BioCryst Pharmaceuticals
Annual Report 2003

Plain-text annual report

BIOCRYST PHARMACEUTICALS INC FORM 10-K (Annual Report) Filed 3/19/2004 For Period Ending 12/31/2003 Address 2190 PARKWAY LAKE DR BIRMINGHAM, Alabama 35244 Telephone CIK Industry Sector Fiscal Year 205-444-4600 0000882796 Biotechnology & Drugs Healthcare 12/31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 000-23186 BIOCRYST PHARMACEUTICALS, INC. (Exact name of registrant as specified in its charter) Delaware (State of other jurisdiction of incorporation or organization) 62-1413174 (I.R.S. employer identification no.) 2190 Parkway Lake Drive; Birmingham, Alabama 35244 (Address of principal executive offices) (205) 444-4600 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class None Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, $.01 Par Value Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]. The Registrant estimates that the aggregate market value of the Common Stock on June 30, 2003 (based upon the closing price shown on the Nasdaq National Market on June 30, 2003) held by non-affiliates was approximately $31,351,088. For this computation, the Registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by officers, directors and certain significant stockholders of the Registrant. Such exclusion shall not be deemed to constitute an admission that any such stockholder is an affiliate of the Registrant. The number of shares of Common Stock, par value $.01, of the Registrant outstanding as of February 27, 2004 was 21,474,636 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive Proxy Statement to be filed in connection with the solicitation of proxies for its 2004 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 under Part III hereof. PART I ITEM 1. BUSINESS Overview BioCryst Pharmaceuticals, Inc. is a biotechnology company focused on designing, optimizing and developing novel small molecule pharmaceuticals that block key enzymes essential for cancer, cardiovascular and autoimmune diseases and viral infections. Our most advanced drug candidate, BCX-1777, is an investigational purine nucleoside phosphorylase (PNP) inhibitor for the treatment of T-cell mediated disorders. Our Business Strategy Our business strategy is to use structure-based drug design technologies to develop innovative, small-molecule pharmaceuticals to treat a variety of diseases and disorders. We focus our drug development efforts on building potent, selective inhibitors of enzymes associated with targeted diseases. Enzymes are proteins that cause or enable biological reactions necessary for the progression of the disease or disorder. The specific enzymes on which we focus are called enzyme targets. BioCryst aims to design compounds that will inhibit an enzyme target by fitting the active site of a particular enzyme. Inhibition means interfering with the functioning of an enzyme target, thereby stopping or slowing the progression of the disease or disorder. The principal elements of our strategy are: • Select and License Promising Enzyme Targets for the Development of Small-Molecule Pharmaceuticals. We use our technical expertise and network of academic and industry contacts to evaluate and select promising enzyme targets to license for the development of small-molecule pharmaceuticals. We choose enzyme targets that meet as many of the following criteria as possible: • serve important functions in disease pathways; • have known animal or cell-based models that would be indicative of results in humans; • address large potential markets and significant unmet medical needs, including pursuing niche markets where the results have potential application to broader markets and needs; • have multiple potential clinical applications; and • offer rapid development and commercialization opportunities. • Focus on High Value-Added Structure-Based Drug Design Technologies. We focus our drug discovery activities and expenditures on applications of structure-based drug design technologies to design and develop drug candidates. Structure-based drug design is a process by which we design a drug candidate through detailed analysis of the enzyme target, which the drug candidate must inhibit in order to stop the progression of the disease or disorder. We believe that structure-based drug design is a powerful tool for efficient development of small-molecule drug candidates that have the potential to be safe, effective and relatively inexpensive to manufacture. Our structure- based drug design technologies typically allow us to design and synthesize multiple drug candidates that inhibit the same enzyme target. We believe this strategy can lead to broad patent protection and enhance the competitive advantages of our compounds. • Develop or License Inhibitors that are Promising Candidates for Commercialization. We test multiple compounds to identify those that are most promising for clinical development. We base our selection of promising development candidates on desirable product characteristics, such as initial indications of safety and efficacy. We believe that this focused strategy allows us to eliminate unpromising candidates from consideration sooner without incurring substantial clinical costs. In addition, we select drug candidates on the basis of their potential for relatively efficient Phase I and Phase II clinical trials that require fewer patients to initially indicate safety and efficacy. We will consider, however, more complex candidates with longer development cycles if we believe that they offer promising commercial opportunities. 1 An important element of our business strategy is to control fixed costs and overhead through contracting and entering into license agreements with other parties. We maintain a streamlined corporate infrastructure that focuses on our strongest areas of expertise. By contracting with other specialty organizations, we believe that we can control costs, enable our drug candidates to reach the market more quickly and reduce our business risk. Key elements of our contracting strategy include: • Entering Into Relationships with Academic Institutions and Biotechnology Companies. Many academic institutions and biotechnology companies perform extensive research on the molecular and structural biology of potential drug development targets. By entering into relationships with these institutions, we believe we can significantly reduce the time, cost and risks involved in drug development. Our collaborative relationships with such organizations may lead to the licensing of one or more drug targets or compounds. Upon licensing a drug target or promising compound from one of these institutions, the scientists from the institution typically become working partners as members of our structure-based drug design teams. We believe this makes us a more attractive development partner to these scientists. In addition, we collaborate with outside experts in a number of areas, including crystallography, molecular modeling, combinatorial chemistry, biology, pharmacology, oncology, cardiology, immunology and infectious diseases. These collaborations enable us to complement our internal capabilities without adding costly overhead. We believe this strategy allows us to save valuable time and expense, and further diversify and strengthen our portfolio of drug candidates. An example of such a collaborative relationship is the arrangement that we have with The University of Alabama at Birmingham, or UAB, which has resulted in the initiation of several of our early drug development programs. • Developing Drug Development Candidates or Licensing Them to Other Parties. We generally plan to advance drug candidates through initial and/or early-stage drug development. For larger disease indications requiring complex clinical trials, our strategy is to license drug candidates to pharmaceutical or biotechnology partners for final development and global marketing. We believe partnerships are a good source of development payments, license fees, milestone payments and royalties. They also reduce the costs and risks, and increase the effectiveness, of late-stage product development, regulatory approval, manufacturing and marketing. We believe that focusing on discovery and early-stage drug development while benefiting from our partners’ proven development and commercialization expertise will reduce our internal expenses and allow us to have a larger number of drug candidates progress to late-stage drug development. However, after establishing a lead product candidate, we are willing to license that candidate during any stage of the development process we determine to be beneficial to the company and to the ultimate development and commercialization of that drug candidate. For some smaller niche disease indications markets, we may choose to complete development, manufacture, and where appropriate market and distribute any approved drugs ourselves, such as BCX-1777 for T-cell leukemias. Products in Development The following table summarizes BioCryst’s development projects as of February 27, 2004: Program and Candidate Disease Category/Indication PNP Inhibitor (BCX-1777) Oncology / T-cell cancers PNP Inhibitor (BCX-4208) Autoimmune diseases / Psoriasis Tissue Factor/Factor VIIa Inhibitors Cardiovascular / Coagulation, inflammation Oncology / Angiogenesis Hepatitis C Polymerase Inhibitors Viral / Hepatitis C Delivery Form Development Stage Intravenous Oral Oral Phase I Phase I Preclinical Worldwide Rights BioCryst BioCryst BioCryst Oral Lead Optimization BioCryst Oral Lead Optimization BioCryst 2 T-cell Related Diseases Overview . The link between T-cell proliferation and the purine nucleoside phosphorylase, or PNP, enzyme was first discovered approximately twenty-five years ago when a patient, who was genetically deficient in PNP, exhibited limited T-cell activity, but reasonably normal activity of other immune functions. In other patients lacking PNP activity, the T-cell population was selectively depleted; however, B- cell function tended to be normal. Based on these findings and the results of cell culture studies, inhibiting PNP produces selective suppression of T-cells without significantly impairing the function of other cells. The human immune system employs specialized cells, including T-cells, to control infection by recognizing and attacking disease-causing viruses, bacteria and parasites. T-cells are an essential part of the body’s immune system that serve a dual purpose to both orchestrate and participate in the body’s immune response. For the most part, this system works flawlessly to protect the body. However, when T-cells multiply uncontrollably, T-cell proliferative diseases, including T-cell cancers, occur. Acute Lymphoblastic Leukemia . The most common form of leukemia in children is acute lymphoblastic leukemia (also known as ALL). According to the American Cancer Society, 3,830 new cases (adult and children combined) will be diagnosed in the United States in 2004. ALL results from an acquired injury to the DNA of a single cell in the bone marrow. T-cell Lymphoma . Lymphoma is a general term for a group of cancers that originate in the lymphatic system. About 54,000 Americans will be diagnosed with a non-Hodgkin’s lymphoma in 2004 and approximately 15% of these will be considered T-cell lymphomas. T-cell lymphoma results when a T-lymphocyte (a type of white blood cell) undergoes a malignant change and begins to multiply, eventually crowding out healthy cells and creating tumors, which enlarge the lymph nodes and invade other sites in the body. Cutaneous T-cell lymphoma (CTCL) is a primary skin neoplasm and accounts for nearly 50% of all T-cell malignancies. T-cell Mediated Autoimmune Diseases. Diseases such as psoriasis, rheumatoid arthritis, multiple sclerosis, and Crohn’s appear to have activated T-cells as a major part of their pathogenesis. Therefore, inhibition and/or elimination of such cells could have a profound and beneficial effect on these diseases. PNP Inhibition . PNP is an enzyme that plays an important role in T-cell proliferation, because it is necessary to maintain normal DNA synthesis in T-cells. Selective inhibition of PNP has an accumulation effect on certain nucleosides, including deoxyguanosine. As the concentration of deoxyguanosine increases within T-cells, it is converted by specific enzymes to deoxyguanosine triphosphate. A high concentration of deoxyguanosine triphosphate in T-cells blocks DNA synthesis and thus inhibits cell division. Our PNP Inhibitor(s) Background . In June 2000, we licensed a series of potent inhibitors of purine nucleoside phosphorylase from Albert Einstein College of Medicine of Yeshiva University (AECOM) and Industrial Research, Ltd, New Zealand (IRL). The lead drug candidate from this collaboration, BCX-1777, is a more potent inhibitor of human lymphocyte proliferation than other previously known PNP inhibitors. Extensive preclinical studies and early patient data indicate that BCX-1777 can modulate T-cell activities. BCX-1777 is an investigational PNP inhibitor for the potential treatment of T-cell leukemias and lymphomas. During 2002, we exercised the option to add a new compound, BCX-4208, to the series of inhibitors of PNP licensed from AECOM and IRL. Preclinical results indicate that BCX-4208 is a more potent inhibitor than BCX-1777. We plan to develop BCX-4208 for autoimmune diseases such as psoriasis and rheumatoid arthritis. PNP Inhibitor (BCX-1777) Overview The first clinical trial with an intravenous formulation of BCX-1777 is a Phase I clinical trial for patients with relapsed or refractory T-cell acute lymphoblastic leukemia (ALL) and T-cell lymphoma. The Phase I trial is an open-label dose-escalation study of BCX-1777 in relapsed or refractory aggressive T-cell malignancies, 3 which are among the most difficult cancers to treat by current therapies. Because of the clinical results seen to this point and some additional testing by our colleagues at the M.D. Anderson Cancer Center, we started three additional trials in 2003 for refractory patients with other types of hematologic malignancies, cutaneous T-cell lymphoma, and solid tumors. Preclinical studies at the M.D. Anderson Cancer Center indicate that BCX-1777 induces the same biochemical changes in various other types of leukemia cells that are responsible for the inhibition of T- leukemia cells, which suggest that BCX-1777 may be even more broadly applicable than originally expected. Initial Phase I clinical results in patients with B-cell acute lymphoblastic leukemia have been encouraging, and we plan to pursue additional B-cell leukemia clinical studies during 2004. Current Development Strategy BCX-1777 Clinical Development for Aggressive T-cell Malignancies . The Phase I clinical trial was developed in close collaboration with experts at The University of Texas M. D. Anderson Cancer Center. Despite encouraging results observed with other T-cell specific agents, the prognosis for patients with relapsed or refractory leukemia or lymphoma is poor and treatment options remain limited. The goal of the Phase I clinical trial is to determine the safety, biochemical and metabolic profile and therapeutic effect produced by BCX-1777 as it relates to the proposed mechanism of action in the inhibition of proliferating T-lymphocytes in patients with T-cell ALL or T-cell lymphoma. Our strategy for future development of BCX-1777 is to pursue with the FDA both orphan drug and fast-track designations. We are also designing a Phase II trial for intravenous BCX-1777, which, assuming successful completion of the current trials, we plan to begin in early 2004 to treat patients with T-cell leukemias. We also plan to initiate a second Phase II trial in early 2004 with intravenous BCX-1777 for treatment of patients with cutaneous T-cell lymphoma (CTCL). Our current intent is for BioCryst itself to market and distribute BCX-1777 in the United States for treatment of T-cell cancers. Early Phase I studies with oral BCX-1777 are currently in progress at the Cleveland Clinic, and we plan to initiate a Phase I/II CTCL clinical trial with oral BCX-1777 during the first half of 2004. PNP Inhibitor (BCX-4208) Overview We believe that the results to date of our Phase I trials of BCX-1777 support the principle that inhibition of PNP has a direct effect on proliferation of activated T-lymphocytes. We are now developing BCX-4208, a second-generation PNP inhibitor, as a drug candidate for the treatment of T-cell mediated autoimmune diseases, including psoriasis. Although BCX-4208 and BCX-1777 are both investigational PNP inhibitors, BCX-4208 differs from BCX-1777 in significant ways. For example, BCX-4208 is more potent, with the ability to modulate T-cell activity for longer period of time. Thus, BCX-4208 has potential advantages over BCX-1777 for the treatment of diseases requiring long-term, chronic administration of a PNP inhibitor. Current Development Strategy During 2003, we conducted a series of preclinical studies of BCX-4208 and have begun preclinical toxicology studies, with the goal of advancing BCX-4208 into Phase I clinical development for treatment of patients with psoriasis in the second half of 2004. Tissue Factor/Factor VIIa Overview A series of complicated reactions take place in the body whenever a blood clot begins to form. The major initiator of these reactions is an enzyme system called the tissue factor/factor VIIa (TF/FVIIa) complex. Animal tests show that various inhibitors of the TF/FVIIa complex can minimize blood clot formation as well as inflammatory responses. This sort of inhibition has been tested with a number of biological agents including the natural inhibitor of the pathway, synthetic peptides and protein inhibitors, and antibodies against tissue factor. However, there are no small molecule drugs currently on the market that intervene at the TF/FVIIa level. We believe that small molecule inhibitors of TF/FVIIa may potentially be useful for treating acute coronary syndromes and complications associated with cardiovascular procedures, such as coronary angioplasty and 4 stent insertions, because any type of damage to arteries and blood vessels exposes tissue factor, which then triggers clot formation. Myocardial infarction, unstable angina, and restenosis during and following angioplasty procedures are all potential treatment targets. In addition, tissue factor is involved in angiogenesis, or new blood vessel growth, and inhibitors of the TF/FVIIa complex are believed to have potential as anti- angiogenesis agents for use in oncology. Background . We have an agreement with Sunol Molecular Corp. to expedite the discovery of new drug candidates designed to inhibit TF/FVIIa. Under the terms of this agreement, Sunol supplies us protein for our drug design program. Current Development Strategy We are continuing to design and synthesize groups of compounds that are potent and selective inhibitors of TF/FVIIa and further optimization is ongoing to identify a compound for preclinical development of a TF/FVIIa inhibitor in oral form. Hepatitis C Overview Hepatitis C virus (HCV) infection has been described in the New England Journal of Medicine as the nation’s most common chronic blood- borne infection. Up to 3% of the world’s population has been infected with HCV. According to the National Centers for Disease Control, as many as 75-85% of those infected with HCV will have chronic infection and 70% of those will develop chronic liver disease. While there are several approved treatments for chronic HCV using a combination therapy of interferon and ribavirin, there are some potentially severe side effects to these treatments. Background . In June 2000, we licensed intellectual property from Emory University related to the hepatitis C polymerase target associated with hepatitis C viral infections. Under the terms of the agreement, the research investigators from Emory provide us with materials and technical insight into the target. Current Development Strategy We are targeting HCV polymerase through collaborative and in-house efforts. Specifically, we are focused on development of orally active inhibitors against the RNA-dependent RNA polymerase. Competition for this target is less intense than for the HCV protease target and history suggests the likelihood of designing a useful inhibitor against this target may be better than for the more difficult protease. Currently, we are designing, synthesizing and screening potential compounds against HCV polymerase. Specifically, our scientists are measuring the potency and ability of potential drug candidates to block the replication of HCV polymerase in vitro, or in test tubes. These experiments measure the potency of each selected compound’s ability to block replication. Advanced screening is also underway to measure the fit of promising compounds in the HCV polymerase active site using X-ray crystallography and computer molecular modeling. The goal is to identify a series of compounds that are potent in vitro inhibitors of the active site of the HCV polymerase for further testing and lead optimization. We also have agreements in place with the National Institute of Allergy and Infectious Diseases, a unit of The National Institutes of Health, and the U.S. Army Medical Research Institute of Infectious Diseases to assay promising inhibitors from the HCV polymerase program for activity against Severe Acute Respiratory Syndrome (SARS), West Nile and Ebola viruses. Structure-Based Drug Design Structure-based drug design is a drug discovery approach by which we design synthetic compounds from detailed structural knowledge of the active sites of enzyme targets associated with particular diseases. Enzymes are proteins that act as catalysts for many vital biological reactions. Our goal generally is to design a compound that will fit in the active site of an enzyme (the active site of an enzyme is the area into which a chemical or biological molecule fits to initiate a biochemical reaction) and thereby interfere with the progression of disease. 5 Our structure-based drug design involves the application of both traditional biology and medicinal chemistry and an array of advanced technologies. We use X-ray crystallography, computer modeling of molecular structures and advanced chemistry techniques to focus on the three-dimensional molecular structure and active site characteristics of the enzymes that control cellular biology. We believe that structure-based drug design technologies are superior to drug screening techniques. By identifying the target enzyme in advance and by discovering the chemical and molecular structure of the enzyme, we believe it is possible to design a better drug to interact with the enzyme. In addition, the structural data obtained by X-ray crystallographic analysis allow additional analysis and compound modification at each stage of the biological evaluation. This capability makes structure-based drug design a powerful tool for efficient development of drugs that are highly specific for particular enzyme target sites. Research and Development We initiated our research and development program in 1986, with drug synthesis beginning in 1987. We have assembled a scientific research staff with expertise in a broad base of advanced research technologies including protein biochemistry, X-ray crystallography, chemistry and pharmacology. Our research facilities include protein biochemistry and organic synthesis laboratories, testing facilities, X-ray crystallography, computer and graphics equipment and facilities to make drug candidates on a small scale. During the years ended December 31, 2001, 2002 and 2003, we spent an aggregate of $40.1 million on research and development. Approximately $26.4 million of that amount was spent on in-house research and development, and $13.7 million was spent on contract research and development. Collaborative Relationships Corporate Alliances Sunol Molecular Corp . In April 1999, we entered into an agreement with Sunol. This agreement requires Sunol to conduct research and supply us with protein targets for drug design to expedite the discovery of new drug candidates designed to inhibit tissue factor/factor VIIa for our cardiovascular program. Academic Alliances The University of Alabama at Birmingham . We have had a close relationship with The University of Alabama at Birmingham (UAB), since our formation. Our Chairman and Chief Executive Officer, Dr. Charles E. Bugg, was the previous Director of the UAB Center for Macromolecular Crystallography, and our President, Chief Operating Officer and Medical Director, Dr. J. Claude Bennett, was the former President of UAB, the former Chairman of the Department of Medicine at UAB and a former Chairman of the Department of Microbiology at UAB. Several of our consultants are employed by UAB. UAB has a large X-ray crystallography center with approximately 110 full-time staff members and approximately $15 million in research grants and contract funding in 2003. Several of our early programs originated at UAB. We currently have agreements with UAB for influenza neuraminidase and complement inhibitors. Under the terms of these agreements, UAB performed specific research for us in return for research payments and license fees. UAB has granted us certain rights to any discoveries in these areas resulting from research developed by UAB or jointly developed with us. We have agreed to pay royalties on sales of any resulting product and to share in future payments received from other third-party collaborators. We have completed the research under the UAB influenza agreement. We funded the research program under the complement inhibitors agreement through March 2002, which entitled us to an assignment of, or a right to an exclusive license for, any inhibitors of specified complement enzymes developed by UAB scientists during the period of support or for a one-year period thereafter. These two agreements have initial 25-year terms, are automatically renewable for five- year terms throughout the life of the last patent and are terminable by us upon three-months’ notice and by UAB under certain circumstances. Albert Einstein College of Medicine of Yeshiva University and Industrial Research, Ltd, New Zealand . In June 2000, we licensed a series of potent inhibitors of purine nucleoside phosphorylase, or PNP, from Albert Einstein College of Medicine of Yeshiva University and Industrial Research, Ltd., New Zealand. The lead drug 6 candidate from this collaboration is BCX-1777. We have the rights to develop and ultimately distribute this, or any other, drug candidate that might arise from research on these inhibitors. For example, in 2003 we obtained the rights to another compound from this series, BCX-4208, which is currently in preclinical development. We have agreed to pay certain milestone payments for future development of these inhibitors, pay certain royalties on sales of any resulting product, and to share in future payments received from other third-party collaborators, if any. We can terminate this agreement at any time by giving 60 days advance notice. Emory University . In June 2000, we licensed intellectual property from Emory University related to the hepatitis C polymerase target associated with hepatitis C viral infections. Under the terms of the agreement, the research investigators from Emory provide us with materials and technical insight into the target. We have agreed to pay Emory royalties on sales of any resulting product and to share in future payments received from other third party collaborators, if any. We can terminate this agreement at any time by giving 90 days advance notice. Patents and Proprietary Information Our success will depend in part on our ability to obtain and enforce patent protection for our products, methods, processes and other proprietary technologies, preserve our trade secrets, and operate without infringing on the proprietary rights of other parties, both in the United States and in other countries. We own or have rights to certain proprietary information, proprietary technology, issued and allowed patents and patent applications which relate to compounds we are developing. We actively seek, when appropriate, protection for our products, proprietary technology and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. In addition, we rely upon trade secrets and contractual arrangements to protect certain of our proprietary information, proprietary technology and products. As of January 31, 2004, we have been issued 21 U.S. patents that expire between 2009 and 2021 and that relate to our PNP and neuraminidase inhibitor compounds. We have licensed four additional patents and two pending patents from Albert Einstein College of Medicine of Yeshiva University and one patent from Emory University. We have also filed patent applications for new processes to prepare certain PNP inhibitors. Additionally, we have 16 U.S. patent applications pending related to PNP, neuraminidase, RNA viral polymerase, paramyxovirus neuraminidase, and serine protease inhibitors. Our pending applications may not result in issued patents, and our patents may not provide us with sufficient protection against competitive products or otherwise be commercially available. Our success is also dependent upon the skills, knowledge and experience of our scientific and technical personnel, none of which is patentable. To help protect our rights, we require all employees, consultants, advisors and collaborators to enter into confidentiality agreements which prohibit the disclosure of confidential information to anyone outside of our company and requires disclosure and assignment to us of their ideas, developments, discoveries and inventions. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the lawful development by others of such information. Marketing and Sales We currently plan to market, distribute and sell BCX-1777 in the U.S. for use in treatment of T-cell cancers. Although our general strategy is to rely on major marketing companies for worldwide commercialization of most products we may develop, we believe that we can manage the highly specialized oncology market for BCX-1777 within the U.S. Most patients with advanced T-cell malignancies in the U.S. are treated at major referral cancer centers, and we expect that many of these centers will be participating in our Phase II trials and will thus be familiar with BCX-1777 if it reaches the market. However, we lack experience in marketing, distributing and selling pharmaceutical products. Our general strategy is to rely on collaborators, licensees or arrangements with others to provide for the marketing, distribution and sales of products we may develop. We may not be able to establish and maintain acceptable commercial arrangements with collaborators, licensees or others to perform such activities. 7 Competition The pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in activities similar to ours, including research and development of drugs for the treatment of infectious, inflammatory and cardiovascular diseases and disorders. Many of these companies have substantially greater financial and other resources, larger research and development staffs, and more extensive marketing and manufacturing organizations than we do. In addition, some of them have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working. They may also market commercial products, either on their own or through collaborative efforts. We expect to encounter significant competition for any of the pharmaceutical products we plan to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. In addition, several pharmaceutical and biotechnology firms, including major pharmaceutical companies and specialized structure-based drug design companies, have announced efforts in the field of structure-based drug design and in the fields of PNP, hepatitis C, and tissue factor/factor VIIa. In order to compete successfully, we must develop proprietary positions in patented drugs for therapeutic markets that have not been satisfactorily addressed by conventional research strategies and, in the process, expand our expertise in structure-based drug design. Our products, even if successfully tested and developed, may not be adopted by physicians over other products and may not offer economically feasible alternatives to other therapies. Government Regulation The FDA regulates the pharmaceutical and biotechnology industries in the United States, and our drug candidates are subject to extensive and rigorous domestic government regulations prior to commercialization. The FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products. In foreign countries, our products are also subject to extensive regulation by foreign governments. These government regulations will be a significant factor in the production and marketing of any pharmaceutical products that we develop. Failure to comply with applicable FDA and other regulatory requirements at any stage during the regulatory process may subject us to sanctions, including: • delays; • warning letters; • fines; • product recalls or seizures; • injunctions; • penalties; • refusal of the FDA to review pending market approval applications or supplements to approval applications; • total or partial suspension of production; • civil penalties; • withdrawals of previously approved marketing applications; and • criminal prosecutions. The regulatory review and approval process is lengthy, expensive and uncertain. Before obtaining regulatory approvals for the commercial sale of any products, we or our licensees must demonstrate that our product candidates are safe and effective for use in humans. The approval process takes many years, substantial expenses may be incurred and significant time may be devoted to clinical development. 8 Before testing potential candidates in humans, we carry out laboratory and animal studies to determine safety and biological activity. After completing preclinical trials, we must file an investigational new drug application, including a proposal to begin clinical trials, with the FDA. We have filed nine investigational new drug applications to date and plan to file, or rely on future partners to file, additional investigational new drug applications in the future as our potential drug candidates advance to that stage of development. Thirty days after filing an investigational new drug application, a Phase I human clinical trial can start unless the FDA places a hold on the study. Our Phase I trials are designed to determine safety in a small group of patients or healthy volunteers. We also assess tolerances and the metabolic and pharmacologic actions of our drug candidates at different doses. After we complete the initial trials, we conduct Phase II trials to assess safety and efficacy and establish the optimal dose in patients. If Phase II trials are successful, we or our licensees conduct Phase III trials to verify the results in a larger patient population. Phase III trials are required for FDA approval to market a drug. A Phase III trial may require hundreds or even thousands of patients and is the most expensive to conduct. The goal in Phase III is to collect enough safety and efficacy data to obtain FDA approval for treatment of a particular disease. For some clinical indications that are especially serious and for which there are no effective treatments, such as refractory cancers, conditional approval can be obtained following Phase II trials. Initiation and completion of the clinical trial phases are dependent on several factors including things that are beyond our control. For example, the clinical trials are dependent on patient enrollment, but the rate at which patients enroll in the study depends on: • the size of the patient population we intend to treat; • the availability of patients; • the willingness of patients to participate; and • the patient meeting the eligibility criteria. Delays in planned patient enrollment may result in increased expense and longer development timelines. After completion of the clinical trials of a product, we or our licensees must submit a new drug application to the FDA for marketing approval before commercialization of the product. The FDA may not grant approval on a timely basis, if at all. The FDA, as a result of the Food and Drug Administration Modernization Act of 1997, has six months to review and act upon license applications for priority therapeutics that are for life-threatening or unmet medical needs. Standard reviews can take between one and two years, and can even take longer if significant questions arise during the review process. The FDA may withdraw any required approvals, once obtained. In addition to clinical development regulations, we and our contract manufacturers and collaborators must comply with the applicable FDA current good manufacturing practice (“GMP”) regulations. GMP regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. Such facilities must be approved before we can use them in commercial manufacturing of our potential products. We or our contract manufacturers may not be able to comply with the applicable GMP requirements and other FDA regulatory requirements. If we or our contract manufacturers fail to comply, our business, financial condition and results of operations will be materially adversely affected. Human Resources As of February 27, 2004, we had 46 employees, of whom 35 were engaged in research and development and 11 were in general and administrative functions. Our scientific staff, 20 of whom hold Ph.D. or M.D. degrees, has diversified experience in biochemistry, pharmacology, X-ray crystallography, synthetic organic chemistry, computational chemistry, and medicinal chemistry. We consider our relations with our employees to be satisfactory. 9 Scientific Advisory Board and Consultants Our scientific advisory board is comprised of five scientific advisors who are leaders in certain of our core disciplines or who otherwise have specific expertise in our therapeutic focus areas. We also have consulting agreements with a number of other scientists with expertise in our core disciplines or who are specialists in diseases or treatments on which we focus. The scientific advisory board meets as a group at scheduled meetings and the consultants meet more frequently, on an individual basis, with our scientific personnel and management to discuss our ongoing research and drug discovery and development projects. The scientific advisory board consists of the following individuals: Name Albert F. LoBuglio, M.D. (Chairman) Gordon N. Gill, M.D. Lorraine J. Gudas, Ph.D. Herbert A. Hauptman, Ph.D. Hamilton O. Smith, M.D. Position Professor of Medicine and the Director of The University Of Alabama at Birmingham Comprehensive Cancer Center. Professor of Medicine and Chair of the Faculty of Basic Biomedical Sciences at the University of California, San Diego School of Medicine. Professor and Chairman of the Department of Pharmacology of Cornell Medical College and the Revlon Pharmaceutical Professor of Pharmacology and Toxicology. President of the Hauptman-Woodward Medical Research Institute, Inc. (formerly the Medical Foundation (Buffalo), Inc.), and Research Professor in Biophysical Sciences at the State University of New York (Buffalo). Recipient of the Nobel Prize in Chemistry (1985). Professor, Molecular Biology and Genetics Department at The Johns Hopkins University School of Medicine, retired, and Scientific Director of The Institute for Bioenergy Alternatives. Recipient of the Nobel Prize in Medicine (1978). The scientific advisors and the consultants are reimbursed for their expenses and receive nominal cash compensation in connection with their service and have been issued options and/or shares of common stock. The scientific advisors and the consultants are all employed by or have consulting agreements with entities other than us, some of which may compete with us in the future. The scientific advisors and the consultants are expected to devote only a small portion of their time to our business, although no specific time commitment has been established. They are not expected to participate actively in our affairs or in the development of our technology. Several of the institutions with which the scientific advisors and the consultants are affiliated may adopt new regulations or policies that limit the ability of the scientific advisors and the consultants to consult with us. The loss of the services of the scientific advisors and the consultants could adversely affect us to the extent that we are pursuing research or development in areas relevant to the scientific advisors’ and consultants’ expertise. To the extent members of our scientific advisory board or the consultants have consulting arrangements with or become employed by any of our competitors, we could be materially adversely affected. Any inventions or processes independently discovered by the scientific advisors or the consultants may not become our property and will probably remain the property of such persons or of such persons’ employers. In addition, the institutions with which the scientific advisors and the consultants are affiliated may make available the research services of their personnel, including the scientific advisors and the consultants, to our competitors pursuant to sponsored research agreements. We require the scientific advisors and the consultants to enter into confidentiality agreements which prohibit the disclosure of confidential information to anyone outside of our company and require disclosure and assignment to us of their ideas, developments, discoveries or inventions. However, our competitors may gain access to trade secrets and other proprietary information developed by us and disclosed to the scientific advisors and the consultants. 10 ITEM 2. PROPERTIES Our administrative offices and principal research facility are located in 57,350 square feet of leased office space in Riverchase Industrial/Research Park in Birmingham, Alabama. The lease runs through June 30, 2010 with an option to lease for an additional five years at current market rates. We believe that our facilities are adequate for our current operations. ITEM 3. LEGAL PROCEEDINGS None. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company’s common stock trades on the Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol BCRX. The following table sets forth the low and high prices of our common stock as reported by Nasdaq for each quarter in 2003 and 2002: First quarter Second quarter Third quarter Fourth quarter 2003 2002 Low High Low High $ .82 $ 2.00 $ 3.68 $ 6.10 1.23 4.51 .60 4.82 2.88 7.37 .71 1.53 6.00 9.41 .85 1.30 The last sale price of the common stock on February 27, 2004 as reported by Nasdaq was $6.87 per share. As of March 3, 2004, there were approximately 338 holders of record of our common stock. The Company has never paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. 11 ITEM 6. SELECTED FINANCIAL DATA Years Ended December 31, (Dollars in thousands, except per share) 2003 2002 2001 2000 1999 Statement of Operations Data: Total revenues (See attached financial statements and notes) $ Research and 1,634 $ 1,774 $ 11,158 $ 7,661 $ 5,329 development expenses 11,522 15,473 13,091 9,590 7,683 Loss before cumulative effect of change in accounting principle (12,700 ) (16,929 ) (4,986 ) (5,490 ) (5,298 ) Cumulative effect of change in accounting principle Net loss Amounts per common share: Loss before 0 $ (12,700 ) $ (16,929 ) $ (4,986 ) $ (11,578 ) $ (5,298 ) 0 (6,088 ) 0 0 cumulative effect of change in accounting principle $ Cumulative effect of change in accounting principle $ Net loss per share Weighted average shares outstanding (.72 ) $ (.96 ) $ (.28 ) $ (.31 ) $ (.34 ) .00 .00 .00 (.35 ) .00 (.72 ) $ (.96 ) $ (.28 ) $ (.66 ) $ (.34 ) (in thousands) 17,703 17,643 17,560 17,467 15,380 2003 2002 2001 2000 1999 December 31, (Dollars in thousands) Balance Sheet Data: Cash, cash equivalents and securities $ 25,732 $ 36,163 $ 52,941 $ 65,583 $ 70,047 Total assets 30,096 41,300 59,096 70,826 73,387 Accumulated deficit (104,660 ) (91,960 ) (75,031 ) (70,045 ) (58,467 ) Total stockholders’ equity 28,447 40,128 56,814 61,481 71,403 12 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Such statements are only predictions and the actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below as well as those discussed in other filings made by the Company with the Securities and Exchange Commission. Overview Since our inception in 1986, we have been engaged in research and development activities and organizational efforts, including: • identification and licensing of enzyme targets; • drug discovery; • structure-based design of drug candidates; • small-scale synthesis of compounds; • conducting preclinical studies and clinical trials; • recruiting our scientific and management personnel; • establishing laboratory facilities; and • raising capital. Our revenues have generally been limited to license fees, milestone payments, interest income, and collaboration research and development fees. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB No. 104. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. The Company has not received any revenues or royalties from the sale of licensed pharmaceutical products. It could be several years, if ever, before we will recognize significant revenue from royalties received pursuant to our license agreements or revenue directly from product sales. Future revenues, if any, are likely to fluctuate substantially from quarter to quarter. We have incurred operating losses since our inception. Our accumulated deficit at December 31, 2003 was $104.7 million. We will require substantial expenditures relating to the development of our current and future drug candidates. During the three years ended December 31, 2003, we spent 34.1% of our research and development expenses on contract research and development, including: • payments to consultants; • funding of research at academic institutions; • large scale synthesis of compounds; • preclinical studies; • engaging investigators to conduct clinical trials; • hiring contract research organizations to monitor and gather data on clinical trials; and • using statisticians to evaluate the results of clinical trials. The above expenditures for contract research and development for our current and future drug candidates will vary from quarter to quarter depending on the status of our research and development projects. For example, on June 25, 2002, we announced preliminary Phase III clinical trial data for peramivir, our investigational oral 13 influenza neuraminidase inhibitor. The trial indicated no statistically significant difference in the primary efficacy endpoint between groups treated with peramivir and groups treated with placebo. Based on these data, we discontinued the development of peramivir. During the first nine months of 2002, our cash expenses related to this trial were approximately $4 million. After terminating the development of peramivir, the Company streamlined its operations, reducing its workforce from 75 employees to 45 employees in order to conserve its resources and provide a longer timeframe in which to advance its other programs. Changes in our existing and future research and development and collaborative relationships will also impact the status of our research and development projects. Although we may, in some cases, be able to control the timing of development expenses, in part by accelerating or decelerating certain of these costs, many of these costs will be incurred irrespective of whether we are able to discover drug candidates or obtain collaborative partners for commercialization. As a result, we believe that quarter-to-quarter comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. If we fail to meet the research, clinical and financial expectations of securities analysts and investors, it could have a material adverse effect on the price of our common stock. Year Ended December 31, 2003 Compared with the Year Ended December 31, 2002 Collaborative and other research and development revenues increased in 2003 to $653,000 compared to $0 in the same period last year, primarily due to a payment from 3-Dimensional Pharmaceuticals Inc. (3DP), a wholly-owned subsidiary of Johnson & Johnson, for certain rights related to complement system inhibitors discovered during the term of our collaborative research agreement. In addition, our revenues include $153,000 from the National Institutes of Health related to the $300,000 first year grant received during 2003 for our hepatitis C inhibitor program. Interest income for 2003 was $980,000, a 44.8% decrease compared to $1,775,000 in 2002. This decrease was due to a reduction in cash and a lower interest rate environment in 2003. Research and development expenses decreased 25.5% to $11,522,000 for 2003 from $15,473,000 in 2002. The decrease in expenses during 2003 was primarily due to the costs incurred by BioCryst during 2002 to complete a Phase III clinical trial for peramivir, a drug candidate that was discontinued in June 2002. In addition, personnel costs were 34% lower during 2003 as a result of the reduction in our staff following the termination of the peramivir program. General and administrative expenses decreased slightly to $2,812,000 in 2003 from $2,856,000 in 2002. In addition, as a result of the termination of the peramivir program effective June 25, 2002, we recorded a non-cash impairment loss of $373,900 in 2002 related to the influenza patents. There were no impairment charges recorded in 2003. The net loss for the year ended December 31, 2003 was $12,700,000, or $0.72 per share, compared to a net loss of $16,929,000, or $0.96 per share in 2002. Year Ended December 31, 2002 Compared with the Year Ended December 31, 2001 Collaborative and other research and development revenue decreased 100.0% to $0 in 2002 from $7,736,976 in 2001, primarily due to a change in accounting estimate following Ortho-McNeil Pharmaceutical, Inc. (Ortho-McNeil) and The R.W. Johnson Pharmaceutical Research Institute’s (RWJPRI) notice of termination of the worldwide license agreement with us to develop and market products to treat and prevent viral influenza. As a result of this termination, we recognized all remaining deferred revenues and expenses related to this agreement during the second and third quarters of 2001. Interest and other income decreased 48.1% to $1,774,524 in 2002 from $3,420,658 in 2001, primarily due to a reduction in cash from the funding of operations and a lower interest rate environment in 2002. Research and development expenses increased 18.2% to $15,473,491 in 2002 from $13,091,057 in 2001. The increase in expenses is primarily attributable to the clinical trial expenses incurred to complete a Phase III trial for peramivir, prior to the termination of this program in June 2002, plus animal studies related to peramivir and our other programs. General and administrative expenses increased 9.5% to $2,855,804 in 2002 from $2,608,392 in 2001. The increase is primarily due to an increase in expenses related to the adoption of a stockholder rights plan, insurance and other professional fees. Royalty expense decreased 100.0% to $0 in 2002 from $443,697 in 2001. This 14 decrease is directly attributable to the change in accounting estimate resulting from the termination of our worldwide license agreement by Ortho-McNeil and RWJPRI for our neuraminidase inhibitor, peramivir. As a result of the termination of this program effective June 25, 2002, we also recorded a non-cash impairment loss of $373,900 in 2002 related to the influenza patents. There were no impairment charges recorded in 2001. Liquidity and Capital Resources Cash expenditures have exceeded revenues since the Company’s inception. Our operations have principally been funded through various sources, including the following: • public offerings and private placements of equity and debt securities, • equipment lease financing, • facility leases, • collaborative and other research and development agreements (including licenses and options for licenses), • research grants and • interest income. In addition, we have attempted to contain costs and reduce cash flow requirements by renting scientific equipment and facilities, contracting with other parties to conduct certain research and development and using consultants. We expect to incur additional expenses, potentially resulting in significant losses, as we continue to pursue our research and development activities and undertake additional preclinical studies and clinical trials of compounds which have been or may be discovered. We also expect to incur substantial expenses related to the filing, prosecution, maintenance, defense and enforcement of patent and other intellectual property claims. On June 25, 2002, we announced we were discontinuing the development of peramivir, our investigational oral influenza neuraminidase inhibitor designed to treat and prevent influenza. After terminating the development of peramivir, the Company streamlined its operations in order to conserve its resources and provide a longer timeframe in which to advance its other programs. On August 5, 2002, at the request of Dr. Charles E. Bugg, our Chairman and Chief Executive Officer and Dr. J. Claude Bennett, our President, Chief Operating Officer and Medical Director, our Compensation Committee and board of directors approved a 25% reduction in their salaries, effective August 1, 2002. On December 8, 2003, the Compensation Committee and board of directors restored their salaries to the full amount in effect prior to August 1, 2002. This change became effective on January 1, 2004. In the event of any change of control of the Company, any cumulative salary reductions during the period from August 1, 2002 through December 31, 2003 would become due and payable to them. The aggregate monthly amount of the reduction was $14,677. On October 24, 2003, our compensation committee voted to pay Dr. Charles E. Bugg, our Chairman and Chief Executive Officer, $484,500 as consideration for the cancellation of options held by Dr. Bugg to purchase 170,000 shares of our common stock. The expiration date of the options was November 18, 2003, and the exercise price of the options was $6.00 per share. The Company invests its excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and mature within three years. The Company has not realized any losses from such investments. In addition, at December 31, 2003, approximately $4.4 million was invested in the Merrill Lynch Premier Institutional Fund, which invests primarily in commercial paper, U.S. government and agency bills and notes, corporate notes, certificates of deposit and time deposits. The Merrill Lynch Premier Institutional Fund is not insured. At December 31, 2003, our cash, cash equivalents and securities held-to-maturity were $25.7 million, a decrease of $10.4 million from December 31, 2002, principally due to the funding of current operations. We raised an additional $21.3 million of capital during February 2004 through a registered offering of our common stock to selected institutional investors. 15 We have financed some of our equipment purchases with lease lines of credit. We currently have a $500,000 general line of credit with our bank, secured by a pledge of $600,000 in marketable securities. There was nothing drawn against this line as of December 31, 2003. In July 2000, we renegotiated our lease for our current facilities, which will expire on June 30, 2010. We have an option to renew the lease for an additional five years at the current market rate in effect on June 30, 2010 and a one-time option to terminate the lease on June 30, 2008 for a termination fee of approximately $124,000. The lease, as amended effective July 1, 2001 for an additional 7,200 square feet, requires us to pay monthly rent starting at $33,145 per month in July 2001 and escalating annually to a minimum of $47,437 per month in the final year, plus our pro rata share of operating expenses and real estate taxes in excess of base year amounts. As part of the lease, we have deposited a U.S. Treasury security in escrow for the payment of rent and performance of other obligations specified in the lease. This pledged amount is currently $390,000, which will be decreased by $65,000 annually throughout the term of the lease. In February 2002, we completed a renovation for approximately $2.6 million to add two chemistry laboratories and purchase additional equipment. Currently, there are no plans for additional renovations. As a result of the reduction in our staff during July 2002, we have approximately 14,000 square feet of excess space, which is currently being subleased. At December 31, 2003, we had long-term operating lease obligations, which provide for aggregate minimum payments of $594,897 in 2004, $605,139 in 2005 and $573,031 in 2006. These obligations include the future rental of our operating facility. We plan to finance our needs principally from the following: • our existing capital resources and interest earned on that capital; • payments under collaborative and licensing agreements with corporate partners; and • lease or loan financing and future public or private financing. We believe that our available funds will be sufficient to fund our operations at least through 2004. However, this is a forward looking statement, and there may be changes that would consume available resources significantly before such time. Our long-term capital requirements and the adequacy of our available funds will depend upon many factors, including: • the progress of our research, drug discovery and development programs; • changes in existing collaborative relationships; • our ability to establish additional collaborative relationships; • the magnitude of our research and development programs; • the scope and results of preclinical studies and clinical trials to identify drug candidates; • competitive and technological advances; • the time and costs involved in obtaining regulatory approvals; • the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; • our dependence on others for development and commercialization of our product candidates, and • successful commercialization of our products consistent with our licensing strategy. In 2003, our operations consumed approximately $1,000,000 per month, but we expect that our monthly cash used by operations will continue to increase for the next several years. During 2004, we plan to both expand our existing clinical programs and initiate clinical programs for several new disease indications. These additional trials and the related manufacturing, personnel resources and testing required to support these studies will consume significant capital resources and significantly increase our expenses and our net loss. As of December 31, 2003, we had $25.7 million in cash, cash equivalents and securities. We raised an additional $21.4 million of capital during February 2004 to provide the resources necessary to continue the development of our existing programs, while prudently maintaining our cash position. We expect our monthly burn rate to 16 increase to approximately $2 million by mid-2004, as we get our Phase II trial underway for T-cell leukemia patients. This monthly burn rate could increase more as the year progresses and in future years depending on many factors, including our ability to raise additional capital, the progress of our BCX-1777 clinical trials for both T-cell leukemia and CTCL, our ability to move BCX-4208 through the preclinical testing required to file an IND and begin clinical trials, and the progression of our discovery programs. We will be required to raise additional capital to complete the development and commercialization of our current product candidates. Additional funding, whether through additional sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. Insufficient funds may require us to delay, scale-back or eliminate certain of our research and development programs. Off-Balance Sheet Arrangements As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2003, we are not involved in any material unconsolidated SPE or off-balance sheet arrangements. Contractual Obligations In the table below, we set forth our enforceable and legally binding obligations as of December 31, 2003. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations we will actually pay in future periods may vary from those reflected in the table. Contractual Obligations Operating Lease Obligations Purchase Obligations Other Long-Term Liabilities Reflected on the Payments due by period Total Less than 1 year 1–3 years 3–5 years More than 5 years $ 3,692,005 $ 594,897 $ 1,706,920 $ 1,390,188 $ 1,687,853 487,853 600,000 600,000 0 0 Company’s Balance Sheet Under GAAP Total Critical Accounting Policies 0 300,000 300,000 $ 5,679,858 $ 1,082,750 $ 2,306,920 $ 1,990,188 $ 300,000 0 0 We have established various accounting policies that govern the application of accounting principles generally accepted in the United States, which were utilized in the preparation of our financial statements. Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. 17 Revenue Recognition The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB No. 104. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. Recognized revenues and profit are subject to revisions as these contracts or agreements progress to completion. Revisions to revenue or profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Valuation of Financial Instruments We carry our held-to-maturity securities at amortized cost, as adjusted for other-than-temporary declines in market value. In determining if and when a decline in market value below amortized cost is other-than-temporary, we evaluate the market conditions and other key measures for our held-to-maturity investments. Future adverse changes in market conditions could result in losses or an inability to recover the carrying value of the held-to-maturity investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. Deferred Taxes We have not had taxable income since incorporation and, therefore, we have not paid any income tax. We have deferred tax assets related to net operating loss carryforwards and research and development carryforwards, and have recorded a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Patents and Licenses Patents and licenses are recorded at cost and amortized on a straight-line basis over their estimated useful lives or 20 years, whichever is lesser. These costs are reviewed periodically in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”) to determine any impairment that needs to be recognized. An investment in our stock involves a high degree of risk. You should consider carefully the following risks, along with all of the other information included in our other filings with the Securities and Exchange Commission, before deciding to buy our common stock. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business operations. If we are unable to prevent events that have a negative effect from occurring, then our business may suffer. Negative events are likely to decrease Risk Factors our revenue, increase our costs, make our financial results poorer and/or decrease our financial strength, and may cause our stock price to decline. In that case, you may lose all or a part of your investment in our common stock. 18 Risks Relating to Our Business We have incurred substantial losses since our inception in 1986, expect to continue to incur such losses and may never be profitable Since our inception in 1986, we have not been profitable. We expect to incur additional losses for the foreseeable future, and our losses could increase as our research and development efforts progress. As of December 31, 2003, our accumulated deficit was approximately $104.7 million. To become profitable, we must successfully develop drug candidates, enter into profitable agreements with other parties and our drug candidates must receive regulatory approval. We or these other parties must then successfully manufacture and market our drug candidates. It could be several years, if ever, before we receive royalties from any future license agreements or revenues directly from product sales. If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates or continue our research and development programs. To date, we have financed our operations primarily from sale of our equity securities and, to a lesser extent, revenues from collaborations and interest. In 2003, our operations consumed approximately $1,000,000 per month, but we expect that our monthly cash used by operations will continue to increase for the next several years. During 2004, we plan to both expand our existing clinical programs and initiate clinical programs for several new disease indications. These additional trials and the related manufacturing, personnel resources and testing required to support these studies will consume significant capital resources and significantly increase our expenses and our net loss. As of December 31, 2003, we had $25.7 million in cash, cash equivalents and securities. We raised an additional $21.4 million of capital during February 2004 to provide the resources necessary to continue the development of our existing programs, while prudently maintaining our cash position. We expect our monthly burn rate to increase to approximately $2 million by mid-2004, as we get our Phase II trial underway for T-cell leukemia patients. This monthly burn rate could increase more as the year progresses and in future years depending on many factors including, our ability to raise additional capital, the progress of our BCX-1777 clinical trials for both T-cell leukemia and CTCL, our ability to move BCX-4208 through the preclinical testing required to file an IND and begin clinical trials, and the progression of our discovery programs. Our long-term capital requirements and the adequacy of our available funds will depend upon many factors, including: • the progress of our research, drug discovery and development programs; • changes in existing collaborative relationships; • our ability to establish additional collaborative relationships; • the magnitude of our research and development programs; • the scope and results of preclinical studies and clinical trials to identify drug candidates; • competitive and technological advances; • the time and costs involved in obtaining regulatory approvals; • the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims; • our dependence on others for development and commercialization of our product candidates; and • successful commercialization of our products consistent with our licensing strategy. We will be required to raise additional capital to complete the development and commercialization of our current product candidates. Additional funding, whether through additional sales of securities or collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. The issuance of preferred or common stock or convertible securities, with terms and prices significantly more favorable than those of the currently outstanding common stock, could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders. In addition, collaborative arrangements may require us to transfer certain material rights to such corporate partners. 19 Insufficient funds may require us to delay, scale-back or eliminate certain of our research and development programs. We have not commercialized any products or technologies and our future revenue generation is uncertain We have not yet commercialized any products or technologies, and we may never be able to do so. Our revenue from collaborative agreements is dependent upon the status of our preclinical and clinical programs. If we fail to advance these programs to the point of being able to enter into successful collaborations, we will not receive any future milestone or other collaborative payments. Any future revenue directly from product sales would depend on our ability to successfully complete clinical studies, obtain regulatory approvals, manufacture, market and commercialize any approved drugs. If our development collaborations with other parties fail, the development of our drug candidates will be delayed or stopped We rely heavily upon other parties for many important stages of our drug development programs, including: • discovery of proteins that cause or enable biological reactions necessary for the progression of the disease or disorder, called enzyme targets; • license or design enzyme inhibitors for development as drug candidates; • execution of some preclinical studies and late-stage development for our compounds and drug candidates; • management of our clinical trials, including medical monitoring and data management; • management of our regulatory function; and • manufacturing, sales, marketing and distribution of our drug candidates. Our failure to engage in successful collaborations at any one of these stages would greatly impact our business. If we do not license enzyme targets or inhibitors from academic institutions or from other biotechnology companies on acceptable terms, our product development efforts would suffer. Similarly, if the contract research organizations that conduct our initial or late-stage clinical trials or manage our regulatory function breached their obligations to us, this would delay or prevent the development of our drug candidates. Even more critical to our success is our ability to enter into successful collaborations for the late-stage clinical development, regulatory approval, manufacturing, marketing, sales and distribution of our drug candidates. Our general strategy is to rely upon other parties for all of these steps so that we can focus exclusively on the key areas of our expertise. For some smaller niche markets, we may perform these steps ourselves and outsource those functions where we do not have the internal expertise. This heavy reliance upon third parties for these critical functions presents several risks, including: • these contracts may expire or the other parties to the contract may terminate them; • our partners may choose to pursue alternative technologies, including those of our competitors; • we may have disputes with a partner that could lead to litigation or arbitration; • our partners may not devote sufficient capital or resources towards our drug candidates; and • our partners may not comply with applicable government regulatory requirements. Any problems encountered with our current or future partners could delay or prevent the development of our compounds, which would severely affect our business, because if our compounds do not reach the market in a timely manner, or at all, we may never receive any milestone, product or royalty payments. 20 If the clinical trials of our drug candidates fail, our drug candidates will not be marketed, which would result in a complete absence of product related revenue To receive the regulatory approvals necessary for the sale of our drug candidates, we or our licensees must demonstrate through preclinical studies and clinical trials that each drug candidate is safe and effective. If we or our licensees are unable to demonstrate that our drug candidates are safe and effective, our drug candidates will not receive regulatory approval and will not be marketed, which would result in a complete absence of product related revenue. The clinical trial process is complex and uncertain. Because of the cost and duration of clinical trials, we may decide to discontinue development of product candidates that are either unlikely to show good results in the trials or unlikely to help advance a product to the point of a meaningful collaboration. Positive results from preclinical studies and early clinical trials do not ensure positive results in clinical trials designed to permit application for regulatory approval, called pivotal clinical trials. We may suffer significant setbacks in pivotal clinical trials, even after earlier clinical trials show promising results. Any of our drug candidates may produce undesirable side effects in humans. These side effects could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a drug candidate. These side effects could also result in the FDA or foreign regulatory authorities refusing to approve the drug candidate for any targeted indications. We, our licensees, the FDA or foreign regulatory authorities may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks. Clinical trials may fail to demonstrate that our drug candidates are safe or effective. Clinical trials are lengthy and expensive. We or our licensees incur substantial expense for, and devote significant time to, preclinical testing and clinical trials, yet cannot be certain that the tests and trials will ever result in the commercial sale of a product. For example, clinical trials require adequate supplies of drug and sufficient patient enrollment. Delays in patient enrollment can result in increased costs and longer development times. Even if we or our licensees successfully complete clinical trials for our product candidates, we or our licensees might not file the required regulatory submissions in a timely manner and may not receive regulatory approval for the drug candidate. If we or our licensees do not obtain and maintain governmental approvals for our products under development, we or our partners will not be able to sell these potential products, which would significantly harm our business because we will receive no revenue We or our licensees must obtain regulatory approval before marketing or selling our future drug products. If we or our licensees are unable to receive regulatory approval and do not market or sell our future drug products, we will never receive any revenue from such product sales. In the United States, we or our partners must obtain FDA approval for each drug that we intend to commercialize. The FDA approval process is typically lengthy and expensive, and approval is never certain. Products distributed abroad are also subject to foreign government regulation. The FDA or foreign regulatory agencies have not approved any of our drug candidates. If we or our licensees fail to obtain regulatory approval we will be unable to market and sell our future drug products. We have several drug products in various stages of preclinical and clinical development; however, we are unable to determine when, if ever, any of these products will be commercially available. Because of the risks and uncertainties in biopharmaceutical development, our drug candidates could take a significantly longer time to gain regulatory approval than we expect or may never gain approval. If the FDA delays regulatory approval of our drug candidates, our management’s credibility, our company’s value and our operating results may suffer. Even if the FDA or foreign regulatory agencies approve a drug candidate, the approval may limit the indicated uses for a drug candidate and/or may require post-marketing studies. The FDA regulates, among other things, the record keeping and storage of data pertaining to potential pharmaceutical products. We currently store most of our preclinical research data at our facility. While we do store duplicate copies of most of our clinical data offsite, we could lose important preclinical data if our facility incurs damage. If we get approval to market our potential products, whether in the United States or internationally, we will continue to be subject to extensive regulatory requirements. These requirements are wide ranging and govern, among other things: • adverse drug experience reporting regulations; • product promotion; 21 • product manufacturing, including good manufacturing practice requirements; and • product changes or modifications. Our failure to comply with existing or future regulatory requirements, or our loss of, or changes to, previously obtained approvals, could have a material adverse effect on our business because we will not receive product or royalty revenues if we or our licensees do not receive approval of our products for marketing. In June 1995, we notified the FDA that we submitted incorrect data for our Phase II studies of BCX-34 applied to the skin for cutaneous T- cell lymphoma and psoriasis. The FDA inspected us in November 1995 and issued us a List of Inspectional Observations, Form FDA 483, which cited our failure to follow good clinical practices. The FDA also inspected us in June 1996. The focus was on the two 1995 Phase II dose-ranging studies of topical BCX-34 for the treatment of cutaneous T-cell lymphoma and psoriasis. As a result of the investigation, the FDA issued us a Form FDA 483, which cited our failure to follow good clinical practices. BioCryst is no longer developing BCX-34; however, as a consequence of these two investigations, our ongoing and future clinical studies may receive increased scrutiny, which may delay the regulatory review process. We may be unable to establish sales, marketing and distribution capabilities necessary to successfully commercialize products we may successfully develop We currently have no marketing capability and no direct or third-party sales or distribution capabilities. If we successfully develop a drug candidate and decide to commercialize it ourselves rather than relying on third parties, as we currently intend to do in the United States for BCX-1777, we may be unable to establish marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for that product. If our drug candidates do not achieve broad market acceptance, our business may never become profitable Our drug candidates may not gain the market acceptance required for us to be profitable even if they successfully complete initial and final clinical trials and receive approval for sale by the FDA or foreign regulatory agencies. The degree of market acceptance of any drug candidates that we or our partners develop will depend on a number of factors, including: • cost-effectiveness of our drug candidates; • their safety and effectiveness relative to alternative treatments; • reimbursement policies of government and third-party payers; and • marketing and distribution support for our drug candidates. Physicians, patients, payers or the medical community in general may not accept or use our drug candidates even after the FDA or foreign regulatory agencies approve the drug candidates. If our drug candidates do not achieve significant market acceptance, we will not have enough revenues to become profitable. We face intense competition, and if we are unable to compete effectively, the demand for our products, if any, may be reduced The biotechnology and pharmaceutical industries are highly competitive and subject to rapid and substantial technological change. We face, and will continue to face, competition in the licensing of desirable disease targets, licensing of desirable drug candidates, and development and marketing of our product candidates from academic institutions, government agencies, research institutions and biotechnology and pharmaceutical companies. Competition may also arise from, among other things: • other drug development technologies; • methods of preventing or reducing the incidence of disease, including vaccines; and • new small molecule or other classes of therapeutic agents. Developments by others may render our product candidates or technologies obsolete or noncompetitive. 22 We are performing research on or developing products for the treatment of several disorders including T-cell mediated disorders (T-cell cancers, psoriasis, and rheumatoid arthritis), cardiovascular, oncology, and hepatitis C, and there are a number of competitors to products in our research pipeline. If one or more of our competitors’ products or programs are successful, the market for our products may be reduced or eliminated. Compared to us, many of our competitors and potential competitors have substantially greater: • capital resources; • research and development resources, including personnel and technology; • regulatory experience; • preclinical study and clinical testing experience; • manufacturing and marketing experience; and • production facilities. Any of these competitive factors could reduce demand for our products. If we fail to adequately protect or enforce our intellectual property rights or secure rights to patents of others, the value of those rights would diminish Our success will depend in part on our ability and the abilities of our licensors to obtain patent protection for our products, methods, processes and other technologies to preserve our trade secrets, and to operate without infringing the proprietary rights of third parties. If we or our partners are unable to adequately protect or enforce our intellectual property rights for our products, methods, processes and other technologies, the value of the drug candidates that we license to derive revenue would diminish. Additionally, if our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs. The U.S. Patent and Trademark Office has issued to us a number of U.S. patents for our various inventions and we have in-licensed several patents from various institutions. We have filed additional patent applications and provisional patent applications with the U.S. Patent and Trademark Office. We have filed a number of corresponding foreign patent applications and intend to file additional foreign and U.S. patent applications, as appropriate. We cannot assure you as to: • the degree and range of protection any patents will afford against competitors with similar products; • if and when patents will issue; or • whether or not others will obtain patents claiming aspects similar to those covered by our patent applications. If the U.S. Patent and Trademark Office upholds patents issued to others or if the U.S. Patent and Trademark Office grants patent applications filed by others, we may have to: • obtain licenses or redesign our products or processes to avoid infringement; • stop using the subject matter claimed in those patents; or • pay damages. We may initiate, or others may bring against us, litigation or administrative proceedings related to intellectual property rights, including proceedings before the U.S. Patent and Trademark Office. Any judgment adverse to us in any litigation or other proceeding arising in connection with a patent or patent application could materially and adversely affect our business, financial condition and results of operations. In addition, the costs of any such proceeding may be substantial whether or not we are successful. Our success is also dependent upon the skills, knowledge and experience, none of which is patentable, of our scientific and technical personnel. To help protect our rights, we require all employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside of our company and require disclosure and assignment to us of their ideas, developments, discoveries and inventions. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure or the 23 lawful development by others of such information, and if any of our proprietary information is disclosed, our business will suffer because our revenues depend upon our ability to license our technology and any such events would significantly impair the value of such a license. If we fail to retain our existing key personnel or fail to attract and retain additional key personnel, the development of our drug candidates and the expansion of our business will be delayed or stopped We are highly dependent upon our senior management and scientific team, the loss of whose services might impede the achievement of our development and commercial objectives. Competition for key personnel with the experience that we require is intense and is expected to continue to increase. Our inability to attract and retain the required number of skilled and experienced management, operational and scientific personnel, will harm our business because we rely upon these personnel for many critical functions of our business. In addition, we rely on members of our scientific advisory board and consultants to assist us in formulating our research and development strategy. All of the members of the scientific advisory board and all of our consultants are otherwise employed and each such member or consultant may have commitments to other entities that may limit their availability to us. If users of our drug products are not reimbursed for use, future sales of our drug products will decline The lack of reimbursement for the use of our product candidates by hospitals, clinics, patients or doctors will harm our business. Medicare, Medicaid, health maintenance organizations and other third-party payers may not authorize or otherwise budget for the reimbursement of our products. Governmental and third-party payers are increasingly challenging the prices charged for medical products and services. We cannot be sure that third-party payers would view our product candidates as cost-effective, that reimbursement will be available to consumers or that reimbursement will be sufficient to allow our product candidates to be marketed on a competitive basis. Changes in reimbursement policies, or attempts to contain costs in the health care industry could limit or restrict reimbursement for our product candidates and would materially and adversely affect our business, because future product sales would decline and we would receive less product or royalty revenue. If we face clinical trial liability claims related to the use or misuse of our compounds in clinical trials, our management’s time will be diverted and we will incur litigation costs We face an inherent business risk of liability claims in the event that the use or misuse of our compounds results in personal injury or death. We have not experienced any clinical trial liability claims to date, but we may experience these claims in the future. After commercial introduction of our products we may experience losses due to product liability claims. We currently maintain clinical trial liability insurance coverage in the amount of $5.0 million per occurrence and $5.0 million in the aggregate, with an additional $2.0 million potentially available under our umbrella policy. The insurance policy may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If our computer systems fail, our business will suffer Our drug development activities depend on the security, integrity and performance of the computer systems supporting them, and the failure of our computer systems could delay our drug development efforts. We currently store most of our preclinical and clinical data at our facility. Duplicate copies of all critical data are stored off-site in a bank vault. Any significant degradation or failure of our computer systems could cause us to inaccurately calculate or lose our data. Loss of data could result in significant delays in our drug development process and any system failure could harm our business and operations. 24 If, because of our use of hazardous materials, we violate any environmental controls or regulations that apply to such materials, we may incur substantial costs and expenses in our remediation efforts Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and some waste products. Accidental contamination or injury from these materials could occur. In the event of an accident, we could be liable for any damages that result and any liabilities could exceed our resources. Compliance with environmental laws and regulations could require us to incur substantial unexpected costs, which would materially and adversely affect our results of operations. Risks Relating to Our Common Stock Our stock price is likely to be highly volatile and the value of your investment could decline significantly The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. Moreover, our stock price has fluctuated frequently, and these fluctuations are often not related to our financial results. For the twelve months ended December 31, 2003, the 52-week range of the market price of our stock was from $0.82 to $9.41 per share. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: • announcements of technological innovations or new products by us or our competitors; • developments or disputes concerning patents or proprietary rights; • status of new or existing licensing or collaborative agreements; • we or our licensees achieving or failing to achieve development milestones; • publicity regarding actual or potential medical results relating to products under development by us or our competitors; • regulatory developments in both the United States and foreign countries; • public concern as to the safety of pharmaceutical products; • actual or anticipated fluctuations in our operating results; • changes in financial estimates or recommendations by securities analysts; • economic and other external factors or other disasters or crises; and • period-to-period fluctuations in our financial results. Because stock ownership is concentrated, you and other investors will have minimal influence on stockholder decisions As of February 27, 2004, our directors, executive officers and some principal stockholders and their affiliates beneficially owned approximately 42.7% (directors and officers owned 23.8%) of our outstanding common stock and common stock equivalents. As a result, these holders, if acting together, are able to significantly influence matters requiring stockholder approval, including the election of directors. This concentration of ownership may delay, defer or prevent a change in our control. We have anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree Our board of directors has the authority to issue up to 3,178,500 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may 25 adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock. In addition, our certificate of incorporation provides for staggered terms for the members of the board of directors and supermajority approval of the removal of any member of the board of directors and prevents our stockholders from acting by written consent. Our certificate also requires supermajority approval of any amendment of these provisions. These provisions and other provisions of our by-laws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. In June 2002, our board of directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights (“Rights”) to the holders of our common stock. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons who acquires more than 15% (19.9% for William W. Featheringill, a Director who currently owns more than 13%, but owned more than 15% at the time the Rights were put in place) of our common stock on terms not approved by the board of directors. We have never paid dividends on our common stock and do not anticipate doing so in the foreseeable future We have never paid cash dividends on our stock. We currently intend to retain all future earnings, if any, for use in the operation of our business. Accordingly, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Information Regarding Forward-Looking Statements This discussion contains forward-looking statements, which are subject to risks and uncertainties. These forward-looking statements can generally be identified by the use of words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” the negative of these words or similar expressions. Statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Discussions containing these forward-looking statements are principally contained in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” above, as well as any amendments we make to those sections in filings with the SEC. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this document. You should read this discussion completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing our risk. We invest excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes, and by policy, limit the amount of credit exposure at any one institution. Some of the securities we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we schedule our investments to have maturities that coincide with our expected cash flow needs, thus avoiding the need to redeem an investment prior to its maturity date. Accordingly, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BALANCE SHEETS December 31, 2003 2002 Assets Cash and cash equivalents Securities held-to-maturity Prepaid expenses and other current assets Total current assets Securities held-to-maturity Furniture and equipment, net Patents and licenses, less accumulated amortization of $202 in 2003 and $201 in 2002 Total assets Liabilities and Stockholders’ Equity Accounts payable Accrued expenses Accrued vacation Total current liabilities Deferred revenue Stockholders’ equity: Preferred stock: shares authorized — 5,000,000 Series A Convertible Preferred stock, $.01 par value; shares authorized — 1,800,000; shares issued and outstanding — none Series B Junior Participating Preferred stock, $.001 par value; shares authorized — 21,500; shares issued and outstanding — none Common stock, $.01 par value; shares authorized — 45,000,000; shares issued and outstanding — 17,871,289 — 2003; 17,657,097 — 2002 675,907 $ 11,940,958 $ 13,824,289 8,087,124 10,624,518 482,620 20,703,989 24,931,427 5,704,399 11,714,151 3,507,705 4,557,287 97,523 $ 30,095,554 $ 41,300,388 179,461 $ 640,349 $ 467,690 240,372 1,348,411 300,000 256,038 443,524 173,015 872,577 300,000 178,713 176,571 Additional paid-in capital Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity 132,928,208 131,910,935 (104,659,778 ) (91,959,695 ) 28,447,143 40,127,811 $ 30,095,554 $ 41,300,388 See accompanying notes to financial statements. 28 STATEMENTS OF OPERATIONS Revenues: Collaborative and other research and development Interest and other Total revenues $ 653,255 $ 0 $ 7,736,976 980,249 1,774,524 3,420,658 1,633,504 1,774,524 11,157,634 Years Ended December 31, 2003 2002 2001 Expenses: Research and development General and administrative Impairment of patents and licenses Royalty expense Interest Total expenses Net loss 11,521,982 15,473,491 13,091,057 2,811,605 2,855,804 2,608,392 0 443,697 464 14,333,587 18,703,195 16,143,610 $ (12,700,083 ) $ (16,928,671 ) $ (4,985,976 ) 373,900 0 0 0 0 0 Net loss per common share $ (.72 ) $ (.96 ) $ (.28 ) Weighted average shares outstanding 17,703,441 17,642,746 17,560,143 See accompanying notes to financial statements. 29 STATEMENTS OF STOCKHOLDER’S EQUITY Balance at December 31, 2000 Exercise of stock options, 46,027 shares, net Employee stock purchase plan sales, 24,122 shares Compensation cost Net loss Balance at December 31, 2001 Employee stock purchase plan sales, 50,127 shares Compensation cost Net loss Common Stock Additional Paid-in Capital Accumulated Deficit Total Stock- Holders’ Equity $ 175,368 $ 131,350,338 $ (70,045,048 ) $ 61,480,658 461 241 101,907 93,131 123,289 102,368 93,372 123,289 (4,985,976 ) (4,985,976 ) 176,070 131,668,665 (75,031,024 ) 56,813,711 122,080 122,581 120,190 120,190 (16,928,671 ) (16,928,671 ) 501 Balance at December 31, 2002 Exercise of stock options, 186,228 shares, net Employee stock purchase plan sales, 27,964 shares Compensation cost Net loss Balance at December 31, 2003 176,571 131,910,935 (91,959,695 ) 40,127,811 877,198 1,862 879,060 20,399 280 20,679 119,676 119,676 (12,700,083 ) (12,700,083 ) $ 178,713 $ 132,928,208 $ (104,659,778 ) $ 28,447,143 See accompanying notes to financial statements. 30 STATEMENTS OF CASH FLOWS Operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Impairment of patents and licenses Amortization of patents and licenses Non-monetary compensation cost Deferred expense Deferred revenue Changes in operating assets and liabilities: Prepaid expenses and other current assets Accounts payable Accrued expenses Accrued vacation Net cash used in operating activities Investing activities: Purchases of furniture and equipment Purchases of patents and licenses Purchase of marketable securities Maturities of marketable securities Net cash provided by investing activities Years Ended December 31, 2003 2002 2001 $ (12,700,083 ) $ (16,928,671 ) $ (4,985,976 ) 1,101,311 1,246,417 1,046,037 373,900 0 201 3,398 120,190 123,289 0 443,698 0 (7,736,976 ) 0 202 119,676 0 0 264,077 (186,513 ) 803,200 67,280 (11,196,347 ) (16,364,055 ) (10,158,486 ) (66,065 ) (361,548 ) (688,769 ) (59,710 ) (193,287 ) 384,311 24,166 67,357 (51,729 ) (82,140 ) (407,880 ) (2,604,379 ) (128,599 ) (65,438 ) (11,573,960 ) (8,085,173 ) (26,433,622 ) 20,121,106 19,822,089 49,485,497 8,413,277 11,200,437 20,382,058 Financing activities: Principal payments of debt and capital lease obligations Exercise of stock options Employee stock purchase plan stock sales Net cash provided by financing activities 0 879,060 20,679 899,739 0 0 122,581 122,581 (9,788 ) 102,368 93,372 185,952 (Decrease) increase in cash and cash equivalents Cash and equivalents at beginning of year Cash and cash equivalents at end of year (1,883,331 ) (5,041,037 ) 10,409,524 13,824,289 18,865,326 8,455,802 $ 11,940,958 $ 13,824,289 $ 18,865,326 See accompanying notes to financial statements. 31 NOTES TO FINANCIAL STATEMENTS Note 1 — Accounting Policies The Company BioCryst Pharmaceuticals, Inc., a Delaware corporation (the “Company”), is a biotechnology company focused on designing, optimizing and developing novel small molecule drugs that block key enzymes essential for cancer, cardiovascular and autoimmune diseases and viral infections. The Company has four research projects in different stages of development from early discovery to an ongoing Phase I trial of the Company’s most advanced drug candidate, BCX-1777. While the prospects for a project may increase as the project advances to the next stage of development, a project can be terminated at any stage of development. Until the Company generates revenues from either a research project or an approved product, its ability to continue research projects is dependent upon its ability to raise funds. Securities Held-to-Maturity The Company is required to classify debt and equity securities as held-to-maturity, available-for-sale or trading. The appropriateness of each classification is reassessed at each reporting date. As of December 31, 2003 and 2002, the Company classified all debt and equity securities as held-to-maturity. The only dispositions of securities classified as held-to-maturity related to actual maturities or securities called prior to their maturity. At December 31, 2003 and 2002, respectively, securities held-to-maturity consisted of $13,791,523 and $22,338,669 of U.S. Treasury and Agency securities carried at amortized cost. All of the non-current portions of securities held-to-maturity are U.S. Agency securities that mature in 2004-2006. The estimated fair value of all held-to-maturity securities at December 31, 2003 and 2002, respectively, was approximately $13,879,086 and $22,640,061. The Company has pledged $600,000 in securities to cover any future draw against its line of credit (see Note 5) and has deposited a U.S. Treasury security of $390,000 in escrow for the payment of rent and performance of other obligations specified in its lease dated July 12, 2000 (see Note 5). The amount deposited in escrow for the lease decreases $65,000 annually throughout the term of the lease. Furniture and Equipment Furniture and equipment are recorded at cost. Depreciation is computed using the straight-line method with estimated useful lives of five and seven years. Laboratory equipment, office equipment, leased equipment and software are depreciated over a life of five years. Furniture and fixtures are depreciated over a life of seven years. Leasehold improvements are amortized over the remaining lease period. Patents and Licenses Patents and licenses are recorded at cost and amortized on a straight-line basis over their estimated useful lives or 20 years, whichever is lesser. The Company periodically reviews its patents and licenses for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“Statement No. 144”) to determine any impairment that needs to be recognized. During the quarter ended June 30, 2002, the Company abandoned the development of peramivir, its influenza neuraminidase inhibitor. As a result, the Company recognized an expense of $373,900 during the quarter ended June 30, 2002 related to the patents for the neuraminidase inhibitors, as they no longer have any readily determinable value to the Company. Income Taxes The liability method is used in accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“Statement No. 109”). Under this method, deferred tax 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 will be in effect when the differences are expected to reverse. 32 Revenue Recognition NOTES TO FINANCIAL STATEMENTS (Continued) The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”). Research and development revenue on cost-reimbursement agreements is recognized as expenses are incurred, up to contractual limits. Research and development fees, license fees and milestone payments are recognized as revenue when the earnings process is complete, the Company has no further continuing performance obligations and has completed its performance under the terms of the agreement, in accordance with SAB No. 104. License fees and milestone payments received under licensing agreements that are related to future performance are deferred and taken into income as earned over the estimated drug development period. Recognized revenues and profit are subject to revisions as these contracts or agreements progress to completion. Revisions to revenue or profit estimates are charged to income in the period in which the facts that give rise to the revision became known. The Company has not received any royalties from the sale of licensed pharmaceutical products. Net Loss Per Share The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share . Net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted loss per share includes common equivalent shares from unexercised stock options and shares expected to be issued under the Company’s employee stock purchase plan. For all periods presented, diluted loss per share does not include the impact of potential common shares outstanding, as the impact of those shares is anti-dilutive. Statements of Cash Flows For purposes of the statements of cash flows, the Company considers cash equivalents to be all cash held in money market accounts or investments in debt instruments with maturities of three months or less at the time of purchase. Stock-Based Compensation The Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). Under APB No. 25, the Company’s stock option and employee stock purchase plans qualify as noncompensatory plans. Under Financial Accounting Standards Board Interpretation 44, Accounting for Certain Transactions involving Stock Compensation, an Interpretation of APB No. 25 , outside directors are considered employees for purposes of applying APB No. 25, if they are elected by the shareholders. Consequently, no compensation expense for employees and directors is recognized. Stock issued to non-employees is compensatory and compensation expense is recognized under Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation (“Statement No. 123”) as amended by Statement of Financial Accounting Standards No. 148 Accounting for Stock-Based Compensation—Transition and Disclosure (“Statement No. 148”). The following table illustrates the pro forma effect on net loss and net loss per share had the Company applied the fair value recognition provisions of Statement No. 123 for the years ended December 31, 2003, 2002 and 2001. See Note 7 for the assumptions used to compute the pro forma amounts. Net loss as reported Deduct total stock-based employee compensation expense determined under Statement No. 123 Pro forma net loss $ (12,700,083 ) $ (16,928,671 ) $ (4,985,976 ) (624,699 ) (1,730,496 ) (2,671,127 ) $ (13,324,782 ) $ (18,659,167 ) $ (7,657,103 ) 2003 2002 2001 33 NOTES TO FINANCIAL STATEMENTS (Continued) 2003 2002 2001 $ (.72 ) $ (.96 ) $ (.28 ) $ (.75 ) $ (1.06 ) $ (.44 ) Amounts per common share: Net loss per share, as reported Pro forma net loss per share Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Note 2 — Furniture and Equipment Furniture and equipment consisted of the following at December 31: Furniture and fixtures Office equipment Software Laboratory equipment Leased equipment Leasehold improvements Less accumulated depreciation and amortization Furniture and equipment, net 2003 2002 $ 330,677 $ 330,677 567,141 561,011 490,037 490,037 3,368,185 3,335,835 62,712 4,646,900 4,633,651 9,465,652 9,413,923 (5,957,947 ) (4,856,636 ) $ 3,507,705 $ 4,557,287 62,712 Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Note 3 — Concentration of Credit and Market Risk The Company invests its excess cash principally in U.S. marketable securities from a diversified portfolio of institutions with strong credit ratings and in U.S. government and agency bills and notes and, by policy, limits the amount of credit exposure at any one institution. These investments are generally not collateralized and mature within less than three years. The Company has not realized any losses from such investments. At December 31, 2003, $4,375,949 was invested in the Merrill Lynch Premier Institutional Fund, which invests primarily in commercial paper, U.S. government and agency bills and notes, corporate notes, certificates of deposit and time deposits. The Merrill Lynch Premier Institutional Fund is not insured. Note 4 — Accrued Expenses Accrued expenses were comprised of the following at December 31: Accrued clinical trials Stock purchase plan withholdings Accrued other Accrued expenses 34 2003 2002 $ 355,957 $ 300,525 49,195 28,023 62,538 114,976 $ 467,690 $ 443,524 NOTES TO FINANCIAL STATEMENTS (Continued) Note 5 — Lease Obligations and Other Contingencies The Company had an unused line of credit of $500,000 at December 31, 2003. The Company has the following lease obligations at December 31, 2003: 2004 2005 Operating Leases $ 594,897 605,139 2006 2007 2008 Thereafter Total minimum payments 573,031 528,750 544,614 845,574 $ 3,692,005 Rent expense for operating leases was $603,996, $651,506 and $484,227 in 2003, 2002 and 2001, respectively. The commitment for operating leases is primarily related to the building lease, which expires in June 2010. The lease, as amended effective July 1, 2001 for additional space, requires monthly rents of $33,145 beginning in July 2001 and escalating annually to a minimum of $47,437 per month in the final year. The Company has an option to renew the lease for an additional five years at the current market rate on the date of termination and a one-time option to terminate the lease on June 30, 2008, subject to a reasonable termination fee. On August 5, 2002, at the request of the compensation committee, our Board of Directors approved a reduction in salary of 25% for both Dr. Charles E. Bugg, Chairman and Chief Executive Officer and Dr. J. Claude Bennett, President, Chief Operating Officer and Medical Director, effective August 1, 2002. In the event of any change of control of the Company, any cumulative salary reductions up to the date of the change of control would become due and payable. The monthly amount of the reduction was $14,677 combined. On December 8, 2003, the Board of Directors approved the recommendation of the compensation committee to restore their salaries to their previous amounts effective January 1, 2004, leaving the cumulative reduction of $249,509 outstanding in the event of a change in control. Note 6 — Income Taxes The Company has not had taxable income since incorporation and, therefore, has not paid any income tax. Deferred tax assets of approximately $46,600,000 and $45,750,000 at December 31, 2003 and 2002, respectively, have been recognized principally for the net operating loss and research and development credit carryforwards, and have been reduced by a valuation allowance of $51,800,000 and $45,750,000 at December 31, 2003 and 2002, respectively. The valuation allowance will remain at the full amount of the deferred tax asset until it is more likely than not that the related tax benefits will be realized. At December 31, 2003, the Company had net operating loss and research and development credit carryforwards (“Carryforward Tax Benefits”) of approximately $95,300,000 and $9,900,000, respectively, which will expire at various dates beginning in 2005 and continuing through 2023. Use of the Carryforward Tax Benefits will be subject to a substantial annual limitation due to the change of ownership provisions of the Tax Reform Act of 1986. The annual limitation is expected to result in the expiration of a portion of Carryforward Tax Benefits before utilization, which has been considered by the Company in its computations under Statement No. 109. Additional sales of the Company’s equity securities may result in further annual limitations on the use of the Carryforward Tax Benefits against taxable income in future years. Note 7 — Stockholders’ Equity In June 2002, the Board of Directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights (“Rights”) to the holders of our common stock. The Rights have certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons who 35 NOTES TO FINANCIAL STATEMENTS (Continued) acquires more than 15% (19.9% for William W. Featheringill, a Director who currently owns more than 13%, but owned more than 15% at the time the Rights were put in place) of the Company’s common stock on terms not approved by the Board of Directors. The rights are not exercisable until the distribution date, as defined in the Rights Agreement by and between the Company and American Stock Transfer & Trust Company, as Rights Agent. The Rights will expire at the close of business on June 24, 2012, unless that final expiration date is extended or unless the rights are earlier redeemed or exchanged by the Company. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series B Junior Participating Preferred Stock (“Series B”), par value $0.001 per share, at a purchase price of $26.00, subject to adjustment. Shares of Series B purchasable upon exercise of the Rights will not be redeemable. Each share of Series B will be entitled to a dividend of 1,000 times the dividend declared per share of common stock. In the event of liquidation, each share of Series B will be entitled to a payment of 1,000 times the payment made per share of common stock. Each share of Series B will have 1,000 votes, voting together with the common stock. Finally, in the event of any merger, consolidation, or other transaction in which shares of common stock are exchanged, each share of Series B will be entitled to receive 1,000 times the amount received per share of common stock. In November 1991, the Board of Directors adopted the 1991 Stock Option Plan (“Plan”) for key employees and consultants of the Company and reserved 500,000 shares of common stock for issuance under the Plan. The Plan was approved by the stockholders on December 19, 1991. The original term of the Plan was for ten years and included provisions for issuance of both incentive stock options and non-statutory options. The exercise price of options granted under the Plan shall not be less than the fair market value of common stock on the grant date. Options granted under the Plan generally vest 25% after one year and monthly thereafter on a pro rata basis over the next three years until fully vested after four years and expire ten years after the grant date. Options are generally granted to all full-time employees. The Plan was amended and restated in February 1993 to effect the following changes: (i) divide the Plan into two separate incentive programs: the Discretionary Option Grant Program and the Automatic Option Grant Program, (ii) increase the number of shares of the Company’s common stock available for issuance under the Plan by 500,000 shares and (iii) expand the level of benefits available under the Plan. The Board amended the Plan on December 23, 1993 to increase the number of shares issuable under the Plan by 500,000 shares and subsequently amended and restated the Plan in its entirety on February 8, 1994. On March 16, 1995, the Board authorized another 500,000 shares for issuance under the Plan. The Plan was subsequently amended and restated effective March 3, 1997, which amendment and restatement included an increase of 1,000,000 shares. The Plan (as so amended and restated) was further amended March 1, 1999 to increase the share reserve by 400,000 shares. The Board amended and restated the Plan in its entirety on March 6, 2000, which increased the reserved shares by 1,200,000 and extended the term of the Plan for ten years from the date of the amendment. This restatement was approved by the Company’s stockholders on May 17, 2000. The automatic option grant program grants options to purchase 10,000 shares to new non-employee Board members and an additional 10,000 shares annually over such period of continued service. The vesting and exercise provisions of options granted under the Plan are subject to acceleration in the event of certain stockholder-approved transactions, or upon the occurrence of a Change in Control as defined by the Plan. 36 The following is an analysis of stock options for the three years ended December 31, 2003: NOTES TO FINANCIAL STATEMENTS (Continued) Balance December 31, 2000 Options granted Options exercised Options canceled Balance December 31, 2001 Options granted Options canceled Balance December 31, 2002 Options granted Options exercised Options canceled Balance December 31, 2003 Options Available Options Outstanding Weighted Average Exercise Price 1,045,314 2,620,992 $ (522,600 ) 522,600 (61,327 ) (60,992 ) 60,992 583,706 3,021,273 (443,735 ) 443,735 466,523 (466,523 ) 606,494 2,998,485 (546,000 ) 546,000 (186,228 ) 440,325 (440,325 ) 500,819 2,917,932 10.30 4.55 2.82 11.55 9.43 1.44 8.14 8.45 1.27 4.72 8.83 7.29 There were 1,979,152, 2,214,954 and 1,986,560 options exercisable at December 31, 2003, 2002 and 2001, respectively. The weighted- average exercise price for options exercisable was $9.71, $9.67 and $9.69 at December 31, 2003, 2002 and 2001, respectively. The following table summarizes, at December 31, 2003, by price range: (1) for options outstanding, the number of options outstanding, their weighted-average remaining life and their weighted-average exercise price; and (2) for options exercisable, the number of options exercisable and their weighted-average exercise price: Range $ 0 to $ 3 3 to 6 6 to 9 9 to 12 12 to 15 Outstanding Exercisable Number Life Price Number Price 809,166 9.0 $ 1.10 83,536 $ 1.14 468,390 5.1 4.08 357,839 4.22 1,026,968 4.9 7.39 927,710 7.35 11,243 9.64 280,685 3.3 14.14 280,685 14.14 12,189 3.8 9.67  15 to 18 21 to 24 24 to 30 0 to 30 93,894 3.0 16.38 93,894 16.38 207,020 6.0 22.84 206,602 22.83 17,643 26.82 2,917,932 5.9 7.29 1,979,152 9.71 19,620 6.4 26.83 As of December 31, 2003, there were an aggregate of 3,601,747 shares reserved for future issuance under both the Plan and the Employee Stock Purchase Plan (“ESPP”) discussed in Note 8. The Company follows APB No. 25 in accounting for both the Plan and the ESPP and, accordingly, does not recognize any compensation cost related to options granted to employees or non-employee Directors. The Company has adopted the disclosure requirements of Statement No. 123, as amended by Statement No. 148. Since Statement No. 123 is only applied to options granted after 1994, the pro forma disclosure should not necessarily be considered indicative of future pro forma results when the full four-year vesting (the period in which the compensation cost is recognized) is included in the disclosure in 2002. The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing method with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: no dividends; expected volatility of 104.4, 104.4 and 92.5 percent; risk-free interest rate of 3.0, 3.6 and 4.6 percent; and expected lives of five years. The weighted-average grant-date fair values of options granted during 2003 under the Plan and ESPP were $2.12 and $0.39, respectively. The compensation cost recorded for options issued to non-employee consultants was $119,676, $120,190 and $123,289 for the years ended December 31, 2003, 2002 and 2001, respectively. 37 Note 8 — Employee Benefit Plans NOTES TO FINANCIAL STATEMENTS (Continued) On January 1, 1991, the Company adopted an employee retirement plan (“401(k) Plan”) under Section 401(k) of the Internal Revenue Code covering all employees. Employee contributions may be made to the 401(k) Plan up to limits established by the Internal Revenue Service. Company matching contributions may be made at the discretion of the Board of Directors. The Company made matching contributions of $158,425, $217,097 and $216,897 in 2003, 2002 and 2001, respectively. On May 29, 1995, the stockholders approved an employee stock purchase plan (“ESPP”) effective February 1, 1995. On May 15, 2002, the stockholders approved an amendment to the ESPP to reserve an additional 200,000 shares and eliminate the January 2005 termination date. The Company has reserved a total of 400,000 shares of common stock under the ESPP, of which 182,996 shares remain available for purchase at December 31, 2003. Eligible employees may authorize up to 15% of their salary to purchase common stock at the lower of 85% of the beginning or 85% of the ending price during the six-month purchase intervals. No more than 3,000 shares may be purchased by any one employee at the six-month purchase dates and no employee may purchase stock having a fair market value at the commencement date of $25,000 or more in any one calendar year. There were 27,964, 50,127 and 24,122 shares of common stock purchased under the ESPP in 2003, 2002 and 2001, respectively, at a weighted average price per share of $0.74, $2.45 and $3.87, respectively. Note 9 — Collaborative and Other Research and Development Contracts The Company granted Novartis Corporation, formerly Ciba-Geigy Corporation (“Novartis”), an option in 1990 to acquire exclusive licenses to a class of inhibitors arising from research performed by the Company by February 1991. The option was exercised and a $500,000 fee was paid to the Company in 1993. Milestone payments are due upon approval of a new drug application. The Company will also receive royalties based upon a percentage of sales of any resultant products. Up to $300,000 of the initial fee received is refundable if sales of any resultant products are below specified levels and has been recorded as deferred revenue. This agreement has been inactive for several years. On November 7, 1991, the Company entered into a joint research and license agreement with The University of Alabama at Birmingham (“UAB”). UAB performed specific research on Complement Factors for the Company for a period of approximately three years in return for research and license fees. The agreement was replaced by a new agreement on July 18, 1995 granting the Company a worldwide license in exchange for funding certain UAB research and sharing in any royalties or sublicense fees arising from the joint research. On November 17, 1994, the Company entered into another agreement for a joint research and license agreement on influenza neuraminidase granting the Company a worldwide license. Under this agreement, the Company funded certain UAB research and UAB shares in any royalties or sublicense fees arising from the joint research. The Company completed its research funding required by the agreements for both projects in 1998, but is still required to pay minimal annual license fees and share any future royalties with UAB. On December 23, 2003, the Company transferred to 3-Dimensional Pharmaceuticals, Inc. (3DP), a wholly owned subsidiary of Johnson & Johnson, certain rights related to complement system inhibitors discovered during our collaborative research agreement with 3DP, which was terminated by BioCryst on October 18, 2003. BioCryst received an initial payment from 3DP, and will receive royalties on any future sales of complement inhibitors covered under the assignment. In April 1999, the Company entered into an agreement with Sunol Molecular Corporation. This agreement requires Sunol to conduct research and supply the Company with protein targets for drug design to expedite the discovery of new drug candidates designed to inhibit tissue factor/factor VIIa for the Company’s cardiovascular program. In June 2000, the Company licensed a series of potent inhibitors of purine nucleoside phosphorylase, or PNP, from Albert Einstein College of Medicine of Yeshiva University and Industrial Research, Ltd, New Zealand. The lead drug candidate from this collaboration is BCX-1777. The Company has the rights to develop and ultimately distribute this, or any other, drug candidate that might arise from research on these inhibitors. 38 NOTES TO FINANCIAL STATEMENTS (Continued) The Company has agreed to pay certain milestone payments for future development of these inhibitors, pay certain royalties on sales of any resulting product, and to share in future payments received from other third-party collaborators, if any. In June 2000, the Company licensed intellectual property from Emory University related to the hepatitis C polymerase target associated with hepatitis C viral infections. Under the terms of the agreement, the research investigators from Emory provide the Company with materials and technical insight into the target. The Company has agreed to pay Emory royalties on sales of any resulting product and to share in future payments received from other third party collaborators, if any. Note 10 — Subsequent Events On February 4, 2004, Registrant entered into a Placement Agency Agreement with Leerink Swann & Company in connection with a registered direct offering of 3,571,667 shares of its common stock at an offering price of $6.00 per share. The common stock was issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission pursuant to Rule 424(b)(2) of the Securities Act of 1933, as amended, the Securities Act, in connection with a shelf takedown from the Company’s registration statement on Form S-3 (333- 111226), filed on December 16, 2003 and which became effective on January 5, 2004. On February 17, 2004, Registrant entered into a Stock Purchase Agreement with Caduceus Private Investments II, LP, Caduceus Private Investments II (QP), LP and UBS Juniper Crossover Fund, L.L.C. As part of this agreement, Registrant has granted these investors the right to appoint a member to its board of directors effective as of the closing of the offering. On February 18, 2004, the Company announced it had completed a $21.4 million registered direct offering of 3,571,667 shares of its common stock to a group of institutional investors. Note 11 — Recent Accounting Pronouncements In December 2003, the FASB revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an Amendment of FASB Statements No. 87, 88, and 106”. This statement revises employers’ disclosures about pension plans and other postretirement benefit plans to provide more information about pension plan assets, obligations, benefit payments, contributions and net benefit cost. This statement retains the disclosures required by the originally issued Statement 132 and requires further disclosures, including information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. SFAS No. 132 (revised 2003) is effective for financial statements with fiscal years ending after December 15, 2003, except for disclosure of information about foreign plans and disclosure of estimated future benefit payments, which are effective for fiscal years ending after June 15, 2004. The adoption of this statement had no impact on the Company’s financial statement disclosures. On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes standards for classifying and measuring as liabilities certain freestanding financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The statement defines an obligation as “a conditional or unconditional duty or responsibility on the part of the issuer to transfer assets or to issue its equity shares.” SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a significant impact on the Company’s results of operations or financial position. On April 30, 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” in order to provide for more consistent reporting of contracts as either freestanding derivative instruments subject to SFAS No. 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a significant impact on the Company’s results of operations or financial position. 39 NOTES TO FINANCIAL STATEMENTS (Continued) In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” (revised December 2003), an interpretation of Accounting Research Bulletin 51, “Consolidation of Financial Statements,” which addresses consolidation of variable interest entities (“VIE”) by business enterprises. This statement is required in financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. For all other types of entities, application is required in financial statements for periods ending after March 15, 2004. The Company believes that the adoption of FIN No. 46 has no impact on the results of operations or financial position. In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“Statement No. 148”). This statement addresses transition methodologies for companies who intend to adopt the fair valuation methodology of Statement No. 123 for their employee stock-based compensation, as well as additional annual and quarterly disclosure requirements for stock-based compensation. The new disclosure rules are effective for interim or annual periods ending after December 15, 2002 and are provided in Notes 1 and 7. The Company does not expect there to be a material impact on its financial position, results of operations or cash flows as a result of adopting this accounting standard. In November 2002, the FASB issued Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN No. 45”). This interpretation modifies the accounting treatment for certain guarantees and is effective for all guarantees issued or modified after December 31, 2002. The new disclosure rules are effective for interim or annual periods ending after December 15, 2002. The Company did not experience a material impact on its financial position, results of operations or cash flows as a result of adopting this accounting standard. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted this statement on July 1, 2002. On July 10, 2002, the Company streamlined its operations, reducing its workforce from 75 employees to 45 employees in order to conserve its resources and provide a longer timeframe in which to advance its other programs. As a result of early implementation of SFAS 146, the Company recognized all expenses related to this reduction in staff as compensation expense during the third quarter of 2002. The total compensation paid in 2002, plus benefits, related to this staff reduction was approximately $325,000. Note 12 — Quarterly Financial Information (Unaudited) (In thousands, except per share) First Second Third Fourth 2003 Quarters Revenues Net loss Net loss per share 2002 Quarters Revenues Net loss Net loss per share $ 308 $ 266 $ 222 $ 838 (2,788 ) (3,252 ) (3,409 ) (3,250 ) (.18 ) (.18 ) (.19 ) (.16 ) $ 539 $ 461 $ 412 $ 363 (5,616 ) (5,161 ) (3,415 ) (2,736 ) (.15 ) (.29 ) (.19 ) (.32 ) Net loss and net loss per share for the years 2003 and 2002 differed from the total of the individual quarters due to rounding. 40 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS The Board of Directors BioCryst Pharmaceuticals, Inc. We have audited the accompanying balance sheets of BioCryst Pharmaceuticals, Inc. as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. 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 BioCryst Pharmaceuticals, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG Birmingham, Alabama January 23, 2004, except for Note 10, as to which the date is February 18, 2004 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES We maintain a set of disclosure controls and procedures that are designed to ensure that information relating to BioCryst Pharmaceuticals, Inc. required to be disclosed in our periodic filings under the Securities Exchange Act is recorded, processed, summarized and reported in a timely manner under the Securities Exchange Act of 1934. We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by BioCryst in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by BioCryst in such reports is accumulated and communicated to the Company’s management, including the Chairman and Chief Executive Officer and Chief Financial Officer of BioCryst, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, BioCryst’s internal control over financial reporting. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT PART III The directors and executive officers of the Company are as follows: Name Charles E. Bugg, Ph.D. J. Claude Bennett, M.D. Michael A. Darwin William W. Featheringill (1)(2) Edwin A. Gee, Ph.D. (1)(2) Carl L. Gordon, CFA, Ph.D. (4) Zola P. Horovitz, Ph.D. John A. Montgomery, Ph.D. (3) Joseph H. Sherrill, Jr. William M. Spencer, III (1)(2) Age 62 70 42 61 84 39 69 79 63 83 Position(s) with the Company Chairman, Chief Executive Officer and Director President, Chief Operating Officer, Medical Director and Director Chief Financial Officer, Secretary and Treasurer Director Director Director Director Director Director Director Randolph C. Steer, M.D., Ph.D. 54 Director (1) (2) (3) (4) Member of the Compensation Committee (“Compensation Committee”). Member of the Audit Committee (“Audit Committee”). John A. Montgomery held the positions of Senior Vice President, Secretary and Chief Scientific Officer until his retirement effective January 31, 2002. He will continue to serve as a Director until the 2004 Annual Meeting. Carl L. Gordon was elected to the Board on March 8, 2004, effective as of February 18, 2004 in connection with the Stock Purchase Agreement with OrbiMed Advisors, LLC. Charles E. Bugg, Ph.D., was named Chairman of the Board, Chief Executive Officer and Director in November 1993 and President in January 1995. Dr. Bugg relinquished the position of President in December 1996 when Dr. Bennett joined the Company in that position. Prior to joining the Company, Dr. Bugg had served 42 as the Director of the Center for Macromolecular Crystallography, Associate Director of the Comprehensive Cancer Center and Professor of Biochemistry at The University of Alabama at Birmingham (“UAB”) since 1975. He was a Founder of the Company and served as the Company’s first Chief Executive Officer from 1987-1988 while on a sabbatical from UAB. Dr. Bugg also served as Chairman of the Company’s Scientific Advisory Board from January 1986 to November 1993. He continues to hold the position of Professor Emeritus in Biochemistry and Molecular Genetics at UAB, a position he has held since January 1994. J. Claude Bennett, M.D., was named President and Chief Operating Officer in December 1996 and elected a Director in January 1997. Since 2001, Dr. Bennett has also served as the Medical Director. Prior to joining the Company, Dr. Bennett was President of The University of Alabama at Birmingham (“UAB”) from October 1993 to December 1996 and Professor and Chairman of the Department of Medicine of UAB from January 1982 to October 1993. Dr. Bennett served on the Company’s Scientific Advisory Board from 1989-96. He is a former co-editor of the Cecil Textbook of Medicine and former President of the Association of American Physicians. He is the immediate past chair of the Scientific Advisory Committee of the Massachusetts General Hospital, a member of the Scientific Advisory Boards of Zycogen, LLC and Aptamera, Inc., and continues to hold the position of Distinguished University Professor Emeritus at UAB, a position he has held since January 1997. Michael A. Darwin joined BioCryst in June 2000 as Controller. Effective November 1, 2002, Mr. Darwin was appointed Chief Financial Officer, Secretary and Treasurer. Prior to joining BioCryst, from June 1990 to June 2000, Mr. Darwin was Chief Financial Officer of a privately held company in the food services industry. He began his career at Ernst & Young and spent six years in public accounting practice. William W. Featheringill was elected a Director in May 1995. Mr. Featheringill is Chairman of the Board, since June 1995, of Electronic Healthcare Systems, a software company, and President, Chief Executive Officer and director, since 1973, of Private Capital Corporation, a venture capital company. Mr. Featheringill was Chairman and Chief Executive Officer of MACESS Corporation, which designs and installs paperless data management systems for the managed care industry, from 1988 to November 1995. MACESS Corporation merged with Sungard Data Systems in late 1995. From 1985 to December 1994, Mr. Featheringill was the developer, Chairman and President of Complete Health Services, Inc., a health maintenance organization which grew, under his direction, to become one of the largest HMOs in the southeastern United States. Complete Health Services, Inc. was acquired by United HealthCare Corporation in June 1994. Edwin A. Gee, Ph.D., was elected a Director in August 1993. Dr. Gee, who retired in 1985 as Chairman of the Board and Chief Executive Officer of International Paper Company, has been active as an executive in biotechnology, pharmaceutical and specialty chemical companies since 1970. He is Chairman Emeritus and a director of OSI Pharmaceuticals, Inc., one of the leading biotechnology companies for the diagnosis and treatment of cancer. Carl L. Gordon, CFA, Ph.D., was elected a Director in March 2004. Dr. Gordon is a founding General Partner of OrbiMed Advisors LLC, an asset management firm focused on the global healthcare industry, since 1998, and was previously a senior biotechnology analyst at Mehta and Isaly, the predecessor firm to OrbiMed, from 1995-1997. Dr. Gordon received a Bachelor’s degree from Harvard College, a Ph.D. in molecular biology from the Massachusetts Institute of Technology, and was a Fellow at the Rockefeller University. Zola P. Horovitz, Ph.D., was elected a Director in August 1994. Dr. Horovitz was Vice President of Business Development and Planning at Bristol-Myers Squibb from 1991 until his retirement in April 1994 and previously was Vice President of Licensing at the same company from 1990 to 1991. Prior to that he spent over 30 years with The Squibb Institute for Medical Research, most recently as Vice President Research, Planning, & Scientific Liaison. He has been an independent consultant in pharmaceutical sciences and business development since his retirement from Bristol-Myers Squibb in April 1994. He serves on the Boards of Directors of Avigen, Inc., Genaera Pharmaceuticals, Inc., Palatin Technologies, Inc., DOV Pharmaceuticals, GenVec, Inc., and NitroMed, Inc. John A. Montgomery, Ph.D., was a Founder of BioCryst and has been a Director since November 1989. He was the Secretary and Chief Scientific Officer since joining the Company in February 1990. He was Executive Vice President from February 1990 until May 1997, at which time he was named Senior Vice President. Dr. Montgomery retired as an officer of the Company effective January 31, 2002, but remains on 43 the Board of Directors. Prior to joining the Company, Dr. Montgomery served as Senior Vice President of Southern Research Institute (“SRI”) of Birmingham from January 1981 to February 1990. He continues to hold the position of Distinguished Scientist at SRI, a position he has held since February 1990. Joseph H. Sherrill, Jr., was elected a Director in May 1995. Mr. Sherrill served as President of R. J. Reynolds (“RJR”) Asia Pacific, based in Hong Kong, where he oversaw RJR operations across Asia, including licensing, joint ventures and a full line of operating companies from August 1989 to his retirement in October 1994. Prior management positions with RJR include Senior Vice President of Marketing for R.J. Reynolds International, President and Chief Executive Officer of R.J. Reynolds Tabacos de Brazil, and President and General Manager of R.J. Reynolds Puerto Rico. William M. Spencer, III, has been a Director of the Company since its inception. Mr. Spencer, who is retired, is also a private investor in Birmingham, Alabama. Mr. Spencer is a Founder of the Company, and served as Chairman of the Board of the Company from its founding in 1986 until April 1992. He co-founded and operated Motion Industries from 1946 through its merger into Genuine Parts Company in 1976. He has founded several businesses and has served on the Board of Directors of numerous public and private corporations. Randolph C. Steer, M.D., Ph.D., was elected a Director in February 1993. Dr. Steer has been an independent pharmaceutical and biotechnology consultant since 1989, having a broad background in business development, medical marketing and regulatory affairs. He was formerly Chairman, President and CEO of Advanced Therapeutics Communications International, a leading drug regulatory group, and served as associate director of medical affairs at Marion Laboratories, and medical director at Ciba Consumer Pharmaceuticals. Dr. Steer serves on the Board of Directors of Techne Corporation and several privately held companies. In accordance with the terms of the Company’s Certificate of Incorporation, the Board of Directors has been divided into three classes with members of each class holding office for staggered three-year terms. Dr. Bugg’s, Dr. Montgomery’s, Dr. Gordon’s and Dr. Gee’s terms expire at the 2004 annual meeting, at which time Dr. Montgomery and Dr. Gee will not be eligible for re-election due to age limits established by the Board of Directors. Mr. Featheringill’s, Mr. Spencer’s and Mr. Sherrill’s terms expire at the 2005 annual meeting, and Dr. Bennett’s, Dr. Horovitz’s, and Dr. Steer’s terms expire at the 2006 annual meeting (in all cases subject to the election and qualification of their successors or to their earlier death, resignation or removal). At each annual stockholder meeting, the successors to the Directors whose terms expire are elected to serve from the time of their election and qualification until the third annual meeting of stockholders following their election and until a successor has been duly elected and qualified. However, the number of directors may be decreased at any time either by the stockholders or by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. No person shall be elected as a director who has reached his or her 70 th birthday. Persons who are serving as directors on the date they reach their 70 th birthday may complete the current term of office of director for which they have been elected but shall not be elected to serve another term as director. The provisions of the Company’s Certificate of Incorporation governing the staggered Director election procedure can be amended only by a shareholder’s vote of at least 75% of the eligible voting securities. There are no family relationships among any of the directors and executive officers of the Company. The Board has by resolution established the number of directors of the Company at ten (10) commencing March 8, 2004. Currently, seven of our directors (Messrs. Featheringill, Gee, Gordon, Horovitz, Sherrill, Spencer and Steer) are independent as defined by the current Nasdaq rules. The Company has an Audit Committee, consisting of Messrs. Featheringill, Gee and Spencer, which is responsible for the review of internal accounting controls, financial reporting and related matters. The Audit Committee also recommends to the Board the independent accountants selected to be the Company’s auditors and reviews the audit plan, financial statements and audit results. The Board has adopted an Amended and Restated Audit Committee Charter that meets all the applicable rules of the Nasdaq National Market and the Securities and Exchange Commission. The Audit Committee Charter can be found on the Company’s website at www.biocryst.com. The Audit Committee members are “independent” directors as defined by the Nasdaq National Market listing standards in effect as of the date hereof and meet Nasdaq’s financial literacy requirements for audit committee members. The Board of Directors has determined that Mr. Featheringill qualifies as the “audit committee financial expert”. Upon the expiration of Dr. Gee’s term at the 2004 Annual Meeting, the Board has made a determination to recruit another outside Board member who would also meet 44 the requirements of a “financial expert”. After this additional Board member has been recruited and adequately understands the Company’s financial records, Mr. Featheringill has determined that he will step down from the Audit Committee. The Company also has a Compensation Committee consisting of Messrs. Featheringill, Gee and Spencer. The Compensation Committee is responsible for the annual review of officer compensation and other incentive programs and is authorized to award options under the Company’s Stock Option Plan. The Board has adopted a Compensation Committee Charter that meets all the applicable rules of the Nasdaq National Market and the Securities and Exchange Commission. The Charter can be found on the Company’s website at www.biocryst.com. The Compensation Committee members are “independent” directors as defined by the Nasdaq National listing standards in effect as of the date hereof. The Company has a Nominating Committee comprised of all independent directors with terms not expiring in the current year. The current members of the committee are Messrs. Featheringill, Horovitz, Sherrill, Spencer, and Steer. The Nominating Committee nominates persons for election or re-election as directors. The Board has adopted a Nominating Committee Charter that meets all the applicable rules of the Nasdaq National Market and the Securities and Exchange Commission. The Nominating Committee has established procedures/qualifications for selecting nominees and will consider nominees recommended in writing, including biographical information and personal references, by stockholders. All submissions by shareholders should be sent directly to the Chairman of the Board, Dr. Bugg at the corporate address. The Company has adopted a Code of Business Conduct (the “Code”) applicable to all employees, including executive officers, and all Board members. The Code is publicly available on the Company’s website at www.biocryst.com. Any waivers of the Code will be disclosed through an Form 8-K filing with the Securities and Exchange Commission. Section 16(a) Beneficial Ownership Reporting Compliance Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders. Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by reference from our definitive Proxy Statement to be filed in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders. 45 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The following financial statements appear in Item 8 of this Form 10-K: Balance Sheets at December 31, 2003 and 2002 Statements of Operations for the years ended December 31, 2003, 2002 and 2001 Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001 Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 Page in Form 10-K 28 29 30 31 Notes to Financial Statements Report of Independent Auditors 32 to 40 41 No financial statement schedules are included because the information is either provided in the financial statements or is not required under the related instructions or is inapplicable and such schedules therefore have been omitted. (b) Reports on Form 8-K On October 20, 2003, we furnished a Current Report on Form 8-K to the Securities and Exchange Commission reporting the Company’s financial results for the quarter ended September 30, 2003. On December 16, 2003, we filed a Current Report on Form 8-K with the Securities and Exchange Commission providing an updated description of the Company’s business, risk factors and management’s discussion and analysis of financial condition and results of operations. (c) Exhibits Number Description 3.1 Composite Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. 3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. 4.1 Rights Agreement, dated as of June 17, 2002, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes the Certificate of Designation for the Series B Junior Participating Preferred Stock as Exhibit A and the form of Rights Certificate as Exhibit B. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A dated June 17, 2002. 10.1 1991 Stock Option Plan, as amended and restated as of March 6, 2000. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 16, 2000 (Registration No. 333-39484). 10.2 # License Agreement dated April 15, 1993 between Ciba-Geigy Corporation (now merged into Novartis) and the Registrant. Incorporated by reference to Exhibit 10.40 to the Company’s Form S-1 Registration Statement (Registration No. 33-73868). 10.3 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 14, 2002 (Registration No. 333-90582). 10.4 # Stock Purchase Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.24 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. 46 Number Description 10.5 # Stockholder’s Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.25 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. 10.6 Warehouse Lease dated July 12, 2000 between RBP, LLC an Alabama Limited Liability Company and the Registrant for office/warehouse space. Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q for the second quarter ending June 30, 2000 dated August 8, 2000. 10.7 Termination Agreement dated as of September 21, 2001 between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the second quarter ending June 30, 2002 dated August 7, 2002. 10.8 Stock Purchase Agreement, dated as of February 17, 2004, by and among BioCryst Pharmaceuticals, Inc., Caduceus Private Investments II, LP, Caduceus Private Investments II (QP), LP and UBS Juniper Crossover Fund, L.L.C. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated February 17, 2004 23 Consent of Ernst & Young, Independent Auditors. 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # Confidential treatment granted. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Birmingham, State of Alabama, on this 19th day of March, 2004. BIOCRYST PHARMACEUTICALS, INC. By: /s/Charles E. Bugg Charles E. Bugg, Ph.D. Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 19, 2004: Signature Title(s) /s/ Charles E. Bugg (Charles E. Bugg, Ph.D.) /s/ J. Claude Bennett (J. Claude Bennett, M.D.) /s/ Michael A. Darwin (Michael A. Darwin) /s/ William W. Featheringill (William W. Featheringill) /s/ Edwin A. Gee (Edwin A. Gee, Ph.D.) /s/ Carl L. Gordon (Carl L. Gordon, CFA, Ph.D.) /s/ Zola P. Horovitz (Zola P. Horovitz, Ph.D.) /s/ John A. Montgomery (John A. Montgomery, Ph.D.) /s/ William M. Spencer (William M. Spencer, III) /s/ Joseph H. Sherrill, Jr. (Joseph H. Sherrill, Jr.) Chairman, Chief Executive Officer and Director President, Chief Operating Officer, Medical Director and Director Chief Financial Officer (Principal Financial and Accounting Officer), Secretary and Treasurer Director Director Director Director Director Director Director /s/Randolph C. Steer Director (Randolph C. Steer, M.D., Ph.D.) 48 INDEX TO EXHIBITS Number Description 3.1 Composite Certificate of Incorporation of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. 3.2 Bylaws of Registrant. Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the second quarter ending June 30, 1995 dated August 11, 1995. 4.1 Rights Agreement, dated as of June 17, 2002, by and between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes the Certificate of Designation for the Series B Junior Participating Preferred Stock as Exhibit A and the form of Rights Certificate as Exhibit B. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A dated June 17, 2002. 10.1 1991 Stock Option Plan, as amended and restated as of March 6, 2000. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 16, 2000 (Registration No. 333-39484). 10.2 # License Agreement dated April 15, 1993 between Ciba-Geigy Corporation (now merged into Novartis) and the Registrant. Incorporated by reference to Exhibit 10.40 to the Company’s Form S-1 Registration Statement (Registration No. 33- 73868). 10.3 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 99.1 to the Company’s Form S-8 Registration Statement dated June 14, 2002 (Registration No. 333-90582). 10.4 # Stock Purchase Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.24 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. 10.5 # Stockholder’s Agreement dated as of September 14, 1998 between Registrant and Johnson & Johnson Development Corporation. Incorporated by reference to Exhibit 10.25 to the Company’s Form 10-Q for the third quarter ending September 30, 1998 dated November 10, 1998. 10.6 Warehouse Lease dated July 12, 2000 between RBP, LLC an Alabama Limited Liability Company and the Registrant for office/warehouse space. Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q for the second quarter ending June 30, 2000 dated August 8, 2000. 10.7 Termination Agreement dated as of September 21, 2001 between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-Q for the second quarter ending June 30, 2002 dated August 7, 2002. 10.8 Stock Purchase Agreement, dated as of February 17, 2004, by and among BioCryst Pharmaceuticals, Inc., Caduceus Private Investments II, LP, Caduceus Private Investments II (QP), LP and UBS Juniper Crossover Fund, L.L.C. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated February 17, 2004 23 Consent of Ernst & Young, Independent Auditors. 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 49 Sequentially Numbered Page 51 52 Sequentially Number Description 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. # Confidential treatment granted. 50 Numbered Page 53 54 55 Exhibit 23 Consent of Ernst & Young, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-39484, 333-30751 and 33-95062) pertaining to the BioCryst Pharmaceuticals, Inc. 1991 Stock Option Plan, as amended and restated as of March 6, 2000, the Registration Statement (Form S-8 Nos. 333-90582 and 33-95062) pertaining to the BioCryst Pharmaceuticals, Inc. Employee Stock Purchase Plan and the Registration Statement (Form S-3 No. 333-111226) pertaining to the shelf registration of up to $60,000,000 of BioCryst Pharmaceuticals, Inc. common stock, of our report dated January 23, 2004, except for Note 10 as to which the date is February 18, 2004, with respect to the financial statements of BioCryst Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2003. Birmingham, Alabama March 15, 2004 /s/ ERNST & YOUNG 51 CERTIFICATIONS Exhibit 31.1 I, Charles E. Bugg, certify that: 1. I have reviewed this annual report on Form 10-K of BioCryst Pharmaceuticals, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 19, 2004 /s/ CHARLES E. BUGG Charles E. Bugg Chairman and Chief Executive Officer 52 Exhibit 31.2 I, Michael A. Darwin, certify that: 1. I have reviewed this annual report on Form 10-K of BioCryst Pharmaceuticals, Inc.; CERTIFICATIONS 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 19, 2004 /s/ MICHAEL A. DARWIN Michael A. Darwin Chief Financial Officer and Chief Accounting Officer 53 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of BioCryst Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles E. Bugg, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Charles E. Bugg Charles E. Bugg Chief Executive Officer March 19, 2004 54 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of BioCryst Pharmaceuticals, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Darwin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael A. Darwin Michael A. Darwin Chief Financial Officer March 19, 2004 End of Filing 55 © 2005 | EDGAR Online, Inc. 

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