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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2001
REGISTRATION NO. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ATHEROGENICS, INC.
(Exact name of Registrant as specified in its charter)
GEORGIA 2834 58-2108232
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
8995 WESTSIDE PARKWAY
ALPHARETTA, GEORGIA 30004
(678) 336-2500
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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RUSSELL M. MEDFORD, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ATHEROGENICS, INC.
8995 WESTSIDE PARKWAY
ALPHARETTA, GEORGIA 30004
(678) 336-2500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
LEONARD A. SILVERSTEIN, ESQ.
LONG ALDRIDGE & NORMAN LLP
SUNTRUST PLAZA, SUITE 5300
303 PEACHTREE STREET
ATLANTA, GEORGIA 30308-3201
(404) 527-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
2
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1)(2) REGISTRATION FEE(2)
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Common stock, no par value 3,585,000 $5.925 $21,241,125 $5,310
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(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act and based upon the
average of the high and low prices quoted on the Nasdaq National
Market on June 26, 2001.
(2) Calculated pursuant to Rule 457(c) based on an estimate of the
proposed maximum aggregate offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS NAMED IN THIS PROSPECTUS MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES, AND NEITHER WE NOR THE SELLING SHAREHOLDERS ARE SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 29, 2001
PROSPECTUS
3,585,000 SHARES
[ATHEROGENICS LOGO]
COMMON STOCK
This prospectus relates to resales of common stock previously issued
by AtheroGenics, Inc. AtheroGenics will not receive any proceeds from the sale
of the shares.
The selling shareholders identified in this prospectus, or their
pledgees, donees, transferees or other successors-in-interest, may offer the
shares from time to time through public or private transactions at prevailing
market prices, at prices related to prevailing market prices or at privately
negotiated prices.
We do not know when or in what amount a selling shareholder may offer
shares for sale. The selling shareholders may not sell any or all of the shares
offered by this prospectus.
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Our common stock is traded on the Nasdaq National Market under the
symbol AGIX. On June 26, 2001, the closing sale price of our common stock on
Nasdaq was $5.87 per share. We urge you to obtain current market quotations for
our common stock.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is _______, 2001.
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TABLE OF CONTENTS
PAGE
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Prospectus Summary.................................................. 4
Risk Factors........................................................ 9
Forward-Looking Statements.......................................... 15
Use of Proceeds..................................................... 16
Selling Shareholders................................................ 16
Price Range of Common Stock and Dividend Policy..................... 17
Capitalization...................................................... 18
Dilution............................................................ 18
Selected Financial Data............................................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 20
Business............................................................ 24
Management.......................................................... 37
Certain Transactions................................................ 45
Principal Shareholders.............................................. 46
Description of Capital Stock........................................ 48
Plan of Distribution................................................ 51
Legal Matters....................................................... 53
Experts............................................................. 53
Where You Can Find Additional Information........................... 53
Financial Statements................................................ F-1
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PROSPECTUS SUMMARY
The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including our financial
statements and related notes included in this prospectus. Our business involves
significant risks. You should carefully consider the information under the
heading "Risk Factors" beginning on page 9.
ATHEROGENICS
AtheroGenics is an emerging pharmaceutical company focused on the
discovery, development and commercialization of novel drugs for the treatment
of chronic inflammatory diseases, such as atherosclerosis, rheumatoid arthritis
and asthma. We designed our lead product candidate, AGI-1067, as an oral drug
to benefit patients with coronary artery disease, which is atherosclerosis of
the blood vessels of the heart. Atherosclerosis is a common disease that
results from inflammation and the buildup of plaque in arterial blood vessel
walls. In October 1999, we entered into a worldwide exclusive license agreement
with Schering-Plough Corporation to develop and commercialize AGI-1067.
Schering-Plough has extensive experience in developing, manufacturing and
commercializing pharmaceutical products. Schering-Plough's total licensing and
development and sales milestone payments to us for this initial indication,
excluding royalties and development costs, could reach $189 million. We
recently completed testing AGI-1067 in a Phase II clinical trial for the
prevention and treatment of restenosis, the reoccurrence of narrowing of the
coronary arteries following angioplasty in patients with coronary artery
disease. We are also progressing with the development of our internally
discovered compound, AGIX-4207, as an agent to treat the signs and symptoms of
rheumatoid arthritis.
We have combined our basic research in the role of blood vessels in
inflammation with applied research techniques into an integrated process to
discover new drugs for treating diseases of chronic inflammation. We call this
technology our vascular protectant or v-protectant platform. Our first
v-protectant drug candidates from this platform technology block the production
of VCAM-1, a protein that binds to white blood cells that accumulate along the
walls of blood vessels and prolong inflammation. Inflammation normally protects
the body from infection, injury and disease, but chronic inflammation often
causes damage in a misdirected attempt at repair and healing. Diseases of
chronic inflammation that we are targeting with our v-protectants include:
- atherosclerosis, including coronary artery disease, which
affects more than 12 million people in the United States and
is the leading cause of death in the United States;
physicians perform more than one million angioplasties
annually worldwide;
- rheumatoid arthritis, which affects 2.1 million people in the
United States and is more common in women than men; the
economic cost of rheumatoid arthritis and related diseases
exceeds $65 billion annually in the United States;
- asthma, which affects more than 17 million people in the
United States; its prevalence and economic impact are both
increasing; and
- solid organ transplant rejection, which affects more than
200,000 people in the United States and is a major factor
contributing to organ shortage.
Our v-protectants are drugs that block a class of signals inside of
cells called oxidant signals. Oxidant signals inside of the cells that line
blood vessels lead to the production of selected proteins including VCAM-1.
These proteins attract white blood cells to the site of chronic inflammation.
White blood cells destroy infective agents and promote healing but can also
amplify chronic inflammation. Diseases marked by chronic inflammation are the
therapeutic targets of several classes of currently available drugs. Some drugs
are directed toward reduction of risk factors for the underlying disease, such
as high blood cholesterol in atherosclerosis. Other drugs provide symptomatic
relief. Among these agents are anti-inflammatory drugs and drugs that decrease
the body's natural defenses. These drugs, called immuno-suppressants, decrease
chronic inflammation, but increase the risk of infection. None of these drugs
treats the underlying cause of chronic inflammation. In contrast, we believe
that our v-protectants can suppress chronic inflammation by blocking production
of VCAM-1 without undermining the body's ability to protect itself against
infection.
AGI-1067 is our v-protectant candidate that is most advanced in
clinical development. We recently announced encouraging preliminary results of
a Phase II clinical trial, CART-1 (Canadian Antioxidant Restenosis Trial), that
assessed in 305 patients the safety and effectiveness of AGI-1067 for the
treatment of post-angioplasty restenosis. An analysis of the results indicated
that six months after angioplasty, the blood vessels of patients who received
AGI-1067 had larger openings, measured as luminal diameters of their coronary
arteries, than those who received placebo. Our Phase II clinical trial followed
the successful completion of seven Phase I clinical trials comprising more than
150 men and women.
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In March 2001, we commenced a Phase I clinical trial to assess the
safety and tolerability of AGIX-4207, our second v-protectant clinical
candidate, in healthy volunteers. We are developing AGIX-4207, a novel oral
agent for the treatment of the signs and symptoms of rheumatoid arthritis. We
have identified other potential v-protectant product candidates to treat
asthma, exacerbation of rheumatologic diseases and solid organ transplant
rejection. We are evaluating these v-protectant product candidates for clinical
development. We plan to develop these v-protectants rapidly and may seek, when
available, regulatory fast track status to expedite development and
commercialization. We will continue to expand upon our v-protectant technology.
We base our competitive strategy on our ability to integrate the
following strengths:
- we have pioneered basic discoveries in vascular cell biology
that form the foundation of our v-protectant technology
platform;
- our scientific expertise coupled with our clinical and
regulatory expertise has enabled us to be the first company
to conduct Phase I and II clinical trials of an
orally-administered, small molecule v-protectant;
- we expect that our exclusive license agreement with
Schering-Plough will allow us to sustain and extend our
competitive advantage; and
- we believe that our scientific, development and licensing
expertise strongly positions us to acquire promising
technologies and products discovered outside AtheroGenics.
We believe that these competitive advantages are important to the
success of our business strategy, which is to:
- develop AGI-1067 for commercialization in collaboration with
Schering-Plough;
- extend our v-protectant technology platform into additional
therapeutic areas that address unmet medical needs;
- create value rapidly through innovative drug discovery
coupled with innovative development to produce useful drugs;
- expand our product candidate portfolio by acquiring
complementary product candidates and technologies; and
- commercialize our products based upon the size and other
relevant characteristics of the patient and physician
populations.
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We were incorporated in the State of Georgia in November 1993. Our
executive offices are located at 8995 Westside Parkway, Alpharetta, Georgia
30004. Our telephone number at that location is (678) 336-2500 and our Internet
address is www.atherogenics.com. We do not intend for information contained on
AtheroGenics' website to constitute part of this prospectus.
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THE OFFERING
Common stock the common shareholders are offering....................... 3,585,000 shares
Use of proceeds......................................................... AtheroGenics will not receive any proceeds from the
sale of shares in the offering.
Nasdaq National Market symbol........................................... AGIX
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SUMMARY FINANCIAL DATA
The following table contains a summary of our statement of operations
data. The pro forma net loss per share data below gives effect to the
conversion of all outstanding preferred stock into shares of common stock,
which was effected upon the closing of AtheroGenics' initial public offering in
August 2000, as if such conversion had occurred on the dates of original issue.
See Note 3 to the financial statements included in this prospectus.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1996 1997 1998 1999 2000 2000 2001
----------- ----------- ------------ ------------ ----------- ----------- ------------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees .................... $ -- $ -- $ -- $ 555,556 $ 3,333,333 $ 833,333 $ 833,333
Research and development ........ -- -- -- 791,653 4,826,370 1,257,947 597,089
----------- ----------- ------------ ------------ ----------- ----------- -----------
Total revenues ............ -- -- -- 1,347,209 8,159,703 2,091,280 1,430,422
Operating expenses:
Research and development,
exclusive of $23,649,
$1,856,932, $449,906 and
$244,498 for the years ended
December 31, 1999 and 2000
and the three months ended
March 31, 2000 and 2001,
respectively, reported
below as amortization of deferred
stock compensation ........... 1,776,891 4,656,478 8,954,904 9,041,345 12,815,788 2,885,640 3,571,888
General and administrative,
exclusive of $61,831, $6,115,796,
$1,521,932 and $550,319 for the
years ended December 31, 1999 and
2000 and the three months
ended March 31, 2000 and 2001,
respectively, reported below as
amortization of deferred stock
compensation .................. 548,766 988,230 1,573,807 2,593,017 3,035,559 786,362 948,651
Amortization of deferred stock
compensation .................. -- -- -- 85,480 7,972,728 1,971,838 794,817
Total operating expenses .. 2,325,657 5,644,708 10,528,711 11,719,842 23,824,075 5,643,840 5,315,356
----------- ----------- ------------ ------------ ------------ ----------- -----------
Operating loss .................... (2,325,657) (5,644,708) (10,528,711) (10,372,633) (15,664,372) (3,552,560) (3,884,934)
Net interest income (expense) ..... 277,563 485,392 (205,130) (60,617) 1,714,850 157,767 784,306
----------- ----------- ------------ ------------ ------------ ----------- -----------
Net loss .......................... $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(13,949,522) $(3,394,793) $(3,100,628)
=========== =========== ============ ============ ============ =========== ===========
Basic and diluted net loss per
share ........................... $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.30) $ (1.29) $ (0.13)
Shares used in computing basic and
diluted net loss per share ...... 1,869,246 2,292,966 2,409,948 2,443,237 10,747,773 2,635,816 23,939,682
Pro forma basic and diluted net
loss per share................ $ (0.72) $ (0.21) $ (0.13)
Shares used in computing pro forma
basic and diluted net loss per
share......................... 19,343,445 16,332,556 23,939,682
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The following table contains a summary of our balance sheet at March
31, 2001:
- on an actual basis; and
- on a pro forma basis to reflect the sale of 3,585,000 shares
of common stock in a private placement on June 19, 2001 at
$5.75 per share, for net proceeds of approximately $18.8
million.
MARCH 31, 2001
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ACTUAL PRO FORMA
------------ -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 41,759,963 $ 62,373,713
Short-term investments........................... 9,000,841 9,000,841
Working capital.................................. 49,890,715 68,716,155
Total assets..................................... 54,211,243 74,824,993
Long-term obligations, less current portion...... 42,766 42,766
Common stock..................................... 103,183,998 122,009,438
Deferred compensation............................ (4,672,314) (4,672,314)
Accumulated deficit.............................. (46,739,032) (46,739,032)
Total shareholders' equity....................... 52,001,381 70,826,821
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RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties we describe below are those that we currently believe may
materially affect our company. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that affect our company.
RISKS RELATED TO OUR COMPANY AND BUSINESS
IF AGI-1067 FAILS IN CLINICAL TRIALS, WE MAY NOT BE ABLE TO GENERATE FUTURE
REVENUES OR BECOME PROFITABLE.
AGI-1067 is our lead compound and the subject of an exclusive
licensing agreement with Schering-Plough. This compound could fail in clinical
trials if we show it is ineffective or causes unacceptable side effects in the
patients we treated.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT GENERATE REVENUE OR
ACHIEVE PROFITABILITY IN THE FUTURE.
Our ability to generate revenue and achieve profitability depends on
our ability, alone or with collaborators, to complete successfully the
development of our product candidates, conduct pre-clinical tests in animals
and clinical trials in human beings, obtain the necessary regulatory approvals,
and manufacture and market the resulting drugs. We have experienced operating
losses since we began operations in 1994. As of March 31, 2001, we had an
accumulated deficit of approximately $46.7 million. We expect to incur
additional operating losses over the next several years and expect cumulative
losses to increase substantially as our research and development, pre-clinical,
clinical, manufacturing and marketing efforts expand. Except for an initial
licensing fee and research and development revenue that Schering-Plough paid to
us, we have had no significant revenue to date.
IF WE DO NOT SUCCESSFULLY DEVELOP OUR OTHER PRODUCT CANDIDATES, WE WILL HAVE
LIMITED ABILITY TO GENERATE REVENUE.
All of our other programs are in early stages of development, and
subject to the risks of failure inherent in developing drug products based on
new technologies. We do not expect any of our potential product candidates to
be commercially available until at least 2004. In addition, other than
AGIX-4207, a product candidate for which we recently commenced Phase I clinical
trials, our drug discovery efforts may not produce any other proprietary
product candidates.
WE WILL NOT BE ABLE TO COMMERCIALIZE OUR PRODUCT CANDIDATES IF WE FAIL TO
DEMONSTRATE ADEQUATELY THEIR SAFETY AND EFFICACY.
We cannot assure you that any product candidate we develop, alone or
with others, will prove safe and effective in clinical trials and will meet all
of the applicable regulatory requirements needed to receive regulatory
approval. We will need to conduct significant research, pre-clinical testing
and clinical trials before we can file product approval applications with the
U.S. Food and Drug Administration and similar regulatory authorities in other
countries. Pre-clinical testing and clinical trials are long, expensive and
uncertain processes. We may spend several years completing our testing for any
particular product candidate, and failure can occur at any stage.
The FDA or we may suspend our clinical trials at any time if either of
us believes that we are exposing the subjects participating in these trials to
unacceptable health risks. The FDA or institutional review boards at the
medical institutions and healthcare facilities where we sponsor clinical trials
may suspend any trial indefinitely if they find deficiencies in the conduct of
these trials. We must conduct clinical trials in accordance with the FDA's Good
Clinical Practices. The FDA and these institutional review boards have
authority to oversee our clinical trials and the FDA may require large numbers
of test subjects. In addition, we must manufacture the product candidates which
we use in our clinical trials under the FDA's Good Manufacturing Practices.
Even if we achieve positive results in early clinical trials, these
results do not necessarily predict final results. A number of companies in the
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after achieving positive results in earlier trials. Negative or
inconclusive results or adverse medical events during a clinical trial could
cause the FDA or us to terminate a clinical trial or require that we repeat it.
Also, even if the FDA approves a New Drug Application for any of our
product candidates, the resulting product may not be accepted in the
marketplace. Physicians, patients, payors or the medical community in general
may be unwilling to accept, utilize or recommend any of our products. In
addition, after approval and use in an increasing number of patients, our
products could show side
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effect profiles that limit their usefulness or require their withdrawal although
the drugs did not show the side effect profile in Phase I through Phase III
clinical trials.
WE MAY EXPERIENCE DELAYS IN OUR CLINICAL TRIALS THAT COULD ADVERSELY AFFECT OUR
FINANCIAL RESULTS AND OUR COMMERCIAL PROSPECTS.
We do not know whether planned clinical trials will begin on time or
whether we will complete any of our clinical trials on schedule or at all.
Product development costs to us and our collaborators will increase if we have
delays in testing or approvals or if we need to perform more or larger clinical
trials than planned. Significant delays may adversely affect our financial
results and the commercial prospects for our products, and delay our ability to
become profitable. We typically rely on third party clinical investigators at
medical institutions and healthcare facilities to conduct our clinical trials
and, as a result, we may face additional delaying factors outside our control.
BECAUSE WE CANNOT PREDICT WHETHER OR WHEN WE WILL OBTAIN REGULATORY APPROVAL TO
COMMERCIALIZE OUR PRODUCT CANDIDATES, WE CANNOT PREDICT THE TIMING OF ANY
FUTURE REVENUE FROM THESE PRODUCT CANDIDATES.
We cannot commercialize any of our product candidates, including
AGI-1067 or AGIX-4207, until the appropriate regulatory authorities have
reviewed and approved the applications for the product candidates. We cannot
assure you that the regulatory agencies will complete their review processes in
a timely manner or that we will obtain regulatory approval for any product
candidate we or our collaborators develop. Satisfaction of regulatory
requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial
resources. Regulatory approval processes outside the United States include all
of the risks associated with the FDA approval process. In addition, we may
experience delays or rejections based upon additional government regulation
from future legislation or administrative action or changes in FDA policy
during the period of product development, clinical trials and FDA regulatory
review.
IF WE DO NOT COMPLY WITH APPLICABLE REGULATORY REQUIREMENTS IN THE MANUFACTURE
AND DISTRIBUTION OF OUR PRODUCTS, WE MAY INCUR PENALTIES THAT MAY INHIBIT OUR
ABILITY TO COMMERCIALIZE OUR PRODUCTS AND ADVERSELY AFFECT OUR REVENUE.
Our failure to comply with applicable FDA or other regulatory
requirements including manufacturing, quality control, labeling, safety
surveillance, promoting, and reporting may result in criminal prosecution,
civil penalties, recall or seizure of our products, total or partial suspension
of production or an injunction, as well as other regulatory action against our
potential products or us. Discovery of previously unknown problems with a
product, supplier, manufacturer or facility may result in restrictions on the
sale of our products, including a withdrawal of such products from the market.
IF SCHERING-PLOUGH DECIDES TO TERMINATE OUR EXCLUSIVE LICENSE AGREEMENT, WE
WOULD LOSE ACCESS TO THEIR SUBSTANTIAL DEVELOPMENT, COMMERCIAL AND FINANCIAL
RESOURCES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND
COMMERCIALIZE AGI-1067 AND OUR ABILITY TO GENERATE REVENUE.
Schering-Plough may terminate our exclusive license agreement for any
reason upon 60 days notice. Under our agreement, Schering-Plough will pay all
costs related to the worldwide development and commercialization of AGI-1067.
Schering-Plough also will pay us significant milestone fees upon attaining
development, regulatory and sales objectives. In addition, the agreement
provides us with access to their substantial product development, manufacturing
and commercialization expertise. If, however, Schering-Plough terminates the
agreement, we may not receive a substantial portion of our potential aggregate
licensing and milestone payments from Schering-Plough or have access to their
resources and expertise.
THE RECEIPT AND TIMING OF MILESTONE PAYMENTS FROM SCHERING-PLOUGH IS UNCERTAIN,
WHICH COULD MATERIALLY ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY.
We have to date received a $5.0 million nonrefundable license fee from
Schering-Plough for entering into our license agreement with them. The receipt
and timing of the balance of the development and sales milestone payments to us
under this agreement is subject to factors relating to the clinical and
regulatory development and commercialization of AGI-1067. These factors
generally are the responsibility of Schering-Plough. As a result, many of these
factors are beyond our control and we cannot assure their achievement.
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OUR FAILURE TO PROTECT ADEQUATELY OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
OR SECURE RIGHTS TO THIRD PARTY PATENTS COULD MATERIALLY ADVERSELY AFFECT OUR
PROPRIETARY POSITION IN THE MARKETPLACE OR PREVENT THE COMMERCIALIZATION OF OUR
PRODUCTS.
Our patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved. In addition, we may not be able to obtain
patent rights on products, treatment methods or manufacturing processes that we
may develop or to which we may obtain license or other rights. Even if we do
obtain patents, they may not adequately protect the technology we own or
in-license. In addition, others may challenge, seek to invalidate, infringe or
circumvent any patents we own or in-license, and rights we receive under those
patents may not provide competitive advantages to us.
Our commercial success will depend in part on our ability to
manufacture, use, sell and offer to sell our product candidates and proposed
product candidates without infringing patents or other proprietary rights of
others. We may not be aware of all patents or patent applications that may
impact our ability to make, use or sell any of our product candidates or
proposed product candidates. For example, U.S. patent applications are
confidential while pending in the Patent and Trademark Office, and patent
offices in non-U.S. countries often publish patent applications for the first
time six months or more after filing. Further, we may not be aware of published
or granted conflicting patent rights. Any conflicts resulting from patent
applications and patents of others could significantly reduce the coverage of
our patents and limit our ability to obtain meaningful patent protection. If
others obtain patents with conflicting claims, we may need to obtain licenses
to these patents or to develop or obtain alternative technology. We may not be
able to obtain any licenses or other rights to patents, technology or know-how
necessary to conduct our business as described in this prospectus. Any failure
to obtain such licenses could delay or prevent us from developing or
commercializing our drug candidates or proposed product candidates, which would
adversely affect our business.
Litigation or patent interference proceedings may be necessary to
enforce any of our patents or other proprietary rights, or to determine the
scope and validity or enforceability of the proprietary rights of others. The
defense and prosecution of patent and intellectual property claims are both
costly and time consuming, even if the outcome is favorable to us. Any adverse
outcome could subject us to significant liabilities, require us to license
disputed rights from others, or require us to cease selling our future
products.
Our commercial success will also depend on our ability to manufacture,
use, sell and offer to sell our product candidates and proposed product
candidates without breaching our agreements with our patent licensees. We have
obtained exclusive licenses to technologies from Emory University, covering
aspects of our v-protectant technology, and The Regents of the University of
California, covering aspects of our diagnostic technology. Our exclusive
license with Emory University requires us to take steps to commercialize the
licensed technology in a timely manner. If we fail to meet these obligations,
Emory University can convert our exclusive license to a non-exclusive license,
can grant others non-exclusive rights in the licensed technology or can require
us to sublicense aspects of the licensed technology. Our license agreement with
The Regents of the University of California also includes a requirement that we
develop the licensed technology within certain time limits. If we fail to meet
these time limits, they can terminate our license. Further, The Regents of
University of California are primarily responsible for patent prosecution of
the technology we license from them, and we are required to reimburse them for
the costs they incur in performing these activities. As a result, we do not
have the ability to control these activities.
We also rely upon trade secrets, proprietary know-how and
technological advances which we seek to protect through agreements with our
collaborators, employees and consultants. These persons and entities could
breach our agreements, for which we may not have adequate remedies. In
addition, others could become aware of our trade secrets or proprietary
know-how through independent discovery or otherwise.
IF OUR COMPETITORS DEVELOP AND MARKET ANTI-INFLAMMATORY PRODUCTS THAT ARE MORE
EFFECTIVE, HAVE FEWER SIDE EFFECTS OR ARE LESS EXPENSIVE THAN OUR CURRENT OR
FUTURE PRODUCT CANDIDATES, WE MAY HAVE LIMITED COMMERCIAL OPPORTUNITIES.
Our competitors include large pharmaceutical companies and more
established biotechnology companies. These competitors have significant
resources and expertise in research and development, manufacturing, testing,
obtaining regulatory approvals and marketing. Potential competitors also
include academic institutions, government agencies, and other public and
private research organizations that conduct research, seek patent protection
and establish collaborative arrangements for research, development,
manufacturing and commercialization. It is possible that any of these
competitors could develop technologies or products that would render our
technologies or product candidates obsolete or non-competitive, which could
adversely affect our revenue potential.
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THIRD PARTIES' FAILURE TO SYNTHESIZE AND MANUFACTURE OUR PRODUCT CANDIDATES TO
OUR SPECIFICATIONS COULD DELAY OUR CLINICAL TRIALS OR HINDER OUR
COMMERCIALIZATION PROSPECTS.
We currently have no manufacturing facilities to synthesize or
manufacture our product candidates, nor do we intend to develop these
capabilities in the near future. Our reliance on third parties for these
services exposes us to several risks that could delay our clinical trials or
hinder our commercialization prospects. These risks include the following:
- A finding that a third party did not comply with applicable
governmental regulations. Manufacturers of pharmaceutical
products are subject to continual review and periodic
inspections by regulatory agencies. Failure of one of our
third party manufacturers to comply with applicable
regulatory requirements, whether or not related to our
product candidates, could result in sanctions against our
potential products, including recall or seizure, total or
partial suspension of production or injunction.
- A failure to synthesize and manufacture our product
candidates in accordance with our product specifications. For
example, a starting material used in the manufacturing
process of AGI-1067 is probucol, which physicians previously
prescribed as a cholesterol-lowering agent but which its
manufacturer withdrew from the market for efficacy reasons.
The occurrence of a rare side effect with chronic dosing of
probucol requires that we maintain a very low maximal amount
of probucol in the manufacture of AGI-1067.
- A failure to deliver product candidates in sufficient
quantities or in a timely manner. Any failure by our third
party manufacturers to supply our requirements for clinical
trial materials or supply these materials in a timely manner
could jeopardize the scheduled initiation or completion of
these clinical trials and could have a material adverse
effect on our ability to generate revenue.
In addition, our continued dependence on third parties for the
synthesis and manufacture of our future products may subject us to costs
outside of our control, which could adversely affect our future profitability
and our ability to commercialize products on a timely and competitive basis.
IF WE ARE UNABLE TO CREATE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR
ENTER INTO AGREEMENTS WITH THIRD PARTIES TO PERFORM THESE FUNCTIONS, WE WILL
NOT BE ABLE TO COMMERCIALIZE OUR FUTURE PRODUCT CANDIDATES.
We currently have no sales, marketing or distribution capabilities.
Therefore, in order to commercialize our product candidates, we must either
develop our own sales, marketing and distribution capabilities or collaborate
with a third party to perform these functions. We have no experience in
developing, training or managing a sales force and will incur substantial
additional expenses in doing so. The cost of establishing and maintaining a
sales force may exceed its cost effectiveness. In addition, we will compete
with many companies that currently have extensive and well-funded marketing and
sales operations. Our marketing and sales efforts may be unable to compete
successfully against these companies.
To the extent we seek sales, marketing and distribution alliances for
our future products, we face risks including the following:
- we may not be able to find collaborators, enter into
alliances on favorable terms or enter into alliances that
will be commercially successful;
- any collaborator might, at its discretion, limit the amount
of resources and time it devotes to marketing our products;
and
- any collaborator may terminate its agreement with us and
abandon our products at any time for any reason, regardless
of the terms of the agreement.
OUR FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY
ACADEMIC COLLABORATIONS COULD MATERIALLY ADVERSELY AFFECT OUR RESEARCH AND
DEVELOPMENT EFFORTS.
We are a small company with 78 full-time employees. If we are unable
to continue to attract, retain and motivate highly qualified management and
scientific personnel and to develop and maintain important relationships with
leading academic institutions and scientists, we may not be able to achieve our
research and development objectives. Competition for personnel and academic
collaborations is intense. Loss of the services of any of our key scientific
personnel and, in particular, Dr. Russell M. Medford, our President and Chief
Executive Officer, could adversely affect progress of our research and
development programs. Dr. Medford is the only employee with whom we have an
employment agreement.
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IF WE NEED ADDITIONAL FINANCING AND CANNOT OBTAIN IT, WE MAY NOT BE ABLE TO
DEVELOP OR MARKET OUR PRODUCTS.
We may encounter increased costs due to unanticipated changes in our
product development or commercialization plans. If these costs exceed our
available funds, we will need to seek additional financing. If additional funds
are not available, we may need to delay clinical studies, curtail operations or
obtain funds through collaborative arrangements that may require us to
relinquish rights to certain of our products or potential markets.
OUR FAILURE TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT OR ACCEPTABLE PRICES
FOR OUR PRODUCTS COULD DIMINISH OUR REVENUES.
Our ability to commercialize our future products successfully, alone or
with collaborators, will depend in part on the extent to which reimbursement
for the products will be available from:
- government and health administration authorities;
- private health insurers; and
- other third party payors.
Government and other third party payors increasingly are attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new drugs. Third party private health insurance coverage may
not be available to patients for any of our future products.
The continuing efforts of government and other third party payors to
contain or reduce the costs of healthcare through various means may limit our
commercial opportunity. For example, in some countries other than the United
States, pricing and profitability of prescription pharmaceuticals are subject
to government control. In the United States, we expect proposals to implement
similar government control to continue. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on the pricing
of pharmaceutical products. Cost control initiatives could decrease the price
that we or any potential collaborators could receive for any of our future
products and could adversely affect our profitability.
IF PLAINTIFFS BRING PRODUCT LIABILITY LAWSUITS AGAINST US, WE MAY INCUR
SUBSTANTIAL FINANCIAL LOSS OR MAY BE UNABLE TO OBTAIN FUTURE PRODUCT LIABILITY
INSURANCE AT REASONABLE PRICES, IF AT ALL, EITHER OF WHICH COULD DIMINISH OUR
ABILITY TO COMMERCIALIZE OUR FUTURE PRODUCTS.
The testing and marketing of medicinal products entail an inherent
risk of product liability. Clinical trial subjects, consumers, healthcare
providers, or pharmaceutical companies or others selling our future products
could bring product liability claims against us. We cannot assure you that we
will be able to acquire or maintain insurance coverage at a reasonable cost or
in sufficient amounts to protect us.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE CAUSING VOLATILITY IN OUR STOCK
PRICE.
Our product candidates are now in research and various stages of
development or clinical trials. Accordingly, we do not receive any revenues
from sales of these product candidates. Our results of operations historically
have fluctuated on a quarterly basis, which we expect to continue. Our results
of operations at any given time will be based primarily on the following
factors:
- the status of development of our various product candidates;
- whether we enter into collaboration agreements and the timing
and accounting treatment of payments, if any, to us under
those agreements;
- whether and when we achieve specified development or
commercialization milestones; and
- the addition or termination of research programs or funding
support.
We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. These fluctuations may cause the price of our stock to fluctuate,
perhaps substantially.
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RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN VOLATILE, AND YOUR INVESTMENT IN OUR STOCK COULD
DECLINE IN VALUE.
The market price of our common stock, and the market prices for
securities of pharmaceutical and biotechnology companies in general, have been
highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this
prospectus, may have a significant impact on the market price of our common
stock:
- announcements of technological innovations or new commercial
products by our competitors or us;
- developments concerning proprietary rights, including
patents;
- developments concerning any research and development,
manufacturing, and marketing collaborations;
- publicity regarding actual or potential results relating to
medicinal products under development by our competitors or
us;
- regulatory developments in the United States and other
countries;
- litigation;
- economic and other external factors, including disasters or
crises; or
- period-to-period fluctuations in financial results.
BECAUSE A SMALL NUMBER OF EXISTING SHAREHOLDERS OWN A LARGE PERCENTAGE OF OUR
VOTING STOCK, YOU WILL HAVE MINIMAL INFLUENCE ON SHAREHOLDER DECISIONS.
Following the completion of the private placement of 3,585,000 shares
of our common stock on June 19, 2001, our executive officers, directors and
greater than five percent shareholders, along with their affiliates, in the
aggregate, owned approximately 33.0% of our outstanding common stock. As a
result, such persons, acting together, will have the ability to influence
substantially all matters submitted to the shareholders for approval, including
the election and removal of directors and any merger, consolidation or sale of
all or substantially all of our assets. These persons will also have the
ability to control our management and business affairs. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, impeding a merger, consolidation, takeover or other business
combination involving us, or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of our business, even if
such a transaction would benefit other shareholders.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS MAY MAKE AN ACQUISITION OF
US, WHICH MAY BENEFIT OUR SHAREHOLDERS, MORE DIFFICULT.
Provisions of our amended and restated articles of incorporation and
amended and restated bylaws that could make it more difficult for a third party
to acquire us include provisions that:
- authorize the issuance of "blank check" preferred stock by
our board of directors without shareholder approval, which
would increase the number of outstanding shares and could
thwart a takeover attempt;
- limit who may call a special meeting of shareholders;
- require shareholder action without a meeting by unanimous
written consent;
- establish advance notice requirements for nominations for
election to the board of directors or for proposing matters
that can be acted upon at shareholder meetings;
- establish a staggered board of directors whose members can
only be dismissed for cause;
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- adopt the fair price requirements and rules regarding
business combinations with interested shareholders set forth
in Article 11, Parts 2 and 3 of the Georgia Business
Corporation Code; and
- require approval by the holders of at least 75% of the
outstanding common stock to amend any of the foregoing
provisions.
FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere in this
prospectus that are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933. These statements involve substantial risks and
uncertainty. You can identify these statements by forward-looking words such as
"may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan,"
"could," "should" and "continue" or similar words. These forward-looking
statements may also use different phrases. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements, which are subject to risks, uncertainties, and
assumptions about us, may include, among other things, statements which address
our operating performance, events or developments that we expect or anticipate
will occur in the future, such as projections of our future results of
operations or of our financial condition, our collaborative efforts with
Schering-Plough, the development of our product candidates and anticipated
trends in our business.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or which we do not fully control that could cause actual
results to differ materially from those expressed or implied in our
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including the following:
- competitive factors;
- general economic conditions;
- the ability to develop safe and effective drugs;
- ability to enter into future collaborative agreements;
- variability of royalty, license and other revenue;
- failure to achieve positive results in clinical trials;
- failure to receive regulatory approval to market our product
candidates;
- uncertainty regarding our owned and our licensed patents and
patent rights, including the risk that we may be forced to
engage in costly litigation to protect such patent rights and
the material harm to us if there were an unfavorable outcome
of any such litigation;
- governmental regulation and suspension;
- technological change;
- changes in industry practices; and
- one-time events.
You should also consider carefully the statements under "Risk Factors"
and other sections of this prospectus, which address additional factors that
could cause our results to differ from those set forth in the forward-looking
statements.
---------------
AATHEROGENICS and DESIGN, AGI and OXYKINE are trademarks of
AtheroGenics, Inc. and are registered in the U.S. Patent and Trademark Office.
This prospectus also refers to trade names and trademarks of other
organizations.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
The selling shareholders will pay any expenses incurred by the selling
shareholders for brokerage, accounting, tax or legal services or any other
expenses incurred by the selling shareholders in disposing of the shares
covered by this prospectus. We will bear all other costs, fees and expenses
incurred in effecting the registration of the shares covered by this
prospectus, including, but not limited to, all registration and filing fees,
Nasdaq listing fees and fees and expenses of our counsel and our accountants.
SELLING SHAREHOLDERS
We issued the shares of common stock covered by this prospectus in a
private placement on June 19, 2001. The following table sets forth, to our
knowledge, certain information about the selling shareholders as of June 19,
2001.
We do not know when or in what amounts a selling shareholder may offer
shares for sale. The selling shareholders may not sell any or all of the shares
offered by this prospectus. Because the selling shareholders may sell all or
some of the shares offered by this prospectus, and because there are currently
no agreements, arrangements or understandings with respect to the sale of any
of the shares, we cannot estimate the number of shares that will be held by the
selling shareholders after completion of the offering. For purposes of this
table, however, we have assumed that, after completion of the offering, none of
the shares covered by this prospectus will be held by the selling shareholders.
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY OWNED STOCK TO BE BENEFICIALLY
PRIOR TO OFFERING NUMBER OF SHARES OWNED AFTER THE OFFERING
------------------------ OF COMMON STOCK ------------------------
NAME OF SELLING SHAREHOLDER(1) NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
------------------------------ ------ ---------- ---------------- ------- ----------
SAFECO Common Stock Trust--
SAFECO Growth Opportunities Fund.............. 1,150,000 4.2% 1,150,000 -- *
SAFECO Resource Series Trust--
Growth Opportunities Portfolio................ 550,000 2.0 550,000 -- *
SEI Institutional Managed Trust.................. 429,000 1.5 429,000 -- *
Vulcan Ventures Inc.............................. 900,147 3.2 400,000 500,147 1.8%
Prudential Small Company Fund, Inc............... 297,400 1.1 272,000 25,400 *
SEI Institutional Investments Trust.............. 258,100 * 258,100 -- *
Prudential Insurance Company of
America VCA-6................................. 139,700 * 128,000 11,700 *
Ascension Health Daughters of
Charity Fund P................................ 67,700 * 67,700 -- *
Marin County Employment
Retirement Association........................ 59,700 * 59,700 -- *
ProMed Partners, L.P............................. 120,300 * 46,700 73,600 *
Goldman Sachs GMMS, LLC.......................... 41,600 * 41,600 -- *
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Undiscovered Managers Small Cap
Growth Fund................................... 40,800 * 40,800 -- *
Deutsche Asset Management Health
Sciences Fund I, Ltd.......................... 84,700 * 38,300 46,400 *
Les Schwab Profit Sharing
Retirement Trust.............................. 37,200 * 37,200 -- *
Alfred I. DuPont Testamentary Trust.............. 35,500 * 35,500 -- *
Portland General Holdings, Inc.
Pension Plan Trust............................ 14,400 * 14,400 -- *
The Nemours Foundation........................... 9,900 * 9,900 -- *
Portland General Holdings, Inc.
Employees' Benefit Trust, Fund II............. 3,700 * 3,700 -- *
The Collins Foundation........................... 2,400 * 2,400 -- *
-------------
* Less than one percent
(1) The term "selling shareholders" includes donees, pledgees, transferees
or other successors-in-interest selling shares received after the date
of this prospectus from a selling shareholder as a gift, pledge,
partnership distribution or other non-sale related transfer.
None of the selling shareholders has had a material relationship with
us within the past three years.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
COMMON STOCK INFORMATION
Our common stock has been traded on the Nasdaq National Market under
the symbol "AGIX" since August 9, 2000. Prior to that time, there was no public
market for our common stock. The following table sets forth, for the period
indicated, the range of high and low closing sale prices for our common stock
as reported on the Nasdaq National Market.
COMMON STOCK
----------------
QUARTERLY PERIOD HIGH LOW
---- ---
Quarter ended September 30, 2000 (commencing August 9, 2000).................................. $ 11.50 $ 7.88
Quarter ended December 31, 2000............................................................... 9.00 4.38
Quarter ended March 31, 2001.................................................................. 7.56 4.95
Quarter ended June 30, 2001 (through June 26, 2001)........................................... 7.79 4.44
As of June 19, 2001, there were approximately 211 holders of record.
On June 26, 2001, the closing sale price of our common stock as quoted on
Nasdaq National Market was $5.87 per share.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to finance our
operations and do not anticipate paying any cash dividends on our capital stock
in the foreseeable future.
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CAPITALIZATION
The following table sets forth our capitalization at March 31, 2001:
- on an actual basis;
- on a pro forma basis to reflect the sale of 3,585,000 shares
of common stock in a private placement on June 19, 2001 at a
price of $5.75 per share, and our receipt of the estimated
net proceeds of approximately $18.8 million from the sale of
the shares.
You should read the following table in conjunction with our financial
statements and related notes included in this prospectus.
MARCH 31, 2001
---------------------------------
ACTUAL PRO FORMA
------------ ------------
Shareholders' equity:
Preferred stock, no par value: Authorized --
5,000,000 shares........................................ $ -- $ --
Common stock, no par value:
Authorized -- 100,000,000 shares;
issued and outstanding -- 23,978,755 shares
(27,563,755 shares pro forma)........................... 103,183,998 122,009,438
Warrants.................................................. 225,713 225,713
Deferred stock compensation............................... (4,672,314) (4,672,314)
Accumulated deficit....................................... (46,739,032) (46,739,032)
Accumulated other comprehensive income.................... 3,016 3,016
------------ ------------
Total shareholders' equity........................ $ 52,001,381 $ 70,826,821
============ ============
The information in the table above does not include:
- shares of our common stock issuable upon exercise of options
outstanding under our benefit plans, of which 2,706,935 were
outstanding at June 19, 2001, with a weighted average
exercise price of $1.99 per share;
- shares of our common stock available for future grant or
issuance under our benefit plans, of which 2,517,665 were
available at June 19, 2001; and
- shares of our common stock issuable upon exercise of
outstanding warrants, of which 250,290 were outstanding at
June 19, 2001, with a weighted average exercise price of
$3.40 per share.
DILUTION
This offering is for sales of stock by our existing shareholders on a
continuous or delayed basis in the future. Sales of common stock by
shareholders will not result in a change to the net tangible book value per
share before and after the distribution of shares by the selling shareholders.
There will be no change in net tangible book value per share attributable to
cash payments made by purchasers of the shares being offered. Prospective
investors should be aware, however, that the market price of our shares may not
bear any rational relationship to net tangible book value per share.
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SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with our financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in this prospectus. The statement of operations data for
the years ended December 31, 1998, 1999 and 2000 and the balance sheet data as
of December 31, 1999 and 2000, are derived from, and qualified by reference to,
our audited financial statements included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1996 and 1997,
and the balance sheet data as of December 31, 1996, 1997 and 1998 are derived
from our audited financial statements that do not appear in this prospectus.
The historical results are not necessarily indicative of the operating results
to be expected in the future.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------- --------------------------
1996 1997 1998 1999 2000 2000 2001
----------- ----------- ------------ ------------ ------------ ----------- ------------
(UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Revenues:
License fees ............. $ -- $ -- $ -- $ 555,556 $ 3,333,333 $ 833,333 $ 833,333
Research and
development ............ -- -- -- 791,653 4,826,370 1,257,947 597,089
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total revenues ..... -- -- -- 1,347,209 8,159,703 2,091,280 1,430,422
Operating expenses:
Research and development,
exclusive of $23,649,
$1,856,932, $449,906 and
$244,498 for the years ended
December 31, 1999 and 2000
and the three months
ended March 31, 2000 and 2001,
respectively, reported
below as amortization of
deferred stock
compensation ........... 1,776,891 4,656,478 8,954,904 9,041,345 12,815,788 2,885,640 3,571,888
General and administrative,
exclusive of $61,831,
$6,115,796, $1,521,932 and
$550,319 for the years ended
December 31, 1999 and 2000
and the three months ended
March 31, 2000 and 2001,
respectively, reported
below as amortization of
deferred stock
compensation............ 548,766 988,230 1,573,807 2,593,017 3,035,559 786,362 948,651
Amortization of deferred
stock compensation ..... -- -- -- 85,480 7,972,728 1,971,838 794,817
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total operating
expenses ......... 2,325,657 5,644,708 10,528,711 11,719,842 23,824,075 5,643,840 5,315,356
----------- ----------- ------------ ------------ ------------ ----------- ------------
Operating loss ............. (2,325,657) (5,644,708) (10,528,711) (10,372,633) (15,664,372) (3,552,560) (3,884,934)
Net interest income
(expense) ................ 277,563 485,392 (205,130) (60,617) 1,714,850 157,767 784,306
----------- ----------- ------------ ------------ ------------ ----------- ------------
Net loss ................... $(2,048,094) $(5,159,316) $(10,733,841) $(10,433,250) $(13,949,522) $(3,394,793) $ (3,100,628)
=========== =========== ============ ============ ============ =========== ============
Basic and diluted net loss
per share ................ $ (1.10) $ (2.25) $ (4.45) $ (4.27) $ (1.30) $ (1.29) $ (0.13)
Shares used in computing
basic and diluted net loss
per share ................ 1,869,246 2,292,966 2,409,948 2,443,237 10,747,773 2,635,816 23,939,682
Pro forma basic and diluted
net loss per share...... $ (0.72) $ (0.21) $ (0.13)
Shares used in computing pro
forma basic and diluted
net loss per share...... 19,343,445 16,332,556 23,939,682
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The following table contains a summary of our balance sheet on an
actual basis at December 31, 1996, 1997, 1998, 1999 and 2000; and at March 31,
2001.
DECEMBER 31,
---------------------------------------------------------------------- MARCH 31,
1996 1997 1998 1999 2000 2001
------------ ------------ ------------- ------------- ------------- ------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents..... $11,404,142 $ 6,925,364 $ 3,683,423 $ 13,409,450 $ 26,463,070 $ 41,759,963
Short-term investments........ -- -- -- -- 27,518,169 9,000,841
Working capital (deficiency).. 11,330,250 6,108,938 (4,259,366) 9,651,239 52,422,951 49,890,715
Total assets.................. 11,965,284 7,612,796 5,341,816 15,717,214 57,598,951 54,211,243
Long-term obligations, less
current portion............. 270,950 281,636 163,262 61,854 84,907 42,766
Redeemable convertible
preferred stock and warrants 14,654,604 14,654,626 14,950,624 39,193,366 -- --
Deferred compensation......... -- -- -- (1,809,680) (5,930,880) (4,672,314)
Accumulated deficit........... (3,362,475) (8,521,791) (19,255,632) (29,688,882) (43,638,404) (46,739,032)
Total common shareholders'
equity (deficit)............ (3,177,653) (8,240,444) (18,973,881) (29,288,600) 54,271,686 52,001,381
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements and related notes included in this prospectus.
OVERVIEW
Since our operations began in 1994, we have been focused on the
discovery and development of novel drugs for the treatment of chronic
inflammatory diseases. Based on our proprietary v-protectant technology
platform, we have advanced two drug candidates into development, and are
progressing on a number of other pre-clinical programs. AGI-1067 is our
v-protectant candidate that is most advanced in clinical development. We
recently announced encouraging preliminary results of a Phase II clinical
trial, CART-1, that assessed in 305 patients the safety and effectiveness of
AGI-1067 for treatment of post-angioplasty restenosis. An analysis of the
results indicated that six months after angioplasty, the blood vessels of
patients who received AGI-1067 had remained more widely open, measured as
greater luminal diameters of their coronary arteries, than those who received
placebo. In March 2001, we commenced a Phase I clinical trial to assess the
safety and tolerability of AGIX-4207. AGIX-4207 is our second v-protectant
clinical candidate, a novel oral agent being developed for the treatment of the
signs and symptoms of rheumatoid arthritis.
To date, we have devoted substantially all of our resources to
research and development. We have not derived any commercial revenues from
product sales and, excluding the effect of certain license fees of a
non-recurring nature received in connection with entering into an exclusive
license agreement, expect to incur significant losses in most years prior to
deriving any such product revenue. We have incurred significant losses since we
began operations in 1994 and, as of March 31, 2001, had an accumulated deficit
of $46.7 million. There can be no assurance if or when we will become
profitable. We expect to continue to incur significant operating losses over
the next several years as we continue to incur increasing research and
development costs. We expect that losses will fluctuate from quarter-to-quarter
and that these fluctuations may be substantial. Our ability to achieve
profitability depends upon our ability, alone or with others, to complete the
successful development of our product candidates, to obtain required regulatory
clearances, and to manufacture and market our future products.
In October 1999 we entered into an exclusive licensing agreement with
Schering-Plough covering our lead compound, AGI-1067. Under terms of the
agreement, Schering-Plough obtained exclusive worldwide rights to AGI-1067 and
related compounds. Schering-Plough is responsible for all costs of development
and commercialization. Schering-Plough paid us an initial licensing fee and
will pay milestone fees upon achievement of development, regulatory and
commercial milestones.
On August 14, 2000, we completed an initial public offering of
6,000,000 shares of common stock at a price of $8.00 per share. All of the
6,000,000 shares were issued and sold. We granted the underwriters a 30-day
option to purchase up to an additional 900,000 shares of common stock to cover
over-allotments. The over-allotment option was exercised for the entire 900,000
shares on September 13, 2000.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
Revenues
Total revenues were $1.4 million for the three months ended March 31,
2001, compared to $2.1 million in the first quarter of 2000. Revenues of
$833,333 in the first quarter of 2001 and 2000 were attributable to licensing
fees from the exclusive license agreement signed in October 1999 with
Schering-Plough. This amount represents the earned portion of the $5.0 million
initial license fee, which is being amortized over 18 months. Research and
development revenues related to the license agreement were $597,089 for the
three-month period ended March 31, 2001 and $1.3 million for the three months
ended March 31, 2000. The variance of $660,858 is due to lower billings related
to our Phase II clinical study, which concluded in April 2001.
Expenses
Research and Development. Research and development expenses were $3.6
million for the three months ended March 31, 2001, compared to $2.9 million for
the three months ended March 31, 2000. The increase of $686,248, or 24%,
reflects the planned expansion of our internal research and development
capabilities, higher costs associated with the AGIX-4207 clinical trials and
pre-clinical costs related to our other product development programs.
General and Administrative. General and administrative expenses were
$948,651 for the three months ended March 31, 2001, compared to $786,362 for
the three months ended March 31, 2000. The increase of $162,289, or 21%, was
primarily due to higher professional fees and the addition of administrative
personnel to support the continued growth of our research and development
efforts.
Amortization of Deferred Stock Compensation. In 2000 and 1999, we
recorded non-cash deferred stock compensation totaling approximately $14.0
million for options granted with exercise prices below the deemed fair value
for financial reporting purposes of our common stock on their respective grant
dates. Amortization of deferred stock compensation was $794,817 for the three
months ended March 31, 2001, compared to $2.0 million for the three months
ended March 31, 2000. This deferred stock compensation is being amortized using
the graded vesting method, which results in higher amortization in the earlier
years.
Net Interest Income
Net interest income was $784,306 for the three months ended March 31,
2001 as compared to net interest income of $157,767 for the three months ended
March 31, 2000. The increase in net interest income was due to an increased
level of investments with funds received from our initial public offering.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues
Total revenues were $8.2 million for the twelve months ended December
31, 2000, compared to $1.3 million in 1999. Revenues of $3.3 million and
$555,556 in 2000 and 1999, respectively, were attributable to licensing fees
from the exclusive license agreement signed in October 1999 with
Schering-Plough. This amount represents the earned portion of the $5.0 million
initial licensing fee that is being amortized over 18 months. Research and
development revenues from our development activities on AGI-1067 were $4.8
million and $791,653 in 2000 and 1999, respectively.
Expenses
Research and Development. Research and development expenses, excluding
amortization of deferred stock compensation, were $12.8 million for the twelve
months ended December 31, 2000, compared to $9.0 million for the twelve months
ended December 31, 1999. The increase of $3.8 million, or 42%, reflects the
continued expansion of our internal research and development capabilities,
pre-clinical costs related to AGIX-4207, a novel compound being developed for
the treatment of rheumatoid arthritis, and other product development programs.
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General and Administrative. General and administrative expenses,
excluding amortization of deferred stock compensation, were $3.0 million for
the twelve months ended December 31, 2000, compared to $2.6 million for the
twelve months ended December 31, 1999. The increase of $442,542, or 17%, was
primarily due to increases in facility costs, personnel costs in administration
departments and professional fees.
Amortization of Deferred Stock Compensation. For the twelve months
ended December 31, 2000, we recorded non-cash deferred stock compensation of
approximately $12.1 million for options granted with exercise prices below the
deemed fair value for financial reporting purposes of our common stock on their
respective grant dates. This deferred stock compensation is being amortized
using the graded vesting method. Amortization of deferred stock compensation
was $8.0 million for the twelve months ended December 31, 2000, of which $1.9
million was attributable to research and development expenses and $6.1 million
was attributable to general and administrative expenses. There was $85,480 of
amortization of deferred stock compensation for the twelve months ended
December 31, 1999.
Net Interest Income (Expense)
Net interest income was $1.7 million for the twelve months ended
December 31, 2000 as compared to net interest expense of $60,617 for the twelve
months ended December 31, 1999. The increase in net interest income was due to
an increased level of invested funds from the initial public offering proceeds,
as well as the elimination of interest expense related to a bridge loan, which
was converted to preferred stock in April 1999.
Income Taxes
As of December 31, 2000, we had net operating loss carryforwards and
research and development credit carryforwards of $35.6 million and $1.2
million, respectively, available to offset future regular and alternative
taxable income. The net operating loss carryforwards and the research and the
development credit carryforwards will expire between 2010 and 2021. The maximum
annual use of the net operating loss carryforwards is limited in situations
where changes occur in our stock ownership. Because of our lack of earnings
history, the resulting deferred tax assets have been fully offset by a
valuation allowance. The utilization of the loss and credit carryforwards to
reduce future income taxes will depend on our ability to generate sufficient
taxable income prior to the expiration of the net operating loss carryforwards
and research and development credit carryforwards. We have not yet completed
full analysis of Internal Revenue Code Section 382 limitations on the
cumulative net operating loss carryforward. However, we do not expect the
annual limitations to prevent utilization of the net operating loss
carryforward due to significant increases in value indicated by the successive
issuances of preferred stock. If a change in ownership has occurred, there will
be an annual limitation; however, we do not expect this limitation to result in
a loss of the deferred tax benefit.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Total revenues were $1.3 million in 1999, compared to none in 1998.
Revenues of $555,556 in 1999 were attributable to licensing fees from the
exclusive license agreement signed in October 1999 with Schering-Plough. This
amount represents the earned portion of the $5.0 million initial license fee
that is being amortized over 18 months. Research and development revenues
related to the exclusive license agreement signed with Schering-Plough were
$791,653 in 1999.
Expenses
Research and Development. Research and development expenses were $9.0
million for the years ended December 31, 1999 and 1998. Research and
development expenses in 1999 were higher than 1998 by $86,441, or 1%,
reflecting slightly higher costs associated with the AGI-1067 clinical trials.
These increased costs principally involved payments to third party contractors.
General and Administrative. General and administrative expenses for
the years ended December 31, 1999 and 1998 were $2.6 million and $1.6 million,
respectively. The $1.0 million, or 63%, increase in 1999 compared to 1998 was
due primarily to an increase in administrative personnel to support our
expanded research and development and licensing programs, and to the costs of
relocating to a larger scientific and administration facility.
Amortization of Deferred Stock Compensation. In 1999 we recorded
non-cash deferred stock compensation of approximately $1.9 million for options
granted with exercise prices below the deemed fair value for financial
reporting purposes of our common stock
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on their respective grant dates. Amortization of deferred stock compensation
was $85,480 in 1999. Of such amount, $23,649 was attributable to research and
development expenses and $61,831 was attributable to general and administrative
expenses. There was no amortization of deferred stock compensation in 1998.
Net Interest (Expense) Income
Net interest expense was $60,617 and $205,130 for the years ended
December 31, 1999 and 1998, respectively. The $144,513, or 70%, decrease in
expense in 1999 as compared to 1998 was attributable to an increase in the
amount of cash available for investing from the sale of Series C convertible
preferred stock and conversion of a bridge loan to preferred stock in April
1999.
Income Taxes
As of December 31, 1999, we had net operating loss carryforwards and
research and development credit carryforwards of $24.9 million and $1.1
million, respectively, available to offset future regular and alternative
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
On June 19, 2001, we received approximately $18.8 million in net
proceeds from the sale of shares of common stock in a private placement to new
and existing shareholders.
We have financed our operations primarily through private placements
of preferred stock, and in August 2000, we completed an initial public offering
of 6.9 million shares of our common stock that raised net proceeds of $49.4
million. At March 31, 2001, we had cash, cash equivalents and short-term
investments of $50.8 million, compared with $54.0 million at December 31, 2000,
$13.4 million at December 31, 1999 and $3.7 million at December 31, 1998.
Working capital at March 31, 2001 was $49.9 million, compared to $52.4 million
at December 31, 2000, $9.7 million at December 31, 1999 and a deficit of $4.3
million at December 31, 1998. The decrease in cash, cash equivalents,
short-term investments and working capital during the quarter ended March 31,
2001 is primarily due to the use of funds in operating activities. The increase
in cash, cash equivalents, short-term investments and working capital for the
years ended December 31, 2000 and 1999 was due to the receipt of proceeds from
our initial public offering and the sale of preferred stock.
Net cash used in operating activities was $2.9 million for the three
months ended March 31, 2001, and $8.8 million, $6.7 million and $9.1 million
for the years ended December 31, 2000, 1999 and 1998, respectively. The use of
cash in the quarter ended March 31, 2001 was principally due to a reduction in
accounts receivable related to Schering-Plough billings. The uses of cash in
2000 compared to 1999 were primarily to fund net losses excluding non-cash
charges. The decrease in cash used in 1999 compared to 1998 was due to receipt
of a $5.0 million initial license fee from Schering-Plough.
Net cash provided by investing activities was $18.2 million for the
three months ended March 31, 2001. Net cash used in investing activities was
$28.2 million, $1.1 million and $62,586 for the years ended December 31, 2000,
1999 and 1998, respectively. Net cash provided by investing activities during
the quarter ended March 31, 2001 consisted primarily of the sales of short-term
investments, with the proceeds reinvested in cash equivalents. Net cash used in
investing activities during 2000 was due to the purchase of short-term
investments, equipment and leasehold improvements. Net cash used in investing
activities during 1999 and 1998 was primarily for the purchase of equipment and
leasehold improvements.
Net cash used in financing activities was $24,532 for the three months
ended March 31, 2001. Net cash provided by financing activities was $50.1
million, $17.5 million and $5.9 million for the years ended December 31, 2000,
1999 and 1998, respectively. Net cash used in financing activities during the
quarter ended March 31, 2001 consisted primarily of payments on capital lease
obligations offset by the exercise of common stock options. Net cash provided by
financing activities in 2000 consisted primarily of proceeds from our initial
public offering and the exercise of preferred stock warrants and common stock
options. Net cash provided by financing activities during the preceding periods
consisted primarily of proceeds from the sale of preferred stock and, in 1998,
proceeds from the bridge loan.
Based upon the current status of our product development and
commercialization plans, we believe that our existing cash and cash equivalents
will be adequate to satisfy our capital needs for at least the next 12 months.
However, our actual capital requirements will depend on many factors,
including:
- the status of product development;
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- the time and cost involved in conducting clinical trials and
obtaining regulatory approvals;
- filing, prosecuting and enforcing patent claims;
- competing technological and market developments; and
- our ability to market and distribute our future products and
establish new licensing agreements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ON MARKET RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we invest in may have market risk. This means that a change in prevailing
interest rates may cause the fair value of the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued
with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the fair value of the principal amount of our
investment will probably decline. To minimize this risk, we intend to continue
to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds, and
government and non-government debt securities. The average duration of all of
our investments has generally been less than one year. Due to the short-term
nature of these investments, we believe we have no material exposure to
interest rate risk arising from our investments.
BUSINESS
OVERVIEW
AtheroGenics is an emerging pharmaceutical company focused on the
discovery, development and commercialization of novel drugs for the treatment
of chronic inflammatory diseases, such as atherosclerosis, rheumatoid arthritis
and asthma. We designed our lead product candidate, AGI-1067, to benefit
patients with coronary artery disease, which is atherosclerosis of the blood
vessels of the heart. Atherosclerosis is a common disease that results from
inflammation and the buildup of plaque in arterial blood vessel walls. In
October 1999 we entered into a worldwide exclusive license agreement with
Schering-Plough to develop and commercialize AGI-1067. In May 2001, we
completed testing AGI-1067 in a Phase II clinical trial for the prevention and
treatment of restenosis, the recurrence of narrowing of the coronary arteries
following angioplasty in patients with coronary artery disease.
We have developed a proprietary vascular-protectant, or v-protectant,
technology platform to discover drugs for the treatment of chronic
inflammation. Our first v-protectants are drug candidates that block the
production of proteins that are necessary to initiate and maintain
inflammation. For example, one of these proteins, VCAM-1, binds to white blood
cells that accumulate at the site of inflammation and directs these cells in
their migration from the bloodstream into the tissue. We believe that
v-protectants can suppress chronic inflammation by blocking production of
VCAM-1 without undermining the body's ability to protect itself against
infection.
AGI-1067 is our v-protectant candidate that is most advanced in
clinical development. We recently announced encouraging preliminary results of
a Phase II clinical trial, CART-1, that assessed in 305 patients the safety and
effectiveness of AGI-1067 for the treatment of post-angioplasty restenosis. An
analysis of the results indicated that six months after angioplasty, the blood
vessels of patients who received AGI-1067 had larger openings, measured as
luminal diameters of their coronary arteries, than those who received placebo.
Our Phase II clinical trial program follows our successful completion of seven
Phase I clinical trials comprising more than 150 men and women.
In March 2001, we commenced a Phase I clinical trial to assess the
safety and tolerability of AGIX-4207 in healthy volunteers. AGIX-4207 is our
second v-protectant clinical candidate, a novel oral agent being developed for
the treatment of the signs and symptoms of rheumatoid arthritis.
We have identified other potential v-protectant product candidates to
treat asthma, exacerbation of rheumatologic diseases and solid organ transplant
rejection. We are evaluating these v-protectant product candidates to choose
lead product candidates for clinical development. We plan to develop these
v-protectants rapidly and may seek regulatory fast track status to expedite
development and commercialization. We will continue to expand upon our
v-protectant technology platform using functional genomics to identify novel
therapeutic gene targets. Functional genomics is the process by which one uses
scientific models and techniques to discover and modify genes, measure the
consequences of the modifications, and reliably determine the function of those
genes.
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INFLAMMATION AND DISEASE
Inflammation is a normal response of the body to protect tissues from
infection, injury or disease. The inflammatory response begins with the
production and release of chemical agents by cells in the infected, injured or
diseased tissue. These agents cause redness, swelling, pain, heat and loss of
function. Inflamed tissues generate additional signals that recruit white blood
cells to the site of inflammation. White blood cells destroy any infective or
injurious agent, and remove cellular debris from damaged tissue. This
inflammatory response usually promotes healing but, if uncontrolled, may become
harmful.
The inflammatory response can be either acute or chronic. Acute
inflammation lasts at most only a few days. The treatment of acute
inflammation, where therapy includes the administration of aspirin and other
non-steroidal anti-inflammatory agents, provides relief of pain and fever for
patients. In contrast, chronic inflammation lasts weeks, months or even
indefinitely and causes tissue damage. In chronic inflammation, the
inflammation becomes the problem rather than the solution to infection, injury
or disease. Chronically inflamed tissues continue to generate signals that
attract white blood cells from the bloodstream. When white blood cells migrate
from the bloodstream into the tissue they amplify the inflammatory response.
This chronic inflammatory response can break down healthy tissue in a
misdirected attempt at repair and healing. Diseases characterized by chronic
inflammation include, among others:
- atherosclerosis, including coronary artery disease;
- restenosis;
- rheumatoid arthritis;
- asthma; and
- solid organ transplant rejection.
Atherosclerosis is a common disease that results from inflammation and
the buildup of plaque in arterial blood vessel walls. Plaque consists of
inflammatory cells, cholesterol and cellular debris. Atherosclerosis, depending
on the location of the artery it affects, may result in a heart attack or
stroke. There are currently no medications available for physicians to treat
directly the underlying chronic inflammation of atherosclerosis.
Atherosclerosis of the blood vessels of the heart is called coronary
artery disease or heart disease. Treatment for coronary artery disease often
progresses to therapeutic procedures, including angioplasty or bypass surgery,
to re-establish an effective blood supply to the heart. Angioplasty corrects
the blockage by the inflation of a balloon delivered by catheter, with or
without the placement of a stent, a small cylindrical mesh device, at the site
of the obstructing plaque. After angioplasty, the artery opened by the
procedure often re-narrows. Significant re-narrowing may cause angina, a heart
attack, or require a repeat angioplasty. Inflammation plays an important role
in this re-narrowing, called restenosis. We are currently unaware of any
medical treatment for restenosis.
Rheumatoid arthritis is a chronic inflammatory disease of the joints.
Rheumatoid arthritis is marked by stiffness, pain, limitations to activity and
the destruction of joints, including knees and wrists. Present therapy of
rheumatoid arthritis includes non-steroidal anti-inflammatory drugs,
corticosteroids, and drugs designed to slow the progression of disease, termed
disease modifying anti-rheumatic drugs (DMARDs). DMARDs include drugs that were
originally designed to treat cancer, such as methotrexate. DMARDs have serious
side effects. Recently, two new DMARDs developed by other companies, Enbrel(R)
(etanercept) and Remicade(R) (infliximab) have been shown to improve the signs
and symptoms of patients with rheumatoid arthritis. These drugs prove that
blocking the activity of tumor necrosis factor, a molecule that stimulates a
broad range of cellular activities implicated in the inflammation process,
improves rheumatoid arthritis, but both drugs must be injected and both
increase the risk of severe infection.
Asthma is a common chronic inflammatory disease of the bronchial
tubes, which are the airways in the lungs. Asthma is marked by episodic airway
attacks that are caused by many stresses, including allergy, cold air, ozone or
exercise. Asthma therapy has concentrated on the use of inhaled corticosteroids
to reduce chronic inflammation and bronchodilators to provide symptomatic
relief. Asthmatic patients, however, continue to experience flare-ups, or
exacerbations, that are not prevented or effectively treated by these
medicines.
There is a wide variety of other chronic inflammatory diseases and
conditions, such as solid organ transplant rejection. Physicians regularly use
anti-inflammatory agents, such as aspirin, other non-steroidal
anti-inflammatory drugs and corticosteroids, alone or in combination with
immuno-suppressants, to treat these diseases. However, these diseases may
suddenly flare due to either the tissue
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inflammation that underlies them or bacteria that take advantage of the
suppressed immune response induced by present therapies. Treatments for the
underlying disease have major side effects and are not completely effective for
these inflammatory exacerbations. For example, systemic corticosteroids cause
major side effects including high blood pressure, adult-onset diabetes,
cataracts, brittle bones and increased risk of infection.
Many physicians are only now becoming aware of the key role of chronic
inflammation in diverse diseases such as atherosclerosis and asthma for which
existing anti-inflammatory treatments are incomplete and limited in use. As
more physicians recognize that a wide range of chronic diseases are
inflammatory in nature, we believe that these physicians will require safer and
more effective anti-inflammatory treatments. We believe that one of these
therapeutic approaches will be the administration of drugs designed to block
the migration of white blood cells through blood vessel walls into inflamed
tissues unless the inflammation is due to infection.
V-PROTECTANT TECHNOLOGY
We have developed a proprietary v-protectant technology platform for
the treatment of chronic inflammatory diseases. This platform is based on the
work of our scientific co-founders R. Wayne Alexander, M.D., Ph.D., and Russell
M. Medford, M.D., Ph.D. In 1993, Drs. Alexander and Medford discovered a novel
mechanism within arterial blood vessel walls that could control the excessive
accumulation of white blood cells without affecting the body's ability to fight
infection. V-protectant technology exploits the observation that the
endothelial cells that line the interior wall of the blood vessel play an
active role in recruiting white blood cells from the blood to the site of
chronic inflammation. V-protectants are drugs that block two harmful effects of
oxygen and other similar molecules, collectively called oxidants. Scientists
have known for some time that some oxidants can damage cells, but have recently
determined that these same oxidants may also act as signals to modify gene
activity inside cells. This change in gene activity leads to the production of
proteins that initiate or maintain inflammation. The protein products of these
cells, including VCAM-1, attract white blood cells to the site of chronic
inflammation. We believe that an excess number of VCAM-1 molecules on the
surface of cells is a disease state. We also believe that AGI-1067 and other
v-protectants can act as anti-oxidants and can block the specific type of
inflammation caused by oxidants acting as signals. We believe that
v-protectants will provide this anti-inflammatory benefit without undermining
the body's ability to protect itself against infection.
V-PROTECTANTS BLOCK ACTIVATION OF VCAM-1
IN CELLS THAT LINE BLOOD VESSELS
ACTIVATION OF VCAM-1
[PHOTO]
INHIBITION OF VCAM-1
[PHOTO]
1 INFLAMMATORY AGENT ATTACHES TO CELL SURFACE RECEPTOR
2 RECEPTOR CHANGES GENERATE OXIDANT SIGNALS INSIDE CELL
3 OXIDANT SIGNALS STIMULATE GENE TO PRODUCE VCAM-1
4 CELL PRODUCES VCAM-1 PROTEINS
5 VCAM-1 MIGRATES TO CELL SURFACE
6 WHITE BLOOD CELLS ATTACH TO VCAM-1 ON CELL SURFACE
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BUSINESS STRATEGY
Our objective is to become a leading pharmaceutical company focused on
discovering, developing and commercializing novel drugs for the treatment of
chronic inflammatory diseases. The key elements of our strategy include the
following:
- Develop AGI-1067 in collaboration with Schering-Plough. We
have entered into an exclusive license agreement with
Schering-Plough to develop and commercialize our lead product
candidate, AGI-1067, for the treatment of atherosclerosis. The
collaboration will seek initially to develop AGI-1067 for the
treatment and prevention of restenosis and the progression of
atherosclerosis in patients with coronary artery disease who
undergo angioplasty.
- Extend our v-protectant technology platform into additional
therapeutic areas that address unmet medical needs. We believe
that our v-protectants have the potential for treating a wide
variety of other inflammatory diseases and clinical
conditions. These indications include rheumatoid arthritis,
asthma, solid organ transplant rejection and other diseases.
We recently commenced a Phase I clinical trial with a
v-protectant compound, AGIX-4207, for the treatment of
rheumatoid arthritis.
- Create value rapidly through innovative drug discovery coupled
with innovative drug development. We intend to use our
capabilities to identify scientific breakthroughs in
inflammation and move these rapidly through pre-clinical
testing to clinical trials. We intend to use our development
expertise to minimize the time required to commercialize our
discoveries in functional genomics, which links genetics to
drug research, and medicinal and combinatorial chemistry,
which are techniques to identify novel drug candidates with
pre-defined activities.
- Expand our clinical product candidate portfolio. In addition
to our existing discovery programs, we intend to acquire
rights to other product candidates and technologies that
complement our existing product candidate lines or that enable
us to capitalize on our scientific and clinical development
expertise. We plan to expand our product candidate portfolio
by in-licensing or acquiring product candidates, technologies
or companies.
- Commercialize our products. We plan to collaborate with large
pharmaceutical companies to commercialize products that we
develop to target patient or physician populations in broad
markets. In contrast, we plan to develop a sales force to
commercialize those of our products that we develop to target
patient or physician populations in narrow markets.
PRODUCTS
The table below summarizes our therapeutic programs, their target
indication or disease, development status and commercial strategy.
THERAPEUTIC PROGRAM DISEASE/INDICATION DEVELOPMENT STATUS(1) COMMERCIAL STRATEGY
-------------------------- ---------------------- ----------------------- --------------------
LEAD V--PROTECTANTS
AGI-1067 Restenosis Phase II clinical trial Exclusive license to
Schering-Plough
AGIX-4207 Rheumatoid arthritis Phase I clinical trial Collaboration
-------------------------- ---------------------- ----------------------- --------------------
OTHER V--PROTECTANTS
AGI-series, intravenous Exacerbations of Compound selection Collaboration
rheumatological
diseases
AGI-series, oral Solid organ transplant Compound selection Internal
rejection
Oral product candidate Chronic asthma Research Collaboration
-------------------------- ---------------------- ----------------------- --------------------
OTHER PROGRAMS
Functional genomics Inflammatory diseases Research
-------------------------- ---------------------- ----------------------- --------------------
DIAGNOSTICS
OXYKINE(R) assay Atherosclerosis Clinical testing Collaboration
-------------------------- ---------------------- ----------------------- --------------------
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(1) References to compound selection mean the process by which we are
selecting a lead product candidate for clinical development.
We have established therapeutic programs for product development using
product candidates we select from among our compound libraries. These programs
seek to exploit the value of the products early and to expand their use broadly.
We are developing our lead compound, AGI-1067, and related compounds in
collaboration with Schering-Plough. We are also progressing with the development
of our internally discovered compound, AGIX-4207, as an agent to treat the signs
and symptoms of rheumatoid arthritis.
We continue to test compounds from among our compound libraries to
identify back-up and follow-up product candidates. We are also pursuing novel
discovery targets in chronic inflammation.
AGI-1067
AGI-1067, our lead v-protectant product candidate, is a small molecule
that patients take orally once per day. In pre-clinical testing, AGI-1067
demonstrated the following three biological properties that we believe will
benefit patients with atherosclerosis:
- AGI-1067 blocks production of VCAM-1. We believe that
decreased VCAM-1 production will diminish atherosclerosis and
restenosis.
- AGI-1067 is a potent anti-oxidant. AGI-1067 protects LDL
cholesterol from converting into a harmful inflammatory agent.
- AGI-1067 lowers LDL cholesterol. LDL cholesterol lowering
reduces the risk of developing atherosclerosis.
According to the American Heart Association, more than 12 million
people in the United States have coronary artery disease, including
approximately 1.1 million who have heart attacks every year. In order to make a
definitive diagnosis in patients with suspected coronary artery disease, a
specially trained cardiologist or radiologist performs a diagnostic procedure
called angiography in which the cardiologist injects dye through an intravenous
catheter to image the coronary arteries. Angiography can reveal coronary artery
disease that may require an invasive procedure. Physicians perform this invasive
procedure, called angioplasty, more than one million times annually worldwide.
This procedure consists of placing a balloon-tipped catheter into the coronary
artery and mechanically re-opening the blood vessel by expanding the balloon
under very high pressure. In addition, cardiologists may opt to treat some of
these coronary artery blockages by inserting a stent to keep the blood vessel
open after the cardiologist removes the catheter.
Angioplasty does not cure coronary artery disease, nor does it treat
the underlying chronic inflammation. In fact, angioplasty induces an
inflammatory response that contributes to its failure in approximately 30
percent of patients who undergo the procedure. This process of re-narrowing, or
post-angioplasty restenosis, is a major clinical problem that limits the
effectiveness of the procedure. Restenosis following balloon angioplasty occurs
due to local damage to the coronary artery. The development of stents and the
ongoing research and development activities with respect to catheter improvement
have not eradicated the problem of restenosis, but have introduced the new
problem of in-stent restenosis which is particularly difficult to treat.
In-stent restenosis occurs when the cells that surround the stent proliferate
and fill the opening of the vessel.
Our initial development target is post-angioplasty restenosis. More
significantly, we believe that AGI-1067 may treat all areas of the coronary
artery susceptible to atherosclerosis in a way that cannot be achieved with any
existing therapy.
We have completed pre-clinical testing in multiple species to establish
the therapeutic properties of AGI-1067. Our pre-clinical results indicated that,
dosed orally, AGI-1067 blocked VCAM-1 production, blocked damage from oxidants
and prevented atherosclerosis. In addition, AGI-1067 reduced LDL cholesterol
comparably to and in combination with statins, which are widely used
cholesterol-lowering drugs. In recent testing, AGI-1067 lowered "bad"
cholesterol, increased "good" cholesterol and blocked atherosclerosis in a
year-long pre-clinical model of progression of atherosclerosis.
Based upon our successful completion of pre-clinical testing, we
studied AGI-1067 in seven Phase I clinical trials comprising more than 150 men
and women, including healthy volunteers and patients up to the age of 85, to
assess tolerability and potential for interaction with other drugs. In the
course of these seven studies we gave AGI-1067 in combination with other drug
classes commonly used in patients with atherosclerosis. In these seven clinical
trials, six of which we conducted under the Investigational New Drug application
for cholesterol lowering, some subjects reported mild nausea during the first
few doses of AGI-1067, but the nausea abated
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while they continued to take the drug. Overall, the subjects tolerated AGI-1067
well, with no dose or use-limiting side effects. These clinical trial results,
which showed that patients tolerated AGI-1067 well alone and in combination with
other drugs, supported our progress to Phase II clinical trials.
We recently announced encouraging preliminary results of our Phase II
clinical trial, CART-1, that assessed in 305 patients the safety and
effectiveness of AGI-1067 for the treatment of post-angioplasty restenosis. An
analysis of the results indicated that six months after angioplasty, the blood
vessels of patients who received AGI-1067 had greater luminal diameters of their
coronary arteries than those who received placebo. This improvement showed a
statistically significant dose response. At the highest dose of AGI-1067, the
increase in the size of the target blood vessel was similar to that achieved
with probucol, the active control drug in CART-1, which has been shown in
previous clinical studies to reduce restenosis rates significantly following
angioplasty without the use of a stent.
We have formed a joint management committee with Schering-Plough to
oversee all aspects of development and commercialization of AGI-1067. The
committee consists of equal numbers of AtheroGenics and Schering-Plough
representatives. Under direction of the joint management committee, we expect to
manage aspects of clinical and pre-clinical development work for AGI-1067.
AGIX-4207
Rheumatoid arthritis is a common auto-immune disease that affects
joints and arterial blood vessels. According to the Arthritis Foundation, there
are 2.1 million people with rheumatoid arthritis in the United States.
Rheumatoid arthritis and related diseases cost the U.S. economy more than $65
billion annually in direct and indirect costs. Approximately 70 percent of
patients with rheumatoid arthritis are young and middle-aged women.
Physicians treat rheumatoid arthritis in a stepwise fashion, starting
with the occasional to regular use of anti-inflammatory agents such as aspirin
or ibuprofen, and proceeding to treatment with DMARDs, which can potentially be
toxic. The newer DMARDs target the modulation of tumor necrosis factor, tissue
repair and proliferation. The recent successful introduction of new drugs for
rheumatoid arthritis has highlighted both the market potential and the size and
scope of the unmet medical need of these patients. These drugs are partially
effective, but must be injected according to a schedule and may cause serious
side effects. AGIX-4207 is a selective modulator of tumor necrosis factor
induced genes and is being tested as an oral medication, taken once a day. This
selective nature of AGIX-4207 may decrease chronic inflammation in rheumatoid
arthritis with fewer side effects. In March 2001, we commenced a Phase I
clinical trial to assess the safety and tolerability of AGIX-4207 in healthy
volunteers.
Treatment of patients with rheumatoid arthritis progresses from pain
reliever to increasingly toxic immuno-suppressants, called disease modifiers. If
we achieve positive clinical trial results, we will evaluate our v-protectant
for the treatment of patients who are receiving moderate disease modifying
therapy to determine whether AGIX-4207 will permit decreasing the use of toxic
drugs while maintaining the patient's clinical status.
We are developing an orally-dosed, v-protectant drug candidate to treat
moderate to severe rheumatoid arthritis in patients who have shown an incomplete
or inadequate response to other DMARD therapy. We are also developing an
intravenously-dosed, v-protectant drug candidate to treat exacerbations of
rheumatologic diseases. An exacerbation is a sudden worsening of the patient's
arthritis or condition that usually requires hospitalization and intensive
therapy.
AGI-Series for Post-Transplant Chronic Solid Organ Rejection
We are developing an orally-dosed, v-protectant drug candidate to treat
chronic solid organ transplant rejection. Patients' immune systems recognize
transplanted organs as foreign and therefore reject them. Acute rejection occurs
soon after transplantation, while chronic rejection may take years. Recent
industry sources report there are approximately 200,000 organ transplant
recipients in the United States who are at risk of chronic transplant rejection.
Chronic rejection is a major factor contributing to organ shortage. Physicians
treat these patients with powerful immuno-suppressants to block all immune and
inflammatory reactions that could cause solid organ rejection. These therapies,
however, may place patients at increased risk for infection. The vascular
protection provided by our product candidates may protect solid organs from
rejection beyond the first year without increasing the risk of infection.
We have identified v-protectant product candidates for oral
administration to patients who have received transplants. We are evaluating
these small molecules based on development criteria such as potency, stability
and ease of formulation. We will use these criteria and results from
comprehensive pre-clinical studies that are under way to choose a lead product
candidate for clinical development that targets chronic solid organ transplant
rejection. We plan to apply to the FDA for fast track status for this product
candidate as an adjunct to current transplant therapy, which includes
immuno-suppressant and anti-inflammatory drugs.
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AGI-Series for Respiratory Diseases
According to the American Lung Association, asthma afflicts more than
17 million adults and children in the United States. From 1980 to 1994, the
prevalence of this disease increased by over 75%. Asthma morbidity and mortality
continue to rise in spite of massive public health efforts. According to the
American Lung Association, in 1998 the combined direct and indirect costs of
asthma in the United States is approximately $11.3 billion annually. Current
therapies that target the underlying disease include corticosteroids and several
classes of drugs that relieve symptoms but are not effective for chronic
inflammation. None of these drugs, including inhaled corticosteroids, are
particularly effective for treating exacerbation of asthma, which remains a
major unmet medical problem. We believe that v-protectants may reduce the
inflammation associated with chronic asthma and with the acute exacerbation of
asthma, and may be useful in the treatment of up to 1.8 million patients
annually who develop acute exacerbations of asthma and seek emergency room
treatment in the United States.
We are evaluating classes of chemical compounds as potential treatments
for asthma and other respiratory diseases. We will evaluate these components for
regular treatment of chronic respiratory diseases or for exacerbations. We will
test our compounds for delivery by the oral, intravenous or inhaled route of
administration.
Diagnostic Assay Program
Based on our v-protectant technology platform, we have designed a
simple and proprietary blood test that measures a circulating blood marker for
atherosclerosis. We plan to conduct tests on human blood samples to establish
whether this new marker, called OXYKINE(R), is an accurate and useful diagnostic
tool. We believe OXYKINE(R) will allow physicians to determine whether a patient
has active and progressive atherosclerosis and whether the disease is responding
to medical therapy. We are not aware of any diagnostic tools that meet this
profile.
RESEARCH PROGRAM
We have built a robust research program using our demonstrated
expertise in functional genomics, molecular biology, cell biology, physiology,
pharmacology, medicine, biochemistry, and analytical and synthetic chemistry and
bioengineering.
Our research program has three main objectives:
- To discover and develop v-protectants with enhanced potency
and improved therapeutic properties. We are synthesizing novel
compounds and testing them in a variety of biochemical and
cell-based assays to discover and develop new, small molecule
v-protectants. We believe that these v-protectants will have
improved therapeutic properties and applicability across a
wide range of chronic inflammatory diseases. We have
identified a novel series of highly potent v-protectants.
- To identify novel anti-inflammatory therapeutic targets
utilizing functional genomics. One part of our drug discovery
platform is a set of techniques that connects our knowledge of
genes, which code for proteins, to agents that modify gene
activity. This collection of methods, called functional
genomics, enables us to select targets efficiently. Our target
for therapy may be the gene, the protein, another substance in
the body that links to the protein, or the agent that induces
the change. For example, oxidants are agents that induce
changes in gene activity. We believe our functional genomics
program will enable us to identify novel genes and their
protein products that are critical to the chronic inflammatory
process. We plan to progress these genes and proteins into
targets for novel classes of drugs.
- To develop new classes of v-protectant drugs based on the
novel therapeutic targets identified by our functional
genomics program. We are identifying enzymes and other
molecular targets that either control or are controlled by
oxidant signals. These discoveries will enable our chemists to
synthesize the next generation of v-protectants. We intend to
use these enzymes and other molecular targets for both
internal efforts and as strategic collaboration assets.
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PATENTS AND INTELLECTUAL PROPERTY
We have established a patent portfolio of owned and in-licensed patents
that cover our lead v-protectant compounds and their use, as well as methods for
regulating the fundamental biological pathway involved in the production of the
inflammatory protein, VCAM-1. It is our goal to pursue both broad and specific
patent protection in the key areas of our research and development both in the
United States and internationally, and to identify value-added exclusive
in-licensing opportunities.
The patent approval process in the United States progresses through
several steps from filing an application, through review of the application by
the U.S. Patent and Trademark Office, and, if the application is allowed, to an
issued patent. There is a similar regulatory process in most non-U.S. countries.
As of June 1, 2001, we own three U.S. patents, nine pending U.S. applications,
three pending international applications filed under the Patent Cooperation
Treaty and 56 associated non-U.S. patent filings, which, if issued, will expire
from 2012 to 2022. In addition, we hold licenses from Emory University to 11
U.S. patents and 16 associated non-U.S. patent filings expiring on or before
2014. We purchased one of the U.S. patents that we own in an agreement with Dr.
Sampath Parthasarathy, a member of our Scientific Advisory Board. We believe the
cost of this agreement to us is immaterial.
We have license agreements with Emory University and The Regents of the
University of California covering aspects of our technology. These agreements
obligate us to make milestone payments upon attainment of agreed-upon goals and
royalty payments on sale of licensed products and technology. The licenses with
Emory University and The Regents of the University of California also require us
to be diligent in commercializing the licensed technologies within certain time
periods.
Under our license agreement with Emory University, Emory University
granted to us an exclusive license to make, use and sell methods and products
covered by certain patents and patent applications owned by Emory University
relating generally to the treatment and diagnosis of VCAM-1 related diseases.
The license agreement requires us to make royalty payments to Emory University
based on certain percentages of net revenue we derive from sales of products
covered by the licensed patents or patent applications, and from sublicensing of
the licensed patents or patent applications. The license agreement also requires
us to make milestone payments to Emory University upon the occurrence of certain
product development events. Milestone payments for AGI-1067 could total $250,000
if all milestone objectives are met. We must indemnify Emory University for all
claims and/or losses caused or contributed to by AtheroGenics arising out of our
use of the license. We have procured commercial general liability insurance in
specified amounts customary in the industry naming Emory University as an
insured.
The Emory license agreement will terminate when all patent rights
licensed under the agreement expire. Emory University may terminate the
agreement if, after Emory gives notice to us, we fail to make a payment, we fail
to render progress reports, we incur specified financial problems, we decide to
no longer develop licensed products under the agreement, or we breach a material
term of the agreement. We may terminate the agreement upon advance notice to
Emory, or if Emory University violates certain material terms of the agreement.
Under our license agreement with The Regents of the University of
California, we received a license to make, use and sell diagnostic and
therapeutic methods and products using monoclonal antibodies in atherosclerosis
and other diseases, which are claimed in applicable patent applications owned by
The Regents of the University of California in the U.S. and Canada. We must make
milestone payments to The Regents of the University of California upon
occurrence of various product development events of up to $45,000 for each
therapeutic application and $35,000 for each diagnostic application. In
addition, we must pay to The Regents of the University of California a
percentage of the net revenue we receive from the sale of products covered by
the patents and patent applications and from our sublicensing the licensed
patents and patent applications. The Regents of the University of California may
terminate the agreement upon proper notice for violation of material terms of
the agreement. The agreement expires in 2018, when the last patent covered by
the license expires. We may terminate the agreement at any time upon prior
notice to The Regents of the University of California. We must indemnify The
Regents of the University of California for all losses and claims arising out of
our use of the license. In addition, we have procured commercial liability
insurance in specified amounts customary in the industry naming the University
of California as an insured.
AGI-1067 Patent Portfolio
Our patent coverage on AGI-1067 is based on patent filings that we own
and patent filings exclusively licensed from Emory University. We own one issued
patent, U.S. Patent No. 5,262,439, which expires in 2012, and related filings in
Japan, Canada and Europe that generically cover the compound AGI-1067 as a
member of a class of related compounds. We own another patent, U.S. Patent No.
6,147,250, that covers through 2018 the specific compound AGI-1067 and its use
to treat VCAM-1 mediated diseases including, among others, atherosclerosis,
post-angioplasty restenosis and coronary artery disease. We also own U.S. Patent
No. 6,121,319, which covers the
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use of a class of compounds closely related to AGI-1067 to treat VCAM-1 mediated
diseases. Applications corresponding to U.S. Patent No. 6,147,250 and U.S.
Patent No. 6,121,319 have also been filed in 20 non-U.S. patent offices. The
patents that we have exclusively licensed from Emory University include the use
of a substance that inhibits a class of oxidant signals to treat diseases
mediated by VCAM-1.
AGIX-4207 Patent Portfolio
Our patent coverage on AGIX-4207 is based on patent filings that we own
and patent filings exclusively licensed from Emory University. We own one U.S.
patent application, and 20 associated non-U.S. patent filings which describe
AGIX-4207 and its use to treat rheumatoid arthritis, other inflammatory
conditions and other disorders mediated by VCAM-1. Any patents issuing from this
application will expire in 2018.
Other V-Protectant Compounds
Certain patent applications in the United States and non-U.S. countries
cover the use of a number of compounds identified in our research program to act
as v-protectants, and specifically for use in treating cardiovascular and
inflammatory disease. Some of these compounds are novel and some represent new
uses for known compounds. In addition we have exclusively licensed patents from
Emory University that cover the use of a class of compounds which act as
v-protectants.
Our patent position, like that of many pharmaceutical companies, is
uncertain and involves complex legal and factual questions for which important
legal principles are unresolved or unclear. We may not develop or obtain rights
to products or processes that are patentable. Even if we do obtain patents, they
may not adequately protect the technology we own or in-license. In addition,
others may challenge, seek to invalidate, infringe or circumvent any patents we
own or in-license, and rights we receive under those patents may not provide
competitive advantages to us.
Our commercial success will depend in part on our ability to
manufacture, use, sell and offer to sell our product candidates and proposed
product candidates without infringing patents or other proprietary rights of
others. We may not be aware of all patents or patent applications that may
impact our ability to make, use or sell any of our product candidates or
proposed product candidates. For example, U.S. patent applications are
confidential while pending in the Patent and Trademark Office, and patent
applications filed in non-U.S. countries are often first published six months or
more after filing. Further, we may not be aware of published or granted
conflicting patent rights. Any conflicts resulting from patent applications and
patents of others could significantly reduce the coverage of our patents and
limit our ability to obtain meaningful patent protection. If others obtain
patents with conflicting claims, we may be required to obtain licenses to these
patents or to develop or obtain alternative technology. We may not be able to
obtain any licenses or other rights to patents, technology or know-how necessary
to conduct our business as described in this prospectus. Any failure to obtain
such licenses or other rights could delay or prevent us from developing or
commercializing our product candidates and proposed product candidates, which
would adversely affect our business.
Litigation or patent interference proceedings may be necessary to
enforce any of our patents or other proprietary rights, or to determine the
scope and validity or enforceability of the proprietary rights of others. The
defense and prosecution of patent and intellectual property claims are both
costly and time consuming, even if the outcome is favorable to us. Any adverse
outcome could subject us to significant liabilities, require us to license
disputed rights from others, or require us to cease selling our future products.
Trademarks
The U.S. Patent and Trademark Office issued a Certificate of
Registration for the trademark OXYKINE on April 10, 2001. The Patent and
Trademark Office issued a Certificate of Registration for the trademark
AATHEROGENICS and DESIGN on November 7, 2000 and issued one for the trademark
AGI on September 19, 2000.
EXCLUSIVE LICENSE AGREEMENT WITH SCHERING-PLOUGH
In October 1999, we entered into a worldwide exclusive license
agreement with Schering-Plough. This agreement consists of contracts with two
Schering-Plough affiliates. Under the agreement we granted to Schering-Plough an
exclusive license under our patents and know-how to make, use and sell AGI-1067
and other specified compounds for the treatment of restenosis, coronary artery
disease and atherosclerosis. During the term of the agreement with
Schering-Plough, we will not develop or commercialize outside the agreement any
compound for the treatment or prevention of restenosis, coronary artery disease
or atherosclerosis.
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Schering-Plough paid us an initial nonrefundable licensing fee of
$5,000,000 upon signing the agreement and has assumed responsibility for all
costs going forward associated with the development, manufacturing and
commercialization of products containing AGI-1067 and any other licensed
compound. Further, Schering-Plough will make certain payments to us upon
achievement of clinical and regulatory milestones. Schering-Plough will also pay
us a royalty on all net sales of licensed products and will pay us fees
associated with the achievement of certain annual sales levels.
Schering-Plough's total direct payments to us for the initial indication of
restenosis, excluding royalties and development costs, could reach $189 million
during the term of the agreement. The amount and timing of any milestone and
royalty payments, however, are subject to events, many of which are beyond our
control and the achievement of which we cannot assure.
The agreement will terminate when the last patent right which is
subject to the agreement expires. Schering-Plough may terminate the agreement at
any time upon 60 days prior written notice to us. We may terminate the agreement
upon the failure of Schering-Plough to meet certain development milestones.
Either party may terminate the agreement upon proper notice of certain uncured
material violations of the agreement. In addition, either party may terminate
the agreement on a product-by-product basis if Schering-Plough ceases
commercialization of a licensed product. Finally, either party may terminate the
agreement if the other party incurs specified financial problems. Upon certain
material breaches of the agreement by AtheroGenics, Schering-Plough may either
terminate the agreement, continue the agreement with future milestone payments
materially reduced by a specified percentage, or continue the agreement with
future royalty payments reduced by a specified percentage. Should either party
terminate the agreement, AtheroGenics will have the right to purchase
Schering-Plough's remaining inventory of licensed products at a specified
amount.
MANUFACTURING
We have entered into an arrangement with a third party manufacturer for
the supply of AGI-1067 bulk drug substance and another third party manufacturer
for the formulated drug product. Our exclusive license agreement with
Schering-Plough grants them the right to manufacture AGI-1067 for late-stage
clinical trials and commercialization. Schering-Plough has assumed
responsibility for manufacturing and formulating AGI-1067. Schering-Plough has
extensive experience in manufacturing pharmaceutical products.
The supplier of the bulk drug substance for AGI-1067 operates under
current Good Manufacturing Practice guidelines using cost-effective and readily
available materials and reliable processes. The starting material used in the
manufacturing process of AGI-1067 is probucol, which was once widely used in
North America as a cholesterol-lowering agent, but has since been withdrawn from
the North American market due to lack of efficacy. Under the terms of our
contract, our bulk drug supplier is committed to manufacture sufficient
quantities to support development activities for the foreseeable future.
After manufacture, a third party supplier formulates AGI-1067 into the
drug product under current Good Manufacturing Practice guidelines. We anticipate
that this supplier will be able to provide sufficient formulated drug product to
complete our ongoing and currently planned clinical trials.
We plan to establish manufacturing agreements with third parties that
comply with Good Manufacturing Practice guidelines for bulk drug substance and
oral or intravenous formulations of our other v-protectant product candidates,
including AGIX-4207.
SALES AND MARKETING
Under our exclusive license agreement for AGI-1067, Schering-Plough
will handle exclusively, or sublicense, on a worldwide basis, sales, marketing
and distribution of AGI-1067 for any therapeutic indication. Schering-Plough has
extensive experience in marketing pharmaceutical products.
We plan to collaborate with large pharmaceutical companies to
commercialize product candidates other than AGI-1067 which are for patient or
physician populations in broad markets. We believe that collaborating with large
companies that have significant marketing and sales capabilities provides for
optimal penetration into broad markets, particularly those areas that are highly
competitive. In contrast, we plan to develop a sales force to commercialize the
products targeted at patient and physician populations in narrow markets. By
using our own sales and marketing organization, we believe we can retain a
higher percentage of the profits generated from the sale of our products.
COMPETITION
We believe pharmaceutical companies and research institutions will
increase their efforts to define and exploit emerging concepts about vascular
cell biology and oxidant signals for drug discovery programs relating to chronic
inflammation. Many of these
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companies and institutions have targeted indications that overlap significantly
with our targets and have substantially greater resources than we do. They may,
therefore, succeed in commercializing products before we do that compete with us
on the basis of efficacy, safety and price.
Our ability to compete is predicated on four related factors:
- First, our scientists and their collaborators have pioneered
the basic discoveries and research methodologies linking
oxidant signals to vascular cell inflammation. These
discoveries and research methodologies form the foundation for
our proprietary drug discovery programs relating to chronic
inflammation.
- Second, our scientific expertise, coupled with our expertise
in clinical drug development, has enabled us to be the first
company to conduct clinical trials of an orally-administered,
small molecule v-protectant. We believe that our current Phase
II clinical trials demonstrate that we are maintaining this
important first-to-clinic competitive advantage.
- Third, we expect that our exclusive license agreement with
Schering-Plough will allow us to sustain and extend our
competitive advantage.
- Fourth, we believe our scientific, development and licensing
expertise strongly positions us to acquire promising
technologies and products discovered outside AtheroGenics.
Our initial target for drug development is restenosis. We are aware of
two orally-dosed drugs that have shown efficacy in prevention of restenosis in
clinical trials. One of these drugs, Tranilast, is currently in a worldwide
Phase III clinical trial sponsored by GlaxoSmithKline. The rationale for this
clinical trial is based on efficacy in a limited Phase II clinical trial in
Japan. However, another major pharmaceutical company previously discontinued
Tranilast development during Phase II in the United States as a treatment of
asthma due to significant human liver toxicity. The second drug, Lorelco,
decreased the rate of restenosis in a North American clinical trial undertaken
by an independent investigator. This trial confirmed and extended results from
Japan, where Lorelco is still marketed. However, Aventis SA previously withdrew
Lorelco from North American markets as a lipid-lowering drug due to lack of
efficacy. We believe that a rare but potentially fatal side effect makes
Lorelco's return to the marketplace highly unlikely. In addition, we are aware
that Amylin Pharmaceuticals Inc. has recently begun Phase I clinical trials to
evaluate a compound as a treatment to prevent restenosis after vascular repair
procedures. Amylin has reported that in animal studies this compound reduced
low-density lipids in blood serum, but not high-density lipids, to inhibit
lipoprotein oxidation, and to inhibit cell adhesion molecules in vascular cells.
In addition to these drugs and this product candidate, some physicians advocate
the use of anti-oxidant vitamins, short courses of radiation delivered directly
to coronary arteries, or the use of specially designed catheters or improved
angioplasty techniques to decrease the incidence or severity of restenosis.
In addition to the drugs and devices that may compete with AGI-1067 in
the treatment of restenosis, there are a number of other drugs and compounds in
development for other indications that we target. A number of companies are
pursuing drugs that control aspects of the immune system across the range of
diseases that we target. For example, Genentech, Inc. in collaboration with
Tanox, Inc. and Novartis AG is developing a novel injectable asthma therapy
based on delivery of an anti-IgE monoclonal antibody, which targets the allergic
component of chronic asthma. Drugs that target tumor necrosis factor, including
Enbrel(R) (etanercept) and Remicade(R) (infliximab) are approved to treat
rheumatoid arthritis.
GOVERNMENTAL REGULATION
We plan to develop prescription-only drugs for the foreseeable future.
The FDA is the regulatory agency that is charged with the protection of people
in the United States who take prescription medicines. Every country has a
regulatory body with a similar mandate. In addition, the European Union has
vested centralized authority in the European Medicines Evaluation Agency and
Committee on Proprietary Medicinal Products to standardize review and approval
across member nations.
Regulatory agencies have established guidelines and regulations for the
drug development process. This process involves several steps. First, the drug
company must generate sufficient pre-clinical data to support initial human
testing. In the United States, the drug company must submit an Investigational
New Drug application prior to human testing. The Investigational New Drug
application contains adequate data on product candidate chemistry, toxicology
and metabolism and, where appropriate, animal research testing to support
initial safety evaluation in humans. In addition, the drug company provides to
the FDA a clinical plan, including proposed use and testing in subjects
comprising healthy volunteers and patients.
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Clinical trials for a new product candidate usually proceed through
four phases:
- Phase I clinical trials explore safety, blood levels,
metabolism and the potential for interaction with other drugs.
Phase I typically proceeds from healthy volunteers into
patients with the target disease and comprises up to
approximately 200 total subjects.
- Phase II clinical trials establish a dose for future testing
and marketing in an adequate number of patients with the
target disease. The clinical trials may include hundreds of
patients who have the target disease and who are receiving a
range of background medications. In addition, Phase II
clinical trials verify the mechanisms of action proposed
pre-clinically.
- Phase III clinical trials usually include two adequate and
well controlled studies in the target population. For most
chronic diseases, drug companies study a few thousand patients
to assure a broadly applicable assessment of safety and
efficacy.
At the successful conclusion of Phase III, drug companies may
submit a product license application, called a New Drug
Application in the United States. Upon accepting the
submission, the FDA or non-U.S. regulatory authorities review
the file for completeness, accuracy and adherence to
regulations. These authorities may use internal and external
consultants and may convene an expert committee to advise on
the safety, effectiveness and usefulness of the proposed new
product candidate prior to final regulatory judgment. The
final step to registration is approval of the package insert
or label that defines what the drug company may promote to
physicians who use the new drug.
- Phase IV clinical trials support marketing of the drug for its
approved indication. Phase IV clinical trials generate data to
allow promotion of the new drug in comparison with other
approved drugs and to support healthcare economics claims. In
addition, every pharmaceutical company is responsible for
post-marketing surveillance for safety in the marketplace.
We must meet regulatory standards prior to exposing subjects to any
candidate drug product. We remain responsible for any of these development
activities whether we perform them internally or contract them to a third party.
The FDA may audit us or our third party contractors at any time to ascertain
compliance with standards. The FDA may halt all ongoing work if it determines
that we or our contractors have deviated significantly from these standards.
These standards include:
- Good Manufacturing Practices, which govern process chemistry,
formulation, labeling and handling of a drug throughout its
life cycle;
- Good Laboratory Practices, which govern the use of a drug in
animal studies to support establishment of safety or the
disposition and metabolism of the administered drug and
handling of human or other biological samples for drug assays;
and
- Good Clinical Practices, which govern the exposure of human
subjects under our protocols. Good Clinical Practices set
standards for the constitution and activities of institutional
review boards that are charged with assuring that the
appropriate person gives informed consent prior to study
participation and protect patients whether they receive an
experimental drug, an approved drug, or an inactive look-alike
called a placebo.
Advertising is subject to FDA approval in the United States and
national review elsewhere. In addition, state and local governments and other
federal agencies may control marketing if the drug substance, formulation,
package, intended use or disposal is subject to local regulation.
The FDA has expanded its expedited review process in recognition that
certain severe or life-threatening diseases and disorders have only limited
treatment options. Fast track designation expedites the development process but
places greater responsibility on the drug company during Phase IV clinical
trials. The drug company may request fast track designation for one or more
indications at any time during the Investigational New Drug application process,
and the FDA must respond within 60 days. Fast track designation allows the drug
company to develop product candidates and to request an accelerated or priority
review of the New Drug Application based on clinical effectiveness in a smaller
number of patients. If the FDA accepts the submission as a priority review, the
time for New Drug Application review and approval is reduced from one year to
six months. We plan to request fast track designation as appropriate for
internal drug development programs.
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EMPLOYEES
As of June 19, 2001, we had 78 full-time employees, including 60 in
research and development. The employee group includes 21 Ph.D.s, seven M.D.s and
18 employees with Masters degrees. We believe that our employee relations are
good.
FACILITIES
Our scientific and administration facility encompasses approximately
27,000 square feet in Alpharetta, Georgia. We lease our facility pursuant to a
long-term lease agreement that expires in 2009 and our aggregate commitment
under this long-term, non-cancelable lease is approximately $8.5 million. This
lease may be extended at our option to 2019.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
ADVISORY BOARDS
We have established advisory boards to provide guidance and counsel on
aspects of our business. These boards are convened once a year and individual
members are contacted as required. Members of these boards provide input on
product research and development strategy, education and publication plans. The
advisory board members are paid an annual stipend and receive options for common
stock for their services, and are reimbursed for expenses in connection with
attendance at advisory board meetings. The names and members of these boards are
as follows:
SCIENTIFIC ADVISORY BOARD
R. Wayne Alexander, M.D., Ph.D., Chairman.................... Professor and Chairman of the Department of
Medicine, Emory University School of Medicine
Victor J. Dzau, M.D.......................................... Chairman, Department of Medicine, Harvard
Medical School
David Harrison, M.D.......................................... Professor of Medicine, Division of Cardiology,
Emory University School of Medicine
Dennis Liotta, Ph.D.......................................... Professor of Chemistry and Vice President of
Research, Emory University School of
Medicine
Robert M. Nerem, Ph.D........................................ Parker H. Petit Professor and Director,
Bioengineering and Bioscience, Georgia
Institute of Technology
Sampath Parthasarathy, Ph.D.................................. Professor, Department of Gynecology and
Obstetrics, Emory University School of
Medicine
Robert D. Rosenberg, M.D., Ph.D.............................. Professor of Biology, Massachusetts Institute
of Technology and Professor of Medicine,
Harvard Medical School
CLINICAL ADVISORY BOARD
William Virgil Brown, M.D.................................... Professor of Medicine, Director of Division of
Atherosclerosis & Lipid Metabolism, Emory
University School of Medicine
Harvey M. Golomb, M.D........................................ Professor and Chairman, Department of
Medicine, and Director, Section of
Hematology/Oncology, The University of
Chicago
Joseph L. Witzum, M.D........................................ Professor of Medicine, University of
California at San Diego
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding our
executive officers, key employees and directors as of June 19, 2001:
NAME AGE POSITION
---- --- --------
Russell M. Medford, M.D., Ph.D......... 46 President, Chief Executive Officer and
Director
Mitchell Glass, M.D.................... 49 Senior Vice President of Strategic Drug
Development
Mark P. Colonnese...................... 45 Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Judith R. Jaeger, M.D.................. 52 Vice President of Clinical Development and
Regulatory Affairs
Martin A. Wasserman, Ph.D.............. 59 Vice President of Discovery Research and
Chief Scientific Officer
Michael A. Henos (1)................... 51 Chairman of the Board of Directors
R. Wayne Alexander, M.D., Ph.D......... 60 Director
Vaughn D. Bryson (2)................... 63 Director
T. Forcht Dagi, M.D. (2)............... 52 Director
Arthur M. Pappas (1)................... 53 Director
William A. Scott, Ph.D. (1)............ 61 Director
Stephen G. Sudovar (2)................. 55 Director
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Russell M. Medford, M.D., Ph.D. is our scientific co-founder, President
and Chief Executive Officer and has served as a member of our board of directors
since our inception in 1993. Dr. Medford has been our President and Chief
Executive Officer since 1995 after serving as Executive Vice President from 1993
to 1995. Since 1989, Dr. Medford has held a number of academic appointments at
the Emory University School of Medicine, most recently as Associate Professor of
Medicine and Director of Molecular Cardiology. Dr. Medford is a molecular
cardiologist whose research has focused on the molecular basis of cardiovascular
disease and holds 11 U.S. patents. Dr. Medford currently serves on advisory
committees to the National Heart, Lung and Blood Institute of the National
Institutes of Health and was recently selected as an inaugural Fellow of the
Council on Basic Cardiovascular Sciences of the American Heart Association. Dr.
Medford serves on the Board of Trustees of EmTech Biotechnology Development,
Inc. and is a director of privately held Inhibitex, Inc. Dr. Medford received a
B.A. from Cornell University, and an M.D. with Distinction and a Ph.D. in
molecular and cell biology from the Albert Einstein College of Medicine. Dr.
Medford completed his residency in internal medicine at the Beth Israel Hospital
and his fellowship in cardiology at the Brigham and Women's Hospital and Harvard
Medical School, where he also served on the faculty of Medicine.
Mitchell Glass, M.D. was promoted to Senior Vice President of Strategic
Drug Development of AtheroGenics in January 2001. He had previously served as
our Vice President of Clinical Development and Regulatory Affairs since 1997.
From 1995 to 1996, Dr. Glass served as Vice President and Director of
Cardiopulmonary Clinical Research, Development and Medical Affairs at SmithKline
Beecham PLC. From 1988 to 1995, Dr. Glass held various positions at ICI
Pharmaceuticals PLC, subsequently Zeneca PLC, where he was responsible for
developing the pulmonary therapeutics group. From 1985 to 1987, Dr. Glass served
as an attending physician in Pulmonary Medicine and Critical Care at Graduate
Hospital while maintaining a teaching position at the University of
Pennsylvania. From 1981 to 1984, Dr. Glass was a postdoctoral Fellow and
Research Associate in Pulmonary Medicine and Respiratory Physiology at the
University of Pennsylvania. Dr. Glass received B.A. and M.D. degrees from the
University of Chicago and completed his residency in internal medicine and
clinical fellowship in Pulmonary Medicine at Presbyterian, University of
Pennsylvania Medical Center.
Mark P. Colonnese has served as our Vice President of Finance &
Administration and Chief Financial Officer since 1999. Prior to joining us, Mr.
Colonnese was at Medaphis Corporation from 1997 to 1998, serving most recently
as Senior Vice President and Chief
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Financial Officer. Previously, Mr. Colonnese was Vice President of Finance and
Chief Financial Officer and a member of the executive committee at aaiPharma
Inc., a pharmaceutical development company, from 1993 to 1997. Mr. Colonnese
served on the board of directors of Endeavor Pharmaceuticals, Inc. from 1994 to
1997. From 1983 to 1993, Mr. Colonnese held a number of executive and management
positions at Schering-Plough Corporation, culminating as Senior Director of
Planning and Business Analysis. Mr. Colonnese holds an M.B.A. from Fairleigh
Dickinson University and a B.S. magna cum laude from Ithaca College.
Judith R. Jaeger, M.D. joined AtheroGenics in January 2001 as Vice
President of Clinical Development and Regulatory Affairs. Prior to joining
AtheroGenics, she served as a clinical consultant to the pharmaceutical industry
and other clients from 1999 to 2000. From 1983 to 1998, Dr. Jaeger held several
positions at Boehringer Ingelheim Pharmaceuticals, Inc., serving most recently
as Director of Immunology Clinical Research. She had responsibility for clinical
research activities ranging from pre-clinical through post-marketing. Her
clinical research activities were focused in Pulmonary Therapeutics and in
Immunology, where her work was primarily in the area of cell adhesion molecules.
Dr. Jaeger received her B.S. degree with Honors from the University of Wisconsin
where she was elected to Phi Beta Kappa, and received her M.D. degree from New
York University. She completed her residency in internal medicine as well as a
Fellowship in Pulmonary Disease at Montefiore Medical Center in the Bronx, New
York, where she also served as an Emergency Department attending physician and
Clinical Instructor in Medicine. Dr. Jaeger is a Diplomate of both the American
Board of Internal Medicine and the Subspecialty Board of Pulmonary Diseases, and
a Fellow of the American College of Chest Physicians.
Martin A. Wasserman, Ph.D. joined AtheroGenics in April 2001 as Vice
President of Discovery Research and Chief Scientific Officer. Prior to joining
AtheroGenics, Dr. Wasserman was the Vice President and Senior Distinguished
Scientist in the Respiratory and Rheumatoid Arthritis Disease Group within the
U.S. Drug Innovation and Approval Organization (R&D) at Aventis Pharmaceuticals,
Inc., from 1995 to 2001. He was Director of Bronchopulmonary Research at
Hoffmann-LaRoche, Inc. from 1992 to 1995. From 1989 to 1991, Dr. Wasserman was
Director of Biomedical Evaluation at the Bristol-Myers Squibb Pharmaceutical
Research Institute. Dr. Wasserman has a B.S. in Pharmacy from Rutgers University
College of Pharmacy, and received an M.A. and Ph.D. in Pharmacology and
Toxicology from the University of Texas Medical Branch in addition to being
honored with the Distinguished Alumus Award. Dr. Wasserman is presently on the
faculty of Seton Hall University School of Graduate Medical Education as
Professor of Internal Medicine and holds three additional Adjunct Professorships
at The University of Medicine and Dentistry of New Jersey, Rutgers University
College of Pharmacy and Philadelphia College of Pharmacy and Sciences. He is on
the editorial boards of several journals and has published numerous articles in
the areas of pulmonary, immunology, inflammation, cardiovascular, renal and
gastrointestinal research.
Michael A. Henos has served as chairman of our board of directors since
1994 and was our Chief Financial Officer from 1994 to 1999. From 1991 to the
present, Mr. Henos has served as managing general partner of Alliance Technology
Ventures, L.P., a venture capital firm with $250 million under management which
principally invests in southeastern technology startup companies. Mr. Henos has
served as a general partner with Aspen Ventures, a $150 million early stage
venture capital partnership from 1986 to the present. Mr. Henos previously
served as a vice president of 3i Ventures Corporation, the predecessor of Aspen
Ventures, from 1986 to 1991. From 1984 to 1986, Mr. Henos served as a healthcare
consultant with Ernst & Young, specializing in venture financing of startup
medical technology companies. Before joining Ernst & Young, Mr. Henos served in
a variety of operating management positions and co-founded and served as Chief
Executive Officer of ProMed Technologies, Inc. Mr. Henos previously served as a
director of KeraVision, Inc.
R. Wayne Alexander, M.D., Ph.D. is our scientific co-founder and has
served as a member of our board of directors since our inception in 1993. Dr.
Alexander has been a Professor of Medicine since 1988 and Chairman of the
Department of Medicine of Emory University School of Medicine and Emory
University Hospital since 1999. From 1988 to 1999, Dr. Alexander served as the
Director of the Division of Cardiology at the Emory University School of
Medicine and Emory University Hospital. Prior to his appointment at Emory
University School of Medicine, Dr. Alexander served as Associate Professor of
Medicine at Harvard Medical School from 1982 to 1988. Dr. Alexander received his
Ph.D. in physiology from Emory University and his M.D. from Duke University
School of Medicine. Dr. Alexander completed his residency in internal medicine
at the University of Washington and completed his fellowship in cardiology at
Duke University.
Vaughn D. Bryson has served as a consultant to us since 1996 and a
member of our board of directors since February 2000. Mr. Bryson is President of
Life Science Advisors, a consulting firm focused on assisting biopharmaceutical
and medical device companies in building shareholder value. Mr. Bryson was a
32-year employee of Eli Lilly & Company and served as President and Chief
Executive Officer of Eli Lilly from 1991 to 1993. Mr. Bryson was Executive Vice
President of Eli Lilly from 1986 until 1991 and served as a member of Eli
Lilly's board of directors from 1984 until his retirement in 1993. Mr. Bryson
was Vice Chairman of Vector Securities International from 1994 to 1996. He is
also a director of Amylin Pharmaceuticals Inc., Ariad Pharmaceuticals Inc.,
Chiron Corporation and Quintiles Transnational Corp. Mr. Bryson received a B.S.
degree in Pharmacy from the University of North Carolina and completed the Sloan
Program at the Stanford University Graduate School of Business.
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T. Forcht Dagi, M.D., M.P.H., F.A.C.S., F.C.C.M. has served as a member
of our board of directors since 1999. Dr. Dagi joined Cordova Ventures, LLP, a
venture firm with over $250 million under management, as a Managing Partner in
1996. Prior to joining Cordova, Dr. Dagi served as director and principal of
Access Partners, an early stage biotechnology fund. Dr. Dagi serves as a
director of the following privately-held companies: AviGenics, Inc., Inhibitex,
Inc., Cogent Neuroscience, Inc., Encelle, Inc., iPhysicianNet Inc., Merix
Biosciences, Inc. and Xanthon, Inc. Dr. Dagi received an A.B. from Columbia
College, an M.D. from the Johns Hopkins School of Medicine, an M.P.H. from the
Johns Hopkins School of Hygiene and Public Health, an M.T.S. from Harvard
University, and an M.B.A. in finance and strategic planning from the Wharton
School of the University of Pennsylvania. Dr. Dagi was trained in neurosurgery
and neurophysiology at the Massachusetts General Hospital and Harvard Medical
School, where he was a Neuroresearch Foundation Fellow. Dr. Dagi is a diplomat
of American Board of Neurological Surgeons and a Fellow of both the American
College of Surgeons and the College of Critical Care Medicine.
Arthur M. Pappas has served as a member of our board of directors since
June 1995. Mr. Pappas is Chairman and Chief Executive Officer of A. M. Pappas &
Associates, LLC, an international advisory services, investment and venture
company that works with life science companies, products and related
technologies. Prior to founding A. M. Pappas & Associates in 1994, Mr. Pappas
was a director on the main board of Glaxo Holdings plc with executive
responsibilities for operations in Asia Pacific, Latin America, and Canada. In
this capacity, Mr. Pappas was Chairman and Chief Executive of Glaxo Far East
(Pte) Ltd. and Glaxo Latin America Inc., as well as Chairman of Glaxo Canada
Inc. Mr. Pappas has held various senior executive positions with Abbott
Laboratories International Ltd., Merrell Dow Pharmaceuticals and the Dow
Chemical Company, in the United States and internationally. Mr. Pappas is a
director of Quintiles Transnational Corp., Valentis Inc., Embrex, Inc., and
privately held ArgoMed, Inc., EBM Solutions, Inc., Elitra Pharmaceuticals and
Incellico, Inc. Mr. Pappas received a B.S. in Biology from Ohio State
University and an M.B.A. in Finance from Xavier University.
William A. Scott, Ph.D. has served as a member of our board of
directors since 1997 and in a consulting role as our Vice President of Research
from May 2000 to May 2001. Dr. Scott was Chief Executive Officer and a member of
the board of directors of Physiome Sciences, Inc., a company that specializes in
the design of computer models of human organs, from 1997 to 1999. From 1983 to
1996, Dr. Scott held numerous positions at the Bristol-Myers Squibb Research
Institute, most recently as Senior Vice President of Drug Discovery from 1990
until 1996. Dr. Scott has served as an Adjunct Professor at the Rockefeller
University since 1983 and as an Associate Dean and Associate Professor at
Rockefeller University. Dr. Scott is currently a director of Variagenics, Inc.
and Deltagen, Inc.
Stephen G. Sudovar joined our board of directors in June 2001. Mr.
Sudovar has served as President and Chief Executive Officer of EluSys
Therapeutics, Inc., a biopharmaceutical company focused on treatments for
blood-borne diseases, since 1999. From 1997 to until joining EluSys
Therapeutics, Mr. Sudovar served as President of Roche Laboratories, Inc., a
U.S. division of Hoffmann-LaRoche. From 1988 to 1996, Mr. Sudovar held a number
of executive and management positions at Roche Laboratories, Inc. From 1977 to
1988, Mr. Sudovar was President, Chief Executive Officer and Chairman of Pracon,
Inc., a healthcare consulting and communications firm that he founded. Earlier
in his career Mr. Sudovar was selected by the President's Commission on
Personnel Exchange to participate in the President's Executive Interchange
Program. As a Presidential appointee, he worked as Deputy Administrator for
planning evaluation and legislation for the Environmental Protection Agency. He
received a special recognition award from the President of the United States for
his work at the agency. Mr. Sudovar received his B.S. from St. Peter's College
and M.B.A. from Fairleigh Dickinson University.
BOARD COMPOSITION
Pursuant to our amended and restated articles of incorporation and
amended and restated bylaws, our board of directors is divided into three
classes, with each director serving a three-year term (after the initial term).
Directors are elected to serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. A director elected to fill a board vacancy serves until the
expiration of the term of the directorship filled. Due to two vacancies in Class
I, Mr. Bryson is currently the only Class I director and will hold office until
the 2004 annual meeting of shareholders. The directors of Class II, Dr.
Alexander, Dr. Dagi, Dr. Scott and Mr. Sudovar, hold office until the 2002
annual meeting of shareholders. The directors of Class III, Mr. Henos, Dr.
Medford and Mr. Pappas, hold office until the 2003 annual meeting of
shareholders. Executive officers are elected by and serve at the discretion of
our board of directors. No family relationships exist among any of our directors
or executive officers.
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BOARD COMMITTEES
We have established an audit committee, a compensation committee and a
science committee.
Audit Committee. The audit committee, which consists of Mr. Bryson, Dr.
Dagi and Mr. Sudovar, is responsible for nominating our independent auditors for
approval by the board of directors and reviewing the scope, results and costs of
the audits and other services provided by our independent auditors.
Compensation Committee. The compensation committee, which consists of
Mr. Henos, Mr. Pappas and Dr. Scott, reviews and approves the compensation and
benefits for our executive officers, administers our 1995 Stock Option Plan,
1997 Equity Ownership Plan and 2001 Equity Ownership Plan, and makes
recommendations to the board of directors regarding such matters and matters
relating to board compensation.
Science Committee. The science committee, which consists of Drs.
Alexander and Scott, is responsible for providing guidance to us on
science-related matters.
DIRECTOR COMPENSATION
In September 2000, we began paying fees to directors who were not
employees of AtheroGenics in the amount $1,000 for each board meeting attended
in person, $500 for each committee meeting attended in person and $250 for each
teleconference in which they participated. As of March 2001, the board of
directors increased the directors' compensation to $2,000 for each board meeting
attended in person, $750 for each committee meeting attended in person and $500
for each teleconference in which they participated. Upon initial election each
non-employee board member will be granted a non-qualified stock option to
acquire up to 20,000 shares of common stock. The exercise price will be equal to
the fair market value of our common stock on the date of grant and the option
will vest one-third at the time of election and one-third on each of the first
and second anniversaries of election. These directors also receive annually
non-qualified stock options having an aggregate value of $30,000 using the Black
Scholes model. In addition, we reimburse all of our directors for ordinary and
necessary travel expenses to attend board and committee meetings.
In connection with joining our board of directors in February 2000, we
entered into a four-year consulting agreement with Mr. Bryson pursuant to which
he will assist management in assessing growth opportunities and strategic
direction. Our board of directors has agreed to pay Mr. Bryson for his
consulting services a non-qualified stock option to acquire up to 20,000 shares
of common stock with an exercise price equal to the fair market value of our
common stock on the date of grant. The option vests 25% on the first anniversary
of the date of grant and approximately 2% per month thereafter.
On May 11, 2000, we entered into a consulting agreement with Dr. Scott,
a member of our board of directors, to engage him to serve as Vice President of
Research for a period of up to six months. We extended the consulting agreement
for an additional six months. Under the agreement, we paid Dr. Scott $900 per
day onsite, plus we awarded him 1,000 shares of common stock for each month of
service. The agreement expired on May 11, 2001. We awarded Dr. Scott a total of
13,000 shares of common stock under the agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more of its
executive officers serving as a member of our board of directors or compensation
committee.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned
during the year ended December 31, 2000 and 1999 by our Chief Executive Officer
and each of our other most highly compensated executive officers whose total
salary and bonus exceeded $100,000 for services rendered to us in all capacities
during 2000 and 1999. The executive officers listed in the table below are
referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION UNDERLYING OPTIONS ALL
FISCAL ---------------------- (NUMBER OF OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SHARES) COMPENSATION(1)
--------------------------- ------ -------- -------- ------------------ ---------------
Russell M. Medford, M.D., Ph.D................... 2000 $237,000 $150,000 590,000 $ 4,992
President and Chief Executive 1999 237,000 -- 300,000 4,990
Officer
Mitchell Glass, M.D.............................. 2000 229,129 20,000 155,000 8,657(2)
Senior Vice President of Strategic 1999 210,000 -- 20,000 27,508(2)
Drug Development
Mark P. Colonnese................................ 2000 190,000 75,000 160,000 5,250
Vice President of Finance and 1999 182,083 30,000 140,000 3,681(3)
Administration
Chief Financial Officer and Secretary
Don Kirksey, Ph.D. (5)........................... 2000 175,000 10,000 90,000 5,250
Vice President of Business and 1999 175,000 -- 50,000 44,914(4)
Corporate Development
---------------
(1) Includes for each named executive officer a 401(k) plan matching
contribution by us for 2000 and 1999, respectively, in the amounts of
$4,992 and $4,990 for Dr. Medford; $5,250 and $1,420 for Mr. Colonnese
and $5,250 and $1,312 for Dr. Kirksey.
(2) Represents reimbursement for personal travel.
(3) Includes $2,256 for consulting services prior to employment.
(4) Represents reimbursement for moving and relocation expenses.
(5) Dr. Kirksey resigned as Vice President of Business and Corporate
Development as of May 11, 2001.
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OPTION GRANTS IN YEAR ENDED DECEMBER 31, 2000
The following table sets forth information concerning the individual
grants of stock options to each of the named executive officers during the
fiscal year ended December 31, 2000. All options were granted under our 1997
Equity Ownership Plan. Each option has a ten-year term, subject to earlier
termination if the optionee's service with us terminates. Options vest at the
rate of 25% on the first anniversary of the vesting commencement date and 1/48th
monthly thereafter in 36 installments. Prior to our initial public offering in
August 2000, options were granted with the exercise prices equal to the fair
value on the date of grant as determined by our board of directors, primarily
through the use of independent valuations. Following the initial public
offering, all options were granted with exercise prices equal to the fair market
value on the date of the grant.
INDIVIDUAL GRANT
------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR(1) ($/SH) DATE
---- -------------------- ----------------- -------- ----------
Russell M. Medford, M.D., Ph.D ... 500,000 32.0% 0.38 1/28/10
90,000 5.8 5.00 12/29/10
Mitchell Glass, M.D .............. 120,000 7.7 0.38 1/28/10
35,000 2.2 5.00 12/29/10
Mark P. Colonnese ................ 125,000 8.0 0.38 1/28/10
35,000 2.2 5.00 12/29/10
Don Kirksey, Ph.D ................ 85,000 5.4 0.38 1/28/10
5,000 0.3 5.00 12/29/10
-------
995,000
=======
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM(2)
----------------------------------
NAME 5% 10%
---- ----------- -----------
Russell M. Medford, M.D., Ph.D ... $ 6,325,579 $10,184,970
283,003 717,184
Mitchell Glass, M.D .............. 1,518,139 2,444,393
110,057 278,905
Mark P. Colonnese ................ 1,581,395 2,546,242
110,057 278,905
Don Kirksey, Ph.D ................ 1,075,348 1,731,445
15,722 39,844
----------- -----------
$11,019,300 $18,221,888
=========== ===========
---------------
(1) In 2000, we granted options to employees to purchase an aggregate of
1,563,850 shares of common stock.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5% and
10% compounded annually from the date the respective options were
granted to their expiration date. The 5% and 10% assumed rates of
appreciation are used in accordance with the rules of the SEC. With
regard to the options expiring January 28, 2010 that were granted at
$.38 per share, we applied the initial public offering price of $8.00
per share as the deemed per share market price at the time of grant.
With regard to the options expiring December 29, 2010 that were granted
at $5.00 per share, we applied the fair market value of $5.00 per
share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock. The
actual gains, if any, on the stock option exercises will depend on the
future performance of the common stock, the optionee's continued
employment through applicable vesting periods and the date on which the
options are exercised and the underlying shares are sold.
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AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 2000
AND YEAR-END OPTION VALUES
The following table sets forth option exercises by the named executive
officers during the 2000 fiscal year, including the aggregate value of gains on
the date of exercise. The table also sets forth (i) the number of shares covered
by options (both exercisable and unexercisable) as of December 31, 2000 and (ii)
the respective value for "in-the-money" options, which represents the positive
spread between exercise price of existing options and the fair market value of
AtheroGenics' common stock at December 31, 2000.
NUMBER OF SECURITIES
VALUE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF REALIZED OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES SHARES DECEMBER 31, 2000 DECEMBER 31, 2000
ACQUIRED ON ACQUIRED ON --------------------------- ------------------------------
NAME EXERCISE EXERCISE(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Russell M. Medford, M.D., Ph.D ... -- $ -- 340,000 650,000 $1,607,710 $2,601,290
Mitchell Glass, M.D .............. 51,700 398,090 90,800 162,500 424,360 592,050
Mark P. Colonnese ................ 44,400 341,880 49,850 205,750 231,729 794,891
Don Kirksey, Ph.D ................ 35,000 269,500 50,750 154,250 236,680 696,020
------- ---------- ------- --------- ---------- ----------
131,100 $1,009,470 531,400 1,172,500 $2,500,479 $4,684,251
======= ========== ======= ========= ========== ==========
---------------
(1) Value realized of shares acquired on exercise was calculated using the
initial public offering price of $8.00 per share.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
As of June 19, 2001, a total of 267,800 shares of common stock were
reserved for issuance under our 1995 Stock Option Plan, or 1995 Plan, 250,000 of
which were subject to outstanding options. The 1995 Plan provides for the grant
of options to which Internal Revenue Code ss.422, relating generally to
incentive stock options and other options, does not apply. The 1995 Plan
provides for granting stock options to our directors, employees, consultants and
contractors. The 1995 Plan is administered by our board of directors. Subject to
the provisions of the 1995 Plan, the board of directors has the authority and
sole discretion to determine and designate those persons to whom options are
granted, the option price of the shares covered by any options granted, the
manner in and conditions under which options are exercisable, including any
limitations or restrictions thereon, and the time or times at which options
shall be granted. Our board of directors may not grant any options under the
1995 Plan more than ten years after June 13, 1995, its date of adoption. The
maximum term of options granted under the 1995 Plan is ten years. Unless
terminated earlier in accordance with the provisions of the 1995 Plan, the 1995
Plan will terminate upon the later of:
- the complete exercise or lapse of the last outstanding option,
or
- the last date upon which options may be granted under the 1995
Plan.
1997 Equity Ownership Plan
As of June 19, 2001, a total of 2,956,800 shares of common stock were
reserved for issuance under our 1997 Equity Ownership Plan, or 1997 Plan, of
which options to purchase an aggregate of 2,456,935 shares were outstanding and
499,865 shares were available for future grant. The 1997 Plan provides for the
grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, nonqualified stock options, shares of restricted stock,
stock appreciation rights and performance awards to our employees, directors,
consultants and advisors, or to alternate grantees affiliated with our directors
if certain conditions are met. Incentive stock options may be granted only to
our employees. The 1997 Plan is administered by our board of directors or its
designee(s). Subject to the provisions of the 1997 Plan, the administrator has
the authority to determine:
- to whom awards will be granted,
- the time when awards may be granted,
- the number of shares to be covered by an award,
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45
- when an award becomes vested or exercisable,
- the exercise price of an award, which price, in the case of
incentive stock options, shall not be less than the fair
market value of our common stock on the date of grant or, in
the case of incentive stock options granted to employees who
own, directly or indirectly, more than 10% of our total
combined voting power, 110% of the fair market value of our
common stock on the date of grant, and
- any restrictions or conditions on the shares subject to
awards.
The maximum term of incentive stock options granted under the 1997 Plan
is ten years or five years in the case of an optionee who owns more than 10% of
our common stock. Our board of directors may terminate the 1997 Plan at any
time, provided that no termination without the consent of the holder of an award
shall adversely affect the rights of the participant under the award.
2001 Equity Ownership Plan
In April 2001, we established the 2001 Equity Ownership Plan, or 2001
Plan. A total of 2,000,000 shares are reserved for issuance under the 2001 Plan.
As of June 19, 2001, no options have been granted and no shares have been issued
under the 2001 Plan. The 2001 Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Internal Revenue Code,
nonqualified stock options, shares of restricted stock and stock appreciation
rights to our employees, directors, consultants and advisors, or alternate
grantees affiliated with our directors if certain conditions are met. Incentive
stock options may be granted only to our employees. The 2001 Plan is
administered by our board of directors or its designee(s). Subject to the
provisions of the 2001 Plan, the administrator has the authority to determine:
- to whom awards will be granted,
- the time when awards may be granted,
- the number of shares to be covered by an award,
- when an award becomes vested or exercisable,
- the exercise price of an award, which price, in the case of
incentive stock options, shall not be less than the fair
market value of our common stock on the date of grant or, in
the case of incentive stock options granted to employees who
own, directly or indirectly, more than 10% of our total
combined voting power, 110% of the fair market value of our
common stock on the date of grant, and
- any restrictions or conditions on the shares subject to
awards.
The maximum term of incentive stock options granted under the 2001 Plan
is ten years or five years in the case of an optionee who owns more than 10% of
our common stock. Our board of directors may terminate the 2001 Plan at any
time, provided that no termination without the consent of the holder of an award
shall adversely affect the rights of the participant under the award.
401(k) Plan
We have established a tax-qualified employee savings and retirement
plan, or 401(k) Plan. Under the 401(k) Plan, eligible participating employees
may elect to contribute up to 15% of their salary, up to the maximum amount of
tax deferred contribution allowed by the Internal Revenue Code. The 401(k) Plan
permits us to make discretionary matching contributions. During 2000 we matched
50% of employees' contributions, up to a maximum of 6% of employees' annual base
compensation. The 401(k) Plan is intended to qualify under Section 401 of the
Internal Revenue Code so that contributions by employees or by us to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that our contributions will be
deductible by us when made. The trustee under the 401(k) Plan, at the direction
of each participant, invests the assets of the 401(k) Plan in any number of
investment options.
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EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Dr. Medford, our
President and Chief Executive Officer, dated as of March 1, 2001.
Our employment agreement with Dr. Medford has an initial term of three
years, commencing on the effective date of the agreement. The initial term
extends automatically for one year on the second anniversary of the effective
date of the agreement and on each anniversary thereafter, unless, prior to such
anniversary, either party gives notice that it wishes to terminate the agreement
at the end of the then current employment term. The agreement provides for a
base salary of not less than $275,000 per year and annual incentive compensation
to be determined by our board of directors in its discretion. However, for the
first year of the agreement, the target annual incentive compensation is
$104,500, or 38% of base salary. Our board of directors will grant annually to
Dr. Medford, subject to availability, additional stock or stock options having a
value of at least 60% of Dr. Medford's then current base salary. The employment
agreement provides Dr. Medford with a one-time allowance for financial and tax
planning assistance in a lump sum payment not to exceed $25,000. The employment
agreement also provides Dr. Medford with a one-time signing bonus of $20,000.
If we terminate Dr. Medford's employment agreement other than for cause
or we choose not to extend the agreement, or if Dr. Medford terminates the
agreement as a result of a constructive discharge or a change of control of
AtheroGenics, we must pay Dr. Medford an amount equal to two times the sum of
his then current base salary and the pro rata portion of his target annual
incentive compensation for the year in which the termination occurs. In the
event that Dr. Medford voluntarily resigns or is discharged for cause, he will
receive no special severance benefits or compensation. Dr. Medford's employment
agreement also has post-termination noncompetition and nonsolicitation
provisions which prohibit him from competing with AtheroGenics or soliciting its
customers or employees for one year following his termination.
CERTAIN TRANSACTIONS
Since January 1, 1998, we have engaged in the following transactions
with our directors, officers and 5% shareholders and affiliates of our
directors, officers and 5% shareholders:
In January 1995, we entered into a license agreement with Emory
University. Under the terms of this agreement, Emory granted to us an exclusive
right and license to make, use and sell products utilizing inventions claimed in
several patents developed by employees of Emory. The Emory employees who
developed the licensed patents include Russell M. Medford, M.D., Ph.D., our
President, Chief Executive Officer and director, R. Wayne Alexander, M.D.,
Ph.D., our Secretary and a member of our board of directors, and Sampath
Parthasarathy, Ph.D., a member of our scientific advisory board. The license
agreement requires us to make royalty payments to Emory based on certain
percentages of net revenue we derive from sales of products utilizing inventions
claimed in the licensed patents and from sublicensing of the licensed patents.
The license agreement also provides for milestone payments to Emory upon the
occurrence of certain events relating to the development of products utilizing
the licensed patents. Drs. Alexander, Medford and/or Margaret K. Offermann,
M.D., Ph.D., Dr. Medford's wife, will receive a portion of our payments to Emory
under the license agreement. We paid a signing fee to Emory upon the execution
of this agreement and an additional amount for achievement of the first
milestone under the agreement. We are required to pay Emory royalties upon sales
of products utilizing the patent technology and milestone payments totaling
$250,000, if all sales and milestone objections are met. We have not made any
other royalty or milestone payments to Emory under this agreement to date.
We are a party to a sponsored research agreement with Emory dated
October 14, 1996. Under the terms of this agreement, Emory agrees to collaborate
with us and furnish the facilities necessary to carry out a specified research
program. As discussed above, some of our directors and executive officers are
employees of Emory. We have paid approximately $300,000 to Emory pursuant to
this agreement.
In August 1998 we consummated a bridge financing in which we issued an
aggregate of $6,000,000 principal amount notes bearing interest at a rate per
annum equal to the prime rate as published in The Wall Street Journal plus 2%.
At that time we also issued warrants exercisable for shares of our Series B
convertible preferred stock covering an aggregate of 10% of the original
principal amount of the notes to the purchasers of the notes. We issued $150,000
principal amount notes with the same terms to additional investors in February
1999. In April 1999 we issued warrants exercisable for shares of our Series C
convertible preferred stock covering an aggregate of 10% of the original
principal amount of the notes to the participants in the bridge financing as
consideration for extending the maturity of the notes. The notes and a portion
of the accrued interest on the notes were converted into 2,140,357 shares of our
Series C convertible preferred stock in April 1999. The investors in this
financing consisted principally of the holders of our convertible preferred
stock. These investors included shareholders Alliance Technology Ventures, L.P.
and related
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entities, as well as Arthur M. Pappas, a member of our board of directors.
Russell M. Medford, our President and Chief Executive Officer and a member of
our board of directors, is a Special Limited Partner of Alliance, Michael A.
Henos, Chairman of our board of directors, is the General Partner of Alliance.
In July 1999, we entered into a sublease agreement for office space
with ATV Management Corp., which was amended effective January 1, 2001. Unless
otherwise extended, this lease will expire in July 2002. Michael A. Henos,
Chairman of our board of directors, is the President and sole shareholder of ATV
Management. The agreement provides for ATV Management Corp. to pay approximately
$3,300 per month to us. This monthly lease payment is substantially equivalent
to our monthly lease payment for equivalent space. To date, we have received
approximately $120,000 from ATV Management pursuant to this agreement.
In April, May and August of 1999, we issued an aggregate of 5,899,999
shares of Series C convertible preferred stock at a price of $3.00 per share.
Investors in this financing included shareholders Alliance and its related
entities, referred to above, and 5% shareholder William Blair Capital Partners
VI, L.P.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information provided to us by
each of the following as of June 19, 2001 regarding their beneficial ownership
of our common stock:
- each person who is known by us to beneficially own more than
5% of our common stock;
- our named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the securities.
Except as indicated by footnote, and subject to applicable community property
laws, the persons and entities named in the table below have sole voting and
sole investment power with respect to the shares set forth opposite such
person's or entity's name.
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Shares of common stock subject to options or warrants currently
exercisable or exercisable within 60 days after June 19, 2001 are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such options or warrants, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person. Unless otherwise
indicated, the address for each of the individuals listed in the table is c/o
AtheroGenics, Inc., 8995 Westside Parkway, Alpharetta, Georgia 30004.
COMMON STOCK
BENEFICIALLY OWNED
----------------------------
NUMBER PERCENT
OF OF
BENEFICIAL OWNER SHARES CLASS
---------------- --------- -------
Entities affiliated with BVF Partners, L.P...................................... 2,372,900(1) 8.6%
227 West Monroe Street, Suite 4800
Chicago, Illinois 60606
Wellington Management Company, LLP.............................................. 2,317,400(2) 8.4%
75 State Street
Boston, Massachusetts 02109
Entities affiliated with William Blair Capital Partners VI, L.P................. 1,666,667(3) 6.0%
232 West Adams Street
Chicago, Illinois 60606
Russell M. Medford, M.D., Ph.D.................................................. 1,113,452(4) 4.0%
R. Wayne Alexander, M.D., Ph.D.................................................. 739,900(5) 2.7%
Michael A. Henos................................................................ 707,944(6) 2.6%
Mitchell Glass, M.D............................................................. 180,300(7) *
Mark P. Colonnese............................................................... 132,550(8) *
Vaughn D. Bryson................................................................ 77,032(9) *
William A. Scott, Ph.D.......................................................... 54,000(10) *
T. Forcht Dagi, M.D............................................................. 40,542(11) *
Arthur M. Pappas................................................................ 14,230 *
Judith R. Jaeger, M.D........................................................... -- *
Stephen G. Sudovar.............................................................. -- *
Martin A. Wasserman, Ph. D...................................................... -- *
All directors and executive officers as a group (12 persons).................... 3,059,950 10.7%
---------------
* Less than one percent (1%) of outstanding shares.
(1) Includes 763,000 shares held by Biotechnology Value Fund, L.P.; 452,600
shares held by Biotechnology Value Fund II, L.P.; 1,047,300 shares held
by BVF Investments, L.L.C.; and 110,000 shares held by certain managed
accounts for which BVF Partners L.P. is the investment manager. BVF
Partners is the general partner of Biotechnology Value Fund, L.P. and
Biotechnology Value Fund II, L.P., and is the manager of BVF
Investments, L.L.C. As such, BVF Partners shares voting and investment
power over the shares beneficially owned by those entities and the
managed accounts. BVF Inc. is the general partner of BVF Partners, and
as such, also shares voting and investment power over the shares.
(2) Wellington Management Company, LLP, in its capacity as an investment
advisor, has shared voting and investment power with regard to
2,030,400 shares and shared dispositive power with regard to all
2,317,400 shares, all of which are held of record by clients of
Wellington Management Company.
(3) Arda Minocherhomjee, Managing Director of William Blair Capital
Partners, LLC, the general partner of William Blair Capital Partners
VI, L.P., exercises voting and investment power over these shares.
(4) Includes 454,000 shares subject to options exercisable within 60 days
and 100,000 shares owned by Medford Future Fund, LLLP, a family limited
partnership of which Dr. Medford is the general partner. As such, Dr.
Medford exercises voting and investment power over these shares.
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(5) Includes 139,000 shares subject to options exercisable within 60 days.
(6) Includes 351,718 shares owned by Alliance Technology Ventures, L.P. and
affiliated entities. Mr. Henos is Managing General Partner of Alliance
and the affiliated entities. As such, Mr. Henos shares voting and
investment power over the shares owned by Alliance.
(7) Includes 128,600 shares subject to options exercisable within 60 days.
(8) Includes 88,150 shares subject to options exercisable within 60 days.
(9) Includes 17,000 shares subject to options exercisable within 60 days.
(10) Includes 41,000 shares subject to options exercisable within 60 days.
(11) Includes 4,180 shares owned by Cordova Technology I, L.L.C., of which
Dr. Dagi is president and a managing member and 17 shares owned by
Cordova Technology Partners, L.P., of which Dr Dagi is both a limited
partner and a member of the general partner. As such, Dr. Dagi has
voting and investment power over the shares owned by Cordova Technology
I and Cordova Technology Partners. The shares indicated also include
12,000 shares subject to options exercisable by Dr. Dagi within 60
days.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our Fourth Amended and Restated Articles of Incorporation authorize the
issuance of up to 100 million shares of common stock, no par value, and five
million shares of preferred stock, no par value, the rights and preferences of
which may be established from time to time by our board of directors. As of June
19, 2001, 27,709,948 shares of common stock were issued and outstanding and no
shares of preferred stock were issued and outstanding.
The description set forth below provides a summary of our capital stock
and describes some of the provisions of our Fourth Amended and Restated Articles
of Incorporation and Third Amended and Restated Bylaws, in addition to
provisions of other agreements with our shareholders. The following summary is
qualified in its entirety by reference to our Fourth Amended and Restated
Articles of Incorporation and Third Amended and Restated Bylaws, copies of which
have been filed as exhibits to or are incorporated by reference in the
registration statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock have unlimited voting rights. Each
shareholder is entitled to one vote for each share on all matters to be voted
upon by the shareholders. There are no cumulative voting rights and no
preemptive or conversion rights. There are no redemption or sinking fund
provisions available to the common stock. Holders of our common stock are
entitled to receive dividends share for share on a pro rata basis when, as and
if declared by the board of directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of AtheroGenics,
holders of common stock will be entitled to share ratably in all assets
remaining after payment of liabilities of AtheroGenics.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations
prescribed by law, without shareholder approval, to issue from time to time up
to an aggregate of five million shares of preferred stock, in one or more
series, each series to have such rights and preferences, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences as our board of directors determines. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of holders of any preferred stock that may be issued in the future.
Issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We currently have no shares of preferred stock outstanding and we have no
present plans to issue any shares of preferred stock.
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WARRANTS
We have issued and outstanding warrants to purchase an aggregate of
250,290 shares of our capital stock. In February 1996 and October 1997 we issued
to Phoenix Leasing Incorporated warrants to purchase 12,500 shares of Series B
convertible preferred stock at an exercise price of $3.00 per share, which are
exercisable until August 2005. Upon the completion of our initial public
offering, these warrants converted into the right to purchase 12,500 shares of
common stock at the same price per share. In July 1998, we issued to Cousins
Properties, Inc. a warrant to purchase 50,000 shares of Series B-1 convertible
preferred stock at an exercise price of $5.00 per share, which is exercisable
until January 2009. Upon the completion of our initial public offering, this
warrant converted into the right to purchase 50,000 shares of common stock at
the same price per share. In August 1998, we issued to certain investors
warrants to purchase 205,002 shares of Series B convertible preferred stock at
an exercise price of $3.00 per share, which are exercisable until August 19,
2008. Upon the completion of our initial public offering, these warrants
converted into the right to purchase 205,002 shares of common stock at the same
price per share. In April 1999, we issued to certain investors warrants to
purchase 200,001 shares of Series C convertible preferred stock at an exercise
price of $3.00 per share, which are exercisable until December 31, 2008. Upon
the completion of our initial public offering, these warrants converted into the
right to purchase 200,001 shares of common stock at the same price per share.
REGISTRATION RIGHTS
Demand Registration. According to the terms of the Amended and Restated
Master Rights Agreement dated as of October 31, 1995, as amended, certain
holders of common stock and warrants to acquire additional shares of common
stock have the right to require us to effect a registration of their stock on
Form S-1, Form S-2, Form SB-1 or Form SB-2 so that those shares may be resold to
the public. To demand a registration, the holders having such registration
rights must propose to dispose of at least 20% of the common stock subject to
registration or the anticipated aggregate offering price must be at least
$15,000,000. If such a request is made, then we must use our best efforts to
effect the registration. We only have to file two registration statements
requested in this manner.
In addition, the holders of common stock having registration rights may
require us to effect a registration of their stock of Form S-3 at any time that
we are eligible to file a registration on that form if those shareholders making
the request propose to dispose of shares at an aggregate offering price of at
least $1,000,000 in the offering.
We may delay filing a demand registration if the statement would become
effective within 180 days of an underwritten registration statement filed by us.
We may also defer the filing of a demand registration for a period of up to 90
days once in any 12-month period.
Piggyback Registration. In addition, if we register any securities for
sale in a public offering, other than a registration relating solely to employee
benefit plans, a registration relating solely to a Rule 145 transaction, or a
registration on any form that does not include substantially the same
information as would be required in a registration statement covering secondary
sales of stock, holders of demand registration rights will have the right to
include their shares in the registration statement.
Piggyback registration rights are subject to conditions and
limitations, including the right of the underwriters of an underwritten offering
to limit the number of shares of common stock to be included in the
registration. We are generally required to bear the expenses of all
registrations, except underwriting discounts and commissions. The Master Rights
Agreement also contains our commitment to indemnify the holders of registration
rights for losses attributable to statements or omissions by us incurred in
connection with registrations under the agreement.
Additional Registration Rights. Pursuant to a common stock purchase
agreement dated as of June 19, 2001, we granted registration rights with respect
to 3,585,000 shares of our common stock sold in a private placement. This
prospectus is a part of the registration statement filed with the SEC to
register the resale of these shares. We are obligated to keep the registration
statement effective until the earlier of :
- June 19, 2003;
- As to any selling shareholder, the date on which that selling
shareholder may sell all of the shares covered by this
prospectus held by that shareholder without restriction by the
volume limitations of Rule 144(e) under the Securities Act; or
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- Such time as all of the shares covered by this prospectus have
been sold:
- Pursuant to and in accordance with the registration
statement,
- To or through a broker or dealer or underwriter in a
public distribution or public securities transaction,
and/or
- in a transaction exempt from the registration
requirements of Section 4(1) under the Securities Act
so that any and all restrictions on the shares are
removed upon the completion of the sale.
EFFECTS OF CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS AND
GEORGIA LAW
Classified Board and Removal of Directors. Our articles of
incorporation provide for our board of directors to be elected initially to
staggered one, two and three year terms and, thereafter, for three year terms.
In addition, members of our board of directors may only be removed for cause.
The classification of directors, together with the limitation on the removal of
directors, has the effect of making it more difficult for shareholders to change
the composition of our board of directors.
Shareholder Action; Special Meeting of Shareholders. Our shareholders
may not take action, outside of a duly called annual or special meeting, by less
than unanimous consent. Our bylaws further provide that special meetings of our
shareholders may be called only upon the request of the holders of not less than
75% of the shares then outstanding and entitled to vote.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. Our bylaws provide that any shareholder proposals must be provided
to us in writing at least 120 days before the date of our previous year's proxy
statement, as provided in Rule 14a-8 under the Exchange Act. Director
nominations must be provided to us in writing at least 60 days before the date
of an annual meeting of shareholders or, in the case of a special meeting of
shareholders, at least 60 days prior to such meeting or the tenth day following
the day on which public announcement is made of the date of the meeting. Our
bylaws also specify requirements as to form and content of a shareholder's
notice. Such provisions may preclude shareholders from bringing matters before
the shareholders at an annual or special meeting.
Anti-takeover Provisions and Georgia Law. The Georgia Business
Corporation Code, or Georgia Code, generally restricts a corporation from
entering into certain business combinations with an interested shareholder,
which is defined as any person or entity that is the beneficial owner of at
least 10% of a company's voting stock, or its affiliates, for a period of five
years after the date on which the shareholder became an interested shareholder,
unless:
- the transaction is approved by the board of directors of the
corporation prior to the date the person became an interested
shareholder;
- the interested shareholder acquires 90% of the corporation's
voting stock in the same transaction in which it exceeds 10%;
or
- subsequent to becoming an interested shareholder, the
shareholder acquires 90% of the corporation's voting stock and
the business combination is approved by the holders of a
majority of the voting stock entitled to vote on the
transaction.
The fair price provisions of the Georgia Code further restrict business
combination transactions with 10% shareholders. These provisions require that
the consideration paid for stock acquired in the business combination must meet
specified tests that are designed to ensure that shareholders receive at least
fair market value for their shares in the business combination.
The interested shareholder and fair price provisions of the Georgia
Code do not apply to a corporation unless the bylaws of the corporation
specifically provide that these provisions are applicable to the corporation. We
have elected to be covered by these provisions in our bylaws, provided, however,
that, notwithstanding anything to the contrary in the provisions, the provisions
shall not apply to any business combination with (1) any shareholder who was an
interested shareholder as of the date we adopted our bylaws or (2) any person or
entity that is at the time of that business combination wholly owned by such
interested shareholder.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is American Stock
Transfer & Trust Company.
LISTING
Our common stock is listed on the Nasdaq National Market under the
symbol "AGIX."
PLAN OF DISTRIBUTION
The term "selling shareholders" includes donees, pledgees, transferees
or other successors-in-interest selling shares received after the date of this
prospectus from a named selling shareholder as a gift, pledge, partnership
distribution or other non-sale related transfer. The selling shareholders may
offer all or part of the shares included in this prospectus from time to time in
one or more types of transactions, which may include block transactions, on
applicable exchanges or automated interdealer quotation systems, in negotiated
transactions, through put or call options transactions relating to the shares
offered by this prospectus, through short sales or a combination of such methods
of sale. These sales may be made at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices or at negotiated prices. Each selling shareholder will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling shareholders may resell their shares by one or
more of the following methods:
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
- a cross or block trade in which the broker or dealer engaged
by a selling shareholder will attempt to sell the shares as
agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by
such broker or dealer for its account;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- negotiated transactions;
- options transactions;
- short sales or borrowing, returns and reborrowings of the
shares pursuant to stock loan agreements to settle short
sales;
- pledge and hedging transactions with broker-dealers or other
financial institutions;
- delivery in connection with the issuance of securities by
issuers, other than us, that are exchangeable for (whether on
an optional or mandatory basis), or payable in, such shares
(whether such securities are listed on a national securities
exchange or otherwise) or pursuant to which such shares may be
distributed; and
- a combination of any such methods of sale or distribution.
In effecting sales, brokers or dealers engaged by a selling shareholder
may arrange for other brokers or dealers to participate in such sales. Brokers
or dealers may receive commissions or discounts from a selling shareholder or
from the purchasers in amounts to be negotiated immediately prior to the sale. A
selling shareholder may also sell the shares in accordance with Rule 144 or Rule
144A under the Securities Act or pursuant to other exemptions from registration
under the Securities Act.
If the shares offered by this prospectus are sold in an underwritten
offering, the underwriters may acquire them for their own account and may
further resell these shares from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The names of the underwriters
with respect to any such offering and the terms of the transactions, including
any underwriting discounts, concessions or commissions and other items
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constituting compensation of the underwriters and broker-dealers, if any, will
be set forth in a prospectus supplement relating to such offering. Any public
offering price and any discounts, concessions or commissions allowed or
reallowed or paid to broker-dealers may be changed from time to time. Unless
otherwise set forth in a prospectus supplement, the obligations of the
underwriters to purchase the shares will be subject to certain conditions
precedent and the underwriters will be obligated to purchase all the shares
specified in such prospectus supplement if any such shares are purchased.
Brokers who borrow the shares to settle short sales of shares and who wish to
offer and sell the shares under circumstances requiring use of the prospectus or
making use of the prospectus desirable may use this prospectus. This prospectus
may be amended and supplemented from time to time to describe a specific plan of
distribution.
From time to time the shareholders may engage in short sales, short
sales against the box, puts, calls and other transactions in our shares, or
derivatives thereof, and may sell and deliver the shares offered by this
prospectus in connection with such transactions.
We will not receive any of the proceeds from the sales of the shares by
the shareholders pursuant to this prospectus. The selling shareholders will pay
any expenses incurred by the selling shareholders for brokerage, accounting, tax
or legal services or any other expenses incurred by the selling shareholders in
disposing of the shares covered in this prospectus. We will bear all other
costs, fees and expenses incurred in effecting the registration of the shares
covered by this prospectus, including, but not limited to, all registration and
filing fees, Nasdaq listing fees and expenses of our counsel and our
accountants. Our common stock is listed for trading on the Nasdaq National
Market, and the shares offered by this prospectus have been approved for
quotation on Nasdaq.
In order to comply with the securities laws of certain states, the
selling shareholders may only sell the shares through registered or licensed
brokers or dealers. In addition, in certain states, the selling shareholders may
only sell the shares if they have been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirements of such state is available and is complied with.
A selling shareholder, and any broker dealer who acts in connection
with the sale of shares hereunder, may be deemed an underwriter within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
them and profit on any resale of the shares as principal might be deemed
underwriting discounts and commissions under the Securities Act. We have agreed
to indemnify certain of the selling shareholders, underwriters and other
participants in an underwriting or distribution of the shares and their
directors, officers, employees and agents against certain liabilities including
liabilities arising under the Securities Act. The selling shareholders may also
agree to indemnify any broker-dealer that participates in transactions involving
the sales of the shares against certain liabilities, including liabilities
arising under the Securities Act. Because the selling shareholders may be deemed
underwriters within the meaning of Section 2(11) of the Securities Act, the
selling shareholders will be subject to the prospectus delivery requirements of
the Securities Act.
We have advised the selling shareholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales in the market
and to the activities of the selling shareholders and their affiliates. In
addition, we will make copies of this prospectus available to the selling
shareholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act.
We are permitted to suspend the use of this prospectus in connection
with the sales of shares by selling shareholders upon the happening of certain
events. These include the existence of any fact that makes any statement of
material fact made in this prospectus untrue or that requires the making of
additions to or changes in this prospectus in order to make the statements
herein not misleading. The suspension will continue until such time as we advise
the selling shareholders that use of the prospectus may be resumed, in which
case the period of time during which we are required to maintain the
effectiveness of the registration statement shall be extended. AtheroGenics will
bear the expense of preparing and filing the registration statement and all
post-effective amendments.
We have agreed with the selling shareholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of:
- June 19, 2003;
- As to any selling shareholder, the date on which that selling
shareholder may sell all of the shares covered by this
prospectus held by that shareholder without restriction by the
volume limitations of Rule 144(e) under the Securities Act; or
- Such time as all of the shares covered by this prospectus have
been sold:
52
54
- Pursuant to and in accordance with the registration statement,
- To or through a broker or dealer or underwriter in a public
distribution or public securities transaction, and/or
- in a transaction exempt from the registration requirements of
Section 4(1) under the Securities Act so that any and all
restrictions on the shares are removed upon the completion of
the sale.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us by Long Aldridge & Norman LLP, Atlanta, Georgia. As of the
date of this prospectus, Long Aldridge & Norman LLP is the beneficial owner of
33,332 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 2000 and 1999, and for each of the three years in the
period ended December 31, 2000, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
King & Spalding is our patent counsel. The statements in this
prospectus under the captions "Our failure to adequately protect or enforce our
intellectual property rights or secure rights to third party patents could
materially adversely affect our proprietary position in the marketplace or
prevent the commercialization of our products" in the risk factors section, and
"Patents and Intellectual Property" in the business section have been reviewed
and approved by King & Spalding, as experts in such matters. We have included
these statements in reliance upon that review and approval.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file periodic reports, proxy statements and other information with
the SEC. You may read and copy all or any portion of the documents we file at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents, upon payment of a duplication fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the SEC's public reference rooms. Also, the SEC maintains a World Wide Web
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
This prospectus is part of a registration statement that we filed with
the SEC. The registration statement contains more information than this
prospectus regarding us and our common stock, including certain exhibits and
schedules. You can obtain a copy of the registration statement from the SEC at
the addresses listed above or from the SEC's web site.
53
55
ATHEROGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
PAGE
Report of Independent Auditors........................................... F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock
and Common Shareholders' Equity (Deficit).............................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
56
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AtheroGenics, Inc.
We have audited the accompanying balance sheets of AtheroGenics, Inc.
as of December 31, 2000 and 1999, and the related statements of operations,
redeemable convertible preferred stock and shareholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AtheroGenics, Inc.
at December 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 13, 2001
F-2
57
ATHEROGENICS, INC.
BALANCE SHEETS
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, MARCH 31, EQUITY AT
------------------------- ----------- MARCH 31,
1999 2000 2001 2001
----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $13,409,450 $26,463,070 $41,759,963
Short-term investments ......................................... -- 27,518,169 9,000,841
Accounts receivable ............................................ 791,653 1,138,244 778,684
Prepaid expenses, note receivable and other current assets ..... 89,619 545,826 518,323
----------- ----------- -----------
Total current assets ..................................... 14,290,722 55,665,309 52,057,811
Equipment and leasehold improvements:
Laboratory equipment ........................................... 904,599 1,352,692 1,360,538
Leasehold improvements ......................................... 1,137,868 966,869 1,210,472
Computer and office equipment .................................. 168,899 476,276 667,140
Construction in progress ....................................... 124,730 131,185 25,819
----------- ----------- -----------
2,336,096 2,927,022 3,263,969
Less accumulated depreciation and amortization ................. 1,101,463 1,152,028 1,260,514
----------- ----------- -----------
1,234,633 1,774,994 2,003,455
Long-term note receivable ........................................ 191,859 158,648 149,977
----------- ----------- -----------
Total assets ............................................. $15,717,214 $57,598,951 $54,211,243
=========== =========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................ $ 679,142 $ 504,991 $ 326,082
Accrued liabilities............................................. 246,286 517,312 521,515
Accrued compensation............................................ 39,314 640,975 427,834
Accrued development costs....................................... 240,000 342,210 491,174
Current portion of capitalized lease obligation................. 101,408 125,759 122,713
Current portion of deferred revenues............................ 3,333,333 1,111,111 277,778
----------- ----------- -----------
Total current liabilities................................. 4,639,483 3,242,358 2,167,096
Long-term portion of capitalized lease obligation................. 61,854 84,907 42,766
Long-term portion of deferred revenues............................ 1,111,111 -- --
Redeemable convertible preferred stock:
Series A, $1 par and liquidation value:
Authorized -- 1,000,000 shares; issued and
outstanding -- 1,000,000 shares at December 31, 1999.......... 1,000,000 -- -- $ --
Series B, $3 par and liquidation value:
Authorized -- 4,804,382 shares; issued and
outstanding -- 4,586,815 shares at December 31, 1999.......... 13,704,499 -- -- --
Series C, $3 par and liquidation value:
Authorized -- 8,500,000 shares; issued and
outstanding -- 8,057,022 shares at December 31, 1999.......... 24,006,992 -- -- --
Preferred stock, no par value: Authorized -- 5,000,000 shares
at December 31, 2000 and March 31, 2001....................... -- -- -- --
Preferred stock warrants........................................ 481,875 -- -- --
Shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 21,100,000 shares at December 31, 1999 and
100,000,000 shares at December 31, 2000 and March 31, 2001;
issued and outstanding -- 2,536,543, 23,909,295 and 23,978,755
shares at December 31, 1999, 2000 and March 31, 2001,
respectively (27,563,755 shares pro forma).................... 2,209,962 103,608,655 103,183,998 122,009,438
Warrants........................................................ -- 225,713 225,713 225,713
Deferred stock compensation..................................... (1,809,680) (5,930,880) (4,672,314) (4,672,314)
Accumulated deficit............................................. (29,688,882) (43,638,404) (46,739,032) (46,739,032)
Accumulated other comprehensive income.......................... -- 6,602 3,016 3,016
----------- ----------- ----------- -----------
Total shareholders' equity (deficit)...................... (29,288,600) 54,271,686 52,001,381 70,826,821
----------- ----------- -----------
Total liabilities, redeemable convertible
preferred stock and shareholders' equity (deficit)...... $15,717,214 $57,598,951 $54,211,243
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
58
ATHEROGENICS, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1998 1999 2000 2000 2001
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Revenues:
License fees .......................................... $ -- $ 555,556 $ 3,333,333 $ 833,333 $ 833,333
Research and development .............................. -- 791,653 4,826,370 1,257,947 597,089
------------ ------------ ------------ ------------ ------------
Total revenues ................................. -- 1,347,209 8,159,703 2,091,280 1,430,422
Operating expenses:
Research and development,
exclusive of $23,649, $1,856,932, $449,906 and
$244,498 for the years ended December 31, 1999 and
2000 and the three months ended March 31, 2000 and
2001, respectively, reported below as amortization of
deferred stock compensation ......................... 8,954,904 9,041,345 12,815,788 2,885,640 3,571,888
General and administrative,
exclusive of $61,831, $6,115,796, $1,521,932 and
$550,319 for the years ended December 31, 1999 and
2000 and the three months ended March 31, 2000 and
2001, respectively, reported below as amortization of
deferred stock compensation ......................... 1,573,807 2,593,017 3,035,559 786,362 948,651
Amortization of deferred stock compensation ........... -- 85,480 7,972,728 1,971,838 794,817
------------ ------------ ------------ ------------ ------------
Total operating expenses ....................... 10,528,711 11,719,842 23,824,075 5,643,840 5,315,356
------------ ------------ ------------ ------------ ------------
Operating loss .......................................... (10,528,711) (10,372,633) (15,664,372) (3,552,560) (3,884,934)
Net interest (expense) income ........................... (205,130) (60,617) 1,714,850 157,767 784,306
------------ ------------ ------------ ------------ ------------
Net loss ................................................ $(10,733,841) $(10,433,250) $(13,949,522) $ (3,394,793) $ (3,100,628)
============ ============ ============ ============ ============
Net loss per share -- basic and diluted ................. $ (4.45) $ (4.27) $ (1.30) $ (1.29) $ (0.13)
============ ============ ============ ============ ============
Weighted average shares outstanding -- basic and
diluted ............................................... 2,409,948 2,443,237 10,747,773 2,635,816 23,939,682
============ ============ ============ ============ ============
Pro forma net loss per share -- basic and diluted ....... $ (0.72) $ (0.21) $ (0.13)
============ ============ ============
Pro forma weighted average shares outstanding -- basic
and diluted ........................................... 19,343,445 16,332,556 23,939,682
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
59
ATHEROGENICS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
---------------------------- ---------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 1998 ................ 1,000,000 $ 1,000,000 4,570,149 $ 13,654,501 -- $ --
Issuance of stock for exercise of
stock options at $.30 per share ......... -- -- -- -- -- --
Issuance of 50,000 Series B-1
convertible preferred stock
warrants in relation to
building agreement ...................... -- -- -- -- -- --
Issuance of 200,001 Series B convertible
preferred stock warrants in relation
to bridge loan agreement ................ -- -- -- -- -- --
Issuance of stock for legal services
at $3 per share ......................... -- -- 16,666 49,998 -- --
Net loss .................................. -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 .............. 1,000,000 1,000,000 4,586,815 13,704,499 -- --
Issuance of stock for exercise of
stock options at $.10 to $.30
per share ............................... -- -- -- -- -- --
Issuance of stock at $3 per share,
net of issuance cost of $164,074 ........ -- -- -- -- 5,899,999 17,535,923
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement ...... -- -- -- -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share ......................... -- -- -- -- 2,140,357 6,421,071
Issuance of stock for legal services
at $3 per share ......................... -- -- -- -- 16,666 49,998
Deferred stock compensation related to
stock option grants ..................... -- -- -- -- -- --
Amortization of deferred stock
compensation ............................ -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 .............. 1,000,000 1,000,000 4,586,815 13,704,499 8,057,022 24,006,992
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- -- -- -- -- --
Issuance of stock for services ............ -- -- -- -- -- --
Issuance of stock upon exercise of
stock warrants .......................... -- -- 109,159 459,558 106,106 433,239
Issuance of common stock, net of issuance
cost of $5,770,749 ...................... -- -- -- -- -- --
Deferred stock compensation related to
stock option grants ..................... -- -- -- -- -- --
Amortization of deferred stock compensation -- -- -- -- -- --
Preferred stock conversion ................ (1,000,000) (1,000,000) (4,695,974) (14,164,057) (8,163,128) (24,440,231)
Preferred stock warrant conversion ........ -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- --
Unrealized gain on available-for-sale
securities .............................. -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Comprehensive loss ........................ -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 .............. -- -- -- -- -- --
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- -- -- -- -- --
Issuance of stock for services ............ -- -- -- -- -- --
Deferred stock compensation related
to forfeited stock options .............. -- -- -- -- -- --
Amortization of deferred stock compensation -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- --
Unrealized loss on available-for-sale
securities .............................. -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Comprehensive loss ........................ -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2001 (UNAUDITED) ..... -- $ -- -- $ -- -- $ --
============= ============= ============= ============= ============= =============
SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------
PREFERRED COMMON STOCK DEFERRED
STOCK --------------------------- STOCK
WARRANTS SHARES AMOUNT WARRANTS COMPENSATION
------------- ------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 1998 ................ $ 125 2,409,030 $ 281,347 $ -- $ --
Issuance of stock for exercise of
stock options at $.30 per share ......... -- 1,345 404 -- --
Issuance of 50,000 Series B-1
convertible preferred stock
warrants in relation to
building agreement ...................... 4,000 -- -- -- --
Issuance of 200,001 Series B convertible
preferred stock warrants in relation
to bridge loan agreement ................ 242,000 -- -- -- --
Issuance of stock for legal services
at $3 per share ......................... -- -- -- -- --
Net loss .................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 .............. 246,125 2,410,375 281,751 -- --
Issuance of stock for exercise of
stock options at $.10 to $.30
per share ............................... -- 126,168 33,051 -- --
Issuance of stock at $3 per share,
net of issuance cost of $164,074 ........ -- -- -- -- --
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement ...... 235,750 -- -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share ......................... -- -- -- -- --
Issuance of stock for legal services
at $3 per share ......................... -- -- -- -- --
Deferred stock compensation related to
stock option grants ..................... -- -- 1,895,160 -- (1,895,160)
Amortization of deferred stock
compensation ............................ -- -- -- -- 85,480
Net loss .................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 .............. 481,875 2,536,543 2,209,962 -- (1,809,680)
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- 602,650 185,788 -- --
Issuance of stock for services ............ -- 11,000 85,438 -- --
Issuance of stock upon exercise of
stock warrants .......................... (256,162) -- -- -- --
Issuance of common stock, net of issuance
cost of $5,770,749 ...................... -- 6,900,000 49,429,251 -- --
Deferred stock compensation related to
stock option grants ..................... -- -- 12,093,928 -- (12,093,928)
Amortization of deferred stock compensation -- -- -- -- 7,972,728
Preferred stock conversion ................ -- 13,859,102 39,604,288 -- --
Preferred stock warrant conversion ........ (225,713) -- -- 225,713 --
Net loss .................................. -- -- -- -- --
Unrealized gain on available-for-sale
securities .............................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Comprehensive loss ........................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 .............. -- 23,909,295 103,608,655 225,713 (5,930,880)
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- 66,460 20,655 -- --
Issuance of stock for services ............ -- 3,000 18,437 -- --
Deferred stock compensation related
to forfeited stock options .............. -- -- (463,749) -- 463,749
Amortization of deferred stock compensation -- -- -- -- 794,817
Net loss .................................. -- -- -- -- --
Unrealized loss on available-for-sale
securities .............................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Comprehensive loss ........................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2001 (UNAUDITED) ..... $ -- 23,978,755 $ 103,183,998 $ 225,713 $ (4,672,314)
============= ============= ============= ============= =============
SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
DEFICIT INCOME EQUITY (DEFICIT)
------------- ------------- ---------------
BALANCE AT JANUARY 1, 1998 ................ $ (8,521,791) $ -- $ (8,240,444)
Issuance of stock for exercise of
stock options at $.30 per share ......... -- -- 404
Issuance of 50,000 Series B-1
convertible preferred stock
warrants in relation to
building agreement ...................... -- -- --
Issuance of 200,001 Series B convertible
preferred stock warrants in relation
to bridge loan agreement ................ -- -- --
Issuance of stock for legal services
at $3 per share ......................... -- -- --
Net loss .................................. (10,733,841) -- (10,733,841)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1998 .............. (19,255,632) -- (18,973,881)
Issuance of stock for exercise of
stock options at $.10 to $.30
per share ............................... -- -- 33,051
Issuance of stock at $3 per share,
net of issuance cost of $164,074 ........ -- -- --
Issuance of 205,002 Series C convertible
preferred stock warrants in relation to
extension of bridge loan agreement ...... -- -- --
Issuance of stock for the conversion of
the bridge loan and accrued interest
at $3 per share ......................... -- -- --
Issuance of stock for legal services
at $3 per share ......................... -- -- --
Deferred stock compensation related to
stock option grants ..................... -- -- --
Amortization of deferred stock
compensation ............................ -- -- 85,480
Net loss .................................. (10,433,250) -- (10,433,250)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 .............. (29,688,882) -- (29,288,600)
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- -- 185,788
Issuance of stock for services ............ -- -- 85,438
Issuance of stock upon exercise of
stock warrants .......................... -- -- --
Issuance of common stock, net of issuance
cost of $5,770,749 ...................... -- -- 49,429,251
Deferred stock compensation related to
stock option grants ..................... -- -- --
Amortization of deferred stock compensation -- -- 7,972,728
Preferred stock conversion ................ -- -- 39,604,288
Preferred stock warrant conversion ........ -- -- 225,713
Net loss .................................. (13,949,522) -- (13,949,522)
Unrealized gain on available-for-sale
securities .............................. -- 6,602 6,602
------------- ------------- -------------
Comprehensive loss ........................ -- -- (13,942,920)
------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 .............. (43,638,404) 6,602 54,271,686
Issuance of stock for exercise of
stock options at $.30 to $.38 per share . -- -- 20,655
Issuance of stock for services ............ -- -- 18,437
Deferred stock compensation related
to forfeited stock options .............. -- -- --
Amortization of deferred stock compensation -- -- 794,817
Net loss .................................. (3,100,628) -- (3,100,628)
Unrealized loss on available-for-sale
securities .............................. -- (3,586) (3,586)
------------- ------------- -------------
Comprehensive loss ........................ -- -- (3,104,214)
------------- ------------- -------------
BALANCE AT MARCH 31, 2001 (UNAUDITED) ..... $ (46,739,032) $ 3,016 $ 52,001,381
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-5
60
ATHEROGENICS, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ----------------------------
1998 1999 2000 2000 2001
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss ........................................... $(10,733,841) $(10,433,250) $(13,949,522) $ (3,394,793) $ (3,100,628)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization .................... 250,095 279,823 420,192 99,115 108,486
Amortization of deferred stock
compensation ................................... -- 85,480 7,972,728 1,971,838 794,817
Amortization of debt discount .................... 242,000 235,750 -- -- --
Stock issued for services ........................ 49,998 49,998 85,438 -- 18,437
Stock issued for interest ........................ -- 271,071 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable ............................ -- (791,653) (346,591) (1,257,947) 359,560
Prepaid expenses, note receivable
and other current assets .................. (1,158,470) 977,544 (422,996) (426,557) 36,174
Accounts payable ............................... 693,404 (770,411) (174,151) (120,062) (178,909)
Accrued liabilities ............................ 1,554,022 (1,028,422) 974,897 217,157 (59,974)
Deferred revenues .............................. -- 4,444,444 (3,333,333) (833,333) (833,333)
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities .............................. (9,102,792) (6,679,626) (8,773,338) (3,744,582) (2,855,370)
INVESTING ACTIVITIES
Purchases of equipment and
leasehold improvements ........................... (62,586) (1,115,085) (738,053) (290,554) (336,947)
(Purchases) sales of short-term investments ........ -- -- (27,511,567) -- 18,513,742
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities ................... (62,586) (1,115,085) (28,249,620) (290,554) 18,176,795
FINANCING ACTIVITIES
Proceeds of capital lease .......................... 99,984 -- -- -- --
Payments on capital lease .......................... (180,951) (198,236) (175,906) (82,573) (45,187)
Proceeds from the issuance of
preferred stock, Series C ........................ -- 17,535,923 -- -- --
Proceeds from the issuance and
exercise of preferred stock warrants ............. 246,000 -- 636,635 636,635 --
Proceeds from the issuance of
common stock ..................................... -- -- 49,429,251 -- --
Proceeds from the exercise of
common stock options ............................. 404 33,051 185,788 82,115 20,655
Proceeds from bridge loan
financing, net of warrants ....................... 5,758,000 150,000 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities .................... 5,923,437 17,520,738 50,076,578 636,177 (24,532)
------------ ------------ ------------ ------------ ------------
(Decrease) increase in cash and
cash equivalents ................................. (3,241,941) 9,726,027 13,053,620 (3,398,959) 15,296,893
Cash and cash equivalents at
beginning of period .............................. 6,925,364 3,683,423 13,409,450 13,409,450 26,463,070
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of
period ........................................... $ 3,683,423 $ 13,409,450 $ 26,463,070 $ 10,010,491 $ 41,759,963
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid ...................................... $ 32,622 $ 28,317 $ 30,254 $ 3,085 $ 11,868
Equipment purchased under
capitalized lease obligation ..................... -- -- 222,500 222,500 --
Conversion of bridge loan and
accrued interest to preferred loan ............... -- 6,421,071 -- -- --
Warrants issued for extension of
bridge loan ...................................... -- 235,750 -- -- --
The accompanying notes are an integral part of these financial statements.
F-6
61
ATHEROGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTH PERIODS
ENDED MARCH 31, 2000 AND 2001 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
AtheroGenics, Inc. ("AtheroGenics") was incorporated on November 23,
1993 (date of inception) in the State of Georgia to focus on the discovery,
development and commercialization of novel therapeutics for the treatment of
chronic inflammatory diseases, such as heart disease (atherosclerosis),
rheumatoid arthritis and asthma.
Unaudited Interim Financial Statements
The financial statements as of March 31, 2001 and for the three month
periods ended March 31, 2000 and 2001 are unaudited and reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
AtheroGenics' management, necessary for a fair presentation of financial
position, results of operations and cash flows.
Use of Estimates
The preparation of the 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.
Cash and Cash Equivalents
AtheroGenics considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. AtheroGenics' cash
equivalents consist primarily of money market accounts, commercial paper,
government agency notes and corporate notes on deposit with several financial
institutions and the carrying amounts reported in the balance sheets approximate
their fair value.
Short-Term Investments
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. These investments are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). AtheroGenics has
classified all investments as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity. Realized gains and
losses are included in investment income and are determined on a specific
identification basis.
Short-term investments consist of commercial paper, government agency
notes and corporate notes that will mature between four and twelve months.
Fair Value of Financial Instruments and Concentration of Credit Risk
Financial instruments that subject AtheroGenics to concentration of
credit risk consist primarily of cash, cash equivalents and short-term
investments. Such assets are maintained by high quality credit, third party
financial institution custodians. The carrying values reported in the balance
sheet for cash, cash equivalents and short-term investments approximate their
fair values.
Accounts Receivable
Accounts receivable consists of accounts receivable and unbilled
receivables from Schering-Plough. Unbilled receivables were $791,653 as of
December 31, 1999. As of December 31, 2000, accounts receivable was $956,649,
while unbilled receivables were $181,595.
F-7
62
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation
of computer and lab equipment is computed using the straight-line method over
the estimated useful lives of three and five years, respectively. Amortization
of leasehold improvements is recorded over the shorter of: (a) the estimated
useful lives of the related assets; or (b) the lease term.
Revenue Recognition
License fees, which are nonrefundable, are recognized when the related
license agreements specify that no further efforts or obligations are required
of AtheroGenics. AtheroGenics has committed to perform certain research and
development activities as part of the license agreement; accordingly, the
upfront license payment is being amortized over the anticipated time period to
conduct such activities. Revenues under research and development arrangements
are recognized as the research and development activities are performed pursuant
to the terms of the related agreements (see Note 2 "License Agreement"). These
revenues are billed quarterly and the related payments are not refundable.
Revenues that have not been invoiced are reflected as unbilled receivables as
described in the accounts receivable note above.
Research and Development and Patent Costs
Research and development costs, including all clinical trial expenses
and expenditures related to obtaining patents, are charged to expense when
incurred.
Stock-Based Compensation
AtheroGenics has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB 25"), in accounting for
its stock-based employee compensation plans, rather than the alternative fair
value accounting method provided for under SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), as SFAS 123 requires the use of
option-valuation models that were not developed for use in valuing employee
stock options. AtheroGenics accounts for transactions in which services are
received in exchange for equity instruments based on the fair value of such
services received from non-employees, in accordance with SFAS 123 and Emerging
Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.
Income Taxes
The liability method is used in accounting for income taxes; deferred
income assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that are expected to be in effect when the
differences are anticipated to reverse.
Comprehensive Income
AtheroGenics computes comprehensive income in accordance with SFAS No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards
for the reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income (loss), as defined, includes all
changes in equity during a period from non-owner sources, such as unrealized
gains and losses on available-for-sale securities. Comprehensive loss was equal
to net loss for the years ended December 31, 1998 and 1999 and was a net loss of
$13,942,920 for the year ended December 31, 2000 as AtheroGenics reported an
unrealized gain from available-for-sale securities of $6,602.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Investments and Hedging Activities ("SFAS 133").
SFAS 133 establishes a new model for accounting for derivatives and hedging
activities and supersedes several existing standards. SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The adoption of SFAS 133 did not have a material
impact on its financial statements.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
F-8
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2. LICENSE AGREEMENT
On October 22, 1999, AtheroGenics entered into an exclusive license
agreement (the "Agreement"), consisting of contracts with each of Schering
Corporation and Schering-Plough Ltd. (collectively, "Schering-Plough"). The
Agreement provides for license fees and milestone payments to be made by
Schering-Plough to AtheroGenics.
In November 1999, under the terms of the Agreement, AtheroGenics
received a $5,000,000 non-refundable license fee for the exclusive worldwide
license to patent rights and licensor know-how held by AtheroGenics.
AtheroGenics is amortizing the fee over 18 months, which is the period
AtheroGenics is conducting development activities pursuant to the Agreement.
Under the Agreement, AtheroGenics granted to Schering-Plough rights to develop,
make, have made, import, export, use, distribute, market, promote, offer for
sale and sell AGI-1067, AtheroGenics' lead product candidate, and specified
compounds.
Schering-Plough may choose to complete the development of the licensed
product without additional help from AtheroGenics. To the extent that
AtheroGenics performs additional research and development at Schering-Plough's
request, AtheroGenics is to be paid for performing such research and
development. AtheroGenics recognized research and development revenues of
$791,653 and $4,826,370 during 1999 and 2000, and $1,257,947 and $597,089 during
the three month periods ended March 31, 2000 and 2001, respectively, in relation
to such requests.
3. NET LOSS PER SHARE
Net loss per share has been computed according to SFAS No. 128,
Earnings Per Share ("SFAS 128"), which requires disclosure of basic and diluted
earnings per share. Basic earnings per share excludes any dilutive effects of
options, shares subject to repurchase, warrants, and convertible securities.
Diluted earnings per share includes the impact of potentially dilutive
securities. AtheroGenics' potentially dilutive securities are antidilutive and,
therefore, are not included in the computation of weighted average shares used
in computing diluted loss per share. Following the guidance given by the SEC,
common stock and preferred stock that has been issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if these shares had been outstanding for all periods presented.
AtheroGenics has not issued or granted shares for nominal consideration since
its formation.
Basic and diluted pro forma net loss per share was computed by dividing
the net loss by the weighted average number of shares of common stock
outstanding plus the conversion of all outstanding convertible preferred stock
into common stock, which occurred upon consummation of AtheroGenics' initial
public offering, retroactive to the date of issuance.
F-9
64
The following is a reconciliation of the numerator and denominator of
basic and diluted net loss per share amounts:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1998 1999 2000 2000 2001
------------- ------------ ------------ ------------ ------------
Basic and diluted:
Net loss ........................ $ (10,733,841) $(10,433,250) $(13,949,522) $ (3,394,793) $ (3,100,628)
============= ============ ============ ============ ============
Weighted average shares used
in computing basic and
diluted net loss per
share ......................... 2,409,948 2,443,237 10,747,773 2,635,816 23,939,682
============= ============ ============ ============ ============
Basic and diluted net loss
per share ..................... $ (4.45) $ (4.27) $ (1.30) $ (1.29) $ (0.13)
============= ============ ============ ============ ============
Pro forma basic and diluted:
Shares used above ............... 2,443,237 10,747,773 2,635,816 23,939,692
Pro forma adjustment to
reflect weighted average
effect of assumed conversion
of preferred stock ............ 8,595,672 13,696,740 --
------------ ------------ ------------
Pro forma weighted average
shares of common stock
outstanding ................... 19,343,445 16,332,556 23,939,682
============ ============ ============
Basic and diluted pro forma
loss per share ................ $ (0.72) $ (0.21) $ (0.13)
============ ============ ============
During all periods presented AtheroGenics had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following at the dates indicated:
DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1998 1999 2000 2000 2001
------------- ------------ ------------ ------------ ------------
Convertible (at one share
for one share)
preferred stock.................. 5,586,815 13,643,837 -- 13,859,102 --
Options ........................... 1,235,875 1,785,325 2,858,175 2,789,475 2,909,215
Warrants .......................... 262,501 467,503 250,290 250,290 250,290
------------- ------------ ------------ ------------ ------------
Total ............................. 7,085,191 15,896,665 3,108,465 16,898,867 3,159,505
============= ============ ============ ============ ============
Weighted average exercise
price of options per
share ........................... $ 0.26 $ 0.28 $ 1.49 $ 0.49 $ 1.74
============= ============ ============ ============ ============
Weighted average exercise
price of warrants per
share ........................... $ 3.38 $ 3.21 $ 3.40 $ 3.40 $ 3.40
============= ============ ============ ============ ============
4. BRIDGE LOAN
AtheroGenics entered into a $6,000,000 bridge loan agreement on August
24, 1998 with various lenders, under which AtheroGenics had an obligation in the
form of unsecured promissory notes (some of the lenders are also shareholders of
AtheroGenics). The initial maturity date was December 31, 1998.
AtheroGenics issued the lenders warrants for 205,002 shares of Series B
Redeemable Convertible Preferred Stock. These warrants became exercisable
January 1, 1999 for $3.00 per share and expire on August 19, 2008. The warrants
have been valued at approximately $1.21 per share based on an independent
appraisal, and the principal balance of the bridge loan payable has been
discounted in an amount equal to such value. This discount was amortized as
additional interest expense over the original term of the bridge loan.
On February 24, 1999, the bridge loan was increased to $6,150,000. In
addition, as an inducement to extend the loan maturity date from December 31,
1998 to April 30, 1999, AtheroGenics issued the lenders additional warrants to
purchase 200,001 shares of Series C Redeemable Convertible Preferred Stock.
These warrants became exercisable on April 13, 1999 for $3.00 per share and
expire on December 31, 2008. The warrants have been valued at approximately
$1.15 per share based on an independent appraisal, and the principal balance of
the bridge loan payable was discounted in an amount equal to such value. This
discount was amortized as additional interest expense over the extended term of
the bridge loan.
Accordingly, 205,002 shares of Series B Redeemable Convertible
Preferred Stock and 200,001 shares of Series C Redeemable Convertible Preferred
Stock were reserved for issuance under these warrants at December 31, 1999.
During the year ended December 31, 2000, 217,213 of these warrants were
exercised.
On April 13, 1999, the promissory notes were converted to 2,050,000
shares of Series C Redeemable Convertible Preferred Stock. On the date of
conversion, accrued interest totaling $382,799 was paid by a combination of
$111,728 in cash and the issuance of
F-10
65
90,357 additional shares of Series C Redeemable Convertible Preferred Stock
based on the fair values of such shares as determined by the most recent
arms-length stock purchase transaction.
The weighted average interest rate for the bridge loan for the period
from January 1 through April 13, 1999 was 9.75%.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A, Series B, Series B-1 and Series C Redeemable Convertible
Preferred Stock were convertible into common stock, at a conversion rate of
one-to-one, upon certain qualifying conditions which include the completion of
an underwritten public offering of AtheroGenics' common stock.
On August 8, 2000, AtheroGenics' Registration Statement on Form S-1 was
declared effective by the SEC. Immediately prior to the closing of AtheroGenics'
initial public offering on August 14, 2000, all of the outstanding shares of
convertible preferred stock automatically converted into 13,859,102 shares of
common stock. Immediately following the automatic conversion of preferred stock,
an amended and restated certificate of incorporation was filed. Under the
amended and restated certificate of incorporation, AtheroGenics is authorized to
issue 100,000,000 shares of common stock and 5,000,000 shares of preferred
stock.
6. STOCK OPTIONS
During 1995, AtheroGenics established a stock option plan (the "1995
Plan") which, as amended, provides that options to purchase AtheroGenics' common
stock may be granted to employees, directors, consultants or contractors with
exercise prices not less than 75% of the fair values of the shares on the dates
of grant.
The 1995 Plan, as amended, authorizes the grant of options for up to
1,264,084 shares of AtheroGenics' common stock, and as of December 31, 2000,
AtheroGenics had reserved 267,800 shares of common stock for future issuance
under the 1995 Plan. Options granted under the 1995 Plan vest over periods
ranging from the date of grant to five years from that date. Under the terms of
certain optionee restriction agreements, AtheroGenics may, if it chooses to do
so, repurchase a declining percentage of shares issued pursuant the exercise of
options during the five-year period following the grant date if the optionee's
employment or affiliation with AtheroGenics is terminated. A summary of stock
option activity under the 1995 Plan follows:
WEIGHTED
AVERAGE
SHARES PRICE RANGE PRICE
-------- ----------- --------
Outstanding at January 1 and December 31, 1998............. 457,000 $ .10-.30 $ .20
Exercised............................................... (24,000) .10 .10
Canceled................................................ (17,800) .30 .30
--------
Outstanding at December 31, 1999........................... 415,200 .10-.30 .20
Exercised............................................... (165,200) .10-.30 .29
--------
Outstanding at December 31, 2000 and March 31, 2001........ 250,000 .10-.30 .14
========
The following table summarizes information concerning outstanding and
exercisable options under the 1995 Plan as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$.10.................... 200,000 4.62 $ .10 200,000 $ .10
.30.................... 50,000 5.61 .30 23,000 .30
----------- -------
250,000 4.82 .14 223,000 .14
=========== =======
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Effective July 30, 1997, AtheroGenics established an equity ownership
plan (the "1997 Plan") whereby options to purchase AtheroGenics' common stock
may be granted to employees, directors, consultants or advisors, or, in certain
cases, alternate grantees who are affiliates of directors. The exercise prices
for incentive stock options may not be less than the fair values of the shares
on the dates of grant. The 1997 Plan authorizes the grant of options for up to
1,474,416 shares of AtheroGenics' common stock. On January 28, 2000,
AtheroGenics' board of directors authorized an additional 2,250,000 shares to be
issued under the 1997 Plan. As of December 31, 2000, AtheroGenics had reserved
3,172,453 shares of common stock for issuance under the 1997 Plan. The 1997 Plan
allows for grants of non-qualified options, incentive stock options, stock
appreciation rights, performance awards and shares of restricted stock.
Non-qualified options granted under the 1997 Plan vest immediately for
non-employees, but vest over a four-year period for employees. Under the terms
of an equity ownership agreement, AtheroGenics may, if it chooses to do so,
repurchase a declining percentage of shares issued pursuant the exercise of
options during the four-year period following the grant date if the optionee's
employment or affiliation with AtheroGenics is terminated. Incentive stock
options generally vest over four years. The majority of the stock options
granted under the 1997 Plan are incentive stock options.
A summary of stock option activity under the 1997 Plan follows:
WEIGHTED
AVERAGE
SHARES PRICE RANGE PRICE
---------- ----------- --------
Outstanding at January 1, 1998...................... 632,750 $ .30 $ .30
Granted.......................................... 151,500 .30 .30
Exercised........................................ (1,345) .30 .30
Canceled......................................... (4,030) .30 .30
----------
Outstanding at December 31, 1998.................... 778,875 .30 .30
Granted.......................................... 748,000 .30-.31 .30
Exercised........................................ (102,168) .30 .30
Canceled......................................... (54,582) .30 .30
----------
Outstanding at December 31, 1999.................... 1,370,125 .30-.31 .30
Granted.......................................... 1,797,850 .38-9.88 2.28
Exercised........................................ (448,450) .30-9.88 .50
Canceled......................................... (111,350) .30-8.25 .67
----------
Outstanding at December 31, 2000.................... 2,608,175 .30-9.88 1.62
Granted.......................................... 135,000 5.75-6.56 6.40
Exercised........................................ (69,460) .30-6.56 .56
Canceled......................................... (14,500) .31-5.00 1.33
----------
Outstanding at March 31, 2001 (unaudited)........... 2,659,215 .30-9.88 1.89
==========
The following table summarizes information concerning currently
outstanding and exercisable options granted under the 1997 Plan as of December
31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 0.30 ...... 677,675 7.68 $ .30 368,776 $ .30
0.31 ...... 285,650 8.94 .31 80,100 .31
0.38 ...... 1,084,500 9.08 .38 349,874 .38
5.00 - 8.25 ...... 536,650 9.77 6.13 10,000 7.70
8.63 - 9.88 ...... 23,700 9.70 9.35 -- --
--------- ---------
2,608,175 8.85 1.62 808,750 .43
========= =========
During 1999 and 2000, in connection with the grant of certain options
to employees, AtheroGenics recorded non-cash deferred stock compensation of
$1,895,160 and $12,093,928, respectively, representing the difference between
the exercise price and the deemed fair value of AtheroGenics' common stock on
the dates these stock options were granted. Deferred stock compensation is
included as a reduction of shareholders' equity and is being amortized to
expense using the graded vesting method. The graded vesting method provides for
vesting of each portion of the overall award over its respective vesting period,
and results in higher vesting in earlier years than straight-line vesting.
During 1999 and 2000, AtheroGenics recorded amortization of deferred stock
compensation of $85,480 and $7,972,728, respectively. At December 31, 2000,
AtheroGenics had a total of approximately $5,930,880 remaining to be amortized
over the corresponding vesting period of each respective option, generally four
years. Such amortization will approximate $3,330,000 in 2001, $1,841,000 in
2002, $744,000 in 2003, and $16,000 in 2004. During the first quarter of 2001,
deferred stock compensation was reduced by $463,749 related to forfeited
options.
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Pro forma information regarding net income is required by SFAS 123,
which also requires that the information be determined as if AtheroGenics had
accounted for the employee stock options granted subsequent to December 31, 1994
under the fair value method. The fair value for these options (which are granted
with an exercise price equal to fair market value as determined by the board of
directors on the grant date) was estimated at the date of grant using the
minimum value method with the following weighted average assumptions for 1998,
1999 and 2000: risk-free interest rates of 4.65%, 5.75% and 6.36%, respectively;
no dividend yield; and a weighted average expected life of the options of five
years. For the period following AtheroGenics' initial public offering, the
Black-Scholes option valuation model was used to calculate the fair value of
options granted. This method included the above assumptions as well as the
estimated volatility of the common stock.
For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' vesting periods. The weighted
average fair values of options granted during 1998, 1999 and 2000 equal $0.06,
$2.54 and $1.16, respectively. Pro forma net loss and net loss per share are as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000
------------- ------------- --------------
Pro forma net loss................................... $ (10,744,826) $ (10,503,993) $ (14,151,546)
Pro forma net loss per share (basic and diluted)..... (4.45) (4.30) (1.32)
7. INVESTMENTS
Short-term investments consist of debt securities classified as
available-for-sale and have maturities greater than 90 days and less than twelve
months from the date of acquisition. AtheroGenics has invested primarily in
commercial paper, all of which have a minimum investment rating of A1/P1, and
government agency notes. AtheroGenics had no realized gains or losses from the
sale of investments for the period ended December 31, 2000. The following table
summarizes unrealized gains and losses on AtheroGenics' investments:
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST LOSS GAIN VALUE
------------ ---------- ---------- ------------
Commercial paper........................... $ 17,946,593 $ -- $ -- $ 17,946,593
Government agency notes.................... 6,541,175 -- 3,641 6,544,816
Corporate notes............................ 3,023,799 -- 2,961 3,026,760
------------ ---------- ---------- ------------
December 31, 2000.......................... $ 27,511,567 $ -- $ 6,602 $ 27,518,169
============ ========== ========== ============
All available-for-sale securities held at December 31, 2000 will mature
during 2001.
8. INCOME TAXES
At December 31, 2000, AtheroGenics had net operating loss carryforwards
and research and development credit carryforwards of $35,587,480 and $1,241,809,
respectively, for income tax purposes, which both begin to expire in 2010. The
significant components of the deferred tax assets are:
DECEMBER 31,
------------------------------
1999 2000
------------- -------------
Net operating loss carryforwards............ $ 9,445,008 $ 12,763,242
Deferred revenue............................ 1,688,889 422,222
Research credits............................ 1,111,891 1,241,809
Other....................................... -- 1,090,289
------------- -------------
Total deferred tax assets................... 12,245,788 15,517,562
Valuation allowance......................... (12,245,788) (15,517,562)
------------- -------------
Net deferred tax assets..................... $ -- $ --
============= =============
Because of AtheroGenics' lack of earnings history, the deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased $4,623,335 and $3,271,774 in 1999 and 2000, respectively.
AtheroGenics' net operating loss carryforwards may be subject to
certain IRC Section 382 limitations on annual utilization in the event of
changes in ownership. These limitations could significantly reduce the amount of
the net operating loss carryforwards available in the future.
F-13
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AtheroGenics has not yet completed a full analysis of IRC Section 382
limitations on the cumulative net operating loss carryforward. However, the
annual limitations are not expected to prevent utilization of the net operating
loss carryforward due to the significant increases in value indicated by the
successive issues of preferred stock. If a change in ownership has occurred,
there will be an annual accrual limitation; however, this limitation is not
expected to result in a loss of the deferred tax benefit.
9. LEASES
Rent expense under operating leases amounted to $86,939, $639,934 and
$786,452 in 1998, 1999 and 2000, respectively.
On June 19, 1998, AtheroGenics entered into a ten-year operating lease
for office and laboratory space through March 1, 2009. Monthly lease payments of
approximately $60,400 began March 2, 1999, the date occupancy commenced, and are
subject to increases during each successive twelve-month period based on changes
in the Consumer Price Index. Future increases in monthly lease payments due to
increases in the CPI are considered to be contingent rentals, and, therefore,
will be charged to expense over the lease term as they become payable.
AtheroGenics may extend the lease term for two successive five-year periods.
AtheroGenics' other operating lease obligations are not significant.
As of December 31, 1998, AtheroGenics had incurred directly
approximately $1,153,000 of laboratory and office construction costs which were
reimbursed to AtheroGenics by the lessor during 1999 pursuant to the lease
agreement and included in the lessor costs covered by the operating lease.
Additional lease payments are made to the lessor of approximately $29,000 per
month through March 1, 2009 related to additional expenditures made by the
lessor for leasehold improvements and equipment, all of which have estimated
useful lives well in excess of ten years.
In conjunction with the above-described lease, AtheroGenics issued the
lessor a warrant for 50,000 shares of Series B-1 Redeemable Convertible
Preferred Stock. The warrant has been valued at $.08 per share based on an
independent professional appraisal. The warrant became exercisable on January 1,
1999 for $5 per share and expires on January 1, 2009. As a result of the
automatic conversion of the Series B-1 Redeemable Convertible Preferred Stock to
common stock immediately prior to the closing of AtheroGenics' initial public
offering, the warrant is now exercisable for common stock.
On March 25, 1999, AtheroGenics entered into a sublease agreement for a
portion of its new office and laboratory space with Inhibitex, Inc. and monthly
lease payments of $11,923 began March 26, 1999, and have increased to $12,224 as
of March 26, 2000. The lease term ends on December 31, 2005.
On July 31, 1999, AtheroGenics entered into a sublease agreement for a
portion of its new office space with ATV Management Corp. and monthly lease
payments of approximately $6,200 began on September 1, 1999. The lease term ends
on July 31, 2002. The chairman of the board of directors of AtheroGenics is the
president and sole shareholder of ATV Management Corp.
F-14
69
At December 31, 2000, AtheroGenics' minimum aggregate commitments (net of
sublease income) under long-term, non-cancelable operating leases are as
follows:
SUBLEASE
GROSS INCOME NET
---------- ---------- ----------
2001......................... $1,130,949 $ 258,279 $ 872,670
2002......................... 1,117,918 226,337 891,581
2003......................... 1,104,512 181,617 922,895
2004......................... 1,099,288 181,617 917,671
Thereafter................... 4,580,367 181,617 4,398,750
---------- ---------- ----------
$9,033,034 $1,029,467 $8,003,567
========== ========== ==========
Equipment and leasehold improvements include the following amounts for
leases that have been capitalized at December 31, 2000 and 1999:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Lab equipment....................... $ 750,000 $ 972,500
Less accumulated amortization....... 600,000 742,205
----------- -----------
$ 150,000 $ 230,295
=========== ===========
Amortization of leased assets is included in depreciation and
amortization expense. The equipment leases provide for one-year extensions at
the end of the lease terms.
Future minimum lease payments under capital leases consist of the
following at December 31, 2000:
2001.................................................... $ 145,328
2002.................................................... 89,947
----------
Total minimum lease payments.......................... 235,275
Less amounts representing interest and warrants......... 24,609
----------
Present value of net minimum lease payments............. 210,666
Less current portion.................................... 125,759
----------
$ 84,907
==========
The amounts recorded as capital lease obligations approximate the
estimated fair market values.
10. EMPLOYEE BENEFIT PLAN
AtheroGenics has a defined contribution plan covering eligible
employees, which is qualified under Section 401(k) of the Internal Revenue Code.
Under the provisions of the plan, eligible participating employees may elect to
contribute up to 15% of their salary (up to the maximum amount of tax deferred
contribution allowed by the Internal Revenue Code). AtheroGenics may make a
discretionary contribution. During 2000, AtheroGenics matched 50% of employees'
contributions, up to a maximum of 6% of the employees' annual base compensation.
AtheroGenics' contribution to the plan for 1999 and 2000 aggregated $37,703 and
$62,093, respectively.
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11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -----------
Net revenues ....................... $ -- $ -- $ -- $ 1,347,209
Operating loss ..................... (2,628,092) (2,370,499) (2,957,600) (2,416,442)
Net loss ........................... (2,750,335) (2,569,057) (2,862,099) (2,251,759)
Net loss per share data:
Basic and diluted ............... (1.14) (1.06) (1.17) (0.90)
Pro forma net loss per share
basic and diluted ............ (0.34) (0.21) (0.20) (0.14)
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- -------------
Net revenues ....................... $ 2,091,280 $ 2,064,050 $ 1,905,155 $ 2,099,218
Operating loss ..................... (3,552,560) (3,219,745) (4,475,752) (4,416,315)
Net loss ........................... (3,394,793) (3,083,213) (3,963,531) (3,507,985)
Net loss per share data:
Basic and diluted ............... (1.29) (1.05) (0.30) (0.15)
Pro forma net loss per share
basic and diluted ............ (0.21) (0.18) (0.20) (0.15)
Because of the method used in calculating per share data, the quarterly
per share data will not necessarily add to the per share data as computed for
the year.
12. SUBSEQUENT EVENTS (UNAUDITED)
On June 19, 2001, AtheroGenics sold 3,585,000 shares of its common
stock to a group of investors in a private placement transaction. Net proceeds
were approximately $18.8 million. AtheroGenics is required to register these
shares with the SEC within 15 days of the closing of the transaction.
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===============================================================================
3,585,000 SHARES
[ATHEROGENICS LOGO]
COMMON STOCK
------------------
PROSPECTUS
---------------
, 2001
---------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WE AND THE SELLING SHAREHOLDERS ARE OFFERING
TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES
TO PERMIT A PUBLIC OFFERING OF THE COMMON SHARES OR POSSESSION OR DISTRIBUTION
OF THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
===============================================================================
72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses in connection with the issuance
and distribution of the securities being registered hereby:
Securities and Exchange Commission registration fee........... $ 5,310
Printing fees................................................. 10,000
Legal fees and expenses....................................... 50,000
Accounting fees and expenses.................................. 15,000
Miscellaneous fees............................................ 10,000
----------
Total............................................... $ 90,310
==========
----------
The foregoing, except for the SEC registration fee, are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Fourth Amended and Restated Articles of Incorporation eliminate, as
permitted by Section 14-2-202(b)(4) of the Georgia Business Corporation Code,
the personal liability of directors and officers for monetary damages to the
corporation or its shareholders for breach of their duty of care and other
duties; provided, however, that our Articles of Incorporation and Section
14-2-202(b)(4) of the Georgia Code do not permit us to eliminate or limit
liability for (1) a breach of duty involving appropriation of a business
opportunity of ours; (2) an act or omission which involves intentional
misconduct or a knowing violation of law; (3) any transaction from which an
improper personal benefit is derived; or (4) any payments of a dividend or any
other type of distribution that is illegal under Section 14-2-832 of the Georgia
Code. In addition, if at any time the Georgia Code is amended to authorize
further elimination or limitation of personal liability, then the liability of
each of our directors and officers shall be eliminated or limited to the fullest
extent permitted by such provisions, as so amended, without further action by
the shareholders, unless the provisions of the Georgia Code require such action.
Sections 14-2-850 to 14-2-859, inclusive, of the Georgia Code govern the
indemnification of directors, officers, employees and agents. Section 14-2-851
of the Georgia Code provides for indemnification of any of our directors for
liability incurred by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative and whether formal or informal, in which he may
become involved by reason of being a member of our board of directors. Section
14-2-851 also provides such indemnity for directors who, at our request, act as
directors, officers, partners, trustees, employees or agents of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or another enterprise. Section 14-2-851 permits indemnification if the
director acted in a manner he believed in good faith to be in or not opposed to
our best interest and, in addition, in criminal proceedings, if he had no
reasonable cause to believe his conduct was unlawful. If the required standard
of conduct is met, indemnification may include judgments, settlements,
penalties, fines or reasonable expenses, including attorneys' fees, incurred
with respect to a proceeding. However, if the director is adjudged liable to us
in a derivative action or on the basis that personal benefit was improperly
received by him, the director will only be entitled to such indemnification for
reasonable expenses as a court finds to be proper in accordance with the
provisions of Section 14-2-854.
Section 14-2-852 of the Georgia Code provides that directors who are wholly
successful with respect to any claim brought against them, which claim is
brought because they are or were directors, are entitled to indemnification
against reasonable expenses as of right. Conversely, if the charges made in any
action are sustained, the determination of whether the required standard of
conduct has been met will be made, in accordance with the provisions of Section
14-2-855 of the Georgia Code, as follows: (1) if there are two or more
disinterested members of the board of directors, by the majority vote of a
quorum of the disinterested members of the board of directors, (2) by a majority
of the members of a committee of two or more disinterested directors, (3) by
special legal counsel or (4) by the shareholders, but, in such event, the shares
owned by or voted under the control of directors seeking indemnification may not
be voted.
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Section 14-2-857 of the Georgia Code provides that an officer who is not a
director has the mandatory right of indemnification granted to directors under
Section 14-2-852, as described above. In addition, we may, as provided by our
Articles, Bylaws, general or specific actions by our board of directors, or by
contract, indemnify and advance expenses to an officer, employee or agent who is
not a director to the extent that such indemnification is consistent with public
policy.
Our officers and directors are presently covered by insurance which (with
certain exceptions and within certain limitations) indemnifies them against any
losses or liabilities arising from any alleged "wrongful act," including any
alleged breach of duty, neglect, error, misstatement, misleading statement,
omissions or other act done or wrongfully attempted. We pay the cost of such
insurance as permitted by our Bylaws and the laws of the State of Georgia.
Reference is hereby made to Section 4(d) of the common stock purchase
agreement, the form of which is filed as Exhibit 10.16 hereto, in which the
selling shareholders agree to indemnify our directors and officers and certain
other persons against certain civil liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this registration statement, we
have sold and issued the following securities:
1. In June 2001, we issued an aggregate of 3,585,000 shares of common
stock for an aggregate purchase price of $20,613,750 million, or $5.75
per share, in a private placement to 19 institutional and sophisticated
investors.
2. In April, May and August 1999, we issued an aggregate of 5,899,999
shares of Series C convertible preferred stock to 21 institutional and
sophisticated investors, consisting primarily of venture capital
companies, for a consideration of $3.00 per share, or an aggregate of
$17,699,997 before expenses of the private placements of approximately
$164,000. In accordance with the terms of the Series C convertible
preferred stock, each share of Series C convertible preferred stock
converted into one share of our common stock immediately prior to the
consummation of our initial public offering in August 2000.
3. In August and December 1998, we issued to some of the holders of our
Series A and Series B convertible preferred stock $6,150,000 principal
amount notes bearing interest at a rate per annum equal to the prime
rate as published in The Wall Street Journal plus 2%. At that time we
also issued warrants exercisable for 205,002 shares of our Series B
convertible preferred stock. In April 1999 we issued warrants
exercisable for 200,001 shares of our Series C convertible stock to the
noteholders as consideration for extending the maturity of the notes.
The notes and, at the option of the noteholders, the accrued and unpaid
interest on the notes were converted into 2,140,357 shares of our
Series C convertible preferred stock in April 1999. In accordance with
the terms of the Series B convertible preferred stock and the Series C
convertible preferred stock, each share of convertible preferred stock
converted into one share of our common stock immediately prior to the
consummation of our initial public offering.
4. From January 1, 1998 through June 19, 2001, we granted incentive stock
options and nonqualified stock options to purchase an aggregate of
2,923,350 shares of our common stock at exercise prices ranging from
$.30 to $9.88 per share to employees and directors under our 1995 Stock
Option Plan and our 1997 Equity Ownership Plan, and issued an aggregate
of 956,816 shares upon the exercise of these and previously granted
options. Of these options granted, options to purchase 349,349 shares
of common stock have been canceled.
5. In July 1998, we issued to Cousins Properties, Inc. a warrant to
purchase 50,000 shares of our Series B-1 convertible preferred stock at
an exercise price of $5.00 per share. This warrant converted into a
warrant to purchase 50,000 shares of our common stock at an exercise
price of $5.00 per share immediately prior to the consummation of our
initial public offering in accordance with the terms of the Series B-1
convertible preferred stock.
6. In December 1998, we issued to Long Aldridge & Norman LLP 16,666 shares
of Series B convertible preferred stock for consideration of $3.00 per
share or an aggregate of $49,998 in legal fees incurred by AtheroGenics
in 1998. In accordance with the terms of the Series B convertible
preferred stock, each share of Series B convertible preferred stock
converted into one share of our common stock prior to the consummation
of our initial public offering.
7. In April 1999, we issued to Long Aldridge & Norman LLP 16,666 shares of
Series C convertible preferred stock for consideration of $3.00 per
share or an aggregate of $49,998 in legal fees incurred by AtheroGenics
in 1998. In accordance with
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the terms of the Series C convertible preferred stock, each share of
Series C convertible preferred stock converted into one share of our
common stock prior to the consummation of our initial public offering.
No underwriters were involved in the foregoing sales of securities. The
issuance of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of such Securities Act as
transactions by an issuer not involving any public offering, or, in the case of
some options to purchase common stock, Rule 701 of the Securities Act. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith:
EXHIBIT
NO. DESCRIPTION
------- -----------
3.01** -- Form of Fourth Amended and Restated Articles of
Incorporation of AtheroGenics, Inc.
3.02** -- Form of Third Amended and Restated Bylaws of
AtheroGenics, Inc.
4.01** -- Form of Common Stock Certificate.
4.02** -- Amended and Restated Master Rights Agreement dated
October 31, 1995, as amended by First Amendment dated
November 1, 1995; Second Amendment dated July 30, 1996;
Third Amendment dated April 13, 1999; Fourth Amendment
dated May 11, 1999; and Fifth Amendment dated August
30, 1999.
4.03** -- Applicable provisions of Fourth Amended and Restated
Articles of Incorporation and Third Amended and
Restated Bylaws of AtheroGenics, Inc. (to be
incorporated by reference to Exhibits 3.01 and 3.02).
5.01* -- Opinion of Long Aldridge & Norman LLP (including
consent).
10.01**+ -- Exclusive License Agreements dated October 22, 1999 by
and between AtheroGenics, Inc. and each of
Schering-Plough Ltd. and Schering Corporation.
10.02**+ -- Exclusive License Agreement dated July 17, 1998
between The Regents of the University of California and
AtheroGenics, Inc.
10.03**+ -- License Agreement dated January 11, 1995 between Emory
University and AtheroGenics, Inc.
10.04**+ -- Patent Purchase Agreement dated April 26, 1995 between
AtheroGenics, Inc. and Sampath Parthasarathy, together
with Services Agreement dated April 26, 1995 between
AtheroGenics, Inc. and Sampath Parthasarathy.
10.05**+ -- Sponsored Research Agreement dated October 14, 1996
between Emory University and AtheroGenics, Inc.
10.06** -- Consulting Agreement dated May 11, 2000 between
AtheroGenics, Inc. and William Scott, Ph.D.
10.07** -- AtheroGenics, Inc. 1995 Stock Option Plan, together
with form of nonqualified stock option agreement.
10.08** -- AtheroGenics, Inc. 1997 Equity Ownership Plan, as
amended by Amendment No. 1 and Amendment No. 2.
10.09** -- Preferred Shares Purchase Warrant dated August 24,
1998 between AtheroGenics, Inc. and certain Lenders
named therein.
10.10** -- Series C Convertible Preferred Stock Purchase
Warrants of AtheroGenics, Inc.
10.11** -- Promissory Note dated April 1, 1999 between
Inhibitex, Inc. and AtheroGenics, Inc.
10.12**++ -- Lease Agreement dated June 19, 1998 between Cousins
Properties, Inc. and AtheroGenics, Inc.
10.13**++ -- Master Equipment Lease dated November 1, 1995 between
Phoenix Leasing Incorporated and AtheroGenics, Inc.
10.14*** -- Employment Agreement dated March 1, 2001 between
AtheroGenics, Inc. and Russell M. Medford.
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10.15*** -- Amendment dated January 1, 2001 to Promissory Note
dated April 1, 1999 between Inhibitex, Inc. and
AtheroGenics, Inc.
10.16 -- Form of Common Stock Purchase Agreement dated as of
June 19, 2001 between AtheroGenics, Inc. and the
Purchasers named therein.
23.01 -- Consent of Ernst & Young LLP.
23.02 -- Consent of Long Aldridge & Norman LLP (contained in
Exhibit 5.01).
23.03 -- Consent of King & Spalding.
24.01 -- Powers of Attorney (see the signature page to this
registration statement).
----------
* To be filed by amendment.
** Files as the exhibit of the same number with AtheroGenics' registration
statement on Form S-1, Registration No. 333-31140, declared effective by the
SEC on August 8, 2000, and incorporated herein by reference.
*** Filed as an exhibit of the same number with AtheroGenics' Annual Report on
Form 10-K for the year ended December 31, 2000, and incorporated herein by
reference.
+ Certain confidential information contained in this document has been omitted
and filed separately with the Commission pursuant to a request for
confidential treatment under Rule 406 of the Securities Act of 1933, as
amended.
++ We agree to furnish supplementally to the Commission a copy of any omitted
schedule or exhibit to this agreement upon request by the Commission.
(b) Financial Statement Schedules
No financial statement schedules are provided, because the information
called for is not required or is shown either in the financial statements or the
notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement: and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
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(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on June 29, 2001.
ATHEROGENICS, INC.
By: /s/ RUSSELL M. MEDFORD
------------------------------------
RUSSELL M. MEDFORD, M.D., PH.D.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Russell M. Medford and Mark P. Colonnese, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- -----
PRINCIPAL EXECUTIVE OFFICER:
/s/ RUSSELL M.MEDFORD President and Chief Executive June 29, 2001
----------------------------------- Officer, Director
RUSSELL M. MEDFORD
PRINCIPAL FINANCIAL AND PRINCIPAL
ACCOUNTING OFFICER:
/s/ MARK P. COLONNESE Vice President of Finance and June 29, 2001
----------------------------------- Administration and Chief
MARK P. COLONNESE Financial Officer
ADDITIONAL DIRECTORS:
/s/ MICHAEL A. HENOS Director June 29, 2001
-----------------------------------
MICHAEL A. HENOS
/s/ R. WAYNE ALEXANDER Director June 29, 2001
-----------------------------------
R. WAYNE ALEXANDER
(Signatures continued on next page)
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78
/s/ VAUGHN D. BRYSON Director June 29, 2001
-----------------------------------
VAUGHN D. BRYSON
/s/ T. FORCHT DAGI Director June 29, 2001
-----------------------------------
T. FORCHT DAGI
/s/ ARTHUR M. PAPPAS Director June 29, 2001
-----------------------------------
ARTHUR M. PAPPAS
/s/ WILLIAM A. SCOTT Director June 29, 2001
-----------------------------------
WILLIAM A. SCOTT
/s/ STEPHEN G. SUDOVAR Director June 29, 2001
-----------------------------------
STEPHEN G. SUDOVAR
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