-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NbytaDy5DGUQEJeqPeQiQK4YmfYjU7jPeLiHhx5/Q2uuMjk03YE69MdWUlDDp8a6 7Ak5eYikrIg8+X0AWTxwXQ== 0000891618-98-004967.txt : 19981118 0000891618-98-004967.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891618-98-004967 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXYS PHARMECUETICALS INC CENTRAL INDEX KEY: 0000913056 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222969941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22788 FILM NUMBER: 98750855 BUSINESS ADDRESS: STREET 1: 180 KIMBALL WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 6508291000 MAIL ADDRESS: STREET 1: 385 OYSTER POINT BLVD STREET 2: SUITE 3 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FORMER COMPANY: FORMER CONFORMED NAME: ARRIS PHARMACEUTICAL CORP/DE/ DATE OF NAME CHANGE: 19931005 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 09/30/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-22788 AXYS PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2969941 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
180 KIMBALL WAY SOUTH SAN FRANCISCO, CALIFORNIA 94080 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (650) 829-1000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required 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 [ ] The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 30,147,403 as of October 31, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AXYS PHARMACEUTICALS, INC. INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements (unaudited)* Condensed Consolidated Balance Sheets -- September 30, 1998 and December 31,1997........................................ 3 Condensed Consolidated Statements of Operations -- Three and nine months ended September 30, 1998 and 1997............... 4 Condensed Consolidated Statements of Cash Flows -- Nine months ended September 30, 1998 and 1997.................... 5 Notes to Condensed Consolidated Financial Statements -- September 30, 1998............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk... 15 PART II: OTHER INFORMATION Item 1. Legal Proceedings........................................... 15 Item 2. Changes in Securities....................................... 15 Item 3. Defaults Upon Senior Securities............................. 15 Item 4. Submission of Matters to a Vote of Security Holders......... 15 Item 5. Other Information........................................... 15 Item 6. Exhibits and Reports on Form 8-K............................ 16 SIGNATURE................................................... 17
- --------------- * The financial information contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed with the Securities and Exchange Commission on March 31, 1998. 2 3 AXYS PHARMACEUTICALS, INC. PART 1: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 DECEMBER 31, (UNAUDITED) 1997(1)(2) ------------- ------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 35,446 $ 22,938 Short-term marketable investments......................... 40,249 30,470 Accounts receivable, trade................................ 3,206 1,301 Prepaid expenses and other current assets................. 4,597 2,802 -------- -------- Total current assets.............................. 83,498 57,511 Property and equipment, net................................. 21,799 14,454 Investment in joint venture................................. 2,591 -- Note receivable from officer................................ 956 775 Other assets................................................ 4,203 844 -------- -------- TOTAL ASSETS...................................... $113,047 $ 73,584 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,057 $ 1,622 Accrued compensation...................................... 2,439 1,793 Other accrued liabilities................................. 2,551 2,148 Current portion of deferred revenue....................... 7,468 5,410 Current portion of capital lease and debt obligations..... 8,760 3,390 -------- -------- Total current liabilities......................... 25,275 14,363 Deferred revenue, noncurrent................................ -- 726 Capital lease and debt obligations, net of current portion................................................... 20,910 14,605 Minority interest in Xyris Corporation...................... 500 -- Stockholders' equity: Preferred stock........................................... -- -- Common stock.............................................. 289,866 117,786 Note receivable from officer.............................. -- (125) Net unrealized gain on available-for-sale securities...... 145 -- Accumulated deficit....................................... (223,649) (73,771) -------- -------- Total stockholders' equity........................ 66,362 43,890 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $113,047 $ 73,584 ======== ========
See accompanying notes to condensed consolidated financial statements. - --------------- (1) The balance sheet at December 31, 1997 has been derived from the audited financial statement at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. (2) Represents the balances of Arris Pharmaceutical Corporation only. 3 4 AXYS PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -------------------- 1998 1997* 1998 1997* ------- ------- --------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.......................................... $14,274 $ 5,548 $ 31,805 $18,413 Operating expenses: Research and development........................ 16,101 7,527 45,475 22,841 General and administrative...................... 4,480 1,930 11,602 5,132 Acquired in-process research and development.... -- -- 124,888 -- ------- ------- --------- ------- Total operating expenses................ 20,581 9,457 181,965 27,973 ------- ------- --------- ------- Operating loss.................................... (6,307) (3,909) (150,160) (9,560) Interest income................................... 990 745 3,659 2,513 Interest expense.................................. (580) (325) (1,687) (707) Equity interest in loss of joint venture.......... (788) (1,690) ------- ------- --------- ------- Net loss.......................................... $(6,685) $(3,489) $(149,878) $(7,754) ======= ======= ========= ======= Basic and diluted net loss per share.............. $ (0.22) $ (0.23) $ (5.06) $ (0.52) ======= ======= ========= ======= Shares used in computing basic and diluted net loss per share.................................. 30,095 15,070 29,625 14,978 ======= ======= ========= =======
See accompanying notes to condensed consolidated financial statements. - --------------- * Reflects the results of Arris Pharmaceutical Corporation only. 4 5 AXYS PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1997* --------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(149,878) $ (7,754) Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: Depreciation and amortization............................. 7,210 3,212 Loss on disposal of property and equipment................ 44 -- Equity interest in loss of joint venture.................. 1,690 -- Forgiveness of note receivable from officer............... 125 -- Acquired in-process research and development.............. 124,888 -- Changes in assets and liabilities: Prepaid expenses, accounts receivable, trade and other current assets........................................ (1,711) 602 Other assets........................................... (3,138) (398) Accounts payable, accrued liabilities and deferred revenue............................................... (9,091) (6,269) --------- -------- Net cash and cash equivalents used in operating activities................................................ (29,861) (10,607) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Available-for-sale securities: Purchases................................................. (33,969) (4,999) Maturities................................................ 66,247 749 Held-to-maturity securities: Purchases................................................. -- (9,683) Maturities................................................ -- 37,906 Purchase of restricted cash................................. -- (4,000) Release on restrictions on cash............................. 11,250 Sequana acquisition, net of cash............................ 13,270 -- Investment in joint venture................................. (2,000) -- Proceeds from sale of property and equipment................ 119 -- Purchase of property and equipment.......................... (5,925) (5,394) --------- -------- Net cash and cash equivalents provided by investing activities................................................ 37,742 25,829 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock.................. 2,350 1,506 Proceeds from note receivable............................... 252 -- Proceeds from notes payable and lease financing............. 6,174 16,150 Proceeds from minority interest............................. 500 -- Principal payments on notes payable and capital leases...... (4,649) (12,062) --------- -------- Net cash and cash equivalents provided by financing activities................................................ 4,627 5,594 --------- -------- Net increase in cash and cash equivalents................... 12,508 20,816 Cash and cash equivalents, beginning of period.............. 22,938 10,822 --------- -------- Cash and cash equivalents, end of period.................... $ 35,446 $ 31,638 ========= ========
See accompanying notes to condensed consolidated financial statements. - --------------- * Reflects the results of Arris Pharmaceutical Corporation only. 5 6 AXYS PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the "Company"), formerly known as Arris Pharmaceutical Corporation ("Arris"), is a leader in the integration of life science technologies with a focus on transforming gene discoveries into drugs. Axys has research collaborations with world-class pharmaceutical companies, covering a broad range of therapeutic areas, including respiratory, cardiovascular and infectious diseases, as well as oncology and central nervous system disorders. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Arris Protease, Inc., Arris Pharmaceuticals Canada, Inc., Sequana Therapeutics, Inc. ("Sequana") (See "Acquisition of Sequana", Note 2) and its wholly owned subsidiary NemaPharm, Inc. and includes the accounts of Xyris Corporation, the Company's majority owned joint venture (See "Formation of Xyris Corporation", Note 4). All significant intercompany accounts and transactions have been eliminated. RECLASSIFICATIONS Certain 1997 amounts have been reclassified to conform to the September 30, 1998 presentations. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements included herein have been prepared by the Company according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results to be expected for subsequent quarters or the full fiscal year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission. 2. ACQUISITION OF SEQUANA On January 8, 1998, the Company acquired all of the outstanding capital stock of Sequana, a genomics company that uses industrial-scale gene discovery technology and functional genomics to discover and characterize genes that cause certain common diseases. The Company issued 14,618,013 shares of Axys Common Stock in exchange for all the outstanding common stock of Sequana, on the basis of 1.35 shares of Arris' common stock for one share of Sequana common stock. The purchase price of $174.1 million consisted of (i) the issuance of 14,618,013 shares of Company common stock valued at $168.1 million, in exchange for all outstanding Sequana capital stock, (ii) the issuance of Company warrants valued at $1.6 million in exchange for all of the outstanding Sequana warrants, (iii) severance costs totaling $1.2 million, and (iv) transaction costs totaling $3.2 million. 6 7 AXYS PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (UNAUDITED) The allocation of the purchase price was determined as follows: Net tangible assets acquired........................... $ 45,882,000 Intangible assets acquired: Workforce in place................................... 3,300,000 In-process technology.................................. 124,888,000 ------------ Total........................................ $174,070,000 ============
The acquisition has been accounted for as a purchase and accordingly, the original purchase price was allocated to acquired assets and assumed liabilities based upon their fair value at the date of acquisition and to in-process research and development which has been charged as an expense in the Axys consolidated financial statements for the nine months ended September 30, 1998. Intangibles arising from the acquisition are being amortized on a straight line basis over 36 months. The operating results of Sequana from January 1, 1998 to September 30, 1998 have been included in the Company's consolidated results of operations. The operating results of Sequana from January 1, 1998 to January 8, 1998 (the date of acquisition) are considered immaterial. As part of the Company's acquisition of Sequana, the Company also obtained 50% ownership of Genos Biosciences, Inc. ("Genos") (see "Investment in Joint Venture", Note 3). The following unaudited pro forma financial summary is presented as if the operations of the Company and Sequana were combined as of December 31, 1996 (i.e. for all of the year ended December 31, 1997). The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at that date, or of the future operations of the combined entities. Nonrecurring charges, such as the acquired in-process research and development charge of $124.9 million are not reflected in the following pro forma financial summary. PRO FORMA FINANCIAL SUMMARY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 ------------------ ------------------ Contract Revenues......................... $ 9,948 $ 31,379 Loss from operations...................... (7,974) (22,755) Basic and diluted net loss per share...... $ (0.26) $ (0.75)
3. INVESTMENT IN JOINT VENTURE In January 1997, Sequana and Memorial Sloan-Kettering Cancer Center ("MSKCC") formed Genos, a joint venture focused on the research and identification of genes and related genetic information of value in the prognosis, diagnosis and positive treatment of certain common cancers. Sequana owns 50% of Genos and was committed to make a capital contributions of approximately $5 million to fund their portion of the initial operations. As of September 30, 1998, the Company had invested $5.2 million in Genos, which investment is accounted for under the equity method. Under terms of the agreement, Sequana licensed certain of its technology to Genos and has contracted with Genos to conduct research and provide certain other services to the joint venture. Payments to date for such research and services have not been material. In connection with the formation of Genos, Sequana sold a warrant to MSKCC to purchase 350,000 shares of the Sequana's common stock. That warrant was assumed by the Company as part of the 7 8 AXYS PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (UNAUDITED) acquisition of Sequana on January 8, 1998, and was converted to a warrant to purchase an aggregate of 472,500 shares of Axys common stock at a price of $12.87 per share. 4. FORMATION OF XYRIS CORPORATION In June 1998, in connection with the formation of Xyris Corporation, a California corporation and majority-owned subsidiary of the Company ("Xyris"), the Company and Bay City Capital LLC, a San Francisco based private merchant bank ("BCC"), each received Series A Preferred Stock of Xyris. Xyris was established in May 1998 to leverage Axys' existing pharmaceutical technology in the agricultural market. In exchange for 2,050,000 shares of Xyris' Series A Preferred Stock, representing 82% of the total outstanding shares of Xyris capital stock, the Company granted to Xyris the right, for a limited period to negotiate an exclusive license in the field of agriculture to all Axys technology, including its genomics, combinatorial chemistry and small molecule drug discovery technology. BCC purchased Xyris Series A Preferred Stock for cash. In connection with BCC's purchase, the Company issued an option (the "Put Option") to BCC, granting BCC the right to require the Company to purchase from BCC all of the 150,000 shares of Series A Preferred Stock of Xyris (the "Xyris Stock") held by BCC. If the Put Option is exercised, the Company would purchase the Xyris Stock with shares of the Company's Common Common Stock, at its then market price, with an aggregate market value on the date the Put Option is exercised equal to $499,500, rounded down to the nearest whole number of shares. The Put Option will terminate upon the earlier of January 5, 1999 or the occurrence of certain other events, including the execution of an exclusive license in the field of agriculture to all Axys technology. 5. NOTES PAYABLE The Company has two lines of credit, one with Sumitomo Bank, Limited ("Sumitomo") and one with Sumitomo and Silicon Valley Bank jointly, to provide an aggregate of up to $27 million in debt financing. The loans are subject to certain financial covenants over the course of the agreements. Interest is computed at various rates based on a Eurodollar rate and range from 7.3% to 7.9% at September 30, 1998. Interest and principal payments are due monthly over a term of up to 48 months. The Company was in compliance with all covenants at September 30, 1998. The balance outstanding on these loans at September 30, 1998 was $25.5 million. 6. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board's Statement No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; accordingly, the adoption of this statement had no impact on the Company's net income or stockholders' equity. There are no material differences between comprehensive income and net income for the three and nine month periods ended September 30, 1998. Comprehensive income is the same as net income as there are no adjustments reported in stockholders' equity which are to be included in the computation for the year ended December 31, 1997. 7. RECENT ACCOUNTING PRONOUNCEMENTS As of January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131). Statement 131 superseded Statement No. 14, Financial Reporting for Segments of an Business Enterprise. Statement 131 established standards for the way that public business enterprises report information about operation segments in annual financial statements and requires that those enterprises report selected 8 9 AXYS PHARMACEUTICALS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1998 (UNAUDITED) information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect the results of operations or financial position of the Company, but may affect the disclosure of the segment information that will be provided in the annual report disclosed on Form 10-K at December 31, 1998. 8. SUBSEQUENT EVENT On October 8, 1998, the Board of Directors adopted a Preferred Share Purchase Rights Plan ("the "Plan") designed to enable all stockholders to realize the full value of their investment and to provide for fair and equal treatment for all stockholders in the event an unsolicited attempt is made to acquire the Company. In connection with the Plan, the Board declared a dividend of one preferred share purchase right (a "Right") for each share of common stock of the Company outstanding on October 28, 1998 and further directed the issuance of one such right with respect to each share of the Company's common stock that is issued after the Record Date. If a person, entity or group of affiliated or associated persons acquires beneficial ownership of 15% or more of the Company's common stock, or announces a tender offer for 15% or more of the Company's common stock, the rights will be distributed. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $35.00 per one one-hundredth of a Preferred Share subject to adjustment. The Rights are redeemable prior to any person's acquisition of more than 15% of the Company's common stock and will expire on October 7, 2008. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company expressly disclaims any obligation to update this information or publicly release any revisions or reflect events or circumstances after the date of this report. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below under "Certain Business Risks" as well as elsewhere herein, together with those discussed in "Item 1. Business" and "Additional Risk Factors" in the Company's Report on Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission on March 31, 1998. OVERVIEW Since its inception in April 1989, the Company has devoted substantially all of its resources to its research and development programs. The Company's revenue has been generated since inception through its corporate collaborations and licensing agreements with Pharmacia & Upjohn, Inc. and its predecessors ("PNU"), Amgen, Inc. ("Amgen"), Bayer AG ("Bayer"), SmithKline Beecham Corporation ("SB"), Merck & Co. ("Merck"), Abbott Laboratories ("Abbott"), Bristol-Myers Squibb ("BMS") and Parke-Davis ("PD"). In addition, through its acquisition of Sequana Therapeutics, Inc. ("Sequana") on January 8, 1998, the Company added the additional corporate collaborations with Boehringer Ingelheim International GmbH ("BI"), Corange International Ltd. ("Corange"), Glaxo-Wellcome ("Glaxo") and PD. These agreements have taken a variety of forms including some of the following elements: payments to the Company of an up-front commitment and license fees, purchase of the Company's common stock, research funding payments, payments for compounds, reimbursement of patient collection costs, milestone payments when milestones are achieved, and royalties upon the sale of any resulting products. Where appropriate, the up-front commitment fees have been recorded as deferred revenue until earned. The Company has not been profitable since inception and expects to incur substantial losses for at least the next several years, primarily due to the cost of its research and development programs, including preclinical studies and human clinical trials. The Company expects that losses will fluctuate from quarter to quarter, that such fluctuations may be substantial, and that results from prior quarters may not be indicative of future operating results. As of September 30, 1998, the Company's accumulated deficit was approximately $224 million. Included in the Company's accumulated deficit at September 30, 1998 was approximately $147 million of acquired in-process research and development from the acquisition of Khepri Pharmaceuticals, Inc. in 1995 and the acquisition of Sequana in January 1998. RESULTS OF OPERATIONS The following discussion on results of operations is based on the combined pro forma operating results for the three- and nine-months ended September 30, 1997 (see table below) of the Company and Sequana as if the acquisition had been effective as of December 31, 1996 and the Company's consolidated operating results for the three- and nine-month periods ended September 30, 1998. PRO FORMA OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 ------------------ ------------------ (AMOUNTS IN THOUSANDS) Revenues.................................. $ 9,948 $ 31,379 Operating expenses: Research and development................ 14,647 45,133 General and administrative.............. 3,275 9,001 ------- -------- Total operating expenses........ 17,922 54,134 ------- -------- Operating Loss............................ $(7,974) $(22,755) ======= ========
10 11 REVENUES The Company's revenues on a pro forma basis increased to $14.3 million and $31.8 million for the three and nine-month periods ended September 30, 1998, respectively, compared to $9.9 million and $31.4 million, respectively, for the comparable periods in 1997. All of the Company's 1998 revenues (through September 30) are attributable to existing or concluded collaborations or licensing agreements with PNU, Merck, BMS, BI, Corange, PD, Glaxo and RBS. The net change in 1998 was primarily due to: (i) the inclusion of the full effects of the research funding for the collaboration with PD to develop novel therapeutic products for the treatment of schizophrenia and bipolar disorder; (ii) the inclusion of the full effects of the research funding for the collaboration with BMS to develop small molecule inhibitors of proteases involved in hepatitis C virus infection; (iii) the recognition during the three month period ended September 30, 1998, of two separate research milestones in its genomics collaboration from PD, as well as a separate research milestone in its development of antivirals against hepatitis C virus in the collaboration with BMS and (iv) the shipment of small molecule synthetic organic compounds under two of the Company's combinatorial chemistry licensing agreements with PNU and PD. Under the existing licensing agreement with PNU, the Company has shipped approximately one-half of the compounds called for in the agreement. The Company started shipping to PD under its licensing agreement in June 1998. These revenue increases were offset by (i) the ending of the research funded portion of a tryptase inhibitor collaboration with Bayer during the fourth quarter of 1997 and (ii) a planned reduction in support with Merck to develop small molecular inhibitors of proteases involved in osteoporsis. RESEARCH AND DEVELOPMENT Research and development expenses increased to $16.1 million and $45.5 million for the three and nine-month periods ended September 30, 1998, respectively, from $14.6 and $45.1 million in the comparable periods in 1997. The expense increase for the three months ended September 30, 1998 was primarily due to increased chemical consumption used in the production of small molecule synthetic organic compounds, increased costs to support the research efforts in new and existing programs and higher expenditures associated with clinical trials of APC-366 which were ended by the Company in September 1998. The slight increase for the nine months ended September 30, 1998 reflects lower than comparable period costs in these same areas. Research and development expenses as a percentage of total expenses, without the consideration of acquired in-process research and development expenses of $124.9 million, has decreased to approximately 78% and 80% of total expenses for the three- and nine-months ended September 30, 1998, respectively compared to 82% and 83% for the comparable periods in 1997. The percentage decrease is due to an increase in general and administrative expenses as discussed below. The Company expects that its research and development costs will increase for the remainder of 1998 in absolute dollars when compared to pro forma amounts in 1997, as a result of further expansion of its proprietary research programs and the conduct of preclinical studies and clinical trials. GENERAL AND ADMINISTRATIVE The Company's general and administrative expenses increased to $4.5 million and $11.6 million, respectively, for the three- and nine-month periods ended September 30, 1998, from $3.3 and $9.0 million in the comparable periods in 1997. The increase in expenses was primarily due to transition costs resulting from the acquisition of Sequana (see "Acquired in-process research and development" below), and administrative costs of closing down the Cambridge, Massachusetts operation of Sequana's NemaPharm, Inc. subsidiary and relocating the NemaPharm personnel and activities to South San Francisco, California, as well as an increase in headcount and facilities required to support additional research programs. However, some of the recurring administrative costs common to both companies were eliminated by combining the two companies. General and administrative expenses as a percentage of total expenses, without the consideration of acquired in-process research and development expenses of $124.9 million, represent approximately 22% and 20% for the three-and nine-month period ended September 30, 1998, compared to 18% and 17% for the comparable periods in 1997. The Company expects its general and administrative costs for the remainder of 1998 will reflect an 11 12 increase in absolute dollars when compared to pro forma amounts in 1997, reflecting additional corporate support resulting from the expansion of the Company's programs. EQUITY INTEREST IN LOSS OF JOINT VENTURE The equity interest in loss of joint venture at September 30, 1998 represents the Company's portion of the losses for the three- and nine-months ended September 30, 1998 of Genos Biosciences, Inc. ("Genos"). The Company holds a 50% interest in Genos. Genos expects to incur increased operating losses in future periods in connection with its research and development activities. Such losses will result in corresponding increases in the Company's equity in loss of joint venture. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT On January 8, 1998 the Company acquired Sequana, a genomics company based in La Jolla, California. The acquisition was a tax-free reorganization accounted for as a purchase. The Company issued approximately 14,620,000 shares of Common Stock in exchange for all the outstanding common stock of Sequana, on the basis of 1.35 shares of Common Stock for one share of Sequana common stock. The costs associated with the acquisition were approximately $5 million. The total purchase price of approximately $174 million was allocated to the assets acquired and liabilities assumed based upon the fair value on the date of the acquisition. Approximately $125 million of the purchase price was allocated to in-process research and development and charged to expense at March 31, 1998. INTEREST INCOME AND EXPENSE Interest income increased to $990,000 and $3.7 million, respectively, for the three- and nine-months ended September 30, 1998, compared to $745,000 and $2.5 million, respectively, for the comparable periods in 1997. The increases were primarily due to the increased average cash balances, resulting from the combination of the Company's cash and Sequana's cash. In addition, the receipt of proceeds from research funding, collection of revenues from the shipment of compounds under the collaborations with PNU and PD, and reimbursement of patient collection fees by the Company's collaborators have contributed to the Company's cash levels. Interest expense increased to $580,000 and $1.7 million, respectively for the three- and nine-month periods ended September 30, 1998, from $325,000 and $707,000, respectively, for the comparable periods in 1997. The increases are primarily due to the result of higher debt balances, primarily from the combination of the Company's and Sequana's debt financing and an additional draw down of $4.2 and $6.2 million on the line of credit with Sumitomo Bank during the three- and nine-months ended September 30, 1998, respectively. The Company has primarily used draw downs from its lines of credit to purchase equipment and make leasehold improvements. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations since inception primarily through private and public offerings of its capital stock and through corporate collaborations. As of September 30, 1998, the Company had realized approximately $96 million in net proceeds from offerings of its capital stock. In addition, the Company had realized $102.6 million since inception from its corporate collaborations. The Company's principal sources of liquidity are its cash and investments, which totaled $75.7 million as of September 30, 1998. The Company has two lines of credit totaling up to $27 million in debt financing. As of September 30, 1998 the Company had borrowed a total of $25.9 million under the agreements. The Company has no additional borrowing capacity under these agreements. The Company is presently engaged in certain discussions to refinance these borrowings. Net cash used in operating activities during the nine-month period ended September 30, 1998 was $29.9 million compared to $10.6 million in the same period in 1997. The increase was primarily due to the increase in net loss for the nine months ended September 30, 1998 and the timing of cash received under the Company's collaboration agreements. Cash used in operating activities is expected to fluctuate from quarter to 12 13 quarter depending, in part, upon the timing and amounts, if any, of cash received from existing and any new collaboration agreements. The Company also spent approximately $5.9 million for the purchase of property, plant and equipment during the nine months ended September 30, 1998. Additional equipment is expected to be acquired or leased in connection with the Company's continuing research and development activities. The Company's revenues presently are attributable to collaborations with PNU, Merck, BMS, BI, Corange, PD, Glaxo, and RBS. The research support for the Factor Xa program with PNU ended in July 1998 as the Company has been negotiating the early termination of this collaboration and an effort is being made to repartner this program. The osteoporosis program with Merck extends through the fourth quarter of 1998. The research support from Corange for the osteoporosis collaboration will continue through mid-February 1999, at which time it will end. The Combinatorial Chemistry collaborations and licensing agreements with PNU and PD, and all other collaborations extend beyond the next 12 months. If the Company is unable to renew or replace any of these collaborations, such events may have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects that its existing capital resources, including research and development revenues from existing collaborations, will enable the Company to maintain current and planned operations for approximately three years. The Company will need to raise substantial additional capital to fund its operations beyond the end of such period. The Company plans to seek such additional funding through use of various financing mechanisms that may then be available to the Company. There can be no assurance that the Company will be able to enter into new collaborations on acceptable terms or that additional financing will be available to the Company on acceptable terms, or at all. Any additional funds raised by issuing equity securities may result in further dilution to stockholders. If adequate funds are not available, the Company may be required to delay, to reduce the scope of or to eliminate one or more of its research or development programs or to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself. CERTAIN BUSINESS RISKS The Company is at an early stage of development. The Company's technologies are, in many cases, new and all are still under development. All of the Company's proposed products are in research or development and will require significant additional research and development efforts prior to any commercial use, including extensive preclinical and clinical testing, as well as lengthy regulatory approval. There can be no assurance that the Company's research and development efforts will be successful, that any of its proposed products will prove to be safe and efficacious in clinical trials or that any commercially successful products will ultimately be developed by the Company. In addition, many of the Company's currently proposed products are subject to development and licensing arrangements with the Company's collaborators. Therefore, the Company is dependent on the research and development efforts of these collaborators. Moreover, the Company is entitled only to a portion of the revenues, if any, realized from the commercial sale of any of the proposed products covered by the collaborations. The Company has experienced significant operating losses since its inception and expects to incur significant operating losses over at least the next several years. The development of the Company's technology and proposed products will require a commitment of substantial funds to conduct these costly and time consuming activities. All of the Company's revenues to date have been received pursuant to the Company's collaborations and licensing agreements. Should the Company or its collaborators fail to perform in accordance with the terms of their agreements, any consequent loss of revenue under the agreements could have a material adverse effect on the Company's business, financial condition and results of operations. The proposed products under development by the Company have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. The Company has no sales, marketing or distribution capability. If any of its products subject to collaborative agreements are successfully developed, the Company must rely on its collaborators to market such products. 13 14 If the Company develops any products which are not subject to collaborative agreements, it must either rely on other pharmaceutical companies to market such products or must develop a marketing and sales force with technical expertise and supporting distribution capability in order to market such products directly. The foregoing risks reflect the Company's early stage of development and the nature of the Company's industry and products. Also inherent in the Company's stage of development is a range of additional risks, including competition, uncertainties regarding protection of patents and proprietary rights, government regulation and uncertainties related to clinical trials and regarding health care reform. These risks and uncertainties are discussed further in "Item 1. -- Business -- Additional Risk Factors" on the Company's Report on Form 10-K for the year ended December 31, 1997, filed by the Company with the Securities and Exchange Commission on March 31, 1998. IMPACT OF THE YEAR 2000 The Year 2000 problem or the "Y2K problem" is a problem that may arise at the turn of the century in computers or other equipment that utilize microprocessor technology. Some computer software programs and computer equipment, as well as other equipment using embedded microprocessors, use two digit date fields rather than four date digit fields (that is, "98" in the computer code refers to the year "1998"). As a result, time-related functions in such software and equipment may misinterpret dates after January 1, 2000 to refer to the twentieth century rather than the twenty-first century (that is, "02" could be interpreted as "1902" rather than "2002"). This could potentially cause system or equipment shutdowns, failures or miscalculations resulting in inaccuracies in computer output. The Y2K problem is a global problem and has the potential to impact virtually every company, including the Company, to one degree or another. The Company is addressing the Y2K problem by reviewing its core information technology systems, including its servers, databases, desktop computers, significant applications (whether licensed from third parties or developed internally) and significant microprocessor-controlled equipment for Y2K readiness. Because the Y2K problem potentially affects many other companies, the Company has also initiated a review of the Y2K readiness of its vendors, service providers and other companies (including its collaboration partners and customers) with whom the Company has significant business relationships ("Important Third Parties"). As the Company completes these internal and external reviews, the Company intends to prioritize the responses it needs to take to address the Y2K problem, to address the highest priorities first and to develop by the end of the third quarter of 1999 such contingency plans as management believes to be prudent. With respect to the Company's core information technology systems and desktop computers, the Company expects to have completed its review and to have made any necessary modifications or replacements by the end of the second quarter of 1999. With respect to third party software applications, the Company expects to complete its review and to replace or upgrade such applications by the end of the third quarter of 1999. In this regard, the Company is currently in the final stages of replacing its enterprise management information system with a new system that will be Y2K ready. With respect to the few software applications the Company has developed and licensed to third parties, the Company has completed its review of certain of these applications and believes them to be Y2K ready. The remaining applications are being tested and if determined not to be Y2K ready, the Company expects to provide upgrades to such applications to make them Y2K ready by the third quarter of 1999. With respect to other internally-developed software applications, the Company has compiled a list of such applications and has initiated the design of appropriate tests. The Company expects to complete its review and replacement or upgrade of these applications by the end of the third quarter of 1999. Finally, with respect to other significant microprocessor-controlled equipment, the Company has identified such equipment and is in the process of testing it. The Company expects to complete its test of such equipment and to have made any necessary upgrades or replacements by the end of the third quarter of 1999. The review of the Y2K readiness of Important Third Parties has just begun and is expected to be substantially completed by the end of the second quarter of 1999. Following completion, the Company expects to assess the nature and extent of the risk from non-readiness by such third parties and to either cease doing business with such third parties, locate back-up businesses who are Y2K ready, obtain reasonable assurances of Y2K readiness, or implement other appropriate contingency plans, by the end of 1999. 14 15 The total costs associated with the Company's Y2K readiness efforts is not known. Expenditures to date with respect to the Y2K problem have not been material and have largely consisted of the time of certain Company personnel. Until the reviews described above are completed, the Company is unable to estimate the extent of the expenditures that will be necessary to address the Y2K problem. However, based on the partial reviews completed by the Company as of September 30, 1998 , the Company does not expect to incur material expenditures in 1998 or 1999 with respect to the Y2K problem. The Company believes that its Y2K readiness review and the actions it intends to take prior to the end of 1999 should result in the absence of significant Y2K-related problems for the Company's computer systems, applications and microprocessor-controlled equipment. However, there can be no assurances that the Company will be able to complete its review of various systems within the time frames indicated, that the Company, will be completely Y2K ready by the end of 1999 or that the Company will not encounter Y2K-related problems that could have a material adverse affect on the Company's results of operations and financial condition. In addition, the Company cannot guarantee the Y2K readiness of Important Third Parties and certain business disruptions could occur, such as a financial institution's inability to process checks drawn on bank accounts, to accept deposits or process wire transfers, an Important Third Party's business failure, interruption in deliveries of equipment, supplies and services from Important Third Parties, loss of voice and/or data connections, loss of power to electrical facilities and other business interruptions which cannot be predicted. Accordingly, there can be no assurance that Y2K-related problems of Important Third Parties will not have a material adverse affect on the Company's results of operations and financial condition. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 15 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.3 Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 99.3 filed on Form 8-K dated October 8, 1998. 4.1 Rights Agreement dated as of October 8, 1998, among Axys Pharmaceuticals, Inc. and ChaseMellon Shareholders Services, LLC, incorporated by reference to Exhibit 99.2 filed on Form 8-K dated October 8, 1998. 4.2 Form of Rights Certificate, incorporated by reference to Exhibit 99.4 filed on Form 8-K dated October 8, 1998. 10.90* Amendment dated September 21, 1998 to the Collaboration Agreement between Warner-Lambert Company and Sequana Therapeutics, Inc. dated October 31, 1997. 10.91 Amendment to the 1997 Non-Officer Equity Incentive Plan. 27 Financial Data Schedule
(b)REPORTS ON FORM 8-K On October 8, 1998, the Company filed with the Commission a Current Report on Form 8-K relating the adoption of a Rights Plan. - --------------- * Confidential treatment has been requested with respect to certain portions of this exhibit. 16 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AXYS PHARMACEUTICALS, INC. Date: November 16, 1998 By: /s/ FREDERICK J. RUEGSEGGER ------------------------------------ Frederick J. Ruegsegger Senior Vice President Finance and Corporate Development and Chief Financial Officer (Principal Financial and Accounting Officer) 17 EX-10.90 2 AMENDMENT TO THE COLLABORATION AGREEMENT 1 EXHIBIT 10.90 CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. Warner-Lambert Company September 21, 1998 2800 Plymouth Road Ann Arbor, Michigan 48105 Attn: Vice President & Chairman Parke-Davis Pharmaceutical Research COLLABORATION AGREEMENT BETWEEN WARNER-LAMBERT COMPANY AND SEQUANA THERAPEUTICS, INC. (DBA AXYS PHARMACEUTICALS, INC.) DATED OCTOBER 31, 1997 ("AGREEMENT") Dear Sir/Madam: We refer to the Agreement and confirm that it is the mutual agreement of the parties to amend the Agreement to delete Exhibit A in its entirety and replace it with the new Exhibit A attached hereto. In addition, the parties have further agreed that all references in the Agreement to BioAgent DB and SequaSearch shall be deemed to be references to the Target Validation System (TVS) as described in new Exhibit A. We are enclosing duplicate copies of this letter. If the above is acceptable to you, please have the copies signed on behalf of the Warner-Lambert Company by a duly authorized signatory and return one fully signed copy to us for our records. Sincerely, /s/ DANIEL H. PETREE - ----------------------------------- Daniel H. Petree President & Chief Operating Officer Accepted this 30 day of September, 1998 Warner-Lambert Company /s/ RONALD M. CRESSWELL - ----------------------------------- Per: Prof. Ronald M. Cresswell, Ph.D., Hon.D.Sc., FRSE Title: Vice President and Chairman Parke-Davis Pharmaceutical Research Warner Lambert Company cc: Warner-Lambert Company Attn: Vice President, General Counsel 2 EXHIBIT A SEQUANA TECHNOLOGY This exhibit provides details regarding the Sequana Technology that is defined in Section 1.43 of the Agreement. Elements of Sequana Technology are: Target Validation Support System PD LIMS High-throughput DBA sequencing protocols High-throughput genotyping protocols Micro-Array technology protocols Each of these elements is described in more detail below. In addition, for each element, the following information is provided as appropriate: A description of "establishment" of the technology at Warner under Section 5.2 of the Agreement that is required to be complete before payment of the Technology Access Fee. Additional technology that will be established at Warner under this Agreement but which is not required to be complete as a condition for payment of the Technology Access Fee. A discussion of the level of support that will be provided to Warner as a part of this Agreement. TARGET VALIDATION SUPPORT SYSTEM (TVS) TVS is designed to provide a convenient system to integrate and curate the key public and proprietary information that supports the association of a candidate gene with a disease state or validates a gene product as a drug target. One goal of TVS is to automate the integration of public data with proprietary data. Another goal is to permit the integration of TVS with various systems and research processes (including high-throughput processes) that identify and populate the system with potential targets. TVS consists of a gemstone database with a java user interface. The interface is a java applet which is launched from Netscape or Internet Explorer. TVS will run on Windows NT, Windows 95 and SUN Unix systems. 1 [*] -- Confidential treatment requested. 3 TVS for the Field will be housed at Sequana and a mechanism will be put in place to provide Warner's Ann Arbor, MI research facility access to the data. Sequana will transfer the TVS system in September 1998 to the Warner Alameda, CA research facility for utilization within Warner in other disease areas. Researchers at other Warner facilities will have access to the version of TVS installed at Alameda via the Warner intranet. [*] Analysis subsystem of TVS [*] Required Hardware [*] The original SequaSearch modules that were part of BioAgentDB are detailed in the attached Appendix, [*] TVS will be "established" at Warner for the purposes of Section 5.2 of the Agreement upon achievement of installation of TVS 1.0 as described above [*]. To verify installation, Sequana will perform a series of basic functionality tests directed at the core functionality in collaboration with Warner Lambert staff. This release will satisfy the payment of the access fee. Sequana will transfer to Warner TVS 2.0 when completed, [*] This release is not tied to the license access fee. TVS will be supported in the following manner at Warner: (a) At least one Warner employee will be designated the "Super User" and will be trained at Sequana on the full functionality of TVS. (b) At least one Warner employee will be designated "Systems Support" and will be trained at Sequana on the systems support issues related to TVS (i.e. UNIX, Mac, Windows, web server system administration). (c) The Super User will handle all user and data support issues and questions that arise at Warner. (d) The System Support personnel will handle all system support issues and questions that arise at Warner. (e) Any questions or problems that the Super User or System Support cannot resolve will be forwarded to the Sequana Help Desk which will be open Monday - Friday, 7 AM to 5 PM PST and staffed by qualified personnel. (f) Sequana guarantees a response to (but not necessarily complete resolution of any Warner inquiry within 24 hours, and Sequana and Warner will cooperate to promptly resolve any such question or problem. 2 [*] -- Confidential treatment requested. 4 (g) Customization of TVS will be done by Warner, or by Sequana under a separate contract arrangement. However, any changes to the source code that are made by Warner that result in incompatibilities with future upgrades provided by Sequana will be the responsibility of Warner to resolve. PD LIMS The PD LIMS system is the non-microsatellite genotyping components of the Sequana LIMS system that are necessary to perform basic phenotype/genotype correlations. [*] PD LIMS will be "established" at Warner for the purposes of Section 5.2 of the Agreement upon achievement of the following: Installation of the database schema and lookup tables on the Warner Sybase server at Warner facility Installation of the 4D server at Warner facility Installation of the Web Server at Warner facility Installation of 4D client software on DNA intake clients and up to four (4) additional clients at Warner facility. Additional installation efforts at Warner related to PD LIMS that are required under this agreement but which will not be necessary before the payment of the License Access Fee described in Section 5.2 include: Super User and System Support on-site training and support during initial installation. [*] PD LIMS will be supported in the following manner at Warner: (a) At least one Warner employee will be designated the "Super User" and will be trained at Sequana on the full functionality of PD LIMS. (b) At least one Warner employee will be designated "Systems Support" and will be trained at Sequana on the systems support issues related to PD LIMS (i.e. UNIX, Sybase, Mac administration). (c) The Super User will handle all user and data support issues and questions that arise at Warner. (d) The System Support personnel will handle all system support issues and questions that arise at Warner. (e) Any questions or problems that the Super User or System Support cannot resolve will be forwarded to the Sequana Help Desk which will be open Monday - Friday, 7 AM to 5 PM PST and staffed by qualified personnel. 3 [*] -- Confidential treatment requested. 5 (f) Sequana guarantees a response to but not necessarily complete resolution of any Warner inquiry within 24 hours and Sequana and Warner will cooperate to promptly resolve any such question or problem. (g) Customization of PD LIMS will be done by Warner, or by Sequana under a separate contract arrangement. However, any changes to the source code that are made by Warner that result in incompatibilities with future upgrades provided by Sequana will be the responsibility of Warner to resolve. Year 2000 compliance of both TVS and PD-LIMS Sequana further represents and warrants that the Software Products are Year 2000 compliant and in no case do the Software Products use or depend on two digit strings for storage or computation of dates or times; provided, however, that if dates from legacy applications are imported non-compliance may result unless the legacy application provides year 2000 compliant dates as inputs to the Software Products. High-throughput DNA Sequencing Sequana has established a high-throughput, high accuracy DNA sequencing laboratory through the development and utilization of several novel sequencing strategies and systems. Strict quality control procedures are developed and built in each and every important step of high throughput sequence production to ensure maximum efficiency and accuracy. Sequana will transfer to Warner Sequana's DNA sequencing Standard Operating Procedures (SOPs) and provide on-site training of up to three person-weeks total. The SOPs to be transferred to Warner include: [*] Installation of high-throughput sequencing at Warner under Section 5.2 of the agreement will be considered to be achieved upon transfer of the SOPs and completion of the training at Sequana. Sequana is not obligated to provide Warner with additional consulting services or support with respect to DNA sequencing. High throughput genotyping Sequana has established a high-throughput, high accuracy polymorphism detection and non-microsatellite genotyping laboratory through the development and utilization of several molecular systems. Sequana will transfer to Warner Sequana's non-microsatellite polymorphism detection and genotype determination Standard Operating Procedures (SOPs) outlined below and provide on-site training of Warner scientists for up to three person weeks total. The SOPs to be transferred to Warner include: 4 [*] -- Confidential treatment requested. 6 [*] Installation of high throughput genotyping at Warner under Section 5.2 of the agreement will be considered to be achieved upon transfer of the SOPs and completion of the training at Sequana. Sequana is not obligated to provide Warner with additional consulting services or support with respect to high-throughput genotyping. Micro-Array Protocols Sequana is a participant in the Molecular Dynamics/Amersham Microarray Technology Access Program. As a member of the Early Access Program, Sequana is gaining considerable lead time in the utilization and development of the MD/Amersham Microarray System ("System"). [*] During this period, the Microarray Group within Sequana will be focusing on extending the capabilities of the System in collaboration with MD/Amersham as follows: [*] - Optimizing the immobilization chemistry and labeling protocols to detect rare mRNAs from small quantities of tissue; - Adapting the Microarray System to work in the "Northern" mode (useful in monitoring the expression of a set of genes in a large number of tissue samples) in as well as the more common "reverse Northern" mode; - Developing proprietary bioinformatics tools to analyze the data generated by the System and present results in a queriable, user-friendly front-end. As part of the technology transfer to Warner, Sequana will transfer operating know-how related to the System to the extent that it is permitted under the agreement with Molecular Dynamics/Amersham. The objective of this sharing of proprietary know-how is to allow Warner to better evaluate the unique features of this System with respect to the other commercially available chip-based technologies for gene expression studies. Based on the terms of its agreement with Molecular Dynamics/Amersham, Sequana will be able to share data generated by the System with Warner anytime after January 1, 1998. It will not be necessary to transfer the micro-array protocols to Warner as a condition for payment of the License Access Fee described in Section 5.2 of the Agreement. 5 [*] -- Confidential treatment requested. 7 APPENDIX TO EXHIBIT A The following are descriptions of the original SequaSearch modules that were a part of BioAgent DB along with their status in TVS. VIRTUAL-LIBRARIAN "Monitors the PubMed literature which pertains to a disorder of interest. The information is then retrieved, reformatted, parsed and deposited into the BioAgentDB. The agent distinguishes new literature from previously reported literature. E-mail alerts (with URLs) are sent to the scientists informing them when new information becomes available. PubMed is a National Library of Medicine ("NLM") web-based product which provides free access to MEDLINE which is the NLM's database of bibliographic citations (e.g., authors, title, and journal reference) and author abstracts from about 3,800 biomedical journals." [*] CANDIDATEVL "Monitors the literature (PubMed) pertaining to candidate genes which are in common with the disorder. The information is then retrieved, reformatted, parsed and deposited into the BioAgentDB with hyperlinks to the candidate gene. The agent distinguishes new literature from previously reported literature. E-mail alerts (with URLs) are sent to the scientists informing them when new information becomes available." [*] ESTAGENT "Monitors the National Center of Biotechnology Information ("NCBI") Integrated Gene Map for sequences which are newly mapped to genomic regions of interest (such as a linkage region). It retrieves the mapped sequences together with higher resolution mapping information, flanking markers, and possible identification of the mapped sequences. This information is automatically retrieved, reformatted, and deposited in the BioAgentDB such that genomic maps are automatically generated. The NCBI's Integrated Gene Map is a map of more than 16,000 human genes which have been mapped relative to a gramework map that contains about 1000 polymorphic genetic markers. This gene map unifies the existing genetic and physical maps with the nucleotide and protein sequence database." [*] 6 [*] -- Confidential treatment requested. 8 GENEINTEGRATOR "Monitors Swiss-Prot and GenPept for new biological attributes (site of expression, map location, function, developmental stage, polymorphisms) of candidate genes. It automatically retrieves, reformats, parses, and deposits the information into the candidate gene record in BioAgentDB." [*] GENEWIZARD "Monitors sequence databases for new matches to sequences of interest and reports those which meet threshold requirements. GeneWizard is currently under development." [*] TRANSCRIPTSCANNER "Monitors the UniGene database at the National Center for Biotechnology Information for clones and mapped EST contigs for those connected with a disorder of interest. TranscriptScanner is currently under development." [*] SYNTENYAGENT "Monitors the mouse genome databases for genes that are syntenic with regions of interest in the human genome. SyntenyAgent is currently under discussion." [*] 7 [*] -- Confidential treatment requested. EX-10.91 3 AMENDMENT TO THE NON-OFFICER EQUITY INCENTIVE PLAN 1 EXHIBIT 10.91 AMENDMENT TO THE 1997 NON-OFFICER EQUITY INCENTIVE PLAN Adopted by the Board of Directors on October 16, 1998 RESOLVED FURTHER, that the 1997 Non-Officer Equity Incentive Plan be, and it is hereby amended, by deleting therefrom Section 3(d) in its entirety. EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets, statements of operations and statements of cash flows included in the Company's Form 10-Q for the period ended September 30, 1998, and is qualified in its entirety by reference to such financial statements and notes thereto. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 35,446 40,249 3,206 0 0 83,498 47,260 (25,461) 113,047 25,275 0 0 0 30,146 66,362 113,047 0 31,805 0 0 57,077 0 1,687 (149,878) 0 (149,878) 0 0 0 (149,878) (5.06) (5.06)
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