by sublicensees through the use of
the licensed technology, the Company pays an annual fee (net of the minimum
annual royalty) for each sublicense granted by it to such technology.
The Company has also filed patent applications based on inventions by
Cadus's scientists directed to hybrid yeast cells and yeast cells engineered to
produce both peptide libraries and human proteins that can function in certain
signal transduction pathways of the engineered yeast cell. These applications
seek to protect aspects of the Apex(TM) and SSCL(TM) technologies. The Company
has also filed patent applications directed to methods, constructs and reagents,
including engineered cells, for discovering ligands to orphan receptors.
Peptides, and mimetics thereof, which have been discovered using the SSCL(TM)
technology are also covered in these patent applications both as compositions
and for their therapeutic use.
In November 1999, the Company terminated its exclusive worldwide
license to issued U.S. patents relating to MEKK enzymes and U.S. and
international patent applications in the field of signal transduction in human
cells that it had obtained from National Jewish Center for Immunology and
Respiratory Medicine.
During 1999, the Company ceased providing to Massachusetts Institute of
Technology ("M.I.T.") research funding for the LivingChipTM, a technology that
was being co-developed by the Company and M.I.T. to miniaturize and automate the
Company's hybrid yeast cell technology. In March 2000, the Company's license to
M.I.T.'s LivingChipTM technology was terminated.
The Company has granted certain rights under several of its patents and
patent applications relating to its yeast-based technologies to Solvay
Pharmaceuticals, OSI and SmithKline Beecham.
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In addition to patent protection, the Company relies upon trade secrets
and proprietary know-how to maintain its competitive position. To maintain the
confidentiality of its trade secrets and proprietary information, the Company
requires its employees and consultants to execute confidentiality agreements
upon the commencement of their relationships with the Company. Such agreements
with employees and consultants also provide that all inventions resulting from
work performed by them while in the employ of the Company will be the exclusive
property of the Company.
Patent law as it relates to inventions in the biotechnology field is
still evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, no predictions can be made
regarding the breadth or enforceability of claims allowed in the patents that
have been issued to the Company or its licensors or in patents that may be
issued to the Company or its licensors in the future. Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign counterparts or
as may be subsequently interpreted by courts inside or outside the United
States, will be sufficiently broad to protect the Company's proprietary rights,
will be commercially valuable or will provide competitive advantages to the
Company and its present or future collaborative partners or licensees. Further,
there can be no assurance that patents will be granted with respect to any of
the Company's pending patent applications or with respect to any patent
applications filed by the Company in the future. There can be no assurance that
any of the Company's issued or licensed patents would ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights would be successful.
The field of gene discovery has become intensely competitive. A number
of pharmaceutical companies, biotechnology companies, universities and research
institutions have filed patent applications or received patents covering their
gene discoveries. Some of these applications or patents may be competitive with
the Company's applications or conflict in certain respects with claims made
under the Company's applications. Moreover, because patent applications in the
United States are maintained in secrecy until patents issue and because patent
applications in certain other countries generally are not published until more
than eighteen months after they are filed and because publication of
technological developments in the scientific or patent literature often lags
behind the date of such developments, the Company cannot be certain that it was
the first to invent the subject matter covered by its patents or patent
applications or that it was the first to file patent applications for such
inventions. If an issue regarding priority of inventions were to arise with
respect to any of the patents or patent applications of the Company or its
licensors, the Company might have to participate in litigation or interference
proceedings declared by the United States Patent and Trademark Office or similar
agencies in other countries to determine priority of invention. Any such
participation could result in substantial cost to the Company, even if the
eventual outcome were favorable to the Company.
In some cases, litigation or other proceedings may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
the Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the
12
scope and validity of the proprietary rights of third parties. Such litigation
could result in substantial cost to and diversion of resources by the Company.
An adverse outcome in any such litigation or proceeding could subject the
Company to significant liabilities, require the Company to cease using the
subject technology or require the Company to license the subject technology from
the third party, all of which could have a material adverse effect on the
Company's business, financial condition and results of operations. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially favorable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from using
certain of its technologies.
In July 1996, SIBIA commenced a patent infringement action against the
Company alleging infringement by the Company of a patent covering the use of
cells, engineered to express any type of cell surface receptor and a reporter
gene, used to report results in the screening of compounds against target assays
and seeking injunctive relief and monetary damages. After trial, on December 18,
1998, the jury issued a verdict in favor of SIBIA and awarded SIBIA $18.0
million in damages. On January 29, 1999, the United States District Court
granted SIBIA's request for injunctive relief that precludes the Company from
using the method claimed in SIBIA's patent. The injunction does not bar the
Company from engaging in development of screening assays. On February 26, 1999,
the United States District Court denied the Company's motions to set aside the
jury verdict, to grant a new trial and to reduce or set aside the $18.0 million
damage award by the jury. The Company has appealed the judgment. The appeal will
be heard by the Court of Appeals for the Federal Circuit in Washington, D.C. All
briefs have been filed and the Court of Appeals heard oral argument on March 9,
2000. In order to stay execution pending appeal of the $18.0 million judgment
obtained by SIBIA, in March 1999, the Company deposited $18.5 million in escrow
to secure payment of the judgment in the event the Company were to lose the
appeal. Interest earned on the $18.5 million has been added to the reserve for
litigation damages, which was $19.1 million at December 31, 1999. If the Company
is not successful in materially reducing or setting aside the $18.0 million
damage award on appeal, the business, financial condition and results of
operations of the Company will be materially adversely affected. The costs of
and the diversion of Company resources associated with this litigation have had
a material adverse effect on the business, financial condition and results of
operations of the Company.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re-examine the patent issued to SIBIA that was the subject
of the litigation. In March 2000, the Patent Office issued an office action
rejecting all claims of SIBIA's patent. This office action is an initial
determination only to which SIBIA will have an opportunity to respond. The
Patent Office is not expected to issue a final decision for several months. A
final decision by the Patent Office that SIBIA's patent is invalid would take
precedence over the outstanding jury verdict and judgment. There can be no
assurance, however, that the Patent Office will issue a final decision finding
SIBIA's patent to be invalid.
Competition
The biotechnology and pharmaceutical industries are intensely
competitive. The Company's technologies consist principally of genetically
engineered yeast cells. The Company is aware of companies, such as American Home
Products Corporation and Glaxo Wellcome, Plc, that may use
13
yeast as a drug discovery medium. In addition, many smaller companies are
pursuing these areas of research. The Company is also aware of other companies
that are inserting human orphan G Protein-coupled receptors into yeast and other
cells and using these hybrid cells for drug discovery purposes. Certain other
companies are seeking to determine the functions of human orphan G
Protein-coupled receptors by identifying agonists to these receptors and by
other research methods. All of the above companies are significant competitors
of the Company. Many of the Company's competitors have greater financial and
human resources, and more experience in research and development than the
Company. There can be no assurance that competitors of the Company will not
develop competing drug discovery technologies that are more effective than those
developed by the Company thereby rendering the Company's drug discovery
technologies obsolete or noncompetitive. Moreover, there can be no assurance
that the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's ability to use or
license its drug discovery technologies, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In order to compete successfully, the Company's goal is to obtain
patent protection for its drug discovery technologies and to make these
technologies available to pharmaceutical and biotechnology companies through
licensing arrangements for use in discovering drugs. There can be no assurance,
however, that the Company will obtain patents covering its technologies that
protect it against competitors. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies that
circumvent the Company's technologies or that such competitors will not succeed
in developing technologies that are more effective than those developed by the
Company or that would render technology of the Company less competitive or
obsolete.
Government Regulation
The development, manufacturing and marketing of drugs developed through
the use of the Company's technologies are subject to regulation by numerous
governmental agencies in the United States and in other countries. To date, none
of the Company's technologies has resulted in any clinical drug candidates. The
FDA and comparable regulatory agencies in other countries impose mandatory
procedures and standards for the conduct of certain preclinical testing and
clinical trials and the production and marketing of drugs for human therapeutic
use. Product development and approval of a new drug are likely to take a number
of years and involve the expenditure of substantial resources.
The steps required by the FDA before new drugs may be marketed in the
United States include:(i) preclinical studies; (ii) the submission to the FDA of
a request for authorization to conduct clinical trials on an investigational new
drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish
the safety and efficacy of the drug for its intended use; (iv) submission to the
FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA
by the FDA before the drug may be shipped or sold commercially.
14
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND will become effective 30 days following its receipt
by the FDA. There can be no assurance that submission of an IND will result in
the commencement of human clinical trials.
Clinical trials, which involve the administration of the
investigational drug to healthy volunteers or to patients under the supervision
of a qualified principal investigator, are typically conducted in three
sequential phases, although the phases may overlap with one another. Clinical
trials must be conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for all
physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company or the FDA may suspend
clinical trials at any time if it is believed that individuals participating in
such trials are being exposed to unacceptable health risks. Even assuming that
clinical trials are completed and that an NDA is submitted to the FDA, there can
be no assurance that the NDA will be reviewed by the FDA in a timely manner or
that once reviewed,
15
the NDA will be approved. The approval process is affected by a number of
factors, including the severity of the targeted indications, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. The FDA may deny an NDA if applicable regulatory criteria are not
satisfied, or may require additional testing or information with respect to the
investigational drug. Even if initial FDA approval is obtained, further studies,
including post-market studies, may be required in order to provide additional
data on safety and will be required in order to gain approval for the use of a
product as a treatment for clinical indications other than those for which the
product was initially tested. The FDA will also require post-market reporting
and may require surveillance programs to monitor the side effects of the drug.
Results of post-marketing programs may limit or expand the further marketing of
the drug. Further, if there are any modifications to the drug, including changes
in indication, manufacturing process or labeling, an NDA supplement may be
required to be submitted to the FDA.
Each manufacturing establishment for new drugs is also required to
receive some form of approval by the FDA. Among the conditions for such approval
is the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other Federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. The Company has no preclinical or
clinical development expertise and intends to rely on third party clinical
research organizations to design and conduct most of such activities if
required.
Prior to the commencement of marketing a product in other countries,
regulatory approval in such countries is required, whether or not FDA approval
has been obtained for such product. The requirements governing the conduct of
clinical trials and product approvals vary widely from country to country, and
the time required for approval may be longer or shorter than the time required
for FDA approval. Although there are some procedures for unified filings for
certain European countries, in general, each country has its own procedures and
requirements.
The Company is also subject to regulation under other Federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by Federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
16
Employees
As of March 15, 2000, the Company had one employee, its chief executive
officer.
The Company's employee is not covered by a collective bargaining
agreement, and the Company believes that its relationship with its employee is
good.
Item 2. Properties.
The Company currently leases one office at 767 Fifth Avenue, New York,
New York on a month- to-month basis. The Company also leases storage space.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings other than
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corporation and an arbitration
proceeding commenced by Philip N. Sussman, the former Senior Vice President,
Finance and Corporate Development, and Chief Financial Officer of the Company.
SIBIA commenced an action on July 9, 1996 in the United States District
Court for the Southern District of California alleging infringement by the
Company of a patent covering the use of cells, engineered to express any type of
cell surface receptor and a reporter gene, used to report results in the
screening of compounds against target assays, and seeking injunctive relief and
monetary damages. After trial, on December 18, 1998, the jury issued a verdict
in favor of SIBIA and awarded SIBIA $18.0 million in damages. On January 29,
1999, the United States District Court granted SIBIA's request for injunctive
relief that precludes the Company from using the method claimed in SIBIA's
patent. On February 26, 1999, the United States District Court denied the
Company's motions to set aside the jury verdict, to grant a new trial and to
reduce or set aside the $18.0 million damage award by the jury. The Company has
appealed the judgment. The appeal will be heard by the Court of Appeals for the
Federal Circuit in Washington, D.C. All briefs have been filed and the Court of
Appeals heard oral argument on March 9, 2000. In order to stay execution pending
appeal of the $18.0 million judgment obtained by SIBIA, in March 1999, the
Company deposited $18.5 million in escrow to secure payment of the judgment in
the event the Company were to lose the appeal. If the Company is not successful
in materially reducing or setting aside the $18.0 million damage award on
appeal, the business, financial condition and results of operations of the
Company will be materially adversely affected. The costs of and the diversion of
Company resources associated with this litigation have had a material adverse
effect on the business, financial condition, results of operations and liquidity
of the Company.
In January 1999, the U.S. Patent and Trademark Office granted the
Company's request to re- examine the patent issued to SIBIA that was the subject
of the litigation. In March 2000, the Patent Office issued an office action
rejecting all claims of SIBIA's patent. This office action is an initial
17
determination only to which SIBIA will have an opportunity to respond. The
Patent Office is not expected to issue a final decision for several months. A
final decision by the Patent Office that SIBIA's patent is invalid would take
precedence over the outstanding jury verdict and judgment. There can be no
assurance, however, that the Patent Office will issue a final decision finding
SIBIA's patent to be invalid.
On October 4, 1999, Philip N. Sussman, the former Senior Vice
President, Finance and Corporate Development, and Chief Financial Officer of the
Company, commenced an arbitration proceeding against the Company seeking
severance pay of approximately $525,000. The Company believes that Mr. Sussman
is not entitled to such severance pay and intends to vigorously defend the
action.
Item 4. Submission to a Vote of Security Holders.
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, $.01 par value per share (the "Common
Stock"), was traded on the Nasdaq National Market under the symbol KDUS until
September 27, 1999 when it was delisted. Since September 27, 1999, the Company's
Common Stock has traded on the over-the- counter bulletin board under the symbol
KDUS. The table below sets forth the high and low sales price per share of the
Common Stock for the periods indicated, as reported by the Nasdaq National
Market or the over-the-counter bulletin board, as the case may be.
Fiscal Year 1998 High Low
First quarter ended March 31, 1998 $ 9.00 $ 4.69
Second quarter ended June 30, 1998 $ 8.25 $ 4 .44
Third quarter ended September 30, 1998 $ 6.75 $ 2.75
Fourth quarter ended December 31, 1998 $ 3.94 $ 1.78
Fiscal Year 1999 High Low
First quarter ended March 31, 1999 $ 2.31 $ 1.00
18
Second quarter ended June 30, 1999 $ 1.13 $ 0.75
Third quarter ended September 30, 1999 $ 0.91 $ 0.22
Fourth quarter ended December 31, 1999 $ 0.44 $ 0.09
As of March 15, 2000, there were approximately 60 holders of
record of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its
Common Stock during the past two fiscal years and does not anticipate paying any
such dividends in the foreseeable future. The Company intends to retain any
earnings for the growth of and for use in its business.
Recent Sales of Unregistered Securities.
Within the past three years, the Company has issued and sold the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Act"), in reliance on an exemption from required registration
pursuant to Section 3(b) or 4(2) of the Act:
In May 1998, the Company sold 660,962 shares of its Common Stock to
SmithKline Beecham p.l.c. and SmithKline Beecham Corporation for approximately
$7.56 per share or an aggregate consideration of $5.0 million.
Item 6. Selected Financial Data.
The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto included elsewhere in this report.
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data: (dollars in thousands, except per share data)
Revenues $6,028 $12,576 $9,013 $6,500 $4,418
Operating costs and expenses:
Research and development 9,116 15,389 11,561 8,283 5,383
General and administrative 3,643 8,977 4,092 2,315 1,376
------- ------- ------- ------- -------
Total operating costs and
expenses 12,759 24,366 15,653 10,598 6,759
------- ------- ------- ------- -------
Operating loss (6,731) (11,790) (6,640) (4,098) (2,341)
Net loss (8,524) $(29,690)(1) $(5,411) $(2,441) $(1,482)
======= ======= ======= ======= =======
Basic and diluted net loss per
share $(0.65) $(2.32) $(.44) $(.39) $(1.07)
======= ======= ======= ======= =======
19
Shares used in calculation
of basic and diluted net
loss per share.............. 13,068,940 12,811,525 12,225,463 6,280,917 1,382,139
December 31,
------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
Cash and cash equivalents $5,082(2) $10,976(2) $36,762 $43,153 $25,683
Total assets 26,699 36,587 42,241 47,287 30,725
Short-term debt -- -- 150 13 2,397
Long-term debt -- -- -- 166 29
Accumulated deficit (52,056) (43,532) (13,842) (8,431) (5,991)
Stockholders' equity 7,465 15,989 40,500 45,181 27,723
- ------------------
(1) The net loss of $29,690,000 for the year ended December 31, 1998,
includes an $18.5 million reserve for litigation damages with respect
to the patent infringement litigation with SIBIA.
(2) In order to stay execution pending appeal of the $18.0 million judgment
obtained by SIBIA, in March 1999, the Company deposited $18.5 million
in escrow to secure payment of the judgment in the event the Company
were to lose the appeal. Such $18.5 million was classified, as of
December 31, 1998, as "restricted cash noncurrent" and the Company's
"cash and cash equivalents" was reduced by $18.5 million. Interest
earned on the restricted cash has been added to restricted cash.
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends on its common stock in the foreseeable future.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
Overview
The Company was incorporated in 1992 and until July 30, 1999 devoted
substantially all of its resources to the development and application of novel
yeast-based and other drug discovery technologies. On July 30, 1999, the Company
sold its drug discovery assets to OSI and ceased its internal drug discovery
operations and research efforts for collaborative partners. Pursuant to such
sale transaction, OSI assumed the Company's lease to its research facility in
Tarrytown, New York, the Company's equipment lease with GECC, and the Company's
research collaboration and license agreement with Solvay Pharmaceuticals. OSI
hired more than 45 of the Company's scientific and administrative personnel. The
Company has terminated all employees who were not hired by OSI or who did not
voluntarily resign, except for the chief executive officer.
The Company has incurred operating losses in each year since its
inception, including net losses of approximately $8.5 million during the year
ended December 31, 1999. At December 31,
20
1999, the Company had an accumulated deficit of approximately $52.1 million,
which includes a $19.1 million reserve (including interest earned on the
escrowed cash) for litigation damages with respect to the patent infringement
litigation with SIBIA. The Company's losses have resulted principally from costs
incurred in connection with its research and development activities and from
general and administrative costs associated with the Company's operations. These
costs have exceeded the Company's revenues and interest income. As a result of
the sale of its drug discovery assets to OSI and the cessation of its internal
drug discovery operations and research efforts for collaborative partners, the
Company ceased to have revenues and substantially reduced its operating
expenses. The Company expects to generate revenues in the future only if it is
able to license its technologies.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenues
Revenues for 1999 decreased to $6.0 million from $12.6 million in 1998.
This decrease was primarily attributable to the Company only receiving a
research milestone payment of $1.0 million from SmithKline Beecham p.l.c.
("SmithKline") in 1999 as compared to the $2.0 million technology development
fee it received from SmithKline in 1998; the termination in July 1999 of the
research collaboration with Bristol-Myers Squibb; the termination in August 1999
of the research collaboration with SmithKline; and the sale to OSI of the
research collaboration with Solvay Pharmaceuticals on July 30, 1999.
Operating Expenses
The Company's research and development expenses for 1999 decreased to
$9.1 million from $15.4 million in 1998 due to the reduction in staff and
research activities as a result of the asset sale to OSI on July 30, 1999.
General and administrative expenses for 1999 decreased to $3.6 million
from $9.0 million in 1998. This decrease is attributable primarily to decreased
litigation expenses and the sale of drug discovery operations to OSI.
Net Interest Income
Net interest income for 1999 decreased to $552,000 from $1.8 million in
1998. This decrease is attributable primarily to the decrease in the Company's
unrestricted cash balances as compared to 1998.
Equity in Other Ventures
21
Equity in other ventures reflects losses and gains associated with the
Company's two equity investments. For the years ended December 31, 1999 and
1998, the Company recognized gains of approximately $21,000 and $8,000,
respectively, related to its investment in Laurel Partners Limited Partnership.
For the years ended December 31, 1999 and 1998, the Company recognized
approximately $1.4 million and $1.2 million, respectively, in losses generated
by Axiom. The Company's investment in Axiom is accounted for under the equity
method with the Company recognizing 100% of Axiom's net losses prior to the
investment made by JAFCO Co. Ltd. ("JAFCO") in Axiom in June 1998. Following the
JAFCO investment, the Company began recognizing 50% of the net losses generated
by Axiom which is the extent to which the Company is deemed to be funding such
losses.
Net Loss
The net loss for 1999 decreased to $8.5 million from $29.7 million in
1998. The decrease can be attributed primarily to the establishment in 1998 but
not in 1999 of the $18.5 million reserve for litigation damages with respect to
the patent infringement litigation with SIBIA as well as a decrease in the
operating expenses of the Company as described above, which was partially offset
by a decrease in revenues.
Years Ended December 31, 1998 and 1997
Revenues
Revenues for 1998 increased to $12.6 million from $9.0 million in 1997.
This increase was primarily attributable to a one time $2.0 million technology
development fee and an increase in research funding from SmithKline one of the
Company's collaborative partners. The research collaboration with SmithKline
began in February 1997.
Operating Expenses
The Company's research and development expenses for 1998 increased to
$15.4 million from $11.6 million in 1997. This increase was attributable to
increases in staffing, supplies and facilities expenses as well as expenses
associated with the Company's sponsored research agreement with M.I.T. which
began in January 1998.
General and administrative expenses for 1998 increased to $9.0 million
from $4.1 million in 1997. This increase was attributable primarily to increased
legal expenses.
Net Interest Income
Net interest income for 1998 decreased to $1.8 million from $2.1
million in 1997. This decrease related primarily to the decreases in the
Company's cash reserves.
Equity in Other Ventures
22
Equity in other ventures reflects losses and gains associated with the
Company's two equity investments. For the years ended December 31, 1998 and
1997, the Company recognized a gain and a loss of approximately $8,000 and
$174,000, respectively, related to its investment in Laurel Partners Limited
Partnership. For the years ended December 31, 1998 and 1997, the Company
recognized approximately $1.2 million and $658,000, respectively, in losses
generated by Axiom. The Company's investment in Axiom is accounted for under the
equity method with the Company recognizing 100% of Axiom's net losses prior to
the investment made by JAFCO in Axiom in June 1998. Following the JAFCO
Investment, the Company began recognizing 50% of the net losses generated by
Axiom which is the extent to which the Company is deemed to be funding those
losses.
Reserve for Litigation Damages
The Company recorded a reserve for litigation damages of $18.5 million
with respect to the patent infringement litigation with SIBIA for the year ended
December 31, 1998.
Net Loss
The net loss for 1998 increased to $29.7 million from $5.4 million in
1997. The increase can be attributed primarily to the establishment of the $18.5
million reserve for litigation damages with respect to the patent infringement
litigation with SIBIA as well as an increase in the operating expenses of the
Company as described above, which was partially offset by an increase in
revenues.
Liquidity and Capital Resources
At December 31, 1999, the Company held cash and cash equivalents,
exclusive of restricted cash of $5.1 million. The Company's working capital at
December 31, 1999 was $5.3 million.
During the year ended December 31, 1999, the Company invested
approximately $470,000 in property and equipment.
On July 30, 1999, the Company sold its drug discovery assets to OSI and
ceased its internal drug discovery operations and research efforts for
collaborative partners. Pursuant to such sale transaction, OSI assumed the
Company's lease to the Company's research facility in Tarrytown, New York, the
Company's equipment lease with GECC, and the Company's research collaboration
and license agreement with Solvay Pharmaceuticals. OSI hired more than 45 of the
Company's scientific and administrative personnel. The Company also terminated
all employees who were not hired by OSI or who did not voluntarily resign,
except for the chief executive officer. As a result of the foregoing, the
Company ceased to have revenues and substantially reduced its operating
expenses. The Company expects to generate revenues in the future only if it is
able to license its technologies.
In February 2000, the Company licensed to OSI, on a non-exclusive
basis, its yeast technologies. OSI paid to the Company a license fee of $100,000
and an access fee of $600,000. OSI is also obligated to pay an annual
maintenance fee of $100,000 until 2010 and a supplemental license fee of
$250,000 upon the lifting or dissolution of the injunction obtained by SIBIA.
23
The Company believes that its existing capital resources, together with
interest income, will be sufficient to support its current and projected funding
requirements through the end of 2001. This forecast of the period of time
through which the Company's financial resources will be adequate to support its
operations is a forward-looking statement that may not prove accurate and, as
such, actual results may vary. The Company's capital requirements may vary as a
result of a number of factors, including the transactions, if any, arising from
the Company's efforts to license its technologies and otherwise realize value
from its assets, the transactions, if any, arising from the Company's efforts to
acquire technologies or products or to acquire or invest in companies, expenses
of pursuing such transactions and the outcome of its appeal of the judgment in
the SIBIA patent litigation.
At December 31, 1999, the Company had tax net operating loss
carryforwards of approximately $30.7 million and research and development credit
carryforwards of approximately $2.6 million which expire in years 2009 through
2019. The Company's ability to utilize such net operating loss and research and
development credit carryforwards is subject to certain limitations due to
ownership changes as defined by rules enacted with the Tax Reform Act of 1986.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities- Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 amends SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998 and was to be
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS 137 defers the effective date of SFAS 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Earlier application is permitted. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. The Company does not believe that the
implementation of SFAS 133 will have a material effect on its financial position
or results of operations.
On December 3, 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaborations with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB No. 101 requires
registrants to adopt the accounting guidance contained therein by no later than
the first fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company is currently assessing the financial impact of complying with SAB
No. 101 and has not yet determined whether applying the accounting guidance of
SAB No. 101 will have a material effect on its financial position or results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings and cash flows are subject to fluctuations due
to changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, its long-term debt arrangements.
The Company does not believe it is materially exposed to changes in interest
rates. Under its current policies the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
Item 8. Financial Statements.
24
The financial statements and notes thereto may be found following Item
14 of this report. For an index to the financial statements and supplementary
data, see Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Information with respect to the executive officers and directors of the
Company as of March 15, 2000 is set forth below:
Name Age Position
- ---- --- --------
Charles Woler, M.D., Ph.D. 50 President, Chief Executive
Officer and Director
James R. Broach, Ph.D. 51 Director
Russell D. Glass (1) 37 Director
Carl C. Icahn 64 Director
Peter S. Liebert, M.D. 64 Director
Professor Siegfried G. Schaefer 50 Director
Jack G. Wasserman (1) 62 Director
- --------------------
(1) Member of the Compensation Committee.
.
Charles Woler, Ph.D., M.D., President and Chief Executive Officer,
joined the Company in September1998. From late 1994 to July 1998, he was General
Manager of the Bouchara Group, a French based pharmaceutical company
specializing in bronchopulmonary disease and dermatology. From July 1993 to
September 1996, he was Vice Chairman of Pierre Fabre Pharma, a $1.0 billion
private pharmaceutical company based in France with operations in 26 countries
and was directly in charge of international operations. From January 1993 to
June 1998, he also served as Associate Professor of Strategy, Management, and
Organization at Paris University. From March 1992 to June 1993, Dr. Woler was
Chairman of Europe Pharmaceuticals at SmithKline Beecham p.l.c. in London and
from 1985 to 1991 he was at Hoffman la Roche-France, serving initially as
Director of Pharma Operations and General Manager of the Pharma Division and
then as Chairman of Pharma, Diagnostic, Vitamines and Fine Chemicals. From 1980
to 1985, he was Medical and Scientific Director and then Marketing and Sales
Director at Riom Laboratories, a division of Akzo Pharma France. From 1976 to
1979 he was Medical Director at Warner Lambert Parke Davis France. Dr. Woler
holds a Doctor of Medicine and a Master's degree in Pharmacokinectics and
Clinical Pharmacology from Paris University, a Ph.D. in Clinical Pharmacology
and Methodology from Lyon University, and an M.B.A. from Paris Trade
Chamber/Paris University.
25
James R. Broach, Ph.D., a scientific founder of the Company and
inventor of the Company's yeast-based drug discovery technology, has been
Director of Research of the Company since its inception. He is and has been
since 1984 a Professor at Princeton University in the Department of Molecular
Biology. In 1984, Dr. Broach and his collaborators were the first ones to
demonstrate that human genes could be successfully implanted into yeast cells.
He received his Ph.D. in Biochemistry from University of California at Berkeley
and his B.S. from Yale University.
Carl C. Icahn became a director of the Company in July 1993. He was a
Co-Chairman of the Board of Directors from May 1995 to May 1996. Mr. Icahn has
been Chairman of the Board and Chief Executive Officer of ACF Industries,
Incorporated, a privately-held railcar leasing and manufacturing company, since
1984, ACF Industries Holding Corp., a privately-held holding company for ACF
Industries, Incorporated since August 1993, and, since 1968, Icahn & Co., Inc.,
a registered broker-dealer and until 1995 a member firm of the New York Stock
Exchange, Inc. Since November 1990, Mr. Icahn has been Chief Executive Officer
and Chairman of the Board of American Property Investors, Inc., the general
partner of American Real Estate Partners, L.P., a public limited partnership
that invests in real estate. From October 1998, Mr. Icahn has been the Chairman
and Chief Executive Officer of Stratosphere Corporation which operates a hotel
and casino. Mr. Icahn received his B.A. from Princeton University.
Russell D. Glass became a director of the Company in June 1998. Since April
1998 Mr. Glass has been President and Chief Investment Officer of Icahn
Associates Corp., a diversified investment firm. Since August 1998 he has also
served as Vice-Chairman and Director of Lowestfare.com, Inc., a leading internet
travel reservations company. Previously, Mr. Glass had been a partner in
Relational Investors LLC, from 1996 to 1998, and in Premier Partners Inc., from
1988 to 1996, firms engaged in investment research and management. From 1984 to
1986 he served as an investment banker with Kidder, Peabody & Co. Mr. Glass
serves as a Director of Automated Travel Systems, Inc., a software development
firm; Delicious Brands Inc., a branded food products company; National Energy
Group, Inc., an oil & gas exploration and production company; and the A.G.
Spanos Corporation, a national real estate developer and owner of the NFL San
Diego Chargers Football Club. Mr. Glass earned a B.A. in economics from
Princeton University and an M.B.A. from the Stanford University Graduate School
of Business.
Peter S. Liebert, M.D., became a director of the Company in April 1995.
Dr. Liebert has been a pediatric surgeon in private practice since 1968 and is
affiliated with Babies Hospital of Columbia Presbyterian. He is Clinical
Associate Professor of Surgery, College of Physicians and Surgeons, Columbia
University. He is also Chairman of the Board of Rx Vitamins, Inc. Dr. Liebert
holds an M.D. from Harvard University Medical School and a B.A. from Princeton
University.
Professor Siegfried G. Schaefer became a director of the Company in
January 1998. Dr. Schaefer has been head of worldwide research at Solvay
Pharmaceuticals since July 1997 and the head of research at a Dutch division of
Solvay Pharmaceuticals from May 1996 to July 1997. From September 1992 to July
1997 Dr. Schaefer was a department head for project management at an
26
affiliate of Solvay Pharmaceuticals. Dr. Schaefer has a Ph.D. in Biology from
the University of Bochum and a Doctorate in Pharmacology and Toxicology from the
University of Munich. Dr. Shaefer is currently a Professor at the University of
Hamburg in the Department of Pharmacology and Toxicology.
Jack G. Wasserman became a director of the Company in May 1996. For the
past five years, Mr. Wasserman has been a senior partner in Wasserman,
Schneider, Babb & Reeds, a New York law firm that concentrates its practice in
legal matters relating to international trade. Mr. Wasserman is a director of
American Property Investors, Inc., the general partner of American Real Estate
Partners, L.P., a public limited partnership that invests in real estate. Mr.
Wasserman is also a director of National Energy Group, Inc., a public company
engaged in oil exploration. Mr. Wasserman received a B.A. from Adelphi
University, a J.D. from Georgetown University and a Graduate Diploma from the
Johns Hopkins University School of Advanced International Studies.
Directors are elected by the stockholders of the Company at each annual
meeting of stockholders and serve until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
removal or resignation.
The Board of Directors has a Compensation Committee, consisting of
Messrs. Glass and Wasserman, which makes recommendations regarding salaries and
incentive compensation for employees of and consultants to the Company and which
administers the 1993 Stock Option Plan and the 1996 Incentive Plan.
The non-employee directors receive $1,000 for each meeting of the Board
of Directors attended and $500 for each meeting of a committee of the Board of
Directors attended.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock of the Company. Reporting persons are
required by SEC regulation to furnish the Company with copies of all such filed
reports. To the Company's knowledge, based solely on a review of copies of such
filed reports furnished to the Company, all of the Company's directors, officers
and greater than ten percent beneficial owners made all required filings during
fiscal year 1999 in a timely manner.
Item 11. Executive Compensation.
The following table sets forth certain information concerning the
compensation paid or accrued by the Company for services rendered to the Company
in all capacities for the fiscal years ended December 31, 1999, 1998 and 1997,
by its Chief Executive Officer and each of the
27
Company's other executive officers whose total salary and bonus exceeded
$100,000 during 1999 (collectively, the "Named Executive Officers"):
Summary Compensation Table
--------------------------
Long-Term
Compensation
Awards
Name and Principal Position Annual Compensation ----------
--------------------------- ------------------- Securities
Year Salary ($) Bonus ($) Underlying All Other
---- --------- -------- Options (#) Compensation
---------- ------------
Charles Woler (1)................. 1999 307,500 -- 129,855 --
President and Chief Executive 1998 125,000 -- 295,145 53,225(2)
Officer
Philip N. Sussman (3)............. 1999 154,327 -- -- --
Senior Vice President of Finance 1998 191,000 -- 255,000 --
and Corporate Development and 1997 160,000 20,000 75,000 --
Chief Financial Officer
David R. Webb (4)................. 1999 121,734 -- -- --
Vice President of Research and 1998 183,750 20,000 20,000 --
Chief Scientific Officer 1997 175,000 20,000 45,000 --
- --------------------------
(1) Dr. Woler joined the Company in October 1998 and received a salary at the
rate of $300,000 per annum for 1998.
(2) All other compensation consists of relocation expenses paid by the Company
on behalf of Dr. Woler.
(3) Mr. Sussman ceased to be employed by the Company in September 1999.
(4) Dr. Webb ceased to be employed by the Company in July 1999.
Employment Contract and Termination of Employment and Change-in-Control
Arrangement
Dr. Charles Woler
Dr. Woler is employed as President and Chief Executive Officer under a
three year employment agreement with the Company, which is extendable to four
years at the Company's option, entered into effective as of October 1, 1998.
Pursuant to his agreement, Dr. Woler will receive an annual base salary of
$300,000 for his first year of employment, $330,000 for his second year of
employment and $360,000 for his third year of employment. If the agreement is
extended, Dr. Woler will receive an annual base salary of $400,000 for his
fourth year of employment. Dr. Woler also received a $24,000 housing allowance
for the first six months of his employment with the Company and is eligible to
receive bonuses from time to time at the discretion of the Compensation
Committee. If the Company terminates Dr. Woler's employment without "cause," as
defined in his employment agreement, if Dr. Woler terminates his employment with
the Company within 18 months after a "change of control," as defined in his
employment agreement, and prior to
28
October 1, 2001 and after Dr. Woler's position or responsibilities are changed,
or if Dr. Woler terminates his employment with the Company within three months
of a material change in his position or principal place of work the Company will
pay to Dr. Woler a lump sum severance payment equal to the base salary he would
have earned for the balance of his agreement, but not more than two years' base
salary, and all unvested stock options issued to him will immediately vest as of
the date of termination. In November 1999, the Company and Dr. Woler entered
into a term sheet to amend his employment agreement to provide that if the
Company fails to make at least a $20 million investment in biotechnology prior
to April 15, 2000 and if Dr. Woler resigns during the 90 day period beginning on
April 15, 2000, the Company will pay to Dr. Woler a lump sum severance payment
equal to the base salary he would have earned for the balance of his agreement.
If the Company makes such an investment, Dr. Woler will be entitled to receive
additional compensation equal to a two percent (2%) "profit interest" on any
profit or capital gain recognized on such investment during the remaining term
of his agreement. The term "profit interest" means a form of interest or
arrangement which would enable Dr. Woler to receive two percent (2%) of any
profit or capital gain realized by the Company from the sale or other
disposition of such investment prior to October 1, 2001, or two percent (2%) of
the unrealized appreciation in the investment as of October 1, 2001, after
reducing the earnings, gain or appreciation, whichever is applicable by ten
percent (10%) per annum, on the amount of the investment.
Option Grants
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1999 by the Company to the
Named Executive Officers:
Option Grants in Last Fiscal Year
Individual Grants
-----------------
Potential Realizable Value
Percent of At Assumed Annual Rates
Total of Stock Price
Securities Options Appreciation for Option
Underlying Granted to Exercise Terms ($)
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/share) Date 5% 10%
---- ----------- ----------- --------- ------ -- ---
Charles Woler........ 129,855 100 1.875 1/3/09 396,600 631,520
Philip N. Sussman ... -- -- -- -- -- --
David R. Webb........ -- -- -- -- -- --
Option Exercises and Holdings
29
The following table sets forth certain information concerning each
exercise of stock options, during the fiscal year ended December 31, 1999 by the
Named Executive Officers and unexercised stock options held by the Named
Executive Officers as of the end of such fiscal year.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1999(#) December 31, 1999($)(1)
Shares Aggregate ----------------------- -----------------------
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------
Charles Woler........ - - 165,279 259,721 - --
Philip N. Sussman ... - - -- -- - --
David R. Webb........ - - -- -- - --
- ------------
(1) Based on the difference between the closing price of the underlying shares
of Common Stock on December 31, 1999 as reported by the over-the-counter
bulletin board ($0.31) and the option exercise price.
Incentive Plans
1993 Stock Option Plan
The 1993 Stock Option Plan provides for the grant of options to
purchase shares of Common Stock to officers, employees and consultants of the
Company. The maximum number of shares of Common Stock that may be issued
pursuant to the 1993 Stock Option Plan is 666,667 (plus any shares that are the
subject of canceled or forfeited awards). Effective as of May 10, 1996, the 1993
Stock Option Plan was replaced by the 1996 Incentive Plan with respect to all
future awards to the Company's employees and consultants. See " -- 1996
Incentive Plan."
The 1993 Stock Option Plan is administered by the Compensation
Committee which is presently comprised of Russell D. Glass and Jack G.
Wasserman.
Under the 1993 Stock Option Plan, the Compensation Committee may
establish with respect to each option granted such vesting provisions as it
determines to be appropriate or advisable. In general, options granted under the
1993 Stock Option Plan have a ten-year term, and such options vest or have
vested over four-year periods at various rates. Unexercised options
automatically terminate upon the termination of the holder's relationship with
the Company. However, the Compensation Committee may accelerate a vesting
schedule and/or extend the time for exercise of all or any part of an option in
the event of the termination of the holder's relationship with the Company. In
addition, the 1993 Stock Option Plan includes a provision authorizing the
Compensation Committee to adjust the number of shares of Common Stock available
for grant, the number of shares of Common Stock subject to outstanding awards
thereunder and the per share
30
exercise price thereof in the event of any stock dividend, stock split,
recapitalization, merger or certain other events. The Compensation Committee may
terminate the 1993 Stock Option Plan at any time but any such termination will
not adversely affect options previously granted.
Options granted under the 1993 Stock Option Plan are nontransferable
except by will or the laws of descent and distribution.
During 1999, there were no stock options granted under the 1993 Stock
Option Plan.
As of March 15, 2000, an aggregate of 276,739 shares of Common Stock
were subject to outstanding stock options granted under the 1993 Stock Option
Plan. As of March 15, 2000, options to purchase 276,739 shares were exercisable
at prices ranging from $1.37 to $3.51 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under the 1993 Stock Option Plan pursuant to a registration
statement on Form S-8.
Stock Option Agreements
The Company has granted non-qualified stock options to directors,
officers, employees and consultants of the Company by means of stock option
agreements. During 1999, there were no stock options granted pursuant to stock
option agreements. As of March 15, 2000, an aggregate of 434,070 shares of
Common Stock were subject to outstanding stock options granted under stock
option agreements, and options to purchase 422,070 shares under such option
agreements were exercisable at prices ranging from $1.50 to $6.75 per share.
The Company has registered the shares issuable upon exercise of stock
options granted under such stock option agreements pursuant to a registration
statement on Form S-8.
1996 Incentive Plan
The Company's 1996 Incentive Plan (the "1996 Incentive Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in May 1996. The 1996 Incentive Plan replaced the 1993 Stock Option
Plan, effective as of May 10, 1996, with respect to all future awards by the
Company to its employees and consultants. However, while all future awards will
be made under the 1996 Incentive Plan, awards made under the 1993 Stock Option
Plan will continue to be administered in accordance with the 1993 Stock Option
Plan. See "Incentive Plans -- 1993 Stock Option Plan." In December 1996, the
Board of Directors amended the 1996 Incentive Plan to (i) increase the maximum
number of shares of Common Stock that may be the subject of awards under the
1996 Incentive Plan from 333,334 to 833,334 (plus any shares that are the
subject of canceled or forfeited awards) and (ii) provide for the grant of stock
options to directors of the Company . The stockholders of the Company approved
such amendments to the 1996 Incentive Plan in June 1997. In December 1997, the
Board of Directors amended the 1996 Incentive Plan to increase the maximum
number of shares of Common Stock that may be the subject of awards under the
1996 Incentive Plan from 833,334 to 1,833,334 (plus any shares that are the
subject of canceled
31
or forfeited awards). The stockholders of the Company approved this amendment to
the 1996 Incentive Plan in June 1998.
The 1996 Incentive Plan is administered by the Compensation Committee,
which has the power and authority under the 1996 Incentive Plan to determine
which of the Company's employees, consultants and directors will receive awards,
the time or times at which awards will be made, the nature and amount of the
awards, the exercise or purchase price, if any, of such awards, and such other
terms and conditions applicable to awards as it determines to be appropriate or
advisable.
Options granted under the 1996 Incentive Plan may be either
non-qualified stock options or options intended to qualify as incentive stock
options under Section 422 of the Code. The term of incentive stock options
granted under the 1996 Incentive Plan cannot extend beyond ten years from the
date of grant (or five years in the case of a holder of more than 10% of the
total combined voting power of all classes of stock of the Company on the date
of grant).
Shares of Common Stock may either be awarded or sold under the 1996
Incentive Plan and may be issued or sold with or without vesting and other
restrictions, as determined by the Compensation Committee.
Under the 1996 Incentive Plan, the Compensation Committee may establish
with respect to each option or share awarded or sold such vesting provisions as
it determines to be appropriate or advisable. Unvested options will
automatically terminate within a specified period of time following the
termination of the holder's relationship with the Company and in no event beyond
the expiration of the term. The Company may either repurchase unvested shares of
Common Stock at their original purchase price upon the termination of the
holder's relationship with the Company or cause the forfeiture of such shares,
as determined by the Compensation Committee. All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the Compensation Committee, become fully vested upon the occurrence of
certain corporate transactions if the holders thereof are terminated in
connection therewith.
The exercise price of options granted and the purchase price of shares
sold under the 1996 Incentive Plan are determined by the Compensation Committee,
but may not, in the case of incentive stock options, be less than the fair
market value of the Common Stock on the date of grant (or, in the case of
incentive stock options granted to a holder of more than 10% of the total
combined voting power of all classes of stock of the Company on the date of
grant, 110% of such fair market value), as determined by the Compensation
Committee.
The Compensation Committee may also grant, in combination with
non-qualified stock options and incentive stock options, stock appreciation
rights ("Tandem SARs"), or may grant Tandem SARs as an addition to outstanding
non-qualified stock options. A Tandem SAR permits the participant, in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares subject to such option directly from the Company in shares
of Common Stock. The amount payable by the Company upon the exercise of a Tandem
SAR is measured by the difference between the market value of such shares at the
time of exercise and the option exercise
32
price. Generally, Tandem SARs may be exercised at any time after the underlying
option vests. Upon the exercise of a Tandem SAR, the corresponding portion of
the related option must be surrendered and cannot thereafter be exercised.
Conversely, upon exercise of an option to which a Tandem SAR is attached, the
Tandem SAR may no longer be exercised to the extent that the corresponding
option has been exercised. Nontandem stock appreciation rights ("Nontandem
SARs") may also be awarded by the Compensation Committee. A Nontandem SAR
permits the participant to elect to receive from the Company that number of
shares of Common Stock having an aggregate market value equal to the excess of
the market value of the shares covered by the Nontandem SAR on the date of
exercise over the aggregate base price of such shares as determined by the
Compensation Committee. With respect to both Tandem and Nontandem SARs, the
Compensation Committee may determine to cause the Company to settle its
obligations arising out of the exercise of such rights in cash or a combination
of cash and shares, in lieu of issuing shares only.
Under the 1996 Incentive Plan, the Compensation Committee may also
award tax offset payments to assist employees in paying income taxes incurred as
a result of their participation in the 1996 Incentive Plan. The amount of the
tax offset payments will be determined by applying a percentage established from
time to time by the Compensation Committee to all or a portion of the taxable
income recognizable by the employee upon: (i) the exercise of a non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.
The number and class of shares available under the 1996 Incentive Plan
may be adjusted by the Compensation Committee to prevent dilution or enlargement
of rights in the event of various changes in the capitalization of the Company.
At the time of grant of any award, the Compensation Committee may provide that
the number and class of shares issuable in connection with such award be
adjusted in certain circumstances to prevent dilution or enlargement of rights.
The Board of Directors may suspend, amend, modify or terminate the 1996
Incentive Plan. However, the Company's stockholders must approve any amendment
that would (i) materially increase the aggregate number of shares issuable under
the 1996 Incentive Plan, (ii) materially increase the benefits accruing to
employees under the 1996 Incentive Plan or (iii) materially modify the
requirements for eligibility to participate in the 1996 Incentive Plan. Awards
made prior to the termination of the 1996 Incentive Plan shall continue in
accordance with their terms following such termination. No amendment, suspension
or termination of the 1996 Incentive Plan shall adversely affect the rights of
an employee or consultant in awards previously granted without such employee's
or consultant's consent.
As of March 15, 2000, an aggregate of 404,167 shares of Common Stock
were subject to outstanding stock options granted under the 1996 Incentive Plan.
As of March 15, 2000, stock options to purchase 178,198 shares were exercisable
at prices ranging from $2.75 to $6.63 per share.
The Company has registered the shares issuable upon exercise of stock
options granted or which may be granted under the 1996 Incentive Plan pursuant
to a registration statement on Form S-8.
33
401(k) Plan
In November, 1993, the Company adopted a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees. The
Company terminated the 401(k) Plan in October 1999. The Company did not make a
matching contribution for the year ended December 31, 1999 to participants in
the 401(k) Plan.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee is composed of Russell Glass and
Jack G. Wasserman. Neither Mr. Glass nor Mr. Wasserman is or was an officer or
employee of the Company.
Board Compensation Committee Report on Executive Compensation
Introduction
The Compensation Committee of the Board is responsible for determining
and administering the Company's compensation policies for the remuneration of
the Company's officers. The Compensation Committee annually evaluates individual
and corporate performance from both a short-term and long-term perspective.
Philosophy
The Company's executive compensation program seeks to encourage the
achievement of business objectives and superior corporate performance by the
Company's executives. The program enables the Company to reward and retain
highly qualified executives and to foster a performance- oriented environment
wherein management's long-term focus is on maximizing stockholder value through
equity-based incentives. The program calls for consideration of the nature of
each executive's work and responsibilities, unusual accomplishments or
achievements on the Company's behalf, years of service, the executive's total
compensation and the Company's financial condition generally.
Components of Executive Compensation
Historically, the Company's executive employees have received
cash-based and equity-based compensation.
Cash-Based Compensation. Base salary represents the primary cash
component of an executive employee's compensation, and is determined by
evaluating the responsibilities associated with an employee's position at the
Company and the employee's overall level of experience. In addition, the
Committee, in its discretion, may award bonuses. The Compensation Committee and
34
the Board believe that the Company's management and employees are best motivated
through stock option awards and cash incentives.
Equity-Based Compensation. Equity-based compensation principally has
been in the form of stock options. The Compensation Committee and the Board
believe that stock options represent an important component of a well-balanced
compensation program. Because stock option awards provide value only in the
event of share price appreciation, stock options enhance management's focus on
maximizing long-term stockholder value and thus provide a direct relationship
between an executive's compensation and the stockholders' interests. No specific
formula is used to determine stock option awards for an employee. Rather,
individual award levels are based upon the subjective evaluation of each
employee's overall past and expected future contributions to the success of the
Company.
Compensation of the Chief Executive Officer
The philosophy, factors and criteria of the Compensation Committee
generally applicable to the Company's officers are also applicable to the Chief
Executive Officer and are reflected in the employment agreement between the
Chief Executive Officer and the Company. The Chief Executive Officer's salary
for 1999 was based on his existing employment agreement with the Company. The
Chief Executive Officer did not receive a cash bonus for 1999 because of the
financial condition of the Company. The stock options to purchase an aggregate
of 129,855 shares of Common Stock granted to the Chief Executive Officer on
January 4, 1999 vest over time and were granted pursuant to his existing
employment agreement with the Company. In November 1999, the Company and the
Chief Executive Officer amended his employment agreement to provide the Chief
Executive Officer with a substantial incentive to identify and consummate a
significant investment in biotechnology.
Russell Glass
Jack G. Wasserman
Comparative Stock Performance Graph
The following graph provides a comparison of the cumulative total
return* for the Nasdaq Composite Index, the Nasdaq Biotechnology Index and the
Company since the Company's initial public offering on July 17, 1996.
Comparison of Cumulative Total Return
among Cadus Pharmaceutical Corporation, the Nasdaq Composite Index and the
Nasdaq Biotechnology Index
35
[Graph]
* $100 invested July 17, 1996 in the Company's Common Stock or in the
index indicated, including reinvestment of dividends.
Corresponding index values and the Company's Common Stock price values
are given below:
7/17/96 12/31/96 12/31/97 12/31/98 12/31/99
------- -------- -------- -------- --------
Cadus $100.00 125.000 91.071 27.686 4.429
Nasdaq Composite Index 100.00 118.808 144.513 201.784 374.482
Nasdaq Biotechnology Index 100.00 112.562 112.484 162.291 327.240
Cadus Closing Stock Price 7.00 8.750 6.375 1.938 0.31
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 15, 2000 with respect to
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Common Stock, (ii) each of the Company's directors, (iii) each of the
Named Executive Officers and (iv) all directors and officers as a group. All
36
information is based upon ownership filings made by such persons with the
Securities and Exchange Commission (the "Commission") or upon information
provided by such persons to the Company.
Number of Shares
Amount and Nature Percentage of Outstanding
Name and Address of Beneficial Owner (1) of Beneficial Ownership Owned(2)
- ---------------------------------------- ----------------------- -------------------------
Carl C. Icahn............................................ 3,370,216(3) 25.75%
767 Fifth Avenue
New York, New York 10153
Bristol-Myers Squibb..................................... 2,061,673 15.78%
P.O. Box 4000
Route 206 and Province Line Road
Princeton, New Jersey 08543-4000
Physica B.V. (4) ........................................ 1,599,942 12.24%
C.J. van Houtenlaan 36
1381 CP Weesp
The Netherlands
BVF Partners, L.P. 725,770 5.55%
227 West Monroe Street, Suite 4800
Chicago, Illinois 60606
International Biotechnology Trust plc . . . . . . 850,000(5) 6.50%
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithins Lane
London EC4N 8NR
United Kingdom
SmithKline Beecham Corporation 660,962(6) 5.06%
One Franklin Plaza
Philadelphia, PA 19102
Charles Woler 194,309(7) *
Philip N. Sussman........................................ ---- *
David R. Webb, Ph.D...................................... ---- *
James R. Broach.......................................... 110,667(8) *
Russell D. Glass......................................... * *
Peter S. Liebert, M.D.................................... 17,334(9) *
Siegfried G. Schaefer, Ph.D.............................. 1,599,942(10) 12.24%
Jack G. Wasserman........................................ 11,500(11) *
All executive officers and directors as a................ 5,303,968(12) 39.4%
group (9 persons)
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* Less than one percent
37
(1) Except as otherwise indicated above, the address of each stockholder
identified above is c/o the Company, 767 Fifth Avenue, New Yor